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Prepaid expenses paid in foreign currency

Nallusamy (AO) (36 Points)

29 September 2010

Hi experts,

Could you please clarify below transaction.

1. Prepaid expenses paid in foreign currency should it be revalued on reporting date (i.e balance sheet date)?

2. For example A company's functional currency is in USD and B company's functional currency is in EUR. B company issue invoice to A company for the value of EUR 1000 on 15/12/2008, FX rate on this date is 1 EUR = 1.4 USD (This EUR 1000 is expenses of next year that is 2009 expenses).. On 25/12/2008, A company paid USD 1500 equivalent of EUR 1000.

Please advise me how to pass this transaction in A company's book of accounts

1. On 15/12/2008

2. On 25/12/2008

3. 01/01/2009 (because this invoice pertaining to 2009)

4. Is there any currency exchange difference in the books of A, If it is, how much and in which date?

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3 Replies

Harpreet (* * * * * *) (1670 Points)
Replied 29 September 2010

Please go through with attachment

Attached File : 14 ca club query.xlsx downloaded: 1099 times

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Bhargav (Associate) (57 Points)
Replied 29 September 2010

Answer to your first question :

As per AS 11

“ A foreign currency transaction should be recorded, on initial

recognition in the reporting currency, by applying to the foreign

currency amount the exchange rate between the reporting currency

and the foreign currency at the date of the transaction.”

So when recording in the the entry is to be passed in reporting currency by applying the exchange rate as on the date of transaction. When reporting at Balance sheet date, AS 11 says that only monetary assets should be restated at the closing rate.

“Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money”

Prepaid expense is not a Monetary Asset as per AS11 since there is no element of money “to be received or paid”

Hence prepaid expenses need not be restated as at the Balance sheet date being a non monetary asset

Nallusamy (AO) (36 Points)
Replied 29 September 2010

Thank you very much.

Dear Harpreet, but as per your 3rd entry (attached excel) entire foreign Exchange Results USD 100 booked in FY year 2008-2009, but the total invoice is for two years. so what i feel is, foreign Exchange Results also should be accounted in both the years (pro-rata basis). Please advise me.