AS – 11 ; Effects of change in foreign

exchange rates on accounting

By Sourabh
 Applicable to all enterprises - corporate or
non-corporate .

 Statement of 1994 revised in 2003 and effective

from 1st April 2004 . It is Mandatory in nature.

 Foreign currencies are currencies other than the reporting currencies

of an enterprise .

 Foreign operations are a subsidiary, associate or a joint venture or

branch of the reporting enterprise, the activities of which are based or
conducted in a country other than the country of the reporting
enterprise .
 Foreign Exchange comes into picture in an enterprise in two ways
1 . Transactions in Foreign Currencies .
2 . Foreign Operations .

 But In the financial statements of the enterprise , transactions must

be entered in the reporting currency of that firm . For India , it is
Indian Rupee .

 So the problems in accounting are

1 . Deciding which exchange rate to use .
2 . Recognising in the financial statements , the effects of
change in exchange rates .
 Rule
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 .

 Exchange differences arising on the settlement of monetary items or

on reporting an enterprise’s monetary items at rates different from
those at which they were initially recorded during the period, or
reported in previous financial statements, should be recognised as
income or as expenses in the period in which they arise .
 Details Transaction Closing
date @ 42 /- date @ 45 /-

Purchases INR 42000 INR 42000

dr. $1000 Inventory

To payable INR 42000 INR 42000

$1000
Difference to go to
exchange fluctuation,
value of inventory or
purchases not to be
adjusted
 Profit and loss a/c

Purchases INR 42000 Value of closing stock

INR 42000

Exchange fluctuation INR 3,000

Balance sheet

Payables INR 45000 Closing stock

INR 42000