Accounting Standards

BACKGROUND
Need For Standards
Business activities are varied.
Strenuous task to present the facts intelligibly, in a summarized form.
Methods & Principles adopted by various reporting enterprise are cohernt, not
misleading.
Information to the extent possible Uniform & Comparable Standards are
evolved.

It Provides
Discipline
Guidelines [i.e Uniform practices & Common techniques].
Yardsticks for evaluation [i.e Comparative analysis].
Objective
It greatly enhances the users of FS like
Investor {AS 13},Employees, Lenders, Creditors, Suppliers, Governments.
To eliminate confusing variations in the treatment of several accounting
aspects.
To bring Feasibility & Uniformity in presentation.
Other Factors
AS is an authoritative pronouncement of code of practice.
It intend to apply only to material items.















Compilation with Companies Act 1956

As per section 211 of Cos Act 1956
Sub sec (3A) Every P&L a/c, and Balance Sheet should comply with AS.
Sub sec (3B) if not complied then following should be disclosed:
Deviation from AS
Reason for such deviation {AS1}
Financial effect, if any arising.
Sub sec (3C) AS means as recommended by ICAI

As per section 217 of Cos Act 1956 sub sec (2AA)
Boards report shall also include a Directors Responsibility Statement,
indicating :
The preparation of Annual Accounts are in compilation of applicable
ASs

As per section 227(3) Powers & Duties Of Auditors
Auditors report shall also state that in his opinion, P&L and Balance
Sheet are complied.



EFFECTIVE DATE 01
ST
APRIL,2004
Why Foreign Currency transaction
(FCT) arises?
OR
Lack of
Technology
Cheap
Manpower
Able to see this
picture? No?
Because of following reasons FCT arises;

Dealings of an entity with clients who is in other currency
country.
Activity undertaken through Branch
Business with Associates (AS -23)
Holding/Subsidiary relationship
Business with Joint Ventures (AS -27)

Globalization

Holding/Subsidiary/Branches/JVs/Associate
OR

This AS address two principal issues;

Selection of an appropriate rate to be used for
a transaction


Manner in which financial effect of change in
exchange rates should be recognized in the
separate financial statement of an enterprise,
and also in the Consolidated Financial
Statements (AS -21)
Effects in Changes in Forex Rates
FOREIGN CURRENCY
TRANSACTIONS
TRANSLATING
FINANCIAL
STATEMENTS OF
FOREIGN OPERATIONS
FORWARD EXCHANGE
CONTRACTS TAX EFFECTS
OF EXCHANGE
DIFFERENCES DISCLOSURE
1.INITIAL
RECOGNITION.
2.REPORTING AT
SUBSEQUENT
BALANCE SHEET
DATES.
3.RECOGNITION OF
EXCHANGE
DIFFERENCES.
1.CLASSIFICATION
INTO INTEGRAL &
NON INTEGRAL.
2.DISPOSAL OF NON
INTEGRAL
OPERATIONS.
3. CHANGE IN
CLASSIFICAION.
4.TRANSLATION
PROVISIONS.
Note: AS 11 does not deal with the re-statement
of the Financial Statements in different currency
Required because of following Transactions;-

Buying & Selling of Goods & Services
Borrowing & Lending Money.
Acquiring or Disposing of Fixed Assets.
The above Transactions should be recorded by applying Exchange Rates. In some
cases Average Rates are also applied. Reporting Entity should normally establish an
appropriate accounting policy and disclose the same in Financial Statements.

For Reporting at the end of the each accounting
period, items in Balance Sheet required to be
classified into following:-

Monetary Items
Money held and assets
and liabilities to be
received or paid in fixed
or determinable
amounts of money.
Non Monetary
Items
Assets and Liabilities
other than monetary
items.
Examples ; Cash,
Debtors, Creditors.
Examples ; Fixed Assets,
Inventories and
Investments in Equity
Shares.
FOR TRANSLATION OF BALANCE SHEET ITEMS THAT ARE DENOMINATED
IN FOREIGN CURRENCY, THE FOLLOWING PRINCIPLES APPLY:
CLOSING RATE FOR THE
FOLLOWING:-
1.Monetary Items,
excepting that restrictions
on remittances etc.
TRANSCTION DATE RATE
OR RATE EXISTED ON
FAIR VALUE ESTIMATION:-
1.For Non- Monetary Items
SELECTION OF RATES FOR TRANSLATION IS BASED ON THE FOLLOWING PRINCIPLE
Grouping of Non Monetary Items Stipulation Regarding Exchange Rate
Those that are carried at Historical Cost
Rates applicable on the date on which
transaction was originally concluded
Those that are carried in terms of Fair
Value or similar valuation
Rates applicable on the date on which Fair
value or similar valuation was determined.
MANOJ P DESAI
The rule of CAPITALISING THE EXCHANGE
DIFFERENCE HAS BEEN WITHDRAWN after
companies act adopted AS 11 as its Accounting
Standard from Effective Date 07
th

December,2006. The Exchange difference should
be charged to Profit & Loss account.
Three reasons for the change:-
1.RBIs ability to bring about a turn around in the forex reserves position .
2. Availability of a variety of derivative instruments to enterprises which
enable them to hedge their open positions effectively with little strain on
managing transaction risk.
3.Need to realign accounting practices in India with International
practices.

Important
Note.
SPACE BAR
Z X C V B N M < > ?
1 2 3 4 5 6 7 8 9 0
A B S D F G H J K L
OBSERVE
THIS PICTURE
EXCHANGE DIFFERENCE IS THE DIFFERENCE RESULTING FROM
REPORTING THE SAME NUMBER OF UNITS OF A FOREIGN CURRENCY IN
THE REPORTING CURRENCY AT DIFFERENT EXCHANGE RATES.
A Transaction relating
to a monetary item
being settled at the rate
different from the rate
at which it was initially
recorded (initial
recognition)
A Transaction being
reported at a rate
different from the rate
at which it was either
initially recorded
(balance sheet
reporting)
A Transaction being
settled at a rate
different from the one
taken for reporting in
the last financial
statement (settlement)
AS-R LAYS DOWN THE FOLLOWING PRINCIPLE FOR RECOGNITION OF
EXCHANGE DIFFERENCES:-
INCOME or EXPENSE
in the PERIOD in
which they arise
Exchange Difference should be
transferred to FCTR - NON-
INTEGRAL OPERATIONS
Transaction
Date
Intervening
Reporting Date
Settlement Date
Period in
which
Exchange
Difference
arise
12
th

January
31
st
March 24
th
April
a) 12
th
Jan to
31
st
Mar.
b) 1
st
Apr to
24
th
Apr.
15
th

September
NIL 10
th
January
15
th
Sept to
10
th
Jan
since it is in
same year.
02
nd

October
30
th

November
20
th
December
a) 2
nd
Oct to
30
th
Nov.
b) 1
st
Dec to
20
th
Dec.
Example
Where an entity has non-
integral foreign operations,
the exchange differential
attributable to some
monetary items having
specific characteristics
should be accumulated in
FOREIGN CURRENCY
TRANSLATION RESERVE
ACCOUNT
Note
NOW WE ARE ENTERING INTO A NEW CONCEPTS WHICH IS INCLUDED IN
REVISED AS-11
FOREIGN OPERATIONS
Foreign operations is
a subsidiary,
Associate, Joint
Venture, or Branch of
the reporting
enterprise, the
activities of which
based or conducted in
a country other than
the country of the
reporting enterprise.
INTEGRAL FOREIGN
OPERATIONS
An Integral Foreign
Operations is a
foreign operation, the
activities of which are
an integral part of
those of the reporting
enterprise.
NON-INTEGRAL
FOREIGN OPERATIONS
This term is defined
negatively. It is an
operation that is not
an integral foreign
operation.
IMPORTANT TO NOTE;
Indian company having foreign branch has been brought
into ambit of FOREIGN OPERATIONS.
It is essential to an enterprise to classify all its operations
be it a branch, an associate, a joint venture or a
subsidiary. Into either INTEGRAL OR NON INTEGRAL
FOREIGN OPERATIONS.
The objective of this classification into IFO or
NIFO is to get the financial statements to
produce results, that are compatible results with
effect of the rate changes on companys cash
flows and on its equity.
Classification in the manner will lead to
selection of an appropriate method for
translation of foreign operations of an entity
for the purpose of reporting.
MANOJ P DESAI
Changes in exchange rates can have a
direct effect on the cash flows of
reporting entity. If they do, then they will
be IFO

Points to be noted in this regard;
1. Nature of overseas operations.
2. Foreign branch carries on its operations as if it were an extended arm of the reporting entity.
3. Forex impact is directly related to on cash flows of reporting entity.
4. Such an impact will arise from and will be relatable to all monetary items.
EXAMPLES FOR IFOS ARE GIVEN BELOW;
1. Entity Produces raw material or component, and transfers the goods for inclusion in the ultimate product
being manufactured by investing company.
2. Entity acts as a Selling Agents
3. Entity setup to Raise a Finance to help investing entity or for Tax reasons
Translation of FINANCIAL STATEMENTS OF IFOS;-
ITEMS SELECTION OF RATE
Initial Recognition Rate applicable on the date of transaction
Cost and Depreciation of Tangible Fixed Assets Date of Purchase.
Assets carried at fair value Date on which fair value determined
Assets that are shown at realizable value or recoverable amount Date on which such value or amunt was determined (closing rate)
Contingent liability Closing Rate
Resulting exchange difference to be RECOGNISED IN THE PROFIT AND LOSS ACCOUNT.
An NFO accumulates cash and other monetary items, incurs
expenses, generates income and arranges borrowings, all
substantially in local currency.
Change in forex will not have direct impact on cash flows of
reporting entity.
The effect if any would be traceable to a change in the Net
Investment in Foreign Operations of reporting entity.
Point to be noted in this regard;
The reporting entity to exercise CONTROL over foreign operations, is not necessarily a determinant factor.
Indications to test whether the entity is an NFO:
1. Nature, Size, Frequency and materiality of transactions of foreign entity with reporting entity.
2. Extent of Autonomy (Dependent/Independent)
3. Mode of Financing (Local currency borrowings rather from reporting entity)
4. Cost of Production or services being incurred and settled in its local currency.
5. Sales being in currencies other than reporting currency.
The above are indications but still we need to exercise our judgment to decide it as NFO or IFO.

Translation of FINANCIAL STATEMENTS OF NFOS;-
ITEMS SELECTION OF RATE
Assets and Liabilities (Balance Sheet items) both
monetary and non-monetary
Apply Closing Rate
Income and Expenses Apply the Rate relevant on the date of Transactions
Resulting Forex should be accumulated in FOREI GN CURRENCY TRANSLATI ON RESERVE (FCTR), UNTI L
DISPOSAL OF NET INVESTMENT OF THAT NFO.
Goodwill or Capital Reserve arising on acquisition of NFO (Subsidiary) should be translated at
Closing Rate
Points to be noted in this regard
1. Normal consolidation procedures such as elimination of intra-
group transactions of subsidiary, associate, JV, Etc should be
applied.
2. Exchange differences attributable to monetary items should be
recognized as INCOME OR EXPENSE in case of IFO and to be
accumulated in FCTR in case of NFO.
3. Financial Statements of different reporting dates can be used
subject to conditions laid down in AS 21.
4. Principles laid down in AS 23 and AS 27 should also be applied.
TAX EFFECTS OF FOREIGN EXCHANGE RATES:-
Here comes relation to AS 22 (Timing Difference) when a foreign branch is changed its identity
from IFO (Forex recognized in P&L account) to NFO (where Forex is accumulated in FCTR
account)
There are two types of transactions as given below;-
ENTERED FOR HEDGING PURPOSES
ENTERED FOR SPECULATIVE PURPOSES
This is done in the intention of
managing or minimizing risks a risk
associated with changes in Forex
Premium (Loss)/Discount (Gain)
arising out of contract should be
recognized over the tenor of the
contract period.
But any Profit or Loss arising on
Cancellation or Renewal of
contract to be recognized as Income
or Expense for the Period
The Gain/Loss arising out of
Speculative Contract to be
computed and should be
recognized on the Reporting
Date" (Balance Sheet Date)
1. Amount of Forex differences included in the Net Profit or Loss for the
Period.
2. Net Forex differences accumulated in FCTR (as owners equity)
3. If the reporting currency is different from the currency of the country in
which the reporting entity is domiciled (registered office), this should be
disclosed with explanatory notes.
4. Reconciliation between opening and closing balance in the said reserve
account to be highlighted.
5. A change in classification of significant foreign operation, additional
disclosures are called for in the following areas;-
a. Nature of change in classification
b. Reasons
c. Impact of such change on shareholders funds
d. Impact on P&L account for the period.
Change in Forex occurring after balance sheet date is disclosed in
accordance with AS 4.
RELATED IAS IS GIVEN BELOW