CA NITIN GOEL AS 11 CH-10J

THE EFFECT OF CHANGES IN FOREIGN EXCHANGE

RATES
AS-11 should be applied in
❖ Accounting for transactions in foreign currencies
Scope
❖ Translating the financial statements of foreign operations.
❖ Accounting for foreign currency transactions in the nature of forward
exchange contracts
FOREIGN CURRENCY TRANSACTIONS
Meaning It is a transaction which is denominated or requires settlement in a
foreign currency.
➢ Buying and selling of goods or services in foreign currency
Examples ➢ Lending or borrowing in foreign currency.
➢ Acquisition and disposition of asset denominated in foreign currency.
Initial → All transactions should be recorded at spot rate i.e. rate of foreign
recognition exchange at the date of transaction.
→ If spot rate is not given then average rate of week or month can be used
These are the items which are receivable or payable in
Monetary fixed or determinable amounts of money.
Subsequent Item Example: Cash, debtors, creditors, etc.
recognition
Use exchange rate at the balance sheet date
/reporting at
These all assets and liabilities other than monetary items.
subsequent
Example: Fixed assets, inventories and investments in
balance Non-monetary
equity shares.
sheet dates item Use exchange rate at the date of transaction.
If item carried at fair value, then use the exchange rate
that existed when the values were determined
Monetary To be recognized as expenses or income i.e. to be debited
Recognition Item or credited to P & L A/c
of exchange
differences Non-monetary No subsequent recognition is required, there does not
item arise any exchange difference.

SPECIAL CASE (MONETARY ITEMS) PARA 46 AND 46A

Exchange differences arising or reporting of long-term foreign currency
Applicability
monetary items. (LTFCMI). Application of this Para is optional but once
exercised it is irrevocable & applies to all such foreign currency monetary
items.
An asset or liability should be designated as LTFCMI if –
Meaning of
➢ Asset or liability is expressed in a foreign currency and
LTFCMI ➢ Has a term of 12 months or more at the date of origination of the asset
or liability.
Exchange Related to Add to/deduct from cost of asset and depreciate over the
difference on depreciable balance life of the asset
LTFCMI capital assets

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Accumulate in FCMITDA and amortize over the balance

period of such long term item
Others FCMITDA: Foreign Currency Monetary Item Translation
Difference Account
Disclosed under Reserve & Surplus as separate line item
• Fact of such option
Disclosure • Amount remaining to be amortized in the financial statements of the
requirements period in which such option is exercised and in every subsequent period
so long as any exchange difference remains unamortized.
FOREIGN OPERATIONS
Integral • It is a foreign operation, the activities of which are integral part of those
Foreign of the reporting enterprise. The business of IFO is carried on as if it were
Operations an extension of the reporting enterprises operations.
• It is a foreign operation that is not an integral foreign operation. The
Non- Integral
business of NIFO is carried on in substantially independent way by
Foreign accumulating cash & other monetary items, incurring expenses,
Operations generating income & arranging borrowing in its own local currency.
FORWARD EXCHANGE CONTRACTS
It means an agreement to exchange different currencies at a forward rate.
Meaning Forward rate is the specified exchange rate for exchange of two
currencies at a specified future date.
Gain or loss recognized in the Statement of P&L for the
For Trading period. The premium or discount on the forward exchange
or contract is not recognised separately.
speculation At each balance sheet date the value of contract is marked
Categories purposes to its current market value and the gain or loss on the
contract is recognised.
Not for Premium or discount – amortize as expense or income
Trading or over the life of contract.
speculation
DISCLOSURE REQUIREMENTS
❖ An enterprise should disclose:
(a) The amount of exchange differences included in the net profit or loss for the period.
(b) Net exchange differences accumulated in foreign currency translation reserve as a
separate component of shareholders’ funds, and a reconciliation of the amount of
such exchange differences at the beginning and end of the period.
❖ When the reporting currency is different from the currency of the country in which the
enterprise is domiciled, the reason for using a different currency should be disclosed.
The reason for any change in the reporting currency should also be disclosed.
❖ When there is a change in the classification of a significant foreign operation, an
enterprise should disclose:
(a) The nature of the change in classification
(b) The reason for the change
(c) The impact of the change in classification on shareholders' funds and
(d) The impact on net profit or loss for each prior period presented had the change in
classification occurred at the beginning of the earliest period presented.

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ASSIGNMENT QUESTIONS

Question 1 (RTP Nov 2018) / (RTP Nov 2020) (ICAI Study Material) Pg no._____
Exchange Rate per $
Goods purchased on 1.1.2021 of US $ 15,000 ₹ 75
Exchange rate on 31.3.2021 ₹ 74
Date of actual payment 7.7.2021 ₹ 73
Ascertain the loss/gain for financial years 2020-21 and 2021-22, also give their treatment as
per AS 11.

Question 2 (RTP Nov 2022) Pg no._____

A company had imported raw materials worth US Dollars 6,00,000 on 5th January, 2021, when
the exchange rate was ₹ 43 per US Dollar. The company had recorded the transaction in the
books at the above-mentioned rate. The payment for the import transaction was made on 5th
April, 2021 when the exchange rate was ₹ 47 per US Dollar. However, on 31st March, 2021, the
rate of exchange was ₹ 48 per US Dollar. The company passed an entry on 31st March, 2021
adjusting the cost of raw materials consumed for the difference between ₹ 47 and ₹ 43 per
US Dollar.
In the background of the relevant accounting standard, is the company’s accounting treatment
correct? Discuss

Question 3 (ICAI Study Material) Pg no._____

Kalim Ltd. borrowed US$ 4,50,000 on 01/01/2021, which will be repaid as on 31/07/2021. Kalim
Ltd. prepares financial statement ending on 31/03/2021. Rate of exchange between reporting
currency (INR) and foreign currency (USD) on different dates are as under:
01/01/2021 1 US$ = ₹ 48.00
31/03/2021 1 US$ = ₹ 49.00
31/07/2021 1 US$ = ₹ 49.50

Question 4 (RTP May 2022) Pg no._____

Kumar Ltd. borrowed US $ 3,00,000 on 31-12-2020 which will be repaid (settled) as on 30-6-
2021. Kumar Ltd. prepares its financial statements ending on 31-3-2021. Rate of exchange
between reporting currency (Rupee) and foreign currency (US $) on different dates are as
under:
31-12-2020 1 US $ = ₹ 44.00; 31-3-2021 1 US $ = ₹ 44.50; 30-6-2021 1 US $ = ₹ 44.75
(i) Calculate borrowings in reporting currency to be recognised in the books on above
mentioned dates & also show journal entries for the same.
(ii) If borrowings was repaid (settled) on 28-2-2021 on which date exchange rate was 1 US$=
₹ 44.20 than what entry should be passed?

Question 5 (RTP Nov 2019) / (ICAI Study Material) Pg no._____

Explain briefly the accounting treatment needed in the following cases as per AS 11 as on
31.3.2021
a) Trade receivables as on 31.3.2021 in the books of XYZ Ltd. include an amount receivable
from Umesh ₹ 5,00,000 recorded at the prevailing exchange rate on the date of sales, i.e.
at US $ 1= ₹ 58.50.
b) Long term loan taken from a U.S. Company, amounting to ₹ 60,00,000. It was recorded at
US $ 1 = ₹ 55.60, taking exchange rate prevailing at the date of transaction.
US $ 1 = ₹ 61.20 on 31.3.2021.

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Question 6 Pg no._____
Beekay Ltd. purchased fixed assets costing ₹ 5,000 lakh on 01.04.2021 payable in foreign
currency (US$) on 05.04.2022. Exchange rate of 1 US$ = ₹ 50.00 and ₹ 54.98 as on 01.04.2021
and 31.03.2022 respectively. The company also obtained a soft loan of US$ 1 lakh on 01.04.2021
payable in three annual equal instalments. First instalment was due on 01.05.2022.
You are required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2022.

Question 7 (ICAI Study Material) Pg no._____

A Ltd. has borrowed USD 10,000 in foreign currency on April 1, 2021 at 5% p.a. annual interest
and acquired a depreciable asset. The exchange rates are as under:
01/04/2021 1 US$ = ₹ 48.00
31/03/2022 1 US$ = ₹ 51.00
You are required to pass the journal entries in the following cases:
(i) Option under Para 46A is not availed.
(ii) Option under Para 46A is availed.
(iii) The loan was taken to finance the operations of the entity (and not to procure a
depreciable asset).
In all cases, assume interest accrued on 31 March 2022 is paid on the same date.

Question 8 Pg no._____
Option Ltd. is engaged in the manufacturing of steel. For its steel plant, it required
machineries of latest technology. It usually resorts to Long Term Foreign Currency
Borrowings for its fund requirements. On 1st April, 2021, it borrowed US $1 million from
International Funding Agency, USA when exchange rate was 1 $ = ₹ 52. The funds were used
for acquiring machineries on the same date to be used in three different steel plants. The
useful life of the machineries is 10 years and their residual value is ₹ 20,00,000.
Earlier also company used to purchase machineries out of foreign borrowings. The exchange
differences arising on such borrowings were charged to profit and loss account and were not
capitalised even though the company had an option to capitalise it as per notified AS 11
(notification issued by MCA in 2009).
Now for this new purchase of machinery, Option Ltd, is interested to avail the option of
capitalising the same to the cost of asset. Exchange rate on 31st March, 2022 is 1 US $ = ₹ 51.
Assume that on 31st March, 2022, Option Ltd. is not having any old Long term foreign currency
borrowings except for the amount borrowed for machinery purchased on 1st April, 2021.
Can Option Ltd. capitalise the exchange difference to the cost of asset on 31st March,
2022? If yes, then calculate the depreciation amount on machineries as on 31st March, 2022.

Question 9 Pg no._____
Om Ld. Purchased an item of property, plant and equipment for US $ 50 Lakh on 01.04.2021
and the same was fully financed by the foreign currency loan (US $) repayable in 5 equal
instalments annually. Exchange rate at the time of purchase was 1 US $ = ₹ 60. As on
31.03.2022 the first instalment was paid when 1 US $ = ₹ 62.
The entire loss on exchange was included in cost of goods sold. Om Ltd. normally provides
depreciation on an item of property, plant and equipment at 20% on WDV basis and exercised
the option to adjust the cost of asset for exchange difference arising out of loan restatement
and payment.
Calculate the amount of exchange loss, its treatment and depreciation on this item of
property, plant and equipment.

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 CA NITIN GOEL AS 11 CH-10J

Solution
Exchange differences arising on restatement or repayment of liabilities incurred for the
purpose of acquiring an item of property, plant and equipment should be adjusted in the
carrying amount of the respective item of property, plant and equipment as Om Ltd. has
exercised the option and it’s a long term foreign currency monetary item. Thus the entire
exchange loss due to variation of ₹ 20 Lakh on 31.03.2022 on payment of US $10 Lakh, should
be added to the carrying amount of an item of property, plant and equipment and not to the
cost of goods sold. Further depreciation on unamortized depreciable amount should also be
provided.

Calculation of Exchange Loss:

Foreign Currency Loan (in ₹) = $ 50 Lakh x 60 = ₹ 3,000 Lakh
Exchange Loss on outstanding loan on 31.03.2022 = US $ 40 Lakh x (62-60) = ₹ 80 Lakh
So ₹ 80 Lakh should also be added to cost of an item of property, plant and equipment with
corresponding credit to outstanding loan in addition to ₹ 20 Lakh on account of exchange loss
on payment of instalment. The total cost of an item of property, plant and equipment to be
increased by ₹ 100 Lakh. Total depreciation to be provided for the year 2021-22 = 20% of
(3,000+100) = ₹ 620 Lakh.

Question 10 (RTP Nov 2018) / (RTP Nov 2020) Pg no._____

Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary
items to be recognized at each Balance Sheet date? Classify the following as monetary or
non-monetary item:
(i) Share Capital
(ii) Investment in Equity Shares
(iii) Trade Receivables
(iv) Property, Plant & Equipment.

Solution
As per AS 11, Monetary items are money held and assets and liabilities to be received or paid
in fixed or determinable amounts of money.
Foreign currency monetary items should be reported using the closing rate at each balance
sheet date. However, in certain circumstances, the closing rate may not reflect with
reasonable accuracy the amount in reporting currency that is likely to be realised from, or
required to disburse, a foreign currency monetary item at the balance sheet date. In such
circumstances, the relevant monetary item should be reported in the reporting currency at
the amount which is likely to be realised from or required to disburse, such item at the
balance sheet date.
Share capital Non-monetary
Trade receivables Monetary
Investment in Equity Shares Non-monetary
Property, Plant & Equipment Non-monetary

Question 11 Pg no._____
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2021 payable after 6 months.
The company entered into a forward contract for 6 months @ ₹ 62.15 per dollar. On 30th
November, 2021; the exchange rate was ₹ 60.75 per dollar. How will you recognise the profit
or loss on forward contract in the books of Stem Ltd. for the year ended 31st March, 2022?

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Question 12 (ICAI Study Material) Pg no._____

Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st December at 1 US$
= ₹ 47.10 when exchange rate was US$ 1 = ₹ 47.02. On 31st December when he closed his
books exchange rate was US$ 1 = ₹ 47.15. On 31st January, he decided to sell the contract at
₹ 47.18 per dollar. Show how the profits from contract will be recognized in the books.

Question 13 Pg no._____
“The company had a engineering contract with a foreign government, work to be carried out
in foreign country and payments to be received in dollars. The work was completed in the
year 2021, and the entire contracted amount was duly recorded in the books of the company
at the prevalent exchange rate on the date of completion of the work. However, payments to
the extent of ₹ 40 crores could not be released by the Foreign Government because of
temporary foreign exchange crisis in that country. These ₹40 crores unrealized at the end, if
converted at the yearend rate would amount to ₹ 40.50 crores. The Company has adopted and
follows the following accounting policy:
“In respect of foreign currency transactions, current assets and current liabilities are
revalued at year end rates. However, if there is a net loss, due to exchange difference, the
same is charged off to the P&L account, but if there is a net gain, the same is ignored in view
of the prudent accounting policies of not recording unrealized gains due to exchange rate
fluctuations”.
Comment on the appropriateness of the above.

Solution
In given case the recoverability of ₹ 40 Crores is not doubtful or uncertain but just deferred
temporarily hence it should be translated using exchange rates at the close of the year.
Further AS-11 clearly mentions that net difference shall be transferred to profit and loss
account. Hence, we can say that exchange difference favourable or unfavorable both shall be
considered at the yearend rather to ignore the gains and recording just losses.

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PRACTICE QUESTIONS

Question 1 Pg no._____
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th February,
2021, when the exchange rate was ₹ 44 per US Dollar. The transaction was recorded in the
books at the above mentioned rate. The payment for the transaction was made on 10th April,
2021, when the exchange rate was ₹ 48 per US Dollar. At the year end 31st March, 2021, the
rate of exchange was ₹ 49 per US Dollar.
The Chief Accountant of the company passed an entry on 31st March, 2021 adjusting the
cost of raw material consumed for the difference between ₹ 48 and ₹ 44 per US Dollar.
Discuss whether this treatment is justified as per the provisions of AS-11 (Revised).

Solution
As per AS 11, initial recognition of a foreign currency transaction is done in the reporting
currency by applying the exchange rate at the date of the transaction. Accordingly, on 25th
February 2021, the raw material purchased and its creditors will be recorded at US dollar
9,000 × ₹ 44 = ₹ 3,96,000.
Also, as per standard, on balance sheet date such transaction is reported at closing
rate of exchange, hence it will be valued at the closing rate i.e. ₹ 49 per US dollar (USD 9,000
x ₹ 49 = ₹ 4,41,000) at 31st March, 2021, irrespective of the payment made for the same
subsequently at lower rate in the next financial year.
The difference of ₹ 5 (49 – 44) per US dollar i.e. ₹ 45,000 (USD 9,000 x ₹ 5) will be shown as
an exchange loss in the profit and loss account for the year ended 31st March, 2021 and will
not be adjusted against the cost of raw materials.
In the subsequent year on settlement date, the company would recognize or provide in the
Profit and Loss account an exchange gain of ₹ 1 per US dollar, i.e. the difference from balance
sheet date to the date of settlement between ₹ 49 and ₹ 48 per US dollar i.e. ₹ 9,000.
Hence, the accounting treatment adopted by the Chief Accountant of the company is incorrect
i.e. it is not in accordance with the provisions of AS 11

Question 2 (Inter May 2018) (5 Marks) Pg no._____

ABC Ltd. borrowed US $ 5,00,000 on 01/01/2021, which was repaid as on 31/07/2021. ABC Ltd.
prepares financial statement ending on 31/03/2021. Rate of Exchange between reporting
currency (INR) and foreign currency (USD) on different dates are as under:
01/01/2021 1 US$ = 68.50
31/03/2021 1 US$ = 69.50
31/07/2021 1 US$ = 70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11.
Solution
Date Particulars Dr. Cr.
Jan. 01, 2021 Bank A/c (5,00,000*68.50) Dr. 3,42,50,000
To Foreign Loan A/c 3,42,50,000
Mar. 31, 2021 Foreign Exchange Difference A/c Dr. 5,00,000
To Foreign Loan A/c 5,00,000
[5,00,000*(69.50-68.50)]
Mar. 31, 2021 Profit & Loss A/c Dr. 5,00,000
To Foreign Exchange Difference A/c 5,00,000
Jul. 31, 2021 Foreign Loan A/c Dr. 3,47,50,000

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 CA NITIN GOEL AS 11 CH-10J

Foreign Exchange Difference A/c Dr. 2,50,000

To Bank A/c 3,50,00,000
Profit & Loss A/c Dr. 2,50,000
To Foreign Exchange Difference A/c 2,50,000

Question 3 Pg no._____
Explain briefly the accounting treatment needed in the following cases as per AS 11:
(i) Sundry Debtors include amount receivable from Ted of U.S., ₹ 5,00,000 recorded at the
prevailing exchange rate on the date of sales, transaction recorded at $1 = ₹ 38.70.
(ii) Long term loan taken from a U.S. Company, amounting to ₹ 60,00,000. It was recorded at
$1 = ₹ 35.60, taking exchange rate prevailing at the date of transactions.
Exchange rates at the end of the year were as under:
$1 Receivable = ₹ 45.80 $ 1 Payable = ₹ 45.90

Solution
AS 11 provides that exchange differences attributable to monetary items should be taken to
Statement of Profit and Loss. In case option under para 46A is exercised, exchange
differences arising on long-term foreign currency monetary items can be adjusted in the cost
of depreciable capital asset or in other cases transferred in Foreign Currency Monetary Item
Translation Difference A/c (FCMITD) and amortised.
Trade Receivables
Particulars Foreign currency Rate ₹
Initial recognition US $ 12,919.90 38.70 5,00,000
Rate on B/S date 45.80
Exchange Difference US $ 12,919.90 7.10 91,731
Gain or loss Gain
Treatment Credit to Profit & Loss A/c
₹ 91,731
Long Term loan
Particulars Foreign currency Rate ₹
Initial recognition US $ 1,68,539.33 35.60 60,00,000
Rate on B/S date 45.90
Exchange Difference US $ 1,68,539.33 10.30 17,35,955
Gain or loss Loss
Treatment Debit to Profit & Loss A/c ₹
17,35,955 or transfer to
FCMITD A/c and amortise.

Question 4 (Inter Nov 2018) (5 Marks) Pg no._____

(i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S. company
amounting to ₹ 30,00,000. It was recorded at US $1 = ₹ 60.00, taking exchange rate
prevailing at the date of transaction. The exchange rate on balance sheet date (31.03.2022)
was US $1 = ₹ 62.00.

(ii) Trade receivable includes amount receivable from Preksha Ltd., ₹ 10,00,000 recorded at
the prevailing exchange rate on the date of sales, transaction recorded at US $1 = ₹ 59.00.
The exchange rate on balance sheet date (31.03.2022) was US $1 = ₹ 62.00.
You are required to calculate the amount of exchange difference and also explain the
accounting treatment needed in the above two cases as per AS 11 in the books of ABC Ltd.

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 CA NITIN GOEL AS 11 CH-10J

Solution
Amount of Exchange difference and its Accounting Treatment
Long term Loan Foreign ₹
Currency Rate
(i) Initial recognition US $ 50,000 ₹ (30,00,000/60) 1 US $ = ₹ 60 30,00,000
Rate on Balance sheet date 1 US $ = ₹ 62
Exchange Difference Loss US $ 50,000 x ₹ (62 – 60) 1,00,000
Treatment: Credit Loan A/c and Debit FCMITD A/c or
Profit and Loss A/c by ₹ 1,00,000
Trade receivables
(ii) Initial recognition US $ 16,949.152* (₹10,00,000/59) 1 US $ = ₹ 59 10,00,000
Rate on Balance sheet date 1 US $ = ₹ 62
Exchange Difference Gain US $ 16,949.152* x ₹ (62-59) 50,847.456*
Treatment: Credit Profit and Loss A/c by ₹
50,847.456* and Debit Trade Receivables
Thus, Exchange Difference on Long term loan amounting ₹ 1,00,000 may either be charged to
Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but
exchange difference on trade receivables amounting ₹ 50,847.456 is required to be
transferred to Profit and Loss A/c.

Question 5 (Inter Jan 2021) (5 Marks) Pg no._____

Explain briefly the accounting treatment needed in the following cases as per AS 11 as on
31.03.2022
(i) Debtors include amount due from Mr. S ₹ 9,00,000 recorded at the prevailing exchange
rate on the date of sales, transaction recorded at US $1 = ₹ 72.00
US $ 1= ₹ 73.50 on 31st March, 2022
US $ 1= ₹ 72.50 on 1st April, 2021.
(ii) Long term loan taken on 1st April, 2021 from a U.S. company amounting to ₹ 75,00,000. ₹
5,00,000 was repaid on 31st December, 2021, recorded at US $ 1 = ₹ 70.50. Interest has
been paid as and when debited by the US company.
US $1= ₹ 73.50 on 31st March, 2022
US $1=1 ₹ 72.50 on 1st April, 2021

Solution
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, 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 recognized as income or as expenses in the period
in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they
relate to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign
Currency Monetary Item Translation Difference Account” in the enterprise’s financial
statements and amortized over the balance period of such long-term asset/ liability, by
recognition as income or expense in each of such periods.
Foreign
Amount (₹)
Currency Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = ₹72 9,00,000

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Rate on Balance sheet date 1 US $ = 73.50

Exchange Difference Gain US $ 12,500 X (73.50 - 72) 18,750
Treatment: Credit Profit and Loss A/c by ₹ 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 (75,00,000/72.50) 1 US $ = 72.50 75,00,000
Rate on Balance sheet date 1 US $ = 73.50
Exchange Difference Loss after adjustment of exchange
gain on repayment of ₹ 5,00,000
₹ 67,987.48 [82,171.88 (US $ 96,356.08 X ₹ 73.5 less ₹ 67,987.48*
70,00,000) less profit 14,184.40 [US $ 7,092.2
(5,00,000/70.5) X ₹ 2)] NET LOSS
Treatment: Credit Loan A/c and Debit FCMITD A/C or
Profit and Loss A/c by ₹ 67,987.48
Thus, Exchange Difference on Long term loan amounting ₹ 67,987.48 may either be charged
to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account
but exchange difference on debtors amounting ₹ 18,750 is required to be transferred to Profit
and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of ₹
5,00,000) has been calculated in the above solution. Alternative considering otherwise also
possible.
NOTE 2: Date of sales transaction of ₹ 9 lakhs has not been given in the question and hence it
has been assumed that the transaction took place during the year ended 31 March 2022

Question 6 (Inter Dec 2021) (5 Marks) Pg no._____

(i) PP Ltd. an Indian Company acquired long term finance from WW (P) Ltd. a U.S. company,
amounting to ₹ 40,88,952. The transaction was recorded at US $1 = ₹ 72.00, taking
exchange rate prevailing at the date of transaction. The exchange rate on balance sheet
date (31.03.2021) is US $1 = ₹ 73.60.
(ii) Trade receivables of PP Ltd. include amount receivable from Preksha Ltd., ₹ 20,00,150
recorded at the prevailing exchange rate on the date of sales, transaction recorded at US
$1 = ₹ 73.40. The exchange rate on balance sheet date (31.03.2021) is US $1 = ₹ 73.60.
Exchange rate on 1st April, 2020 is US $1 = ₹ 74.00.
You are required to calculate the amount of exchange difference and also explain the
accounting treatment needed in the above two cases as per AS 11 in the books of PP Ltd.

Solution
(i) Long term Finance
Foreign Currency Rate ₹
Initial recognition US $ 56,791 (40,88,952/72) 1 US $ = ₹ 72 40,88,952
Rate on Balance sheet date 1 US $ = ₹ 73.60
Exchange Difference Loss 90,866
[US $ 56,791 x (73.60 – 72)] (rounded off)
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, 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 recognized as income or as expenses in the period
in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they

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relate to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign

Currency Monetary Item Translation Difference Account” in the enterprise’s financial
statements and amortized over the balance period of such long-term asset/ liability, by
recognition as income or expense in each of such periods.
Treatment needed in this case: PP Ltd. can either Debit Foreign Currency Monetary Item
Translation Difference (FCMITD) A/c or Debit Profit & Loss A/c by ₹ 90,866 & Credit Loan A/c

(ii) Trade Receivables

Foreign Currency ₹
Rate
Initial recognition US $ 27,250 (20,00,150/ 73.40) 1 US $ = ₹ 73.40 20,00,150
Rate on Balance sheet date 1 US $ = ₹ 73.60
Exchange Difference Gain [US $ 27,250 X (73.60-73.40)] 5,450
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences on
trade receivables amounting ₹ 5,450 is required to be transferred to Profit and Loss A/c.
Treatment needed in this case: Credit Profit and loss account by ₹ 5,450.

Question 7 Pg no._____
Legal Ltd. is engaged in the manufacturing of rubber. For its plant, it required machineries of
latest technology. It usually resorts to Long Term Foreign Currency Borrowings for its fund
requirements. On 1st April, 2021, it borrowed US $1 million from International Funding Agency,
USA when exchange rate was 1 $ = ₹ 63. The funds were used for acquiring machineries, on
the same date, to be used in three different plants. The useful life of the machineries is 10
years and their residual value is ₹ 30,00,000.
Earlier also the company used to purchase machineries out of foreign borrowings. The
exchange differences arising on such borrowings were charged to P&L A/c and were not
capitalized even though the company had an option to capitalize it as per notified AS 11.
Now for this new purchase of machinery, Legal Ltd, is interested to avail the option of
capitalizing the same to the cost of asset. Exchange rate on 31st March, 2022 is 1 US $ = ₹ 62.
Assume that on 31st March, 2022, Legal Ltd. is not having any old long term foreign currency
borrowings except for the amount borrowed for machinery purchased on 1st April, 2021.
Comment whether Legal Ltd. can capitalize the exchange difference to the cost of asset
on 31st March, 2022. If yes, then calculate the depreciation amount on machineries as on 31st
March, 2022.

Solution
As per paragraph 46A of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, in respect
of accounting periods commencing on or after 1st April, 2011, for an enterprise which had
earlier exercised the option under paragraph 46 or not (such option to be irrevocable and to
be applied to all such foreign currency monetary items), the exchange differences arising on
reporting of long term foreign currency monetary items at rates different from those at which
they were initially recorded during the period, or reported in previous financial statements, in
so far as they relate to the acquisition of a depreciable capital asset, can be added to or
deducted from the cost of the asset and shall be depreciated over the balance life of the asset.

Accordingly, though Legal Ltd. had not earlier exercised the option, yet it can avail the option
to capitalize the exchange difference to the cost of machinery by virtue of para 46A of AS 11.
Further, since Legal Ltd. has no earlier long term foreign currency borrowings, it is not
required to apply capitalization option to earlier borrowing also.

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Exchange difference to be capitalized and depreciation amount

Cost of the asset in $ 1 million
Exchange rate on 1st April, 2021 1$ = ₹ 63
Cost of the asset in ₹ (1 million x ₹ 63) 63 million
Less: Exchange differences as on 31st March, (1 million)
2022 (63-62) x $ 1 million (Gain)
62 million
Less: Depreciation for 2021-22 (5.90 million)
(62 million - 3 million) /10 years
56.10 million

Question 8 Pg no._____
Opportunity Ltd. purchased an equipment costing ₹ 24,00,000 lakhs on 1.4.2021 and the same
was fully financed by foreign currency loan (US Dollars) payable in four annual equal
installments. Exchange rates were 1 Dollar = ₹ 60.00 and ₹ 62.50 as on 1.4.2021 and 31.3.2022
respectively. First installment was paid on 31.3.2022. The entire difference in foreign exchange
has been capitalized. You are required to state that how these transactions would be
accounted for.

Solution
As per AS 11, exchange differences arising on reporting an enterprise’s monetary items at
rates different from those at which they were initially recorded during the period, should be
recognized as income or expenses in the period in which they arise. Thus, exchange
differences arising on repayment of liabilities incurred for the purpose of acquiring fixed
assets will be recognized as income or expense.
Calculation of Exchange Difference:
Foreign currency loan = ₹ 24,00,000/60 = 40,000 US Dollars
Exchange difference = 40,000 US Dollars × (62.50-60.00) = ₹ 1,00,000
(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting ₹ 1,00,000 should be charged
to profit and loss account for the year.

Note: The above answer has been given on the basis that the company has not availed the
option for capitalisation of exchange difference as per para 46/ 46A of AS 11.
However, as per para 46A of the standard, the exchange differences arising on reporting of
long term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, in so far as they relate to the acquisition of a depreciable
capital asset, can be added to or deducted from the cost of the asset and shall be depreciated
over the balance life of the asset
Accordingly, in case Opportunity Ltd. opts for capitalizing the exchange difference, then the
entire amount of exchange difference of ₹ 1,00,000 will be capitalised to ‘Equipment account’.
This capitalized exchange difference will be depreciated over the useful life of the asset.

Cost of the asset on the reporting date

Initial cost of Equipment ₹ 24,00,000
Add: Exchange difference as on 31.3.2022 ₹ 1,00,000
Total cost on the reporting date ₹ 25,00,000

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Question 9 (ICAI Study Material) Pg no._____

A Ltd. purchased fixed assets costing ₹3,000 lakhs on 1.1.2021 and the same was fully financed
by foreign currency loan (U.S. Dollars) payable in three annual equal instalments. Exchange
rates were 1 Dollar = ₹ 40.00 & ₹ 42.50 as on 1.1.2021 & 31.12.2021 respectively. First instalment
was paid on 31.12.2021. The entire difference in foreign exchange has been capitalised.
You are required to state, how these transactions would be accounted for.

Solution
As per AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, 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 recognized as income or expenses in the period in
which they arise. Thus exchange differences arising on repayment of liabilities incurred for
the purpose of acquiring fixed assets are recognized as income or expense.

Calculation of Exchange Difference:

Foreign currency loan = 3,000 lakhs/40 = 75 lakhs US Dollars
Exchange difference = 75 lakhs US Dollars × (42.50 – 40.00) = ₹187.50 lakhs
(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting ₹ 187.50 lakhs should be
charged to profit and loss account for the year.
Note: The above answer has been given on the basis that the company has not exercised the
option of capitalization available under para 46 of AS 11. However, if the company opts to avail
the benefit given in paragraph 46A, then nothing is required to be done since the company
has done the correct treatment.

Question 10 (RTP May 2021) Pg no._____

(a) Classify the following items into Monetary and Non-monetary:
(i) Share capital; (ii) Trade Payables; (iii) Cash balance; (iv) Property, plant and equipment
(b) Trade payables of CAT Ltd. include amount payable to JBB Ltd., ₹ 10,00,000 recorded at
the prevailing exchange rate on the date of transaction, transaction recorded at US $1 = ₹
80.00. The exchange rate on balance sheet date (31.03.2022) was US $1 = ₹ 85.00. You are
required to calculate the amount of exchange difference and also explain the accounting
treatment needed for this as per AS 11 in the books of CAT Ltd.

Solution
(a) Share capital - Non-monetary; Trade Payables - Monetary
Cash balance – Monetary; Property, plant and equipment - Non-monetary
(b) Amount of Exchange difference and its Accounting Treatment
Foreign ₹
Currency Rate
Trade Payables
Initial recognition US $ 12,500* (₹10,00,000/80) 1 US $ = ₹ 80 10,00,000
Rate on Balance sheet date 1 US $ = ₹ 85
Exchange Difference Loss US $ 12,500* x ₹ (85-80) 62,500
Treatment: Debit Profit and Loss A/c by ₹ 62,500
and Credit Trade Payables
Thus, Exchange Difference on trade payables amounting ₹ 62,500 is required to be transferred
to Profit and Loss

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Question 11 (ICAI Study Material) Pg no._____

Classify the following items into Monetary and Non-monetary:
(i) Inventories; (ii) Trade Receivables; (iii) Investment in Equity Shares; (iv) Property, plant &
equipment

Solution
Inventories- Non-monetary;
Trade Receivables - Monetary
Investment in Equity Shares – Non-monetary;
Property, Plant & Equipment - Non-monetary

Question 12 (RTP May 2019) / (ICAI Study Material) / (RTP Nov 2021) (Similar) Pg no._____
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2021, payable after three months.
Company entered into a forward contract for three months @ ₹ 49.15 per dollar. Exchange
rate per dollar on 01st Feb. was ₹ 48.85. How will you recognize the profit or loss on forward
contract in the books of Rau Ltd.
Solution
Calculation of profit or loss to be recognized in the books of Rau Ltd.
₹
Forward contract rate 49.15
Less: Spot rate (48.85)
Loss/Premium on Contract 0.30
Forward Contract Amount $1,00,000
Total loss on entering into forward contract = ($1,00,000 × ₹ 0.30) ₹ 30,000
Contract period 3 months
Loss for the period 1st February, 2021 to 31st March, 2021 i.e. 2 ₹ 20,000
months falling in the year 2020-2021 will be ₹ 30,000*2/3 =
Balance loss of ₹ 10,000 (i.e. ₹ 30,000 – ₹ 20,000) for the month of April, 2021 will be
recognized in the financial year 2021-2022.

Question 13 (RTP May 2018) / (RTP Nov 2019) Pg no._____

Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2021 payable after 6
months. The company entered into a forward contract for 6 months @ ₹ 64.25 per Dollar. On
31st October, 2021, the exchange rate was ₹ 61.50 per Dollar. You are required to recognise
the profit or loss on forward contract in the books of company for year ended 31st March, 2022

Solution
Calculation of profit or loss to be recognized in the books of Power Track Limited
₹
Forward contract rate 64.25
Less: Spot rate (61.50)
Loss/Premium on Contract 2.75
Forward Contract Amount $50,000
Total loss on entering into forward contract = ($50,000 × ₹ 2.75) ₹ 1,37,500
Contract period 6 months
Loss for the period 1st November, 2021 to 31st March, 2022 i.e. ₹ 1,14,583
5 months falling in the year 2021-2022 will be ₹ 1,37,500*5/6 =
Thus, the loss amounting to ₹ 1,14,583 for the period is to be recognized in the year ended 31st
March, 2022.

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Question 14 (Inter Nov 2018) (5 Marks) / (RTP May 2020) Pg no._____

AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2021 from an American
company M/s M&M Limited. The amount was payable after 6 months. The company entered
into a forward contract on 1st January 2021 for five months @ ₹ 62.50 per dollar. The exchange
rate per dollar was as follows:
On 1st January, 2021 ₹ 60.75 per dollar
On 31st March, 2021 ₹ 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized
in the books of AXE Limited for the year ending 2020-21, as per the provisions of AS 11.

Solution
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may enter into
a forward exchange contract to establish the amount of the reporting currency required, the
premium or discount arising at the inception of such a forward exchange contract should be
amortized as expenses or income over the life of the contract.
Forward Rate ₹ 62.50
Less: Spot Rate (₹ 60.75)
Premium on Contract ₹ 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) ₹ 8,75,000
Contract period 5 months
3 months falling in the year 2020-21; therefore loss to be recognized in 2020-21 (8,75,000/5)
x 3 = ₹ 5,25,000. Rest ₹ 3,50,000 will be recognized in the following year 2021-22.

Question 15 Pg no._____
Mr. Y bought a forward contract for three months of US $ 2,00,000 on 1st December 2021 at 1
US $ = ₹ 44.10 when the exchange rate was 1 US $ = ₹ 43.90. On 31-12-2021, when he closed
his books, exchange rate was 1 US $ = ₹ 44.20. On 31st January, 2022 he decided to sell the
contract at ₹ 44.30 per Dollar. Show how the profits from the contract will be recognized in
the books of Mr. Y.

Solution
As per AS 11, in recording a forward exchange contract intended for trading or speculation
purpose, the premium or discount on the contract is ignored and at each balance sheet date,
the value of contract is marked to its current market value and the gain or loss on the contract
is recognised. Since the forward
contract was for speculation purposes the premium on forward contract i.e. the difference
between the spot rate and the forward contract rate will not be recorded in the books.
Only when the forward contract is sold the difference between the forward contract rate and
sale rate will be recorded in the Profit & Loss Account.
₹
Sale rate 44.30
Less: Contract rate (44.10)
Profit on sale of contract per US$ 00.20
Contract Amount US $ 2,00,000
Total profit (2,00,000 x 0.20) ₹ 40,000

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Question 16 (Inter Nov 2022) (5 Marks) Pg no._____

a) Jared Limited purchased a Machine for US $ 20,000 on 31st December, 2021 payable after
four months. It entered into a forward contract for four months @ ₹ 78.85 per US $. On
31st December,2021 the exchange rate was ₹ 77.50 per US $.
How will you recognize the Profit or Loss on Forward Contract for the year ended 31st
March,2022 in the books of Jared Limited?

b) Trade Payables of Jared Limited includes amount due to Sterling Limited ₹ 9,75,000
recorded at the prevailing exchange rate on the date of purchase; transaction recorded
at US $ 1 = ₹ 75.00. The exchange rate on Balance Sheet date (31st March,2022) was US
$ 1 = 79.00 The payment was made on 1st May,2022 when the exchange rate was US $ 1 =
₹ 78.30.
You are required to calculate the amount of exchange difference on 31st March, 2022 and
1st May, 2022 and also explain the accounting treatment needed in the above case as per
AS 11 in the books of Jared Limited.

Solution:
(a)
Forward Rate 78.85
Less: Spot Rate (77.50)
Premium on Contract 1.35
Contract Amount US$ 20,000
Total Loss (20,000 x 1.35) ₹ 27,000
Contract period 4 months (3 months falling in the year ended 31 st March, 2022)
Loss to be recognized (₹27,000x 3/4) = ₹ 20,250 in the year ended 31st March, 2022.
(b) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, 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 recognized as income or
as expenses in the period in which they arise.
Trade payables Foreign Currency Rate Amount ₹
Initial recognition US $13,000 (9,75,000/75) 1 US $ = ₹ 75
Exchange Rate on Balance sheet date 1 US $ = ₹ 79
Exchange Difference Loss US $ 13,000 X (79-75) 52,000
Exchange Rate on Settlement date 1 US $ = ₹ 78.30
Exchange Difference Profit US $ 13,000x(79-78.30) 9,100

For the year ended 31st March, 2022 exchange difference loss amounting ₹ 52,000 will be
charged to statement of Profit & Loss A/c.
However, there is exchange difference gain of ₹ 13,000 x (79-78.30) = 9,100 on 1st May, 2022.
Thus gain of ₹ 9,100 will be credited to statement of Profit & Loss A/c for the year ended 31st
March, 2023.

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