FINANCIAL ACCOUNTING

PROJECT
S.Y.B.A.F

TOPIC :- ACCOUNTING TRANSACTIONS OF

FOREIGN CURRENCY

NAME:- VISHAL NARAYAN MOHITE

ROLL NO :- 319
1 . INTRODUCTION :
With businesses increasingly tapping
foreign markets, there was a need to create guidelines on the
treatment of revenue earned in foreign currency. Foreign
Exchange Accounting covers the accounting of the
transactions which are carried by a business in different
currencies (Foreign currency) other than functional currency,
and records such transactions in the functional currency of the
reporting entity, based on the exchange rate in effect on the
date of transaction.

This also takes into picture any gains or

losses that occur due to change in the expected exchange rate
between the functional currency of the entity and the currency
in which a transaction is denominated. A foreign-currency
transaction is one that requires settlement, either payment or
receipt, in a foreign currency. When the exchange rate
changes between the original purchase or sale transaction
date and the settlement date, there is a gain or loss on the
exchange. Whoever views the denominated currency (the
currency the transaction takes place in) as the foreign
currency takes the gain or loss.

Companies that make many

foreign-currency transactions may buy a forward currency
contract to get a guaranteed rate. Businesses with few
foreign-currency transactions are more likely to convert
currency on the spot, or current, rate.

A Foreign currency transaction is denominated in a

currency other than the functional currency of the reporting
entity. The gain or loss from a foreign-currency transaction
will be recognized when exchange rates fluctuate between
the date of sale and date of settlement or receipt.
2 . HISTORY

Accounting Standard (AS) 11, The Effects of Changes

in Foreign Exchange Rates (revised 2003), issued by
the Council of the Institute of Chartered Accountants of
India, comes into effect in respect of accounting periods
commencing on or after 1-4-2004 and is mandatory in
nature from that date. The revised Standard supersedes
Accounting Standard (AS) 11, Accounting for the
Effects of Changes in Foreign Exchange Rates (1994),
except that in respect of accounting for transactions in
foreign currencies entered into by the reporting
enterprise itself or through its branches before the date
this Standard comes into effect, AS 11 (1994) will
continue to be applicable

3. OBJECTIVE ;-
1. The standard should be applied in accounting for
transactions entered in foreign currencies.

2. This standard also deals with accounting for

foreign currency transactions in the nature of
forward exchange contracts.

3. This standard does not specify the currency of

presentation of financial statements. Normally an
organization prepares its financial statements in
currency of home country.

4. The standard does not deal with the restatement of

an enterprise's financial statements from its
reporting currency into another currency for the
convenience for user accustomed to that currency
of for similar purpose.
5. This standard does not deal with the presentation in
a cash flow statement of cash flows arising from
transactions in a foreign currency and the
transactions of cash flows of a foreign operation.

6. This standard does not deal with the exchange

difference arising from foreign currency
borrowings to the extent that they are regarded as
an adjustment interest cost.
4. How to Account for Foreign
Currency Transactions ?

Record the Value of the Transaction

Record the value of the transaction in dollars at the
exchange rate current at the time of purchase or sale.
For example, a United States company buys plant and
equipment from the United Kingdom when the
exchange rate is $1.50 to £1 and agrees to pay £10,000.
Convert £10,000 to dollars by multiplying by 1.5 and
enter the transaction in the company's ledgers as
$15,000. Debit the plant and equipment account and
credit accounts payable with $15,000.

Calculate the Value in Dollars

Calculate the value of the payment in dollars at the
exchange rate current when the transaction is settled. In
the example, at the time of settlement the exchange rate
is $1.55 to £1. The cost to the company in dollars is
therefore £10,000 multiplied by 1.55, or $15,500.

Post the Payment

Post the payment of the accounts receivable at the

original rate and record the loss on exchange by
accounting for the difference between the original
transaction value and the settlement amount. Following
the example, credit the bank account with the actual
amount paid of $15,500. Debit accounts payable with
the original debt of $15,000 and debit the loss on
foreign exchange account with the difference of $500.

Record Change in Value

Calculate the value of foreign-currency accounts
receivable or payable at the spot rate at the end of the
accounting year. Record any change in value from the
original transaction date as a foreign-currency gain or
loss in the year and post the other side of the entry to
accounts payable or accounts receivable, as appropriate.
In the example, if the amount of £10,000 remains
unpaid at year end and the spot rate at that date is $1.55,
debit the loss on foreign exchange account with the
change in value of $500 and credit accounts payable
with $500.
5. CONTENT :-

Practical problem

X Ltd. an Indian Company advanced $ 16,000 for

import of goods from US Company of USA on 1st
February, 2013. The goods were received alongwith
purchase bill for $25,000 on 1st March, 2013. The
balance amount was paid on 15th March, 2013.

The rate of exchange on the various dates was as

follows
1-2-2013 $1=47.50
1-3-2013 $1=48.00
15-3-2013 $1=49.00
Pass journal entries for the above transactions in the
books of X ltd
 Solution :

Date Particulars Dr. ₹ Cr.₹

1-2-13 US Co. A/C Dr 7,60,000
To bank A/C 7,60,000
1-3-13 Purchase A/C Dr. 12,00,000
To US Co.A/c Dr. 11,92,000
To foreign exchange 8,000
fluctuation A/c
15-3-13 US Co.A/C Dr. 4,32,000
Foreign exchange
fluctuation A/c Dr. 9,000
To bank A/c 4,41,000
31-3-13 P&L A/C Dr. 1,000
To foreign exchange 1,000
fluctuation A/C
6.Conculsion :-

Accounting Standard (AS) 11 is about the Effects of

Changes in Foreign Exchange Rates. The Statement
is applied in accounting for transactions in foreign
currency and translating financial statements of
foreign operations. It also deals with accounting of
forward exchange contract. Initial recognition of a
foreign currency transaction shall be by applying the
foreign currency exchange rate as on the date of
transaction. In case of voluminous transactions a
weekly or a monthly average rate is permitted, if
fluctuation during the period is not significant.

At each Balance Sheet date foreign currency

monetary items such as cash, receivables, and
payables shall be reported at the closing exchange
rates unless there are restrictions on remittances or it
is not possible to effect an exchange of currency at
that rate. In the latter case it should be accounted at
realisable rate in reporting currency. Non monetary
items such as fixed assets, investment in equity shares
which are carri at historical cost shall be reported at
the exchange rate on the date of transaction. Non
monetary items which are carried at fair value shall
be reported at the exchange rate that existed when the
value was determined.

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 a
non-integral foreign operation is reclassified as an
integral foreign operation, the translated amounts for
non-monetary items at the date of the change are
treated as the historical cost for those items in the
period of change and subsequent periods. Exchange
differences which have been deferred are not
recognised as income or expenses until the disposal
of the operation.