Description
the importance of understanding effect of changes in foreign exchange rates, how does the changes effect the financial statements.
The Effect of Changes in Foreign Exchange Rates
ASHUTOSH DASH
The Priories…..
• Applicable to all enterprise • Primarily drawn from Schedule VI of companies Act Accounting Standard 11 • Not to deal with restatement
Why is it important
• Companies deal with foreign trade/Operations • Foreign trades/operations are denominated in foreign currency • Exchange rate of a currency relative to other fluctuates
The perspective of TWO
Two Transactions • Account for the original transaction • Account for gain/losses from exchange rate fluctuation Two Exchange Rates • Historical Exchange Rate • Current Exchange Rate
Does it affect FS????
• Yes - Balance Sheet contains monetary items - Bottom line is affected by exchange difference • Does not affect Cash Flow statement
Monetary Vs Non Monetary
• Monetary Assets: Cash or ... any claim to money Generally fixed and obligatory Whose holders gain or lose general purchasing power during inflation or deflation
• Non Monetary Assets: Assets not defined as monetary
Balance Sheet Exposure
• Balance Sheet Items if • Balance Sheet Items if restated at historical translated at current exchange rate then exchange rate then • the value does not • the value changes change; from one date to other; • hence is not subject to exposure risk • hence is subject to exposure risk
Pegged/Common Currency
Independent Float
Will Deal with…….
Effect of changes in Forex Rates
Financial effect of currency fluctuation
Foreign Currency Transaction Financial statement of foreign operation
Appropriate Rate
Foreign Currency Transaction
Initial Recognition
• Use exchange rate on transaction date • Average rate if not much fluctuation
Changes on B/S Date
• Monetary items – Restated at closing rate • Non monetary – At rate of the transaction date (historical) At a rate on revaluation date (Revalued) Marked to market if fair value
Exchange Rate Difference
• Adjusted in P/L account • AS 11 – Exchange difference arising out of foreign currency liability adjusted to P/L • Schedule VI - Exchange difference arising out of corresponding foreign currency liability is capitalized
An Illustration
Transaction Closing Payment Date Date Date Imported Inventory costing $10000 on 22nd March 2010 on 2months credit 22.03.10 31.03.10 20.05.10 Exchange Rate $1 = Rs 42 Inventory 4,20,000 Rs 43 4,20,000 Rs 42.8 Bal@42
Accounts Payable
Adjusted in P/L Account
4,20,000
4,30,000
(10000)
4,28,000
2000
Exception to Closing Rate
• Use a most likely rate - Restriction on remittance - Closing rate is unrealistic
An Iillustation
• Accounts receivables from US customers on 31st March 2010 amounts to $10lakhs. • Exchange Rate Transaction Date – 1$ = Rs 43.8 31st March 2010 - 1$ = Rs 46.0 • Management does want to use closing rate as the rate possibly would be between 45.5-45.8 at the time of collection. • Suggest the appropriate accounting treatment
Forward Exchange Contract
• Record at exchange rate on transaction date
• Premium or discount to be recognized in P/L account proportionately • Gains/Losses to be adjusted in P/L account periodically
TRANSLATION OF FINANCIAL STATEMENTS
Why is Translation?????????
• Subsidiaries though controlled by parents are subject to regulation of using - Local currency - Local GAAP • Hence translation is a must
Recognize two types of Subsidiaries
Integral
Subsidiaries that do most of the transactions in parent companies currency
Non Integral
Subsidiaries that operate relatively independent of their parents and most transactions are in their local currency
Functional currency may be instrumental in deciding the type of subsidiary
Non Integral Operation
• Use Current Rate Method • Assume net investment exposed to risk • Translate - Assets & Liabilities using Current rate - Equities using historical rate - Income statement using historical/Average rate • Create Exchange Fluctuation Reserve Account
Integral Operation
• Use Temporal Method • Produce translated FS as if subsidiary has used parents currency • Translate - Non monetary items using historical rate - Monetary items using current rate - Equity, income & Expenses using historical or average rate
Disposition of Translation Adjustment
Current Method
Translation adjustment is reported in the balance sheet
Temporal Method
Translation adjustment is reported in the P/L account as gains or losses
Consolidation – An Illustration
Liabilities $’000 $’000 Assets $’000 30.09 140 30 20 10 200 $’000 31.12 210 40 30 20 300 Acquisition Closing Share capital Retained Earnings Secured Loan Current liabilities Total 100 50 40 10 200 100 Fixed 70 Inventory 100 Receivable 30 Cash & Equivalents 300
Exchange rate on date of acquisition = Rs 40 Closing = Rs50 Acquired 80% at Rs 5000K
THANK YOU
24
Assets
doc_733900348.pptx
the importance of understanding effect of changes in foreign exchange rates, how does the changes effect the financial statements.
The Effect of Changes in Foreign Exchange Rates
ASHUTOSH DASH
The Priories…..
• Applicable to all enterprise • Primarily drawn from Schedule VI of companies Act Accounting Standard 11 • Not to deal with restatement
Why is it important
• Companies deal with foreign trade/Operations • Foreign trades/operations are denominated in foreign currency • Exchange rate of a currency relative to other fluctuates
The perspective of TWO
Two Transactions • Account for the original transaction • Account for gain/losses from exchange rate fluctuation Two Exchange Rates • Historical Exchange Rate • Current Exchange Rate
Does it affect FS????
• Yes - Balance Sheet contains monetary items - Bottom line is affected by exchange difference • Does not affect Cash Flow statement
Monetary Vs Non Monetary
• Monetary Assets: Cash or ... any claim to money Generally fixed and obligatory Whose holders gain or lose general purchasing power during inflation or deflation
• Non Monetary Assets: Assets not defined as monetary
Balance Sheet Exposure
• Balance Sheet Items if • Balance Sheet Items if restated at historical translated at current exchange rate then exchange rate then • the value does not • the value changes change; from one date to other; • hence is not subject to exposure risk • hence is subject to exposure risk
Pegged/Common Currency
Independent Float
Will Deal with…….
Effect of changes in Forex Rates
Financial effect of currency fluctuation
Foreign Currency Transaction Financial statement of foreign operation
Appropriate Rate
Foreign Currency Transaction
Initial Recognition
• Use exchange rate on transaction date • Average rate if not much fluctuation
Changes on B/S Date
• Monetary items – Restated at closing rate • Non monetary – At rate of the transaction date (historical) At a rate on revaluation date (Revalued) Marked to market if fair value
Exchange Rate Difference
• Adjusted in P/L account • AS 11 – Exchange difference arising out of foreign currency liability adjusted to P/L • Schedule VI - Exchange difference arising out of corresponding foreign currency liability is capitalized
An Illustration
Transaction Closing Payment Date Date Date Imported Inventory costing $10000 on 22nd March 2010 on 2months credit 22.03.10 31.03.10 20.05.10 Exchange Rate $1 = Rs 42 Inventory 4,20,000 Rs 43 4,20,000 Rs 42.8 Bal@42
Accounts Payable
Adjusted in P/L Account
4,20,000
4,30,000
(10000)
4,28,000
2000
Exception to Closing Rate
• Use a most likely rate - Restriction on remittance - Closing rate is unrealistic
An Iillustation
• Accounts receivables from US customers on 31st March 2010 amounts to $10lakhs. • Exchange Rate Transaction Date – 1$ = Rs 43.8 31st March 2010 - 1$ = Rs 46.0 • Management does want to use closing rate as the rate possibly would be between 45.5-45.8 at the time of collection. • Suggest the appropriate accounting treatment
Forward Exchange Contract
• Record at exchange rate on transaction date
• Premium or discount to be recognized in P/L account proportionately • Gains/Losses to be adjusted in P/L account periodically
TRANSLATION OF FINANCIAL STATEMENTS
Why is Translation?????????
• Subsidiaries though controlled by parents are subject to regulation of using - Local currency - Local GAAP • Hence translation is a must
Recognize two types of Subsidiaries
Integral
Subsidiaries that do most of the transactions in parent companies currency
Non Integral
Subsidiaries that operate relatively independent of their parents and most transactions are in their local currency
Functional currency may be instrumental in deciding the type of subsidiary
Non Integral Operation
• Use Current Rate Method • Assume net investment exposed to risk • Translate - Assets & Liabilities using Current rate - Equities using historical rate - Income statement using historical/Average rate • Create Exchange Fluctuation Reserve Account
Integral Operation
• Use Temporal Method • Produce translated FS as if subsidiary has used parents currency • Translate - Non monetary items using historical rate - Monetary items using current rate - Equity, income & Expenses using historical or average rate
Disposition of Translation Adjustment
Current Method
Translation adjustment is reported in the balance sheet
Temporal Method
Translation adjustment is reported in the P/L account as gains or losses
Consolidation – An Illustration
Liabilities $’000 $’000 Assets $’000 30.09 140 30 20 10 200 $’000 31.12 210 40 30 20 300 Acquisition Closing Share capital Retained Earnings Secured Loan Current liabilities Total 100 50 40 10 200 100 Fixed 70 Inventory 100 Receivable 30 Cash & Equivalents 300
Exchange rate on date of acquisition = Rs 40 Closing = Rs50 Acquired 80% at Rs 5000K
THANK YOU
24
Assets
doc_733900348.pptx