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Adjustment of exchange differences — ICAI revises accounting standards

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Company bottomlines are to be significantly impacted by the latest move of the Institute of Chartered Accountants of India (ICAI) to revise its Accounting Standard (AS-11) on the effects of changes in foreign exchange rates.

NEW DELHI, Feb. 6

FROM April 1, 2004, India Inc would have to recognise exchange differences arising out of liabilities incurred for acquiring fixed assets in their profit and loss account prepared for a particular accounting period.

This new accounting treatment is in variance with the current norm, which requires adjustment of exchange differences arising out of repayment of liabilities incurred for acquiring fixed assets in the carrying amount of the respective fixed assets.

Company bottom lines are to be significantly impacted by the latest move of the Institute of Chartered Accountants of India (ICAI) to revise its Accounting Standard (AS-11) on the effects of changes in foreign exchange rates.

The only exception to the new accounting treatment is in the case of exchange differences arising on a monetary item that, in substance, forms part of an enterprise's net investment in a non-integral foreign operation.

The revised Accounting Standard, which has been cleared at the latest meeting of the ICAI Council, specifies requirements on accounting for transactions in foreign currencies and translation of financial statements of foreign operations.

The revised standard also deals with the accounting for foreign currency transactions in the nature of forward exchange contracts.

"We had to revise the Accounting Standard (AS-11) on the effect of changes in exchange rates mainly because of the new environment.

Earlier, foreign exchange was a strictly regulated area. Now, with the burgeoning forex reserves and a more liberal forex regime, we feel that a time has come when exchange differences can be expensed out instead of taking them to balance sheets", the President of ICAI, Mr R. Bupathy, said at a press conference here.

While the existing AS-11 deals only with translation of financial statements of foreign branches, the revised AS-11 (2003) deals with translation of financial statements of foreign operations, which includes subsidiaries, associates and joint ventures also.

Further, the existing AS-11 treats all foreign operations (branches) as integral to the activities of the reporting enterprise.

The revised AS-11 (2003) requires classification of foreign operations as those that are part of the enterprise (termed integral foreign operations) and those that are largely independent (termed non-integral foreign operations).

The financial statements of the former are translated using the temporal method that involves application of a combination of historical and closing rates; the financial statements of the latter type of operations are translated by using the current rate method that involves application of the closing rate.

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