Notes on Accounting Standard 11

Overview of AS 11

• Key Components:
  1. Accounting for foreign transactions
  2. Accounting for foreign operations
  3. Accounting for forward contracts
• Most exam questions will focus on components 1 and 3.

Monetary Items as per AS 11

• Definition:
  • Monetary items are assets or liabilities that are receivable or payable in fixed amounts of money.
• Recognition:
  • Foreign currency monetary items are re-stated at each balance sheet date as per the exchange rate on that date.
• Examples:
  • Monetary Items: Trade receivables, debtors, creditors, bank balance
  • Non-Monetary Items: Share capital, fixed assets, most investments

Explanation of Problem Questions

Question 22: Monetary Item

• Issue 1:

  • BK Limited purchased fixed assets for Rs. 5000 lakhs on 1-4-2012, payable in USD on 5-4-2013.
  • Exchange Rates:
    • 1-4-2012: $50
    • 31-3-2013: $54.98
  • Accounting Treatment:
    • Asset recorded at $100 lakhs (5000/50).
    • On balance sheet date, re-state creditors for ($100 x (54.98 - 50)) = Rs. 498 lakhs restatement loss.
    • If opted for MCA notification, this loss can be added to fixed asset.
    • Without MCA, loss goes to P&L.

• Issue 2:

  • US$1,00,000 soft loan obtained on 1-4-2012. First installment due on 1-5-2013.
  • Calculation:
    • Restatement loss = $1,00,000 x (54.98 - 50) = Rs. 498,000.
    • If MCA is followed, transfer to translation difference reserve account.

Question 24: Forward Contract

• Scenario:
  • Sterling Limited purchased plant for US$20,000 on 31-3-2011, payable after 4 months. Forward contract at 48.85, spot rate at 47.5.
  • Loss Calculation:
    • Loss per dollar = 48.85 - 47.5 = 1.35
    • Total loss = 1.35 x 20,000 = Rs. 27,000.
    • Loss spread over 4 months = Rs. 6,750/month to P&L.

Import Transaction Example

• Transaction Date:
  • Imported raw materials of US$9,000 on 25-2-2011 at 44, balance sheet date rate at 49, payment made at 48.
  • Loss and Gain Calculation:
    • Loss on restatement = $9,000 x (49 - 44) = Rs. 45,000.
    • Gain on settlement = $9,000 x (48 - 49) = Rs. 9,000.

Forward Contract Example

• Scenario:
  • Mr. Bhai bought forward contract for US$2 lakhs on 31-12-2010 at 44.1, spot rate 43.9.
  • Sold contract at 44.3, profit = ($44.3 - $44.1) x $2,00,000 = Rs. 40,000.

Other Important Concepts

• Non-speculative vs. Speculative:
  • Understand the treatment of gains/losses based on speculative or non-speculative motives.

Conclusion

• The lecture discusses various practical applications of AS 11, illustrating the fundamental principles of recognizing foreign currency transactions and the treatment of monetary and non-monetary items in the company's financial statements.
• Prepare for the next topic on Accounting Standard 20 in the following session.

Important Points to Remember

• The treatment of restatement losses in relation to MCA notifications and financial statements is crucial to understanding AS 11 effectively.
• Distinguish between speculative and non-speculative forward contracts for proper accounting practices.