Agreement to Purchase of Tdr by gjy55527

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Accounting Standard (AS) 11
      (Revised 2003)
 THE EFFECTS OF CHANGES IN
  FOREIGN EXCHANGE RATES
     Mandatory for Accounting Periods
   commencing on or after 1st April, 2004
                                                   2

                Contents
Sr. No. Particulars
   1    Glossary
  2     Need & Objective
  3     Coverage At A Glance
  4     Accounting of FC Transactions
  5     Accounting of Foreign Operations
  6     Accounting of Forward Exchange Contracts
  7     Disclosure
  8     AS 11 & Schedule VI
  9     AS 11 & International AS 21
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                Glossary
 AS     Accounting Standard
 RE     Reporting Enterprise (GSL)
FSs     Financial Statements (BS, P & L etc)
Ex.     Exchange
Diff.   Difference
 FC     Foreign Currency (US $ etc)
US $    United States Dollar
A/c     Account
 RC     Reporting Currency (Rs.)
Rs.     Rupees
                                                                            4

     Need & Objective

                           Domestic Sales             Foreign Purchases
 Export Sales

Expenses in FC                  Galaxy                Indian Purchases


 Expenses in Rs.                                      Rs. Borrowings
                          US $ Borrowings



                   Galaxy’s financial reports are in Rs.

         All financial transactions are to be recorded in Rs.


     Which Ex. Rate ?                      How to treat Ex. Diff. in A/cs
                                                                                   5

Coverage At A Glance
Direct        business                                  Business dealings through
dealings           with                                 foreign based branch, JV,
Customers, Suppliers                                    Subsidiary, Associate etc.
                          Foreign Currency Activities
etc. from local point


       Accounting               Tax Effect of      Disclosure     Transitional
                                  Ex. Diff.                        Provisions


Foreign Currency Transactions                Foreign Operations        Forward
                                                                       Exchange
                                                                       Contracts
a) Conversion                          a)   Classification of FO
b) Recognition of Ex. Diff.            b)   Conversion of FS
c) Eg. : FC Transaction                c)   Disposal of NFO
                                       d)   Change in classification
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     Conversion of FC Transactions
Initially FC transactions shall be recorded at TDR * / AR
For practical purpose Average Rate (AR) can be used in place of TDR.
Appropriate Accounting Policy shall be established for the purpose.
View Eg. AR Policy >>>>>>>
*TDR = Spot Rate on Transaction Date
            Conversion Rate Table for FC Transactions (FCT)
Classification of BS Items     Initial A/cing    Conversion at BS Dt
Monetary Items                   TDR / AR         Closing Rate (CR)*
Non Monetary Carried @
    Historical Cost              TDR / AR              TDR/AR
    Fair Value                   TDR / AR        Valuation Date Rate
Contingent Liabilities              -----            Closing Rate
*CR = Rate on BS Date

                                                              Back to Glance
                                                       7

   Eg. : Average Rate (AR) Policy
 Accounting Policy for Initial Recognition : -
  Purchases & Sales in FC are recorded at
   Customs Ex. Rates
   (Currently CBEC prescribes Customs Ex.
   Rates by Notification U/s. 14 (3) (a) of Customs
   Act, 1962)
  Other Transactions in FC are recorded at TDR
   i.e. Ex. Rates prevailing on Date of Transaction
 Note :- AR should approximate to the TDR
 i.e. AR can not be used if Ex. Rates fluctuates
 significantly
                                           <<<< Back
                                                                           8


      Recognition of Ex. Diff. - FCT

                      Settled after the BS Date




                             Purchase
                            Agreement
                            @ TDR / AR
Reported in
    BS @                                                    Settled @
Closing Rate                                                TDR / AR



      Ex. Diff. arises EITHER on Settlement OR on Reporting in BS
    The same should be recognized in P & L A/c for the period
                                                              Back to Glance
                                                                                     9

   Eg. : Ex. Diff. on FC Transaction
Accounting Year                           2004-05                   2005-06
Accounting   of   asset
purchase as per revised
AS 11 (2003)
Current Asset purchase         Purchase   Payment     BS Dt     Payment BS Dt
                               01.12.04   31.01.05   31.03.05   30.04.05 31.03.06
worth US $ 1/=
Spot Rates (Rs./$)               50/-       52/-      47/-       46/-        52/-
Current Asset A/c     DR        50.00
Vendor A/c           DR                    50.00      3.00      47.00
Ex. Loss A/c         DR                    2.00                              5.00
Rs. Current A/c           CR               52.00                46.00
Vendor A/c                CR    50.00                                        5.00
Ex. Gain A/c              CR                          3.00       1.00

                                                                        Back to Glance
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               Classification of FO
Foreign Operation (FO) is defined as a subsidiary, associate, joint
venture or branch based in a foreign country.
Classified : Way in which financed & operates w.r.t. RE
 Particulars      Integral FO (IFO)          Non Integral FO (NFO)
Definition     FO whose activities are Negatively defined –
               an integral part of the FO which is not an IFO
               activities of RE
Operates as    Extended arm of RE       Separate Entity
Example        Selling Agent may just   Independent Branch Generates
               sell goods received      Income,    Incurs     Expenses,
               from RE and remit        Accumulates Monetary Items,
               proceeds back to RE      Borrows locally etc. etc.
Effect of Rate Has immediate effect Do not have direct impact on
Fluctuation    on RE’s Cash Flows RE’s      Cash   Flows    from
               from Operations      Operations
                                        View Indicators of NFO >>>>
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                Indicators of NFO
   Major factor : Impact on cash flows from operations
   Other indicators of NFO are –
    a) High degree of autonomy in carrying operations
    b) Low proportion of transactions with RE
    c) No dependence on RE for finance
    d) COP or services settled on it’s own
    e) Sales are in currencies other than RC (Rs.)
    f) Cash flows of RE are insulated from day-to-day
       activities of FO
    g) Sales prices are not responsive to Ex. Rate
       Fluctuations
    h) Existence of local demand for the product
    If can’t be classified clearly then judgment is necessary
    for determination.
                                                    Back to Glance
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    Conversion of FSs of FO &
   Recognition of Ex. Diff. thereof
For Conversion IFO is treated as FC Transaction
Particulars        Integral FO =           Non Integral FO
                  FC Transaction
P & L Items         TDR / AR                  TDR / AR
Monetary Items     Closing Rate             Closing Rate
Non Monetary        TDR / AR                Closing Rate
carried      @
Historical Cost
Non Monetary      Valuation Date            Closing Rate
carried @ Fair         Rate
Value
Recognition of Recognized in P & Accumulated in FOREX Reserve
Ex. Diff.      L A/c as & when   A/c (Accumulation will continue
               arise             until disposal of NFO) Eg. >>
                                                                              13


       Eg. : Conversion of NFO FS
Particulars                    Rate      Dr $   Dr. Rs.   Cr $      Cr. Rs.
Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-)
Share Capital                   40/-                      100         4000
Reserves                        40/-                      50          2000
Assets / Liabilities            40/-     200      8000    50          2000
On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-)
Share Capital                Original                     100         4000
Opening Reserves             Original                     50          2000
Current Profit               AR = 45/-                    20            900
Assets / Liabilities         CR = 50/-   400     20000    230        11500
FOREX Reserve (Balancing Figure)                                      1600
           Total                         400     20000    400        20000

                                                                 Back to Glance
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                     Disposal of NFO
Particulars                       Nature of Disposal
                        100% Disposal        Part Disposal
Gain or       Loss   on Recognize in    Recognize in P & L A/c
Disposal                P & L A/c
Accumulated amt in 100% transfer Part amount transfer to
FOREX Reserve A/c to P & L A/c   P & L A/c on pro-rata
                                 basis
When to trf FOREX Period in which gain or loss                 on
Reserve to P & L  disposal is recognized in P & L A/c




                                                        Back to Glance
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    Change in Classification of FO
Particulars                           Conversion Rate for
                                IFO = FCT                 NFO
P & L Items                      TDR / AR               TDR / AR
Monetary Items                 Closing Rate           Closing Rate
Non Monetary carried @           TDR / AR             Closing Rate
Historical Cost (FC)
Non Monetary carried @     Valuation Date Rate        Closing Rate
Fair Value (FC)
IFO reclassified as NFO
 Ex. Diff. will arise on conversion of non-monetary items ;&

 The same shall be accumulated in FOREX Reserve                Eg.>>

NFO reclassified as IFO
 FOREX Reserve is continued until actual disposal of FO
 Translated amounts for Non Monetary Items are treated as
   historical cost of those items, from that date.       Eg.>>
                                                                             16

Eg. : Reclassification IFO to NFO
BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars             US           IFO                    NFO
                         $    Rate          Rs.    Rate                Rs.
Share Capital          100    40/-         4000     40/-              4000
Op. Reserves            50    40/-         2000     40/-              2000
Current Profit          20    45/-          900   Original            2000
Ex. Gain Loss                              1100
FOREX Reserve                                                          500
Monetary Liabilities   230    50/-     11500        50/-             11500
       Total           400             19500                         20000
Monetary Assets        300    50/-     15000        50/-             15000
Non Monetary @         100    45/-         4500     50/-              5000
Historical Cost
       Total           400             19500                         20000
                                                           << Back
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  Eg. : Reclassification NFO to IFO
BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars         $    Rate NFO Rs.     IFO Rs.         Remarks
Share Capital      100 40/-        4000       4000
Op. Reserves       50    40/-      2000       2000
Current Profit     20    45/-       900        900
FOREX Reserve                      1600       1600     Continued until
                                                       disposal of FO
Liabilities        230 50/-       11500      11500
      Total        400            20000      20000
Monetary Assets 300 50/-          15000      15000
Non Monetary @ 100 50/-            5000       5000 Treated as Historical
Historical Cost                                      Cost from date of
                                                      reclassification
      Total        400            20000      20000
                                                                Back to Glance
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 Forward Exchange Contract (FEC)
FEC is an agreement to exchange different currencies at Forward Rate
# Particulars       Hedging FEC                  Speculative FEC
1 Purpose           Manage risks                 Gain by calculated risks
2 Eg.               Say Minimizing Ex. Rate Earn profit by trading in
                    fluctuation risk associated FOREX
                    with Accounts Receivable of
                    USD 100K
3 Accounting        Purpose different hence different A/cting treatment
        Premium/ Deferred over tenor of the Ignored
        Discount contract

        Ex. Diff.   Recognize on the basis of Value of FEC is marked
                    ex. rate movements        to M.V. on BS Dt
4 Practical         View Eg. >>>>                View Eg. >>>>
Profit or Loss on Cancellation/Renewal is recognized in P & L A/c
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               Eg. : Hedging FEC
Accounts
              Sale Dt       FEC Dt           BS Dt        Settlement Dt
Receivable
              01.12.04     01.12.04         31.03.05        30.04.05
  US $
    1/=      Spot = 43/-   FR = 48/-      Spot = 45/-      Spot = 47.50
             Accounting as per Revised AS 11 (2003)
Accounting Premium (5/-) Ex. Gain Ex. Loss Ex. Loss Net Gain/
Year       Amortization    Rs.    Calculation Rs.    (Loss)
2004-05       5 * (4/5)     4/-        43 – 45         (2/-)      2/-
2005-06       5 * (1/5)     1/-       45 - 47.50   (2.50)       (1.50)
Total                       5/-                        4.50      0.50




                                                                 << Back
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       Eg. : Speculative FEC
FEC Date                        1st March, 2005
Forward Purchase of             USD 1/-
Maturity Date                   30th June, 2005
Forward Rate                    Rs. 50/- per $
Forward Rate available on BS    Rs. 48/- per $
date (31.03.05) for remaining
maturity of the contract
Ex. Loss in 2004-05             Rs. 2/-



                                           Back to Glance
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     Tax Effects of Foreign Ex. Diff.
   There will be some tax effects associated with
    the gain or loss from exchange rate fluctuation

   These tax effects shall be accounted for in
    accordance with AS 22 i.e. Accounting for
    Taxes on Income




                                            Back to Glance
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                       Disclosure
An Enterprise shall specifically disclose –
1. Ex. Diff. recognized in P & L A/c for the period
2. FOREX Reserve as part of Share Holder’s Funds
3. Reconciliation of Opening & Closing FOREX Reserve
4. Where RC is different from the currency of domiciled
   country, reasons thereof
5. Where RC currency has been changed from previous
   accounting period then reasons for such change
6. If classification of FO has been changed, then -
    Nature & Reasons for Change
    Impact of change on Share Holder’s Funds
    Impact on Net Profit or Loss for each prior period, as if change
     is applicable from retrospective effect.
7. AS 11 encourages disclosure of Enterprise’s FC Risk
   Management Policy
                                                           Back to Glance
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     Transition on 1st April, 2004
 Revised AS 11 is applicable from 1st April, 2004.
 Old AS 11 used the term “Foreign Branch”
  instead of “Foreign Operation”
  Also it did not classified FO’s as IFO & NFO

 On 1st time application, if a Foreign Branch is
  classified as NFO then accounting treatment
  pertaining to change in classification of FO shall
  be applied
  i.e. Accumulate Ex. Diff. on conversion of Non
  Monetary Items in FC Translation Reserve
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        AS 11 (2003) & Schedule VI
As per the announcement of ICAI
# Particulars        Schedule VI          Revised AS 11 (2003)
1 Ex. Diff. on a/c   Capitalize     i.e. Recognize in P & L A/c
  of FC Liability    adjust in carrying
  linked to Fixed    cost of Fixed
  Asset              Asset
2 Relation to old In    line       with Capitalization         provision
  AS 11 (1994)    Schedule           VI discontinued on revision in 2003
                  provision
3 Implication        ICAI    will    be   Until the revision of Schedule VI
                     approaching          capitalization   treatment   will
                     Govt. for revision   continue & it will still be
                     of Schedule VI       considered to be complying
                                          with New AS 11 (2003)
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                AS 11 (2003) & IAS
Particulars         Indian AS 11             International AS 21
Scope               Covers accounting of Major aspects of FEC’s are
                    FEC’s                covered    under    IAS  39
                                         (Financial   Instruments  :
                                         Recognition & Measurement)
Alternative         Preferring               Permits alternative :
A/cing in case of   elimination         of   Ex.    Diff.     on      severe
Severe Currency     alternatives,    IAS’s   devaluation of currency can
Devaluation         alternative treatment    be included in carrying amt
                    is not recognized        of asset s.t. conditions
Terminology         FO’s are classified as FO’s are classified as
w.r.t. FO           Integral &             “FO’s that are integral to the
                    Non Integral           operations of RE” &
                                           “Foreign Entity”
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