ICDS VI Effects of Changes in Foreign Exchange ratesICDS VI deals with the treatment of transactions in foreign currencies and forward contracts involving foreign currencies and translating the financial statements of foreign operations.
Initial RecognitionA foreign currency transaction shall be recorded by applying exchange rate on foreign currency at the date of the transaction. An average rate for a week or a month that approximates the actual rate may be used, if the rate fluctuates then the actual rate at the date of transaction will be used.
Conversion in Reporting Currency1. Foreign currency monetary items will be converted into reporting currency at closing rate. 2. Non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction. 3. Non-monetary item being inventory denominated in foreign currency, which is carried at the net realizable value shall be converted at exchange rate and then reported.
Recognition of Exchange DifferenceExchange difference arising due to settlement or conversion of monetary items at the end of the year shall be recognized as income or as expense in that year itself. But if it is due to non-monetary items, then such difference shall not be recognized. Note: The financial statements of a foreign operation shall be translated in the same way as above.
Forward Exchange ContractsAny premium or discount arising at the beginning of a forward exchange contract shall be amortized as expense or income over the life of the contract. Exchange differences on such a contract shall be recognized as income or as expense in the year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognized as income or as expense for the previous year. Such treatment will not be applied in the cases when the contract is: 1. not intended for trading or speculation purpose 2. entered to establish the amount of reporting currency required or available at the settlement date of the transaction 3. entered to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction The premium or discount that arises on the contract is measured by the difference between: 1. the foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year 2. the same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later
Comparison of ICDS VI and AS 11
|Sl. No.||Basis||ICDS VI||AS 11|
|1.||Types of foreign operation||ICDS VI does not specify the types of foreign operations||AS 11 provide classification of foreign operations – integral foreign operation and non- integral foreign operation|
|2.||Disclosure||ICDS does not provide for disclosure requirements||As per AS 11, an enterprise should disclose amount of exchange differences included in the net profit, foreign currency translation reserve, reason for any change in the reporting currency, change in the classification of a significant foreign operation|
|3.||Depreciable asset||It does not specifically mention about depreciable asset||Para 46 and 46a provides for exchange difference arising due to depreciable asset|
|4.||Capitalization of exchange difference||ICDS does not provide for capitalization of exchange difference||Para 46 and 46a provides for capitalization of exchange difference arising due to depreciable asset|
For further reading on these series, check out our next article on ICDS VII