There’s more than one way for businesses to facilitate a foreign exchange transaction. Every business needs to make sure it processes all foreign operations and currency transactions in the right reporting currency. AS 11 details how to report foreign exchange transactions when making financial statements.
How the standard applies
AS 11 helps businesses settle on which exchange rate should be used and acts as a guide on recognizing the financial effects of changes in exchange rates. It also informs on transactions in foreign currency that deal with forwarding exchange contracts.
How the standard doesn’t apply
AS 11 does not name a specific currency to be used. In most cases, companies use the domestic country’s currency. But if a business decides to use a different currency, the form lists that you must state the reasons for doing so. One must also state reasons for a change in reporting currency. It also does not deal with the following:
- Restating business-related financial statements from the reporting currency into a different currency
- Cash flow statements that come about due to transactions in foreign currency and translating cash flows of foreign operations
- Exchange differences resulting from borrowed foreign currency that adjust interest costs
Types of Transactions
There are two types of foreign exchange transactions at play and are as follows.
A. Initial Recognition
A foreign currency transaction is one that needs to be made in a foreign currency. These transactions need to be recorded by using the exchange rate between the foreign currency and reporting currency back to the foreign currency amount on the date of transaction.
B. Subsequent Reporting on Balance Sheet Dates
On a balance sheet date, remember to follow three necessary steps:
1. Report all foreign currency monetary items at the closing rate. There are specific circumstances in which this rate may not show an accurate amount, however, and this is to be expected. In these cases, monetary items should be reported at the value that is expected to be realized from the monetary item by the sheet date.
2. Non-monetary items taken at the fair value or a similar value must be reported at the exchange rates when such values were determined
3. Non-monetary items carried in historical cost, made in a foreign currency, need to be reported using the same exchange rate at the date of transaction
How to spot exchange differences
In accounting standard 11, when reporting monetary items at different rates from the ones recorded initially, these must be recorded as the income or as an expense.
Para 46 and 46A
Exchange differences must be taken to a profit or loss statement—any exchange difference occurring on the account of a depreciable asset does not have to be charged to the profit or loss statement, but these may be added or reduced from the cost of such an asset. “Long-term Foreign currency monetary item” is the designation for the any depreciable capital asset represented in the Balance sheet under foreign currency terms.