Business enterprises may have branches abroad and may be preparing P&L accounts and balance-sheets, as per local regulation in foreign currency. However, while consolidating the accounts at the head office, the P&L account and balance-sheet expressed in foreign currencies are required to be translated in Indian rupees. AS 11 prescribes the rate at which they are to be translated into rupees.

The exporters are allowed to maintain exchange earner's foreign currency (EEFC) accounts and the residents are permitted to have resident foreign currency (RFC) accounts. AS 11 prescribes the rate at which such transactions are required to be translated while finalising the P&L account and balance-sheet of the entities concerned.

Significant aspects

Paras 11 and 12: Reporting of foreign currency transactions is dealt with in these paragraphs.

Paras 13, 14, 15 and 16: The method to be adopted for recognising the exchange differences arising in foreign currency transactions is dealt with in these paragraphs.

Paras 36 and 37: The treatment to be given in respect of forward exchange contracts entered into for hedging purposes is dealt with in these paragraphs.

Paras 38 and 39: The treatment to be given in respect of forward exchange contracts entered for trading/speculation purposes is dealt with in these paragraphs.

Paras 40 to 44: Disclosures in respect of exchange differences included in the financial accounts are dealt with in these paragraphs.

The Reserve Bank of India, as per its circular DBOD.No.BP.BC.68/21.04.018/96 dated June 5, 1996, has advised all commercial banks, thus: "We have examined the matter and we observe that the revised Accounting Standard 11 on accounting for effects of changes in foreign exchange rates has come into effect for accounting periods commencing on or after April 1, 1995. On examining the Revised AS 11 we find that the standards are not in accordance with FEDAI guidelines or prudential practices to be followed by the banks. We have accordingly taken up the matter with the Institute of Chartered Accountants of India. Meanwhile the banks may adopt the following guidelines for finalising the accounts for 1995-96.

"All foreign exchange transactions in India should be valued as per the guidelines issued by the Foreign Exchange Dealers Association of India. This will apply to all commercial banks that are authorised to deal in foreign exchange.

Indian banks having foreign branches are required to translate the financial statements of their branches abroad for incorporation in the financial statements. These banks should adopt the following procedures:

All assets and liabilities, both monetary and non-monetary, of the foreign entity should be translated at the closing rate;

Income and expense items of the foreign branches should also be translated at the closing rates;

Resulting exchange profit on consolidation should not be taken to P&L account but kept in a separate account on the liabilities side under Schedule 5, "Other liabilities".

However, any exchange loss on consolidation should be debited to the profit and loss account."

Unfortunately, the matter was not resolved for almost a decade and the RBI was compelled to repeat the same instructions year after year. The last such instructions was given on March 31, 2004 (Circular DBOD.No.BP.BC.71/21.04.018/2003-2004) to all commercial banks to follow the guidelines prescribed in Circular DBOD.No.BP.BC.93/21.04.018/2002-03 dated April 8, 2003, only for finalising the accounts for the year ended March 31, 2004. On March 15, 2005, the RBI came out with Circular No.RBI/2004-05/395 DBOD No.BP.BC.76/21.04.018/2004-05 wherein guidelines have been given to banks, which are summarised below:

1) For the purpose of Paragraph 17, foreign branches of Indian banks and offshore banking units (OBUs) set up in India would be classified as "non-integral foreign operations."

2) Representative offices are to be classified as "integral foreign operations"

3) The RBI has envisaged the difficulties faced by banks in implementing clauses 9 and 21. In order to mitigate them, option has been given to banks to follow the guidelines outlined in paragraph 4.2 of their circular. In effect, in respect of the same transactions, corporates will follow the guidelines of AS 11 and banks, the RBI guidelines.

4) Closing rate has been defined by AS 11 as the exchange rate at the balance-sheet date. However, the RBI wants banks to follow "the last closing spot rate of exchange announced by FEDAI for that accounting period."

It will thus be seen that AS 11 is not required to be implemented in full, particularly if banks face difficulty in implementing it.

(To be concluded)

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