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 Index

Introduction..................................... ....................................3
Introduction

In the globalization environment business empire are growing across the borders,
entire world is single market for company. Indian business enterprises spreading
their activities across the world. Being the part of the world market is not going to
be easy there are cultural difference, legal issues and currency and settlement
issues.

In 1973 International Monetary Fund permitted member of countries to select and

maintain an exchange arrangement of their choice. Indian exchange rates were
controlled by RBI (Reserve Bank of India) and at the end of 1992, a dual exchange
rate system was introduced and a year later, India moved to a unified market
determined exchange rate. In terms of fiscal control we are in the process of moving
full convertibility from the present regime of partial convertibility. These changes
will force Indian enterprises to face the full impact of exchange risk. This paper
deals with accounting implication on foreign exchange transaction.

Definition of Foreign currency transaction As per Accounting

Standard -11

A foreign currency transactions is a transactions which is denominated in or requires

settlement in foreign currency, including transactions arising when an enterprise
either.

a. buys or sells goods or services whose price is denominated in a foreign

currency,

b. borrows or lends funds when the amounts payable or receivable are

denominated in a foreign currency,

c. becomes a party to an unperformed forward exchanges contracts: or

d. Otherwise acquires or disposes of assets or incurs or settles liabilities,

denominated in a foreign currency.
In simple word a transaction that requires settlement in a foreign currency is a
called foreign currency transaction.
Accounting Issues on foreign currency transaction

If foreign currency transaction is settled in on the date of transaction one can easily
record the transaction as per current spot price of foreign exchange but when
transaction is carried forward there we need to study the effects of foreign
transaction due to changes in foreign currency valuation.

In India for the accounting purpose foreign activities of an Indian enterprise are
divided in to two categories.

1. Accounting for foreign currency transaction

It may enter into transactions which are denominated in foreign currency like
import and export of goods or services borrowing or lending of money,
acquisitions and sale of securities outside India and subscription by foreign
firms to shares issued by Indian companies.

2. Accounting for foreign operation

It may have foreign operations conducted through branches, subsidiaries,
associates, etc. The feature of a foreign operation is that it maintains its own
accounting records and prepares financial statements in the local currency.

The two principal accounting issues common to both types of activities relate to the
choice of the rate of exchange to be issued and the manner of dealing with the loss
or gain arising from the differences in the exchange rates.

Foreign exchange differences arises because companies record transactions on

accruals basis, as per Indian tax law a firm can record entry on received or accrual
basis. The companies can avoid the problem of foreign exchanges differences by:

a. Settlement in only one currency

 b. Recording accounting entries of foreign currency transaction when they
are converted in to local currency.

c. Fixed exchange rate of exchange to be used.

However, this solution is not feasible because these options are not available when
company purchase or sales in foreign exchange transactions.

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