A PROJECT REPORT ON

FOREIGN CURRENCY CONVERSION

SUBMITTED

TO THE UNIVERSITY OF MUMBAI

AS A PARTIAL REQUIREMENT FOR COMPLETING THE DEGREE OF

M.COM (ACCOUNTS) SEMESTER I

SUBJECT: ADVANCED FINANCIAL ACCOUNTING

SUBMITTED BY:

SAKSHI CHAWLA

ROLL NO.: 37

UNDER THE GUIDANCE OF

PROF. DHANABALU R. NAIKAR

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SIES COLLEGE OF COMMERCE AND ECONOMICS,

PLOT NO. 71/72, SION MATUNGA ESTATE

T.V. CHIDAMBARAM MARG,

SION (EAST), MUMBAI – 400022.

CERTIFICATE

This is to certify that Sakshi Chawla of M.Com (Accounts) Semester I (academic year 2015-2016) has successfully completed the project on

FOREIGN CURRENCY CONVERSION

under the Guidance of Prof. Dhanabalu R. Naikar

_________________ _________________

(Prof. Dhanabalu R. Naikar) (Payal Samwani)

__________________ __________________

(External Examiner) (Nina Roy Choudhury)

Place: _____________

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Date: ___________

DECLARATION

I, Sakshi Chawla Student M.Com (Accounts) Semester I (academic year

2015-16) hereby declare that, I have completed the project on

FOREIGN CURRENCY CONVERSION

The information presented in this project is true and original to the best of my knowledge.

Place: _____________

Date: _____________

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___________________

Sakshi Chawla

Roll No.: 37

ACKNOWLEDGEMENT

I would like to thank the University of Mumbai, for introducing M.Com(Accounts) course, thereby giving its students a platform to be abreast with changing business scenario, with the help of theory as a base and practical as a solution.

I am indebted to the reviewer of the project Prof. Dhanabalu R. Naikar, my project guide for his support and guidance. I would sincerely like to thank him for all his efforts.

Last but not the least; I would like to thank my parents for giving the best education and for their support and contribution without which this project would not have been possible.

______________________

Sakshi Chawla

Roll no.: 37

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Index

Introduction

AS-11: The Effect of Exchange Difference

Terminology

Accounting Treatment

Classification of Foreign Operations

Translation of Financial Statements

Disposal of Non-Integral Operations

Disclosures

Forward Exchange Contracts

Example of an Indian Company with operations overseas

Ranbaxy Laboratories Limited Illustration Solution

Example of a Foreign Company with operations in India

The Coca-Cola Company Illustration Solution

Conclusion

Bibliography

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Introduction

A multinational corporation (MNC) or multinational enterprise is an

organization that owns or controls production of goods or services in one or more

countries other than their home country. It can also be referred as an international

corporation, a "transnational corporation", or a stateless corporation.

A multinational corporation is usually a large corporation which produces or sells

goods or services in various countries.

Importing and exporting goods and services

Making significant investments in a foreign country

Buying and selling licenses in foreign markets

Engaging in contract manufacturing—permitting a local manufacturer in a

foreign country to produce their products

Opening manufacturing facilities or assembly operations in foreign countries

A foreign currency transaction is a transaction which is denominated in or

requires settlement in a foreign currency, including transactions arising when an

enterprise either:

Buys or sells good or services whose price is denominated in a foreign

currency

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Borrows or lends funds when the amounts payable or receivable are

denominated in a foreign currency

Becomes a party to an unperformed forward exchange contract; or

Otherwise acquires or disposes off assets, or incurs or settles liabilities,

denominated in a foreign currency

In India, these foreign currency transactions and their treatment is governed by the

Accounting Standard 11 – The Effects of Exchange Differences.

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AS – 11: The Effects of Exchange Differences

Objective

An enterprise may carry on activities involving foreign exchange in two ways. It

may have transactions in foreign currencies or it may have foreign operations. In

order to include foreign currency transactions and foreign operations in the

financial statements of an enterprise, transactions must be expressed in the

enterprise’s reporting currency and the financial statements of foreign operations

must be translated into the enterprise’s reporting currency.

The principal issues in accounting for foreign currency transactions and foreign

operations are to decide which exchange rate to use and how to recognize in the

financial statements the financial effect of changes in exchange rates.

Scope

1. This Standard should be applied:

(a) in accounting for transactions in foreign currencies; and

(b) in translating the financial statements of foreign operations.

2. This Standard also deals with accounting for foreign currency

transactions in the nature of forward exchange contracts.

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3. This Standard does not specify the currency in which an enterprise

presents its financial statements. However, an enterprise normally

uses the currency of the country in which it is domiciled. If it uses a

different currency, this Standard requires disclosure of the reason for

using that currency. This Standard also requires disclosure of the

reason for any change in the reporting currency.

4. This Standard does not deal with the restatement of an enterprise’s

financial statements from its reporting currency into another currency

for the convenience of users accustomed to that currency or for

similar purposes.

5. This Standard does not deal with the presentation in a cash flow

statement of cash flows arising from transactions in a foreign currency

and the translation of cash flows of a foreign operation (see AS 3,

Cash Flow Statements).

6. This Standard does not deal with exchange differences arising from

foreign currency borrowings to the extent that they are regarded as an

adjustment to interest costs (see paragraph 4(e) of AS 16, Borrowing

Costs).

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Terminology

The following terms are used in Accounting Standard 11 with the meanings

specified:

1. Average rate is the mean of the exchange rates in force during a period.

2. Closing rate is the exchange rate at the balance sheet date.

3. Exchange difference is the difference resulting from reporting the same

number of units of a foreign currency in the reporting currency at different

exchange rates.

4. Exchange rate is the ratio for exchange of two currencies.

5. Fair value is the amount for which an asset could be exchanged, or a

liability settled, between knowledgeable, willing parties in an arm’s length

transaction.

6. Foreign currency is a currency other than the reporting currency of an

enterprise.

7. Foreign operation is a subsidiary, associate, joint venture or branch of the

reporting enterprise, the activities of which are based or conducted in a

country other than the country of the reporting enterprise.

8. Forward exchange contract means an agreement to exchange different

currencies at a forward rate.

9. Forward rate is the specified exchange rate for exchange of two currencies

at a specified future date.

10. Integral foreign operation is a foreign operation, the activities of which are

an integral part of those of the reporting enterprise.

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11. Monetary items are money held and assets and liabilities to be received or

paid in fixed or determinable amounts of money.

12. Net investment in a non-integral foreign operation is the reporting

enterprise’s share in the net assets of that operation.

13. Non-integral foreign operation is a foreign operation that is not an integral

foreign operation. As defined in AS 21, Consolidated Financial Statements.

As defined in AS 23, Accounting for Investments in Associates in

Consolidated Financial Statements. As defined in AS 27, Financial

Reporting of Interests in Joint Ventures. The Effects of Changes in Foreign

Exchange Rates 113

14. Non-monetary items are assets and liabilities other than monetary items.

15. Reporting currency is the currency used in presenting the financial

statements.

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Accounting Treatment

Initial Recognition

A foreign currency transaction should be recorded, on initial recognition in the

reporting currency, by applying to the foreign currency amount the exchange rate

between the reporting currency and the foreign currency at the date of the

transaction.

For practical reasons, a rate that approximates the actual rate at the date of the

transaction is often used, for example, an average rate for a week or a month might

be used for all transactions in each foreign currency occurring during that period.

However, if exchange rates fluctuate significantly, the use of the average rate for a

period is unreliable.

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Foreign

Currency

Amount

Exchange Rate at the

date of transac

tion

Amount in

Reporting

Cuurency

Reporting at Subsequent Balance Sheet Date

Attention needs to be paid while reporting items at the Balance Sheet date.

The treatment is different for Monetary items (e.g. Cash, receivables, payables)

and Non-Monetary items (e.g. Fixed assets, inventory, investments).

The carrying amount of an item is determined in accordance with the

relevant Accounting Standards. For example, certain assets may be measured at

fair value or other similar valuation (e.g., net realizable value) or at historical cost.

Whether the carrying amount is determined based on fair value or other

similar valuation or at historical cost, the amounts so determined for foreign

currency items are then reported in the reporting currency in accordance with this

Standard.

The contingent liability denominated in foreign currency at the balance sheet

date is disclosed by using the closing rate.

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a) Monetary Items

b) Non- Monetary Items

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Foreign Currenc

y Amount

Closing Rate

Amount in Reporting Cuurency

Non-Monetary Items

At Historical Cost

Rates at the date of the transaction

At Fair Value

Rates that existed when the values were determined

Recognition of Exchange Differences

An exchange difference results when there is a change in the exchange rate

between the transaction date and the date of settlement of any monetary items

arising from a foreign currency transaction. When the transaction is settled within

the same accounting period as that in which it occurred, all the exchange difference

is recognized in that period. However, when the transaction is settled in a

subsequent accounting period, the exchange difference recognized in each

intervening period up to the period of settlement is determined by the change in

exchange rates during that period.

Exchange differences arising on the settlement of monetary items or on

reporting an enterprise’s monetary items at rates different from those at which they

were initially recorded during the period, or reported in previous financial

statements, should be recognized as income or as expenses in the period in

which they arise, with the exception of exchange differences dealt with in

accordance with Net Investment in a Non-integral Foreign Operation.

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Net Investment in a Non-integral Foreign Operation

Exchange differences arising on a monetary item that, in substance, forms

part of an enterprise’s net investment in a non-integral foreign operation should be

accumulated in a foreign currency translation reserve in the enterprise’s financial

statements until the disposal of the net investment, at which time they should be

recognized as income or as expenses.

An enterprise may have a monetary item that is receivable from, or payable

to, a non-integral foreign operation. An item for which settlement is neither

planned nor likely to occur in the foreseeable future is, in substance, an extension

to, or deduction from, the enterprise’s net investment in that non-integral foreign

operation. Such monetary items may include long-term receivables or loans but do

not include trade receivables or trade payables.

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Classification of Foreign Operations

The method used to translate the financial statements of a foreign operation

depends on the way in which it is financed and operates in relation to the reporting

enterprise.

For this purpose, foreign operations are classified as:

a) Integral Foreign Operations

b) Non-integral Foreign Operations

Integral Foreign Operations

It carries on the business as if it were an extension of the reporting enterprise’s

operations. Such a foreign operation might only sell goods imported from the

reporting enterprise and remits the proceeds to the reporting enterprise. In such

cases, a change in the exchange rate between the reporting currency and the

currency in the country of foreign operation has an almost immediate effect on the

reporting enterprise’s cash flow from operations. Therefore, the change in the

exchange rate affects the individual monetary items held by the foreign operation

rather than the reporting enterprise’s net investment in that operation.

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Non-Integral Foreign Operations

In contrast, a non-integral foreign operation accumulates cash and other monetary

items, incurs expenses, generates income and perhaps arranges borrowings, all

substantially in its local currency. It may also enter into transactions in foreign

currencies, including transactions in the reporting currency. When there is a change

in the exchange rate between the reporting currency and the local currency, there is

little or no direct effect on the present and future cash flows from operations of

either the non-integral foreign operation or the reporting enterprise. The change in

the exchange rate affects the reporting enterprise’s net investment in the non-

integral foreign operation rather than the individual monetary and non-monetary

items held by the non-integral foreign operation.

Determination of a Non-integral Foreign Operation

The following are indications that a foreign operation is a non-integral foreign

operation rather than an integral one:

1. While the reporting enterprise may control the foreign operation, the

activities of the foreign operation are carried out with a significant degree

of autonomy from those of the reporting enterprise;

2. Transactions with the reporting enterprise are not a high proportion of the

foreign operation’s activities;

3. The activities of the foreign operation are financed mainly from its own

operations or local borrowings rather than from the reporting enterprise;

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4. Costs of labour, material and other components of the foreign operation’s

products or services are primarily paid or settled in the local currency

rather than in the reporting currency;

5. The foreign operation’s sales are mainly in currencies other than the

reporting currency;

6. Cash flows of the reporting enterprise are insulated from the day-to-day

activities of the foreign operation rather than being directly affected by the

activities of the foreign operation;

7. Sales prices for the foreign operation’s products are not primarily

responsive on a short-term basis to changes in exchange rates but are

determined more by local competition or local government regulation; and

8. There is an active local sales market for the foreign operation’s products,

although there also might be significant amounts of exports.

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Translation of Financial Statements

Integral Foreign Operations

Translation of Integral Foreign Operation should be done as if the transactions had

been those of the reporting enterprise itself.

Tangible Fixed Assets (Cost and Depreciation)

Translated using the exchange rate at the date of purchase of the asset

or, if the asset is carried at fair value or other similar valuation, using

the rate that existed on the date of such valuation.

Inventories

Translated using the exchange rates that existed when the costs were

incurred. The recoverable amount (or realizable value) of an asset is

translated using the exchange rate that existed when such an amount

was determined.

Non-Integral Foreign Operations

In translating the financial statements of a non-integral foreign operation for

incorporation in its financial statements, the reporting enterprise should use the

following procedures:

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(a) The assets and liabilities, both monetary and non-monetary, of the non-

integral foreign operation should be translated at the closing rate;

(b) Income and expense items of the non-integral foreign operation should

be translated at exchange rates at the dates of the transactions; and

(c) All resulting exchange differences should be accumulated in a foreign

currency translation reserve until the disposal of the net investment.

Any goodwill or capital reserve arising on the acquisition of a non-integral foreign

operation is translated at the closing rate. A contingent liability disclosed in the

financial statements of a non-integral foreign operation is translated at the closing

rate for its disclosure in the financial statements of the reporting enterprise.

Exchange Differences

The translation of the financial statements of a non-integral foreign operation

results in the recognition of exchange differences arising from:

(a) Translating income and expense items at the exchange rates at the dates

of transactions and assets and liabilities at the closing rate;

(b) Translating the opening net investment in the non-integral foreign

operation at an exchange rate different from that at which it was previously

reported; and

(c) Other changes to equity in the non-integral foreign operation.

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These exchange differences are not recognized as income or expenses for the

period because the changes in the exchange rates have little or no direct effect on

the present and future cash flows from operations of either the non-integral foreign

operation or the reporting enterprise.

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Disposal of Non-Integral Foreign Operations

An enterprise may dispose of its interest in a non-integral foreign operation

through sale, liquidation, repayment of share capital, or abandonment of all, or part

of, that operation.

On the disposal of a non-integral foreign operation, the cumulative amount of the

exchange differences which have been deferred and which relate to that operation

should be recognized as income or as expenses

The payment of a dividend forms part of a disposal only when it constitutes a

return of the investment. In the case of a partial disposal, only the proportionate

share of the related accumulated exchange differences is included in the gain or

loss. A write-down of the carrying amount of a non-integral foreign operation does

not constitute a partial disposal. Accordingly, no part of the deferred foreign

exchange gain or loss is recognized at the time of a write-down.

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Disclosures

An enterprise should disclose:

(a) The amount of exchange differences included in the net profit or loss for

the period; and

(b) Net exchange differences accumulated in foreign currency translation

reserve as a separate component of shareholders’ funds, and a reconciliation

of the amount of such exchange differences at the beginning and end of the

period.

When the reporting currency is different from the currency of the country in which

the enterprise is domiciled, the reason for using a different currency should be

disclosed. The reason for any change in the reporting currency should also be

disclosed.

When there is a change in the classification of a significant foreign operation, an

enterprise should disclose:

(a) The nature of the change in classification;

(b) The reason for the change;

(c) The impact of the change in classification on shareholders’ funds; and

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(d) The impact on net profit or loss for each prior period presented had the

change in classification occurred at the beginning of the earliest period presented.

The effect on foreign currency monetary items or on the financial statements of a

foreign operation of a change in exchange rates occurring after the balance sheet

date is disclosed in accordance with AS 4, Contingencies and Events Occurring

after the Balance Sheet Date.

Disclosure is also encouraged of an enterprise’s foreign currency risk management

policy.

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Forward Exchange Contracts

Non Speculative

An enterprise may enter into a forward exchange contract or another financial

instrument that is in substance of a forward exchange contract, which is not

intended for trading on speculation purposes, to establish the amount of the

reporting currency required or available at the settlement date of a transaction.

Premium/discount (difference between exchange rate at the date of inception of

forward exchange contract and forward rate specified in the contract) to be

amortized over life of the contract.

Exchange differences on such contract to be recognized in Profit and Loss

statement in the reporting period in which the exchange rates change.

Any profit or loss arising on cancellation should be recognized as income or

expense of that period.

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Speculative

In recording a forward exchange contract intended for trading or speculation

purposes, the premium or discount on the contract is ignored.

The value of the contract is marked to its current market value at each balance

sheet date, and the gain or loss on the contract is recognized.

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Example of an Indian company with

operations overseas:

Ranbaxy Laboratories Limited

Headquarters: Gurgaon, Haryana, India

Branches: Ground Operations in 43 countries; and Manufacturing facilities in 8

Ranbaxy Laboratories Limited is an Indian multinational pharmaceutical company

that was incorporated in India in 1961. The company went public in 1973 and

Japanese pharmaceutical company Daiichi Sankyo acquired a controlling share in

2008. In 2014, Sun Pharma acquired the entire 63.4% share of Ranbaxy making

the conglomerate world’s fifth largest specialty generic pharma company. Ranbaxy

exports its products to 125 countries.

In the Brand Trust Report 2014, Ranbaxy was ranked 184th among India's most

trusted brands according to the Brand Trust Report 2014, a study conducted by

Trust Research Advisory, a brand analytics company.

Ranbaxy was started by Ranbir Singh and Gurbax Singh in 1937 as a distributor

for a Japanese company Shionogi. The name Ranbaxy is a portmanteau of the

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names of its first owners Ranbir and Gurbax. Bhai Mohan Singh bought the

company in 1952 from his cousins Ranbir and Gurbax. After Bhai Mohan Singh's

son Parvinder Singh joined the company in 1967, the company saw an increase in

scale.

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Illustration – Question

XYZ Ltd. has a branch in New Jersey, USA. On December 31, 2013, the Trial

Balance of the branch was as follows:

Particulars Dr. ($) Particulars Cr. ($)

Goods from Head Office 45,000 Head Office account 9,000

Stock as on 01.01.13 7,500 Sales 81,000

Furniture and Fixtures 10,000 Owing for expenses 1,000

Cash in hand 1,050

Cash at bank 950

Salaries 13,000

Taxes and Insurance 250

Rent 1,000

Debtors 12,250

91,000 91,000

The Branch account in the head office showed a debit balance of Rs. 1,12,500 and

Goods sent to Branch account showed a credit balance of Rs. 8,07,500.

Furniture and Fixtures are acquired on 01.01.10, when $1 = Rs.15

Provide for depreciation @10% per annum.

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Stock at the branch as on 31.12.13 was valued at $4500.

Exchange rates:

01.01.13 $1 = Rs. 17.50

01.12.13 $1 = Rs. 18.50

Average $1 = Rs. 18.00

Prepare:

1) Trading and Profit and Loss A/c

2) Balance Sheet of New Jersey Branch

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Illustration – Solution

Dr. Converted Trial Balance as on 31.12.13 Cr.

Particulars $ Rate Rs. Particulars $ Rate Rs.

Goods from HO 45000 given 807500 HO A/c 9000 given 112500

Stock 7500 17.50 131250 Sales 81000 18 1458000

Furniture and Fix 10000 15 150000 Owing for expenses 1000 18.50 18500

Cash in Hand 1050 18.50 19425

Cash at Bank 950 18.50 17575 Exchange difference 19875

Salaries 13000 18 234000

Tax & Insurance 250 18 4500

Rent 1000 18 18000

Debtors 12250 18.50 226625

1608875 1608875

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Dr. Trading and Profit and Loss A/c for the year ended 31.12.13 Cr.

Particulars Rs. Particulars Rs.

To, Opening Stock 131250 By, Sales 1458000

To, Goods from HO 807500 By, Closing Stock ($4500 x Rs.18.5) 83250

To, Gross Profit c/d 602500

1541250 1541250

To, Salaries 234000 By, Gross Profit b/d 602500

To, Depreciation 15000 By, Exchange Difference 19875

To, Tax and Insurance 4500

To, Rent 18000

To, Net Profit 350875

622375 622375

Balance Sheet as on 31.12.13

Liabilities Rs. Rs. Assets Rs. Rs.

HO A/c 112500 Furniture and Fixture 150000

(+) Net Profit 350875 463375 (-) Depreciation @ 10% 15000 135000

Cash in hand 19425

Outstanding expenses 18500 Cash at bank 17575

Debtors 226625

Closing Stock 83250

481875 481875

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Example of a foreign company with

operations in India:

The Coca-Cola Company

Headquarters: Atlanta, Georgia

Branches: 900 plants across the world

The Coca-Cola Company is the world’s largest beverage company. The company’s

best known product Coca Cola was invented by John Stith Pemberton in 1886. The

Coca-Cola formula and brand was bought in 1889 by Asa Candler who

incorporated The Coca-Cola Company in 1892.

Coca-Cola currently offers nearly 400 brands in over 200 countries or territories

and serves 1.5 billion servings each day.

With the acquisitions of major brands in India it went on to be known as The

Hindustan Coca Cola Beverages Pvt. Ltd. The company is a 100% company

owned Bottler. It has 3 business regions and operates out of 22 locations across

India.

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Coca-Cola acquired most of the local Indian brands including Thums Up, Limca,

Maaza, Citra and Gold Spot.

The Coca-Cola System in India has:

24 company-owned bottling operations

25 franchisee-owned bottling operations

Approximately 8000 locals as employees

Created employment indirectly for more than 1,50,000 people

The country wide marketing office is located at Gurgaon, Haryana. The company

has 3 more regional offices in Mumbai, Hyderabad, and Kolkata. It also has over

50 manufacturing locations in the country.

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Illustration – Question

A Canadian firm has a branch in Mumbai, India. On December 31, 2009, the Trial

Balance of the branch was as follows:

Particulars Dr. (Rs) Cr. (Rs)

Stock on 01.01.09 37800

Purchases/Sales 225000 337500

Debtors/Creditors 117000 78000

Bills Receivable/Payable 31200 27300

Wages and Salaries 14400

Rents, Rates, Taxes 10800

Head Office balance 103500

Miscellaneous Expenses 4500

Furniture 14730

Cash at Bank 90870

546300 546300

Stock as on 31.12.09 was Rs. 65000

Mumbai Branch A/c in the books of the Canada Head Office showed a

debit balance of $1080.

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The Furniture and fittings were purchased from a remittance of $125

received from the Head Office.

Exchange rates:

31.12.08 $1 = Rs. 67.50

31.12.09 $1 = Rs. 68.50

Average $1 = Rs. 68.00

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Illustration – Solution

Dr. Converted Trial Balance as on 31.12.09 Cr.

Particulars Rs. Rate $ Particulars Rs. Rate $

Stock (01.01.09) 37800 67.50 560 Sales 337500 68 4963

Debtors 117000 68.50 1708 Creditors 78000 68.50 1139

Bills Receivable 31200 68.50 455 Bills Payable 27300 68.50 399

Purchases 225000 68 3309 HO Balance 103500 Given 1080

Wages and Salaries 14400 68 212

Rents, Rates, Taxes 10800 68 159 Exchange Difference 340

Miscellaneous Exp 4500 68 66

Furniture and Fix 14730 Given 125

Cash at bank 90870 68.50 1327

7921 7921

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Dr. Trading and Profit and Loss A/c for the year ended 31.12.09 Cr.

Particulars $ Particulars $

To, Opening Stock 560 By, Sales 4963

To, Purchases 3309 By, Closing Stock (Rs.65000 ÷ $68.50) 949

To, Wages and Salaries 212

To, Gross Profit c/d 1831

5912 5912

To, Rents, Rates, Taxes 159 By, Gross Profit b/d 1831

To, Miscellaneous Expenses 66 By, Exchange Difference 340

To, Net Profit 1946

2171 2171

Balance Sheet as on 31.12.09

Liabilities $ $ Assets $ $

HO A/c 1080 Furniture and Fixture 125

(+) Net Profit 1946 3026 Bills Receivable 455

Creditors 1139 Cash at bank 1327

Bills Payable 399 Debtors 1708

Closing Stock 949

4564 4564

Page | 39

Conclusion

International corporations have their operations in more than one country. Since

every country has its own currency, the consolidation of all of the operations

becomes a little tricky. That is where the Accounting Standard comes into the

picture.

Accounting standards facilities uniform preparation and reporting of general

purpose financial statements published annually for the benefit of shareholders,

creditors, employee and public at large. They are very useful to the investors and

other external groups in assessing the progress and prospects of alternative

investments in different companies in different countries.

Depending on which country the Head Office of a firm is located, the reporting

currency changes, as it is usually the currency of the origin of the organization.

If the HO is in India, the figures of the branch will have to be converted to Indian

Rupees. While, if the HO is located outside of India, the figures of the Indian

Branch will have to be converted to the required currency of the HO.

Without bringing in such uniformity, it would have become difficult to assess and

analyze the overall progress and evaluate the performance of various branches.

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Bibliography

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