S. No.

Scope of ICDS

Particulars

VI

Effects of changes in Foreign Exchange rates

1. Scope - Treatment of transactions in foreign currencies , Translation of financial statements of foreign operations ,Treatment of Forward foreign exchange currency transactions.

2. Meaning of Average rate - Mean of exchange rates , Closing rate - rate at the last day of previous year , Exchange difference - Difference between conversion of units at two different exchange rates , Exchange rate - rate of one currency in terms of another currency , Foreign currency - other than reporting currency , Foreign operations of a person - Means branch or any other establishment outside India, Foreign Currency Transactions - Denominated in foreign currency or requires settlement in foreign currency , Forward Exchange Contract - Agreement to exchange currencies at a forward rate, any foreign currency option contract or any other similar financial instrument , Forward rate - Specified exchange rate for exchange at a specified future date , Indian currency - As per section 2 of FEMA, 1999 , Integral foreign operations - A foreign operation of which activities are integral part , Monetary items - those items which requires payment in fixed or determinable amount of money. e.g. cash , receivables and payables , Non integral foreign operations - Not an integral foreign operation , Non monetary items - Other than monetary items. e.g. Fixed assets, inventories & investment in equity shares , Reporting currency - Means Indian currency except in case of foreign operations.

3. Foreign Currency Transactions - Initial Recognition - Exchange rate at the date of transactions , in case of regular transactions a average rate that approximates the actual rate can be used for a  number of transactions in a period but in case any significant fluctuations, actual rate at the date of transaction will be considered. All these are subject to provision of sec. 43A of the act or rule 115 of income tax rules as the case may be.

4. Conversion at last day of previous FY - Monetary items will be converted using closing rate , in absence of closing rate, realisable value at closing date will be considered for conversion and Non monetary items will be converted using date of transaction rate. All these are subject to provision of sec. 43A of the act or rule 115 of income tax rules as the case may be.

5. Recognition of exchange difference - Monetary items exchange differences will be recognised in profit & loss acoount in previous year and in case of non monetary items exchange differences will not be recognised in profit & loss account. All these are subject to provision of sec. 43A of the act or rule 115 of income tax rules as the case may be.

6. Financial Statements of Foreign Operations - Classification of Foreign Operations - Separte methods of conversion in case of Intergral operations and Non integral operations.

7. Indicators to classify a operation as Non integral operations - Activities of the operation carried out with a significant degree of autonomy , Not high proportion of foreign operation's activities , Financed mainly from its operations or  local borrowings ,   Cost of labour, material and other components of foreign operation's product & services are primarily paid in local currency , Foreign operation 's sale are mainly in currencies other than Indian currency , Cash flow are insulated from the activities of day to day activities of the foreign operations , Sale price of the foreign operation's product and services are determined by local competition or local government regulations , there is active local sales market for the foreign opertion's products or services.                                                                                 

8. Conversion of Integral Foreign Operations - Same as foreign transactions conversion.

9. Conversion of Non integral Foreign Operations - Assets & Liablilities will be converted at closing rate irrespective of whether they are monetary or non monetary , Income & Expense at the dates of the transactions. All exchange differences will be booked in profit & loss account.

10. Change in the Classification of Foreign Operations - Although consistency principles  requires to follow a consistent classification , yet it may be changed due to change in the financing pattern of foreign operations  or change in manner of operations . Conversion will be as per changed classification from the date of conversion.

11. Forward Exchange Contracts - Premium or discount at the inception of such transactions will be amortised over the life of the contract , Exchange differences will be recognised as income or expense in the previous year in which the exchange rate change , any profit or loss on cancellation or renewal will be recognised as income or expense for the previous year. Not applicable to contracts which are for trading or speculation purpose , entered to establish the amounts of reporting currency required or available at the settlement date , to hedge the foreign currency risk of a firm commitment , a highly probable forecast transaction, these transaction will be recognised at the time of settlement.

12 . Premium or discount is difference between exchange rate at the date of inception of contract and forward rate mentioned in contract.

13. Exchange difference is difference between the foreign currency amount of the contract translated at the exchange rate at the last day of the previous year or the settlement date which ever is earlier.