30-11-2012, 12:59 PM
Accounting Implication on Foreign Currency Transactionmes
Abstract
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.
A foreign currency transactions is a transactions which is denominated in or requires settlement in foreign currency, including transactions arising when an enterprise either.
• buys or sells goods or services whose price is denominated in a foreign currency,
• borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency,
• becomes a party to an unperformed forward exchanges contracts: or
• 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.
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.
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.