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      Question

      A company purchases raw material from a US-based supplier for USD 10,000 on January 1, 20X1, when the exchange rate is ₹87/USD. The payment remains outstanding on the balance sheet date of March 31, 20X1, when the exchange rate has shifted to ₹90/USD. Pursuant to AS-11, how should the resulting exchange difference be recognised in the financial statements?

      A The exchange loss of ₹30,000 should be capitalised and added to the cost of the closing stock. Correct Answer Incorrect Answer
      B The exchange loss of ₹30,000 should be recognised as an expense in the Statement of Profit and Loss for the period. Correct Answer Incorrect Answer
      C The difference should be accumulated in a Foreign Currency Translation Reserve (FCTR) until the actual payment is made. Correct Answer Incorrect Answer
      D The difference should be deferred in the Balance Sheet and amortised over the remaining credit period of the supplier. Correct Answer Incorrect Answer
      E No exchange difference is recognised until the transaction is settled (Realisation Principle). Correct Answer Incorrect Answer

      Solution

      Under AS-11, trade payables (sundry creditors) are classified as Monetary Items because they represent money to be paid in a fixed or determinable amount. Monetary items denominated in a foreign currency must be reported using the closing rate (the exchange rate at the balance sheet date).   As per the General Principle of AS-11, exchange differences arising on the settlement of monetary items or on reporting monetary items at rates different from those at which they were initially recorded during the period shall be recognised as income or as expenses in the period in which they arise.   Calculation of Difference:

      • Initial Value (Jan 1): 10,000 × 87=8,70,000
      • Closing Value (Mar 31): 10,000 × 90=9,00,000
      • Exchange Difference: ₹30,000 (Loss)

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