Translation of financial statements of foreign operation

Translation of financial statements of foreign operation:- AS-11 classifies the foreign operation

into two types:

(a) Integral foreign operation

(b) Non-integral foreign operation

(a) Integral foreign operation: Integral foreign operation is a foreign operation, the activities of

which are an integral part of those of the reporting enterprise, like dependent branches, sales

depot, foreign arm etc. which produces raw material and transfers it to Head Office.

Translation of financial statements of integral foreign operation:

The individual items in the financial statements of the foreign operation are translated as if all

these transactions had been entered into by the reporting enterprises. It means —

* Individual items in the financial statements of the foreign operation are translated at the

actual rate on the date of the transactions; alternatively, average rate can also be applied.

* The cost and depreciation of the tangible fixed assets is translated using the exchange rate at

the date of purchase of the asset if the asset is carried at cost.

* If tangible fixed asset is carried at fair value, translation should be done using the rate that

existed on the date of the valuation.

* The cost of inventories is translated at the exchange rates that existed when the cost of

inventory was incurred and realisable value is translated applying exchange rate when

realisable value is determined which is generally closing rate.

* Exchange difference arising on the translation of the financial statement of integral foreign

operation should be charged to profit and loss account

* Exchange difference arising on the translation of the financial statement of foreign operation

may have tax effect which should be dealt as per AS-22 "Accounting for Taxes on Income".

(b) Non-integral foreign operation: Non-integral foreign operation is a foreign operation that is

not an integral foreign operation. The following are indications that a foreign operation is a

non-integral foreign operation rather than an integral foreign operation:

(i) 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

enterprises;

(ii) Transactions with the reporting enterprise are not a high proportion of the foreign

operation's activities.

(iii) The activities of the foreign operation are financed mainly from its own operations or local

borrowings rather than from the reporting enterprise.

(iv) Cost of labour, material and other components of the foreign operation's products or

services are primarily paid or settled in the local currency and not in the reporting currency, (v)

Day-to-day cash flow of the reporting enterprises is independent of the foreign enterprises cash

flows.

(vi) Sales prices of the foreign enterprises are not affected by the day-to-day changes in

exchange rate of the reporting currency of the foreign operation.

(vii) There is an active sales market for the foreign operation product.

Translations of accounts of non-integral foreign operation

* Balance sheet items, assets and liabilities, both monetary and no monetary, at closing rate.

* Items of income and expense at actual exchange rates on the date of transactions.

* All resulting exchange differences should be accumulated in a foreign currency translation

reserve until the disposal of the net investment.

* Contingent liabilities at closing rate.

* Tax effects, if any, may be accounted for as per AS-22.

Change in the classification of foreign operation:-

When a foreign operation that is integral to the operations of the reporting enterprise is

reclassified as a non-integral foreign operation, exchange difference arising on the translation

of non-monetary assets at the date of the reclassification are accumulated in a foreign currency

translation reserve. When a non-integral foreign operation is reclassified as an integral foreign

operation, the translated amounts for non-monetary items at the date of the change are

treated at the historical cost for those items in the period of change and subsequent periods.

Exchange differences which have been deferred are not recognized as income or expenses until

the disposal of the operation.