Foreign currency transaction

We see lots of Merger and Acquisition by Indian Companies and vice versa and so its bound to involve foreign currency transaction which spills over more than a day and so 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.

1. Foreign currency transaction
   Transactions 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.
2. Foreign operation
   Foreign operations conducted through branches, subsidiaries, associates, etc.

The companies can avoid the problem of foreign exchanges differences if they can find

1. Settlement in only one currency
2. Recording accounting entries of foreign currency transaction when they are converted in to local currency.
3. Fixed exchange rate of exchange to be used.

However, this solution is not feasible because these options are not available when company purchase or sales in foreign exchange transactions.

Compounding problems

When a foreign currency transaction takes place it has to be accounted by using a rate of exchange rate and if the transaction is not settled by that day then we have exchange rate difference situation. Suppose this monetary item is settled partly on some other date but in same financial period then we can book trading gain or loss for that financial period. Further if the transaction is carried forward to the next financial year then we will express these monetary items as outstanding items on date balance sheet date with foreign exchange rate for the given date for example foreign exchange rate declared by RBI on 31st march. These processes will continue till the transaction is settled down.

Now companies have 2 options to leave the data on balance sheet.

Either opt for

Transaction Date foreign exchange rate

OR

Translate their foreign currency items into rupees on balance sheet date by using closing rate and the resultant exchange difference is recognized in the profit and loss account.

Infosys Example

Infosys one of the giant software company in India who has diversified across the world. Infosys has its business in Asia, Australia, North America and Europe. Foreign exchange plays major role in Infosys revenue. Infosys entered in to forward contracts and hedged contracts to reduce the exchange risk.

Infosys annual report for 2008 and figured out how this company shows foreign exchange accounting in the report.

1. Any income of losses by the forward contract had shown under the head “Other income” in Profit and Loss account. It also showed average rate as well as period rate for different currency.

2. Foreign Currency account balance had shown under the head “Cash and Bank Balance”.