Chapter 7: Standards Impacting Financial Statements - Test 2: answer key

Question 1 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. Meridian Engineering Ltd is an Indian company with the Indian rupee as its reporting currency and a financial year ending 31 March 2026; its financial statements were approved by the Board of Directors on 20 June 2026. The following transactions of 2025-26 remained to be accounted for. (i) On 15 December 2025, the company exported a consignment of CNC machines to a customer in the United States for USD 1,20,000, receivable on 15 April 2026. Spot rates per USD were: 15 December 2025 Rs 87.40; 31 March 2026 Rs 89.00. The customer actually remitted the amount on 10 May 2026, when the rate was Rs 89.30. (ii) On 1 February 2026, the company imported a captive power plant from a US supplier for USD 2,00,000, payable on 30 April 2026. The plant was installed and ready for use on 1 March 2026 and is depreciated on the straight-line basis over 15 years with no residual value. Spot rates per USD were: 1 February 2026 Rs 86.00; 1 March 2026 Rs 87.50; 31 March 2026 Rs 89.00. (iii) On 1 January 2026, the company borrowed USD 5,00,000 from an overseas bank, repayable after three years, exclusively to acquire a depreciable capital asset. Rates per USD on 1 January 2026 and 31 March 2026 were Rs 85.50 and Rs 89.00 respectively. The company has exercised the option available under paragraph 46A of AS 11 in respect of all its long-term foreign currency monetary items and the option is irrevocable. (iv) The company holds all of the equity of Meridian Asia Pte Ltd, Singapore, which operates with a high degree of autonomy, arranges its own borrowings and sells mainly in the local market. Translation of its financial statements for 2025-26 resulted in a net exchange gain of Rs 27,00,000. The investment is carried at cost and there was no disposal during the year.

What amount of exchange gain or loss on the export receivable from the US customer must Meridian Engineering Ltd recognise in the statement of profit and loss for the year ended 31 March 2026?

1. Gain of Rs 2,28,000
2. Gain of Rs 1,92,000 (correct answer)
3. Gain of Rs 36,000
4. Nil, since the amount is recognised only on actual receipt in May 2026

Answer: B — Gain of Rs 1,92,000

Explanation. The receivable is a foreign currency monetary item. It is initially recorded at the transaction-date rate of Rs 87.40 and restated at the closing rate of Rs 89.00 on 31 March 2026. Exchange gain = USD 1,20,000 x (Rs 89.00 - Rs 87.40) = Rs 1,92,000, recognised in the statement of profit and loss for 2025-26. The further movement from Rs 89.00 to Rs 89.30 between the balance sheet date and the date of receipt belongs to the year 2026-27 and cannot be anticipated.

Where it goes wrong. Option (a) uses the settlement-date rate of Rs 89.30 to measure the whole gain, thereby recognising a profit of 2026-27 in 2025-26.

Authority. AS 11 para 9 (initial recognition); AS 11 para 11(a) (monetary items at closing rate); AS 11 para 13 (recognition of exchange differences)

Question 2 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

At what amount should the imported captive power plant be recognised in the balance sheet of Meridian Engineering Ltd at 31 March 2026, before charging depreciation for the year?

1. Rs 1,78,00,000
2. Rs 1,75,00,000
3. Rs 1,72,00,000 (correct answer)
4. Rs 1,76,00,000

Answer: C — Rs 1,72,00,000

Explanation. The power plant is a non-monetary item carried at historical cost denominated in a foreign currency. AS 11 requires such an item to be reported at the exchange rate at the date of the transaction, i.e. USD 2,00,000 x Rs 86.00 = Rs 1,72,00,000. The plant was ready for use on 1 March 2026, but the measurement of its cost is unaffected by the movement in the rate thereafter; the corresponding payable is a separate monetary item restated at the closing rate with the loss taken to the statement of profit and loss.

Where it goes wrong. Option (a) translates a historical-cost non-monetary item at the closing rate, which is the rule for monetary items only.

Authority. AS 11 para 11(b) (non-monetary items at historical cost); AS 11 para 9; AS 10 (Revised) para 9

Question 3 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

How should the exchange difference of Rs 17,50,000 on the USD 5,00,000 long-term borrowing be dealt with in the financial statements of Meridian Engineering Ltd for the year ended 31 March 2026?

1. Add it to the cost of the depreciable capital asset and depreciate it over the balance useful life of that asset (correct answer)
2. Recognise it as an expense in the statement of profit and loss for the year 2025-26
3. Transfer it to the foreign currency translation reserve as a separate component of shareholders' funds
4. Accumulate it in the Foreign Currency Monetary Item Translation Difference Account and amortise it over the balance period of the loan

Answer: A — Add it to the cost of the depreciable capital asset and depreciate it over the balance useful life of that asset

Explanation. The borrowing is a long-term foreign currency monetary item (term of 12 months or more at origination) and the company has irrevocably exercised the paragraph 46A option. Where the exchange difference relates to the acquisition of a depreciable capital asset, it is added to or deducted from the cost of the asset and depreciated over the balance life of the asset. The exchange loss of USD 5,00,000 x (Rs 89.00 - Rs 85.50) = Rs 17,50,000 is therefore capitalised, not expensed.

Where it goes wrong. Option (d) is the paragraph 46A treatment applicable only where the exchange difference does not relate to a depreciable capital asset; it cannot be applied to this borrowing.

Authority. AS 11 para 46A (option for long-term foreign currency monetary items); AS 11 para 13

Question 4 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

How should the net exchange gain of Rs 27,00,000 arising on translation of the financial statements of Meridian Asia Pte Ltd be dealt with?

1. Recognise it in the statement of profit and loss for 2025-26 as other income
2. Recognise it as an extraordinary item in the statement of profit and loss
3. Adjust it against the carrying amount of the investment in the subsidiary
4. Accumulate it in a foreign currency translation reserve until disposal of the net investment (correct answer)

Answer: D — Accumulate it in a foreign currency translation reserve until disposal of the net investment

Explanation. Meridian Asia Pte Ltd operates with a significant degree of autonomy, is financed by local borrowings and sells in the local market; it is a non-integral foreign operation. Exchange differences arising from translating its financial statements are not recognised as income or expense for the period, because changes in exchange rates have little or no direct effect on present and future cash flows from operations. They are accumulated in a foreign currency translation reserve until disposal of the net investment, when the cumulative amount is recognised in the statement of profit and loss.

Where it goes wrong. Option (a) applies the integral-operation treatment, under which exchange differences are routed through the statement of profit and loss.

Authority. AS 11 para 24 (translation of non-integral foreign operations); AS 11 para 30(c); AS 11 para 32 (disposal)

Question 5 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

Scenario. Trident Polymers Ltd is an Indian company with the rupee as its reporting currency and a financial year ending 31 March 2026. It operates through a branch in the United Kingdom and a wholly owned subsidiary in Germany. The UK branch manufactures and sells in the local market, remits surplus funds to India and its day-to-day operations are directed by the head office; it is treated as an integral foreign operation. The German subsidiary arranges its own borrowings, pays its costs in euros and sells mainly in Germany; it is treated as a non-integral foreign operation. Relevant information is as follows. (i) The UK branch's machinery was purchased on 1 April 2022 for GBP 1,60,000 and is carried at cost. Exchange rates per GBP were Rs 98 on 1 April 2022, an average of Rs 103 for 2025-26, and Rs 106 on 31 March 2026. (ii) On 1 February 2026, Trident Polymers Ltd entered into a forward contract to sell USD 1,50,000 at Rs 87.00 per USD, deliverable on 31 July 2026, to establish the rupee value of an export receivable. The spot rate on 1 February 2026 was Rs 86.40 per USD. The contract is not intended for trading or speculation. (iii) On 1 March 2026, the company purchased a forward contract for USD 2,00,000 at Rs 88.00 per USD, maturing on 31 August 2026, purely for speculation. On 31 March 2026, the forward rate for delivery on 31 August 2026 was Rs 89.25 per USD, while the spot rate on that date was Rs 88.60 per USD. (iv) On 1 September 2026, the company disposed of 25% of its interest in the German subsidiary through sale. Cumulative exchange differences of Rs 96,00,000 relating to that operation had been deferred in the foreign currency translation reserve; no write-down of the carrying amount of the operation had been made at any time.

At what amount is the machinery of the UK branch included in the translated trial balance of Trident Polymers Ltd as on 31 March 2026 (before charging depreciation for the year)?

1. Rs 1,69,60,000
2. Rs 1,56,80,000 (correct answer)
3. Rs 1,64,80,000
4. Rs 1,61,60,000

Answer: B — Rs 1,56,80,000

Explanation. The UK branch is an integral foreign operation, so its individual items are translated as if the transactions had been entered into by the reporting enterprise itself. Machinery is a non-monetary item carried at historical cost; the cost and depreciation are translated at the exchange rate on the date of purchase. Translated cost = GBP 1,60,000 x Rs 98 = Rs 1,56,80,000, irrespective of the average or closing rates for 2025-26.

Where it goes wrong. Option (a) translates the machinery at the closing rate, which is the procedure for non-integral foreign operations, not for an integral branch.

Authority. AS 11 para 20 (translation of integral foreign operations); AS 11 para 11(b)

Question 6 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

What amount of premium or discount on the forward contract entered into on 1 February 2026 must Trident Polymers Ltd recognise in the statement of profit and loss for the year ended 31 March 2026?

1. Rs 90,000
2. Rs 45,000
3. Rs 30,000 (correct answer)
4. Rs 60,000

Answer: C — Rs 30,000

Explanation. The contract is not for trading or speculation; it was entered into to establish the rupee value of an export receivable. The premium at inception is the difference between the forward rate and the spot rate: (Rs 87.00 - Rs 86.40) x USD 1,50,000 = Rs 90,000, to be amortised as expense over the life of the contract of six months. Two months (February and March) fall in 2025-26, so the premium charged is Rs 90,000 x 2/6 = Rs 30,000; the balance of Rs 60,000 is charged in 2026-27.

Where it goes wrong. Option (a) charges the entire premium in the first year; option (b) spreads it over twelve months instead of the six-month contract life.

Authority. AS 11 para 15 (forward exchange contracts); AS 11 para 16 (exchange differences on forward contracts)

Question 7 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

What amount of gain or loss on the speculative forward contract purchased on 1 March 2026 must Trident Polymers Ltd recognise in the statement of profit and loss for the year ended 31 March 2026?

1. Gain of Rs 1,20,000
2. Nil, since the contract is marked to market only on settlement
3. Gain of Rs 2,00,000
4. Gain of Rs 2,50,000 (correct answer)

Answer: D — Gain of Rs 2,50,000

Explanation. In recording a forward exchange contract intended for trading or speculation, the premium or discount on the contract is ignored and, at each balance sheet date, the value of the contract is marked to its current market value, the gain or loss being recognised in the statement of profit and loss. Gain = USD 2,00,000 x (Rs 89.25 - Rs 88.00) = Rs 2,50,000, measured using the forward rate for the remaining maturity of the contract.

Where it goes wrong. Option (a) uses the spot rate of Rs 88.60 instead of the forward rate applicable to the contract's maturity; option (b) wrongly defers recognition until settlement.

Authority. AS 11 para 17 (forward contracts for trading or speculation)

Question 8 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

On disposal of 25% of its interest in the German subsidiary, what amount of the deferred exchange differences must Trident Polymers Ltd recognise in the statement of profit and loss?

1. Rs 24,00,000 (correct answer)
2. Rs 96,00,000
3. Rs 72,00,000
4. Nil, since the amount remains in the foreign currency translation reserve until complete disposal

Answer: A — Rs 24,00,000

Explanation. On disposal of a non-integral foreign operation, the cumulative amount of exchange differences deferred and relating to that operation is recognised as income or expense. In the case of a partial disposal, only the proportionate share of the related accumulated exchange differences is included in the gain or loss. Proportionate share = Rs 96,00,000 x 25% = Rs 24,00,000, recognised in the statement of profit and loss in the year of disposal.

Where it goes wrong. Option (b) releases the entire cumulative balance on a partial disposal; option (d) ignores the fact that disposal, including partial disposal, triggers recognition.

Authority. AS 11 para 32 (disposal of a non-integral foreign operation); AS 11 para 30(c)

Question 9 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. Himalayan Exports Ltd has a payable of USD 40,000 at 31 March 2026, recorded at Rs 82.00 per USD. Because of exchange control restrictions, currencies cannot be exchanged at the official closing rate of Rs 84.50 per USD at the balance sheet date, and the amount likely to be required to settle the item is Rs 85.20 per USD. At what amount should the payable be reported in the balance sheet at 31 March 2026?

Himalayan Exports Ltd has a payable of USD 40,000 at 31 March 2026, recorded at Rs 82.00 per USD. Because of exchange control restrictions, currencies cannot be exchanged at the official closing rate of Rs 84.50 per USD at the balance sheet date, and the amount likely to be required to settle the item is Rs 85.20 per USD. At what amount should the payable be reported in the balance sheet at 31 March 2026?

1. Rs 32,80,000
2. Rs 33,80,000
3. Rs 34,08,000 (correct answer)
4. Rs 34,20,000

Answer: C — Rs 34,08,000

Explanation. A foreign currency monetary item is normally reported at the closing rate. However, AS 11 recognises that the closing rate may not reflect with reasonable accuracy the amount in reporting currency likely to be realised or required to be disbursed, for example where there are restrictions on remittances or the closing rate is unrealistic. In such circumstances the item is reported at the amount likely to be disbursed at the balance sheet date, i.e. USD 40,000 x Rs 85.20 = Rs 34,08,000.

Where it goes wrong. Option (b) mechanically applies the closing rate even though the standard expressly displaces it where remittance restrictions make that rate unrealistic.

Authority. AS 11 para 11(a) (where closing rate does not reflect the amount likely to be disbursed)

Question 10 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

Scenario. Sterling Overseas Ltd holds all of a non-integral foreign operation. Goodwill of SGD 4,00,000 arising on the acquisition of that operation is recognised in the foreign operation's own financial statements. Exchange rates per SGD were Rs 65 on the date of acquisition, an average of Rs 62.50 for 2025-26 and Rs 62 on 31 March 2026. At what amount is the goodwill included in the consolidated balance sheet at 31 March 2026?

Sterling Overseas Ltd holds all of a non-integral foreign operation. Goodwill of SGD 4,00,000 arising on the acquisition of that operation is recognised in the foreign operation's own financial statements. Exchange rates per SGD were Rs 65 on the date of acquisition, an average of Rs 62.50 for 2025-26 and Rs 62 on 31 March 2026. At what amount is the goodwill included in the consolidated balance sheet at 31 March 2026?

1. Rs 2,60,00,000
2. Rs 2,48,00,000 (correct answer)
3. Rs 2,50,00,000
4. Rs 2,56,00,000

Answer: B — Rs 2,48,00,000

Explanation. When the financial statements of a non-integral foreign operation are translated, the assets and liabilities, both monetary and non-monetary, are translated at the closing rate. Any goodwill or capital reserve arising on acquisition of a non-integral foreign operation is likewise translated at the closing rate. Hence goodwill is carried at SGD 4,00,000 x Rs 62 = Rs 2,48,00,000, the resulting exchange difference being taken to the foreign currency translation reserve.

Where it goes wrong. Option (a) translates goodwill at the historical acquisition rate as if it were a non-monetary item of the reporting enterprise; option (c) uses the average rate applicable to income and expenses.

Authority. AS 11 para 30(e) (goodwill or capital reserve on acquisition of a non-integral operation); AS 11 para 24

Question 11 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. On 1 October 2025, Kaveri Ltd entered into a forward contract to buy USD 80,000 at Rs 88.40 per USD, deliverable on 30 June 2026, to cover an import payable. The spot rate on 1 October 2025 was Rs 87.20 per USD. The contract is not intended for trading or speculation. What amount of premium must be recognised as an expense in the statement of profit and loss for the year ended 31 March 2026?

On 1 October 2025, Kaveri Ltd entered into a forward contract to buy USD 80,000 at Rs 88.40 per USD, deliverable on 30 June 2026, to cover an import payable. The spot rate on 1 October 2025 was Rs 87.20 per USD. The contract is not intended for trading or speculation. What amount of premium must be recognised as an expense in the statement of profit and loss for the year ended 31 March 2026?

1. Rs 96,000
2. Rs 64,000 (correct answer)
3. Rs 32,000
4. Rs 48,000

Answer: B — Rs 64,000

Explanation. The premium at inception = (Rs 88.40 - Rs 87.20) x USD 80,000 = Rs 96,000, to be amortised as expense over the life of the contract of nine months (1 October 2025 to 30 June 2026). Six months fall in the year ended 31 March 2026. Premium to be charged = Rs 96,000 x 6/9 = Rs 64,000; the balance of Rs 32,000 is charged in 2026-27. Exchange differences on the contract are recognised separately in the period in which exchange rates change.

Where it goes wrong. Option (c) amortises only three months, applying the fraction that falls in the following year instead of the current year.

Authority. AS 11 para 15 (amortisation of premium or discount over the life of the contract)

Question 12 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. At 31 March 2025, Nandi Ltd carried a receivable of USD 1,00,000 at the then closing rate of Rs 83.00 per USD. During 2025-26, USD 40,000 was received on 20 February 2026 at Rs 84.00 per USD. The closing rate at 31 March 2026 was Rs 86.00 per USD. What exchange gain must the company recognise in the statement of profit and loss for the year ended 31 March 2026?

At 31 March 2025, Nandi Ltd carried a receivable of USD 1,00,000 at the then closing rate of Rs 83.00 per USD. During 2025-26, USD 40,000 was received on 20 February 2026 at Rs 84.00 per USD. The closing rate at 31 March 2026 was Rs 86.00 per USD. What exchange gain must the company recognise in the statement of profit and loss for the year ended 31 March 2026?

1. Rs 2,20,000 (correct answer)
2. Rs 1,80,000
3. Rs 2,60,000
4. Rs 3,00,000

Answer: A — Rs 2,20,000

Explanation. Where a transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period is determined by the change in exchange rates during that period, measured from the rate at which the item was last reported. Gain on the portion settled = USD 40,000 x (Rs 84.00 - Rs 83.00) = Rs 40,000. Gain on the portion outstanding = USD 60,000 x (Rs 86.00 - Rs 83.00) = Rs 1,80,000. Total exchange gain for 2025-26 = Rs 2,20,000.

Where it goes wrong. Option (b) recognises only the restatement of the outstanding balance and ignores the gain already realised on the settled portion.

Authority. AS 11 para 13 (exchange differences in each intervening period); AS 11 para 11(a)

Question 13 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. On 10 January 2026, Gomti Ltd paid an advance of USD 30,000 to a foreign supplier for raw material to be delivered in June 2026, when the rate was Rs 85.60 per USD. No material had been received by 31 March 2026. The closing rate on that date was Rs 88.20 per USD. At what amount should the advance be shown in the balance sheet at 31 March 2026?

On 10 January 2026, Gomti Ltd paid an advance of USD 30,000 to a foreign supplier for raw material to be delivered in June 2026, when the rate was Rs 85.60 per USD. No material had been received by 31 March 2026. The closing rate on that date was Rs 88.20 per USD. At what amount should the advance be shown in the balance sheet at 31 March 2026?

1. Rs 26,46,000
2. Rs 26,07,000
3. Rs 25,68,000 (correct answer)
4. Rs 25,50,000

Answer: C — Rs 25,68,000

Explanation. An advance for the purchase of goods is a non-monetary item, since it will not be received or paid in a fixed or determinable amount of money; it represents a right to receive goods. It is accordingly carried at the exchange rate at the date of the transaction, i.e. USD 30,000 x Rs 85.60 = Rs 25,68,000. The subsequent depreciation of the rupee against the dollar does not alter the amount at which the advance is reported and no exchange difference arises on it.

Where it goes wrong. Option (a) restates the advance at the closing rate, treating a non-monetary item as though it were a monetary asset.

Authority. AS 11 para 11(b) (non-monetary items at historical cost); AS 11 (definition of non-monetary items)

Question 14 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. On 1 April 2025, Ashoka Ltd purchased machinery for USD 2,00,000, payable in two equal annual instalments on 31 March 2026 and 31 March 2027. The exchange rate on 1 April 2025 was Rs 80.00 per USD and the closing rate on 31 March 2026 was Rs 84.00 per USD; the first instalment was duly paid on 31 March 2026. What exchange loss on the outstanding second instalment must be recognised in the statement of profit and loss for the year ended 31 March 2026?

On 1 April 2025, Ashoka Ltd purchased machinery for USD 2,00,000, payable in two equal annual instalments on 31 March 2026 and 31 March 2027. The exchange rate on 1 April 2025 was Rs 80.00 per USD and the closing rate on 31 March 2026 was Rs 84.00 per USD; the first instalment was duly paid on 31 March 2026. What exchange loss on the outstanding second instalment must be recognised in the statement of profit and loss for the year ended 31 March 2026?

1. Rs 8,00,000
2. Rs 2,00,000
3. Nil, since the instalment is not due until 31 March 2027
4. Rs 4,00,000 (correct answer)

Answer: D — Rs 4,00,000

Explanation. Although the consideration is payable for the acquisition of a non-monetary asset, the unpaid consideration itself is a liability to be paid in fixed amounts of foreign currency and is therefore a monetary item. The outstanding instalment of USD 1,00,000 must be restated at the closing rate, giving an exchange loss of USD 1,00,000 x (Rs 84.00 - Rs 80.00) = Rs 4,00,000, which is recognised in the statement of profit and loss; the cost of the machinery is unaffected.

Where it goes wrong. Option (a) includes the loss on the instalment already paid, which was recognised on settlement and not on 31 March 2026 as outstanding; option (c) defers recognition on the ground that the liability is not yet due.

Authority. AS 11 para 11(a) (monetary items at closing rate); AS 11 para 13

Question 15 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

Scenario. A UK branch of an Indian company is an integral foreign operation. Its closing inventory of GBP 15,000 was purchased when the exchange rate was Rs 101 per GBP. The average rate for the year was Rs 104 and the closing rate was Rs 107. At what amount is the closing inventory carried in the translated financial statements?

A UK branch of an Indian company is an integral foreign operation. Its closing inventory of GBP 15,000 was purchased when the exchange rate was Rs 101 per GBP. The average rate for the year was Rs 104 and the closing rate was Rs 107. At what amount is the closing inventory carried in the translated financial statements?

1. Rs 15,15,000 (correct answer)
2. Rs 16,05,000
3. Rs 15,60,000
4. Rs 15,45,000

Answer: A — Rs 15,15,000

Explanation. The individual items of an integral foreign operation are translated as if the transactions had been entered into by the reporting enterprise itself. The cost of inventories is translated at the exchange rates that existed when those costs were incurred. Hence closing inventory is translated at GBP 15,000 x Rs 101 = Rs 15,15,000; a rate approximating the actual rate (such as the average rate) is used only for transactions, and the closing rate applies only to monetary items.

Where it goes wrong. Option (b) translates inventory at the closing rate, which is the procedure prescribed for assets and liabilities of non-integral, not integral, foreign operations.

Authority. AS 11 para 20 (translation of integral foreign operations); AS 11 para 11(b)

Question 16 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. Rohini Ltd has a long-term foreign currency loan of USD 3,00,000 taken at Rs 80.00 per USD to acquire a depreciable plant. The closing rate on 31 March 2026 is Rs 84.00 per USD. The company has irrevocably exercised the option under paragraph 46A of AS 11 and the plant has a remaining useful life of 8 years. What amount of depreciation on the capitalised exchange difference is charged to the statement of profit and loss for the year ended 31 March 2026?

Rohini Ltd has a long-term foreign currency loan of USD 3,00,000 taken at Rs 80.00 per USD to acquire a depreciable plant. The closing rate on 31 March 2026 is Rs 84.00 per USD. The company has irrevocably exercised the option under paragraph 46A of AS 11 and the plant has a remaining useful life of 8 years. What amount of depreciation on the capitalised exchange difference is charged to the statement of profit and loss for the year ended 31 March 2026?

1. Rs 2,00,000
2. Rs 1,50,000 (correct answer)
3. Rs 1,20,000
4. Nil, since the exchange loss is never depreciated

Answer: B — Rs 1,50,000

Explanation. Exchange loss = USD 3,00,000 x (Rs 84.00 - Rs 80.00) = Rs 12,00,000. Since the option under paragraph 46A has been exercised and the borrowing relates to a depreciable capital asset, the loss is added to the cost of the plant and depreciated over the balance useful life of 8 years. Depreciation on the capitalised amount for 2025-26 = Rs 12,00,000 / 8 = Rs 1,50,000, recognised indirectly through depreciation.

Where it goes wrong. Option (c) depreciates the exchange loss over the original ten-year life instead of the balance useful life; option (a) uses an unsupported six-year remaining life.

Authority. AS 11 para 46A; AS 10 (Revised) para 30 (depreciation over useful life)

Question 17 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

Scenario. Under AS 11, at what rate should income and expense items of a non-integral foreign operation be translated for incorporation in the financial statements of the reporting enterprise?

Under AS 11, at what rate should income and expense items of a non-integral foreign operation be translated for incorporation in the financial statements of the reporting enterprise?

1. At the closing rate, the resulting difference being accumulated in the foreign currency translation reserve
2. At the historical rates at which the related assets were acquired by the foreign operation
3. At the exchange rates at the dates of the transactions, an average rate for the period being used for practical reasons (correct answer)
4. At the closing rate, the resulting difference being recognised in the statement of profit and loss

Answer: C — At the exchange rates at the dates of the transactions, an average rate for the period being used for practical reasons

Explanation. For a non-integral foreign operation, assets and liabilities, both monetary and non-monetary, are translated at the closing rate, while income and expense items are translated at the exchange rates at the dates of the transactions. For practical reasons, a rate that approximates the actual rates, such as an average rate for the period, is often used to translate income and expense items. All resulting exchange differences are accumulated in a foreign currency translation reserve until disposal.

Where it goes wrong. Option (a) applies the closing rate to income and expenses, which is the rule for assets and liabilities, not for the statement of profit and loss.

Authority. AS 11 para 24(b) and para 24(d) (translation of non-integral foreign operations)

Question 18 · 2 marks · Chapter 7: Standards Impacting Financial Statements · medium

Scenario. How should a debit balance in the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) be presented in the balance sheet prepared under Schedule III, Division I of the Companies Act, 2013?

How should a debit balance in the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) be presented in the balance sheet prepared under Schedule III, Division I of the Companies Act, 2013?

1. As a non-current asset under the head 'Other non-current assets'
2. As 'Miscellaneous expenditure' to the extent not written off or adjusted
3. As a deduction from the cost of the related depreciable asset
4. On the Equity and Liabilities side under 'Reserves and Surplus' as a separate line item (correct answer)

Answer: D — On the Equity and Liabilities side under 'Reserves and Surplus' as a separate line item

Explanation. Schedule III does not specify a line item for FCMITDA. Since the balance represents a foreign currency translation loss, it does not meet the definition of an asset: it is neither a resource controlled by the enterprise nor one from which future economic benefits are expected to flow. Accordingly, a debit or credit balance in FCMITDA is shown on the Equity and Liabilities side of the balance sheet under the head 'Reserves and Surplus' as a separate line item.

Where it goes wrong. Option (a) treats the balance as an asset merely because it is a debit balance carried forward to be amortised in later periods.

Authority. AS 11 para 46A; Schedule III, Division I, Companies Act, 2013

Question 19 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. On 1 February 2026, Vaigai Ltd purchased goods for USD 80,000 when the rate was Rs 85.00 per USD. It paid USD 30,000 on 20 March 2026 at Rs 86.20 per USD, and the balance remained unpaid at 31 March 2026, when the closing rate was Rs 87.00 per USD. What total exchange loss is charged to the statement of profit and loss for the year ended 31 March 2026?

On 1 February 2026, Vaigai Ltd purchased goods for USD 80,000 when the rate was Rs 85.00 per USD. It paid USD 30,000 on 20 March 2026 at Rs 86.20 per USD, and the balance remained unpaid at 31 March 2026, when the closing rate was Rs 87.00 per USD. What total exchange loss is charged to the statement of profit and loss for the year ended 31 March 2026?

1. Rs 1,36,000 (correct answer)
2. Rs 1,00,000
3. Rs 1,60,000
4. Rs 1,56,000

Answer: A — Rs 1,36,000

Explanation. Exchange differences arise both on settlement and on restatement. Loss on the amount settled = USD 30,000 x (Rs 86.20 - Rs 85.00) = Rs 36,000. Loss on the amount outstanding at the year end = USD 50,000 x (Rs 87.00 - Rs 85.00) = Rs 1,00,000. Total exchange loss charged to the statement of profit and loss for 2025-26 = Rs 1,36,000; the liability is carried at Rs 43,50,000.

Where it goes wrong. Option (c) restates the whole USD 80,000 at the closing rate, ignoring that USD 30,000 was settled during the year at a different rate.

Authority. AS 11 para 13; AS 11 para 11(a)

Question 20 · 2 marks · Chapter 7: Standards Impacting Financial Statements · hard

Scenario. Kalinga Ltd reclassified one of its foreign operations from a non-integral foreign operation to an integral foreign operation with effect from 1 April 2025. How should the reclassification be accounted for?

Kalinga Ltd reclassified one of its foreign operations from a non-integral foreign operation to an integral foreign operation with effect from 1 April 2025. How should the reclassification be accounted for?

1. All assets and liabilities are restated at the closing rate and the deferred exchange differences are recognised in the statement of profit and loss immediately
2. The operation continues to be translated as a non-integral foreign operation until the investment is disposed of, the reclassification having no accounting effect
3. The deferred exchange differences are transferred to the revaluation reserve and the non-monetary items are revalued annually
4. The translated amounts for non-monetary items at the date of the change are treated as their historical cost, and the deferred exchange differences are not recognised until disposal (correct answer)

Answer: D — The translated amounts for non-monetary items at the date of the change are treated as their historical cost, and the deferred exchange differences are not recognised until disposal

Explanation. Where 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 as the historical cost for those items in the period of change and subsequent periods. Exchange differences which have been deferred are not recognised as income or expenses until the disposal of the operation. This avoids restating past translation in profit or loss merely because of a change in classification.

Where it goes wrong. Option (a) recognises the deferred differences immediately; the standard expressly continues to defer them until the investment is disposed of.

Authority. AS 11 para 33 (change in the classification of a foreign operation)