UNIT V

Foreign Branch

5.1   Foreign Branch

Introduction:

In modern times, the market for goods is not limited to one country, but extends to other countries. To sell products overseas, you need to open a branch office in that country. Such a branch is known as a foreign branch.

A foreign branch is nothing more than an independent branch in a foreign country. One of the important differences between an independent branch in your own country and an independent branch in a foreign country is that the latter holds accounting books in the foreign currency in which it operates.

 The main problem when the head office receives the trial balance is to convert the trial balance into the currency of the head office. This is because it cannot be incorporated into the books of the head office unless the trial balance is converted.

Therefore, the question arises of how to convert when exchange rate fluctuations are apparent in the open market.

Fluctuations can be divided into three categories:

1. A stable currency with almost no exchange rate fluctuations.

2. Moderate fluctuations in exchange rates within a medium range.

3. Wide fluctuations where fluctuations exceed a certain limit.

IN THE BOOKS OF HEAD OFFICE

Trading and Profit and Loss Account

for the year ended 31st Dec. 2005

1. Stable currency with virtually no exchange rate fluctuations:

If the foreign exchange rate between the two countries is fairly stable, the figures included in the trial balance of the foreign branch will be converted at a fixed rate, that is, the official rate. However, (a) remittances from branches will be converted at the actual rate. The remittance is made, and (b) the unconverted, but acquired headquarters account with the number showing the branch account on the date on the headquarters books.

The converted branch trial balance shows a slight difference in the head office books. It is placed on the short side of the account designated as the "exchange difference" that is closed by the transfer to the branch's P & L account.

2. When the exchange rate fluctuates slowly:

You must follow the rules below.

Converting a branch trial balance into your home currency often makes a difference. This is called the "Exchange difference".

It may mean profit or loss. If there is a profit, the same can be carried forward for future losses from the exchange. If there is a loss, it may be adjusted and carried forward with respect to past exchange profits. If not, it may be transferred to the income statement.

3. Wide variability when variability exceeds certain limits:

If the exchange rate fluctuates frequently between the two countries and the market or actual rate differs significantly from the standard or official rate, the exchange rate is said to fluctuate significantly.

For each set of books, you need to enter the actual receipt or payment and convert them at an artificial fixed rate. The difference will be transferred to your foreign exchange reserves account.

Problem 1:

On December 31, 2005, the following balances appeared in the books of the Kolkata branch of a British company headquartered in London.

Inventory on December 31, 2005 was Rs 32,500. The Kolkata branch A / c on the books of the London office showed a debit balance of 2,580 on December 31, 2005. Furniture and fixtures were obtained from a £ 350 remittance from London. This accurately covered the cost of such equipment.

You can get the exchange rate at:

The average price in 2005 is 12 rupees per person.

Prepare transactions and income statements and balance sheets related to the Kolkata branch in a book in London.

Solution:

In London Books

Converted Trail Balance

Kolkata Branch Trading and Profit & Loss Account

for the year ended 31st December, 2005

                     Dr.                                                                                                                                                          Cr.

Kolkata Branch Balance Sheet

as at 31st December, 2005

Problem 2:

From the following details, prepare a Branch Trading and Profit & Loss and a Branch A/c in the Head Office books of a business with Head Office in India and Branchin New York.

Trail Balance as on 30-06-2005

The following information is provided:

(1) The exchange rate on January 7, 2004 was $ 1 = Rs 4.80 and the exchange rate on March 6, 2005 was $ 14.90. The rate of average was $ 1 = Rs 4.85.

(2) The closing price of the branch is $ 220.

(3) The branching product is H.O. You will be charged more than 10% of the cost to.

(4) Depreciate branch furniture at 10%.

Solution:

In H.O. books

Converted Trial Balance of New York Branch

Note: Branch ‘Furniture’ has been converted at the average rate in the absenc of information regarding the rate of exchange on the date of acquistion of furniture.

New York Branch Trading and Profit & Loss Account

for the year ended 30th June, 2005

                Dr.                                                                                                                                                                         Cr.

New York Branch Account

Dr.                                                                                                                                                                              Cr.

Branch Stock Adjustment Account

5.2 Conversion as per AS 11 and incorporation in HO accounts

Companies may engage in forex-related transactions in several ways. To include foreign business and foreign currency transactions in the financial statements, the transactions must be expressed and reported in the financial statements in the company's reporting currency.

Applicability of AS11 Impact of fluctuations in foreign exchange rates

This standard deals with key issues regarding accounting for foreign businesses and foreign currency transactions in determining the exchange rate to be used and guidance on recognizing the financial impact of exchange rate fluctuations in financial statements.

This standard does not specify the currency in which the company represents its books. However, companies typically use the currency of their country of residence. If you are using different currencies, the standard must disclose why. The standard also requires disclosure of the reasons for the change in reporting currency.

AS 11 doesn't handle the restatement of business financial statements from the reporting currency to a different currency to facilitate users familiar with such currencies, or for such similar purposes.

This standard does not cover the presentation of cash flow statements resulting from transactions in foreign currencies and conversion of cash flows from overseas businesses.

The standard also does not treat foreign exchange differences resulting from borrowing in foreign currencies until it is considered an adjustment of interest costs.

Foreign currency transactions

A. First recognition

Foreign currency transactions are transactions denominated in foreign currencies or that need to be settled in foreign currencies. Such foreign currency transactions must be recorded by applying the exchange rate between the foreign currency and the reporting currency to the foreign currency amount on the trading day upon initial recognition in the reporting currency.

B. Subsequent balance sheet date report

All Balance Sheet Dates:

(A) All foreign currency items must be reported at the closing price. However, in certain circumstances, the closing rate may not indicate a reasonable and accurate amount in the reporting currency that is expected to be realized.

In such a scenario, the monetary item must be reported in the reporting currency at the value expected to be realized from such monetary item on the balance sheet date or required for payment.

(B) Non-monetary items recorded at acquisition costs denominated in foreign currencies must be reported using the exchange rate on the transaction date. And

(C) Non-monetary items recorded at fair value or similar valuations denominated in foreign currencies must be reported at the prevailing exchange rate at the time such value was determined.

Recognition of exchange differences

The foreign exchange difference that occurs when you report a company's financial items at a different rate than originally recorded must be recognized as revenue or expense.

Case Study

X Ltd. purchased 3,000 racks worth of fixed assets on January 1, 2006 and raised funds through a foreign currency (US $) loan paid in three equal instalments. The exchange rates on January 1, 2006 and December 31, 2006 were Rs 1 = 40.00 Rs and Rs 42.50, respectively. The first instalment was rendered on December 31, 2006. The total foreign exchange difference is capitalized.

Here, these transactions are accounted for as follows:

According to paragraph 13, the exchange rate difference resulting from the reporting of a financial item of a company or the settlement of a financial item at a rate different from that initially recorded during the period or reported in the previous financial statements must be recognized as income or expense for the period in which it occurred.

Calculation of exchange difference:

Currency of Foreign  (US dollar) loan = 3,000 lakh ÷ 40 (exchange rate as of January 1, 2006) = USD 75 lakh

Exchange difference = US $ 75 x (42.50 – 40.00) = Rupee 187.50. Therefore, the entire loss incurred due to the exchange difference of Rs 187.50 must be charged to the income statement for each year. AS11 and Ind AS 21

Para 46 and 46A

The general principle is that the income statement must reflect the exchange difference, regardless of the exchange difference that occurs in the revenue or capital accounts. However, the Dominion of India has inserted the above paragraph in AS11 “Effects of Exchange Rate Fluctuations” with reference to the notice issued on March 31, 2009.

Differences in exchanges that occur for amortizable if it occurs in an account for depreciable assets, you do not need to charge the income statement and it may be added or reduced from the cost of such assets. This addition must be depreciated along with the asset over the useful life of such a depreciable asset.

The underlined condition is that such an asset is a depreciable capital asset and must appear in foreign currency on the balance sheet and be designated as a "long-term foreign currency item".

Tax effect due to exchange differences

Gains and losses on foreign exchange differences resulting from the conversion of foreign currency transactions and financial statements of foreign businesses may be subject to tax effects that are accounted for in accordance with AS22 “Corporate Tax Accounting”.

Overseas branch: Headquarters entry

A feature of overseas branches is that the information received from overseas branches is displayed in foreign currency and must be converted into the currency of the country of the head office before it are often used for accounting. For example, if an Indian company has a branch office in Nairobi, the trial balance for the branch office will be shilling. The trial balance must be converted to rupees before it can be incorporated. Before addressing the issue of incorporation, it is a good idea to consider how to handle transactions with branches from an exchange perspective.

Moderate variation:

The rules for recording transactions with branches in the books of the head office can be stated as follows.

(A) Fixed assets:

If you keep the fixed asset accounts acquired at the branch in the books of the head office, the price you paid can be converted to either the transaction date or the payment date rate. The depreciation charged to the branch for such assets must also be converted at the same rate. If exchange rate fluctuations increase or decrease liability for repayment of a loan made to purchase a fixed asset, such an increase will be added to the acquisition cost of the fixed asset and the decrease will be deducted Asset.

(B) Fixed liability:

If you want to keep the accounts related to fixed liabilities in the books of the head office, the conversion for entry into the head office must be done at either the prevailing rate or the prevailing rate on the day the liability was incurred. payment.

(C) Products entrusted to the branch office:

Products entrusted to the branch office are recorded in the books of the head office for a fee. The branch translates the invoice at the prevailing rate on the date of receipt of the goods.

(D) Remittance from branch office:

Remittances from the branch will be converted to the actual amount received at the head office. Similarly, remittances to a branch are converted by the branch for the amount actually received.

(E) Expenses charged to the branch:

The costs charged to the branch are converted by the branch at the average rate. The Institute of Chartered Accountants of India distinguishes between permanent changes and temporary or short-term changes in the value of a currency.

Following the IMF, the practice of allowing member states to change the value of their currency by 2.25% without the permission of the IMF is that the Institute makes such changes temporary or short-term and exceeds this limit is considered to be permanent.

Perhaps the institute doesn't say so, but for permanent changes, the devaluation treatment recommendations will apply. Otherwise, the usual conversion rules apply. These are summarized below.

Trial balance conversion:

The following rules are followed:

(A) The conversion of fixed assets displayed in the trial balance of the branch office must be performed at the prevailing rate on the transaction date or payment date.

 (B) Fixed liabilities must be transformed at the prevailing rate, either on the date the liability was incurred or on the date of payment. The same rate will be used later. (As the redemption date approaches, the conversion may take place at the current interest rate.) (The review question may not list multiple interest rates for fixed assets and liabilities. In that case, the initial interest rate. Prefers. You must use the day of the year.)

(C) Current assets and liabilities should be converted at the prevailing rate on the last day of the year. (If the current asset is acquired and held overseas by the head office and is subject to a futures exchange agreement, the asset must be converted at the rate stated in the agreement.)

(D) Revenue items must be converted at the average rate. The average rate should be reached by checking the average of the rates at the beginning and end of the year. However, all types of starting stocks must be converted at the starting rate (since the starting stock was an asset of the previous year, it will be converted at the ending rate).

Similarly, the closing price must be converted at the closing price. Depreciation must be converted at the rate at which the associated fixed asset was converted. It should be noted that in the year the local currency is devalued, even revenue items should be converted at the prevailing rate at the end of the year.

This is due to the recommendation of the Institute of Chartered Accountants of India regarding the devaluation. According to the Association of Certified Accountants of India, under certain special circumstances, the average rate may not be appropriate for converting revenue items in the financial statements of foreign companies.

Here is an example of this situation:

1. When income / expenditure is not evenly earned / generated during the accounting period, such as in a seasonal business.
2. When the exchange rate fluctuates very much during the accounting period.
3.  When you receive a profit transfer from a branch, or when you make a loss transfer to a branch at a rate that is significantly different from the average rate.

In such cases, the institute has stated that the weighted average rate may be more appropriate.

(E) Remittances from branches must be converted to the corresponding numbers in the head office books. Suppose the Nairobi branch indicates a remittance Sh. 60,000 at headquarters in India. If the headquarters receives only 63,890 rupees, this must be the number standing in the credit of the account named "Transfer from Branch".

The appearance of Sh. 60,000 is converted with Rs63, 890 instead of calculation. Similarly, the head office accounts and other connected accounts in the branch trial balance must be converted to the numbers in the branch accounts in the head office books. The conversion in this case is not calculated.

(F) The trial balances will not match because various items in the branch trial balance have been converted at different rates. The difference must be stated shortly as the "exchange difference" and reflected in the income statement. However, if the difference is large, it must be carried forward in the currency fluctuation account. However, if the exchange rate fluctuates slowly, it is unlikely that a big difference will occur.

Note: The Institute of Chartered Accountants of India distinguishes between translation and conversion as follows:

Foreign currency conversion:

The process of expressing the amount displayed in foreign currencies as the equivalent amount in rupees using the exchange rate between the two currencies

Foreign currency conversion:

The process of expressing the amount displayed in foreign currency to the equivalent amount in rupees using the exchange rate at which the foreign currency is bought and sold.

Problem 3:

The following is B Ltd in Mumbai as of March 31, 2012. It is a trial balance of the Nairobi branch office.

The stock at Nariobi on 31st March, 2012 was 30,000 shillings. The followings were the exchange rates:

When fixed assets were acquired                                                   Re. 1 = 1.50 shillings

On April 1, 2011                                                                                  Re. 1 = 0.90 shillings

On March 31, 2012                                                                              Re. 1 = 0.92 shillings

Average                                                                                                  Re. 1 = 0.91 shillings                                       

Goods from the headquarters were charged to the books of the headquarters for 90,000 rupees. What is the branch account in the books of the head office? It shows the debit balance of 1, 62,000. After converting the trial balance of Nairobi and charging 10% depreciation for plants and machinery, furniture and accessories, prepare the Nairobi transaction and income statement. Also, please enter the account of the Nariobi branch in the books of the head office.

Solution:

Nairobi Trial Balance

Value of Stock @ Re. 1 = 0.92 Sh.,  Rs 32,608.

     Dr.     Nairobi Trading and Profit and Loss Account for the year ended March 31, 2012       Cr.

Nairobi Branch Account

Students are encouraged to check if this is correct by comparing the balance of the Nairobi branch with their net worth.

Alternative method of conversion:

Instead of converting all the items and then creating a branch transaction income statement in the head office books, first create a branch transaction income statement in the branch currency and then a simplified trial balance according to the rules. It can be converted.

If you solve the above figure this way, the solution would be:

Nairobi Trading and Profit and Loss Account

Dr.                                                               (In Local Currency)                                                                                 Cr.

Nairobi Branch Trial Balances as on 31st March, 2012

The Nairobi Branch Account will appear as under: 

Nairobi Branch Account

Dr.                                                                                                                                  Cr.

Students will find that the "difference in exchange" in this way is different from what was revealed in the previous way. This is because the branch transaction / profit and loss account has already been created, including the opening price, depreciation cost, and closing price. Each of these items was converted at a different rate in the previous method. However, since net income is converted at the average rate, the second method also has the effect that the average rate is applied to these items.

Problem 4:

C Ltd in Kolkata has a branch in Imagine, which has dollars as currency. In July 2009, we had the following transactions with the head office.

During the month, $ 20,000 was sent to Kolkata at the actual rate of $ 1.25. 1. The standard rate is $ 2 = Re. 1. The average rate is $ 1 = Re. At 1, the rate at the end of the month was $ .80 = Re. 1. Shows how transactions are entered into the branch ledger. It also shows how branch accounts appear in the books at headquarters, and also shows the converted trial balance.

Solution:

Branch Books

Stores Control Account

Dr.                                                                                                                                            Cr.

Head Office Account

Capital Expenditure Account

DR.                                                         Trading and Profit and Loss Account                         Cr.

Cash Account

                                                         Branch Account (in H.O. Books)

Branch Trial Balance

Note:

(1) To get the nominal value, convert the value of $ 45,000 at the nominal interest rate, which is twice the actual value of the transaction. The nominal interest rate is $ 2 = Re.1 while 1 = $ 1.

(2) The nominal interest rate is twice the real interest rate. Therefore, the number entered in the Nominal column is twice the actual number of the purchase.

(3) A $ 16,000 store is used to spend at standard rates. The average rate is $ l = Re. 1, half of the nominal interest rate. Therefore, the number entered in the actual column is half the standard number.

(4) Same reason as (3).

(5) The balance in the Nominal column shows the closing price of $ 44,000 at par. The prevailing rate on July 31 is $ 0.80 per rupee. Therefore, the actual value of the closing price is 44,000/2 x 8 or $ 17,600.

(6) Capital expenditures should have been converted at the prevailing rate on the day the construction was completed but because it has not been given and converted at average rate.

Problem 5:

Carlin & Co. Is headquartered in New York (USA) and has a branch office in Mumbai (India). The Mumbai branch will provide a trial balance as of March 31, 2012 and additional information provided thereafter.

Additional Information:

(A) The computer was obtained from a US $ 6,000 remittance received from the New York headquarters and paid to the supplier. Depreciate your computer at 60% per year.

(B) As of March 31, 2012, the unsold inventory of the Mumbai branch was worth Rs 420,000.

(C) The exchange rate can be interpreted as follows.

1)     January 4, 2011 @ 40 rupees per US dollar

2)     March 1, 2012 @ 742 per US $

3)     Average annual exchange rate @ 41 rupees per US dollar

4)     Conversion with $ must be done with precision up to two decimal places.

Income statement for the year ended March 31, 2012 and Carlin & Co. You will be asked to prepare the balance sheet for the day of the Mumbai branch on the books of the New York headquarters in US dollars. The Mumbai branch account showed a debit balance of US $ 39609 on March 31, 2012 in New York's books and there were no items awaiting adjustment.

Solution:

Trading and Profit and Loss Account of Mumbai branch

for the year ended 31st March, 2012

Balance Sheet of Mumbai Branch as on 31.3.2012

Working Notes:

Converted Trial Balance of Mumbai Branch as on 31st March, 2012

Problem 6:

S & M Ltd. in Mumbai has a branch office in Sydney, Australia. As of the end of March 2012, the following ledger balances have been extracted from the books of the Mumbai and Sydney offices.

The following information is also available:

(1) Inventory as of March 1, 2012:

                     Mumbai Rs1, 50,000

                     Sydney A $ 3,125

(2) The head office always shipped products to branches at a cost of 25%.

(3) The allowance for doubtful accounts is 5%.

(4) Depreciation is provided at 10% of the building and 20% of the depreciation of plants and machinery.

(5) Managing Directors are entitled to a 2% commission on net income.

(6) Income tax is provided at 47.5%.

Things necessary:

(A) To convert the trial balance of a branch to rupees, use the following exchange rates.

                                                     Open rate A $ = Rs 20

                                                    Closing price A $ = Rs 24

                                                    Average rate A $ = Rs 22

                                              For fixed assets A $ = Rs 18

(B) Create trading and profit and loss accounts for the fiscal year ended March 31, 2012, and present head office performance and branch performance as separately as possible. (No balance sheet required.) Ignore the depreciation rates listed in Schedule XIV of the Companies Act. [C.A. (Intel) May Modified in 1995]

(a)                                                                               S & M Ltd.

Sydney Branch Trial Balance (in Rupee)

As on 31st March, 2012

                                                                                                                                                  (Rs. 000)

(b)                                           Trading and Profit and Loss Account for the year ended 31st March, 2012

Working Notes:

References:

1. Financial Accounting by B.B. Dam
2. Financial  Accounting K.R DAS