AS 11 lays down the principles for accounting for foreign currency transactions and foreign operations — that is, how to record transactions denominated in a currency other than the reporting currency, how to translate the financial statements of foreign operations, and how to deal with the exchange differences that inevitably arise when exchange rates move. For any business that imports, exports, borrows in foreign currency, or has overseas operations, this standard is central.
| Initial recognition | At the spot rate on transaction date |
| Monetary items | Retranslated at closing rate |
| Non-monetary items | Kept at historical rate |
| Exchange differences | Recognised in P&L (general rule) |
| Corresponding standard | AS 11 / Ind AS 21 |
Objective and scope
The objective is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an enterprise, and how to translate financial statements into a reporting currency. The two principal questions are which exchange rate(s) to use, and how to recognise in the financial statements the financial effect of changes in exchange rates. AS 11 deals with accounting for transactions in foreign currencies, translating the financial statements of foreign operations, and accounting for foreign currency transactions in the nature of forward exchange contracts.
Initial recognition of foreign currency transactions
A foreign currency transaction is a transaction denominated in or requiring settlement in a foreign currency, such as buying or selling goods priced in a foreign currency, borrowing or lending foreign currency, or acquiring or disposing of assets in foreign currency. On initial recognition, a foreign currency transaction is recorded in the reporting currency by applying the exchange rate at the date of the transaction to the foreign currency amount. For practical reasons, an average rate for a period may be used if it approximates the actual rates, unless rates fluctuate significantly.
Reporting at subsequent balance sheet dates
The treatment at each subsequent balance sheet date depends on whether the item is monetary or non-monetary — this distinction is the crux of AS 11.
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money — for example, cash, receivables, payables, and loans. Foreign currency monetary items are reported using the closing rate (the exchange rate at the balance sheet date). Because the closing rate differs from the rate at which the item was first recorded (or last reported), an exchange difference arises.
Non-monetary items are assets and liabilities other than monetary items — for example, fixed assets, inventories, and investments in equity shares. Non-monetary items carried at historical cost are reported using the exchange rate at the date of the transaction (they are not re-translated at the closing rate). Non-monetary items carried at fair value are reported using the exchange rates that existed when the values were determined.
Recognition of exchange differences
Exchange differences arise when monetary items are settled, or reported at rates different from those at which they were initially recorded or previously reported. The general rule under AS 11 is that exchange differences are recognised as income or expense in the period in which they arise (taken to the profit and loss account). So if a foreign currency payable is recorded at one rate and the rupee weakens by the time it is reported or settled, the additional rupee cost is an exchange loss in the profit and loss account; if the rupee strengthens, an exchange gain arises.
(There have historically been specific options and provisions in Indian practice — for example, relating to exchange differences on long-term foreign currency monetary items and on certain depreciable assets — under which some exchange differences could be capitalised or amortised rather than taken to profit and loss. These are specialised provisions; the general principle remains that exchange differences go to the profit and loss account.)
Forward exchange contracts
Where an enterprise uses a forward exchange contract to hedge a foreign currency monetary item, the premium or discount on the contract (the difference between the forward rate and the spot rate at inception) is generally amortised as expense or income over the life of the contract, and the exchange difference on the contract is recognised in the profit and loss account in the reporting period. Forward contracts taken for trading or speculation, rather than to hedge an existing exposure, are dealt with by marking to market, with gains or losses recognised in the profit and loss account.
Translation of foreign operations
For foreign operations, AS 11 classifies them (under the framework as it has applied in India) and prescribes how their financial statements are translated into the reporting currency — broadly, assets and liabilities at the closing rate, and income and expense items at rates at the dates of transactions (or an average), with the resulting exchange differences accumulated and dealt with according to the classification of the operation. The detailed mechanics depend on the nature of the foreign operation and its relationship with the reporting enterprise.
Disclosure
An enterprise should disclose the amount of exchange differences included in the net profit or loss for the period, and the amount of exchange differences accumulated where applicable. The accounting policy for foreign currency translation is also disclosed.
A full worked example
An Indian company imports goods worth USD 50,000 on 1 February when the rate is ₹82/USD. It has not paid by 31 March (year-end), when the rate is ₹84/USD. It finally pays on 30 April at ₹83/USD. How are the exchange differences accounted for?
Step 1 — Record at the transaction-date rate. The purchase and payable are recognised at ₹82.
| Date | Event | Rate | Amount (₹) |
|---|---|---|---|
| 1 Feb | Purchase / payable recognised | 82 | 41,00,000 |
| 31 Mar | Payable retranslated (closing rate) | 84 | 42,00,000 |
| 30 Apr | Payment made | 83 | 41,50,000 |
Step 2 — Year-end retranslation. The creditor is a monetary item, so it is retranslated at the ₹84 closing rate. The payable rises from ₹41,00,000 to ₹42,00,000 — a ₹1,00,000 exchange loss charged to the P&L.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Exchange loss (P&L) | 1,00,000 | |
| Creditor | 1,00,000 |
Step 3 — Settlement. On 30 April the company pays USD 50,000 at ₹83 = ₹41,50,000, settling a creditor carried at ₹42,00,000 — a ₹50,000 exchange gain.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Creditor | 42,00,000 | |
| Bank | 41,50,000 | |
| Exchange gain (P&L) | 50,000 |
The mechanism to remember: monetary items (payables, receivables, loans) are retranslated at each balance-sheet date and on settlement, with differences going to profit or loss. Non-monetary items like fixed assets or inventory bought in foreign currency stay at their historical rate and are not retranslated. AS 11 is closely aligned with Ind AS 21.
How AS 11 compares with Ind AS 21
AS 11 corresponds to Ind AS 21, The Effects of Changes in Foreign Exchange Rates, and the core mechanics — the transaction-date rate on initial recognition, the closing rate for monetary items, historical rate for non-monetary items at cost, and exchange differences generally to profit and loss — are similar. The most significant conceptual difference is the functional currency approach in Ind AS 21: under Ind AS, each entity determines its functional currency (the currency of the primary economic environment in which it operates) and measures its results and position in that currency, translating into the presentation currency for reporting. AS 11 uses the "reporting currency" framework rather than the functional currency concept, and the classification and translation of foreign operations differ in approach. Ind AS 21 also does not carry the India-specific options to capitalise or amortise certain exchange differences in the way that has existed under the AS framework.
Common pitfalls
Frequent issues include re-translating non-monetary items at the closing rate (only monetary items are re-translated); using an inappropriate rate on initial recognition; failing to recognise exchange differences on outstanding monetary items at the balance sheet date; and mishandling forward contracts (for example, not amortising the premium over the contract period).
Why this is cleaner on a unified system
Foreign exchange accounting is far more reliable when multi-currency transactions, revaluation at period-end, and the ledger all sit in one connected system that applies exchange rates consistently. When the platform records each foreign currency transaction at the transaction-date rate and re-translates monetary items at the closing rate automatically, the exchange differences flow into the accounts correctly without manual reconciliation — particularly valuable for businesses operating across multiple countries and currencies, a theme that runs through our multi-country guides.
This article is a detailed educational summary of AS 11 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of AS 11 as issued by the ICAI before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.
Frequently asked questions
How are foreign currency transactions recorded under AS 11?
A foreign currency transaction is recorded at the exchange rate on the transaction date. At each balance-sheet date, monetary items are retranslated at the closing rate, while non-monetary items remain at their historical rate.
What is the difference between monetary and non-monetary items under AS 11?
Monetary items are money held or amounts to be received or paid in fixed sums — like debtors, creditors and loans — and are retranslated at the closing rate. Non-monetary items like fixed assets and inventory are kept at their historical rate and not retranslated.
How are exchange differences treated under AS 11?
Exchange differences arising on the settlement or retranslation of monetary items are generally recognised in the profit and loss account in the period they arise. For example, a payable rising from Rs 41,00,000 to Rs 42,00,000 at year-end creates a Rs 1,00,000 exchange loss.
What is the difference between AS 11 and Ind AS 21?
AS 11 and Ind AS 21 are closely aligned in their core mechanics of recording at transaction rate and retranslating monetary items. Ind AS 21 introduces the concept of functional currency more formally and has more detailed guidance on foreign operations.