As per para 13 of AS 11 (Revised 2003) 'The Effects of Changes in Foreign Exchange Rates', exchange differences arising on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, should be recognized as income or expenses in the period in which they arise. Thus, exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets will be recognized as income or expense. Calculation of Exchange Difference: Foreign currency loan 24,00,000/60 = 40,000 US Dollars Exchange difference - 40,000 US Dollars (62.50-60.00) = 1,00,000 (including exchange loss on payment of first instalment) Therefore, entire loss due to exchange differences amounting 1,00,000 should be charged to profit and loss account for the year. Note: The above answer has been given on the basis that the company has not availed the option for capilisation of exchange difference as per para 46/46A of AS 11. However, as per para 46A of the standard, the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset. 05 Accordingly, in case Opportunity Ltd. opts for capitalizing the exchange difference, then the entire amount of exchange difference of 1,00,000 will be capitalsied to 'Equipment account'. This capitalized exchange difference will be depreciated over the useful life of the asset. Cost of the asset on the reporting date Initial cost of Equipment 24,00,000 Add: Exchange difference as on 31.3.2014 1,00,000 Total cost on the reporting date 25,00.000 Illustration 11 A business having the Head Office in Kolkata has a branch in UK. The following is the trial balance of Head Office and Branch as at 31.03.2013 Account Name Amount in Dr. C. Fixed Assets (Purchased on 01.04.2010) 5,000 Debtors 1,600 Opening Stock 400 Goods received from Head Office Account (Recorded in HO books as 4,02,000) Sales 20,000 Purchases 10,000 Wages 1,000 Salaries 1.200 Cash 3,200 Remittances to Head Office (Recorded in HO books as 1,91,000) 2,900 Head Office Account (Recorded in HO books as 74.90,000) 7,400 Creditors 4,000 Closing stock at branch is 700 on 31.03.2013 Depreciation @ 10% p.a. is to be charged on fixed assets. Prepare the trial balance after been converted in Indian Rupees. Exchange rates of Pounds on different dates are as follow: 6,100