ICDS VI – Effects of changes in foreign exchange rates


This ICDS deals with :

(a)    Treatment of transactions in foreign currencies;

(b)    Translating the financial statements of foreign operations;

(c)     Treatment of foreign currency transactions in the nature of forward exchange contracts


Average rate :

Is the mean of the exchange rates in force during the period.

Closing Rate:

Is the exchange rate at the last day of the previous year

Exchange difference:

Is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates

Exchange rate:

Is the ratio of exchange of two currencies

Foreign currency:

Is a currency other than the reporting currency of a person

Foreign operations of a person:

Is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India.

Foreign currency transactions:

Is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person-

(i)                  Buys or sells goods or services whose price is denominated in a foreign currency; or

(ii)                Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or

(iii)               Becomes a party to an unperformed forward exchange contract; or

(iv)               Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in foreign currency.

Forward exchange contract:

Means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature.

Forward rate:

Is the specified exchange rate for exchange of two currencies at a specified future date

Indian Currency:

Shall have the meaning assigned to it in Section 2 of the FEMA Act 1999

Integral foreign operations

Is a foreign operation, the activities of which are an integral part of the operations of the person

Monetary Items

Are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables and payables are examples of monetary items

Non-Integral foreign operations

Is a foreign operation that is not an integral foreign operation

Non-monetary items:

Are assets and liabilities other than monetary items. Fixed assets, inventories and investments in equity shares are examples of non-monetary items.

Reporting currency:

Means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out.


Foreign Currency transactions


Financial Statements of Foreign Operation

ICDS 6 _2

The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to a person. Hence it is classified in to:

When the operation does not impact the Cash flow?

ICDS VI provides following indications that a foreign operation is a non-integral foreign operation rather than integral:

  • The activities of foreign operation are conducted with a significant degree of autonomy from the activities of the person;
  • Transactions with the person are not a high proportion of the foreign operation’s activities;
  • The activities of the foreign operations are financed mainly from its own operations or local borrowings;
  • Cost of labour, material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency;
  • The foreign operation’s sales are mainly in currencies other than Indian currency;
  • Cash flows of the person are insulated from the day-to-day activities of the foreign operation;
  • Sales price for the foreign operation’s products or services are not primarily responsive on a short term basis to changes in exchange rates but are determined more by local competition or local government regulations;
  • There is an active local sales market for the foreign operation’s products or services, although there also might be significant amounts of exports.

Forward Exchange contracts

 ICDS _6 _3


Premium or discount arise on the contract is measured by difference between:

Exchange Rate at the date of inception of the contract – the Forward rate specified in the contract

Exchange difference on the contract is difference between :

(a)    The foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and

(b)    The same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later.


Key Difference with AS

       Removal of Accumulation of FCTR

For  non integral operations AS requires creation of FCTR to part the difference in exchange. This is because the profits and gains from non-integral operations are unrealised and are realisable only when the company is wound up.  However ICDS suggests that such profit/loss be recognised on par with integral operations

Removal of Mark to Market

For trading and speculation transactions AS provides for recognising gains/losses on account of exchange differences on the basis of MTM. But ICDS requires gains/losses on such transactions should be realised only at the time of settlement.

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