Bansal Company Ltd. imported raw material worth US Dollars 12,000 on 15th January, 2024 when the exchange rate was 68 per US Dollar. The payment for…

As per AS 11, ‘The Effects of Changes in Foreign Exchange Rates', initial recognition of a foreign currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction. Accordingly, on 15th January, 2024, the raw material purchased and its creditors will be recorded at US dollar 12,000 × ₹ 68 = 8,16,000. Also, on balance sheet date such transaction is reported at closing rate of exchange, hence it will be valued at the closing rate i.e.65 per US dollar (USD 12,000 x 65 = 7,80,000) at 31st March, 2024, irrespective of the payment made for the same subsequently at lower rate in the next financial year. The difference of 3 (65 – 68) per US dollar i.e.36,000 (USD 12,000 x 3) will be shown as an exchange gain in the profit and loss account for the year ended 31st March, 2024 and will not be adjusted against the cost of raw materials. In the subsequent year on settlement date, the company would recognize or provide in the Profit and Loss account an exchange gain of 1per US dollar, i.e. the difference from balance sheet date to the date of settlement between 65and 64per US dollar i.e.12,000. Hence, the accounting treatment adopted by the Accountant of the company is incorrect i.e. it is not in accordance with the provisions of AS 11.