AS 11 answers one practical question every accountant faces: when a transaction happens in dollars, euros, or any foreign currency, how do you record it in your Indian rupee books — and what do you do when the exchange rate moves?
The standard works in two stages. Stage 1 — Initial Recording: When you first record a foreign currency transaction (say, importing machinery or exporting goods), translate it at the spot rate on the transaction date. Simple. Mr. Sharma's company buys goods from the US on 1 Oct; the ₹/$ rate that day is your recording rate. Stage 2 — Balance Sheet Date Restatement: Now here's where students trip up. At every balance sheet date, you must restate monetary items (cash, bank, debtors, creditors, loans) at the closing rate. The resulting gain or loss goes straight to the Profit & Loss account — no deferral, no reserve. But non-monetary items (fixed assets, inventory, investments at cost) stay at the original historical rate — you do not restate them.
The monetary vs non-monetary split is the heart of AS 11. Think of it this way: if you could settle the item by paying cash (a creditor, a loan), it's monetary — restate it. If it's a physical asset or a cost-based investment, it's non-monetary — leave it alone.
Forward exchange contracts get their own treatment. If a company books a forward contract to hedge a foreign currency exposure, the premium or discount on that contract (difference between forward rate and spot rate on the contract date) is amortized to P&L over the contract period. Any exchange difference on the contract itself also hits P&L. One important exception: if a forward contract is taken to hedge the acquisition of a fixed asset, the exchange difference can be adjusted to the cost of the asset — this is a specific exam-tested exception.
For foreign branches, the standard distinguishes between an integral foreign operation (treated like an extension of the head office — use historical/closing rates depending on item type, just like standalone transactions) and a non-integral foreign operation (translates all assets/liabilities at closing rate; all income/expenses at actual or average rate; exchange differences go to a Foreign Currency Translation Reserve in equity, not P&L). This distinction is asked frequently as a 5–8 mark question.