04 September 2014
i want to knw that if there is any outstanding expense to b adjusted then which rates shall b taken ? do u we need to use both avg rate n closing rate? plzz help
25 July 2024
In accounting for outstanding expenses in the context of a foreign branch or entity, the exchange rates used depend on the nature of the transaction and the financial statement (Profit and Loss or Balance Sheet) where it is recorded. Here’s how you typically handle outstanding expenses in the context of foreign branch accounting:
### Average Rate vs. Closing Rate
1. **Outstanding Expense in Profit and Loss (P&L)**: - **Average Rate**: Outstanding expenses in the P&L are typically adjusted at the average exchange rate prevailing during the period in which the expense was incurred. This rate is used to calculate the rupee equivalent of the foreign currency amount.
Example: If an expense was incurred throughout the year, you would use the average exchange rate for the year to convert the foreign currency amount to rupees in the P&L statement.
2. **Outstanding Expense in Balance Sheet (BS)**: - **Closing Rate**: Outstanding expenses recorded in the Balance Sheet as liabilities are converted at the closing exchange rate on the date of the Balance Sheet. This rate reflects the exchange rate at the end of the reporting period.
Example: If there is an outstanding expense at the end of the financial year, you would use the closing exchange rate as of the Balance Sheet date to convert the foreign currency liability to rupees.
### Practical Application
- **P&L Treatment**: Suppose an expense was incurred evenly throughout the year in a foreign currency (e.g., USD). To calculate the rupee equivalent in the P&L statement, you would use the average exchange rate for the entire year.
- **Balance Sheet Treatment**: At the end of the year, if there is an outstanding liability (e.g., unpaid vendor invoice) in a foreign currency, convert this amount using the closing exchange rate for that specific date.
### Importance of Consistency
It’s important to maintain consistency in the exchange rate methods used across financial statements to ensure accurate reporting and compliance with accounting standards. Different rates are applied based on whether the expense is being recognized in the P&L or reported as a liability in the Balance Sheet.
By applying the average rate for P&L and the closing rate for Balance Sheet, you align with standard accounting practices that reflect the timing and measurement attributes of financial transactions in foreign currencies. Always ensure to document and disclose your exchange rate policy in your financial statements for transparency and clarity.
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