Accounting Standand 11
CA Hiral
(Querist) 17 April 2009
This query is : Resolved
There is recent amendment in AS 11 regarding treatment of exchange rate difference arisingon long term monetary items.I want to know how to treat exchange rate diffrence for the period from 7th Dec,06 to 31st March,2009 which is already provided in P&l account? should I provide Exchange rate diff.of 31.3.09 first and then apply the amendmant?
A V Vishal
(Expert) 19 April 2009
Accounting issues
This amendment has given rise to many accounting issues, some of which are discussed hereunder:
First: The ICAI does not appear to have brought out any corresponding modification in its pronouncement, in line with this Gazette Notification. All non-corporate entities, partnership or otherwise, are still expected to comply with AS 11 as pronounced by the ICAI. Perhaps, one is led to believe that all non-corporates stand completely insulated from exchange rate volatility about which there is a hue and cry.
Second: Para 46 is a transitional provision. Transition is a point-in-time when a Standard is introduced for the first time. Transitional provisions ought to address the accounting needs up to the transition date and not beyond. Para 46 that introduces a change from a ‘retrospective date’ of December 7, 2006, extends to companies which may raise foreign currency at a future date. To provide discretionary relief in the garb of a transitional provision, making it effective both prospectively and retrospectively, cannot be deemed to be a step in the right direction.
Third: In a simultaneous action, the MCA has also issued another notification withdrawing a restrictive capitalisation provision in Schedule VI ([this provision read with sub-section 1 of Section 211 is deemed inoperative]. Schedule VI provisions permitted capitalisation of exchange differences insofar as they related only to those assets that were ‘acquired from abroad’. This proviso had been introduced at a time when (i) dealings in forex were governed by very strict regulatory measures, (ii) exchange rates were controlled, (iii) imports were under licensing system and (iv) GOI had notified a devaluation of INR to reflect its purchasing power.
The scope of the so-called transitional Para 46 traverses much beyond the borders earlier drawn under Schedule VI, and allows capitalisation even where a depreciable capital asset was acquired within India. Omission of the words ‘acquired from abroad’ is conspicuous. Nor is there a one-on-one relationship between FC borrowings and assets obtained. This amendment emits a signal to the world-outside that rupee’s strength today is less than it was on June 6, 1966.
Fourth: The scope of Para 6 of AS 11 states that the Standard does not deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
The capitalisation principles laid down in AS 16 (borrowing costs), include:
a) The fundamental requirement in AS 16, that the asset to which borrowing costs can be added should be a ‘qualifying asset’, namely, one which takes substantial period of time of approximately twelve months or so, to make it ready for its intended use or sale.
b) AS 16 also permits that, to the extent exchange differences can be regarded as adjustment to interest costs, that element can be treated as borrowing costs and can be capitalised.
c) The accounting treatment now proposed in Para 46 not merely ignores the scope of Para 6, but causes a deep dent in the application of (a) and (b) above.
Fifth: Any accounting principle that permits either capitalisation of costs, or allows restatement of carrying amount based on revaluation, invariably prescribes a ceiling level that capitalisation should not exceed the fair market value (recoverable amount). The new Para 46 fails to address this issue.
Entities are bestowed with unbridled freedom to capitalise exchange differences to assets, even if the resultant carrying amount were to exceed the fair market value. The direction in which financial reporting is now being allowed to proceed is more real than apparent. There could possibly be an argument that the prescriptions in other Standards would come into operation.
Sixth: Exchange differences arise in more ways than one. The relevant part of Paragraph 13 of AS 11 is as follows: “Exchange differences arising on the
