Interpereation of Para 4 (e) of As-16

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Snehal Parikh (Querist)
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08 August 2010 If the Company has taken foreign currency loan for assetunderconstruction and the interest monetorium period is 6 years Should we book exchange gain as on 31st March,2010 as income or reduce(decapitalise) the cost of asset under consturction ? This affects indian corporate histroy greatway.Certain companies reduce cost of asset under construction due to exchange gain on such loan taking base of notification of As-11 issued on 31st March,2009.Mr.Dolphy De'sauza also opines the same may be credited to profit and loss account Please explain which is correct accounting effect to reduce cost or to book the same in profit and loss account

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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08 August 2010 In paragraph 46 of AS 11 introduced through notification dated March 31,2009 the crucial word used is " depreciable capital assset". But the standard as well as "Guidance note on terms used in financial statement"does not define that term. Hence divergent views may arise on the accounting issue of exchange difference. Therefore, a prudent view is ,if an asset is subject to depreciation it can be called as a "depreciable capital asset". Here the asset is under construction,though not depreciated, it can be subject to depreciation. So ,as per my understanding,the exchange difference should be capitalized / decapitalized as the case may be.

Snehal Parikh

Snehal Parikh (Querist)
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14 August 2010 Mr. B Chakrapani, I have raised the same in context para 4(e) of As-16.As per para 4(e)exchange rate fluctuation in relation to foreign currency loan to the extent of interest adjustment cost is capitalised and the excess over the interest cost should be given effect as per AS-11.If the company has exchange gain in relation to foreign currency loan for asset under consturction, should the same reduce the cost of asset under construction or credited to P & L Account ? The same case happens in majority of companies during the F.Y 09-10 in case foreign loan for asset under construction,as the exchange rate reduces as compared rate as on 1/04/09. The decision will affect indian corporate history to large extent.Can you please immediately reply considering para 4 (e)of As-16 and notification of As-11 issued on 31st March,2009 in above situation ?