Interpretation of para 4(e) of As-16

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Snehal Parikh (Querist)
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07 August 2010 The exchange rate fluctuation in relation to foreign currency loan for projects under construction to the extent interest cost adjustment is capitalised and the treatment of excess over interest cost differential is given as per AS-11.

My query is that if the company gets benifit of exchange rate fluctuation in relation to foreign currency loan for projects under consturction should reduce the cost or credited to profit and loss account. Schedule VI does not allow decapitalistion of CWIP or assets under consturction. Please expiain the above.

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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07 August 2010 para 4 of AS-16 reads as follows:
Borrowing costs may include:
(a)
(b)(c)(d)

(e)exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

the clear interpretation (which is also confirmed by me in various CA final book) that if the company gets benifit of exchange rate fluctuation in relation to foreign currency loan for projects under consturction should reduce the cost interest and net amount to be capitalized.

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VINOD ARORA

VINOD ARORA (Expert)
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07 August 2010 I must say.. its Great question !!

As Mr Manmohan has advised, reducing borrowing cost/cwip to the extent of amount of gain seems to be in line with AS-16, which continuously use the word exchange differences.

Althouth ASI-10 also refers to accounting treatment/adjustments pertaining to exchange losses but nevertheless the word exchange diffeerences covers exchange gains as well.

Accordingly, borrowing costs should be adjusted to the extent of gains of forex. If forex gain exceeds the borrwing cost for current year then ofcourse decapitalisation of past borrowing costs has to be looked into.

I believe there is no bar on decapitalisation of cwip items, for effecting such kind of adjustments.

Snehal Parikh

Snehal Parikh (Querist)
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08 August 2010 Dear Vivek, exchange rate fluctuation relating to foreign currency loan in relation to asset under consturction reduce cost of asset under construction. Many Indian Companies follow this accounting treatment taking into account base of notification of As-11 issued on 31st March,2009 in interpretation of para 4(e) of As-16.One view is that the same should be credited to income statment by learned partner of one of big 4 firms in his book. what is your view? This affects indian corporate world substantially.

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