Reg forex loss on capital asset
This query is : Resolved
09 January 2014
One of my friend who runs a proprietary business, has imported a machine from outside India in 2012. Now while making payment of the same he has to pay higher amount as dollar is increased. Now the difference i.e should forex loss be capitalised and debited to asset or it should be expensed out? The differential amount is very large. If you have any notification / supporting pls provide the same
20 July 2025
The treatment of forex loss on capital assets (like imported machinery) depends on the timing of the exchange difference and the accounting standards or income tax provisions you follow.
Here’s a clear breakdown:
✅ Accounting Treatment (As per AS-11 or Ind AS-21)
If your friend follows AS-11 (Accounting Standard):
Exchange differences on foreign currency liabilities incurred to acquire a fixed asset should be adjusted to the cost of the asset (i.e., capitalized) as per Para 46A of AS-11.
This treatment is optional but widely followed for tax and audit purposes.
Example:
Machine invoice value in 2012: USD 1L @ ₹50 = ₹50L
Actual payment in 2013: USD 1L @ ₹60 = ₹60L
Difference ₹10L (forex loss) → can be capitalized into the asset’s cost.
If Ind AS is applicable (for large companies):
Exchange differences are generally charged to P&L, not capitalized, unless hedge accounting is applied.
✅ Income Tax Treatment (Section 43A of the Income-tax Act, 1961)
If the asset is imported and the liability is in foreign currency, and:
The exchange loss is due to payment or restatement of the loan taken for acquisition of the asset,
Then Section 43A of the Income-tax Act mandates that such loss be added to the actual cost of the asset — i.e., capitalized.
This is applicable only if the payment is made after the date of acquisition and the variation is due to exchange rate fluctuation.
Here’s a clear breakdown:
✅ Accounting Treatment (As per AS-11 or Ind AS-21)
If your friend follows AS-11 (Accounting Standard):
Exchange differences on foreign currency liabilities incurred to acquire a fixed asset should be adjusted to the cost of the asset (i.e., capitalized) as per Para 46A of AS-11.
This treatment is optional but widely followed for tax and audit purposes.
Example:
Machine invoice value in 2012: USD 1L @ ₹50 = ₹50L
Actual payment in 2013: USD 1L @ ₹60 = ₹60L
Difference ₹10L (forex loss) → can be capitalized into the asset’s cost.
If Ind AS is applicable (for large companies):
Exchange differences are generally charged to P&L, not capitalized, unless hedge accounting is applied.
✅ Income Tax Treatment (Section 43A of the Income-tax Act, 1961)
If the asset is imported and the liability is in foreign currency, and:
The exchange loss is due to payment or restatement of the loan taken for acquisition of the asset,
Then Section 43A of the Income-tax Act mandates that such loss be added to the actual cost of the asset — i.e., capitalized.
This is applicable only if the payment is made after the date of acquisition and the variation is due to exchange rate fluctuation.
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