Hi All ......
A SOCIETY imported a machine from US by taking a LOAN in US ......
Now What treatment would be there for the exchange difference on loan taken and its re-instatement at the end of each year ....
And I pay loan installments every Month ... So what would be the Accounting Treatment for the exchange difference on installment paid every month ....
Please advice as per AS and give reference of the AS to be followed .....
Thanks !!!!!!!
hi vinay
Here applicable accounting standard is AS-11 as AS-16 will apply to only qualifying assets which takes time to get ready for use.
you should book machinery at its historical cost and any exchange gain/loss on loan liability whether principle repayment or interest should be taken to P&L account.
Hi Shantanu ......
thanks for ur reply ...........
But I want to ask why AS-16 is not applicable .......... ??? Is machine not a qualifying asset ..........????
I think it is ....... and does qualifying asset is that which takes time of 12 months and more to be said as a qualifying asset ......????
And AS-11 says that it is not applicable to the exchange difference that is adjustable to interest cost of loan .........
Thanks!!!!
yes u r rit
but as per your question it seems that asset ur purchasing is ready to use. so it will not be a qualified asset
Hi Vinay
As per AS 16, a qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use (fixed assets, investment property) or sale (inventory).
as per AS 16, borrowing cost can be capitalised upto the time the asset is ready for its intended use. as per para 4(e) - borrowing cost includes exchange rate diffenrences relatable to foreign currency borrowing, to the extent that they are regarded as an adjustment to borrowing cost. On that much part AS 16 will be applicable and on the rest AS 11 applies. If ur machine is ready for intended use then AS 16 will not apply.
That is when u convert monetary items at closing rate/ settled rate, if there is a loss, it can be apportioned between as 11 and AS 16 as follows :
e.g. foreign currency borrowing : US$10,000 interest rate 4% payable annually. spot rate $1 = Rs. 42.
Rate of interest if amount borrowed in Indian currency 10%. Closing rate : $ 1 = Rs. 46
It means that at the year end when monetary item will get converted at closing rate there is a loss of Rs. 4 per $ totaling to Rs. 40,000. this Ex diff will be bifurcated into two parts: covered under As 16 and on Balance AS 11 will be applicable.
Interest on f.c.loan $10,000 x 4% = $ 400 i.e. $ 400 x Rs. 46 = Rs. 18400
Interest had the amt been borrowed in Indian currency = $ 10,000 x Rs. 42 = Rs. 4,20,000 x 10% = Rs. 42,000
Interest saving due to foreign currency borrowing = Rs. 42,000 - Rs. 18,400 = Rs. 23,600
Rs. 23,600 will be considered as an adjustment to interest cost under AS 16 and the balance exchange difference i.e. 40,000 - 23,600 = Rs. 16,400 will be dealt with as per AS 11. Indirectly u can say that the interest saving to the extent of exchange rate difference will be considered as an adjustment to interest cost
This is my opinion on the point. others may hv some different opinion. In case u need further clarification on the point, u may revert back to me
Regards, CA Shakuntala Chhangani
Hi Shankutala ..... Thanks for ur reply .....
I just need to know what would be the treatment under AS-11 and AS-16 after bifurcation ........????
Thanks !!!!
Vinay Verma
vinay.kr.verma @ gmail.com
Under AS 16 Adjustment to interest cost(para 4(e)) will get capitalised and for balance protion u hv an option under newly added para 46A vide notification dated 31.3.2009 to AS 11. It can either be transferred to P/L A/c as per old practice or can be adjusted to the cost of asset as per notification.
Regards, CA Shakuntala Chhangani
Dear Shakuntalaji
Plz explain treatment of foreign exchange in above case if the dollar rate as on 31st March is Rs. 40/-. What will be the loan amount outstanding in the balance sheet on reprting date.
Thanks & regards
CA. Bharat Goel, Kolkata
hello Goelji, as per AS 11(Revised), loan in foreign currency being the monetary item must be translated into reporting currency at the closing rate. hence outstanding loan balance in US $ X Rs. 40 will appear on the liability side of the balance sheet.
Regards, CA Shakuntala Chhangani
Hi, someone tell me how to translate Fixed Assets as per AS 11. Whether it is on Historical rate or Closing rate?
Thanks Shakntalaji.
It means diffrence will be treated as foreign currency fluctuation gain.
CA. Bharat Goel
Hi Shakuntala,
Thank you for your reply.
But Still, I have one doubt.
Can we treat the same at time of Non- integral foreign operation?
Regards,
Dimple
Hi again Dimple. first of all sorry for the late reply as I was not well. the answer to your question is no. this is because in case of NIFO all the exchange differences, whether monetary or non-monetary, are required to be accumulated in a separate account called foreign currency fluctuation reserve and is shown in the Balance sheet. This is transferred to P/L only upon disposal of NIFO.
If you have any further doubt., revert back to me.
Regards, CA Shakuntala Chhangani
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