CBDT instructed to scrutnise all comp. taken relief un. AS11

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CBDT instructed to scrutnise all companies which have taken relief under AS-11

The Central Board of Direct Taxes (CBDT) has advised its field formations to scrutinise all cases in which companies have amortised foreign exchange losses under the one-time discretion allowed by the government through an amendment to Accounting Standard 11 (AS-11).
In its discussions with chief commissioners last week, the board asked the tax departments to scrutinise long-term foreign currency monetary items in all company returns, especially in the light of this new amendment. Sources close to the development said the scrutiny will assess the nature of foreign exchange losses typically on overseas borrowings.

The temporary relief on AS-11 was permitted on March 31 against the background of the sharp depreciation of the rupee against the dollar, euro, pound and Swiss franc in 2008. As a result of this, several companies with significant foreign currency loans had to suffer mark-to-market losses.
Under AS-11, gains or losses from foreign exchange fluctuations have to be recognised in the profit and loss account. The amendment to AS-11 provided an option to capitalise or amortise exchange differences on long-term foreign currency positions (typically overseas borrowings) with retrospective effect from December 2006. 

This was done by adding or deducting such losses from the cost of fixed assets if, and only if, the money was borrowed for acquiring an asset. This treatment enabled companies to make adjustments directly on the balance-sheet by bypassing provisioning in the profit and loss account.

The CBDT think the amendment has substantial revenue implications on corporate earnings since this option, once exercised, is irrevocable. Since almost every company has forex exposures, the losses could have run into thousands of crores, tax officials said.

“One has to see whether these borrowings are for the acquisition of capital assets or a part of speculative or treasury operations just to manage currencies,” a source said.

There have been several reports of positions being taken on currency movements just for speculative gains, officials said. In that case, they pointed out, there is no justification for the company to take advantage of this one-time relief granted by the government

“The amortisation will be allowed if the reason is genuine; otherwise or the amortisation will be cancelled,” they added.

Replies (1)

ICAI was warning the DCA about the hasty original notification....

 

And corporate India was poo-pooing AS-11 saying

(a)it was rooted in conservatism

(b)temporary currency fluctuation

(c)Notional loss without impact in cash flows

None of the companies had any issues when they made M2M profits and paid out handsome dividends

AS-11should not have been tinkered with;

(a) if there is volatility in the accounting environment, it is the duty of accountancy to disclose such volatility

(b) AS-11 was not conservative, it allowed companies to make M2M profits

(c) Loss is very much an accounting concept, as much as cash flows is a concept of finance. If there were no adverse financial implications, then the same could have been disclosed in the Board Report.

(d) payment of dividend out of fictitious profits goes against the principle of capital maintenance and may affect the going concern. Dividends are probably being paid out of capital which has been disguised under the DCA notification

 

DCA clearly does not know accountancy so it should have taken ICAI's expertise on the issue. Section 43A of the Income Tax Act is sane, but this is clearly collusion between the regulators and corporate honchos


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