Defintion of foreign currency transaction - AS 11

AS 693 views 2 replies

neha sharma

Article

28 Points Joined August 2009

Hello everyone

I have a question. Recently at work I came across this case.

A loan in USD currency say USD 100 was granted to a client in the year 2009 for a period of 5 years. the client paid interest on that loan upfront in 2009 in USD currency. The company converted the whole USD amount into INR @ 45 and parked the proceeds in the Prepaid Income(100$*45=4500 inr). The company has been accruing the income on yearly basis. the accrual of income is done by the company by taking 900INR each year to the P/L account. This effectively means that the company is accruing the income each year @ 45INR

My question - Should the company not be accruing the interest at prevailing rate/average rate as per AS 11.

the contention of the company is - Since the income received in 2009 was already converted into INR then, hence it does not qualify as a foreign currency transaction. And hence as per them, this does not fall under the purview of AS 11

I don't agree with this. Request the views of learned member. Also if some one can help with the relevant extract which can prove this point right. Many thanks

Replies (2)

DDDDDD

176 Points Joined September 2010

Dear Neha,

The US D 100 is the principal amount or interest amount? In the 1st sentence you have mentioned that the loan amount in USD 100. In the subsequent paragraphs you said that the company has transferred this amount to P&L. Can you please make it clear?

neha sharma

Article

28 Points Joined August 2009

Thanks Dinesh for your reply. apologies for not putting across the question in a clear manner. 100 USD is the loan amount. the loan (tenure 5 years)was given in 2009. on disbursement of the loan, the client also collected interest in advance (intererest rate being 10%). Hence interest amount of USD 50 (100$*10%pa*5) was received in advance in 2009. the interest amount received in the nostro was converted at the prevaliling exchange rate of INR 45 and liability in the form of prepaid income was booked at INR 2250 (50$*45).

Now the the interest amount needs to be recognised as income over period of 5 years by taking 1/5th to income account each year.

The company has followed the below amortisation schedule:

INR 2250 / 5 = INR 450 (year 1)

INR 2250 / 5 = INR 450 (year 2)

INR 2250 / 5 = INR 450 (year 3)

INR 2250 / 5 = INR 450 (year 4)

INR 2250 / 5 = INR 450 (year 5)

In my opinion the amortisation should be as below:

USD 50/5 = USD 10

Year 1 = USD 10*prevailing exchange rate/average rate

Year 2 = USD 10*prevailing exchange rate/average rate

Year 3 = USD 10*prevailing exchange rate/average rate

Year 4 = USD 10*prevailing exchange rate/average rate

Year 5 = USD 10*prevailing exchange rate/average rate

As per the client, since the USD interest amount was already converted into INR in 2009, AS11 is not appplicable to this transaction. Please confirm on my understanding here.