1.2       Query

Accounting for the effects of changes in foreign exchange rates.

1.A public sector corporation is following the under-noted accounting policy in regard to the effects of changes in foreign exchange rates:

“Purchases and related expenses and receivables in foreign currencies in respect of transactions during the year are converted into Indian rupees at the exchange rate as at the close of the year if the overall effect of fluctuations in foreign exchange during the year is a net loss to the corporation.

In respect of liabilities and receivables in foreign currencies carried over from the previous years and not discharged/realised till the end of the year, the exchange rate at the close of the current year will be applied only for liabilities in the event of overall effect of fluctuations in the exchange rate during the year being a net loss. In respect of receivables carried over from the previous years, the exchange rate at the close of the current year will be applied only on receivables if the overall effect of fluctuation in the exchange rate is a net gain for the Corporation.

The value adjustments in respect of up-dating of liabilities/ receivables will be booked to the respective heads of accounts.”

2.In other words, in respect of liabilities and receivables in foreign currency carried over form previous years and not discharged/realised till the end of the year, the exchange rate at the close of the current year will be applied for liabilities only in the event of the overall effect of the fluctuations in the exchange rate during the year being a net loss. In respect of receivables carried over from the previous years, the exchange rate at the close of the year will be applied only on receivables if the overall effect of fluctuations in the exchange rate is a net gain for the corporation. This is being done on conservative principle of providing for all losses and not taking cognizance of anticipated gains.

3. Under the circumstances, the querist has sought the opinion of the Expert Advisory Committee as to whether it is in order if in respect of liabilities and receivables in foreign currencies carried over from previous years and not discharged/realised till the end of the year, the corporation:

(a)        applies the exchange rate at the close of the current year only on liabilities and not on receivables in the event of appreciation of US dollar vis-à-vis rupee;

(b)        applies the exchange rate at the close of the current year only on receivables in the event of appreciation of rupee vis-à-vis foreign currency; and

(c)        book such value adjustments in respect of up-dating of liabilities/receivables to the revenue accounts under the respective heads of account instead of charging the same under one account head, i.e., “Difference in Exchange Account”.

                                                                                        Opinion                                            August 3, 1990

1.The Committee presumes on the basis of the facts of the case that the query relates to conversion of assets and liabilities arising from trading transactions, i.e., in respect of current assets and current liabilities. The opinion of the Committee is, therefore, restricted to only this aspect of foreign currency conversion.

2.In this context the Committee notes paragraphs 23 and 24 of the Accounting Standard (AS) 11 on “Accounting for the Effects of Changes in Foreign Exchange Rates”, issued by the Institute of Chartered Accountants of India, which recommends, inter alia:

“23. At each balance sheet date, there may be items of foreign currency assets and liabilities, i.e., items to be received or paid in foreign currency, in respect of transactions not settled within the same accounting period. An exercise should be carried out to perceive the impact of converting such items at the closing rate. This conversion process should be carried out separately for the following two categories of items – (a) Current assets and current liabilities and (b) Long-term liabilities. The results of the conversion should be dealt with in the manner described in paragraphs 24 and 25.”

“24.  (a) In case of current assets and current liabilities (other than those related to fixed assets), if the result of conversion at the closing rate is an overall net-gain, such gain should not be taken into account and the assets and liabilities should continue to appear in the books at the rates at which they were originally recorded. On the other hand, if the result is a net loss, the current assets and current liabilities should be restated and the loss should be charged in the Profit and Loss Statement….”

3.The Committee further notes that para 34 of AS 11, inter alia, requires the following disclosure:

“34.The following disclosures should be made with regard to accounting of foreign currency transactions or translation of financial statements of foreign branches:

(a)            …………

(b)            The accounting treatment of exchange difference, showing separately

            (i)            the amount of loss recognized in the Profit and Loss Statement ……..”

4. The Committee notes that AS 11 does not distinguish between the current assets and current liabilities arising out of current year’s transactions and those carried forward from previous years but remaining outstanding at the end of the current year. Thus, the accounting treatment recommended in the standard will be the same in both cases.

5.Subject to the presumption made in para 1 above, the opinion of the Expert Advisory Committee on the issues raised in para 3 of the query is as below:

(a)        All the current assets and current liabilities should be restated at the closing rate if the overall result of conversion at the closing rate is a net loss. If the overall result of such conversion at the closing rate is a net gain, the current assets and current liabilities should continue to appear in the books at the rates at which they were originally recorded and such gain should not be taken into account. Thus, the treatment suggested by the querist in para 3(a) of the query is not correct.

(b)        The treatment suggested in para 5(a) above should be followed. The treatment suggested by the querist in para 3(b) of the query is not correct.

(c)        Net loss on conversion of current assets and current liabilities should be separately disclosed in the profit and loss account. The treatment suggested by the querist in para 3(c) is, therefore, not correct.

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