1.25 Query
Foreign currency transactions.
1.The company in question is a large public sector organisation in export business of certain engineering goods. During the year 1988-89, this company supplied goods to another public sector company on a ‘deemed export’ status and in view of complexities of the product and its purpose keeping in line with certain Indo-Soviet trade protocols, the transaction was designated in US dollars. The invoicing was done in US dollars by the selling company to be settled by the buying company on a deferred payment basis over a period of 10 years under a scheme of ‘suppliers credit’ extended by Exim Bank of India. The buyers’ payment schedule was quarterly, based on exchange rate prevailing on the due date of that instalment. Thus, the selling company booked its sales at an exchange rate of Rs. 15/- per dollar based on exchange rate prevailing around 1st December, 1988. During the year 1989-90, it has received 4 instalments at pertinent exchange rate on the due dates of these instalments. The querist has also stated that there is a continuous strengthening of US dollar against the Indian Rupee and consequently, the need has now arisen for the company to restate the debt appearing in the books of account, as of the date of Balance Sheet, i.e., 31st March, 1990. The exchange rate as on 31st March 1990 is of the order of Rs. 17.13. Thus, Rs. 2.13 is the difference between the rate of dollar booked in accounts and the rate of dollar as on 31.3.90, which is defined as the “current rate”.
2.The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(A) (i) Whether the company can restate its debtors figure appearing as on 31st March, 1990 pertaining to the sale made in 1988-89 and booked at the exchange rate of Rs. 15/- per dollar, at the current rate of Rs. 17.13 and concomitant credit being given to ‘Exchange Gain Account’ in the accounts for the year ended 31st March, 1990.
(ii) Since the above debt is not a current asset as defined in the ‘Compendium of Opinions’ of the Institute and AS 11 but the change in the exchange rate being permanent change in excess of 2.25%, as per the Institute’s ‘Statement on Accounting for Foreign Currency Translation’, albeit this would be deferred receivable. Whether the treatment as in A (i) above is correct keeping in view AS 11 and Institute’s opinion on the subject. Furthermore, since AS 11 is in a recommendatory stage till 31.3.1991 and the transaction has occurred before 1.4.1989, whether the company can make the adjustment as above.
(B) The same company has also arrangements with large foreign air cargo handling agents and acts as break bulk agent in respect of goods imported in India by various companies through these handling agents. As part of the operation, the company collects the freight form the consignees in India and, thereafter, remits the dues to its foreign associates. However, due to exchange fluctuations, there is a difference between the amounts collected and remitted.
Whether the incremental liability on this account at the year end due to exchange fluctuation can be considered along with the exchange gain under item (A) above, to ascertain net exchange variation under the head Current Assets/ Liabilities.
(C) The same company is a partner in a partnership firm in Gulf. As per the federal laws of that country, 51% of the partnership is held by the local partner and 49% by this company. As per the Articles of Association of the partnership, upto 90% of the profits can be declared as dividend with the balance being retained. Since the formation of the partnership, 90% of the profit of each year was distributed as dividend to the partners in their profit sharing ratio, except, during the last 3 years when only 50% of the profit has been distributed as dividend.
The Indian company has shown both the original investment and the retained earnings of subsequent years as explained above under the head “Investments”. The retained earning of each year has been valued on the basis of closing rate of exchange prevailing at the end of each financial year.
The clarification sought now is that by virtue of restating the deferred receivable as stated in (A) above on the basis of exchange rate prevailing on 31st March, 1990, should the company also restate, in view of uniform accounting treatment, the retained earnings shown under “Investment” by adopting the exchange rate as on 31.3.1990. If so, whether the gain arising out of the same pertaining to the previous years should be a gain to be credited to revenue account or capital account? If it is capital in nature, whether it is a free reserve available for distribution of dividends? If revenue in nature, whether the gain would need to be also disclosed for purposes of disclosure of income relating to previous years?
(D) What disclosure should be made in the notes forming part of the accounts in respect of the above?
Opinion August 3, 1990
1.The Committee notes that Accounting Standard (AS)-11 on ‘Accounting for the Effects of Changes in Foreign Exchange Rates’ comes into effect in respect of accounting periods commencing on or after 1.4.1989 and the ‘Statement on Accounting for Foreign Currency Translation’, issued by the Institute in 1976 stands withdrawn from that date. Therefore, in view of the Committee the recommendations contained in AS 11 shall also apply in respect of transactions entered into before 1.4.89 but remaining outstanding in accounting period/s commencing on or after 1.4.89.
2.The Committee notes the definition of ‘sundry debtor’ and ‘current assets’ as contained in ‘Guidance Note on Terms Used in Financial Statements’, issued by Institute of Chartered Accountants of India, which are reproduced below:
“Sundry Debtor
Person from whom amounts are due for goods sold or services rendered or in respect of contractual obligations. Also termed as debtor, trade debtor, account receivable.”
“Current Assets
Cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.”
3.The Committee notes paragraphs 23, 24 and 33 of the Accounting Standard (AS)-11 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 are 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……….”
“Investments
33Investments made by Indian enterprises in ventures outside India should normally be classified as long-term investments, as distinct from current investments (which are by nature readily realisable and are intended to be held for not more than one year). These long-term investments should be carried in the balance sheet at their original rupee cost. However, the carrying amount should be reduced to recognise a decline, other than temporary, in their value. Indicators of the value of such investments may be obtained by reference to their market value, prevailing exchange rates, the investees’ assets and results and the expected cash flows from the investments. The type and extent of the investor’s stake in the investees should also be taken into account. Restrictions on distributions by the investees or on disposal by the investor may also affect the value attributed to the investments.”
4.The Committee is accordingly of the following opinion in respect of the issues raised in para 2 of the query:
A. (i) The company should restate its debtors’ figure appearing as on 31.3.1990 (pertaining to sale made in 1988-89 and booked at the exchange rate of Rs. 15/- per dollar) as well as other current assets and current liabilities as on 31.3.1990 at the closing rate, i.e., Rs. 17.13 if the overall result of such conversion is net loss. The loss should be charged to profit and loss account. If, however, the overall result of such conversion is a net gain, the same should not be taken into account and the current asset and current liabilities should continue to appear in the books at the rates at which they were originally recorded. Therefore, the treatment suggested by the querist in para 2A(i) of the query is not proper.
(ii) The debtors as stated above are in the nature of current assets as these arise out of the trading activities of the company. These should be converted as recommended in A (i) above.
B. Similarly, the amount due to the foreign associates in respect of freight collected from consignees in India should be converted at the closing rate only if the net result of conversion of all current assets and current liabilities is a net loss. In this event, the current assets and current liabilities should be restated at the closing rate and the loss should be charged in the profit and loss account. If the result of such conversion is an overall gain, such gain should not be taken into account and all current assets and current liabilities should continue to appear in the books at the rates at which they were originally recorded.
C. The investment in partnership firm is not in the nature of a current asset. The original investment should be recorded at the original rupee cost. If the retained earnings become a part of the fixed investment in the partnership firm, they should be valued at the closing rate prevailing at the end of the relevant financial year to which these retained earnings pertain. To the extent they do not, they should be considered in the nature of current investments and should be converted as suggested in para 4 A above.
D. The company should disclose in the accounts the accounting methods recommended in the preceding paragraphs in respect of the above items.
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