1.41 Query:   

  Disclosure of earnings in foreign exchange under Schedule VI to the Companies Act.

  1. A company had invited bookings in foreign currency for sale of its cars during 1990-91. The customers had an option to cancel the bookings and take the refund also in foreign exchange in case cancellation takes place by the particular date. After the date of cancellation refunds will be made only in Indian currency. Sales against these bookings will take place in 1990-91 and in later years.

2. The querist has referred the following issues for the opinion of the Expert Advisory Committee with reference to earnings in foreign exchange to be reported under Clause 4 D (e) of Part-II of Schedule VI to the Companies Act, 1956:

(a) Whether so much of bookings made in foreign currency and brought into India during 1990-91 can be shown as earnings in foreign exchange even though sale has not taken place during 1990-91.

(b) Whether the booking money in foreign currency relatable to cancellation refunds made in Indian rupees during 1990-91 can be shown as earnings in foreign exchange. If it is not reported here then this foreign exchange receipt will not be reflected anywhere as no ultimate sale will take place.

                            Opinion                                        May 3, 1991

1. The Committee notes paragraph 4D(e) of Part-II of Schedule VI to the Companies Act, 1956, which states as under:

                        “Earnings in foreign exchange classified under the following heads namely:

                        (i)            Export of goods calculated on F.O.B. basis;

                        (ii)            Royalty, know-how, professional and consultation fees;

                        (iii)            Interest and dividend;

                        (iv)            Other income, indicating the nature thereof.”

2. The Committee is of the view that paragraph 4D(e) of Part-II of Schedule VI to the Companies Act requires that the disclosure of information of earnings in foreign exchange relates to “income” of the company, i.e., relating to the items which are credited to profit and loss account. In other words, the said paragraph does not require the information to be disclosed in respect of foreign exchange received/receivable in respect of items which do not figure in profit and loss account, e.g., deposits received in foreign currency.

  3. The Committee is accordingly of the view that the receipt of foreign exchange for bookings of cars during 1990-91 will not be required to be disclosed under paragraph 4D(e) of Part-II of Schedule VI in the accounts of the company for the year 1990-91 if sales do not take place in respect of such bookings during the said year. This is in view of the fact that if sales do not take place during the year 1990-91, the said receipt of foreign currency will appear as ‘current liability’ in the balance sheet of the company and will not figure in the profit and loss account. The Committee is also of the view that the said receipt of foreign exchange should be disclosed under paragraph 4D(e) of Part-II of Schedule VI in the year in which the sales takes place against the bookings in foreign currency.

4. Section 209 of the Companies Act, 1956 also requires that the accounts of a company shall be kept on accrual system of accounting. The actual receipt of foreign exchange during the year is not criteria for determination of earnings in foreign exchange during the year. Foreign exchange earnings shall be disclosed in the year in which sales take place irrespective of the fact that the foreign exchange is received before or after the date of the sale.

5. The Committee is of the following opinion in respect of the issues raised in paragraph 2 of query:

                        (a)            No.

                        (b)            No.

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