Expert Advisory Committee

1.4 Query:

Treatment of roll-over charges in respect of liabilities

incurred for purchase of raw materials.

1. The querist had earlier obtained an opinion of the Expert Advisory Committee on the subject of treatment of roll-over charges which was published in the March 1992, issue of ‘The Chartered Accountant’. In the said opinion, the Committee had, inter alia, opined that “roll-over charges in respect of the liabilities not relating to the acquisition of fixed assets should be charged to profit and loss account of the period in which such roll-over charges become due.”

2. This query relates to the treatment of the roll-over charges paid in respect of foreign exchange liabilities incurred for purchase of raw materials. The querist has wanted to know whether the roll-over charges should be –

(a) shown as part of raw material costs, or

(b) shown as part of finance costs, or

3. The querist has expressed his view that since the roll-over charges are incurred for the purpose of purchase of raw materials, it should be shown as part of raw material costs. In case a forward cover has been taken, materials are valued at the forward rate. This rate includes the initial premium cost. Thus, the initial premium cost is automatically taken as material cost. There is no reason to treat subsequent premium cost, incurred by way of roll-over charges, in a different manner. Thus, roll-over charges should be charged to the respective account head, i.e.,

- Roll-over charges for raw material contracts should be charged to ‘Raw Material Purchased Account’; and

- Roll-over charges pertaining to interest hedging should be charged to interest, pertaining to royalty to royalty expense account etc.

4. The querist has sought the opinion of the Expert Advisory Committee as to the manner of treatment of roll-over charges incurred in respect of liabilities not relating to acquisition of fixed assets.

Opinion March 2, 1994

The Committee notes that the Institute of Chartered Accountants of India had, in 1989, issued Accounting Standard (AS) 11 (hereinafter referred to as old AS-11) on Accounting for the Effects of Charges in Foreign Exchange Rates, which is the subject of the above query. However, due to convertibility of rupee and other related developments, the Council of the Institute decided to revise the old AS-11 in June 1992. Accordingly, in August 1993, the old AS-11 was withdrawn and an exposure draft of the revised AS-11 was issued. The Committee also notes that the query primarily pertains to the year ending as on March 31, 1992. The Committee has decided to give its opinion in two parts. The first part (Part A) contains the opinion as per old AS 11 and is relevant for the accounts closing before the withdrawal of old AS 11. The second part (Part B) contains the opinion as per the exposure draft of revised AS-11 and is applicable to the accounting period ending on or after August 1993. However, in the view of the Committee, in cases where accounts for any accounting period closing before August 1993 are finalised after August 1993, the opinion in Part B may be followed for such accounts also.

PART A: Opinion as per old Accounting Standard (AS) 11, issued by the Institute of Chartered Accountants of India in 1989.

The Committee notes that the roll-over charges, in respect of a forward exchange contract, represent the difference between the spot rate at the time of the roll-over and the forward rate at the end of the contract, i.e., the roll-over charges/credits represent the difference arising on account of change in foreign exchange rates. The Committee also notes that Accounting Standard (AS) 11 on ‘Accounting for the Effects of Charges in Foreign Exchange Rates’ and Schedule VI to the Companies Act, 1956, specifically recognise the adjustments of the gains or losses arising from exchange rate fluctuations in the cost of fixed assets in case the liability in foreign currency is incurred for acquisition of such assets. The Committee is, therefore, of the opinion that, in other cases, such losses/gains should be charged/credited to the profit and loss account of the period in which the roll-over charges/credits arise. In other words, these should not be charged/credited to purchase of raw materials account, royalty account etc.

PART B: Opinion as per exposure draft of revised Accounting Standard (AS) 11, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India in August, 1993.*

1. The Committee notes para12 of revised Accounting Standard (AS) 11 on ‘Accounting for the Effects of Charges in Foreign Exchange Rates’ issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, which reads as follows:

“12 An enterprise may enter into a forward exchange contract, or another financial instrument that is in substance a forward exchange contract, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The difference between the forward rate and the exchange rate at inception of the forward exchange contract should be recognised as interest income or expense over the life of the contact, except in respect of liabilities incurred for acquiring fixed assets in which case, such difference should be adjust in the carrying amount of the respective fixed assets.”

2. The Committee notes that the roll-over charge in respect of a forward exchange contract represent the difference between the spot exchange rate at the inception of the roll-over contract and the forward rate.

3. On the basis of the above, the Committee is of the opinion that the charges/credits, paid/received by the company, for rolling over a forward contract in respect of liability not relating to acquisition of fixed assets, should be charged/credited to the profit and loss account of the period in which such charges/credits arise, as part of the interest cost. In other words, these should not be charged/credited to purchase of raw material account, royalty account etc.

* The Committee wishes to draw attention to the fact that the opinion is based on the recommendations made in Exposure Draft of Revised Accounting Standard (AS) 11, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, published in ‘The Chartered Accountant’, August, 1993. It is, thus, possible that this opinion may change upon issuance of revised Accounting Standard (AS) 11.

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