1.5 Query: Treatment of roll-over charges in respect of interest on float.
1. This query relates to the accounting treatment of interest paid on float, as explained with the help of the following example:
(a) Foreign currency loan (relating to acquisition of fixed assets) outstanding as on 1.1.91 US$ 3,00,000
Installment due on 30.06.91 US$ 1,00,000
Installment due on 31.12.91 US$ 1,00.000
Installment due on 30.06.92 US$ 1,00,000
- Accounting year ending on 30.9.91
- Loan of US$ 3,00,000 recorded in accounts at the rate of US$ 5.70 per Rs. 100 Rs. 52,63,157
- Foreign currency rates (US $/100 Rs.)
- as on 1.1.91 Spot 5.50
6 month forward 5.20
- as on 30.6.91 Spot 5.00
6 month forward 4.70
- as on 30.9.91 Spot 4.90
6 month forward 4.70
(b) The company enters into a forward cover for the entire loan of US $ 3,00,000 up to 30.6.91. Even though two installments are due beyond 30.6.91, the company can take a forward cover only up to 30.6.91, i.e., for six months only as per the existing rules in this regard. The forward rate as per the contract is US $ 5.20 per Rs. 100. Thus, all the three installments shall be paid at the same rate as and when these are due. In respect of second and third installment, roll-over charges would have to be paid by the company.
(c) On 30.6.91, the company pays the first installment at the rate of US $ 5.20 (Rs. 19,23,077) when the prevailing rate is US $ 5.00. The company rolls over the second and third installments up to 31.12.91 by paying the roll-over charges equivalent the premium prevailing on 30.6.91. Roll-over charges are calculated in the following manner:
200000 X 100/4.70 = Rs. 42,55,319
200000 X 100/5.00 = Rs. 40,00,000
Roll-over charges Rs. 2,55,319
(d) For rolling-over the forward contract, the bank takes the following steps:
(i) US $ 3,00,000 (i.e. the amount contracted) are bought by the bank on 30.6.91. Out of this, US $ 1,00,000 are used for payment of the first installment of the loan. Balance US$ 2,00,000 not required immediately, are sold in the market against rupees. The bank again buys forward for 31.12.91, a sum of US $ 2,00,000. This Act is called rolling over.
(ii) This process results in the following float in the hands of the bank:
Bank buys 2,00,000 X 100/5.20 = Rs. 38,46,154 (forward contract rate) Bank sells 2,00,000 X 100/5.00 = Rs. 40,00,000 (Spot rate on roll-over date) Net receipt (float) Rs. 1,53,846
On this float, the bank would pay interest to the company at an agreed rate, say 15% p.a., i.e., 1,53,846 X 15/100 X 6/12 = Rs. 11,538.
(e) Hence, for rolling over the forward contract, the bank would recover roll-over charges of Rs. 2,55,319 from the company and pay interest on float of Rs. 11,538. Thus, the net cost of rolling-over the contract to the company would be Rs. 2,43,781.
2. It may be noted that in case the spot rate on the date of roll-over is worse than the forward contract rate, positive float results. In case the forward contract rate is better than the spot rate this would result in a negative float, i.e., an outflow for the bank. In that case the bank would recover interest on float apart from the roll-over charges.
3. The querist is of the view that two accounting treatments are possible for this interest on float, namely-
(a) The interest received/paid can be reduced/added to the roll-over charges. The net roll-over charges can be treated in accordance with the earlier opinion of the Committee, or
(b) Interest on float represents purely a financial charge. The amount of interest earned/paid can be treated as a revenue items and taken to profit and loss account irrespective of whether roll-over charges are capitalised or charged to profit and loss account since float is nothing but funds in rupees received/paid by the bank on which the bank pays/charges interest. The querist favours this treatment.
4. The querist has sought the opinion of the Expert Advisory Committee as to what should be the accounting treatment of interest received/paid on float in respect of:
(a) liabilities relating acquisition of fixed assets, and
(b) other liabilities.
Opinion November 11, 1993
1. The Committee notes from the facts of the query and practices prevailing in this regard that, at the end of the term of a forward contract, i.e., after six months, in case the company decides to roll-over the contract for another term, a float arises in the hands of the bank, as explained at para 1(d) of the query. In the view of the Committee, the nature of the float is as if the company itself has earned profit by cancelling the roll-over contract. The interest paid by the bank on the float is like interest earned by the company by investing the profit on cancellation of roll-over contract. The Committee is, therefore, of the view that it should be treated as any other interest received by the company; irrespective of the nature of the source of funding of such investments and the accounting treatment thereof.
2. On the basis of the above, the Committee is of the opinion that, in the present case, interest received/paid on float should be treated as a revenue item, in the relevant profit and loss account. __________________________ |