1.10 Query: Treatment of depreciation arising out of foreign exchange fluctuations.
1. By virtue of Act 24 of 1993, ‘X’ Corporation, registered under the Companies Act, 1956, has become the owner of the transmission line assets w.e.f. 01.04.92, hitherto owned by ‘A’ Co., ‘B’ Co., and ‘C’ Co. Section 5(1) of the said Act stipulates that “subject to the provisions of sub-section (2), every liability of each of the three companies in relation to its transmission system in respect of any period prior to the appointed day, which has been transferred to, and vested in the corporation under sub-section (2) of Section 3, shall be the liability of the corporation and shall be enforceable against the corporation and not against the company:
Provided that nothing contained in this sub-section shall apply to:
(a) the income and expenditure on revenue account relating to, any period before the appointed day and received or, as the case may be, incurred by any of the three companies on or after the appointed day;
(b) arrears of depreciation regarding contingent liabilities on capital account relating to any period before the appointed day, arising on account of the decision of any court, tribunal or other authority.” (Emphasis supplied by the querist)
2. Section 5(2), states that “where any repayment of loan or interest or both, has been made, on or after the appointed day, by any of the three companies to any lending agency, such repayment shall be reimbursed by the corporation to concerned company on adjustment of transmission charges or any other amount due to the corporation from the concerned company.” By virtue of this provision, all loans including foreign loans stand transferred in the name of the corporation pending completion of government approval and other legal formalities.
3. As per the accounting policies followed by the corporation: “Depreciation is provided retrospectively for the effect of foreign exchange fluctuations relating to fixed assets.” Accordingly, all assets capitalised prior to 1.4.92 and depreciation on these assets on account of foreign exchange fluctuations has been accounted for in the books of account of 1992-93 as amount recoverable from transferor companies.
4. As per paragraph 2.124 of Electricity (Supply) Annual Accounts Rules, 1985, “where any revaluation or devaluation of rupee vis-a-vis the currency in which the liability is to be discharged is more than 10% at one time, the same shall be treated as follows:
(i) the increase or decrease in the amount of foreign currency liability shall be accounted for as an increase or decrease in the cost of the assets financed by the liability;
(ii) the depreciation for the past years shall also be reworked for the assets where the conditions laid down in paragraph 2.65 for retrospective reworking of depreciation are fulfilled”. (Emphasis supplied by the querist)
5. As per paragraph 2.65 of Electricity (Supply) Accounts Rules, 1985, “retrospective reworking of accumulated depreciation owing to change in the amount of cost of an asset for reasons mentioned in 2.124 shall be made only where the increase/decrease in the amount of cost is more than
- Rs.50,000 for an asset; and - 20 per cent of the cost booked earlier.
In all other cases, the depreciation in the balance life of the asset should be increased or decreased proportionately so that 90 per cent of full cost (or 100 per cent in case of leasehold assets) is depreciated over the estimated useful life of the asset.”
6. Government auditors, however, are of the opinion that the depreciation on account of foreign exchange fluctuations is to be debited to the prior period expenses account and should not be debited to the transferor companies. They are of the view that depreciation is not an expenditure but only a charge to the accounts and therefore it should not be debited to the transferor companies. The querist is, however, of the view that it is not worthwhile to debit the depreciation on account of foreign exchange fluctuations to prior period expenses for the period the assets were not really with the corporation, i.e., the transferee company. To the querist, this appears to be contradictory to the matching principle of accounting since the income for that period is with the transferor companies and it has been clearly stated in Section 5(1) para (a) of Act 24 of 1993 that the income and expenditure on revenue account relating to any period before the appointed day and received or, as the case may be, incurred by any of the three companies on or after the appointed day.
7. The querist has further argued that the corporation is governed by the Electricity (Supply) Act, 1948, and that the provisions of the said Act read with the rules thereunder have prevailed wherever the same have been inconsistent with the provisions of the Companies Act, 1956. The querist has also pointed out that ‘A’ Co. Ltd., is also following the policy of providing depreciation on account of foreign exchange fluctuations with retrospective effect.
8.The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Could the corporation charge depreciation with retrospective effect on account of foreign exchange fluctuations even if Accounting Standard (AS) 11 is made mandatory?
(ii) If the corporation could charge depreciation with retrospective effect, could it charge its account, by debiting prior period expenses, for the period for which the assets were held by transferor companies?
(iii) Could the corporation charge the prior period depreciation to the accounts of the transferor companies as per the provisions of Act 24 of 1993?
(iv) Could the corporation charge depreciation on account of foreign exchange fluctuations prospectively keeping in view the provisions of Electricity (Supply) Accounts Rules, 1985, from the year 1993-94 onwards?
Opinion June 14,1994
1.The Committee presumes the Electricity (Supply) Act, 1948, is applicable to the ‘X’ Corporation Limited. Accordingly, the Electricity (Supply) Annual Accounts Rules, 1985, formulated by the Central Government, in exercise of the powers conferred by Section 69 of the Electricity (Supply) Act, would also be relevant to the said corporation.
2. The Committee further notes that para 4.2 of the ‘Preface to the Statement on Accounting Standards’, issued by the Institute of Chartered Accountants of India, inter alia, states: “The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in our country.”
3. On the basis of the above, the opinion of the Committee, based on the presumption at para 1 above, on the issues raised by the querist in para 4 of the query is as follows:
(i) The corporation should charge depreciation on foreign currency fluctuations adjusted in the cost of fixed assets, in accordance with the provisions of para 2.124 read with para 2.65 of the Electricity (Supply) Annual Accounts Rules, 1985. AS 11 is applicable only to the extent that it does not conflict with the requirements of the law, in view of para 4.2 of the ‘Preface to the Statement of Accounting Standards’ reproduced in para 2 above.
(ii) From the accounting point of view, retrospective adjustment of depreciation on account of foreign exchange fluctuations should not be made by debiting prior period expenses, but should form part of the figure of depreciation disclosed in the profit and loss account of the current year with appropriate disclosure of the adjustments in the notes to the account.
(iii) The issue regarding charging of depreciation related to previous years to accounts of the transferor companies involves interpretation of the provisions of the Act 24 of 1993 and therefore is not in accordance with Rule 2 of Advisory Service Rules. The Committee, therefore, refrains from expressing an opinion on this matter.
(iv) In view of (i) above, this question does not arise. _________________________
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