1.18  Query:    

Accounting for forward exchange contracts.

1. A company has purchased dredgers from abroad. Some of these dredgers were financed by supplier’s credit and some by foreign currency loans. In the case of the former, the principal is repayable in equal half-yearly instalments, along with interest accrued on the balance outstanding before each such repayment, and in the case of the latter, the principal is repayable in 8 equal instalments after an initial moratorium of 7 years, interest being payable half-yearly commencing from day one.

2.  As per the querist, during 1992-93, the company entered into a contract with banks in India for forward cover for 6 months with ‘roll-over’ facility for which roll-over charges were payable. The roll-over charges payable at the year end of the contract, i.e., at the end of the 6 months. In two such forward contracts the period of 6 months falls partly in the financial year 1992-93 and partly in the financial year 1993-94. However, these two contracts were prematurely terminated during April 1993 in view of the adverse trends in foreign exchange fluctuations. The loss or gain on these two forward contracts was accounted for in the financial year 1992-93 pro-rata on accrual basis. Even regarding accounting of the gain which accrued after the balance sheet date, such gain was accounted for in 1992-93 accounts as per Accounting Standard (AS) 4, issued by the Institute of Chartered Accountants of India, since the gain was certain and not any more contingent, by the time the accounts were finalised.

 3. As per the querist, the government auditors have, however, observed that since the roll-over charges are due for payment at the year end (beyond April 1993), the proportionate loss or gain on cancellation need not be accounted for in the financial year 1992-93.

4.   The querist has sought the opinion of the Committee on the above issue.

        Opinion*                       June 13, 1994

1.The Committee notes para 14 of Exposure Draft of revised Accounting Standard (AS) 11 on ‘Accounting for the Effects of Changes in Foreign Exchange Rates’, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, which reads as follow:

“14.  Any profit or loss arising on cancellation of a forward exchange contract should be recognised as income or as expense for the period, except in case of a forward exchange contract relating to liabilities incurred for acquiring fixed assets, in which case, such profit or loss should be adjusted in the cost of the respective fixed asset.”

2. On the basis of the above, the Committee is of the opinion that the loss or gain arising on cancellation of a forward exchange contract should be accounted for during the period when such contract is cancelled, i.e., it should not be pro-rated. The said gain or loss should be adjusted in the cost of the dredgers acquired by incurring the foreign currency liabilities.

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