Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.9       Query

 

Disclosure of foreign exchange transactions under Part II of

Schedule VI to the Companies Act, 1956.

1. A company has shown on cash basis the expenditure incurred in foreign exchange on (i) royalty; (ii) know-how; (iii) professional and consultation fees; and (iv) others, whereas the earnings in foreign exchange from professional fees have been shown on accrual basis. The company has not disclosed, in the Notes to the Accounts, the two different methods of accounting adopted for foreign exchange earnings and receipts. The Government Auditor has objected to this practice and has desired that the company should also disclose the reasons for adopting two different methods of accounting. But, the company feels that such a disclosure is not necessary for the following reasons:

 

(1)Para 4-D of Part II of Schedule VI to the Companies Act requires the profit and loss account to contain, by way of a note, information regarding certain foreign exchange transactions, but, it has not been mentioned that the expenditure/earnings are to be given on accrual basis or on cash basis except in respect of remittance of dividends in foreign currency to non-resident shareholders, which obviously can only be on cash basis.

 

(2)The company discloses earnings on accrual basis, because, these are accounted for after raising all invoices to the foreign clients who also confirm their balances after the close of the year and there is hardly any doubt left of not receiving the amount in foreign exchange. However, it has not been found practicable to show the expenditure on accrual basis. Besides, the word ‘expenditure’ in foreign exchange in its ordinary connotation implies actual outgo of foreign exchange. Further, if the accrual basis is to be adopted for the disclosure, certain provisions will have to be adopted for the disclosure, certain provisions will have to be made in view of the normal accrual accounting practice. However, no provision is exact by its very nature and may vary in some cases from the actual payment, sometimes substantially.

 

(3) The company feels that the treatment as described in (2) above, is in line with paras 12.5 and 12.6 of the Institute’s Statement on ‘The Amendments to Schedule VI to the Companies Act, 1956’.

 

(4)The company has been following this practice consistently for the last many years and as such it has not been considered necessary to make any disclosure in the accounts regarding the different bases followed for disclosing foreign exchange expenditure and foreign exchange receipts.

2. The opinion of the Expert Advisory Committee was sought regarding the advisability of disclosure of different bases for foreign exchange earnings and foreign exchange expenditure, and the reasons therefor.

 

                                                             Opinion                                                       August 13, 1982

 

 1.In the opinion of the Committee, the querist’s interpretation of the word ‘expenditure’ in the context of foreign exchange, that in its ordinary connotation, it implies actual outgo of foreign exchange in the year in which it is reported, does not appear to be correct. Such an expenditure can be disclosed on accrual basis also as discussed below in para 12.5 of the Institute’s ‘Statement on the Amendments to Schedule VI to the Companies Act, 1956’:

 

  “A significant question with regard to the disclosure of expenditure in foreign currency for the aforesaid items is whether such disclosure is to be made on a cash basis or on a mercantile basis. On the one hand, the disclosure is to be made by way of a note on the Profit and Loss Account. It may, therefore, be suggested that if all the items in the Profit and Loss Account  are stated on a mercantile basis, this item should also be similarly disclosed. On the other hand, however, the requirement, is to disclose “expenditure in foreign currency” and it may be that whilst at the time of accrual, it may be anticipated that payment will ultimately be made in foreign currency but in actual fact, circumstances may render this unnecessary and instead, settlement may be made in local currency or through some other form of adjustment or payment no involving foreign currency. Therefore, until actual payment is made, it may be difficult to determine whether any foreign currency expenditure would be involved—the more so as in our country, Reserve Bank permission is needed before any foreign currency payment can actual be made. The actual quantum of the foreign currency expenditure is also subject to variation at the time of payment. For instance as compared to the amount at which the expenditure had accrued, the ultimate payment may be for a lesser or a larger amount because of adjustments for discount, interest, etc. Moreover, the Rupee amount disclosed at the time of accrual may not necessarily be the same as the Rupee expenditure involved at the time of remittance.”

 

2.In view of the practical difficulties in making the disclosure of foreign exchange expenditure on accrual basis, the company can adopt different bases for disclosing foreign exchange earnings and expenditure.

 

3. Regarding the disclosure of the fact that different bases have been adopted, it is suggested in para 12.6 of the aforementioned publication that “a footnote would be desirable in order to indicate whether the disclosure has been made on a cash basis or on accrual basis”. Thus, in the opinion of the Committee, the company should make such disclosure and the fact that such disclosure has not been made in the past should not stand in the way of adopting sound accounting principle of disclosure. However, the reasons for adopting different bases of accounting for the earnings and expenditure in foreign exchange need not be disclosed.

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