A. Facts of the Case

1. A Government of India company is carrying on the business, inter alia, of procuring, transmission, processing and marketing of natural gas. At present the company owns over 4500 kms. of pipeline and currently transmits about 62 MMSCM per day of natural gas. The company operates seven LPG manufacturing plants in different parts of the country with an installed capacity of 1.17 million MT of LPG per annum.

2. The company has laid various pipelines in different parts of the country and created other related infrastructure for transmission of natural gas. The company purchases natural gas from joint venture companies and transmits gas through the pipeline for the purpose of sale to various consumers and for internal consumption to manufacture value added products like LPG, polymers and other liquid hydrocarbons.

3. The querist has stated that the pricing of natural gas is presently regulated in terms of MOP&NG Order No. L-12015/3/94-GP, dated September 18, 1997 (copy separately provided by the querist). According to the Order, the price of natural gas (consumer price) varies between floor price of Rs. 2150/MCM to ceiling price of Rs. 2850/MCM based on 75% of international fuel oil parity price except for concessional prices in North- Eastern states. As per the querist, the company purchases natural gas from joint venture companies at a much higher price, which is linked to international fuel oil parity subject to a ceiling price but selling the same as per the Order.

4. Out of the consumer price collected by the company, it retains the amount required to compensate for higher cost of gas purchased from the joint venture companies and also contribution towards pool money amounting to Rs. 250 crore per annum. The balance price is paid as producer price to the joint venture companies.

5. The company purchases natural gas from the joint venture companies on continuous basis through pipelines and the meter readings of gas quantity are obtained everyday at 0600 hrs. Joint venture companies raise invoices on monthly basis which are payable partly in foreign currency and partly in Indian currency within 21 to 30 days as per the terms of the respective agreements for purchase of gas. The foreign exchange payment is made at the exchange rate prevailing at the due date of payment and the entire amount is booked as purchase of natural gas. In respect of the invoices at the year end, the company books the actual amount as liability which is paid to the joint venture companies on due date, as the due date usually comes before adoption of accounts by the Board of Directors. Since there is continuous transfer of custody of natural gas in pipelines, it is practically difficult to treat everyday as the transaction date. The company treats the date of payment, i.e., due date of payment as its transaction date as well as the settlement date in terms of paragraph 6 of Accounting Standard (AS) 11, ‘Accounting for the Effects of Changes in Foreign Exchange Rates’, issued by the Institute of Chartered Accountants of India.

6. The querist has provided the following extracts from the payment clause of the agreement with two joint venture companies:

"Within 21 days after the receipt of monthly payment statement, or annual payment statement as the case may be, or prior to the last business day of the next month, whichever is later, the buyer shall pay to seller the sum due in the monthly payment statement. The exchange rate which shall be used to convert USD to INR shall be the Bills buying rate indicated by the foreign exchange dealer bank on the date of making payment."

"The buyer shall pay to seller for gas delivered at the price specified in the Purchase-sale agreement within 30 days after receipt of each monthly invoice from seller."

7. The accounting treatment followed by the company has also been disclosed in its Notes to Accounts for the financial year 2001-02 as below:

"The price of gas purchased from Joint Venture Consortium (JVC) (Indian and Foreign Partners) from Ravva, Tapti/Panna-Mukta fields is denominated in USD per MMBTU. The liability in USD has been converted at Bills buying rate, TT selling rate and TT buying rate, prevailing as on 31.03.2002 or on the date of payment, as the case may be."

8. The statutory auditors of the company raised objection on the above treatment by stating:

"The company is accounting for all foreign currency transactions on the date of payment except foreign exchange liability accounted for on the date of the balance sheet."

According to the querist, the statutory auditors have further stated the following:

As per paragraph 6 of Accounting Standard (AS) 11, ‘Accounting for the Effects of Changes in Foreign Exchange Rates’, a transaction in a foreign currency is recorded in the financial records of an enterprise at the date on which the transaction occurs, normally using the exchange rate at that date. If these transactions would have been accounted for on the date of transaction, there would have arisen a difference between the amount booked on the date of transaction and actual amount paid for such transaction due to the time gap and exchange rate difference between the date of transaction and the date of payment. Consequently, this difference would have been shown as per paragraph 9 of AS 11 which provides that exchange differences arising on foreign currency transactions should be recognised as income or as expense in the period in which they arise, except as stated in paragraphs 10 and 11 of AS 11.

9. The querist has informed that the accounting treatment followed by the company results, under the present regulated scenario, in the impact of foreign exchange rate variation being directly adjusted in the producer price. Thus, there is no impact on income or expenditure on account of exchange rate difference in foreign exchange transactions. In view of this, the exchange difference is not accounted for separately as there is no impact on its bottom line for the year.

B . Query

10. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) In view of the facts explained above, what should be the transaction date in terms of AS 11 for the company?

(b) Since payment of gas purchased from joint ventures is as per the regulated natural gas price mechanism and the company profitability is not affected in any way, can the transaction date be the

 

- Date on which payment is made; or

- Due date of payment; or

- Invoice date; or

- Each day of gas purchase?

(c) Keeping in view the regulated scenario on natural gas pricing, whether the accounting treatment followed by the company is in accordance with the requirements of AS 11.

(d) Whether the answer to query (c) above would remain the same when gas price is deregulated in view of the proposed Petroleum Regulatory Bill where any exchange loss/gain will affect the profitability of the company for the year.

(e) In case answer to (d) above is different from the answer to (c) above, whether the accounting treatment would be in compliance with AS 11 if the exchange rate difference is clubbed with the cost of purchase of natural gas in the profit and loss account.

C. Points considered by the Committee

11. The Committee notes that paragraphs 5 and 6 of AS 11 require as below:

"5. A transaction in a foreign currency should be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction, except as stated in para 4 above in respect of inter-related transactions.

6. A transaction in a foreign currency is recorded in the financial records of an enterprise as at the date on which the transaction occurs, normally using the exchange rate at that date. This exchange rate is often referred to as the spot rate. For practical reasons, a rate that approximates the actual rate is often used, for example, an average rate for all transactions during the week or month in which the transactions occur. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable."

12. On the basis of the above, the Committee notes that the purchase transaction in a foreign currency should be recorded in the reporting currency at the date of the transaction. The Committee further notes that AS 11 does not envisage any exception to the aforesaid treatment on the grounds of regulated price or an alternative treatment which does not affect the profit for the period. However, AS 11 permits use of an average rate, as a practical measure, for all transactions during the week or month in which the transactions occur, provided such a rate approximates the actual rate. The Committee is of the view that AS 11 is based on the well recognised principle of accounting that every transaction should be recorded in the books of account at the actual amount on the date of transaction and in case of foreign currency transactions, the actual amount can only be arrived at if the exchange rate on the date of transaction is used.

13. The Committee is of the view that for the above purpose, the date of transaction should be considered, as per the generally accepted accounting principles, to be the date on which the buyer obtains significant risks and rewards of ownership in the goods, viz., the natural gas. From the facts of the case, the Committee notes that the natural gas is purchased by the company on a continuous basis through pipelines and the meter readings of gas quantity are obtained everyday at an appointed time. Evidently, at that point of time, significant risks and rewards of ownership in respect of the natural gas are obtained by the company. Therefore, the Committee is of the view that each day would be the transaction date for the quantity of natural gas purchased by the company on that day.

D. Opinion

14. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 10:

(a) The transaction date in terms of AS 11 is the date on which significant risks and rewards of ownership in the goods, viz.,

natural gas, are obtained by the company. Under the circumstances of the company, as explained above, each day would be the transaction date for the quantity of natural gas purchased by the company on that day. Accordingly, the purchase transaction should be recorded at the daily exchange rate. However, an average rate may be used instead of the aforesaid rate if the average rate approximates the said rate, as explained in paragraph 12 above.

(b) The transaction date should be each day of purchase of natural gas, as explained in (a) above.

(c) The accounting treatment followed by the company is not as per AS 11.

(d) Yes, the answer to (c) above would remain the same irrespective of the price mechanism being regulated or deregulated.

(e) Answer to (d) above is not different from the answer to (c) above, therefore, the question does not arise.