Query No. 7 Subject: Exchange differences in respect of fixed assets acquired within India in foreign currency.1 A. Facts of the Case 1. A public sector company in the power sector enters into mainly three types of foreign exchange transactions, viz., (i) borrowings in foreign currencies to partly finance its capacity addition programme; (ii) contracts for supply, erection, testing and commissioning of power plant equipment; and (iii) purchase of stores and spares for operation and maintenance of power plants. The accounting policy followed by the company regarding foreign currency transactions is as under:
2. The querist has stated that Accounting Standard (AS) 11, ‘The Effects of Changes in Foreign Exchange Rates’ (revised 2003), issued by the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1.4.2004 and is mandatory in nature from that date. The querist has also stated that paragraph 13 of AS 11 (revised 2003) states that exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise (emphasis supplied by the querist).
3. The querist has drawn the attention of the Committee to Schedule VI to the Companies Act, 1956, according to which where the original cost and additions and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability of the company, as expressed in Indian currency, for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of moneys borrowed by the company from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the assets (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability is so increased or reduced during the year, shall be added to, or , as the case may be, deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed asset.
4. The querist has referred to the announcement issued by the Institute on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-a-vis Schedule VI to the Companies Act, 1956’, which has clarified that pending the amendment, if any, to Schedule VI to the Companies Act, 1956, a company following the provisions of Schedule VI will still be considered to be complying with AS 11 for the purposes of section 211 of the Act and the auditors of the company should not assert non-compliance with AS 11 (2003) under section 227(3)(d) of the Act in such a case and should not qualify their report in this regard on the true and fair view of the state of the company’s affairs and profit or loss of the company under section 227(2) of the Act.
5. The querist has also drawn the attention of the Committee to the erstwhile AS 11 (revised 1994) which makes no distinction in treatment of exchange differences in respect of assets acquired from ‘outside India’ and those acquired within the country. As per paragraph 10 of AS 11 (1994), "Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which are carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets".
6. According to the querist, as per extant regulations, Indian bidders are permitted to quote in foreign currencies for supply of equipment of Indian origin to domestic companies under international competitive bidding system, subject to certain conditions. Accordingly, exchange differences arise in respect of payments made or liabilities incurred under such contracts. Further, borrowings are also made by companies in foreign currency to finance procurement of fixed assets within India. Keeping in view the intent of the provisions of Schedule VI to the Companies Act, 1956, particularly considering that the Indian bidders were not permitted till recently to quote in foreign currencies for supplies within the country, the querist is of the view that it would be appropriate to adjust such exchange differences in respect of fixed assets acquired within the country in the cost of the related fixed assets, pending amendment, if any, to Schedule VI to the Companies Act, 1956.
B . Query 7. The querist has sought the opinion of the Expert Advisory Committee as to whether a company would be in compliance with the requirements of AS 11 (revised 2003) read with Schedule VI to the Companies Act, 1956, if the exchange differences in respect of liabilities incurred or in respect of repayment of borrowings in foreign currency made specifically for acquisition of all fixed assets, whether acquired from a country outside India or within the country, are adjusted in their carrying cost.
C. Points considered by the Committee 8. The Committee restricts its opinion on the issue raised by the querist in paragraph 7 above and has not examined any other issue that may arise in respect of the accounting policy of the company stated in paragraph 1 above, e.g., treatment of exchange differences arising on current assets.
9. The Committee also notes that the revised Standard (2003) supersedes Accounting Standard (AS) 11, ‘Accounting for the Effects of Changes in Foreign Exchange Rates’ (1994) except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise itself or through its branches before the date this Standard comes into effect, AS 11 (1994) will continue to be applicable.
10. The Committee notes the requirements of Schedule VI to the Companies Act, 1956, as stated in paragraph 3 above and the Announcement issued by the Institute on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-a-vis Schedule VI to the Companies Act, 1956’, published in ‘The Chartered Accountant’,November 2003 (page 497), which, inter alia, states as follows:
11. The Committee notes that the requirement of Schedule VI, as stated in paragraph 3, differs from AS 11 (revised 2003), as stated in paragraph 2, only to the extent of accounting treatment in respect of fixed assets acquired from a country outside India. Thus, it is only to that extent, the law, i.e., Schedule VI, prevails over AS 11 (revised 2003).
12. On the basis of the above, the Committee is of the view that foreign exchange differences in respect of liabilities incurred for acquisition of fixed assets within India after AS 11 (revised 2003) coming into force, the said AS 11 and not Schedule VI would apply.
D. Opinion 13. On the basis of the above, the Committee is of the opinion that adjustment of exchange differences in the cost of fixed assets in respect of liabilities incurred or in respect of the repayment of borrowings in foreign currency made specifically for acquisition of the fixed assets would be in compliance with the requirements of AS 11 (revised 2003) read with Schedule VI to the Companies Act, 1956, only if the fixed assets are acquired from a country outside India. In respect of the exchange differences arising on liabilities incurred or on repayment of borrowings in foreign currency for acquisition of fixed assets acquired within India, AS 11 (revised 2003) would apply for transactions entered into on or after 1.4.2004.
1 Opinion finalised by the Committee on 26.5.2004 |