4. The above-mentioned amount of advance was accounted for as ‘Advance for Capital Expenditure’ and grouped under the head ‘Fixed Assets – Construction Stores & Advances’ in the annual accounts of the company for the financial year 2007-08. The company did not restate the amount of advances at the rates of exchange ruling as at the balance sheet date, i.e., 31st March, 2008.

5. During supplementary audit of accounts u/s 619(3) of the Companies Act, 1956 by the Comptroller & Auditor General of India, it was observed by them that the advances paid for capital expenditure in foreign currency are monetary items as per Accounting Standard (AS) 11, ‘The Effects of Changes in Foreign Exchange Rates’, and should have been reported at the exchange rates prevailing as on 31.03.2008 (reporting date), i.e., US Dollars = Rs. 39.49 and Euro = Rs. 62.34 and the corresponding exchange gain of Rs. 5.54 crore should have been credited to the profit and loss account/‘Incidental Expenditure During Construction’ account.

6. During discussions with the Government Auditors, the statutory auditors of the company were of the view that advance for capital expenditure in foreign currency is to be treated as a non-monetary item considering the following:

         (i) As per the definition given in AS 11, monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money, e.g., cash, receivables and payables.

         (ii) As per International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates, the essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Conversely, the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.

         (iii) In the instant case, the capital advance is not to be received back in cash; rather, only a capital asset will be received against the same. Hence, it is a nonmonetary item as per the definition of AS 11.

          (iv) The intention of AS 11 is to recognise that portion of gain/loss of the change in foreign currency rates arising on subsequent payments/receipts, which pertains to the relevant accounting period (i.e., the monetary assets/ liabilities are restated at year-end rates to recognise the gain/loss which has arisen in that accounting period). Since no gain/loss is going to arise on receipt of the asset at a later date, there is no question of recognising the portion of gain/loss which has arisen up to the yearend date. Any gain/loss on change in foreign currency rates would arise only when the advance is received back in cash whereas the financial statements are prepared with the assumption that only an asset would be received against the capital advance. Hence, restating the capital advance at the year-end rates would only lead to a notional entry which would be required to be reversed in the subsequent period.

After deliberations, Government Auditors observed that the observation regarding treatment of advances for capital expenditure lacks clarity and should be referred to the Expert Advisory Committee of the Institute of Chartered Accountants of India for opinion.

B. Query

7. Considering the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

         (i) Whether advance paid to M/s A Ltd. for acquisition of fixed assets is a monetary item.

        (ii) If answer to (i) above is in the affirmative, whether the advances paid to a party for acquisition of fixed assets are to be restated by using the closing rate of exchange at each balance sheet date.

         (iii) In case answer to (ii) above is in the affirmative, whether these exchange differences can be adjusted in the cost of related assets, considering the provisions of paragraph 9.1 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, i.e., directly attributable cost of bringing the asset to its working condition for its intended use.

C. Points considered by the Committee

8. The Committee notes that the basic issue raised by the querist relates to treatment of advance paid in foreign currency. Therefore, the Committee has examined only this issue and has not examined any other issue that may be contained in the Facts of the Case. Further, the Committee notes that the foreign currency advance was paid on 18.10.2007 (i.e., during the accounting year 2007- 08). Hence, Accounting Standard (AS) 11, ‘The Effects of Changes in Foreign Exchange Rates’, notified under the Companies (Accounting Standards) Rules, 2006 (the ‘Rules’) is applicable for the Facts of the Case. Incidentally, the Committee notes that the total of payments payable at different stages mentioned in paragraph 3 above exceeds 100% of contract price. However, this does not affect the issue involved.

9. The Committee notes the following paragraphs from AS 11 notified under the ‘Rules’:

        “7.11 Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.”

        “7.14 Non-monetary items are assets and liabilities other than monetary items.”

         “12. Cash, receivables, and payables are examples of monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items. …”

10. From the above, the Committee is of the view that the words ‘received or paid’ in the definition of the term ‘monetary items’ do not necessarily envisage receipt or payment in cash. What is of the essence of the definition of monetary items is that the value of the asset or liability should be fixed or determinable in monetary terms. Accordingly, where the advance is related to a fixed price contract for the receipt of a specified quantity of goods, it will be a non-monetary asset since it represents a claim to receive a specified quantity of goods and not a right to receive money. From the Facts of the Case, the quantity of the fixed assets to be received is specified and the price expressed in multi-currency is also fixed.

It is a case of fixed price contract for the receipt of a specified quantity of fixed assets. Hence, the Committee is of the view that, in the present case, foreign currency component of advance paid which is related to the fixed assets to be received is a non-monetary item.

D. Opinion

11. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 7 above:

      (i) No. Advance paid to M/s A Ltd. for acquisition of fixed assets is not a monetary item. It is a non-monetary item.

      (ii) In view of (i) above, this question does not arise.

       (iii) In view of (ii) above, this question does not arise.