Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.2       Query

 

Treatment of exchange rate fluctuations in respect of liability for

long-term foreign credits used for purchase of fixed assets.

 

1. A public sector company has acquired, in past, fixed assets for which long-term foreign credit was available. In the accounts of the year, in which assets have been capitalised, liability for such long-term foreign credit has been provided on the basis of bank exchange selling rates ruling on the date of capitalisation of assets acquired. Subsequent exchange fluctuations are charged-off to revenue in the year of payment of foreign credit.

 

2. A doubt has now arisen in regard to the treatment being given by the company regarding the exchange fluctuations, as stated in the above para, in view of the instructions given in Schedule VI, Part-I of the Companies Act, 1956. As per the instructions in Schedule VI, fixed assets which have 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 for making payment towards the whole or a part of moneys borrowed by the company, the amount by which the liability is so increased 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 cost of the fixed assets.

 

3. The querist has sought the opinion of the Expert Advisory Committee as to whether the practice followed by the company is proper in the light of the instructions given in Schedule VI, Part-I of the Companies Act, 1956. The querist has pointed out that the said practice is in line with the practice followed by most of the organisations in this regard.

 

                                                                     Opinion                                      December 3, 1987

 

1. The Committee notes that Part I of Schedule VI to the Companies Act, 1956, contains ‘Instructions in accordance with which assets should be made out’, including treatment of foreign currency exchanges rates fluctuations in respect of the long-term foreign liabilities related to the assets. The Committee is of the view that in case of companies there is no option but to follow the said ‘Instructions’ irrespective of any possible alternative treatments.

 

2. The Committee notes that according to the aforesaid ‘Instructions’ “where the original cost aforesaid and additions and deductions thereto, relates 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 increases 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 monies borrowed by the company from any person directly or indirectly in any foreign currency specifically for the purpose of acquiring the asset (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 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 the cost of the fixed asset”.

 

3. On the basis of the above, the Committee is of the opinion that the practice followed by the company in question is not proper.

 

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