Foreign exchange

This query is : Resolved

Santosh Kumar Patodia (Querist)
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25 June 2012 I am Jt President in textile company.

This year, we have expansion plan about 100 Cr and most of machines are imported.

In case of imported machines, we cover exchange immediately on finalisation of order / opening of L/C.

Machines will arrive in India after 8 months.

In this case, whether capitalisation will be done -

From exchange coverage rate at which bank will debit our account

or

Prevailing exchange rate at the time of arrival of machine.

If we have to capitalised from prevailing exchange rate -

1. What is the use of coverage of exchange
2. The difference between booking rate and prevailing rate has to be debited/ credited to regular PL account, whether this is correct ???

Yr views pl

Sanjay Chauhan (IFRS)

Sanjay Chauhan (IFRS) (Expert)
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25 June 2012 AS 11 (revised 2003) is not applicable to forward exchange contracts entered into in respect of firm commitments or highly probable forecast transactions. (The views expressed are those of the Technical Directorate of the ICAI, published in May 2005 journal)

As per para 38 of AS 11, The gain or loss on such contracts should be recognised in the statement of profit and loss for the period. The premium or discount on the forward exchange contract is not recognised separately.

Response:
1. The use of coverage of exchange helps the business to protect the cash flows.

2. The asset will have to be recorded at the transaction date as per para 9 of AS 11. All other exchange differences including settlement difference on forward contract are debited to profit & loss account.

Perspective:
If an entity early adopts AS 30, whihc it can do by vitue of notification issued by ICAI in Feb or March 2011, it can defer the MTM on such contracts . In given case till 8 months when the delivery will be received.

Then account the MTM of 8 months in fixed asset. (Cash FLow Hedge accounting)

MTM after fixed asset is recored, till the settlement value of forward (assuming the settlement date matches with payment to vendor) will be a Fair Value Hedge. In this forward MTM and Vendor MTM, both will be passed through profit & loss account.

Regards,
SC.