Gross profit issue

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TARIQUE RIZVI (Querist)
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18 September 2016 Can anyone advise me in this connection ? We update our export sales as per shipping bill issued by the custom authorities but there are so many consultants who have advised me to update the export sales as per the realized value against your export sale invoice because of which gross profit will look much bigger and there would be very dim chance of income tax scrutiny.

Actually always the rate of US Dolllar as per the shipping bill issued by the custom authorities remains less but the payments gets realized always at higher rate because of fluctuation in rate of US Dollar. If we are updating our export sale invoice with the realized value of the export bill, it would mean that we have clubbed the exchange difference with the value of invoice as per custom rate and nothing else and finally gross profit will go up. But whatabout the payment which is realised after filing income tax return. Consultants have advised me to update the receivables at 31st March with the prevailing rate of RBI and finally during the next financial year exchange difference will reflect as nominal as possible.

I will appreciate views of the expert on this issue.

tks rgds

Kaushik Joshi

Kaushik Joshi (Expert)
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19 September 2016 Dear Tarique Rizvi, I'm surprised no one has answered your query yet. 1st - Continue 'your practise' of accounting for the billing I.e. as per customs rate. I gather your concepts are strong so don't fall for such advise. if amount is realised in current year it'd be a forex gain or loss in c.y. 2nd - yes the consultant has rightly said to re state your receivables as on balance sheet date. It is in line with AS-11. I disagree with booking sale at realised amount.

TARIQUE RIZVI

TARIQUE RIZVI (Querist)
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19 September 2016 Exchange Difference whatever comes during the current year or during the next year should be reflected under the head of other income of under the head of business income.

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Kaushik Joshi

Kaushik Joshi (Expert)
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19 September 2016 it'll be business income

Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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26 July 2024 The issue you're facing relates to accounting for export sales and handling exchange rate fluctuations, which can impact the reported gross profit and tax implications. Here's a detailed explanation of the issues and best practices in this context:

### **Export Sales and Exchange Rate Fluctuations**

1. **Export Sales Recognition:**
- **Customs Shipping Bill Rate**: Generally, export sales are initially recorded in the books based on the rate mentioned in the shipping bill issued by customs. This rate is the rate at which the export is documented and reported to authorities.
- **Realized Value**: The actual amount received in foreign currency can differ from the amount mentioned in the shipping bill due to fluctuations in exchange rates.

2. **Accounting for Exchange Rate Fluctuations:**
- **Realization of Payments**: When payments are received, they may be at a different rate than the one used for initial recording. This difference is usually treated as an exchange gain or loss.
- **Reporting Exchange Gains/Losses**: Exchange gains or losses should be recorded as per accounting standards. Typically, these are recognized in the profit and loss account as per the relevant accounting standards or regulations, such as AS 11 (The Effects of Changes in Foreign Exchange Rates) in India.

### **Accounting Treatment**

1. **Gross Profit Impact:**
- **Initial Recording**: Record sales based on the invoice value, which is usually aligned with the shipping bill rate.
- **Realization**: When payments are received at different rates, adjust the receivables and recognize the exchange difference. The difference between the invoice rate and the actual rate received should be recognized as an exchange gain or loss.

2. **Exchange Differences:**
- **During the Current Year**: Exchange differences due to fluctuations between the date of transaction and the date of payment should be adjusted in the financial statements for the period in which they occur.
- **Income Tax Implications**: Exchange gains or losses are treated as business income or expense and should be included in the computation of taxable income.

### **Best Practices**

1. **Record Sales at Shipping Bill Rate:**
- For consistency and compliance, it is advisable to record export sales based on the rate mentioned in the shipping bill as this reflects the transaction value agreed upon at the time of shipment.

2. **Adjust for Exchange Differences:**
- **Realization**: Recognize exchange gains or losses in the period they arise. This should be recorded in the books as per the applicable accounting standards and not deferred to the next financial year.
- **Receivables**: Adjust the outstanding receivables as of the year-end based on the exchange rate prevailing at that date.

3. **Handling Exchange Differences:**
- **Business Income**: Exchange differences should be reflected under business income, not under other income, as they arise from the primary business operations.

4. **Income Tax Return:**
- Ensure that the exchange differences are properly accounted for in the financial statements and reflected accurately in the income tax return.

### **Impact on Gross Profit and Tax Scrutiny**

- **Gross Profit Impact**: Recognizing sales based on the shipping bill rate while adjusting for exchange differences ensures that gross profit reflects the actual economic transaction. Manipulating exchange rates or recognizing unrealized gains can lead to inaccuracies and potential issues during tax scrutiny.
- **Tax Scrutiny**: Properly recording and reporting exchange gains and losses in line with accounting standards helps ensure transparency and reduces the risk of discrepancies during tax assessments.

### **Conclusion**

It is essential to follow accounting standards and regulatory requirements to ensure accurate reporting. Manipulating exchange rates or delaying the recognition of gains/losses may lead to incorrect financial reporting and potential issues with tax authorities. Always consult with a professional accountant or tax advisor to ensure compliance and accuracy in your financial reporting.