Analysis of Clarification issued by MCA Dated 9-8-2012

Accounting treatment of Foreign exchange fluctuation (Forex) is covered under various standards as follows:

AS 10 - Forex on liabilities for FA purchase etc,

AS 11 - Forex on Monetary items, forward cover forex, forex on Long term monetary items etc,

AS 16 - exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs etc.

Forex accounting is as per applicable Accounting Standards with co-relation with other Accounting Standard.

This article is regarding Para 46(A) of AS 11 for long-term foreign currency monetary items with reference to time to time notification /amendments and clarification with impact consideration of para 4(e) of AS 16.

Extract of Para 46(A) of AS 11

“(1) In respect of accounting periods commencing on or after the 1st April, 2011 for an enterprise which had earlier exercised the option under paragraph 46 and at the option of any other enterprise (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, insofar as they related to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account’’ in the enterprise's financial statements and amortized over the balance period of such long-term asset or liability, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15 of the said rules. to exercise the option referred to in sub-paragraph (1), an asset or liability shall be designated as a long term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of twelve months or more at the date of origination of the asset or the liability.

(2) Provided that the option exercised by the enterprise shall disclose the fact of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized.’’

In Summarisation, Forex arising on reporting of long-term foreign currency monetary items:

a. insofar as they related to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset,

b. and in other cases, can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account’’ in the enterprise's financial statements and amortized over the balance period of such long-term asset or liability,

As Forex treatment covered under Para 4(e) of AS 16 also, Now question is arised what would be the treatment of Para 4(e) of AS 16?

Extract of Para 4(e) of AS 11, borrowing cost may include:

“Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs”.

The response of above question is given in Frequently Asked Questions on AS 11 notification – Companies (Accounting Standards) Amendment Rules, 2009 (G.S.R. 225 (E) dt. 31.3.09) issued by Ministry of Corporate Affairs.

Question No.17: Does the notification also apply to those exchange differences which are regarded as an adjustment to interest costs in terms of paragraph 4(e) of Accounting Standard (AS) 16, Borrowing Costs?

Meaning of Notification:

(1) When paragraph 46 was first inserted by notification dated 31 March, 2009, the bracketed portion read as "In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before 31st March, 2011". The bracketed portion was amended by notification dated May 11, 2011 and changed to “In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before 31st March, 2012." The bracketed portion was last amended by notification dated December 29, 2011 and currently reads as "In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before 31st March, 2020"

(2) Inserted by the Companies (Accounting Standards) (Second Amendment) Rules, 2011, by Notification dated 29-12-2011.

Response for Question No. 17

No. Paragraph 6 of AS 11 excludes from the scope of the Standard exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs under paragraph 4(e) of AS 16. Paragraph 6 of AS 11 and paragraph 4(e) of AS 16 have not been amended by the notification. Thus, the exchange differences referred to above still remain outside the scope of AS 11 and within the scope of AS 16. Accordingly, these exchange differences should continue to be accounted for in accordance with AS 16.

That means long term loan / borrowing related forex would be covered first in Para 4(e) of AS 16 and remaining Forex will be covered in AS 11.

The Ministry has received several representations from industry associations that para 6 of Accounting Standard-11 and para 4(e) of AS-16 are posing problems in proper implementation of para 46A of notification 914(E) dated 29-12-2011.

MCA has come with Clarification on dated 9-8-2012.

Extract of Clarification No. 25/2012, dated 9-8-2012

CLARIFICATION ON PARA 46A OF NOTIFICATION NUMBER G.S.R. 914(E) DATED 29-12-2011 ON ACCOUNTING STANDARD 11 RELATING TO "THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES"

The Ministry has received several representations from industry associations that para 6 of Accounting Standard-11 and para 4(e) of AS-16 are posing problems in proper implementation of para 46A of notification 914(E) dated 29-12-2011. In order to resolve the problems faced by industry, it is hereby clarified that para 6 of Accounting Standard-11 and para 4(e) of the Accounting Standard-16 shall not apply to a company which is applying clause 46A of Accounting Standard-11.

Extract of Para 6 of AS 11

“This Standard does not deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs [see paragraph 4(e) of AS 16, Borrowing Costs”

By this clarification, following are consideration:

(1) If company has chosen the option for Para 46(A), then Para 4(e) of AS 16 and Para (6) of AS 11 will not be applicable.

(2) Treatment to be considered from date of notification issued i.e. from 29.12.2011, if account year March 31, 2012 is not closed and if March 31, 2012 financial year closed then the impact to be considered for financial year started from April 1, 2012, if any.

Nirmal Shah

Email: Nirmal.Shah@essar.com

Source:

Clarification No. 25/2012, dated 9-8-2012

AS 11: The Effects of Changes in Foreign Exchange Rates

AS 16: Borrowing Costs

Frequently Asked Questions on AS 11 notification – Companies (Accounting Standards) Amendment Rules, 2009 (G.S.R. 225 (E) dt. 31.3.09) issued by Ministry of Corporate Affairs