20 February 2010
Hi, Experts, We have a loan of 5 Milloin USD which was sanctioned on 1St April,2008, When the INR/USD rate was 44 Rs. So, it turns out to be 220 Million INR, loan. However the rate of exchange on 1st April,2009 was 48 INR/USD. So, it turns out ot be 240 Million Rs. loan. I would like to ask experts whether the interest rate differential wil be calculated, by comparing the interst of 5 million USD with 220 million INR or by comparing the interest of 5 Million USD with 240 Million INR.
21 February 2010
Use Forex rate as on the date of Borrowing, i.e. Rs 44/$ to caluclate the notional interest in INR that would have been payable had the loan been borrowed in INR. This is because, the ASI states that Interest rate to be used for this notional interest is of the date of borrowal. So to bring the analysis on a common footing, interest rate and Exch rate should both be of the same date of borrowal.[same explained by ASI appendix]
Use Forex rates as on the dates of service of the interest on Forex Loan to calculate the Actual Interest Cost borne by the company. The example in the appendix also does the same, and it is just that the date of Payment of interest and the closing of Accounting year happen to be on the same date, i.e. March 31, 2009
The amounts so arrived at after making calculations as per the above two paras should be compared with Forex Fluctuation on account of Monetary Liab, i.e. $ 5m* Rs(48-44)/$=Rs 2 crores
Also, looking at the real intention behind the clause is that ICAI wishes to capture the fact that enterprises borrow at lower rates when raise funds from abroad, but when it comes to payment, the home currency depreciates and we eventually have to pay out more than what we anticipate. As a result they want us to capitalise that part of Forex Flucuation which is attributable to Interest Rate Differential. The back bone of this lies in the Interest Rate Parity principle according to which the developing countries have a high rate of Interest as compared to that of developed countries and consequently the former's currency is always expected to depreciate.
CAclubindia
