Exchange fluctuation on fixed assets

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CA Sanjana arora (Querist)
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02 July 2013 hii experts,

my company has purchased an old machine from foreign country as on 24.01.2012 for EURO 70000 and we capitalized this machinery as on 15.04.2012 and payment of it has not made yet..so what should be the treatment of exchange fluctuation as on 31-3-2013...exchange fluctuation should be capitalized or not.

CA Devanshi Gandhi (Ajani)

CA Devanshi Gandhi (Ajani) (Expert)
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03 July 2013 exchange fluctuation till 15-4-12 needs to be capitalized. after that it cannot be capitalised.

CA Sanjana arora

CA Sanjana arora (Querist)
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03 July 2013 but i thing as per AS 6 expenses incurred which are directly related to fixed assets should be capitalized...and so as per AS 11 it should be capitalized

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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21 July 2024 Under Indian Accounting Standards (Ind AS) and generally accepted accounting principles (GAAP), the treatment of exchange fluctuation related to fixed assets, especially those acquired from foreign countries, needs careful consideration. Here’s a structured approach based on your scenario:

1. **Initial Acquisition of Machinery (24.01.2012):**
- The machinery was purchased from a foreign country for EURO 70,000.
- As of 24.01.2012, you have an obligation (liability) to pay EURO 70,000.

2. **Capitalization Date (15.04.2012):**
- The machinery is capitalized into your books as a fixed asset on 15.04.2012.
- At this point, the exchange rate for EURO to your local currency (INR, assuming) is used to determine the INR equivalent of EURO 70,000 for capitalization purposes.

3. **Exchange Fluctuation Treatment:**
- Exchange rate fluctuations between 24.01.2012 (date of obligation) and 15.04.2012 (capitalization date) generally do not impact the initial measurement and capitalization of the asset under Ind AS 16 (Property, Plant and Equipment).
- However, any difference arising due to exchange rate fluctuations between these dates should be recognized in the profit or loss for the period, as per Ind AS 21 (The Effects of Changes in Foreign Exchange Rates).

4. **Subsequent Accounting (As on 31.03.2013):**
- Exchange rate fluctuations from 15.04.2012 to 31.03.2013 should also be considered.
- Any exchange differences arising due to changes in exchange rates during this period are recognized in profit or loss unless they are directly attributable to and necessary for the acquisition or construction of a qualifying asset (as per Ind AS 23, Borrowing Costs, and Ind AS 16).

5. **Treatment of Exchange Fluctuation:**
- If the exchange fluctuation is directly related to the borrowing used to finance the acquisition or construction of the asset, it may be capitalized as part of the cost of the asset.
- If the exchange fluctuation is not directly related to borrowing costs or the acquisition/construction of the asset, it should be recognized in profit or loss.

**Conclusion:**
- The exchange fluctuation between the date of obligation (24.01.2012) and the capitalization date (15.04.2012) should be recognized in profit or loss.
- Exchange fluctuations after the capitalization date (15.04.2012) until the end of the reporting period (31.03.2013) should also be accounted for in profit or loss, unless they meet the criteria for capitalization under Ind AS 16 and other applicable standards.

It's essential to consult with a qualified accountant or financial advisor who can apply these principles to your specific circumstances and ensure compliance with accounting standards and regulations applicable in your jurisdiction.