Fixed Asset purchased in Foreign Currency

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varun gupta (Querist)
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20 May 2009 Hi,
A company imports a Fixed Asset for say 10000 USD in Oct 08 and books the asset @50/USD. Payment is not made till 31st Mar 09 while the exchange rate goes up to Rs 51/USD. Now,
a) Shd the company increase the cost of Asset in Books from 500000 to 510000 or diff or Rs 10000 be charged to P&L A/c as Forex Loss?
b) If charged as Forex Loss, will it be an allowable exp under Income Tax Act for books closing on 31Mar 09?
c) Suppose, Payment is made in June 09 at the conversion rate of 50.5/USD, what will be the treatment in books now? Will diff be reduced from asset cost again or will it be credited to P&L A/c.
d) Dep will be charged on which value for 2008-09 & 2009-10?

Pls keep the Query OPEN after your replies to let other experts insert their views also.

taxindiaconnect

taxindiaconnect (Expert)
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20 May 2009 A foreign currency gains / loss may be either on account of revenue transaction or capital transaction. Further to this such gain / loss may be either on completed ( Closed ) transaction or due to reinstatement of the foreign currency liability / assets at the year end as per AS 11. The reinstatement of liability / assets give rise to unrealized gains / loss on account of foreign currency fluctuations.

As per as 11 (Before deferment by AS11) the all the gains / loss either on account of capital or revenue, Realised or Unrealised shall be / credited / charged to P & L Account in books. However for Income tax purpose, any such gain / loss realised or unrealised on account of revenue transaction will be taxed or will be tax deductible as the case may be.

Any gain / loss on account of capital transaction, if unrealised will not be taxed / allowed deduction for tax purpose. Any realised gain / loss will also will not be taxed / allowed deduction for tax purpose, however such realised gains / loss, as per the provisions of section 43A of IT Act 1961. will be adjusted against the cost of the assets purchased against that liability. The situation would be same in books and tax after the the deferredment of the as 11.
Give me your persaonl ID, I will send you the above analysis in a simple table.

varun gupta

varun gupta (Querist)
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21 May 2009 THe reply is not yet clear. Pls elaborate.
My personal id is varun.g12@rediffmail.com

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Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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24 July 2024 Let's address each part of your query regarding the fixed asset purchased in foreign currency:

a) **Treatment of Exchange Rate Fluctuation:**
- When the exchange rate changes between the date of purchase and the date of payment, the accounting treatment typically depends on whether the asset was fully paid for by the balance sheet date (31st March 2009 in this case).

- Since the payment was not made by 31st March 2009, and the exchange rate increased from 50/USD to 51/USD, there is an unrealized foreign exchange loss. This loss should generally be recognized in the Profit and Loss (P&L) account.

- The cost of the fixed asset should be adjusted to reflect the exchange rate at the balance sheet date. Therefore, the cost of the asset should be increased from Rs 5L (10K USD * 50 Rs/USD) to Rs 5.10L (10K USD * 51 Rs/USD).

- The foreign exchange loss of Rs 10K (5.10L - 5L) should be charged to the P&L account as an expense.

b) **Tax Treatment of Forex Loss:**
- The foreign exchange loss recognized in the P&L account is generally allowable as an expense under the Income Tax Act, provided it meets the requirements of deductibility under tax laws (such as being revenue in nature and incurred in the course of business).

c) **Payment Made in June 2009:**
- When the payment is eventually made in June 2009 at an exchange rate of 50.5/USD, there will be a further adjustment needed.

- The difference between the exchange rate used for accounting (51 Rs/USD) and the actual payment rate (50.5 Rs/USD) should be accounted for.

- If the asset cost was initially adjusted to Rs 5.10L due to the exchange rate change, and the payment is made at 50.5 Rs/USD, there will be a realized foreign exchange gain of Rs 5,000 (5.10L - (10K * 50.5)). This gain should generally be credited to the P&L account.

d) **Depreciation Calculation:**
- For the financial year 2008-09, depreciation should be charged on the adjusted cost of the asset at 31st March 2009, which is Rs 5.10L

- For the financial year 2009-10, depreciation should be charged on the revised cost of the asset after considering the actual payment made in June 2009 at 50.5 Rs/USD, if applicable. The cost basis for depreciation should reflect the actual expenditure incurred.

These steps ensure that the company's books accurately reflect the impact of exchange rate fluctuations on the cost of the fixed asset and comply with both accounting standards and tax regulations.

If you have further questions or need clarification on any specific aspect, feel free to ask!