Loss/(Gain) from Difference in exchange rate

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Renjith.R.s.

Renjith.R.s. (Querist)
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08 December 2021 Our company (which is in India) provided a loan to the American subsidiary for a period of three years. The interest we are charging on monthly basis.

For adjusting loss/gain against exchange rate, against interest amount we are making necessary provision against unpaid amount.

The loan period is for 3 years, whether yearly we have to disclose the impact of currency fluctuation on the principal amount in our financials?
Also request to confirm procedure followed against interest income is correct?

B Sathyanarayanan

B Sathyanarayanan (Expert)
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08 December 2021 yes under the accounting standards issued by ICAI and new ICDS , you have to show it in your profit and loss under Gain or loss in exchange flu cation and interest income earned from overseas subsidiary is allowed under income tax act under section 43A .

Renjith.R.s.

Renjith.R.s. (Querist)
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08 December 2021 Thanks. Impacts on a principal amount due to exchange rate difference will be an increase or decrease in asset value, correct?
How will treat exchange rate difference against unpaid accumulated interest?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 Dealing with exchange rate differences, particularly for loans between entities in different currencies, involves several accounting and reporting considerations. Here’s how to handle such situations:

### 1. **Disclosure of Exchange Rate Impact on Principal Amount**

For a loan provided to a foreign subsidiary, you need to account for exchange rate fluctuations in your financial statements. The following steps are generally followed:

- **Principal Amount**:
- **Initial Recognition**: Record the loan in the functional currency of the lender at the spot exchange rate on the date of the transaction.
- **Subsequent Measurement**: At each reporting date, the loan amount should be re-measured at the closing exchange rate. Any difference between the exchange rate at the reporting date and the rate at the date of transaction needs to be recognized in the financial statements.

- **Annual Disclosure**:
- The impact of currency fluctuations on the principal loan amount should be disclosed annually in the financial statements. This is typically done by showing the revaluation impact as an exchange difference under the head of ‘Foreign Exchange Gain/Loss’ in the profit and loss statement or as a part of equity under ‘Other Comprehensive Income’ (OCI), depending on the accounting standards followed.

### 2. **Accounting for Interest Income and Provision**

- **Interest Income**:
- Interest income should be recognized in the functional currency based on the agreed interest rate. The interest income should be accrued monthly as per the loan agreement, and it should be converted into the functional currency at the exchange rate prevailing on the date of the transaction.

- **Provision for Unpaid Amount**:
- If there are unpaid amounts, you need to make a provision for the same in your financial statements. This provision should also consider the impact of currency fluctuations and be adjusted as per the closing rate on the reporting date.

### 3. **Impact of Exchange Rate Differences**

- **Principal Amount**:
- **Increase/Decrease in Asset Value**: Exchange rate differences result in a change in the value of the loan when translated into the functional currency. If the foreign currency strengthens relative to the functional currency, the principal amount in the functional currency will increase, and vice versa. This change should be reflected as a gain or loss in the financial statements.

- **Unpaid Accumulated Interest**:
- **Treatment of Exchange Rate Difference**: For unpaid accumulated interest, the exchange rate difference needs to be calculated and recognized similarly. The difference is recognized as a foreign exchange gain or loss in the profit and loss account or in OCI based on the accounting standards.

### 4. **Accounting Standards**

The accounting treatment of foreign currency transactions and the impact of exchange rate fluctuations should follow the relevant accounting standards:

- **Ind AS (Indian Accounting Standards)**:
- Ind AS 21, *The Effects of Changes in Foreign Exchange Rates*, outlines how to handle foreign currency transactions and translation of financial statements.

- **IFRS (International Financial Reporting Standards)**:
- IFRS 21, *The Effects of Changes in Foreign Exchange Rates*, provides similar guidance on foreign currency transactions and their impact on financial statements.

### **Summary**

1. **Principal Loan Amount**: Re-measure at each reporting date and recognize exchange differences as foreign exchange gains or losses.
2. **Interest Income**: Recognize based on the functional currency at the agreed exchange rate.
3. **Provision for Unpaid Amount**: Adjust for exchange rate differences and recognize appropriately.
4. **Annual Disclosure**: Disclose the impact of currency fluctuations annually in financial statements.

**Action Points**:

- Ensure proper documentation and accounting entries for all currency fluctuations.
- Maintain detailed records of exchange rates used for conversion.
- Consult with a professional accountant or auditor to ensure compliance with applicable accounting standards.

Feel free to consult with a professional accountant or auditor for tailored advice specific to your company's situation and the applicable accounting standards.