Recently Para 46A was inserted in AS11 (Effects of Changes in Foreign Exchange Rates) for application beyond 31st March 2011 by virtue of notification G.S.R. 914(E).
By virtue of said notification “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, in so far as they related to acquisition of depreciable capital assets, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset”.
Facts:
A limited Co. imported Plant & Machinery from abroad. The procurement was financed through ECB route. Foreign currency exchange rate risk in respect of said exposure has been hedged by entering into forward exchange contracts. Respective asset / loan were initially recorded in books at exchange rate prevailing on date of transaction. At each reporting date, premium on forward contract up to reporting date was charge to P&L account corresponding credit being given to respective loan account, prior to insertion of Para 46A in AS 11
Entry in books of accounts:
P&L Account Debit (forward cover premium for respective period)
ECB Loan Account Credit
Now, we have opted to exercise the option available under Para 46A of AS 11 & capitalised premium to respective assets with corresponding credit to respective loan account.
Entry in books of accounts:
Asset Debit (forward cover premium for respective period)
ECB Loan Account Credit
Query:
(A) Whether Premium on forward contracts to hedge foreign currency loans for acquiring capital assets can also be capitalised & added to cost of respective asset under Para 46A of AS 11
OR
(B) Exchange differences arising on revaluation of unhedged foreign currency loans are only intended for treatment under 46A of AS 11.
Kindly give your valued inputs in the matter.
CAclubindia
