Fixed assets

As per AS - 16,

Borrowing Costs Include

Exchange Difference arising from Foreign Currency Borrowing to the extent that they are regarded as an adjustment to the interest cost.

AND

AS 16 further states that,

Borrowing Cost should be capitalised if such Borrowing Cost are incurred for Qualifying Asset

Qualifying Assets are those asset which take substantial period of time to get ready for its intended use or sale. (Usually 12 months)

Fixed Assets those take 12 month to get ready would satisfy as Qualifying Asset.

Inventory could be stated as Qulifying only if it take substantial period of time to get ready to sale. (Inventory should not be frequently produced or Produced in large Qty)

So as per your query,

IF the said Asset or Inventory satisfy as Qualifying Asset AND

There is Foreign Loan Outstanding in books which was taken for Qualifying Asset.

THEN

• Foreign Fluctuation resulting from revaluing the Monetary Item is gain then it should not to be considered for either borrowing cost or for capitalisation.

• Foreing Fluctuation resulting from revaluing the Monetary Item is loss then this loss (A) will be compared with difference in the interest amount if borrowed locally (B) and interest amount actually incurred on foreign borrowing (C) will be considered as borrowing Cost and the same amount would be capitalised to Qualifying Asset.

          Amount to be Capitalise = A - (B - C)    

          Balance Amount in (A) will be transfered to Statement of P&L as Exchange Difference.

Dear Experts

I simply import an Asset (qualifing) and pay for it. In both transaction arised currency fluctuation and there is not any foreign loan outstanding. in this case can I capitalise the currency fluctuation or not ?

The Foreign Exchange Difference arising in your case is not to be Capitalised, it should be booked in Statement of P&L as Exchange Difference.

Assets are to be recorded at Historical Costs only even if it is imported. And Foreign Exchange Difference can only be Capitalised if the Above two conditions are satisfied.

• I think you misunderstood the definition of Qualifying Assets, Qualifying assets are those asset which are constructed or produced before it can be use and such construction or production will take 12 months or more to get ready. ONly these assets are qualifying assets.
• There should also be Foreign borrowing for construction or production of assets too.

IN YOUR CASE YOU WILL HAVE TO CHARGE THE DIFF ARISING DUE TO FOREIGN EXCHANGE FLUCTUATION IN PROFIT AND LOSS.