Applicability of AS 11 in Buyers Credit on Capital Goods

As per Accounting Standard 11 – The effects of Changes in Foreign Exchange Rates on Import of Capital Goods / Fixed Assets are

  1. Fixed Assets are to be treated as non monetary item. It may be recorded at historical cost or net realisable value as per accounting method followed by the firm on the capitalisation date. However as on the Balance sheet date all fixed assets should be reported at closing rate (i.e. 31.03.2017)
  2. In case, the capital good procured is a Non Integral Foreign operation then unrealised foreign exchange gain / loss should be transferred to Foreign Currency Translation Reserve a/c. The same would be disclosed under Share holder’s fund (both opening and closing balance should be provided)
  3. In case, the capital good procured is an Integral Foreign operation then unrealised foreign exchange gain / loss should be transferred to Profit ans Loss a/c.
  4. In case where the importer has availed buyers credit on capital goods in foreign currency, the value of capital good / fixed asset is to be revised every time there is a forex gain/loss until the final payment is made to the funding bank.
  5. The value of the capital good  / fixed assets is also to be revised as on Balance Sheet date and reported at closing rate.

Importer Query

Can you guide us on accounting and tax treatment as on 31st March 2017 for the unrealized forex gain/loss due to exchange rate fluctuation ?

In our case, the Buyer’s Credit in Japanese Yen 10 Million is taken for acquiring capital assets (fixed assets) and was capitalized on 01 Feb 2017. The capitalization was done in INR at conversion rate  0.6105 (JPY INR) on Buyer’s Credit funding date 01 June 2016. On 31 March 2017 conversion rate was 0.58 resulting to forex gain.

Above Buyers Credit got due on 26 May 2017 and was rollover for further 1 year getting due date on 20 May 2018.

Particular Date Yen Rate
Buyers Credit Availed 1 Jun 2016 0.6105
Capitalized ** 1 Feb 2017 0.6105
Financial Year End 31 Mar 2017 0.58
Buyers Credit Expiry & Rollover 26 May 2017  
Rollover Expiry 20 May 2018  

** Capitalisation Date: The Date on which the fixed asset is capitalised in the books of accounts and put to use.

Questions ???

Do we have to capitalize our assets in INR based on forex as on 01 Feb 2017 or 01 June 2016?

Revert: Capital assets is to be capitalised on  01 Feb 2017.

Do we have to restate our fixed assets every time there is forex gain/loss until the final payment is made ?

Revert: Yes, the Fixed assets value is to be revised every time there is forex gain/loss until the final payment is made. (Also on all B/S dates)

Are we supposed to pass the accounting entry for the Forex gain/loss and give effect to P&L (although the Buyer’s Credit was for capital asset acquisition) ?

Revert: Capital goods was procured as non integral foreign operation, hence unrealised foreign exchange gain / loss should be transferred to Foreign Currency Translation Reserve a/c. No effect will come in Profit and Loss A/c.

We are finalizing Balance Sheet for 31 March 2017 and there is forex gain. What will be Income Tax treatment ?

Revert: For finalizing Balance Sheet for 31 March 2017 all Fixed Assets should be reported at closing rate (‘Closing rate’ as the exchange rate at the balance sheet date. i.e. 31 March 2017)

Note:  For companies for whom IND AS (16 & 21) is applicable, treatment will be different and will be answered in separate article.

Reference

  1. The Effects of Changes in Foreign Exchange Rates 
  2. Buyers Credit Accounting Entries

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