Accounting Treatment of Foreign Exchange Gain/Loss on a Disputed Foreign Creditor Balance under Indian Accounting Standards

The article analyses the correct accounting treatment for disputed foreign-currency trade payables under Ind AS 37 and Ind AS 21. When a quality dispute makes the final settlement uncertain, the liability is no longer a standard trade payable but becomes a provision, since the obligation exists, an outflow is probable, and a reliable estimate—such as a 30–40% settlement—is available (paras in full text). Only this best-estimated amount represents the carrying value under Ind AS 37. The remaining portion becomes a contingent liability, disclosed but not recognised. This estimated foreign-currency liability is a monetary item, which must then be re-translated at the closing rate under Ind AS 21, with resulting exchange differences recorded in profit or loss. The article contrasts this correct method with the incorrect practice of translating the full invoiced amount, and explains auditor expectations under SA 540, disclosure requirements, and the financial-statement impact.

Consider a common yet challenging scenario: a company procures goods from a foreign supplier, and a liability is recorded in a foreign currency. Subsequently, a significant dispute emerges over the quality of the supplies, leading to negotiations. Management, supported by robust evidence and ongoing communication, concludes that the final settlement w