The Central Government has notified two amendments dated 29 December 2011 to AS-11 The Effects of Changes in Foreign Exchange Rates. Given below is a brief overview of these two amendments, practical issues arising thereon and the author’s perspective.
Overview of the first amendment The first amendment extends the sunset date for the use of option given in paragraph 46 of AS-11 whereby a company can opt to capitalise/amortise exchange difference arising on longterm foreign currency monetary items. It substitutes the words ‘in respect of accounting period commencing on or after 7 December 2006 and ending on or before 31 March 2012,’ in paragraph 46, by the words ‘in respect of accounting periods commencing on or after 7 December 2006 and ending on or before 31 March 2020.’
Overview of the second amendment The second Notification inserts a new paragraph, viz., paragraph 46A, in AS-11. This paragraph deals with accounting for both companies which had exercised option given in paragraph 46 of AS-11 as well as any other company which had not exercised that option. According to this paragraph, a company may choose to adopt the following treatment in respect of accounting periods commencing on or after 1 April 2011:
(i) Foreign exchange differences arising on longterm foreign currency monetary items related to acquisition of a fixed asset are capitalised and depreciated over the remaining useful life of the asset.
(ii) Foreign exchange differences arising on other long-term foreign currency monetary items are accumulated in the ‘Foreign Currency Monetary Item Translation Difference Account’ and amortised over the remaining life of the concerned monetary item.
The option once elected is irrevocable. Like paragraph 46, paragraph 46A also does not apply to exchange differences arising on long-term foreign currency monetary items that in substance form part of a company’s net investment in non-integral foreign operation.
Main issues There are numerous questions on the interplay of these two amendments and the manner in which they would work in consonance with each other. Lets us understand what is clear and what is confusing.
What is clear?
(1) Those companies that were hitherto amortising/ capitalising exchange differences can continue to do so till 2020.
(2) Those companies that were hitherto not amortising/capitalising exchange differences can avail of the new option in paragraph 46A. Such an option is available on a prospective basis for the remaining life of the loan and is not restricted to 2020.
What is confusing?
(1) Those companies that were hitherto amortising/capitalising exchange differences can continue to do so till 2020 under paragraph 46. The amortisation was done restricting the amortisation period to 2012. If the company wishes to continue with paragraph 46, the amortisation period is extended because of the extension from 2012 to 2020. It is not clear whether the amortisation on the loan is calculated on a retrospective basis or on a prospective basis over the balance amortisation period.
(2) Can a company, which had earlier exercised the option given in paragraph 46, now opt out of that exemption on the grounds that it chose the option because it was restricted to 31-3-2011 and not 31- 3-2020? Hence, can it start recognising exchange differences on foreign currency monetary items, including long-term items, immediately in profit or loss?
(3) It is not clear if companies that were amortising/ capitalising exchange differences under paragraph 46 can switch over to paragraph 46A. How the two paragraphs (46 & 46A) will work in consonance with each other? Let us assume that a company has taken a foreign currency loan, not related to acquisition of fixed asset, whose term extends till 31 March 2025. Will the company amortise exchange differences arising on such loan till 31 March 2020 or till 31 March 2025? The manner in which paragraph 46A is drafted appears to allow both existing option users and new option users to capitalise/amortise exchange differences on a prospective basis. If that is true, what is the relevance of paragraph 46?
(4) In paragraph 46, the sunset date has been used at two places: one for the date range during which the option given can be used and the second to specify the period up to which the balance in the ‘Foreign Currency Monetary Item Translation Difference Account’ needs to be amortised. The Notification dated 29 December 2011 has extended the sunset date to 31 March 2020 at the first place. However, a similar change has not been made with regard to the second date. The strict legal and technical interpretation of the paragraph suggests that a company can continue using the option given in paragraph 46 till accounting periods ending on or before 31 March 2020. However, there cannot be any balance in the ‘Foreign Currency Monetary Item Translation Difference Account’, created for exchange differences arising on long-term monetary items not related to acquisition of a depreciable capital asset, post 31 March 2011. In practical terms, this means that after 31 March 2011, a company will be able to use the option given in paragraph 46 only for capitalisation of exchange differences arising on long-term monetary item related to acquisition of a depreciable asset. Other exchange differences will be immediately recognised in the P&L Account. Whilst this may be the strict legal interpretation of the paragraph, certain companies may question whether it really reflects the intention of the regulator. They may also argue that the amendment intends to extend the option given in its entirety. Hence, they can also amortise any balance in the ‘Foreign Currency Monetary Item Translation Difference Account’ till 31 March 2020. Many companies are taking this approach.
The MCA or the Institute of Chartered Accountants of India, will need to clarify the above issues.
