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ICAI MATTERS
Frequently Asked Questions on AS 11
Mon, 18 May 2009
Frequently Asked Questions on AS 11
notification – Companies (Accounting
Standards) Amendment Rules, 2009 (G.S.R. 225 (E) dt. 31.3.09) issued by Ministry
of Corporate Affairs

ASB Guidance in the form of FAQs on AS 11 notification – Companies (Accounting
Standards) Amendment Rules, 2009 (G.S.R. 225 (E) dt. 31.3.09) issued by Ministry
of Corporate Affairs does not form part of the Standard. The purpose of this
Guidance is to illustrate and to assist in clarifying the application of the notification.
(1) The notification uses the term ‘depreciable capital asset’. What is meant by the
term ‘depreciable capital asset’ as none of the accounting standards uses this
terminology?
Response
The notification dated 31.03.2009 issued by the Ministry of Corporate Affairs
seeks to insert paragraph 46 after paragraph 45 in the Accounting Standard (AS)
11 relating to the “The Effects of Changes in Foreign Exchange Rates”. It requires
that 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 (in respect of accounting periods commencing on or after 7th
December 2006) or reported in previous financial statements, in so far as it relates
to the acquisition of a depreciable capital asset can be added to or deducted from
the cost of the asset. The notification also requires that depreciation on such
capital asset be provided over the balance life of such an asset. The term
“depreciable capital asset” has not been used in the accounting standards or the
“Guidance Note on Terms used in Financial Statements”. The nearest term
available is “depreciable assets” in paragraph 3.2 of AS 6, reproduced below:
“Depreciable assets are assets which
(i) are expected to be used during more than one accounting period;
and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of
goods and services, for rental to others, or for administrative
purposes and not for the purpose of sale in the ordinary course of
business.”
Further paragraph 3.1 of AS 6 states: “Depreciation includes amortisation of
assets whose useful life is predetermined”.
Accordingly, in the view of the ASB, the term “depreciable capital asset” would
cover tangible fixed assets and intangible assets that are subject to depreciation,
amortisation or impairment.
(2) Would the notification cover exchange differences including those arising in
terms of paragraph 36 of the Standard which deals with the forward exchange
contracts?
Response
The notification would cover exchange differences including those arising in
terms of paragraph 36 of AS 11 which deals with the forward exchange contracts
provided such exchange differences relate to long term foreign currency monetary
items as per the notification.
(3) Which other category of long term monetary assets would be covered apart from
the depreciable capital asset? For example will this cover Fixed Deposits with a
foreign bank held for more than 12 months as well as the amounts payable for
a period exceeding 12 months?
Response
The notification covers the exchange differences arising on reporting of long term
foreign currency monetary items and would cover all the long term monetary
assets in foreign currency which have a term of 12 months or more at the date of
the origination of the asset or liability.
(4) Will the assets acquired in India by payment in foreign currency also be
covered by the notification? If this presumption is correct will it contradict the
requirements of Schedule VI to the Companies Act 1956?
Response
The notification would apply to all the depreciable capital assets which are
acquired using the long term foreign currency monetary items as no distinction is
made with regard to the place of acquisition of assets. It may be added that
Schedule VI has simultaneously been amended so as to delete the paragraph
dealing with the increase or decrease in original cost of fixed asset acquired from
a country outside India as a consequence of change in the exchange rate. This
paragraph was a part of the Horizontal form of Balance Sheet under heading
“Instructions in accordance with which assets should be made out”.
(5) The exemption provided by the notification is in respect of those items which
are covered in paragraph 15 which deals with monetary items that in substance
form part of the net investment in a non-integral foreign operation of the
enterprise. Whether the monetary items in case of integral foreign operation
will be covered by the notification?
Response
The notification specifically exempts exchange differences dealt with in
accordance with paragraph 15 of AS 11 which deals with monetary items that in
substance form part of the net investment in a non-integral foreign operation of
the enterprise. However, monetary items in the case of integral foreign operations
will be covered by the notification provided it falls under the definition of “long
term foreign currency monetary items”.
(6) How the transitional account under head ‘Foreign Currency Monetary Item
Translation Difference Account’ is to be amortised?
Response
Illustration
An example illustrating application of the amendments in AS 11 is given below:
A company borrowed US $ 100000 on 1st April 2005 which has been used for
other than acquiring depreciable assets repayable in full, after a period of 6 years.
Exchange rate on that date was $ 1 equal to Rs. 40. The company follows the
financial year as its accounting year. The details of the exchange rates and the
accounting treatment made by the company in subsequent years is as follows:
Year ending Exchange rate $
1 equal to Rs.
Accounting treatment
March 31, 2006 41 Loss of Rs. 1,00,000 recognised
in profit and loss
March 31, 2007 39 Rs. 2,00,000 gain recognised in
profit and loss
March 31, 2008 48 Rs. 9,00,000 loss recognised in
profit and loss
March 31, 2009 50 
March 31, 2010 51 (assumed) ----
March 31, 2011 52 (assumed) ----
The company has opted to follow the Companies (Accounting Standards),
Amendment Rules, 2009.
Rupees in Lakhs
Year Ending Opening
Balance
Exchange
difference
Total Amount to be
recognised in
P&L Account
Closing
Balance
Remarks
March 31, NIL (1.00) (1.00) 1.00 NIL No change
2006
March 31,
2007
NIL 2.00 2.00 2.00 NIL No change
March 31,
2008
NIL 9.00 9.00 2.25 6.75 *
March 31,
2009
6.75 2.00 8.75 2.92 5.83** Total is
amortised
over a period
of 3 years
March 31,
2010
5.83 1.00 6.83 3.41 3.42*** Total is
amortised
over a period
of 2 years
March 31,
2011
3.42 1.00 4.42 4.42 NIL Full amount
is amortised
* On 1.4.2008, Rs. 6.75 Lakhs would be credited to general reserve and debited to
Foreign Currency Monetary Items Translation Difference Account in the year
ended 31.03.2009.
** (8.75 minus 2.25 + 1/3 of Rs.2.00 lakh)
*** (5.83 minus 2.92 + 1/2 of Rs.1.00 lakh)
(7) Will exercising the option under the Companies (Accounting Standards)
Amendment Rules, 2009 be a change in the accounting policy?
Response
As the notification involves the adoption of an option available (a different
accounting policy), it will be treated as change in accounting policy and it should
be disclosed in accordance with Para 32 of AS 5, Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies.
(8) Is the option once exercised irreversible? If an enterprise does not want to
adopt the treatment as per the new paragraph, can it do so? Can it exercise the
option?
Response
As per the notification, if the option is exercised, the fact of exercise of such
option and of the amount remaining to be amortised in the financial statements of
the period in which such option is exercised and in every subsequent period so
long as any exchange difference remains unamortised should be disclosed. The
option once exercised is irrevocable.
The company has a discretion not to adopt the treatment as per the notification
and can follow the principles stated in AS 11. A decision with regard to the
exercise of the option will have to be taken in first financial statements approved
on or after the date the notification comes into force, i.e. March 31, 2009.
However, in case a company did not have any long term foreign currency
monetary items, in such accounting period (being a period commencing on or
after 7th December 2006) but such liability is incurred say in a subsequent
accounting period, i.e., the accounting period ending on 31st March 2010, it may
be possible for such a company to exercise the option in such subsequent year
ending on 31st March 2010.
(9) What will be the status of the ICAI announcement regarding derivatives? Will
derivatives also be valued on the basis of this notification or the announcement
of ICAI would continue to be applicable?
Response
The notification applies to long-term foreign currency monetary items (including
foreign currency derivatives) to which AS 11 applies. If the company has opted
for early adoption of AS 30, Financial Instruments: Recognition and
Measurement, it should continue to apply the treatment enunciated in AS 30. In
other cases, ICAI announcement dated 29.03.08 regarding derivatives will apply.
(10) Will the recognition of income and expense in accordance with the notification
be treated as an item of unusual nature referred to in paragraph 12 and 13 of
AS 5?
Response
Paragraph 12 of AS 5 requires as under:
“When items of income and expense within profit or loss from ordinary
activities are of such size, nature or incidence that their disclosure is
relevant to explain the performance of the enterprise for the period, the
nature and amount of such items should be disclosed separately.”
Paragraph 13 of the said Standard also states that although the items of income
and expense described in paragraph 12 are not extra ordinary items, the nature and
amount of such items may be relevant to users of the financial statements in
understanding the financial position and performance of an enterprise and in
making projections about financial position and performance. Paragraph 13 also
requires the disclosure of such information which is sometimes made in the notes
to financial statements.
The compliance of these paragraphs will have to be made in case the
circumstances described in the said two paragraphs are applicable to the exchange
differences dealt with by the aforesaid notification. This is a matter of judgment
by the management and the management needs to consider whether the said
paragraphs apply in the circumstances of their case.
(11) Will assets acquired from foreign currency monetary item that are not
depreciated but amortised be included?
Response
As per paragraph 3.1 of AS 6, depreciation includes amortisation of assets whose
useful life is predetermined. Hence assets acquired from long term foreign
currency monetary items that are not depreciated but amortised are covered by
notification.
(12) In case the foreign currency monetary item is not fully utilised for acquisition
of fixed assets, then will proportionate adjustment be permissible in the fixed
asset cost and balance of exchange fluctuation will be adjusted to Foreign
Currency Monetary Items Translation Difference Account?
Response
Proportionate adjustment based on actual application of funds should be done to
the fixed asset cost and ‘Foreign Currency Monetary Item Translation Difference
Account’.
(13) If the long term foreign currency monetary item is received in instalments
whether the installment received within a period of 12 months should be treated
as short term in nature?
Response
Yes, each loan installment should be treated as a separate monetary item. The
principle should be to amortise the exchange difference proportionately over the
period of the monetary item and not to carry forward any unamortised amount
beyond the settlement of the monetary item to which the exchange difference
relates. Treating the entire loan as a single monetary item would result in the
exchange difference relating to the loan instalment which is settled being
amortised in accounting periods even after such settlement.
(14) How ‘Foreign Currency Monetary Item Translation Difference Account’
should be presented in the Balance Sheet?
Response
The ‘Foreign Currency Monetary Item Translation Difference Account’ should be
shown as a separate line item in the Balance Sheet, in line with treatment given to
Deferred Tax Asset/Liability, i.e. after the head ‘Investments’ or after the head
‘Unsecured Loans’ as the case may be and separately from current assets and
current liabilities.
(15) Does this notification apply to exchange difference arising on forward
exchange contracts entered into to hedge the foreign currency risks of future
transactions in respect of which firm commitments are made or which are
highly probable forecast transactions or only to forward contracts foreign
currency items included in Para 36 of AS 11?
Response
The notification does not cover the contracts entered into to hedge the foreign
currency risks of future transactions in respect of which firm commitments are
made or which are highly probable forecast transactions. AS 30 or the
announcement issued by ICAI dated 29.3.08 will apply in such cases.
The amendment is applicable only to foreign currency items referred to in
paragraph 36 of AS 11.
(16) Whether the notification applies to non-corporate entities which are not covered
by Companies Act?
Response
The notification applies to Companies registered under the Companies Act, 1956.
In respect of all other entities, AS 11 as issued by ICAI is required to be followed.
(17) Does the notification also apply to those exchange differences which are
regarded as an adjustment to interest costs in terms of paragraph 4(e) of
Accounting Standard (AS) 16, Borrowing Costs?
Response
No. Paragraph 6 of AS 11 excludes from the scope of the Standard exchange
differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs under paragraph 4(e) of AS 16.
Paragraph 6 of AS 11 and paragraph 4(e) of AS 16 have not been amended by the
notification. Thus, the exchange differences referred to above still remain outside
the scope of AS 11 and within the scope of AS 16. Accordingly, these exchange
differences should continue to be accounted for in accordance with AS 16.
(18) Should we capitalise exchange differences arising on settlement of long term
foreign currency monetary items?
Response
As per paragraph 7.3 of AS 11, exchange differences include differences arising
out of settlement also. Hence, such differences also should be capitalised.
(19) The notification refers to the acquisition of depreciable capital assets. Will it
include the self constructed assets and acquired by other means?
Response
The term acquisition is wide enough to include self constructed assets and assets
acquired by other means in case a long term foreign currency monetary item is
incurred in relation to such acquisition.
(20) Suppose a company has got two separate long term foreign currency monetary
items; one for use in connection with acquisition of a depreciable asset and
second for use in working capital. Should the treatment suggested in the
notification be followed only for acquisition of depreciable assets?
Response
The company should capitalise the exchange difference relating to a depreciable
capital asset on the basis of the notification. The difference relating to the long
term monetary liability in respect of working capital should be adjusted through
‘Foreign Currency Monetary Items Translation Difference Account’. The
accounting treatment in the notification, if opted for, would need to be applied to
all long-term foreign currency monetary items.
(21) If capitalisation of exchange differences results in carrying value greater than
recoverable amount. Is it permissible?
Response
The provisions of AS 28, Impairment of assets, will apply in such cases.
(22) If the company exercises the option, what are the implications on current tax
and deferred tax?
Response
Where the option is not exercised by the company, the foreign exchange losses
and gains would continue to be treated as per the present practice for determining
the current tax liability. However, the accounting treatment as per the option in
the notification may give rise to timing differences under AS 22, Accounting for
Taxes on Income.
Adjustment to the general reserves should be made on a net of tax basis. This is
supported by the approach taken by the ICAI in other cases. Thus, the deferred tax
asset/liability arising in the event of the option being exercised is to be recognised
against the corresponding net adjustment to the general reserves.
(23) What are the disclosures to be furnished in the financial statements if the
option is exercised?
Response
The exercise of the option will be a change in accounting policy. This would
require a disclosure as per the requirements of Paragraph 32 of AS 5 apart from
the following additional disclosures.
Additional disclosures are:
a) That the company has chosen to avail the option.
b) Amount of amortisation charged to the Profit and Loss Account
c) Amount remaining to be amortised in financial statements of the period in
which such option is exercised and in every subsequent period so long as
the exchange differences remain unamortised.
d) Comparative figures should be furnished based on last audited figures.
e) The effect of adjustment (relating to amounts previously recognised) made
through general reserve or if no balance is available through the balance in
opening surplus/deficit in Profit and Loss Account.
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