8/6/2019 AS-II

1/4

May

31

AS 11 -The Effects of Changes in Foreign Exchange Rates

Extension of sunset date in transitional provisionsPosted In Accounting |No Comments

On 31 March 2009, the Central Government added a new paragraph in the transitionalprovisions to AS 11 The Effects of Changes in Foreign Exchange Rates, notified under theCompanies (Accounting Standard) Rules, 2006 (as amended). The paragraph provided thatin respect of accounting periods commencing on or after 7 December 2006 and ending on or

before 31 March 2011, a company can chose to adopt the following treatment as an alternateto the immediate recognition of exchange differences arising on long-term foreign currencymonetary items:

i. If the long-term foreign currency monetary item was related to acquisition of a depreciable

capital asset, exchange differences arising on such item should be added to or deducted fromthe cost of the asset and depreciated over the life of the asset.

ii. If the long-term foreign currency monetary item was related to other than an acquisition ofa depreciable capital asset, exchange differences thereon should be accumulated in theForeign Currency Monetary Item Translation Difference Account and amortized over thelife of the monetary item but not beyond 31 March 2011.

The transitional provision required the option to be applied for all long-term foreign currencymonetary items, except monetary items that in substance form part of a companys netinvestment in a non-integral foreign operation. Further, the option was needed to be appliedfrom the date the said transitional provision came into effect and the option one selected wasirrevocable.

Our Supplement to Assurance Eye: Amendment to AS /1, issued in April 2009 andAssurance Eye for the months of May and June 2009 provide our perspectives on variouspractical issues arising from the transitional provisions to AS 11.

Main changes

The central government, vide notification dated 11 May 2011 to be published in the OfficialGazette of India, has decided to amend AS 11 and extend the applicability of the abovetransitional provisions by one more year. For this purpose, the words in respect of accounting

periods commencing on or after 7 December 2006 and ending on or before 31 March 2011have been substituted with the words in respect of accounting periods commencing on orafter 7 December 2006 and ending on or before 31 March 2012. Besides this, no otherchange has been made in the paragraph.

Practical issues and perspectives

The practical application of this amendment is expected to give rise to certain questionswhich will need to be debated by companies internally, with auditors and legal/ accounting

professionals. In certain matters, additional inputs may be needed from the Ministry ofCorporate Affairs (MCA) and/ or the Institute of Chartered Accountants of India (ICAI).This Supplement to Assurance Eye provides an overview of key issues that may arise in

practical application of the amendment. This supplement also gives our perspectives andpoints of view on those issues. However, this should not be treated as a formal guidance onthe matter, as final views on these issues can be taken only by the regulators. We recommend

that the MCA/ ICAI provide guidance on these issues.

http://taxguru.in/accounting/11-effects-foreign-exchange-rates-extension-sunset-date-transitional-provisions.htmlhttp://taxguru.in/accounting/11-effects-foreign-exchange-rates-extension-sunset-date-transitional-provisions.htmlhttp://taxguru.in/category/accounting/http://taxguru.in/category/accounting/http://taxguru.in/accounting/11-effects-foreign-exchange-rates-extension-sunset-date-transitional-provisions.htmlhttp://taxguru.in/accounting/11-effects-foreign-exchange-rates-extension-sunset-date-transitional-provisions.html

8/6/2019 AS-II

2/4

In the transitional provisions to AS 11, the date of 31 March 2011 has been used at twoplaces: one for the date range during which the option given can be used and the second tospecify the period upto which the balance in the Foreign Currency Monetary ItemTranslation Difference Account, created for exchange differences arising on long-termforeign currency monetary items not related to acquisition of a depreciable capital asset,

needs to be amortized. The notification dated 11 May 2011 has replaced the date of 31March 2011 with 31 March 2012 at the first place. However, a similar change has not

been made with regard to the second date. How can a company resolve this inconsistency?

A strict legal and technical interpretation of the paragraph, after considering the amendment,suggests that a company can continue using the option given in the transitional provisions tillaccounting periods ending on or before 31 March 2012. However, there cannot be any

balance in the Foreign Currency Monetary Item Translation Difference Account post 31March 2011. In practical terms, this means that after 31 March 2011, a company will be ableto use the option given in the above paragraph only for capitalization of exchange differencesarising on long-term foreign currency monetary item related to acquisition of depreciablecapital assets. However, exchange differences arising on other items will be charged to profit

and loss immediately.While the above appears to be the strict legal interpretation of the paragraph; however, onemay question whether it truly reflects the intention of the regulator for the amendment. Thesupporters of this view may argue that the regulator intends to extend the option given in itsentirety. Hence, they can also amortize any balance in the Foreign Currency Monetary ItemTranslation Difference Account till 31 March 2012. While this argument is attractive, theadoption of this view may involve potential legal challenges without proper amendment inAS 11. Hence, it is important that a company consults legal professionals, before taking thisview.

ABC Limited (the company) has 31 March yearend. The company has been using the option

given in AS 11 to capitalize/ defer and amortize the exchange differences arising on long-term monetary items, since AS 11 was originally amended in 2009. The company has notauthorized its financial statements for the year ended 31 March 2011 for issue till the dateof notification, i.e., 11 May 2011. The company has the following issues regarding theamendment:

(i) Can it consider the impact of the amendment in its financial statements for the yearended 31 March 2011 to amortize the balance in the Foreign Currency Monetary ItemTranslation Difference Account till 31 March 2012?

(ii) If the answer to issue (i) is yes, should the amortization be changed prospectively orretrospectively?

The option, when originally added to AS 11 in March 2009, if selected was required to beapplied retrospectively from accounting periods commencing on or after 7 December 2006.The amendment made in May 2011 only changes the sunset date from 31 March 2011 to 31March 2012. Keeping this in view, we believe that if a company using this option has notauthorized its financial statements for issue on the date of notification, i.e., 11 May 2011, itwill need to consider the impact of the amendment in its financial statements for the yearended 31 March 2011.

The notification does not provide any guidance on whether a company should apply thechange retrospectively or prospectively. In the absence of such guidance, the following twoviews are likely:

a. Post this amendment, AS 11 uses words in respect of accounting periods commencing on

or after 7 December 2006 and ending on or before 31 March 2012. Hence, the companyshould compute the cumulative adjustment amount retrospectively from 7 December 2006.

8/6/2019 AS-II

3/4

b. AS 11 only requires the option to be applied retrospectively. However, it does not specifyas to how amortization of the Foreign Currency Monetary Item Translation DifferenceAccount should be calculated. Generally any change in the amortization of items such asfixed assets and intangible assets is applied prospectively from the period of change. Hence,the company should amortize any balance in the Foreign Currency Monetary Item

Translation Difference Account as at 1 April 2010 and any subsequent differences arisingduring the period over the two years ended 31 March 2011 and 31 March 2012.

A company whose financial statements for the year ended 31 March 2011 were authorized forissue before the date of notification, i.e., 11 May 2011, will not have any balance in theForeign Currency Monetary Item Translation Difference Account at the inception of theyear 2011-12. Further, it will need to amortize the entire difference arising in the year ending31 March 2012 during that year itself. Hence, the amendment made in May 2011 is not likelyto impact accounting for exchange differences arising on long-term foreign currencymonetary item not related to acquisition of a depreciable capital asset, in the annual financialstatements of the company. However, it is likely to impact quarterly financial results of thecompany to be published during the year ended 31 March 2012.

Whether amendment is just an extension of the existing option or it is a new irrevocableoption? Hence, if a company has not used the option given in AS 11 earlier, can it now opt touse the option given in AS 11 and vice versa?

The amendment merely extends the sunset date of 31 March 2011 given in the transitionalprovisions to 31 March 2012. Hence we believe that it is not possible to treat this extension asa new option. Hence, if a company has not used the option given in AS 11 earlier, it cannotopt to use the option given in AS 11 at this stage. Similarly, a company that has previously

been using this option cannot opt out of the same

What disclosures should be made in the financial statement?

Paragraph 46 of AS 11 states, If the option stated in this paragraph is exercised, disclosureshall be made of the fact of such exercise of such option and of the amount remaining to beamortized in the financial statements of the period in which such option is exercised and inevery subsequent period so long as any exchange difference remains unamortized.

Hence company should make following disclosures in the financial statement:

(a) The fact of availment of option till 31 March 2012 (and the change from 31 March2011 to 31 March 2012)

(b) Amount remaining to be amortized

(c) Whether change in the amortization of the Foreign Currency Monetary Item Translation

Difference Account arising due to the date extension is calculated prospectively orretrospectively.

Whether this amendment is in line with notified Ind-AS 21 The Effects of Changes inForeign Exchange Rates?

No, the amendment is not the same as that under Ind-AS 21. For example, Ind-AS 21 doesnot differentiate between long-term foreign currency monetary items related to acquisition ofdepreciable asset and other long-term items. Rather, it states that a company using this optionwill recognize and accumulate exchange differences arising on restatement all long-termforeign currency monetary items, directly in equity and then amortize the same over the lifeof the item, in an appropriate manner. Further, unlike the amendment, Ind-AS 21 does not lay

down any fixed sunset date.

8/6/2019 AS-II

4/4

How this amendment will apply to a company having financial year ending other than 31March, e.g., to a company whose year-end is June 30?

Post this amendment, AS 11 uses words in respect of accounting periods commencing on orafter 7 December 2006 and ending on or before 31 March 2012. However, the meaning ofwords accounting period is not clear. Keeping this in view, the following two views seem

likely on this matter:

(i) The accounting period refers to financial year. Hence, a company having 30 Juneyear end can use this option only till 30 June 2011.

(ii) The accounting period refers not only to complete financial year; rather, it may beinterpreted to include even a part of financial year. Hence, a company having 30 June yearend can continue to use this option till the quarter ended 31 March 2012. However,considering the specific sunset date given in AS 11, it cannot have any unamortized amountin the Foreign Currency Monetary Item Translation Difference Account after 31 March2012. Nor it can capitalize exchange differences to the cost of fixed assets, after 31 March2012.

A similar view will apply in case of other year ends as well.