The rupee has appreciated 10-11 per cent against the dollar in recent times. Accounting Standard (AS-11) of the Institute of Chartered Accountants of India (ICAI) governs accounting of foreign currency transactions and translations. Those who have long-term loans in dollar such as external commercial borrowings (ECBs) have to book huge gains on account of this fluctuation, when re-stating the balance-sheet. Is this correct?

The rupee appreciation in the past few weeks was very fast and it is difficult to assume that the appreciation will sustain in the long run. How do we proceed to simultaneously comply with the standard and recognise the currency volatility? We have to be prudent while recognising income and booking losses. The gain on account of the appreciation may not be sustainable, and hence is it prudent to recognise the same in the profit and loss (P&L) account? Can it be a good practice, not to recognise the income and pass it on to an exchange risk administration reserve to meet future liabilities? Is AS-11 equipped to meet this scenario?

Prudence is no longer an objective of most accounting framework. Fair presentation is. Therefore, it is important that assets and liabilities are represented at fair values. In the case of forex loan, fair presentation would be to account for the loan at the exchange rate prevailing on the balance-sheet date. As a corollary, the corresponding gain/loss is recognised in the `profit and loss’ account (where else can it go?).

It would be incorrect not to recognise the gain, since it would tantamount to creating a secret reserve. It is also not appropriate to suggest that the gain is not being recognised, since exchange rates can cause the reverse moment in the future. What if they do not? Accounting cannot be based on prediction.

Just another point, if the loan was used for financing a fixed asset, then the exchange difference may very well be termed as a borrowing cost under AS-16 and to that extent the same may be capitalised or de-capitalised.


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