Deepak Gupta | Aug 29, 2016 |
IND AS 23: Clarification of Borrowing Cost with regards to foreign exchange loss/ Gain
As per Para 6 Borrowing costs may include:
(a) Interest expense calculated using the effective interest method as described in Ind AS 39 Financial Instruments: Recognition and Measurement;
(b) [Refer to Appendix 1]
(c) [Refer to Appendix 1]
(d) Finance charges in respect of finance leases recognised in accordance with Leases; and
(e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
6A With regard to the exchange difference required to be treated as borrowing costs in accordance with paragraph 6(e), the manner of arriving at the adjustments stated therein shall be as follows:
(i) The adjustment should be of an amount that is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing
in functional currency when compared to the cost of borrowing in a foreign currency.
(ii) Where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the
Settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment
to interest.
Crux: If the exchange loss arising due to restatement of foreign liability is less than the interest-saving amount (The difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency), then the entire amount is to be considered as Borrowing cost.
On the other hand, If the exchange loss arising due to restatement of foreign liability exceeds interest saving amount (The difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency), then we need to calculate the amount of interest saving component in the foreign loss.
When there is foreign exchange gain in subsequent years, the same should be adjusted to the extent of loss previously recognised as an adjustment to Interest Cost
Let us have an example to understand the abovementioned paragraphs
Practical Example
ANK Limited (an Indian Company) has imported goods worth $ 1,00,000 from the US at the rate of 65( Year -2014) by taking a foreign currency loan. The interest rate is 6% P.A at the end of the year. An equivalent borrowing in INR would carry an interest rate of 14% P.A.The exchange rates for the years are given below:
March 2015- 1$ – Rs 70
March 2016- 1$ – Rs 64
FY 2014-15
Calculation of Foreign Exchange Loss:
Particular | Amount |
Foreign currency loan recognised at the time of import of goods | 65,00,000 |
Foreign currency loans recognised at the end of the period | 70,00,000 |
Foreign Exchange loss | 5,00,000.00 |
Calculation of Interest Saving Component:
Particular | Amount |
Foreign currency loans recognised at the end of the period | 70,00,000 |
Interest rate as Foreign rate(70 lacs @ 8%) | 5,60,000 |
Interest rate as Local currency Borrowing rate( 70 lacs @ 14%) | 9,80,000 |
Interest Saving Component | 4,20,000 |
Adjustment to Borrowing Cost:
Particular | Amount |
Total Foreign Exchange loss | 5,00,000 |
Foreign Exchange loss is regarded as an adjustment to interest loss | 4,20,000 |
Foreign Exchange loss | 80,000 |
Statement of Profit and Loss Account for FY 2014-15
Particular | Amount |
Interest Cost (560000+4,20,000) | 9,80,000 |
Foreign Exchange Loss | 80,000 |
Total Expenses | 10,60,000 |
Para Ref: 6A(i) The adjustment should be of an amount that is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency.
FY 2015-16
Particular | Amount |
Foreign currency loans recognised at the end of the period (2016) | 70,00,000 |
Foreign currency loans recognised at the end of the period | 64,00,000 |
Foreign Exchange Gain | 6,00,000 |
Statement of Profit and Loss Account for FY 2015-16
Particular | Amount |
Interest Income ( to the extent of earlier adjustment) | 4,20,000 |
Foreign Exchange Gain | 1,80,000 |
Total Income | 6,00,000 |
Para Ref: 6A(ii) :
Where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest.
Appendix 1
Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences, if any, between the Indian Accounting Standard (Ind AS) 23 and the corresponding International Accounting Standard (IAS) 23, Borrowing Costs.
Comparison with IAS 23, Borrowing Costs
(i) paragraph 6(a)
(ii) paragraph 6(b)
This article has been shared by CA Deepak Rathore. He can be reached at [email protected]
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