IND AS 23: Clarification of Borrowing Cost with regards to foreign exchange loss/ Gain

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

1. IAS 23 provides no guidance as to how the adjustment prescribed in paragraph 6(e) is to be determined. Paragraph 6A is added in Ind AS 23 to provide guidance.
2. The following paragraph numbers appear as Deleted in IAS 23. In order to maintain consistency with paragraph numbers of IAS 23, the paragraph numbers are retained in Ind AS 23 :

(i) paragraph 6(a) (ii) paragraph 6(b)

3. The transitional provisions given in IAS 23 have not been given in Ind AS 23, since all transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards.

This article has been shared by CA Deepak Rathore. He can be reached at [email protected]