Capitalisation of forex gain loss for asset

Capitalisation of forex gain loss for asset

A foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign currency, and that currency fluctuates relative to their home currency. It can create differences in value in the monetary assets and liabilities, which must be recognized periodically until they are Estimated Reading Time: 7 mins 18/03/ · 4) Answering to the Fourth point, Since foreign currency borrowings will be monetary item as defined in Ind-As 21 and hence it will be re-measured at closing exchange rates (as per para a of Ind-As 21) and difference will be debited/ credited to the PL of that period, However if the foreign currency borrowing has been taken for some eligible “Qualifying Assets” then exchange loss can be capitalized 30/01/ · Therefore, in essence, such exchange loss is neither allowed to be added to block of asset nor allowed as revenue expenditure as the same is attributable for purchase of capital assets

Foreign Currency Borrowing- Exchange Loss Capitalization: Ind-As/ IFRS

There have been many controversies in the field of direct taxes revolving around loss on exchange fluctuation for liability incurred to purchase assets in India and outside India. More specifically in a scenario where Rupee is continuously depreciating as against Dollar since last few years.

Treatment for tax purposes is guided by section 43A of the Income tax Act, Act which permits capitalization of realized foreign exchange fluctuation loss on liability incurred for acquisition of assets outside India. However, from an Accounting perspective, Para 46A of Accounting Standard 11 'The Effects of Changes in Foreign Exchange Rates' permits capitalization of exchange difference on foreign borrowings to the cost of the depreciable assets irrespective of asset being acquired in India or outside India.

Therefore an important point marking distinction in accounting and direct taxes is exchange capitalisation of forex gain loss for asset capitalized as per books towards liability for domestically acquired assets is not allowed to be capitalized from direct tax perspective in absence of any specific provision under the Act. Further, recently notified Income Computation and Disclosure Standards ICDS applicable from AY and onwards is also silent on said aspect. Also, judicially the position is not settled and majority of decision are against the assessee.

Therefore, capitalisation of forex gain loss for asset, in essence, such exchange loss is neither allowed to be added to block of asset nor allowed as revenue expenditure as the same is attributable for purchase of capital assets. As no deduction neither deprecation on such loss is allowed, it eventually results in dead loss for the companies entailing approx. In recent past wherein Rupee is deprecating, the provisions of section 43A has motivated business houses to purchase assets from outside India rather than domestically from indigenous manufacturers.

However, it seems that not allowing exchange loss on liability incurred for purchase capital asset in India is not the intent, capitalisation of forex gain loss for asset. Also, Government at Centre has already clarified its stand to rationalize provisions of Income tax Act. Moreover, during last few years Rupee has depreciated significantly against the US Dollar severely impacting the industry particularly those who have exposure to External Commercial Borrowings ECBs and Foreign Currency Convertible Bonds FCCBs, capitalisation of forex gain loss for asset.

Therefore it is expected that Section 43A would be amended to allow Capitalization of such foreign exchange loss even for domestically acquired asset. This will set direct tax laws in line with Government policies to boost Indian Economy and rationalize the provisions of Income tax as a way forward to build a better brand Capitalisation of forex gain loss for asset. The Author is Partner; and Mr. Sign In. Home Magazine Economy Corporate Markets Money Industry Technology Opinion photos Videos Specials.

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Foreign Exchange Gain or Loss

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Capitalisation of FOREX Differences

18/03/ · 4) Answering to the Fourth point, Since foreign currency borrowings will be monetary item as defined in Ind-As 21 and hence it will be re-measured at closing exchange rates (as per para a of Ind-As 21) and difference will be debited/ credited to the PL of that period, However if the foreign currency borrowing has been taken for some eligible “Qualifying Assets” then exchange loss can be capitalized A foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign currency, and that currency fluctuates relative to their home currency. It can create differences in value in the monetary assets and liabilities, which must be recognized periodically until they are Estimated Reading Time: 7 mins 30/01/ · Therefore, in essence, such exchange loss is neither allowed to be added to block of asset nor allowed as revenue expenditure as the same is attributable for purchase of capital assets