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Workshop on Issues inWorkshop on Issues in
Accounting StandardsAccounting Standards
April 17, 2009
Himanshu Kishnadwala
Contractor, Nayak & Kishnadwala
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Todays AgendaTodays Agenda
AS 11
AS 1 AS 4
AS 29
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Nature of Forex Losses/gainsNature of Forex Losses/gains
1. On Forex Loans (incl FCCB, ECBs):
Utilised for acquisition of Fixed assets Outside India
Within India
Utilised for other purposes
2. On Short er! "orro#in$s, Creditors, de"tors, etc
%. &tilisation o' 'or#ard coers
. Cancellation o' For#ard Coers
*. ++ Losses$ains on o-en 'or#ard coers
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AS 11: ecent !e"e#op$entsAS 11: ecent !e"e#op$ents
Fe" 2/: +atter re'erred to 0SB (2 !eetin$s held)
0SB could not arrie at a consensus and re'erred to
Council
+arch 2/: IC0I Council could not reach a decision
In !id!arch discussions #ere held "et#een IC0I, CII
re-resentaties and 3t .Secretar4, 5OI
6ecision de'erred to Council +eetin$ in 0-ril 2/ 70C0S held a !eetin$ on 2th+arch 2/, to discuss
!odi'ication to 0S 11
IC0I o"8ected to a!end!ent o' 0S 11 #as oerruled
MCA issued notification on 31stMarch 2009
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Treat$ent of Forex %xposuresTreat$ent of Forex %xposures
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1& Forex Loans:1& Forex Loans:For ac'uisition of Fixed assets or for other purposesFor ac'uisition of Fixed assets or for other purposes
O-tion to 'ollo# 0S 11 or +C0 noti'ication
I' 0S 11 'ollo#ed:
0ll losses on loans (#hether 'or ac9uisition o' 'ixed 0ssets or
others) hae to "e taen to ; < L ac Sa!e treat!ent een 'or losses on 4ear end restate!ent
MCA notification also omits 2ndpararaph! "xpl# 1$2 in %art
& of Schedule '
hus co!-anies, (usin$ "acin$ o' le$al o-inions), a--l4in$Schedule =I 'or ca-italisin$ 'orex losses on ac9uisition o' 'ixed
assets cannot do so no#
Such co!-anies no# need to 'ollo# 0S 11 or +C0 noti'ication
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reat!ent i' +C0 o-tion exercised: Exchan$e di''erences 'or all LFC+ relatin$ to de-recia"le 'ixed
assets to "e ad(usted to the cost of the fixed assets>
6e-reciation on ad8usted cost oer the "alance li'e o' the asset> Other eli$i"le exchan$e di''erences to "e accu!ulated in a account
called: )*orei#n Currency +onetary tem -ranslation .ierence
A!c*# +FCM&,-.
0!ount accu!ulated under FC+I6 0c to "e amortised o/er
alance period of the lon term asset$liailit U, "F"
31stMarch 2011#
0"oe not applicale'or exchan$e di''erences dealt in -ara 1*
o' 0S 11 (i.e. 7et Inest!ent in a noninte$ral 'orei$n
o-eration.)
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ransitional ;roisions: Exchan$e di''erences relatin$ to de-recia"le 'ixed assets to "e
ad8usted to the cost o' the 'ixed assets>
Other eli$i"le exchan$e di''erences to "e accu!ulated in theDForei$n Currenc4 +onetar4 Ite! ranslation 6i''erence 0c
(FC+I6)
Corres-ondin$ e''ect to "e $ien to 5"6"A7 "S"'"
0dditional char$e 'or de-reciation
0!ortisation o' FC+I6
0dditional 6isclosures:
Fact o' exercisin$ the o-tion
0!ount re!ainin$ to "e a!ortised in 'uture 4ears
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1& Forex Loans:1& Forex Loans:
For ac'uisition of Fixed assets or for other purposes (For ac'uisition of Fixed assets or for other purposes (
Schedule =I allo#ed 'orex losses$ains to "e ad8usted to cost o'
the 'ixed assets onl4 i' the assets #ere ac9uired 'ro! outside
India
MCA notification does not ha/e such condition and requiresad(ustment for all assets +i#e# acquired outside &ndia or
8ithin &ndia.
Co!-anies #ho had earlier 'ollo#ed Schedule =I (rather than
0S 11) #ould hae ad8usted losses onl4 'or assets ac9uiredoutside India
o 'ollo# +C0 noti'ication, these co!-anies #ould no# hae to
$ie retros-ectie e''ect ('ro! 2?A) 'or een assets
ac9uired #ithin India corres-ondin$ e''ect to 5eneral esere
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Financial
ear
Amount
repaid
+in US-.
Amt o$s
+in
US-.
ate Amount
+s. in
la:hs
Forex
+7oss.
$ ain
+la:hs.
emar:s
2@? 1,, 2 2. Os Loan
2?A 2, 1 A.2 .2 5ain to ; < L ac
2?A A, %2. 1.@ ++ $ain to ; < L ac
2A/ %, * 1%.* (1.*) 0ctual Loss
2A/ *, * 2*. (*.) ++ Loss
+4#;0.
Loan is taen "4 the co!-an4 in Oct 2@ and is re-a4a"le in %
instal!ents Oct 2?, Oct 2A and Oct 2/.
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0ssu!in$ Loan is 'or Capital Asset acquisition
I' +C0 noti'ication a--lied, e''ectie 2?A, all 'orex $ains
losses to "e ad8usted #ith cost o' ca-ital asset.
For 2?A, $ain o' s. 1.A lahs #ill "e reduced 'ro! 'ixedassets corres-ondin$ e''ect to 5eneral esere
For 2A/, loss o' s. @.* lahs #ill "e added to the 'ixed
assets corres-ondin$ restate!ent o' loans
6e-reciation 'or 2A/ to "e re#ored "4 considerin$excess de-reciation -roided in 2?A and additional
de-reciation 'or 2A/
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0ssu!in$ Loan is 'or
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)& *n ST +orro,ings- .reditors- de+tors- etc)& *n ST +orro,ings- .reditors- de+tors- etc
Outstandin$ "alances o' de"torscreditors are
!onetar4 ite!s and #ould nor!all4 not exceed a
-eriod o' 12 !onths
+C0 noti'ication #ould there'ore not a--l4
0S 11 #ould "e a--lica"le to these ite!s
0ll exchan$e di''erences on settlement o' these ite!s
or on restatement at the 4ear end #ould there'ore "eta:en to the %7 a$c
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/0& ti#isation or cance##ation of/0& ti#isation or cance##ation of
For,ard .o"ersFor,ard .o"ers
0S 11 a--lies 'or 'or#ard contracts : Baced "4 actual transactions (-ara %@%?)
Intended 'or tradin$ or s-eculation -ur-oses (-ara %A%/)
In "oth cases a"oe, the -ro'itloss on cancellation or
on ++ is to "e char$ed to the ;L ac +C0 7oti'ication does not coer this
I' 'or#ard contracts are 'or DForecast or Bihl%roale future transactions, 0S 11 does not a--l4
o 'ollo# IC0I 0nnounce!ent o' +arch 2A in such
cases
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2& 3T3 Losses/gains on open for,ard co"ers2& 3T3 Losses/gains on open for,ard co"ers
7either 0S 11 nor +C0 noti'ication a--l4 to such ite!s
IC0I announce!ent o' +arch 2A #ould "e
a--lica"le 'or such ite!s
0s -er the announce!ent 2 o-tions: Char$in$ ++ losses to the ;L ac (no entr4 'or -ro'its)
i' not so done "4 the co!-an4, statutor4 auditor to $ie
Dappropriate disclosures in his re-ort
Such disclosures ma not amount to a qualification
Earl4 ado-tion o' 0S %
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2& 3T3 Losses/gains on open for,ard co"ers2& 3T3 Losses/gains on open for,ard co"ers
I' 0S % ado-ted oluntaril4: o 'ollo# 0S % to the extent -er!itted "4 existin$ la#s and
re$ulations
O-en deriatie contracts are to "e ++ unless the4 can "econsidered as DCash Flo# ed$e
I' treated as DCash Flo# ed$e, $ainslosses can "e taen to
DE9uit4 rather than ;L ac+for the effecti/e portion of the
hede. +normall ta:en to )Bedin eser/e a$c.* Strin$ent docu!entation necessar4 'or the sa!e
For ineffecti/e-ortion $ainslosses to "e taen to ;L ac
On closure, $ainslosses to "e trans'erred to the ;L ac
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2& 3T3 Losses/gains on open for,ard co"ers2& 3T3 Losses/gains on open for,ard co"ers
ransitional -roisions i' 0S % ado-ted Ine''ectie -ortion o' such deriatie contracts as at the
"e$innin$ o' the accountin$ -eriod is to "e ad8usted a$ainst the
o-enin$ eenue eseres
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;ara A1 o' 0S % #hich deals #ith Guali'4in$ ed$in$
Instru!ents states DThis Standard does not restrict thecircumstances in which a derivative maybe designated as a hedging
instrument, provided the conditions of para 98 are met, except for
some options.However, a non-derivative financial asset or non-
derivative financial liability maybe designated as a hedging
instrument only for a hedge of a foreign currency ris.
;ara /@(") o' 0S % de'ines Cash 'lo# hed$e as !a hedge of the
exposure to variability in cash flows that" #i$ is attributable to a particular ris associated with a recognised
asset or liability#such as all or some future interest payments on
variable rate debt$or a highly probable forecast transaction and
#ii$ could affect profit or loss.
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;ara F.1.@ o' 5uidance in i!-le!entin$ 0S % in %rd-ara
!entions the 'ollo#in$:
!%s regards foreign currency ris, &., hedge accounting can be applied
because para 8' of %S () permits a non-derivative financial asset orliability to be designated as a hedging instrument for hedge
accounting purposes for a hedge of a foreign currency ris*
Further, -ara F.2. o' 5uidance in i!-le!entin$ 0S % deals
#ith the 9uestion D+s hedge accounting permitted for a
currency borrowing that hedges an expected but not contractualrevenue stream in foreign currency*
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es, if the revenues are highly probable. nder paragraph 9/#b$
of %S () a hedge of an anticipated sale may 0ualify as a cash
flow hedge.
1or example, an airline entity may use sophisticated modelsbased on experience and economic data to pro2ect its revenues
in various currencies. +f it can demonstrate that forecast
revenues for a period of time into the future in a particular
currency are !highly probable*, as re0uired by paragraph 98 of
%S (), it may designate a currency borrowing as a cash flow
hedge of the future revenue stream. The portion of the gain or
loss on the borrowing that is determined to be an effective hedge
is recognised directly in the appropriate e0uity account until the
revenues occur.
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+C0 noti'ication re9uires co!-anies to 'ollo# either 0S 11 or
-ara @ 'or all such Forex lia"ilities
Can companies still adopt Bede Accountin as per AS 30
for these forex liailities &n other 8ords! neither AS 11 nor MCA notification is
follo8ed! ut AS 30 is adopted#
I' ed$e 0ccountin$ as -er 0S % is ado-ted, the losses 'or the
e''ectie -ortion #ould "e taen to a Ded$in$ esere he sa!e does not need to "e a!ortised, "ut reersed on
co!-letion o' the transaction
his #ould result in 'urther de'er!ent o' such ++ losses.
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Inco$e Tax I$p#icationsInco$e Tax I$p#ications
2 t4-es o' losses to "e considered: Losses on eenue account
Losses on ca-ital account
Losses on eenue 0ccount Losses can "e on settle!ent or on restate!ent
e'er recent SC decision in case o' Wood#ard 5oernor
India ;t Ltd (SC) onda Siel ;o#er ;roducts Ltd (SC)
#herein such losses are considered allo#a"le
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Inco$e Tax I$p#ications (Inco$e Tax I$p#ications (
Losses on Ca-ital 0ccount Ex-lanation to sec %0 -roides that losses$ains to "e
ad8usted to cost o' asset to the extent the same arises on
repament and for assets acquired outside &ndia For losses$ains ad8usted other than a"oe ad8ust!ents to
"e done to "loc o' assets
6e-reciation allo#a"le us %2 to "e reco!-uted accordin$l4
In case +C0 noti'ication not follo8edand losses$ainstaen to ; < L ac #hether deducti"leH Seems difficult in
/ie8 of SC decision of ,ata &ron = Steel 7td 231 &, 2>#
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e#e"ant for Inco$e Tax i$p#icationse#e"ant for Inco$e Tax i$p#ications
Section %0 o' I 0ct, 1/@1
Sutle8 Cotton +ills Ltd (SC): 11@ I 1
ata Iron < Steel Ltd (SC): 2%1 I 2A* Wood#ard 5oernor India ;t Ltd (SC)
onda Siel ;o#er ;roducts Ltd (SC)
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AS 1: !isc#osure of Accounting 4o#iciesAS 1: !isc#osure of Accounting 4o#icies
Basic 0ssu!-tions in 'inancial state!ents: 5oin$ Concern
Consistenc4
0ccrual
With !an4 industriesco!-anies 'acin$ recession,
oin concernissue !a4 need to "e addressed.
I!-ortant 'actors to "e considered: 7et #orth (een i' -ositie $oin$ concern !a4"e a''ected)
Ca-acit4 to serice de"t re-a4a"le in near 'uture
Future "usiness scenario
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AS 0: .ontingencies and %"ents *ccurring after theAS 0: .ontingencies and %"ents *ccurring after the
5a#ance Sheet !ate5a#ance Sheet !ate
hose si$ni'icant eents that occur "et#een the BSdate and date on #hich 'inancial state!ents area--roed.
2 t4-es o' eents -ossi"le: those #hich -roide 'urther eidence o' conditions that
existed at the "alance sheet date> and
those #hich are indicatie o' conditions that arosesu"se9uent to the "alance sheet date.
Contin$encies not coered "4 0S since re-lacedand no# coered "4 0S 2/
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AS 0: %"ents *ccurring after the 5a#anceAS 0: %"ents *ccurring after the 5a#ance
Sheet !ate (Sheet !ate (
Ad(ustments to assets$liailitiesD 6ecessar'or eents that pro/ide additional information
!ateriall4 a''ectin$ the deter!ination o' a!ounts relatin$ to
conditions existin$ at BS date. (e.$. a de"tor #ho has "eco!einsolent)
6ot appropriate 'or eents #hich do not relate to conditions
existin$ at BS date. (e.$. 'all in !aret alue o' inest!ents
a'ter BS date) Eents #hich do not a''ect 'i$ures stated in the 'inancial
state!ents #ould nor!all4 not re9uire disclosure in 'inancial
state!ents disclosure, however, re0uired in 3irectors4 5eport
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AS 0: %"ents *ccurring after theAS 0: %"ents *ccurring after the
5a#ance Sheet !ate (5a#ance Sheet !ate (
So!e eents re9uired to "e re'lected in BS "ecause o'statutor4 re9uire!ents or their s-ecial nature (e.$.'inal diidends -ro-osed or declared)
So!e eents !a4 indicate that the D5oin$ Concern isiolated. (e.$. drastic deterioration in o-eratin$results, unusual chan$es a''ectin$ existence or su"stratu! o' the enter-rise due to 'ire, etc).
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%ro/isionre9uired #hen:
here is a ;resent O"li$ation>
Which esults 'ro! a -ast eent>
here is Out'lo# o' resources e!"od4in$ econo!ic
"ene'its>
elia"le esti!ate can "e !ade 'or the sa!e.
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9
Present obligation as a
result of an obligatingevent?
Probable outflow?
Reliable estimate?
Provide
Possible obligation?
Disclose contingent liability
Remote?
No
Yes
NoNo (rare)
Yes
Yes
Yes
No
Yes
Do nothing
No
AS 29 -- Recognition Criteria Decision TreeAS 29 -- Recognition Criteria Decision Tree
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8uestions (8uestions (
Thank youThank you
himanshu@cnkindia com
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