AS11 Amendment and implications on Corporates and Accounting

Ministry of Corporate Affairs (Central Government) under recommendation of National Advisory Committee on Accounting Standards (NACAS) amended AS11 as per powers vested on it in Section 642(1) & Section 211(3c) of the companies Act, 1956, on 31st March, 2009. The crux of the amendment is as follows, if a foreign currency monetary item (borrowing) is long term (ie) more than 12 months.

1) for Accounting period commencing from 7.12.2006 and ending with 31.03.2011 at the option of the enterprise, the enterprise can account for "Unreal" exchange gain or loss of the foreign currency monetary item at the balance sheet date (statement of financial position) in the manner set out in below

a) if the foreign currency monetary item is acquired for purchase of a depreciable capital asset then the "unreal" loss or gain accrued due to flucuation in forex rates will be capitalised along with the depreciable capital asset. The amount so capitalised should be amortised over the life time of the asset or before 31st March 2011, whichever is earlier

b) if the foreign currency monetary item is acquired for any other purpose like "Working Capital" etc then the "unreal" loss or gain accrued due to fluctuation in forex rates will be accumulated in a specific account named "Foreign Currency Monetary item Translation Difference Account" The amount so accumulated should be amortised over the life time of the foreign currency monetary item or before 31st March 2011, whichever is earlier.


This is a retrospective amendment from 7.12.2006, hence all “unreal exchange losses” booked on foreign currency monetary items prior to 7.12.206 should be treated as per clause (a) and (b) above. Changes in prior period profits due to this should be adjusted in the current year in the retained earnings. These changes should be amortised over the life time of the foreign currency monetary item or before 31st March 20011.

Impact for Enterprises
Enterprises through this amendment are being insulated from the sharp depreciation of the Rupee, which was at levels of 40.55 in June 2007, 42.8 in June 2008 and currently at levels of 48.20 against the US Dollar, this is a sharp drop of 19% since 2007 and 13% since 2008. This depreciation of Rupee was pushing up the cost of foreign currency monetary item (as repayments are more in Indian Rupee terms) impacting profitablity of the enterprises significantly. Through this amendment the Government intends to spread the impact of currency depreciation over a number of years rather than taking a hit or profit in a single year and thereby enabling enterprises to show better profit and earnings per share.
As per this amendment, impact of currency flucutions will be removed from the profit and loss account and hit directly in the networth of the company for the period prior to the current accounting year (from 17.12.2006 till 31.12.2008), and for the current year (2008-09 onwards) the impact will be spread over till 2011 and thereby improving profitability and earnings per share (stimulus to the stock market?).

For example if for the year 2006-07 unreal currency loss accounted in the books was Rs.1 crore and for the year 2007-08 it was Rs.2 crores, and for the year 2008-09 it was estimated to be Rs.1.5 crores, the accounting entry will be as follows (if the foreign currency monetary item is towards other than purchase of capital asset).

Dr. Foreign Currency Monetary item Translation Difference Account - Rs.3crores
Cr. Retained Earnings -Rs.3crores
(Being the currency loss for the prior periods of 2006-07 & 2007-08 adjusted in retained earnings)

Dr. Foreign Currency Monetary item Translation Difference Account -Rs.1.5crores
Cr. Exchange Loss -Rs.1.5crores
(Being the currency loss for the current period transferred to translation difference account as per amendment to AS11)

If in the above example if the foreign currency monetary item is towards purchase of a capital asset then the entry would be :

Dr. Fixed Assets - Rs.3crores
Cr. Retained Earnings - Rs.3crores
(Being the currency loss for the prior periods of 2006-07 & 2007-08 capitalised and adjusted in retained earnings)

Dr. Fixed Assets - Rs.1.5crores
Cr. Exchange Loss - Rs.1.5crores
(Being the currency loss for the current period transferred & capitalized to fixed assets as per amendment to AS11)

Disclosure in financial statements


ASB of ICAI has issued guidelines for disclosure of the amendments to AS11. ASB recommends that the “Foreign currency monetary item translation difference account” should be shown as a line item in the balance sheet (treatment similar to deferred tax). In case of debit balance should be shown under “investments” and if credit balance should be shown after the item “unsecured loans” as a separate line item.