CA FINAL FR NOV 2016 NMQs

Ques :-
Opportunity Ltd. purchased an equipment costing ` 24,00,000 lakhs on 1.4.2013 and the same was fully financed by foreign currency loan (US Dollars) payable in four annual equal installments. Exchange rates were 1 Dollar = ` 60.00 and ` 62.50 as on 1.4.2013 and 31.3.2014 respectively. First installment was paid on 31.3.2014. The entire difference in
foreign exchange has been capitalized. You are required to state that how these transactions would be accounted for.
Ans:-
Solution
As per para 13 of AS 11 (Revised 2003) „The Effects of Changes in Foreign Exchange Rates‟, exchange differences arising on reporting an enterprise‟s monetary items at rates different
from those at which they were initially recorded during the period, should be recognized as income or expenses in the period in which they arise. Thus, exchange differences arising on
repayment of liabilities incurred for the purpose of acquiring fixed assets will be recognized as income or expense.
Calculation of Exchange Difference:
Foreign currency loan = ` 24,00,000/60 = 40,000 US Dollars
Exchange difference = 40,000 US Dollars x (62.50-60.00) = ` 1,00,000
(including exchange loss on payment of first instalment)Therefore, entire loss due to exchange differences amounting ` 1,00,000 should be charged to profit and loss account for the year.
Note: The above answer has been given on the basis that the company has not availed the option for capilisation of exchange difference as per para 46/46A of AS 11.
However, as per para 46A of the standard, the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset.
Accordingly, in case Opportunity Ltd. opts for capitalizing the exchange difference, then the entire amount of exchange difference of ` 1,00,000 will be capitalsied to „Equipment account‟. This capitalized exchange difference will be depreciated over the useful life of the asset.
Cost of the asset on the reporting date
Initial cost of Equipment ` 24,00,000
Add: Exchange difference as on 31.3.2014 ` 1,00,000
Total cost on the reporting date ` 25,00,000