Ind AS Refresher Course Series Association of Finance and Tax Professionals Gyan Ki Baat and Webtel In association with with CA Gaurav Saraf Day 2 Knowledge Partner Brought to you by
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Ind AS Refresher Course Series
Association of Finance and Tax Professionals
Gyan Ki Baat and WebtelIn association with
with CA Gaurav Saraf
Day 2
Knowledge Partner
Brought to you by
Presentation of Financial Statements
Inventories
Income Taxes
Borrowing Costs
Discrption04
Ind AS 1
Today’s coverage
CA GAURAV SARAF
Ind AS 2
Ind AS 12
Ind AS 23
Some TextHere
Some TextHere
An overall perspective
CA GAURAV SARAF
The Financial Accounting Standards Board (FASB)
The International Accounting Standards Board (IASB)
The Australian Accounting Standards Board (AASB)
US GAAP - ASCs
IFRS
EU adopted IFRS
SFRS
Ind AS were notified by the MCA in 2015
Ind AS
The CG prescribes under section 133 of the Companies Act, the Accounting Standards recommended by the ICAI, in consultation with the NFRA
ICAI regularly monitors development globally and plays a critical role in formulating new Ind AS or making amendments to existing Ind AS.
Ind AS 1 :Presentation of
Financial Statements
TATTVAM & Co.
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Fair presentationand compliance
with Ind ASs
Financial statements are required
to be presented fairly as set out in
the framework and in accordance
with Ind AS and are required to
comply with all requirements of
Ind ASs.
Presentationconsistency
An entity is required
to retain
presentation and
classification from
one period to the
next.
Accrual basis ofaccounting
Entities are required
to use accrual basis
of accounting except
for cash flow information.
Going concern
Financial statements are required to
be prepared on a going concern
basis (unless entity is in liquidation
or has ceased trading or there is an
indication that the entity is not a
going concern).
Overall Considerations
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
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tatem
ents
Materiality andaggregation
Each material class of similar
assets and items of dissimilar
nature or function is to be
presented separately.
Comparativeinformation
At least 1 year of
Comparative information
(unless impractical).
Offsetting
Offsetting of assets and liabilities
or income and expenses
are not permitted unless
required by other Ind ASs.
Overall Considerations
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Components Of Financial Statements
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF PROFIT OR LOSS ANDCOMPREHENSIVE INCOME FOR THE PERIOD
STATEMENT OF FINANCIAL POSITION
STATEMENT OF CASH FLOWS
NOTES TO ACCOUNTS
A complete set of financial statements comprises:
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
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tatem
ents
Statement Of Financial Position
Current Assets
▪ Expected to be realised in, or
▪ is intended for sale or
▪ consumption in the entity’s
▪ normal operating cycle
▪ Held primarily for trading
▪ Expected to be realised within 12 months
▪ Cash or cash equivalents.
Current Liabilities
▪ Expected to be settled in the entity’s normal operating cycle
▪ Held primarily for trading
▪ Due to be settled within 12 months
▪ The entity does not have the unconditional right at the end of the reporting period to defer settlement of the liability for at least 12 months.
Present current and non-current items separately; or
Present items in order of liquiditySTRUCTURE & CONTENT
TATTVAM & Co.
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Balance Sheet of Maruti Suzuki India Limited
as at 31 March 2020
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
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tatem
ents
Statement Of Comprehensive Income
An entity presents all items of income and expense recognised in a period, either:‒ In a single statement of comprehensive income‒ In two statements: a statement displaying components of profit or loss (separate
income statement) and a second statement of other comprehensive income.
Line items within other comprehensive income are required to be categorised into two categories:
‒ Those that could subsequently be reclassified to profit or loss‒ Those that cannot be re-classified to profit or loss.
Information required to be presented in the:‒ Statement of comprehensive income is defined in Ind AS 1.82-87‒ Profit or loss as defined in Ind AS 1.88‒ Other comprehensive income in Ind AS 1.90-96‒ Further information required to be presented on the face or in the notes to the Statement of
Comprehensive Income is detailed in Ind AS 1.97.
STRUCTURE & CONTENT
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Statement of Profit and Loss
of Maruti Suzuki India Limited
for the year ended 31 March 2020
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Statement Of Changes in Equity
Total comprehensive income for the period, showing separately attributable to owners or the parent and noncontrolling interest
For each component of equity, the effects of retrospective application/restatement recognised in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
The amounts of transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners
STRUCTURE & CONTENTInformation required to be presented:
For each component in equity a reconciliation between the carrying amount at the beginning and end of the period, separately disclosing each change
Amount of dividends recognised as distributions to owners during the period (can alternatively be disclosed in the notes)
Analysis of each item of OCI (alternatively to be disclosed in the notes).
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Statement of Changes in Equity
of Maruti Suzuki India Limited
for the year ended 31 March 2020
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Statement of Cash Flows
of Maruti Suzuki India Limited
for the year ended 31 March 2020
Provides users of financial statements with cash flow information –refer to Ind AS7 Statement of Cash Flows.
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
cial S
tatem
ents
Notes To The Financial Statements
Statement of compliance with Ind ASs
Significant accounting policies, estimates, assumptions, and judgements must be disclosed
Additional information useful to users understanding/ decision making to be presented
STRUCTURE & CONTENT
Information that enables users to evaluate the entity’s objectives, policies and processes for managing capital.
TATTVAM & Co.
CA GAURAV SARAF
Ind
AS
1 : Presen
tatio
n o
f Fin
an
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tatem
ents
Other Considerations
Financial statements must be clearlyidentified and distinguished fromother information in the samepublished document, and mustidentify:• The level of rounding• Name of the reporting entity• Whether the financial statementscover the individual entity or a groupof entities• The statement of financial positiondate (or the period covered)• The presentation currency used.
Identification Of TheFinancial Statements
A third statement of financial positionrequired when an entity changesaccounting policies, or makesretrospective restatements orreclassifications:• Opening statement is only required
if impact is material• Opening statement is presented as at
the beginning of the immediatelypreceding comparative periodrequired by Ind AS 1 (e.g., if anentity has a reporting date of 31December X2 statement of financialposition, this will be as of 1 JanuaryX1)
• Only include notes for the thirdperiod relating to the change.
Third Statement Of Financial Position
• Accounts presented at least annually• If longer or shorter, entity mustdisclose that fact.
Reporting Period
Ind AS 2 :Inventories
TATTVAM & Co.
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Definition & Scope
EXCLUSION
All inventories except:
• Financial instruments (Ind AS 32 Financial Instruments: Presentation & Ind AS 109 Financial Instruments)
• Biological assets (Ind AS 41 Agriculture).
DOES NOT APPLY TO
measurement of inventories held by:
• Producers of agricultural and forest products measured at NRV
• Minerals and mineral products measured at NRV
• Commodity brokers who measure inventory at fair value less costs to sell.
DEFINITION
Held for sale in ordinary course of business
• In the process of production for such sale
• In the form of materials or supplies to be consumed in the production
process or in the rendering of services.
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Measurement
Initial Measurement
At cost where cost comprises of cost of
purchase, cost of conversion and other costs
Lower of cost or net realizable value (NRV), where,
NRV = Estimated selling price in the ordinary
course of business (-) the estimated cost of
completion (-) the estimated costs necessary to
make sale
Subsequent Measurement
20
Cost of Conversion
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Measurement
Cost of Conversion
Cost of Purchase
Other Costs
Cost of ConversionCost specifically attributable to units of production, systematic allocation of fixed & variable production overheads
Cost of Purchase
Purchase price, import duty and other taxes (non recoverable), transport,
handling & other costs directly attributable to acquisition
Other Costs
Costs incurred in bringing the inventory to their present location & condition
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Example
Costs incurred in bringing inventories to their present location and condition
A retailer purchases finished goods and stores them in a warehouse before delivery to its retail stores. Theretailer transfers finished goods between internal warehouses and retail stores, incurring relatedtransportation costs. The retailer incurs storage costs for the warehouse, such as rental, depreciation andutilities.
a) Should these costs be included in inventory or expensed as incurred?b) How should the retailer account for intermediate warehouse costs?c) How should the retailer account for the intermediate transportation costs between different internal
warehouses and from the internal warehouses to its retail stores?
Solution
Intermediate storage costs, transportation costs between internal warehouses and transportation costs to the retail stores represent an unavoidable part of the supply chain in getting inventories to their present location and condition and are generally included in the cost of inventory. They are part of the normal business model and are incurred to get the inventories to their first point of sale.
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Recognition as an expense
Abnormal Costs
Abnormal amount of waste materials, labour or other production cost
Storage Costs
Storage cost unless those form part of production process
Administration overhead
Administration overhead that are not directly attributable
Selling cost
Selling cost do not form part of inventory costs
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Cost Formulas
For interchangeable items, either:
− FIFO
− Weighted average cost
For non-interchangeable items:
− Specific identification
Retail method
Often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.
Standard cost methodTakes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revisedin the light of current conditions.
Prohibited Formula
-Use of LIFO is prohibited.
Measurement Techniques
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Illustration
The following is relevant information for entity A:
▪ Full capacity is 10,000 labour hours in a year and normal capacity is 7,500 labour hours in a year.
▪ Actual labour hours for current period are 6,500 hours.
▪ Total fixed production overhead is ₹ 1,500 and total variable production overhead is ₹ 2,600.
▪ Total opening inventory is 2,500 units and total ending inventory is 2,300 units.
▪ Total units produced in a year are 6,500 units, total units sold in a year are 6,700 units.
The cost of inventories is assigned by using FIFO cost formula.
CA GAURAV SARAF
Ind
AS
2 : In
ven
tories
Solution
Management should allocate fixed overhead costs and variable overhead costs to units produced at a rate of ₹ 0.2 per hour (1,500/7,500) and ₹ 0.4 per hour respectively.
Therefore, fixed production overheads allocated to 6,500 units produced is ₹ 1,300 (6,500 x ₹ 0.2).
The remaining ₹ 200 of overheads incurred that remains unallocated is recognised as an expense.
The amount of fixed overhead allocated to inventory is not increased as a result of low production by using normal capacity to allocate fixed overhead.
Variable production overhead absorption rate: ₹ 0.4 per hour (₹ 2,600/6,500)The above rate results in the allocation of all variable overheads to units produced during the year.
As each unit has taken 1 hour to produce (6,500 hours/6,500 units produced), total fixed and variable production overhead recognised as part of cost of inventory is: 2,300 x 1 x (₹ 0.2 + ₹ 0.4) = ₹ 1,380
The remaining ₹ 2,720 (₹ 1,500 + ₹ 2,600 - ₹ 1,380) is recognised as an expense in the income statement as follows:
Absorbed in cost of goods sold (FIFO basis) (6,500 – 2,300) = 4,200 x ₹ 0.6 2,520
Unabsorbed fixed overheads – also included in cost of goods sold 200
Total 2,720
Ind AS 12 :Income Taxes
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Scope
This Standard shall be applied in accounting for income taxes.
For the purposes of this Standard, income taxes include:► all domestic and foreign taxes which are based on taxable profits► taxes, such as withholding taxes, which are payable by a subsidiary, associate or jointventure on distributions of profits to the reporting entity.
This Standard does not deal with :► the methods of accounting for government grants► investment tax creditsHowever, this Standard deals with the accounting for temporary differences that may arisefrom such grants or investment tax credit.
Investment tax credits are not defined in Ind AS 12. Investment tax credits can take different formsand be subject to different conditions. Sometimes a tax credit is given as a deductible expense incomputing the entity's tax liability, and sometimes as a deduction from the entity's tax liability,rather than as a deductible expense. In some cases, the value of the credit is chargeable to incometaxes and in others it is not.For example, the state government offers an investment tax credit of 30 percent for investments insolar, fuel cell and small wind technologies.
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Case Study
Identify whether the following taxes are covered under the scope of Ind AS 12
Description
Tonnage Tax
Withholding Taxes
Dividend Distribution Tax
Investment Tax Credits
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Current and Deferred Taxes
The timing of the recognition of transactions for the purpose of measuring the taxable profit is governed by the application of tax laws which might prescribe accounting treatment different from that used in financial statement.
Deferred taxes is purely an accounting concept.
DeferredTax
Tax consequences which are expected to become or form part of legal assets or liabilities in a future period
Current Tax
Tax consequences that are legal assets
or liabilities at the reporting date
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Current Taxes – Recognition and Measurement
Recognition
• Recognise liability for unsettled portion of tax expense• Recognise an asset to the extent amounts paid exceed amounts due• Tax loss which can be used against future taxable income can be recognised as an asset
(deferred tax asset)
Measurement
• Measure the asset/liability using the tax rates that are enacted or substantially enacted at the reporting date.
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Definitions
Temporary difference:Difference between the carrying amount of an asset/liability and its tax base.
Tax base of a liability:Is it’s carrying amount Less any amount that will be deductible for tax purposes in respect of the liability in future periods.
Tax base of an asset:• Is the amount that will be deductible for tax purposes against any taxable economicbenefits that will flow to the entity when it recovers the carrying amount of the asset• If those economic benefits will not be taxable, the tax base of the asset is equal to itscarrying amount.
Tax base of income received in advance• Is it’s carrying amount• Less any revenue that will not be taxable in the future.
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Temporary Difference
Taxable temporary differences will result in taxable amounts in future when the carrying amount of an asset is recovered or liability is settled.
Deductible temporary differences will result in deductible amounts in future when the carrying amount of an asset is recovered or a liability is settled.
Deferred Tax Liability Deferred Tax Assets
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Deferred Tax
Recognise liabilities for all taxabletemporary differences, except to the extent itarises from:
• Initial recognition of goodwill• Initial recognition of an asset/liability that
does not affect accounting or tax profit andthe transaction is not a businesscombination
• Liabilities from undistributed profits frominvestments in subsidiaries, branches andassociates, and interests in joint ventureswhere company can control the timing ofthe reversal.
Deferred tax liabilities
Recognise for deductible temporary differences, unused tax losses,unused tax credits to the extent that taxable profit will be availableagainst which the asset can be used, except to the extent it arises fromthe initial recognition of an asset/liability that:
• Is not a business combination; and• does not affect accounting/tax profit.
Recognise for deductible temporary differences arising frominvestments in subsidiaries and associates to the extent it is probablethe temporary difference will reverse in the foreseeable future andthere will be available tax profit to be utilised.
A deferred tax asset is recognised for the carry forward of unused taxlosses and unused tax credits to the extent that it is probable that futuretaxable profits will be available (i.e. the entity has sufficient taxabletemporary differences or there is convincing other evidence thatsufficient taxable profits will be available against which the unused taxlosses or unused tax credits can be utilised).
Deferred tax assets
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Deferred Tax - Measurement
• Measure the balance at tax rates that are expected to apply in the period in which the asset is realised or liability settled based on tax rates that have been enacted or substantively enacted by the end of the reporting period
• Deferred tax assets and liabilities are not discounted
• The applicable tax rate depends on how the carrying amount of an asset or liability is recovered or settled
• Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from a transaction or event which is recognised, in the same or a different period, directly in equity or other comprehensive income, or a business combination
• Current tax and deferred tax are charged or credited directly to equity or other comprehensive income if the tax relates to items that are credited or charged, in the same or a different period, directly to equity or other comprehensive income.
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Basis of Deferred Tax Calculation
Indian GAAP
Ind AS
Accounting Profit/loss Tax Profit/loss Timing difference
Accounting Balance sheet Tax Balance Sheet Temporary difference
Financial Statements Tax ReturnDeferred Tax
Asset/Liability
Financial Statements Tax ReturnDeferred Tax
Asset/Liability
=
=
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Example
A machine cost Rs.100. For tax purposes, depreciation of Rs.30 has already been deducted in the currentand prior periods and the remaining cost will be deductible in future periods, either as depreciation orthrough a deduction on disposal. Revenue generated by using the machine is taxable, any gain on disposalof the machine will be taxable and any lose on disposal will be deductible for tax purposes.
What is be the tax base of machine ?
Solution
The tax base of the machine is Rs.70.
CA GAURAV SARAF
Ind
AS
12 : In
com
e Ta
xes
Example
Current liabilities include accrued expenses with a carrying amount of Rs.100. The related expense will bededucted for tax purposes on a cash basis.
What is the tax base of accrued expenses ?
Solution
The tax base of the accrued expenses is nil.
CA GAURAV SARAF
Ind
AS
12 : In
com
e tax
es
Example
Current liabilities include accrued expenses with a carrying amount of Rs.100. The related expense hasalready been deducted / considered for tax purpose.
What is the tax base of accrued expenses ?
Solution
The tax base of the accrued expenses is Rs.100.
CA GAURAV SARAF
Ind
AS
12 : In
com
e tax
es
Example
An entity has an item of PP&E whose cost is fully tax deductible.
Deductions being given over a period shorter than the period over which the asset is being depreciatedunder Ind-AS 16.
At the reporting date, the asset has been depreciated to Rs. 500,000 for financial and Rs. 300,000 for taxpurposes.
Calculate Tax base, accounting base and temporary difference.
Solution
• Tax base – Rs. 300,000• Accounting base – Rs. 500,000• Temporary differences – Rs. 200,000 (Rs. 500,000 – Rs. 300,000)
CA GAURAV SARAF
Ind
AS
12 : In
com
e tax
es
Example
An entity (FY Ended: 31 December 2020) holds a medium-term cash deposit on which interest ofRs. 10,000 is received annually on 31 March .► The interest is taxed in the year of receipt.► At 31 December 2015, the entity recognises a receivable of Rs. 7,000 in respect of interest accrued butnot yet received.
Calculate Tax base, accounting base and temporary differences as at 31 Dec 2015.
Solution
• Tax base – Rs. Nil• Accounting base – Rs. 7,000• Temporary differences – Rs. 7,000 (Rs. 7,000 – Rs. Nil)
Ind AS 23 :Borrowing Costs
TATTVAM & Co.
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Definition
Borrowing Costs
• Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of funds
• Borrowing costs may include interest expense calculated using the effective interest method
Qualifying Asset
• A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale
• Examples include inventories (that are not produced over a short period of time)
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalised as part of the cost of that asset
An entity shall begin capitalising borrowing cost as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when entity meets all the following conditions:a) Incurs expenditure on the assetb) Incurs borrowing costc) Undertakes activities that are necessary to prepare the asset for its intended use or sale
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Recognition
Suspension of capitalisation of borrowing costsAn entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of a qualifying asset.An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to prepare an asset for its intended use or sale. Such costs are costs of holding partially completed assets and do not qualify for capitalisation.
An entity also does not suspend capitalising borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.
Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Recognition
Specific Borrowings
If funds are borrowed specifically, the amount of borrowing costs eligible for capitalisation are the actual borrowing costs incurred on that
General Borrowings
To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset.The capitalisation rate shall be the weighted average of the borrowing costsapplicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.
The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period.
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Example
PPE Corp. begins construction on a new office building on September 1, 20X6. Construction continues without interruptions through March 31, 20X7. Directly attributable expenditure are below.September: $1,00,000October : $4,00,000November : $4,00,000December : $4,00,000
PPE assumes mid month convention for attributable expense.It has not taken any specific borrowing. It had outstanding $90,00,000 loan @ 4% rate and $50,00,000 loan @ 6% rate during construction period.What will be the capitalised amount for the year ended December 31st , 20X6 ?
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Example
Solution:
Date Qualifying Expenditure
(A)
Capitalisation period
(B)
Weighted average qualifying expenditure(C)
September $1,00,000 3.5/12 $29,167
October $4,00,000 2.5/12 $83,333
November $4,00,000 1.5/12 $50,000
December $4,00,000 0.5/12 $16,667
Total $13,00,000 $1,79,167
Annualised interest cost: (4% of $90,00,000) + (6% of $50,00,000) = $6,60,000
Hence weighted average rate: $6,60,000/$1,40,00,000 = 4.71%
Amount that can be capitalised: $1,79,167 x 4.71% = $8,439
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Exchange difference as a borrowing cost
The manner of arriving at the adjustments of foreign exchange difference is as follows:
The adjustment should be of anamount which is equivalent to theextent to which the exchange lossdoes not exceed the differencebetween the cost of borrowing infunctional currency whencompared to the cost of borrowingin a foreign currency.
When there is an unrealisedexchange loss which is treated asan adjustment to interest andsubsequently there is a realised orunrealised gain in respect of thesettlement or translation of thesame borrowing, the gain to theextent of the loss previouslyrecognised as an adjustmentshould also be recognised as anadjustment to interest.
TATTVAM & Co.
CA GAURAV SARAF
Ind
AS
23
: Bo
rrow
ing
Co
sts
Example
At the beginning of the year the entity, domiciled in the UK, has a $ 1 million foreign currency loan. The interest rate on the loan is 4% and is paid at the end of the period. An equivalent borrowing in sterling would carry an interest rate of 6%.
The spot rate at the beginning of the year is £1 = US$ 1.55 and at the end of the year it is £1 = US$ 1.50.
The expected interest cost on a sterling borrowing would be £ 6,45,161 at 6% = £ 38,710.
The actual cost of the $ loan is:
Loan at the beginning of the year: $10,00,000 at 1.55 6,45,161Loan at the end of the year: $10,00,000 at 1.50 6,66,667Exchange loss 21,506Interest paid $10,00,000 at 4% = $40,000 at 1.50 26,667Total cost of loan 48,173
Interest on sterling equivalent: £6,45,161 at 6% 38,710Difference 9,463
The total actual cost of the loan exceeds the interest cost on a sterling equivalent loan by £9,463. Therefore, only £12,043 (£21,506 -£9,463) of the exchange difference of £21,506 may be treated as interest.
Thank You !
© 2021 TATTVAM & Co.All Rights Reserved.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
For any feedback, consultation or suggestions, please reach out to me at [email protected] or call on +91 9999380414
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