Exchange loss

[A.raza]

My question may appears to be a stupid one... but i am unable to resolve the issue....

a few days ago i read it in first volume of selected opinion issued by ICAP, that

<b>It is permissible to adjust the cost of fixed assets with the sifferences arising from fluctuations in exchange rates relating to loans used for acquisition of such assets.</b>

<b>ITEM NO. 1.13 FIXED ASSETS-CAPITALIZATION OF EXCHANGE LOSS</b>


Now the above opinion was issued back in 1993, what i need to know is whether the same is still applicable or there is a revision in this concept


Further, if a company borrows a foreign currency loan for working capital requirements, can it capitalize the exchange loss as part of inventory inline with the opinion issued by ICAP mentioned above.

[awaisaftab]

According to IAS-23,Borrowing Costs, the definition of borrowing cost include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. So this treatment is still allowed according to IAS-23.See IAS-21 and IAS-2 for more details. I will recommend you first go through all relevant standards and then consult opinions of ICAP.

[kamranACA]

Dear

I understand that your question is regarding capitalization of exchange differences arising out of “loans in foreign currency used for acquisition of fixed assets” and you have not inquired about capitalization exchange differences MERELY pertaining to Interest/borrowing cost.

IAS-21 does not allow capitalizing exchange losses in carrying amount of PPE items.

The exception already discussed in above post is provided by IAS-23 where exchange differences pertaining to “borrowing cost” {and not pertaining to borrowing itself} have been included in the definition of “borrowing cost”. It’s totally a different issue and I guess is not connected with what you have asked. The impact of exchange difference to the extent it affects ONLY the “interest on loans in foreign currency” can be capitalized in the carrying amount of ONLY the qualifying assets till the date they remain in the process of construction. Once the construction period is over, no further amount of “such” exchange difference is permitted to be capitalized. In case of non-qualifying assets, such exchange difference cannot be capitalized. So, in fact IAS-23 allows capitalizing “borrowing cost along with exchange difference impact” and not the exchange difference pertaining to loans.

I must mention that IAS-21 (and even IAS-23) never allowed capitalizing exchange differences pertaining to loans in foreign currency in the carrying amount of assets. The opinion you have referred was based upon the then version of Fourth Schedule to the Companies Ordinance, 1984 which was at that time differing with the requirements of IAS-21 and being local law carried an over-riding impact. Therefore at that time EXCHNAGE DIFFERENCE ARISING OUT OF LOANS IN FOREIGN CURRENCY (and not merely pertaining to interest) was permitted to be capitalized in the carrying amount of related assets.

Now, after revision of Fourth Schedule (some years back) capitalization of exchange differences pertaining to loans (not pertaining to interest) are no more allowed to be capitalized.

May I remind you that in 1993 version of IAS-21 there was one option to capitalize exchange differences arising out of SEVERE DEVALUATION or DEPRECIIATION OF A CURRENCY against which there is no means of hedging. Now, this option has also been eliminated in 2005 version of IAS-21. Accordingly, the related interpretation to IAS-21 i.e. SIC-11 has also been superseded.

Selected opinions are not the binding pronouncements. These are the reflection of personal point of view of the members of the respective committee on a given issue at a given time. An opinion is expressed on written formal requests to the committee by the persons soliciting such opinion. ICAP does not revise already issued opinions since these are not the pronouncements.

I hope the query is answered.

Best regards,


KAMRAN.

[A.raza]

Thanks for the replies... i was confused after reading the selected opinion.... thanks once again...