02-25-2010, 09:22 PM
Dear
I understand that your question is regarding capitalization of exchange differences arising out of âloans in foreign currency used for acquisition of fixed assetsâ 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 âborrowing costâ {and not pertaining to borrowing itself} have been included in the definition of âborrowing costâ. Itâs 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 âinterest on loans in foreign currencyâ 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 âsuchâ 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 âborrowing cost along with exchange difference impactâ 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 Accordingly, the related interpretation to IAS-21 i.e. SIC-11 has also been superseded.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.
I understand that your question is regarding capitalization of exchange differences arising out of âloans in foreign currency used for acquisition of fixed assetsâ 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 âborrowing costâ {and not pertaining to borrowing itself} have been included in the definition of âborrowing costâ. Itâs 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 âinterest on loans in foreign currencyâ 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 âsuchâ 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 âborrowing cost along with exchange difference impactâ 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.
