Borrowing costs on foreign currency loans need not be expensed in P&L

The Corporate Affairs Ministry has yet again come to the rescue of India Inc on the issue of accounting of exchange differences on long-term foreign currency borrowings.
It has now allowed companies to capitalise exchange losses, if any, to the extent such losses represent the difference in interest rates on local and overseas borrowing.
This accounting flexibility will help bolster profits for Indian corporates that have borrowed in foreign currency, say accounting experts.
Until now, exchange losses on foreign currency borrowings to the extent they are regarded as adjustment to interest cost had to be expensed in the profit and loss account.
This is provided in an accounting standard AS-16 (Borrowing Costs) issued by the Union Government, based on the recommendation of National Advisory Committee on Accounting Standards (NACAS).
Through a new circular, the Corporate Affairs Ministry has now clarified that this accounting norm under AS-16 will not apply to a company that has opted for flexible accounting treatment on exchange losses under AS-11, which is the accounting standard on exchange differences.
The Government had in December 2011 allowed companies to opt for flexible accounting treatment on forex losses even for accounting periods beyond March 31, 2012.
But many accounting experts frown at the Corporate Affairs Ministry's unilateral action as the latest move tends to hide economic volatility.
In the long run, such accounting jugglery – allowing corporates to carry forward interest expense to balance sheets — will be a disservice to companies, they point out.
This decision has come about without waiting for the formal views of the CA Institute or NACAS — country's top accounting standards body, it is learnt.
The latest Corporate Affairs Ministry move (circular) will result in increased capitalisation, said Jamil Khatri, Global Head of Accounting Advisory Services, KPMG.
Though the revised Schedule VI to the Companies Act treats exchange differences representing differential interest rates as finance costs and not exchange gains or losses, the latest amendment removes such distinction for the purpose of capitalisation, he said.
It is not clear whether the new requirements need to be applied retrospectively or prospectively considering that such expenses may have been expensed in the past, said Khatri.