The Hindu Business Line : Stranded in the forex Standard

reads thus: "Foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amounts in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance-sheet date, e.g., where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance-sheet date.

"In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from, or required to disburse, such item at the balance-sheet date."

This paragraph does not categorically state as to which rate is to be applied for foreign currency monetary items. In the beginning, it is stated that the closing rate is to be applied. However, the second sentence states that in certain circumstances the closing rate may not reflect with reasonable accuracy the amount in reporting currency.

In such circumstances, it is suggested that the relevant monetary items should be reported in the reporting currency at the amount which is likely to be realised.

It is not possible for anybody to estimate the amount which is likely to be realised because of the volatility of the foreign currency market. Hence, it must be clear as to which rate is required to be applied.

As per para 12, the contingent liability denominated in foreign currency is required to be translated by using the closing rates in the balance-sheets. However, there are instances where the customer is able to strike a forward deal with his banker at a different price than the closing rate.

As the rate has been fixed it does not make sense to value it at a different rate than the contracted rate. If the closing rate is higher than the contracted rate, contingent liabilities will be shown more than the actual.

Illustration: Customer A buys $5 million on January 1, 2004, to be delivered on July 1, 2004, at Rs 47.38 when the spot rate was Rs 46 and premium was 6 per cent per annum. On the balance-sheet date viz., March 31, 2004, if the closing rate is Rs 43, the contingent liability of $5 million is required to be valued at Rs 43 instead of the contracted rate of Rs 47.38.

It should be remembered that irrespective of the exchange rate prevailing on July 1, 2004, the customer is required to pay Rs 47.38, that is, the rate already decided in the contract. Hence, it is felt that it is not appropriate to apply the closing rates.

In para 24(b), it is stated that income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions.

Illustration: An exporter sends a consignment valued at $10,000 on January 1, 2004, for collection when the exchange rate was Rs 46. If he is able to realise the export proceeds on March 31, 2004, and the exchange rate is Rs 50, he will be able to realise Rs 5,00,000 from the bank.

It is not proper to state that he should account for only Rs 4,60,000 and should show Rs 40,000 under foreign currency translation reserves.

In short, the customer should be allowed to show the full amount wherein the amount has actually been converted from foreign currency to Indian rupees.

So long as the amount continues to be maintained in foreign currency, the customer may be allowed to keep the surplus in foreign currency translation reserves.

Further, the FEDA rules stipulate that the rate prevalent on the date of conversion has to be applied.

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