Accounting for foreign borrowings

PARVATHA VARDHINI C. | Updated on March 12, 2018

Forex losses may be moved from the P&L account to the balance sheet.

Foreign borrowing is another area where forex fluctuations affect companies.


Take Rural Electrification Corporation (REC), for example. For the half year ended September 2011, the company had Rs 9,096 crore in foreign-currency borrowings.

Even though the company doesn’t have to repay foreign-currency borrowings anytime soon, accounting rules requires such borrowings to be reported based on the closing exchange rate at the end of each accounting period. The gain or loss arising on this restatement has to be shown in the financial statements.

New rules

Originally, all such notional losses had to be shown in the P&L account. Predominantly due to this exposure, the company made forex losses of about Rs 132 crore in April-September 2011, bringing profits lower by that amount.

Under the new rules which REC started following from the December quarter, if a foreign-currency borrowing (term of more than 12 months) relates to a depreciable capital asset, translation differences from the loan could be added to/deducted from the asset, instead of charging to the P&L account.

When a company has other foreign-currency borrowings that cannot be directly attributed to an asset (say, for general expenses or working-capital requirements), then the translation difference could be charged to a special translation difference reserve.

Later, this amount can be spread out and amortised. By taking this up, about Rs 198 crore of forex losses for the company moved from the P&L account to the balance sheet.

Hence, the profits of Rs 770 crore for the quarter were propped up by the same amount.

These changes to the rules were first made in 2009 and were applicable only until the year ended March 31, 2011. In December, the dates were extended till March 31, 2020, also allowing companies who did not take it up in the past to do so now.

Published on September 15, 2012

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