Difference in ICAI and Income Tax Standard: Effects of Changes in foreign Exchange Rates

The CBDT has now notified the Income Disclosure and Tax Accounting Standards vide notification no. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015. Comparative study of Accounting Standard issued by ICAI, and notified TAS has been given hereunder

Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates

This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent

Accounting Standards issued by ICAI	Income Computation and Disclosure Standards (ICDS)
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
A. Exchange differences-recognition criteria
AS-11 provides guidance on initial and subsequent recognition of foreign currency transactions and the resultant exchange differences.	ICDS expressly provides that these provisions will be subject to Section 43A of the Act and Rule 115 of the Income-tax Rules, 1962. [Para 6] A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. The proposed standard also allows use of average rate if that approximates the actual rate at the date of the transaction. It provides that average rate for a week or a month may be used for all transaction in each foreign currency occurring during that period. However, if exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used. [Para 3(1) and (2)] (i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year. (ii) In respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year [Para 5]
B. Conversion at last date of previous year
AS – 11 provides that: a)        Foreign currency monetary items should be reported using the closing rate. If closing rate does not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse, 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, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realized from, or required to disburse, at the balance sheet date. b) Non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction.	ICDS provides that: a)      Foreign currency monetary items shall be converted into reporting currency by applying closing rate The proposed standard also provides that where closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realized from or required to disburse, a foreign currency monetary item, owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realized from or required to disburse such item at the last date of the previous year. b) Non-monetary items shall be converted into reporting currency by using the exchange rate at the date of transaction [Para 4]
C. Foreign Currency translation reserve
Exchanges differences arising on translation of the financial statements of non-integral foreign operations should be accumulated in a foreign currency translation reserve in the balance sheet	all resulting exchange differences shall be recognised as income or as expenses in that previous year.[Para 9]
D. Forward contracts
Forward exchange or similar contracts entered into for trading or speculation purposes should be mark-to-market at each balance sheet date and the resultant exchange differences should be recorded in profit or loss.	Premium, discount or exchange difference on contracts /Forward Exchange Contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement [Para 11(5)]
E. Transitional Provisions
-	All foreign currency transactions existing on 01-04-2015 or undertaken on or after 01-04-2015 shall be recognized in accordance with provisions of this standard. [Para 12]