As 11

Among a few, the AS 11, which deals with the effects of changes in foreign exchange rates, has a unique feature.

It prescribes that when the acquisition of assets are financed through foreign currency loan, the exchange difference arising on foreign currency transaction should not be treated as part of the revenue account, even after the commencement of commercial production.

For example, assume that company A has financed the acquisition of an asset through a dollar loan.

After three months of commercial production, the rupee depreciates by five per cent against dollar.

The effect of depreciation will be given in balance sheet which moves up the loan component. This practice is not adopted anywhere else in the world.

As such, instead of being shown as loss in revenue account, the effect is given in the balance sheet which, in turn, inflates profits. Though there is no accounting standard on the treatment of income and expenses prior to and after the commercial production, expense and income prior to commercial production is normally capitalised.

An exception for this is Reliance Industries, which treats it both as part of revenue account and the profit is transferred to the capital reserve. A rethinking, therefore, is required on AS11.