MCA - Amendment to Accounting Rules

Accounting for effects of changes in Foreign Exchange Rates – MCA Notification of 29 December 2011

Accounting standard 11 “The Effects of Changes in Foreign Exchange Rates” principles in the current form was revised in 2003 by ICAI, to implement from 1st Apr 2004 i.e FY 2004-05. According to which all Fx gains / losses arising at the end of each accounting period irrespective of their nature whether balance sheet or P&L items, have to be taken to P&L A/C (either Dr. or Cr.). The revised standard also introduced accounting for forward contracts. However the standard was not followed uniformly across the board, owing to contradicting provisions in Schedule VI under Companies Act.


The Ministry of Corporate Affairs announced the Companies (Accounting Standards) Rules on 7th December 2006, prescribing implementation of AS 11 as issued by ICAI.

Then came 2008 turmoil in global financial markets and new lows for INR. Pressure mounted on Govt from the corporates who were to book heavy losses on account of rupee depreciation. Govt. on the last day of financial year 2008-09 came out with a notification – with the following relaxation

  1. Exchange differences arising on reporting of Long Term Foreign Currency Monetary Items (LTFCMI) at the end of each accounting period, to the extent they are related to acquisition of depreciable capital assets – can be added to or deducted from that asset and depreciation also calculated accordingly.
  2. In case of other LTFCMI, such differences would be accumulated in a balance sheet account Foreign Currency Monetary Item Translation Difference Account (FCMITDA) and amortized over the life of such long-term asset or liability – and this treatment was initially allowed up to 31st March 2011.

LTFCMI covered balance sheet items like long term debt, Creditors and loans & advances with their original life of 12 months or more.

The above notification, allowed retrospective reinstatement of accounts from Dec’ 2006, at the option of the company. A number of companies with long-term foreign currency liabilities exercised the option, in order to avoid accounting losses resulting from Rupee depreciation. The option, once chosen, cannot be revoked.

Meantime, convergence of accounting standards with IFRS, originally scheduled to take effect from April 1, 2011, got deferred indefinitely. The MCA extended the above relaxation till 31 March 2012, by a notification issued on 11th May 2011.

Over the last six months, Fx markets have worsened taking rupee to 50+ levels, forcing companies to declare heavy FX losses for the quarter ended Sep’2011.

In view of steep depreciation of Rupee, the MCA has further extended the relief granted for valuation adjustment; vide Notification dated 29 December 2011, till 31 March 2020. As a result, current position is

Exchange gains / losses on FC monetary items duration of 1 year or more, retrospectively for the period commencing from December 2006,

  • Adjusted to (debit / credit) the corresponding depreciable asset account, where the asset was funded by the liability, and
  • In all other cases, gains / losses on such long term FC monetary items can be accumulated in a Translation Difference account, to be amortized over the period till 31 March 2020
AS 11, however, would continue to apply to short-term foreign currency cash flows (with maturity less than 1 year), which will be marked-to-market at closing rates as at quarter-end / year-end.