Accounting for changes in the foreign-exchange rate is a sore point for many corporate entities, as rate movements pose several challenges. To make it worse, Indian GAAP principles tend to be nebulous and conflicting.Consider, for example, a company holding an investment in a US subsidiary. To hedge this investment against foreign-exchange risks the company takes a dollar forward contract, which it rolls forward each year under a documented hedging strategy. In accordance with the accounting standard AS-11 — The Effects of Changes in Foreign Exchange Rates, the forward premium is amortised over the life of the contract.Exchange differences on the forward contract are recognised in the profit-and-loss statement. However, investment as a non-monetary item under AS-11 is not re-valued and is stated at historical cost. This would result in an accounting mismatch as the P&L recognises gains and losses on the forward contract but not on the investment.
Source: Hindu Business Line
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