WORKSHOP ON ICDS 10 May 2017 SIRC of ICAI, Chennai.

Transcription

1 WORKSHOP ON ICDS 10 May 2017 SIRC of ICAI, Chennai. B.RAMANA KUMAR, M.Com., Llb., FCA, ADVOCATE, Chennai. DEFINITIONS IN ICDS - 6 Average rate - the mean of the exchange rates in force during a period. Closing rate is the exchange rate at the last day of the previous year. Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates. Exchange rate is the ratio for exchange of two currencies. Foreign currency is a currency other than the reporting currency of a person. Foreign operations of a person is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India. 2 ADV B. Ramana Kumar 1

2 DEFINITIONS IN ICDS - 6 Foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person: (i) buys or sells goods or services whose price is denominated in a foreign currency; or (ii) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or (iii) becomes a party to an unperformed forward exchange contract; or (iv) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. 3 DEFINITIONS IN ICDS - 6 Foreign currency transaction is a transaction which is denominated in or requires settlement in a Forward exchange contract means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature; Forward rate is the specified exchange rate for exchange of two Currencies at a specified future date; Indian currency shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999); 4 ADV B. Ramana Kumar 2

3 DEFINITIONS IN ICDS - 6 Monetary items are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items; Non-monetary items are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items; Reporting currency means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out. 5 Scope: Treatment of transactions in foreign currencies Translating the financial statements of foreign operations Treatment of foreign currency transaction in the nature of forward exchange contracts. Initial Recognition: Applies to the foreign currency amount, the exchange rate between the reporting currency and the foreign currency at the date of the transaction. An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency in that period If there are significant fluctuations then the actual rate at the date of the transaction shall be used. 6 ADV B. Ramana Kumar 3

4 Conversion : At the last date of the Previous Year Monetary items in foreign currency When closing rate doesn t reflect with accuracy Non-monetary items in a foreign currency Non-monetary item being inventory Shall be converted into reporting currency by applying the closing rate. Shall be reported in the reporting currency at the amount which is likely to be realised from or required to disburse such item at the last date of the previous year Shall be converted into reporting currency by using the exchange rate at the date of the transaction Shall be reported using the exchange rate that existed when such value was determined. 7 Recognition of Exchange Differences: Exchange differences arising on the settlement in respect with monetary items shall be recognised as income or as expense in that previous year. Exchange differences arising on the conversion of non monetary items shall not be recognised as income or as expense in that previous year. Exceptions: Notwithstanding anything contained in the Notification, initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income-tax Rules, 1962, as the case may be. 8 ADV B. Ramana Kumar 4

5 Forward Exchange Contracts: Financial Statements of Foreign Operations The financial statements of a foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 of the Notification. Shall be treated as if the transactions of the foreign operation had been those of the person. Forward Exchange Contracts Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. 9 Forward Exchange Contracts: The provisions shall apply when the contract is not intended for trading or speculation purposes and is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction. The provisions shall not apply to a contract Which is entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. 10 ADV B. Ramana Kumar 5

6 Forward Exchange Contracts: Premium or discount that arises on the contract is difference between Exchange rate at the date of the inception of the contract and The forward rate specified in the contract Exchange difference on the contract is the difference between The FC amount of the contract translated at the exchange rate at the last day of the PY and The same FC amount translated at the date of inception of the contract or the last day of the immediately preceding PY 11 Premium, discount or exchange difference on 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. 12 ADV B. Ramana Kumar 6

7 Transitional Provisions: The provisions of this standard shall apply to all foreign currency transactions undertaken on or after 01/04/2016 Exchange differences arising in respect of monetary items or non-monetary items, on the settlement during the PY or on conversion thereof at the last day of the PY shall be recognised in accordance with the provisions of this standard after taking into account the amount recognised on the last day of the PY for an item if it is carried forward from said previous year. 13 Transitional Provisions: The financial statements of foreign operations for the PY shall be translated using the principles and procedures specified in this standard after taking into account the amount recognised on the last day of the PY for an item, if any, which is carried forward from said previous year. All forward exchange contracts existing on the 01/04/2016 or entered on or after 01/04/2016 shall be dealt with in accordance with the provisions of this standard after taking into account the income or expenses, if any, recognised in respect of said contracts for the previous year ending on or before the 31/03/ ADV B. Ramana Kumar 7

8 STATUS OF ICDS 6: Before and After Translating the financial statements of foreign operations: PREVIOUS ICDS -6: Integral The financial statements was to be translated using the principles and procedures as if the transactions of the foreign operation had been those of the person himself. Previously, it was divided along the lines of Integral and Non-integral. Non integral The assets and liabilities was to be translated at closing rate, Income and expense items was to be translated at exchange rate on the date of transactions and the resulting exchange differences was to be transferred to P & L. 15 STATUS OF ICDS 6: Before and After Translating the financial statements of foreign operations: CURRENT ICDS -6: Currently, it is no longer divided along the lines of Integral and Non-integral. The financial statements is translated using the principles and procedures as if the transactions of the foreign operation had been those of the person himself. 16 ADV B. Ramana Kumar 8

9 STATUS OF ICDS 6: Before and After Clarification inserted with regards inventory carried at fair value: PREVIOUS ICDS-6: Non-monetary items in a foreign currency was to be converted into reporting currency by using the exchange rate at the date of transaction. An issue arose with regards non-monetary items being inventory carried at fair value. AS II prescribed the date of determining the NRV while the ICDS VI prescribed exchange rate at the date of the transaction. The same led to difference in valuation on inventory as per AS-II and ICDS-VI r.w ICDS-II 17 STATUS OF ICDS 6: Before and After Clarification inserted with regards inventory carried at fair value: CURRENT ICDS-6: This issue has been clarified and now non-monetary items being inventory carried at fair value shall be converted at rate prevailing on date when such NRV is determined which is as per provisions of AS-II. 18 ADV B. Ramana Kumar 9

10 FAQ REGARDING ICDS 6 A Question was clarified in the FAQ regarding Derivative instruments: Which ICDS would govern Derivative instruments? It was clarified that ICDS 6, subjected to the provisions of para 3 of ICDS 8, provides guidelines for derivative contracts, such as forward contracts etc. For derivatives not covered or within the scope of ICDS 6, it was clarified that the Provisions of ICDS 1 will be applicable. 19 COMPARISON BETWEEN ICDS 6, GAAP and AS Reporting Currency and functional Currency: ICDS - 6 An entity s reporting currency is the currency of the country in which it is domiciled. The ICDS does not make use of the term functional currency. GAAP The provisions of GAAP are similar to the ones as defined in ICDS. AS AS defines Functional Currency as the currency of the primary economic environment in which an entity operates. It prescribes that priority should be given to the number of primary indicators before considering secondary indicators when the indicators are mixed and the functional currency is not obvious. 20 ADV B. Ramana Kumar 10

11 COMPARISON BETWEEN ICDS 6, GAAP and AS Foreign Currency: ICDS 6, AS In the case of ICDS -6 and AS, foreign currency is defined as a currency other than the reporting currency. GAAP has provisions that are similar to ICDS-6. Foreign Exchange Transactions: ICDS-6 All exchange differences from translation are recognized in profit or loss. However, initial recognition, translation and recognition of exchange differences are subject to provisions of section 43A of Act or Rule 115 of Income-tax Rules, 1962, as the case may be. 21 COMPARISON BETWEEN ICDS 6, GAAP and AS Foreign Exchange Transactions: GAAP The Provisions are similar to ICDS. Differences arise in on monetary items that, in substance, forms part of entity s net investment in a non-integral foreign operations are accumulated in equity until the disposal of the non-integral operations. An entity also has an option to recognize unrealized exchange differences on translation of certain long-term monetary assets/ liabilities directly in equity or as adjustment to cost of an asset. The amount so accumulated in equity shall be transferred to profit or loss over the period of maturity of such long-term monetary items in an appropriate manner. 22 ADV B. Ramana Kumar 11

12 COMPARISON BETWEEN ICDS 6, GAAP and AS Foreign Exchange Transactions: AS All exchange differences arising on translation of foreign currency transactions are generally recognized in profit or loss unless permitted otherwise. Translation of Foreign Operation: ICDS-6 Currently, it is no longer divided along the lines of Integral and Non-integral. The financial statements is translated using the principles and procedures as if the transactions of the foreign operation had been those of the person himself. 23 COMPARISON BETWEEN ICDS 6, GAAP and AS Translation of Foreign Operation: GAAP Integral operations: Financial statements are translated as if the transactions of the foreign operation had been those of the entity itself. Non-Integral operations: Financial statements are translated in a manner similar to the old ICDS provisions except that: (a) income and expenses are translated at actual rate or appropriate rate approximating the actual rate and (b) all resulting exchange differences are accumulated in equity until the disposal of the net investment. AS: Similar to the translation of non-integral foreign operations under Indian GAAP. 24 ADV B. Ramana Kumar 12

13 COMPARISON BETWEEN ICDS 6, GAAP and AS Forward Exchange Contracts: ICDS - 6 In respect of forward contracts not intended for trading or speculation purposes: (A) Any premium or discount arising at the inception of a forward exchange contract is amortized as expense or income over the life of the contract and (B) Exchange differences are recognized as expense or income in the reporting period in which the exchange rates change. In respect of forward contracts intended for trading or speculation purposes or are held to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction, any premium, discount or exchange difference are recognized at the time of settlement. 25 COMPARISON BETWEEN ICDS 6, GAAP and AS Forward Exchange Contracts : GAAP Similar to ICDS. In respect of such forward contracts, premium or discount is ignored and at each balance sheet date, contract value is marked to its current market value and any gain or loss arising on such contract is then recognized. AS Derivatives are measured at fair value with change in fair value recognized in profit or loss unless they qualify as hedging instruments in a cash flow hedge or in a net investment hedge. 26 ADV B. Ramana Kumar 13

14 ISSUES WITH ICDS 6 Forex Derivatives and others not covered: Forex Derivatives are not covered by ICDS - 6. ICDS -1 relating to Accounting Policies does not recognize concept of prudence. Therefore on joint reading of ICDS I and ICDS VI, unrealized MTM loss on forex derivatives may not be allowed as deductible expenditure. Treatment of Transactions in Foreign Currencies: With regards to capital items not covered by 43A, a question arises if one could take different stand for gain and loss. In case of gain, can it be argued that IT Act overrides ICDS, hence the gain would be capital receipt and in case of loss it can it be argued that ICDS being beneficial provisions loss on capital item would be allowed as deduction? 27 Impact on Banks: ISSUES WITH ICDS 6 There could be significant impacts on banks as exchange gain / loss forward contracts for speculation and trading purpose, would now be allowed only on actual settlement basis. The Impact of provisions of S. 43(5) must also be taken into consideration. Other Issues: Whether this would imply that accumulated exchange gain / loss would be taxable in the year in which ICDS become effective? Whether same would amount to tax income on retrospective basis? In respect of capital items not covered by S. 43A, whether loss would be allowed as deductible expenditure? 28 ADV B. Ramana Kumar 14

15 Scenario: ISSUES WITH ICDS 6 Purchase of local Asset in India utilizing foreign loan. Problems: Section 43A only Deals with imported Assets only. Issue: Would 43A apply? Treatment of Exchange gain/loss? Would the Asset be capitalized as per Section 43A? 29 Case study 1. A foreign asset purchased from Japan for Chennai metro rail project for US$ 2 billion and the supplier arranges for the loan from Singapore bank for the purchase at 1% 2. what if the same asset is purchased by the buyer from loan taken for the Singapore bank as ECB 3. Any change if the loan is taken from and Indian Bank consortium? Workshop on Transfer Pricing SIRC of ICAI 30 ADV B. Ramana Kumar 15

16 QUESTIONS & COMMENTS 31 CA B.RAMANA KUMAR ADVOCATE 1 FLOOR, 2/3, 4 TH STREET, GOPALAPURAM CHENNAI PHONE ramanakumar@ovopaxlegal.com ramanaechambers@gmail.com 32 ADV B. Ramana Kumar 16