03-01-2007, 08:26 PM
I just want to bring on discussion an issue of practical difficulty to the accountants at exporting units. The members of this forum who are also the students or associate/fellow members of ICAP are specifically requested to comment on the situation. The export sales are normally recognized on disptach of goods to customers i.e. on the bill of lading date by using the foreign currency exchange rate of the said date. In fact, there could be so many exchange rates on a single time as all the banks might have different rates at the same time. Therefore, exporting units recognise the sales by using the rate of the bank from whom E-Form was obtained or where the proceeds are to be received against the shipment either it is on L/C basis or D/A basis. IAS 21 also allows to translate such amounts on week average rates or month average rates to facilitate the practice, if the variation in rates is not enormous.
Apparently, there is a time gap between the sale recognition date in the books of account and the realization date against the shipment and this time gap would eventually result in a foreign currency gain or loss to be recognized in the books of account being the difference between amount debited to the export debtor's account against the said sales and the amount actually received therefrom on realization date.
IAS 21 (para 52) interalia requires the diclosure of the amount of exchnage difference recognised in profit and loss account. We should also keep in mind, that in this area, IAS 21 deals with translation facet of foreign currency and not the conversion thereof. Where translation is used for reporting purpose and conversion is the actual conversion at the time of realization.
The said IAS has not stipulated that in which component of profit and loss account (i.e. Sales or Other Income) such gain or loss should be included. Instead, it simply requires its discloure that could be made by giving merely an explanatary note under any of the components of profit and loss account. This situation leaves the preparer of accounts to use his judgment that where such gain/loss should logically be included. IAS 18 (para 11) explains the term revenue by stipulating that "the amount of revenue is the amount of cash and cash equivalents received or receivable".
It means that whether it is a received amount or receivable amount, in both cases, it would be the part of revenue. Further, logically it has only and only arisen due to selling in foreign currency. If the same sales would have been made in local currency, no such gain/loss would have ever arisen. The driving force behind such income is the sales to export debtors in foreign currency. This can lead to include such income in the amount of export sales. Disclosure could be given in an explanatory note to such amount of export sales appearing in the notes to the accounts. Apparently, IAS 21 does not have any explicit objection on this treatment.
Why such treatment is desired for exporting units? It is now explained. Taxation under Presumptive Tax Regime (PTR) is made under section 169 of Income Tax Ordinance, 2001 where tax is withheld/dedcuted by the banks at the time of receiving of proceeds against the realization. Realization amount for exporter is the amount that is finally received through bank by the exporter after deduction of due tax that is full and final tax for exporter. If the exchange gain (that is a notional figure and has nothing to do with actual cash and cash equivalent received) is included in other income, the tax authorties would never leave it untaxed. It is commonly known that in Pakistan the so-called tax authorities have nothing to do with common sence and they tax the exporters under Normal Tax Regime (NTR) for whatever income figure that might be appearing in the other income component of the profit and loss account. Such behaviour and very very common practice of tax authorities would call for un-necessary appeals, costs, documentation, explanations and wastage of time for the exporters. This would lead to double taxation of the same income; once under PTR and again under NTR that is totally against the law and is only a burden on the exporters in either way.
Now the issue is that the Technical advisory committee of the Institute of Chartered Accountants (ICAP) has issued a selected opinion (volume 1) in 1993 that such gain should be included in OTHER INCOME instead of trading results. I understand that so many pronouncements have changed over the period but selected opinions are never withdrawn because these have no legal effect; these are simply the opnions which can differ from professional to professional. Now IAS 1 after recent revision has even eliminated the requirement to identify the profit from operating activities and profit from other activities. (we are doing this becoz 4th Sch. to CO 84 requires it). It has also eliminated the requirement to identifiy the extra ordinary and ordinary activities etc.
Although the said opinions have no legal effect and even ICAP does not take responsibility for such opinions, still, the auditors of the companies in exporting sector require them to follow this opinion while no such requirement could be seen in IAS 21.
This is causing practical difficulties to the exporters and tax authorities are charging tax on such gains that are appearing in other income leading to double taxation of same cash and cash equivalent earned.
I seek to have the views of the members of this forum on this issue.
Best regards,
KAMRAN.
Apparently, there is a time gap between the sale recognition date in the books of account and the realization date against the shipment and this time gap would eventually result in a foreign currency gain or loss to be recognized in the books of account being the difference between amount debited to the export debtor's account against the said sales and the amount actually received therefrom on realization date.
IAS 21 (para 52) interalia requires the diclosure of the amount of exchnage difference recognised in profit and loss account. We should also keep in mind, that in this area, IAS 21 deals with translation facet of foreign currency and not the conversion thereof. Where translation is used for reporting purpose and conversion is the actual conversion at the time of realization.
The said IAS has not stipulated that in which component of profit and loss account (i.e. Sales or Other Income) such gain or loss should be included. Instead, it simply requires its discloure that could be made by giving merely an explanatary note under any of the components of profit and loss account. This situation leaves the preparer of accounts to use his judgment that where such gain/loss should logically be included. IAS 18 (para 11) explains the term revenue by stipulating that "the amount of revenue is the amount of cash and cash equivalents received or receivable".
It means that whether it is a received amount or receivable amount, in both cases, it would be the part of revenue. Further, logically it has only and only arisen due to selling in foreign currency. If the same sales would have been made in local currency, no such gain/loss would have ever arisen. The driving force behind such income is the sales to export debtors in foreign currency. This can lead to include such income in the amount of export sales. Disclosure could be given in an explanatory note to such amount of export sales appearing in the notes to the accounts. Apparently, IAS 21 does not have any explicit objection on this treatment.
Why such treatment is desired for exporting units? It is now explained. Taxation under Presumptive Tax Regime (PTR) is made under section 169 of Income Tax Ordinance, 2001 where tax is withheld/dedcuted by the banks at the time of receiving of proceeds against the realization. Realization amount for exporter is the amount that is finally received through bank by the exporter after deduction of due tax that is full and final tax for exporter. If the exchange gain (that is a notional figure and has nothing to do with actual cash and cash equivalent received) is included in other income, the tax authorties would never leave it untaxed. It is commonly known that in Pakistan the so-called tax authorities have nothing to do with common sence and they tax the exporters under Normal Tax Regime (NTR) for whatever income figure that might be appearing in the other income component of the profit and loss account. Such behaviour and very very common practice of tax authorities would call for un-necessary appeals, costs, documentation, explanations and wastage of time for the exporters. This would lead to double taxation of the same income; once under PTR and again under NTR that is totally against the law and is only a burden on the exporters in either way.
Now the issue is that the Technical advisory committee of the Institute of Chartered Accountants (ICAP) has issued a selected opinion (volume 1) in 1993 that such gain should be included in OTHER INCOME instead of trading results. I understand that so many pronouncements have changed over the period but selected opinions are never withdrawn because these have no legal effect; these are simply the opnions which can differ from professional to professional. Now IAS 1 after recent revision has even eliminated the requirement to identify the profit from operating activities and profit from other activities. (we are doing this becoz 4th Sch. to CO 84 requires it). It has also eliminated the requirement to identifiy the extra ordinary and ordinary activities etc.
Although the said opinions have no legal effect and even ICAP does not take responsibility for such opinions, still, the auditors of the companies in exporting sector require them to follow this opinion while no such requirement could be seen in IAS 21.
This is causing practical difficulties to the exporters and tax authorities are charging tax on such gains that are appearing in other income leading to double taxation of same cash and cash equivalent earned.
I seek to have the views of the members of this forum on this issue.
Best regards,
KAMRAN.