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Please advice me about capitalizing foreign exchange losses related to payment to foreign supplier for self-constructed asset.

Thank You.


You cannot capitalize such exchange differences in the cost of self constructed asset.


You have clear the issue.

Thank You !!!
Dear Kamran !!!!

would you plz refer to IAS 23 -Borrowing costs. The Std stipulates that borrowing costs in case exchange differences - losses- arising from foreign currency borrowings, to the extent that they are regarded as an adjustment to interest costs may be capitalized for qualifying assets (an asset that takes a substantial period of time to get ready for its intended use or sale). Other foreign exchange losses can not be capitalized.

Hope to have an answer from u.

Adil Iqbal
Dear Adil,

IAS 23 deals with borrowing costs and its very subject is not the exchange differences. However, while describing the ingredients of "Borrowing Costs" it includes

"exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs"

It looks very logical since such fluctuation will affect the interest amount directly that is in itself eligible for capitalization. So, this does not tentamount to capitalization of exchange differences in a sense. Rather, it is capitalization of borrowing costs that may fluctuate due to exchange differences as well.

You would appreciate that there were certain differences between the requirements of 4th schedule to CO84 and IFRSs/IASs before the revision of the said schedule. The exchange differences were allowed to be capitalised by 4th schedule but there were no such provisions in IAS-16 or IAS-21 allowing directly to capitalize these differences. After revision of 4th schedule the provisio allowing such capitzlaition was carved out. Due to this all companies/entities had to change their accounting policy regarding capitalziation of exchange differences thereby eliminating such option. You can pick up annual reports of 2006 and 2007 and can check such changes specially in manufacturing companies.

I refer you to see paragraph 21, 23 and 28 of IAS 21 (amended upto 17 January 2008). In short

-Upon initial recognition all monetary and non-monetary items have to be recorded at spot rate of the transcation date. (Paragraph 21).

-For subsequent reporting, monetary items have to be re-stated on balance sheet date's spot rates while the non-monetary items remain un-affected. (Paragraph 23).

-All exchange gains/losses on translation of monetary items have to be charged to P/L account. (Paragraph 28).

There arises no question of any gain or loss on non-monetary items since these are not restated.

The transactional timing fluctuations would also affect only the supplier's account and would bear no affect to the relevant property, plant and equipment item.

I hope this, despite being short, may help you.


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