Recognition of Forex Fluctuation for Loan Received in Functional Currency From Overseas Agencies

A Limited (hereinafter referred to as “the Company”) is engaged in the infrastructure business. Since, the infrastructure business is a capital intensive business the company has availed external aid from overseas funding agencies, known as Overseas Development Assistance (ODA). The ODA agreement is signed between the Government of India (GOI) and the overseas funding agencies. Through its mechanisms, the GOI disburse the loan amount to the company in INR and the company shall at the time of satisfaction of loan make the repayment to GOI in INR.

During the current year 20X1-20X2, the company initiated two projects: the development of bridges and the development of an airport ceiling in Mumbai. The company has availed the loan from the ODA for each of these project. Consequently, a Memorandum of Understanding (MOU) was entered into between the company, the GOI, and the Mumbai Government. The MOU pertaining to the development of bridges stipulates that the company is liable for the repayment of debts taken from the overseas funding agency, including any exchange rate fluctuations of the loan currency. However, MOU relating to the development of the airport ceiling specifies that the company is only liable for the repayment of debts and not for any exchange rate fluctuations.

The company considered that the loan agreement is between the GOI and the overseas funding agency and also receipt and payment of loan shall be in INR. Thus, the company has no liability towards foreign exchange fluctuation. Furthermore, the GOI shall make payment to the overseas funding agency for satisfaction of loan in case the company defaults in making payment. Thus, the company has not accounted for the exchange rate variation and has not complied with the provision of Ind AS 21, The Effects of Changes in Foreign Exchange Rates.

To understand whether the company’s accounting of not recognizing the forex fluctuations and the liabilities created thereon in respect of either of the project is correct or not

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