Treatment of foreign exchange fluctuations and interest cost on issuance of FCCB

Expert Advisory Committee of ICAI has recently issued an opinion on the accounting treatment of foreign exchange fluctuations and interest cost on issuance of Foreign Currency Convertible Bonds (FCCB), the summary of which is as below:

Facts of the case:

A listed company has issued Foreign Currency Convertible Bonds (FCCB) for a tenure of five years and one day. FCCBs are convertible into equity shares at a pre-determined price and on a pre-determined dollar rate. Hence, the number of shares to be issued is fixed. According to the querist, since FCCBs are convertible into equity at the option of investors, they may be treated as non-monetary item under AS 11. Hence, restatement of liability is not required. The querist has further stated that the amount of FCCB is meant for capital expenditure and is a pre-condition for raising FCCB as per RBI guidelines. Therefore, the total amount of interest on FCCB, whether used or yet to be used for capital expenditure, has to be capitalised.

Query on which the opinion was sought:

How should foreign exchange fluctuation be treated on FCCB? Moreover, what should be treatment of interest on FCCB used for capital expenditure progressively from April 2013 to March 2014?

Opinion of the Expert Advisory Committee:

The EAC expressed the view that FCCB should be considered as a monetary item. Accordingly, they should be reported using the closing foreign exchange rate at each balance sheet date, according to AS 11. For accounting treatment of interest cost on FCCB, the company first needs to determine whether capital expenditure being funded from FCCB meets the definition of a qualifying asset under AS 16. The company also needs to evaluate the purpose of issuing FCCB, including the purpose/usage of rupee loan. Merely the fact that the FCCBs are meant for capital expenditure according to RBI guidelines would not be sufficient to justify capitalization of total amount of interest on FCCBs. The EAC also noted that according to paragraph 4(e) of AS 16, borrowing costs may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Therefore, the company also needs to determine the portion of foreign exchange fluctuation which can be considered as borrowing costs and treated accordingly.

Click here to read the complete opinion issued by Expert Advisory Committee of ICAI.

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