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Exchange difference on payment to contractor for development on fixed assets

8 November 2009 1,208 views 3 Comments

we have a contract for development of a fixed assets, as per the contract:-

Total Contract amount =  260 Million AED

We have to pay this amount in Euro that is already fixed as per the contract it is 4.49 AED per Euro

whatever is the rate prevailing currently doesnt matter bcoz it has been already fixed in contract,

so my concern is exchange loss on payment will be added to the value of fixed Assets or

will have to transferred to P&L A/c

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3 Comments »

  • cmanishiyer said:

    The contract has an embedded foreign exchange forward contract which needs to be separated from the host contract. The separation should be such that the fair value of the forward as at inception of the contract is zero. The exchange difference on the forward contract can be added to the value of fixed assets if hedging is properly documented and is effective prospectively and retrospectively.

    Regards,
    Manish
    +919825286903

    # 9 November 2009 at 6:36 am
  • adey786 said:

    Exchange difference should be added to the cost as it would be cost relating to acquisition of the asset. You can not have this asset ownership unless you make payments to the contractor, and naturally any exchange difference will sit in the cost of asset.

    Regards

    # 12 November 2009 at 1:27 pm
  • riyer said:

    Embedded derivatives do not exist if the EURO is the currency in which the supplier does all its international trade.

    whether embedded derivatives exist or not, the exchange loss/gain cannot be capitalised to the cost of assets as they are not incurred to bring the asset to its existing use.

    # 22 December 2009 at 11:03 am

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