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Alimony & Tax Implications
By CA A. K. Jain, CA Meenakshi Aggarwal &  Manish Negi


Meaning of Alimony

Alimony or maintenance is a U.S. term signifying a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the ex-spouse upon divorce. It is established by divorce law or family law in many countries and is based on the premise that both spouses in theory have a legal obligation to support each other during their marriage or upon separation or/and divorce. Alimony can also be said to be the allowances which husband or wife by court order pays to other spouse for maintenance while they are separated or after they are divorced.


Introduction


Though this is important matter to deal with during the litigation of a divorce case, the very perception of right to claim the financial support for post divorce maintenance was not quite a familiar concept among the Indian divorce seekers, especially women even few years back. But as the rate of divorce is increasing in India at a rapid speed, people are becoming aware of the various details related to divorce laws. The era of feminist campaigns, and spread of education have contributed to the growing recognition of alimony in divorce cases. 


The alimony is an obligation by laws in almost all the countries of the world. It is expected that both the spouses irrespective of the sex must bear the maintenance support during and after marriage. According to marriage conventions marriage is a sacred union. Once the knot is tied, the duties and obligations of marriage are to be carried out for the rest of the life even if there is mental disparity or physical separation between the husband and the wife. The husband is bound to take up the responsibilities for the maintenance of his wife in spite of sharing an estranged relationship. As time changed, the laws and education empowered woman, divorce came as a natural solution for an abortive wedding.


The present society treats men and women equal, as a result the burden of alimony can now fall upon either side of the party depending upon the financial conditions of the spouses. Though in the present age of egalitarianism both men and women are now equal in the eyes of law, in practice men are more liable to provide interim support to their ex spouse during the litigation procedure.


After divorce either of the spouse has the right to claim alimony. Though not an absolute right, but can be granted by the court depending upon the circumstances and financial conditions of both the spouses.


The following are the conditions depending on which alimony is awarded by the court.


Alimony is generally not granted to the seeking spouse if he or she is already receiving support during the time of divorce. Although the rewarding of alimony can be revised in such events based on the arguments for claiming the support. In case of a contested divorce, often spouses fail to come to any understanding regarding alimony. In such situations, the court takes up the task of making a decision on the amount of alimony to be paid.


The sum and period of alimony generally depends upon how long the marriage existed. Marriages that lasted more than 10 years are entitled to be granted a life long alimony. Age of the spouse is also taken into consideration while awarding alimony. Normally a young recipient of alimony gets it for a smaller period of time if the court thinks that he or she will soon be able to become financially sound through prospective career excellence. Alimony is also in vogue in order to equalize the economic condition of both the spouses. The higher earning spouse is entitled to pay a heavy amount as alimony.


The spouse who is projected to be enjoying a prosperous career is liable to pay high alimony amount. If one of the spouses is suffering from poor health, the other is subjected to payment of high alimony to ensure proper medication and well being of the other spouse. The terms and conditions of payment of alimony in India vary from one personal law to another. The Shah Bano case is one such instance that exposes how the sustenance of a divorced woman is affected due to inclusion of inappropriate laws regarding post divorce maintenance and financial support.


Taxability




Now with this background about ‘Alimony’, let’s look at the taxation of the alimony in the hands of the receiver. The following factors need to be considered in this regard:

The word ‘Income’ is defined in S. 2(24) of the Income-tax Act. This definition does not specifically cover ‘Alimony’. But at the same time this definition is an inclusive definition and hence whatever can fall under natural meaning of the word ‘Income’ is covered under this definition. Now to look at the natural meaning of the word ‘Income’, we must consider the following factors.


The Income Tax Act classifies income into two categories - 'revenue receipts' and 'capital receipts'. Generally, revenue receipts are taxable income and are subject to certain deductions/exemptions, whereas capital receipts are non taxable. 


When a divorcee receives alimony from estranged spouse, it constitutes as a part of capital receipt. Considering, that you are receiving a lump sum amount, it will fall under capital receipt, hence you will not have to pay any tax on it. This is because the amount received is not in exchange of any services offered towards any business, vocation or employment. Therefore, the amount that you would receive as alimony would tax free. However, note that if the alimony is received on a monthly basis, it will be treated as revenue receipt and hence it will be taxable. In such a case, the law interpreted here is that a one time lump sum amount received will be treated as capital receipt and monthly amount (considered as income) as capital receipt.


To return to the question of taxability, though alimony cannot be said to arise from any particular “source” or be treated as a consideration for any past service, business or vocation, it is taxable in the hands of the recipient as per the ruling of the Mumbai High Court. The judgment concludes that monthly alimony received by a divorcee from an estranged spouse will remain taxable, while a one-time alimony payment will be a capital receipt and won't be taxable.


Case Laws


1. The Bombay High Court in Princess Maheshwari Devi of Pratapgarh v. Commissioner of Income-tax 147 ITR 258 (Bom) answered the two questions raised before it


(a) Whether, alimony received by the assessee under section 25 of the Hindu Marriage Act, 1955, on nullity of marriage, is income in her hands and liable to tax?


The Court held: No. The reasons were as under - In our view, from the point of view of taxability, the decree must be regarded as a transaction in which the right of the assessee to get maintenance from her ex husband was recognized and given effect to. That right was undoubtedly a capital asset. By the decree that right has been diminished or partly extinguished by the payment of the lump sum of Rs. 25,000 and balance of that right has been worked out in the shape of monthly payments of alimony of Rs. 750 which, as we have pointed out, could be regarded as income. It is, in our view, beyond doubt that, had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee, a larger monthly sum would have been awarded to her on account of alimony. It is not as if the payment of Rs. 25,000 can be looked upon as a commutation of any future monthly or annual payments because there was no pre existing right in the assessee to obtain any monthly payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, the receipt of that amount must be looked upon as a capital receipt.


(b) Whether, on the facts and in the circumstances of the case, the alimony of Rs. 750 per month received by the assessee from her ex husband on the nullity of marriage is income in her hands liable to tax?


The amount of Rs. 750 per month is what the assessee periodically and regularly gets and is entitled to get under this decree. This amount must, therefore, be looked upon as a return from the said decree which is the definite source thereof. The word "return", in our view, in a case like this, can never be interpreted as meaning only a return for labour or skill employed on capital invested. Such a definition of "return" would be too narrow and would exclude the case of voluntary payments, when it is the settled position in law that in some cases even voluntary payments can be regarded as "income". Although it is true that it could never be said that the assessee entered into the marriage with any view to get alimony on the other hand, it cannot be denied that the assessee consciously obtained the decree and obtaining the decree did involve some effort on the part of the assessee. The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be "income" within the meaning of the said term in the said Act.


2. In CIT v. Shaw Wallace and Co., AIR (1932) PC 138; (1932) 2 Comp. Cases 276; it has been held that: "The object of the Indian Act is to tax income, a term which it does not define. It is expanded, no doubt, into income, profits and gains, but the expansion is more a matter of words than of substance. Income, in this Act connotes a periodical monetary return coming in with some sort of regularity, or expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree or the crop of a field."


3. In Dooars Tea Ltd. v. Commr. of Agri., IT (1963) 44 ITR 6, the Supreme Court has pointed out that it is necessary to bear in mind that the word ‘income’ as used in the Indian IT Act, 1922, is a word of elastic import and its extent and sweep are not controlled or limited by the use of the words ‘profit and gains’ and they have pointed out that the diverse forms which income may assume cannot exhaustively be enumerated, and so in each case the decision of the question as to whether any particular receipt is income or not must depend upon the nature of the receipt and the true scope and effect of the relevant taxing provisions.


4. In H.H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT, (1963) 49 ITR 594, it was held that a voluntary payment, which is made entirely without consideration and is not traceable to any source which a practical man may regard as a real source of his income but depends entirely on the whim of the donor, cannot fall in the category of ‘income.’ Thus voluntary and gratuitous payments which are connected with the office, profession, vocation or occupation may constitute income, although if the payments were not made, enforcement thereof cannot be insisted upon. These payments constitute income because they are referable to a definite source, which is the office, profession, vocation or occupation. It could thereof be said that such payment is taxable as having an origin in the office, profession, or vocation of the payee, which constitutes a definite source for the income. What is taxed under the Indian IT Act is income from every source (barring the exception provided in the Act itself) and even a voluntary payment, which can be regarded as having an origin, which a practical man can regard as a real source of income, will fall in the category of income, which is taxable under the Act."


5. The motive of payer is not relevant while deciding whether a receipt is revenue or capital in nature. [P. H. Divecha v. CIT, (1963) 48 ITR 222 (SC)]


6. In CIT v. Smt. Shanti Meattle, (1973) 90 ITR 385 (All.) it was held that "In the circumstance of the case, the allowance received by the assessee from her husband was held to be taxable as income in her hands."


7. In CIT v. M. Ramalaxmi Reddy, (1980) 19 CTR (Mad.) 270; (1981) 131 ITR 415, it has been held by the Division Bench of the Madras High Court that a receipt cannot be treated as income where no characteristics of income can be detected in it. Where a person gets some receipt of money where he does not angle for it, or where it is not the product of an organised seeking after emoluments, or where it is merely a chance encounter with a venture, which while enriching him does not form part of any scheme of profit making, the idea of income is absent. It has been held there that the real basis for the concept of non-taxable casual receipt is that the transaction in question which produces it does not constitute any trade or an adventure in the nature of trade.


8. It has been held in the case of Mehboob Production P. Ltd v. CIT, (1977) 106 ITR 758 (Bom.) that: "In order to constitute of income, the receipt must be one which comes in (a) as a return, and (b) from a definite source. It must also be of the nature which is of the character of the income according to the ordinary meaning of that word in the English language and must not be of the nature of a windfall." A receipt in lieu of source of income is a capital receipt and a receipt in lieu of income is a revenue income.


9. It has been held in the case of Commissioner of Income-tax v. M. P. Poncha, (1995) 125 CTR (Bom.) 274; (1995) 211 ITR 1005 (Bom.) that:


"Payment of alimony to divorced wife — payment made by employer out of assessee’s salary under instructions of assessee. This is a clear case of application of income by the assessee for payment of alimony to his ex-wife and maintenance of his minor child. The direction to the employer or the agreement with the employer to pay the agreed amount of Rs.650 per month to the ex-wife every month is only a mode of payment .It does not in any way amount to diversion of salary income before it accrues to the assessee. The employer is obliged to pay the amount only after the salary income accrues to the assessee and becomes payable to him. It is at that point of time that the employer has agreed or undertaken to pay as per the wishes of the assessee the sum of Rs.650 per month to his ex-wife. The employers have only agreed to deal with the amount of salary accrued to the assessee in such a manner as directed by him. It is a clear case of application of income which has accrued in the hands of the assessee. This is not a case of diversion of income by overriding title."


10. In the judgment of the Board in the case of Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC), delivered by Lord Russell of Killowen, their Lordships of the Privy Council, after referring to the aforesaid two decisions, have observed as follows (p. 522):


"The word 'income' is not limited by the words 'profits' and 'gains'. Anything which can properly be described as income is taxable under the Act unless expressly exempted.

It is not in their Lordship's opinion correct to regard as an essential element in any of these or like definitions a reference to the analogy of fruit, or increase or sowing or reaping or periodical harvests."

11. In Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 (PC), the assessee, who owned a nine-annas share in an estate, with the object of discharging his debts and of obtaining for himself an adequate income for his life, conveyed the greater portion of his estate to his son-in-law's mother who owned the remaining seven-annas share in the estate. The consideration for the transfer was: (i) the payment of the assessee's debts amounting to Rs. 10,26,937 ; (ii) a cash payment of Rs. 4,73,063 ; and (iii) an annual payment of Rs. 2,40,000 to the assessee for his life. It was held by the Privy Council, inter alia, that this was clearly a case where the owner of an estate (the assessee) had exchanged a capital asset for (inter alia) a life annuity which was income in his hands and not a case in which he had exchanged his estate for a capital sum payable in instalments and that this income was taxable under the I.T. Act, even though the annuity did not constitute or provide a profit or gain to the assessee. After referring to the aforesaid decision of the Privy Council in the case of Shaw Wallace & Co., their Lordships observed as follows (p. 242):


"The word 'income' is not limited by the words 'profits' and 'gains'. Anything which can properly be described as income is taxable under the Act unless expressly exempted. In their Lordships' view the life annuity in the present case is 'income' within the words used in the judgment of this Board which was delivered in the case of CIT v. Shaw Wallace & Co. ."


Conclusion


Alimony cannot be said to be income from any particular source. Nor it can be said to be return for any past service or any consideration. It is a personal payment. Decree is a legal process of pronouncement. The right to claim alimony originates from the relationship of marriage. There can be no decree of alimony without marriage. Alimony should not be regarded as ‘return’ from the decree, because it has its roots in the relationship of marriage and NOT in the decree. A husband may agree to pay alimony to his wife with mutual consent without existence of decree. If alimony were to be treated as income, then money given by husband to wife every month could also be treated as income applying the same analogy as given in the case of Princess Maheshwari Devi (supra). The intention of the statute governing alimony is to provide for ‘Maintenance and support’ of the dependant and certainly not to create a ‘source of income’ in the common parlance.


As a matter of law, the decision of Princess Maheshwari Devi (Bombay High Court) holds good and accordingly monthly alimony shall be taxable and single payment alimony shall be dealt as capital receipt. However owing to reasons cited above, the decision is worth another consideration.

Tapuriah Jain & Associates
Chartered Accountants
21,. Skipper House, 9, Pusa Road, New Delhi - 110 005
Tele : 91-11-28754012 & 13, Mobile : 91-98-100-46108, E-Mail : caindia@hotmail.com
www.anilkumarjainca.blogspot.com


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GM gets relief in tax liability case from HC


Aug 27, 2012:

General Motors (GM) India Limited, Indian subsidiary of US-based auto giant General Motors Corporation Group, has got relief from Gujarat High Court in connection with a tax liability case filed against it by the Income Tax (I-T) Department.

A division bench of Justice V M Sahai and Justice N V Anjaria quashed notices issued to the company by I-T authorities ordering fresh assessment of its income tax return for assessment year 2006-07 and held that the income tax officials erred in issuing notices to the petitioner company.

The court further held that that GM was entitled to get the benefit of unabsorbed depreciation of past years. It further held that the company was eligible to get the depreciation set off against the profits of subsequent years. While deciding the important issue of depreciation, the bench ruled, “Current depreciation is deductible in the first place from the income of the business to which it relates. If such amount is larger than the amount of the profits of the business, then such excess comes for absorption from the profits and gains from any other businesses carried out by the assessee (GM).”

It added, “If a balance is left out even thereafter, that becomes deductible from out of income from any other source under any other heads of income during that year. In case there is still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year.”

GM India, manufacturing cars under brand name Chevrolet, had filed the petition before high court early this year and challenged the notice issued by the income tax department for reassessment of income return for assessment year 2006-07 in March, 2011. The company had sought interference of the court in holding that the income tax department had wrongly assessed its income for financial year 2006-07 to the tune of Rs 53 crore, whereas it had claimed nil tax for the period.

The company’s turnover in 2006-07 was Rs 1884.51 crore, on which it showed a profit of 55 crores. It however declared it’s total taxable income as nil under e-filing.

The case was sent to scrutiny, in which the revenue authorities held that they had reasons to believe to assess additional income of Rs 53 crores, upon which the company would have to pay tax. The company raised it’s objections to such findings with the Dispute Resolution Panel in Ahmedabad which issued direction to the Assessing Officer in August 2010 to make additions under the provisions of Section 144C (6) of the Income Tax Act.

The officer made additions under various heads to the income of the Company, and allowed unabsorbed depreciation of assessment year 1997-98 of Rs 43. 60 crore and accepted the total income at nil. The relevant additions were made to the income of the Company but the same was set off against various unabsorbed losses and unabsorbed depreciation of the previous year.

However, the Company got notice from the I-T department in March 2011 seeking reassessment of its return of assessment year 2006-07. The I.T. officials had reasoned that the Company was not entitled for set off of depreciation of 1997-98 against profits for year 2006-07. GM objected to the decision of I-T department and after there was no resolution on the issue with the I-T department, the former approached high court early this year.


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Functional Currency under IFRS and its Implementation
By Sanjay Chauhan
This article covers the ‘Functional Currency’ aspect differentiating with ‘Presentation Currency’ as laid in Ind AS 21 i.e. IAS 21, which is totally new concept when India converges to IFRS.


Introduction
India has laid down the convergence plan of ‘Indian Accounting Standards’ (AS) with ‘International Financial Reporting Standards’ i.e. IFRS in a phased manner. The first phase implementation was expected to begin from April 1, 2011 but due to practical challenges, the implementation is delayed. Veerappa Moily in a recent interview expressed his views by saying that even if tax issues are not addressed, the Ministry will go ahead with IFRS convergence.

ICAI, as part of convergence approach, has come out with 35 Ind AS which are same as IFRS except for the carve outs. Ministry of Corporate Affairs (MCA) has notified 35 Ind ASs on February 25, 2011.

Amongst these standards, there is one standard that has the potential to entirely turn the Indian financial statements Topsy Turvy and that is IAS 21 i.e. Ind AS 21.

Currency for accounting and presentation
While all Indian entities prepare their books of accounts in Indian Rupees, we have never thought on preparing our books in any other currency. While there may be some who did wish of using currency other than Indian Rupee (INR) on account of huge foreign exchange exposures but did not have any guidance or literature to support them.  The spot will now be addressed in “Ind AS 21 - The Effects of Changes in Foreign Exchange Rates”

Once India starts converging to Ind AS, we will have this standard on effects of exchange fluctuations, which has considered the aspect of huge volatility and exposures to operations due foreign currency (i.e. other than INR). It requires the managements of the companies to adopt a suitable currency for maintaining their accounts. Since the entities may vary their exposures to currency in different years, the standard has mandated the assessment of such book keeping currency every year.

If any other currency say US $ is considered as the currency that influences the primary economic environment, managements will have to prepare themselves to consider INR as foreign currency exposure and mark to market all INR monetary assets and liability at each balance sheet date.

Ind AS 21 – ‘The Effects of Changes in Foreign Exchange Rates’ is a standard that brings a new dimension to the financial statements prepared in India. Now, the book keeping currency i.e. Functional currency will no more be optional or default INR, it will be governed by specific principles as laid down under the standard and can be different than the presentation currency.

Functional Currency:
Let us appreciate the governing principles of functional currency under Ind AS 21:

“Functional currency is the currency of the primary economic environment in which the entity operates.” (para 7)

“The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency:

a. the currency:

(i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and

(ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.

b. the currency that mainly influences labour, material and other costs of providing goods or  services (this will often be the currency in which such costs are denominated and settled).” (para 8)

Ind AS 21 defines the Functional Currency and differentiates with the Presentation Currency. The primary factor that drives the choice of currency is primarily influenced by stream of revenue and operating costs. Additional factors that the standard requires to examine are the currency of loan obligations.

“Many reporting entities comprise a number of individual entities (e.g. A group is made up of a parent and one or more subsidiaries). Various types of entities, whether members of a group or otherwise, may have investments in associates or joint ventures. They may also have branches. It is necessary for the results and financial position of each individual entity included in the reporting entity to be translated into the currency in which the reporting entity presents its financial statements. This Standard permits the presentation currency of a reporting entity to be any currency (or currencies). The results and financial position of any individual entity within the reporting entity whose functional currency differs from the presentation currency are translated in accordance with paragraphs 38–50.” (para 10)

Under existing AS 11 definitions, foreign currency is a currency other than reporting currency, and reporting currency is the currency used for reporting financial statements. The rules of translating the subsidiary accounts into reporting currency as remain similar under Ind AS 21, which prescribes using closing rate for Balance sheet items and transaction rate or average rate for income statement items (para 38-50)



Point of difference:
Under Indian GAAP, a currency used for  preparing as well as reporting  .i.e. presenting financial statements to regulatory authorities, lenders, investors, etc is foreign currency is no other than INR. There is no idea of differentiating the currency to report financial statements (presentation currency) and currency in which books of accounts are to be maintained (functional currency).

Functional Currency: Industry perspective
Under Indian GAAP there is no concept of functional currency identification. It however has reference to ‘Reporting Currency’, which is expected to be the same currency of the country in which it is domiciled.

The definition of functional currency in Ind AS will encompass all the Companies whose primary economic environment is not the Indian economy.

The impact of this standard will be more evident on Commodity market linked companies engaged in mining, refining, and trading products, whose primary revenue is governed by International Commodity prices prevailing on London Metal Exchange in US Dollars. Another Industry attracted by the implementation of Ind AS will be Business Process Outsourcing Companies and Software Companies whose primary revenue is again governed in terms of Dollars and Euros.Oil and Gas companies are also prone to get functional currency assessment and application in India since the Oil prices are quoted in US $ per barrel globally.

It will also be impacting the bullion companies that are listed on Indian stock exchanges and others that are planning to list soon on Indian and international bourses. The revenues of these companies are always traded in US $ in India and internationally.

Domestic prices for sales within India, of these companies though is in INR, but are arrived at by first considering the respective International prices in US$ and then making certain adjustments such as duty differentials, domestic market premium, freight differentials, competitive discounts, etc which in industry terms is called as ‘Shadow Gap’ pricing.

It will depend on each company to apply its own judgment and access all the criteria of primary environment and other additional factors that influence the choice of its functional currency.

Challenges on adoption of functional currency other than INR in India:

1. If the accounting records of these Indian Companies are to be prepared under Ind AS then the financial statements will altogether give a different picture. Since currency fluctuation on say US $ may now sit in transaction amounts and change company’s profitability.

2. Change in mindset and budgets required.

3. Will lead to difficulty in decision making processes by Indian Managements specifically in assessing its foreign exchange exposure which so far was on currencies other than INR.

4. Continuing a parallel accounting system for Income Tax submission since Direct tax Code does not provide for similar changes.

5. Updation / modification to respective ERP solutions.

6. Accounting for Deferred tax and unwanted volatility in income statement.

Indian Industry including Managements, Lenders, Investors, Analysts of financial statements will have to prepare for seeing a currency different than INR as accounting currency in annual financial statements. Many companies internationally have adopted this standard which aligned their accounting currency i.e. functional currency in line with their respective primary economic environments.

In International market most of the transactions happen in US dollars and India is now a part of a global economic platform and thus is very much influenced by US $ in its financial statements. The impact is more evident in industries that are primarily dependent on US $ and whose profitability is affected by any change in US $: INR exchange rate such as Mining & Metals, Oil & Gas, Software exports and Business Processing Operations among others.

In determining the functional currency, the entity will have to manage various challenges including the change in mindset and ERP solutions. It is worth to note that accounting software giants such as SAP has a functionality to address the dual currency accounting which can take care of both Tax reporting using INR as functional currency and IFRS reporting using any other currency.


Change in functional currency
“When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change”

Thus the entity will have to assess the criteria for driving primary economic every year and apply the accounting impacts for such change prospectively. Here the country’s policies also would influence the decision such as restrictions on holding foreign currency and INR being the only legal tender in India.

The entity will also have to explain as to why it considers such change in its functional currency, in notes to financial statements.

Presentation currency
Here Ind AS 21 allows the entity to present its financial statements in any currency and does not restrict any one currency. However, considering the Indian requirements for ROC filing, tax submission, Stock exchange filings, etc the presentation currency will be preferred to be INR.

INR as the presentation currency in Indian market will also be preferred currency for reporting to facilitate easy comparability with its peer group.  This can be achieved by either following the rules of translation (using average rate for P&L and closing rate of balance sheet) which will give rise to translation reserve or convenient translation using a single rate for all the items on balance sheet and income statement. 

International Precedence
In order to relate to the new concept, we hereby study some international companies who have gone through the change in functional currency. Following relevant excerpts are for reference:
“StatoilHydro (OSE:STL; NYSE:STO) changed the company structure as per 1 January 2009. The parent company, StatoilHydro ASA, and two subsidiaries, consequently changed their functional currencies to USD from the same date.

The accounts for these companies are therefore now recorded in USD, while the presentation currency for the Group remains NOK. The changes in functional currencies have no cash impact.

The companies changing functional currency will no longer have currency exchange effects, deriving from USD denominated monetary assets and liabilities, related to the “Net financial items”. Conversely, monetary assets and liabilities, denominated in other currencies than USD, may now generate such currency effects.” 

Radiance Electronics Limited, Singapore
“Certain subsidiaries of the Group have changed their functional currency from SGD and RMB to USD in FY2008A. Revenue for these subsidiaries is mainly denominated in USD while purchases are mostly made in USD. Administrative expenses are denominated based on their country of domicile and are mainly in SGD and RMB.

While the factors used to determine its functional currencies are mixed, the Company is of the opinion that USD best reflects the economic substance of the underlying transactions and circumstances relevant to the foregoing subsidiaries. Accordingly, the subsidiaries adopt USD as its functional currency with effect from the current financial year ended 31 December 2008. This change shall be applied retrospectively to the prior years.

The Company and the Group continues to present its financial statements in SGD consistent with prior years.”

Internationally it was easier for Companies to adopt a change in currency of accounting since these are fully convertible economies i.e. they can operate bank accounts in foreign currency. Thus the change in mindset was comparatively easier, however the common challenge was again ERP which had to be equipped with dual currency reporting for tax purposes.

Forward Path
It will be a challenging journey for Indian corporates who will adopt Converged IFRS ie “Ind AS” and will have to definitely consider the implications of these standards on its accounting and reporting requirements.

Companies will also have to consider the Enterprise Resource Planning (ERP) solutions to make them equipped with dual currency accounting and reporting considering the Indian Tax authorities will require INR as book keeping currency. 

Thus till now we considered INR for recording and viewed dollar as foreign currency but now the users of financial statements will have to be prepared to see Indian Profit & Loss account under US $ and exchange fluctuation impact on profitability on INR balances.

This standard on functional currency might be considered as welcome move for some and tedious requirement for others. We will have to wait and see the real implementation.

Article Courtesy (mail from) : Ajay Aggarwal

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