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Finally, there is some clarity, pending finalisation of a proper accounting standard, on how to deal with forward covers on transactions that are not completed in the accounting period.

The Institute of Chartered Accountants of India (ICAI) has said that prospective revenue implications of fluctuations in currency rates should not be taken to the quarterly profit and loss account if the hedged transaction has not taken place within the accounting quarter.

The difference between the currency rate on the day the forward contract was entered into and the day on which the transaction is completed should be taken to the P/L account only in the quarter in which the hedge is concluded. The premium paid on the hedge is treated as an expenditure separately.

The ICAI central council, in a decision taken late June, has said an accounting standard on the effects of change in foreign exchange rates (AS-11) will not be applicable on contracts entered into to hedge currency risks of a commitment for export or import that is to take place in the near future.

The decision came after sections of the industry sought a clarification on the matter as the revised AS-11 was applicable with effect from April 1, 2004.

The industry was confused if it had to account for the fluctuation in the currency rate where a forward contract had been entered into in the first quarter of the current financial year but the transaction in the form of purchase/sale of good and services had not taken place before the end of the quarter.

The institute has said that companies could follow any of the internationally followed practices to account for the fluctuation when quarterly accounts are prepared. Internationally, the norm is to book gain or loss on forward cover only on the conclusion of a transaction.

For instance, assume that a company enters into a forward contract with a bank on April 1, 2004, to buy dollars at the rate of Rs 49 - at a premium of Rs 6 to the current spot rate of Rs 43 - for an import transaction that is to be completed on July 30. On June 30, when the company has to prepare its accounts for the quarter April-June 2004, if the spot rate is Rs 48, the gain on the forward contract would be Rs 5.

However, since AS-11 will not be applicable, the company cannot book this gain in the profit and loss account for the quarter ending June 2004.

When the transaction is completed on July 30, the company can book the gain made against the spot rate that day. If the spot rate on the day the import transaction is completed is Rs 50, the gain on the forward cover would have risen to Rs 7.

This gain of Rs 7 can be taken into the P/L account for July-September 2004. The premium of Rs 6 paid on the spot rate of April 1 is to be treated separately as an expense.

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