## Exception to Recognising Exchange Differences in P&L – Para 46A
Normally, all exchange differences on monetary items go to P&L.
Para 46A provides an option (irrevocable once exercised) for companies with long-term foreign currency monetary items (e.g., a foreign currency loan with tenor > 1 year).
---
### Two Situations
#### Case A: Long-term foreign loan taken for a Depreciable Asset (e.g., PPE)
| Treatment |
|---|
| Exchange difference on the long-term loan adjusted to the cost of the asset |
| Exchange loss → Add to cost of asset |
| Exchange gain → Deduct from cost of asset |
| Depreciation is then charged on the revised cost |
Journal Entry (when loss arises):
```
Dr PPE A/c (cost capitalised)
Cr Exchange Loss A/c
```
(The exchange loss is first recorded normally, then reclassified to PPE cost.)
---
#### Case B: Long-term foreign loan NOT related to a depreciable asset
| Treatment |
|---|
| Exchange difference transferred to a separate reserve account |
| Account name: Foreign Currency Monetary Item Translation Difference A/c (FCMITD) |
| This balance is amortised to P&L over the remaining life of the loan |
Journal Entry (when loss arises):
```
Dr FCMITD A/c
Cr Exchange Loss A/c
```
---
### Key Rule
> Once the Para 46A option is exercised, it is irrevocable.
### Example 1
Illus 8 – Foreign Loan for PPE (Para 46A)
01.01.Y1: Foreign loan of ₹75 lakhs @ ₹40/$ = ₹3,000 lakhs (3-year long-term loan for PPE).
```
Dr Bank A/c (or PPE A/c) 3,000 lakhs
Cr Foreign Loan A/c 3,000 lakhs
```
31.12.Y1 (year-end): Closing rate = ₹42.5/$
- New loan value = 75 × 42.5 = ₹3,187.5 lakhs
- Exchange Loss = ₹187.5 lakhs
If Para 46A NOT opted:
```
Dr Exchange Loss (P&L) 187.5 lakhs
Cr Foreign Loan A/c 187.5 lakhs
→ Loss hits P&L immediately.
```
If Para 46A OPTED (loan for depreciable PPE):
```
Dr Exchange Loss A/c 187.5 lakhs
Cr Foreign Loan A/c 187.5 lakhs
Dr PPE A/c 187.5 lakhs ← Capitalise
Cr Exchange Loss A/c 187.5 lakhs
```
- Revised Cost of PPE = ₹3,000 + ₹187.5 = ₹3,187.5 lakhs
- Depreciation is charged on ₹3,187.5 lakhs going forward.
### Example 2
Illus 9 – Three Scenarios Side-by-Side
Foreign loan: $10,000 @ ₹48/$ = ₹4,80,000. Year-end rate = ₹51/$. Exchange loss = ₹30,000.
Scenario (i): Para 46A NOT availed
```
31.3.Y2 Dr Exchange Loss (P&L) 30,000
Cr Foreign Loan A/c 30,000
→ ₹30,000 charged to P&L.
```
Scenario (ii): Para 46A availed – loan for depreciable PPE
```
31.3.Y2 Dr Exchange Loss A/c 30,000
Cr Foreign Loan A/c 30,000
Dr PPE A/c 30,000
Cr Exchange Loss A/c 30,000
→ ₹30,000 added to cost of PPE; depreciation adjusted.
```
Scenario (iii): Para 46A availed – loan NOT for depreciable asset
```
31.3.Y2 Dr Exchange Loss A/c 30,000
Cr Foreign Loan A/c 30,000
Dr FCMITD A/c 30,000
Cr Exchange Loss A/c 30,000
→ ₹30,000 parked in FCMITD reserve; amortised to P&L over remaining loan life.
```