The government's decision to relax compliance with accounting norm (AS 11) relating to foreign exchange losses and gains could could create deferred tax liability for companies opting for revised regulations, said global accounting firm Ernst & Young.
"A company that chooses to capitalise such (foreign) exchange losses in accordance with the option will have to consider creating a deferred tax liability," the global accounting firm said in its note on Amendment to Accounting Standard (AS 11).
The government through a notification on March 31 amended AS 11, giving the companies option to capitalise the losses and gains arising from restatement of financial assets on the basis of prevailing exchange rates, also known as mark-to-market (MTM) provisioning.
Pursuant to the notification, E&Y pointed out, a company could adopt the amended accounting norms relating to foreign exchange losses and gains for accounting periods commencing December 2006 up to March 2011.
However, once the changed norms are adopted, the company will have to stick over to it for the prescribed period, it said, adding the deferred tax liability may have to be created "because the tax benefit has been received before the expense has been debited in the books".
Under the new norms, the exchange losses and gains will have to be accumulated under a separate head, "Foreign Currency Monetary Item Translation Difference Account" and amortised by March 2011.