Indian Government Accounting Standard (IGAS) 7

The Indian Government Accounting Standard 7 (IGAS 7) on Foreign Currency transactions and Loss or Gain by Exchange Rate variation presents IGAS 7 as set by the GASAB (Government Accounting Standards Advisory Board).

Introduction and Context

Government Accounting Rules, 1990 require that the accounts of the Government be maintained in Indian currency, which is the Indian rupee. The Indian rupee serves as the reporting currency for the financial statements of the Government.

Despite the primary requirement to maintain accounts in Indian rupees, the Government engages in various activities that involve foreign currency transactions. These include:

Operations of Indian Embassies and Missions abroad, which incur expenditure and make payments on behalf of various Ministries, Departments, public sector undertakings, and State Governments [3, 15(a)].
Bilateral and multi-lateral transactions, such as borrowing or lending, where principal and interest payments are denominated in foreign currency [4, 15(b)]. This can lead to loss or gain by exchange rate variation.
Procedures for disbursing foreign currency loans for projects, particularly from the World Bank, such as Direct Payment/Commitment procedure. This involves direct foreign currency payment to contractors/suppliers/consultants from loan funds, with the rupee equivalent being recoverable from the project implementing agency.
Schemes involving foreign currency denominated bonds/deposits like ‘The NRI Bonds’, ‘India Millennium Deposits’, and ‘Resurgent India Bonds’, subscribed by Non-Resident Indians, Overseas Corporate Bodies, or banks [6, 15(d)]. While proceeds may not always enter the Consolidated Fund (e.g., kept in Public Account or acquired by RBI), transactions flowing to the Government account are covered [6, 15(d)].
Issuing rupee securities to international financial institutions (like ADB, World Bank, IDA, IFAD, AfDB), which are accounted for under ‘internal debt’ [6, 15(f)]. These may require repayment in convertible currencies upon encashment, giving rise to exchange difference [6, 15(f)].
Transactions for acquiring Special Drawing Rights (SDRs) at the IMF, accounted for under specific heads [7, 15(e)].
Purchasing or selling goods or services where the price is denominated in foreign currency [15(c)].

These foreign currency transactions can lead to loss or gain due to differences between the exchange rate applied and the exchange rate internally adopted by the Government, such as the official rate of exchange or salary rate of exchange.

Objective of IGAS 7

The primary objective of IGAS 7 is to establish the accounting and disclosure requirements for foreign currency transactions and the financial effects arising from exchange rate variations. Specifically, it aims to address the loss or gain resulting from these variations and deals with the requirements for disclosure of foreign currency external debts and the rate applied for their disclosure. The standard seeks to provide guidance on which exchange rate to apply and how to recognise the financial effects of exchange rate variations in the financial statements in terms of loss or gain.

Scope of IGAS 7

IGAS 7 applies to the Accounting Authority that prepares and presents the financial statements of the Government under the cash basis of accounting. This includes both the Union Government and State Governments.

The standard specifically applies to:

Accounting and disclosure for transactions in foreign currencies [9(a)].
Accounting and disclosure for the financial effects of exchange variations in terms of loss or gain [9(b)].
Disclosure of foreign currency external debts and the rate(s) applied for disclosure [9(c)].

A declaration of compliance with IGAS 7 requires compliance with all its requirements.

IGAS 7 deals with the presentation of expenditure and revenue related to loss or gain by exchange rate variations from foreign currency transactions, and the disclosure of foreign currency external debt. However, it does not deal with disclosure requirements of external guarantees. Those requirements are covered in IGAS 1, “Guarantees given by Governments: Disclosure Requirements”. Furthermore, the standard does not deal with foreign currency reserves, as the Reserve Bank of India is the custodian of these.

Definitions of Key Terms

The standard provides specific definitions for terms used within its context:

Accounting authority: The authority responsible for preparing the financial statements of the Government.
Capital account: A division within Government accounts where receipts and expenditure of a capital nature are recorded.
Closing rate: The exchange rate effective on the last working day of the financial statement period.
Consolidated Fund of India or Consolidated Fund of State: The fund established under Article 266(I) of the Constitution of India.
Cross currency swap agreement: A financial agreement where two parties exchange streams of principal and interest payments in different currencies.
Direct Payment Procedure: A process where foreign currency is paid directly to contractors/suppliers/consultants from World Bank loan/credit funds, as chosen by the project implementing agency.
Exchange rate: The ratio used for exchanging two currencies.
Exchange rate variation: A change in the exchange ratio between two currencies.
Exchange difference: The difference arising from reporting the same foreign currency amount in the reporting currency using different exchange rates.
External guarantee: A guarantee against a liability that is denominated in foreign currency.
Financial Statements: Refers specifically to the Annual Finance Accounts of the Governments.
Foreign currency: Any currency other than the reporting currency of the Government (Indian Rupees).
Forward rate: A predetermined exchange rate specified in an agreement for exchanging two currencies on a future date.
Government: Encompasses the Central (Union) Government, a State Government, or a Union Territory Government.
Government accounts: The prescribed form, divisions, and accounting records used to account for all Government transactions.
Guarantee: An accessory contract where a promisor agrees to be answerable to a promisee for the debt, default, or miscarriage of another party, whose primary liability must exist or be contemplated.
Indian currency: Currency expressed or drawn in Indian rupees.
Official rate of exchange: The official accounting exchange rate between Indian rupees and foreign currencies, determined and issued periodically by the Ministry of External Affairs, Government of India.
Public Account: The Public Account of India as referenced in Article 266(2) of the Constitution of India.
Public Sector Undertaking: Government companies incorporated under the Companies Act, 1956, and Statutory Corporations established under specific Acts of Parliament and State Legislatures.
Reporting currency: Indian Rupees.
Revenue account: A division within Government accounts where receipts and expenditure of a revenue nature are recorded.
Salary Rate of Exchange: The exchange rate set by the Ministry of External Affairs, Government of India, for disbursing salaries to officials posted at Missions abroad.
Special Drawing Right: The international reserve asset created by the International Monetary Fund.

Reporting Foreign Currency Transactions

A foreign currency transaction is defined as one denominated in or requiring settlement in a foreign currency. IGAS 7 mandates how these transactions are initially reported. A foreign currency transaction of the Government shall be reported in the reporting currency (Indian Rupees) by applying the exchange rate between the reporting currency and the foreign currency that was applicable at the date of receipts and payments.

The applicable exchange rate at the date of receipts and payments is the rate determined by the Government of India for specific purposes (e.g., salary rate, official rate), or alternatively, the rate indicated by the Reserve Bank of India in its daily buying and selling rates, as appropriate.

Treatment of Loss or Gain by Exchange Rate Variation

IGAS 7 provides specific accounting treatments for loss or gain arising from exchange rate variations.

General Rule: All losses or gains by exchange rate variation in respect of Government transactions in foreign currencies (with certain exceptions) shall be recognised as revenue loss or gain.

Operating Activities and Contractual Commitments: Government may incur losses or gains from its operating activities, such as the operation of its missions abroad. Losses or gains may also arise due to contractual commitments to bear the financial effect of exchange rate variations as part of the Government’s fiscal and economic policy, as mentioned in the context of project financing (paragraph 4) and bond schemes (paragraph 5).

Special Drawing Rights (SDRs): Loss or gain arising from transactions for the acquisition of Special Drawing Rights at the International Monetary Fund shall be reported in the financial statements.

Financing Activities: Exchange difference may arise from the Government’s financing activities, including borrowing loans denominated in foreign currencies and issuing rupee securities. External borrowings are initially recorded at the historical rate of exchange, which is the rate prevailing on the date of the transaction. Since most loans have long repayment periods, exchange rates can change significantly over time. If the exchange rate is higher at the time of repayment compared to the historical rate, the rupee amount required for repayment will exceed the original rupee amount of the loan drawn.

Loan Repayment and Outstanding Balances: In case of repayment of loans, any remaining balance in the external debt head at the end of the loan period may be cleared. This clearance should be done by adjusting the balance under an appropriate revenue or expense head for exchange rate fluctuations or under a miscellaneous Government Account head.

Disclosure Requirements

IGAS 7 mandates specific disclosures in the financial statements to provide transparency regarding foreign currency transactions and exchange rate variations.

Statement of Accounting Policies: The financial statements shall disclose the rates of exchange adopted internally by the Government for different types of foreign currency transactions. This includes any forward contract rates used. The basis for adopting these rates must also be disclosed as part of the Statement of Accounting Policies.

Details of Foreign Loans: The financial statements shall disclose specific details of foreign loans. A format for this disclosure is provided in the standard. The details to be disclosed include:

Loans outstanding at the beginning and end of the year, presented on both a historical cost basis (in Rupees) and a closing rate basis (in Rupees) [22(a), 22(b), 23(g)].
Loans outstanding in foreign currency units at the beginning and end of the year [22(c), 23(g)].
Additions during the year, shown in both foreign currency terms and Indian Rupees, along with the rate of exchange adopted for the additions [22(d)].
Discharge (repayment) during the year, showing amounts separately in foreign currency units, on a historical basis, and on a current rate of exchange basis [22(e)].
Loss or gain on repayment of loans resulting from exchange rate variation [23(f)].
Interest paid on external debt [23(h)].
The closing rate of exchange applied for disclosure purposes [23(i)].

The format for this disclosure includes columns for Foreign Currency Units, Historical Cost Basis (Rs), Closing Rate Basis (Rs), Rate of Exchange, Loss or Gain on repayment, and Interest paid on debt raised outside India.

Disclosures in the Notes: Financial statements shall also disclose specific information in the notes. These notes should include:

A category-wise gross figure of loss and gain by exchange rate variation for the financial year [23(a)].
Loss and gain by exchange rate variation separately for Capital Head transactions and Revenue Head transactions [23(b)].
The amount of loan and exchange difference specifically for fully repaid loans [24(c)].
The amount of loss or gain, if any, on cross-currency swap agreements [24(d)].

The categories of foreign currency transactions for the gross figure disclosure include those mentioned in paragraph 16(a) to (f).

Effective Date

This Indian Government Accounting Standard (IGAS 7) shall be effective for financial statements for the periods commencing from the 1st April subsequent to the date it is notified by the Government.

In summary, IGAS 7 provides crucial guidance for the Indian Government on how to account for and disclose the financial implications of transactions conducted in currencies other than the Indian rupee, focusing particularly on the gains and losses that arise from fluctuating exchange rates.Based on the provided source material, here are comprehensive notes on the Indian Government Accounting Standard 7 (IGAS 7) on Foreign Currency transactions and Loss or Gain by Exchange Rate variation. These notes draw solely on the information presented in the source document. There is no conversation history provided in the prompt, so the notes are based exclusively on the source.

The source presents excerpts from the Indian Government Accounting Standard 7 (IGAS 7), which is set by the GASAB (Government Accounting Standards Advisory Board). The document outlines the standard’s introduction, objective, scope, definitions, treatment of foreign currency transactions and exchange rate variations, disclosure requirements, effective date, and a format for disclosure.

Structure of the Standard

The standard employs a specific structure to distinguish mandatory requirements from explanatory material. Standards, which represent the mandatory requirements that must be followed for compliance, are set in bold italic type. The explanatory paragraphs that provide context and detail are presented in plain type. It is noted that the Indian Government Accounting Standards are not intended to apply to immaterial items.

Introduction and Context

The fundamental requirement under the Government Accounting Rules, 1990, is that the accounts of the Government must be maintained in Indian currency, specifically the Indian rupee. The Indian rupee is designated as the reporting currency for the financial statements of the Government.

However, the Union and State Governments engage in various activities that involve transactions in foreign currencies. These activities necessitate a standard to deal with the accounting and reporting of these foreign currency transactions and the resulting financial effects.

Examples of government activities leading to foreign currency transactions mentioned in the source include:

Operations of Indian Embassies and Missions abroad [3, 15(a)]: These entities incur expenditure on their operations, including staff pay and entitlements, and make payments on behalf of other Ministries, Departments (defence, commerce, education), public sector undertakings, and State Governments [3, 15(a)]. These activities involve foreign currency transactions [3, 15(a)].
Bilateral and multi-lateral transactions [4, 15(b)]: Under Article 292 of the Constitution, the Union’s executive power includes borrowing upon the security of the Consolidated Fund. The Government enters into bilateral and multi-lateral transactions involving borrowing or lending, including debt servicing, denominated in foreign currency [4, 15(b)].
Foreign currency loans for projects [5, 15(b)]: For projects, particularly those aided externally by institutions like the World Bank, there are different disbursement procedures. The Direct Payment/Commitment procedure involves direct payment of foreign currency from loan/credit funds to contractors, suppliers, or consultants as opted by the project implementing agency. While the rupee equivalent is recoverable from the agency, the Union Government may release ‘additional central assistance’ towards these disbursements.
Foreign currency denominated bonds/deposits [6, 15(d)]: The Government may float schemes or enter agreements with banks (like SBI) to float schemes such as ‘The NRI Bonds’, ‘India Millennium Deposits’, and ‘Resurgent India Bonds’ for subscription by Non-Resident Indians or other entities [6, 15(d)]. Proceeds may not always enter the Consolidated Fund (e.g., Public Account or acquired by RBI), but transactions where the flow goes to the Government account are covered [6, 15(d)].
Rupee securities issued to international financial institutions [6, 15(f)]: Securities issued to institutions like the ADB, World Bank, IDA, IFAD, and AfDB are accounted for as ‘internal debt’ of the Central Government [6, 15(f)]. Repayment upon encashment may be required in convertible currencies [6, 15(f)].
Acquisition of Special Drawing Rights (SDRs) at the IMF [7, 15(e)]: Transactions for acquiring SDRs are accounted for under specific heads [7, 15(e)].
Purchasing/selling goods or services where the price is denominated in foreign currency [15(c)].

These foreign currency transactions inherently expose the government accounts to the risk of loss or gain due to differences in exchange rates. This variation can occur between the rate applicable for the transaction and any internally adopted rate, such as the official rate of exchange or salary rate of exchange.

Objective of IGAS 7

The main objective of this standard is to provide the necessary accounting and disclosure requirements concerning foreign currency transactions and the financial effects, specifically the loss or gain, arising from exchange rate variations. It also addresses the requirements for disclosure of foreign currency external debts and the specific exchange rate(s) applied for that disclosure. A principal issue the standard aims to clarify is which exchange rate to apply for reporting and how to recognise the financial effects (loss or gain) of exchange rate variations in the financial statements.

Scope of IGAS 7

IGAS 7 is applicable to the Accounting Authority responsible for preparing and presenting the financial statements of the Government. It is to be applied under the cash basis of accounting, as defined in the Government Accounting Rule 21 of GAR 1990 and Government Financial Rule 68 of GFR 2005. The standard applies to the foreign currency transactions of both the Union Government and the State Governments.

The standard covers the following aspects:

Accounting and disclosure for transactions in foreign currencies [9(a)].
Accounting and disclosure for financial effects of exchange variations resulting in loss or gain [9(b)].
Disclosure of foreign currency external debts and the exchange rate(s) used for their disclosure [9(c)].

Compliance with all the requirements of this standard is necessary for financial statements to be described as complying with IGAS 7.

While the standard deals with presenting expenditure and revenue related to exchange rate variations and disclosing foreign currency external debt, it explicitly does not deal with the disclosure requirements of external guarantees. These are covered in IGAS 1. Furthermore, IGAS 7 does not cover foreign currency reserves, as the Reserve Bank of India holds custodianship over these.

Definitions of Key Terms

The standard defines several terms crucial to its understanding:

Accounting authority: The body responsible for preparing the Government’s financial statements.
Capital account: A division of Government accounts used for receipts and expenditure of a capital nature.
Closing rate: The exchange rate on the last working day of the period for which financial statements are prepared.
Consolidated Fund of India or Consolidated Fund of State: Refers to the fund under Article 266(I) of the Constitution of India.
Cross currency swap agreement: A financial agreement to exchange principal and interest payment streams in one currency for those in another.
Direct Payment Procedure: The method involving direct foreign currency payment from World Bank loan/credit funds to parties like contractors/suppliers/consultants, based on the project agency’s choice.
Exchange rate: The ratio for exchanging two currencies.
Exchange rate variation: A change in the exchange ratio between two currencies.
Exchange difference: The difference resulting from reporting the same foreign currency amount in the reporting currency at different exchange rates.
External guarantee: A guarantee against a liability denominated in foreign currency.
Financial Statements: Specifically means the Annual Finance Accounts of the Governments.
Foreign currency: A currency other than the Government’s reporting currency (Indian Rupees).
Forward rate: A specified exchange rate for a future exchange of two currencies agreed upon in an agreement.
Government: Refers collectively to the Central (Union) Government, a State Government, or a Union Territory Government.
Government accounts: The prescribed format, divisions, and records where all Government transactions are accounted for.
Guarantee: An accessory contract where the promisor is answerable to the promisee for the debt, default, or miscarriage of another person whose primary liability exists or is contemplated.
Indian currency: Currency expressed or drawn in Indian rupees.
Official rate of exchange: The official accounting rate of exchange between Indian rupees and foreign currencies periodically determined and issued by the Ministry of External Affairs, Government of India.
Public Account: Refers to the Public Account of India under Article 266(2) of the Constitution of India.
Public Sector Undertaking: Government companies incorporated under the Companies Act, 1956, and Statutory Corporations set up under specific Acts.
Reporting currency: Indian Rupees.
Revenue account: A division of Government accounts used for receipts and expenditure of a revenue nature.
Salary Rate of Exchange: The exchange rate between the reporting currency and foreign currency fixed by the Ministry of External Affairs for salary disbursement to officials at Missions abroad.
Special Drawing Right: The international reserve asset created by the International Monetary Fund.

Reporting Foreign Currency Transactions

When a foreign currency transaction occurs, it is a transaction denominated in or requiring settlement in a foreign currency. Such transactions shall be reported in the reporting currency (Indian Rupees) by applying the exchange rate between the reporting currency and the foreign currency that was applicable at the date of receipts and payments. The applicable rate is either the rate determined by the Government of India for the specific purpose (e.g., salary rate, official rate) or the rate indicated by the Reserve Bank of India in its daily buying and selling rates.

Treatment of Loss or Gain by Exchange Rate Variation

IGAS 7 provides specific rules for accounting for the financial impact of changes in exchange rates.

General Recognition: All losses or gains by exchange rate variation in respect of Government transactions in foreign currencies, except for certain cases dealt with in paragraphs 23 and 24, shall be recognised as revenue loss or gain.

Operating Activities and Policy Decisions: Losses or gains by exchange rate variations can arise from the Government’s operating activities, such as the operations of its missions abroad. They can also result from contractual commitments where the Government bears the financial effect of exchange rate variations as part of its fiscal and economic policy, as seen in project financing arrangements (paragraph 4) and certain bond schemes (paragraph 5).

Special Drawing Rights: Loss or gain arising from transactions for the acquisition of Special Drawing Rights at the International Monetary Fund shall be reported in the financial statements.

Financing Activities and External Borrowings: Exchange differences can also arise from the Government’s financing activities, such as borrowing loans denominated in foreign currencies and issuing rupee securities. External borrowings are initially recorded at the historical rate of exchange, which is the rate on the transaction date. Due to the long repayment periods of most loans, exchange rates can change significantly. If the exchange rate at the time of repayment is higher, the rupee amount required to repay the loan will exceed the rupee amount originally drawn.

Clearing Loan Balances: At the end of the loan period, any balance remaining in the external debt head after repayment may be cleared. This clearance should be done by adjusting the balance under an appropriate revenue or expense head for exchange rate fluctuations, or alternatively, under a miscellaneous Government Account head.

Disclosure Requirements

Comprehensive disclosure is a key aspect of IGAS 7.

Disclosure of Exchange Rates: The financial statements shall disclose the rates of exchange adopted internally by the Government for different types of foreign currency transactions, including any forward contract rate. The basis for adopting these rates must also be disclosed as part of the Statement of Accounting Policies.

Detailed Disclosure of Foreign Loans: The financial statements shall disclose specific details regarding foreign loans. A suggested format for this disclosure is provided in paragraph 30. The required details are:

Loans outstanding at the beginning and end of the year, presented on a historical cost basis (in Rupees) and on a closing rate basis (in Rupees) [22(a), 22(b), 23(g)].
Loans outstanding at the beginning and end of the year in foreign currency units [22(c), 23(g)].
Additions during the year, shown in foreign currency terms and in Indian Rupees, along with the rate of exchange adopted for these additions [22(d)].
Discharge (repayment) during the year, presented separately showing amounts in foreign currency units, on a historical basis, and on a current rate of exchange basis [22(e)].
Loss or gain on repayment of loans resulting from variation in the exchange rate [23(f)].
Interest paid on external debt [23(h)].
The closing rate of exchange applied for reporting [23(i)].

The disclosure format includes columns to capture these details comprehensively, showing amounts in foreign currency units, Indian Rupees (historical cost and closing rate basis), rates of exchange, loss/gain on repayment, and interest paid.

Notes to the Financial Statements: Certain details are required to be disclosed specifically in the notes to the financial statements. These include:

The gross figure of loss and gain by exchange rate variation for the financial year, broken down category-wise [23(a)]. The categories include those mentioned in paragraph 16(a) to (f).
The loss and gain by exchange rate variation reported separately for transactions accounted for under Capital Heads and those under Revenue Heads [23(b)].
The amount of loan and exchange difference in respect of fully repaid loans [24(c)].
The amount of loss or gain, if any, on cross-currency swap agreements [24(d)].

Effective Date

This Indian Government Accounting Standard shall become effective for financial statements covering periods commencing from the 1st April immediately following the date the standard is officially notified by the Government.

In essence, IGAS 7 establishes a framework for the Indian Government to consistently account for and disclose the financial impacts of its foreign currency activities, providing clarity on how exchange rate fluctuations are handled in government accounts and reported in the annual financial statements.