The Hindu Business Line : `Revised accounting norms not applicable to forward contracts'

THE Institute of Chartered Accountants of India (ICAI) has clarified that its revised accounting standard on the effects of changes in foreign exchange rates (AS-11) would not be applicable to the forward contracts taken to hedge the foreign currency risk of a firm commitment or a highly probable forecast transactions.

The Reserve Bank of India had recently permitted hedging of forecast transactions i.e. one could take forward cover in transactions that have not yet been executed but forecasted as a highly probable transaction that would be executed.

Following this regulatory nod from the Central Bank, clarifications had been sought from ICAI by certain industry associations as to whether the revised AS-11 would deal with such transactions also.

"Some of the enterprises were interpreting that the revised AS-11 would apply for firm commitments or a highly probable forecast transaction. We have now clarified that the revised AS-11 would not apply on hedging of a highly probable forecast transaction," a senior ICAI official told Business Line.

The revised AS-11, which was issued in March 2003, is mandatory in respect of accounting periods commencing on or after April 1, 2004.

For the purpose of preparation of quarterly results for the quarter ended June 30, 2004, the revised AS-11 is required to be applied.

The official said that ICAI is developing an accounting standard on `Financial instruments: Recognition and measurement' and that this standard would deal with hedge accounting on a comprehensive basis.

"Till the time a new standard is developed, enterprises could adopt international accounting standards to take care of any exchange difference arising on a forward contract taken to hedge the foreign currency risk of a firm commitment or a highly probable transaction," the ICAI official said.