The Hindu Business Line : Derivative accounting

The debate going on with respect to derivative accounting, especially after a directive was issued by the Institute of Chartered Accountants of India on March 29, 2008 and the articles published by media, whether descriptive or in the nature of interviews, are of serious nature.

According to the directive of the ICAI, to maintain the principle of prudence while complying AS-1, a disclosure with respect to company’s accounting policies makes it mandatory to provide for the losses in respect of outstanding derivative contracts at the balance-sheet date by marking them to market. Here it is clear and simple that every entity is supposed to provide for the loss due to outstanding derivative contracts as at March 31, 2008.

The above referred directive says “It may be noted that although the ICAI has issued AS-30, Financial Instruments: Recognition and Measurement, which contains Accounting for derivatives, it becomes recommendatory from April 1, 2009 and mandatory from April 1, 2011.

In this scenario, the Council expressed the view that since the aforesaid Standard contains appropriate accounting for derivatives, the same can be followed by the entities, as the earlier adoption of a standard is always encouraged”.

It is difficult to understand the basis of issuing a directive for earlier adoption because AS-1 itself makes it mandatory to account for losses at the balance sheet date and is already applicable whereas AS-30 simply provides guidance as to how to account for the transactions relating to derivative contracts remaining outstanding as at balance sheet date. The ICAI directive suggests the adoption of the principles laid down in AS-30 as is evident from the language of the directive. In case different accounting treatment to these transactions is given by different entities it will be difficult to know about the true and fair value of the company from the audited published financial statements.

On the one hand, we are moving towards adoption of International Accounting Standards to make our accounting compatible with the international accounting norms for better uniformity and transparency and, on the other hand, we are allowing different entities to adopt different norms to account for derivative transactions. It is suggested to make the AS-30 mandatory for the sake of uniformity and better transparency.

Dilip K. Raina Chartered Accountant

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