The Hindu Business Line : ‘AS 11 norms would have driven down India Inc profits’

Profit and loss
Reliance’s Q1 net profit would have been lower by Rs 940 cr, RCom’s lower by Rs 1,000 crore and Bharti Airtel’s by Rs 250 cr
Cos say they have followed Schedule VI of the Companies’ Act on the basis of legal advice

Kripa Raman

Mumbai, Aug. 5 Several blue-chip Indian companies would have reported substantially lower net profits for the fiscal first quarter had they followed Accounting Standard 11 (AS 11) on forex borrowings.

Under AS 11, foreign exchange gains or losses on borrowings for fixed assets have to be charged to the profit and loss account. This would impact the net profit that companies announce every quarter.

Reliance Industries’ first quarter net profit of Rs 4,110 crore would have been lower by Rs 940 crore (or by close to a fourth) had it followed AS 11, the company said in its notes to the accounts.

Reliance Communications’ net profit of Rs 1,500 crore would have been lower by Rs 1,000 crore, or two thirds; and Bharti Airtel’s net profit of Rs 2,100 crore lower by Rs 250 crore. Jet Airways’ net earnings of Rs 143 crore would have been wiped out and moved into the red with a forex loss under AS 11 of Rs 622 crore.

These companies say they have followed Schedule VI of the Companies’ Act on the basis of legal advice obtained by them. This allows them to adjust their foreign exchange losses against the carrying cost of fixed assets.

This means if they had to pay Rs 4,200 ($100) on borrowings for fixed assets at Rs 42 to the dollar, and the rupee depreciated to Rs 44 subsequently, then the difference of Rs 200 will be adjusted against the value of the machinery acquired by the company. Under AS 11, this will directly dent net profit.

Conceptually, AS 11 presents a truer picture of the affairs of a company, said a chartered accountant and partner at a major audit firm: “If one has to pay more on borrowings because of exchange fluctuations, it does not mean the value of one’s asset changes.”

The Government notification of the Companies (Accounting Standards) Rules 2006, says in a footnote to AS 11: “it may be noted that the accounting treatment of exchange differences contained in this Standard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act 1956.”

An official with Institute of Chartered Accountants of India said: “What these companies ought to be doing is very clear from this notification.”

This is a classic legal issue where these companies have got legal advice to say they are following the law of the land (the Companies’ Act) which is after all still not invalid, said the partner with the audit firm: “Somebody must take up this issue so that reporting is done in the true spirit with which it ought to be done.”