The Hindu Business Line : Conflicting standards

By arming itself with powers to prescribe accounting standards, the Government has created a situation where accountants can neither go against norms prescribed by the ICAI nor against the law.

Lay investors have had enough reason to entertain misgivings about whether financial statements do indeed reflect an enterprise’s performance accurately. That is bound to be reinforced by the recently surfaced dichotomy between the accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI) and the Company Affairs Ministry on accounting for changes in foreign exchange rates affecting a company. The reported financial performance in the f irst quarter of the current fiscal of some of the leading listed companies would show significant differences in the bottomline depending on whether they followed the norms prescribed by the Ministry under the company law or the ICAI. The fact that in some cases profits turn into a loss or that the figure of net profits is overstated by as much as 20-25 per cent is not conducive to proper price discovery in the shares of these companies.

At the heart of the issue is whether changes in the rupee value of foreign currency obligations due to changes in the exchange rate ought to be directly reflected as a loss/gain in the profit and loss account or adjusted against the cost at which fixed assets are currently carried in the books of account. Issues such as the appropriateness of a particular method when currency movements are bi-directional, as is increasingly the case, or when the company has hedged its risk by locking itself into a specific rate that is different from the rate prevailing on the date for which financial statements are prepared, lend themselves to differing interpretations. Interestingly, each of these interpretations has its own conceptual merit. That, however, is inherent in the nature of accounting for financial transactions, not just for differences in foreign exchange rates. That is precisely the reason why the ultimate decision is best left to the accounting profession itself.

If the Government is of the view that the accounting body is abdicating its responsibility by either not laying down proper standards or is defining them so loosely as to lack academic rigour, there are ways of dealing with the situation so that companies are presented with only one set of standards. By arming itself with powers some years ago to prescribe accounting standards, the Government has created a situation where the accountants can neither go against norms prescribed by the institution to which they owe professional allegiance and are subject to its disciplinary oversight, nor go against the law. Such an absurd situation ought not to be allowed to prevail.

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