India Inc can raise a New Year toast to the Corporate Affairs Ministry. The apex ministry for corporates has eased an accounting rule on foreign exchange losses, allowing these to be taken on the books over the period of foreign exchange loans.
This should go a long way in helping the books look better for the current fiscal and beyond, even as the rupee continues its downward plunge. Companies would not be henceforth required to reflect their marked-to-market positions of their foreign currency debt in their quarterly earnings reports.
The relaxation means that exchange losses, if any, need not be expensed in the profit and loss account every quarter. This new flexible accounting treatment may help companies show to their investors a less distorted picture of their financial performance as their earnings statements will not get affected by notional exchange losses.
A new rule — Rule 46A — for accounting of exchange differences has now been introduced by the Corporate Affairs Ministry for this purpose. This window would be available both for companies that had earlier opted for a flexible accounting treatment announced in March 2009 due to the global financial crisis and also to those which did not then avail of this facility.
The corporate affairs has now issued two notifications — one extending the sunset clause under Rule 46 to March 2020 from the current level of March 2012 and the other is for ushering in a new Rule 46A which will be available for all companies.
“The latest move of Corporate Affairs Ministry is a welcome move. It will be a big breather for companies that face huge currency loss due to recent rupee volatility,” Mr G. Ramaswamy, CA Institute President, told Business Line here.
An important feature of the latest rule change is that companies that did not opt for the flexibility announced in March 2009 can now avail themselves of the flexible accounting treatment for accounting periods beginning April 1, 2011.
A sharp depreciation of the rupee against the dollar in the recent months has adversely impacted many companies which had foreign currency loans outstanding on their books. This has compelled many companies to turn to the Government and accounting regulators for regulatory relief.
The country’s top accounting standards body — National Advisory Committee on Accounting Standards had recently recommended to the Government that the existing flexible treatment on accounting of forex losses be extended for accounting periods beyond March 2012 and that such flexibility should be available over the period of the liability (loan).
The Corporate Affairs Ministry had in March 2009 eased accounting treatment on foreign exchange differences to help companies tide over the global financial crisis in 2008-09.
India Inc was given an option to refrain from complying with AS-11 (Effects of changes in foreign exchange rates), which stipulated that all exchange differences on foreign currency borrowings should be recognised only in the profit and loss account.
FLEXIBILITY
This flexibility allowed corporates to take the losses arising from exchange rate differences to the balance sheet and adjust them against the depreciable capital asset for whose acquisition the borrowings were made in foreign currency.
This was available only for accounting periods commencing December 7, 2006, till March 31, 2011, and later extended till March 2012. Now, this has been extended to March 2020.