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Entities with dollar obligations will be asking the rupee “Why this kolaveri?” – a line from a Tamil song which translates as infuriating rage and which has become the rage all over town.
The tsunamic fall in the rupee vis-a-vis the dollar has dented many income statements and balance-sheets. Many of these dents are not visible in the income statements of entities that opted for the choice given in Accounting Standard-11 and the Companies (Accounting Standards) Rules to park exchange differences on long-term obligations in the balance-sheet in a separate account.
The first official notification No G.S.R.225 (E) was issued on March 31, 2009 giving the choice till March 31, 2011 which was extended by a year through a notification in May 2011.
The disappointing performance of the rupee has corporate requesting for another extension citing a host of economic conditions. The option provides that exchange differences arising on reporting of long-term foreign currency monetary items in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the life of the asset. For non-asset obligations, it was accumulated in a “Foreign Currency Monetary Item Translation Difference Account” and amortised over the balance period of such obligation with a sunset period of March 31, 2012.
Mark-to-market
The option is the most significant difference in the standards on foreign exchange differences between International Financial Reporting Standards (IFRS) and their Indian equivalents.
IFRS standards which believe in living — and in some instances perishing — on a year-to-year basis mandate all exchange differences hitting the profit and loss account every year. IFRS Standards on financial instruments state that all derivative transactions be marked-to-market.
Consistent accounting
Stories abound as to why the extension should or should not be given.
One of the factors to be considered is that if the foreign currency has been taken for an asset, that asset is depreciated according to its estimated useful life.
In case the asset has become a liability for the enterprise, it is impaired. Both these non-cash expenses find a place in the profit and loss account.
Opting for the choice would result in taking a different accounting treatment for the underlying asset and the loan taken to acquire it which may not be in tune with matching and other concepts of accounting.
Yet another reason pointed out for not offering a choice is that when forex gains are in the money and positive, entities are quick to take the credits into the profit and loss account.
Consistency demands that when the gains are out of the money and negative, the debits also go there.
Hedging
Another reason touted against the option is that entities today have a lot of options to hedge their bets through futures and options and derivatives. These act as a sort of insurance against wrong judgemental calls taken. Normal accounting practices do not permit deferring insurance losses or gains over a period of time.
One can take a forward contract on the dollar, swap it against the Euro and end up designating the contract in Yen. It is argued that shareholders need to know on a quarterly or annual basis the financial impact of all these escapades. Anything else is just deferring the news, whether good or bad.
Taking a holistic view, the net impact of forward contracts, swaps, options and derivatives mirror whether the risk management strategies of an enterprise are robust or retrograde.
As the risk management policies are reviewed on a dynamic basis, the financial statements should also reflect the net result of these policies at least annually. This is another argument of the brigade that favours international standards.
The Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA) should not be thinking of extending the sunset period. On hindsight, may be the Companies Accounting Standards Rules need not have provided them in the first place.
(The author is a Bangalore-based chartered accountant.)
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