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Firms get govt breather on forex earnings
October, 17th 2011

The ministry of corporate affairs, or MCA, has given Indian firms another year to spread their liabilities on account of foreign exchange borrowings accruing from fluctuations in foreign exchange, or forex, rates.

While getting more time to amortize such liabilities will come as a breather for a large number of companies that have raised loans abroad, it has perturbed chartered accountants, who say this is the governments way of signalling a delay in the implementation of International Financial Reporting Standards (IFRS). They also contend that the government should refrain from tinkering with IFRS-compliant accounting standards that have been notified, but are yet to be implemented.

IFRS guidelines are more stringent and allow accounting for such gains or losses to be charged in the profit and loss account. I feel we need to take a long-term view on adopting global standards, and that ad hoc changes dont help, said Jamil Khatri, executive director and head of accounting advisory services at KPMG in India.

The rupee has been weakening against the dollar in the past few months because of global economic turmoil. It has dropped 10.5% against the US currency since July.


File photo/Bloomberg

Khatri said that deferring losses because of forex fluctuation under Indian GAAP (generally accepted accounting principles) will only provide temporary relief, which is neither desirable nor justified.

According to AS11 (the current accounting standard), losses occurring because of the fluctuation of the rupee can be absorbed in two ways.

While this can be depreciated for the life of the plant or machinery for capital expenditure, when it comes to other segments, such as working capital, it could be spread over certain quarters.

MCA last week extended the date for amortizing gains or losses on money raised overseas on or after December 2006 till March 2012, against the previous deadline of March 2011.
The Institute of Chartered Accountants of India (Icai), the auditing and accounting regulator, had amended its guidelines accordingly with an exemption granted until 2011. This, too, has now been extended by another year after the MCA relaxation.

On 26 February, MCA notified 35 accounting standards required to make Indian accounting standards (Ind-AS) compliant with IFRS and said they will be implemented on 1 April.

Aligning with IFRS norms will help Indian firms raise cheaper capital overseas, besides making overseas listings and setting up subsidiaries and joint ventures abroad less cumbersome. More than 150 countries have adopted IFRS, created by the International Accounting Standards Board, an independent, privately funded standards body based in London.

The move is a clear indication by the government that IFRS will not be implemented before 2013, said Amarjit Chopra, former Icai president. He said this was unfortunate as it disrupts the implementation of the new standards.

The institutes position is that Ind-AS (norms) are ready, he said. These are in line with global practices and should not be tampered with, he said.

With the dollar strengthening against the rupee, exporters have benefited in the last few months, he said, but questioned what will happen when the US currency weakens.

Playing around with volatility is not good practice, he said.

Vinayak Pai, a Bangalore-based independent consultant on IFRS and business solutions, was critical of the MCA move.

Already some tweaking or carve-outs have been made in Ind-AS. If the government goes on making exemptions the spirit of adopting IFRS is defeated, Pai said.

India gave a pledge at the G-20 in 2009 that it would implement IFRS by 2011.

The ministry is committed to IFRS implementation but unless the direct taxes code is implemented, which has to be done through a parliamentary Act, the ministry can do little about implementation, a senior government official said.

The minimum alternate tax will be affected once Ind-As is implemented as the method of calculating the levy will change.

According to a road map issued last year, companies with a net worth of Rs.1,000 crore or more and publicly traded companies were supposed to align their accounts with IFRS in the first phase, starting 1 April.

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