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Full accounting shift for hedging tools on hold
February, 16th 2011

India's accounting rule-setter has said that most Indian companies, barring a few big ones, will not have to follow a stringent rule that mandates incorporation of valuation gains or losses on complex financial instruments , such as derivatives, in their income statements.

The Institute of Chartered Accountants of India (ICAI) has deferred accounting standard (AS) 30 that operationlises this requirement for companies that are not in the first phase of convergence of Indian accounting norms with globally recognised international financial reporting standards, or IFRS.

Originally issued by the ICAI in 2007, these standards were made applicable from April 1, 2009, on a recommendatory basis and were to become mandatory from this April.

The 300-odd companies, including those in stock market benchmarks sensex and the Nifty and those that have net worth of more than Rs 1,000 core, will have to report their financials according to IFRS starting April 1.

They will have to follow an equivalent international accounting standard (IAS-39) to AS-30 . Companies across sectors were sceptical of AS 30 because of its impact on bottom lines. The standard recognises notional gains or losses arising out of fluctuations in the value of assets, making profit-and-loss statements volatile.

"If Indian companies were to apply AS 30, in most cases, the impact would be very significant and mostly adverse in the financial statements," said Dolphy D'Souza, partner, Ernst & Young.

The standard, first issued in 2007, was put on hold after the financial crisis showed the impact such valuation gains or losses could have on profit-and-loss accounts.

"Subsequent to the issuance of this standard, the world witnessed financial crisis which raised issues with regard to accounting treatment of financial instruments," the regulator said in a note.

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