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Poll blues prompt ICAI to defer AS 11 relaxation
March, 14th 2009

The upcoming general elections could take its toll on the bottom lines of a host of Indian companies that have accessed overseas debt.

The Institute of Chartered Accountants of India (ICAI) has deferred a decision on relaxing accounting standard 11 (AS 11), which mandates mark-to-market (MTM) provisioning in the profit and loss account for foreign exchange-related gains and losses.

A decision was being awaited by Indian companies as a large number of them would have had to book further MTM losses with the rupee touching 51 against the US dollar. Most of them raised debt when the Indian currency was at sub-Rs 42 levels against the greenback. Companies have been booking losses over the past few quarters as well and had sought relaxation to book the losses till the loans matured.

The move will also impact over 150 companies that raised funds through foreign currency convertible bonds (FCCBs) and many of these companies were awaiting clarity from ICAI before deciding on buying back the bonds at a discount.

Last week, the statutory body postponed the decision on the grounds that it should not do anything that will be seen as benefitting a section of the society or the industry, an ICAI office-bearer said.

ICAI put off the decision although it, as a statutory body, is not subject to the model code of conduct that restrains the government from taking policy decisions that could benefit certain groups or sections.

"There were two views on this issue and a consensus could not be reached in the ICAI council meeting," said Uttam Prakash Agarwal, president of ICAI. However, discussions were still on and a decision would be taken soon, he added.

An ICAI member said the question was not about changing one accounting standard alone. It was more about whether the statutory body should change accounting standards due to the prevalent conditions.

It is not an extraordinary situation as globally companies have had to deal with exchange rate fluctuations, said another member.

Several large companies, based on legal opinion, were not following AS 11 and had instead decided to follow Schedule VI of the Companies Act, which said that as a result of exchange rate fluctuation, any change in the repayment needed to be added or deducted from the cost of fixed assets. Schedule VI allows the capitalisation of such losses.

Meanwhile, the ministry of corporate affairs that has a nominee on the ICAI council, the apex decision-making body, wanted the agency to review the role of auditors which had allowed companies to use the provisions of Schedule VI.

Later, however, it started seeing merit in the relief sought by companies, sources privy to the discussions said.

With the issue proving to be tricky, the Accounting Standards Board (ASB) referred the issue to a sub-committee, which recommended that relief could be given and companies could book the losses over a period of time.

The sources said that ASB referred the issue to the ICAI council without giving a verdict. When the ICAI council met last week, the issue was debated for nearly two hours but the members were divided over the issue.

There was no unanimity. Also it was felt that the elections process is underway and any agency should not be seen as giving relief. The matter will now be taken up after May 15, said an ICAI council member.

The law, however, mandates that companies have to announce unaudited fourth quarter results by April 30 and many companies are expected to go ahead with it despite no clarity on the issue.

As a regulator it is our duty to consider requests and look into their merits. We are having a dialogue on the issue. As of today, companies have to book the gains and the losses. The government always has the option to go to the National Advisory Committee on Accounting Standard (NACAS), said Agarwal.

NACAS is set up under the Companies Act and accounting standards prepared by ICAI are notified after they are referred to the body.

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