The country's accounting regulator, Institute of Chartered Accountants of India (ICAI), clarified on Monday that its announcement on derivative accounting was to ensure that companies report their estimated losses from foreign currency derivatives as per already existing norms. The regulator said it has not advanced the compliance date for the new accounting norms on financial instruments, although it would encourage early adoption. ICAI said that it has no problem if other regulators-SEBI or RBI-want an early implementation.
Adopting the new standard on financial instruments-AS 30-would allow companies to provide for future gains as well as losses on foreign currency derivatives as per their fair market value, while following the existing norm of accounting prudence-AS 1-will force them to provide for only losses and not gains. That is if they do not adopt the new standards, they will not have the flexibility to provide for future gains. Therefore, net profit may be lower. Corporate houses are expected to make their balance sheets this way even now, but many had doubts after ICAI recently brought in AS 30.
ICAI officials told reporters on Monday that it received queries from various quarters on whether corporate houses need to disclose their exposure to derivative instruments now since the accounting standard covering them need to be compulsorily followed only three years from now.
"Some even suggested that companies need not disclose them. Our position is that companies have to disclose their exposure to foreign currency derivatives as per the principle of prudence enunciated in accounting standard one, which requires companies to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market", ICAI president Ved Jain said here.
This removes the possibility of companies not disclosing derivative losses in the transition period-from now to 2011-under any pretext. Derivative losses may be more for greedy corporate houses that used these instruments to make speculative gains instead of using them merely for hedging risks. Accounting experts said that those who do not adopt AS 30 immediately, will have to assess the losses on those instruments based on their understanding and available information and deduct it from their profits.
"Banks are already doing it, but corporate houses keep them as off-balance sheet items. Many big companies listed in overseas markets using international GAAP do show them in their books, but others including a large number of small and medium enterprises do not. We cannot speculate on its exact magnitude now. For those who used derivatives as a risk mitigating tool, the impact may be less," said E&Y director Viren Mehta, who specialises in financial markets.