Recognising hedging losses, a matter of prudence: ICAI
April, 16th 2008
While concerns are being raised by sections of the industry and media because Indian companies perhaps could get away by not reporting losses on derivative contracts in case the deals are classified as not speculative, Mr Ved Jain, President, The Institute of Chartered Accountants of India (ICAI) said that making provision for losses on outstanding derivative contracts is a matter of prudence.
Given the standards of corporate governance followed in the country and the sensitive issue of investors interest, some companies may well opt to exploit loopholes which are there for the taking. Mr Jain re-iterated that the March 29 announcement on accounting for derivatives, issued by regulator of the Indian accounting, contains the best practice of accounting treatment that in case there is a situation of loss on derivative contracts outstanding on the balance sheet date, the same needs to be provided according to the principle of prudence as enunciated in Accounting Standard (AS) 1.
In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information, Mr Jain noted.
But, who decides whether the transaction is speculative or not? Are profits or losses a measure of speculation? The ICAI is still to come clear on queries such as these; e-mailed questions to the Institute in this regard were yet to receive any replies at the time of writing.
Industry experts remain critical of the way the ICAI has chosen to ask companies to adopt hedge accounting standard. I believe that it would have been a better policy to ask companies to adopt AS-30 (Financial instruments: Recognition and measurement) for hedge accounting rather than exempting companies from recognising or disclosing mark-to-market losses if the transaction is not speculative, said Mr Asish K. Bhattacharyya, Professor of Finance and Control, Indian Institute of Management Calcutta.
It is in the interest of investors that companies adopt AS-30, if they are entering into hedging transactions and even if a company uses hedge accounting adequate information is available as to mark-to-market losses, although it does not hit the bottom line, Mr Bhattacharyya added.
Surely, the last about the issue has not been heard yet.