Companies will soon need to disclose the nature and extent of risks arising from the financial instruments they hold and the steps taken to manage such risks.
In a step which is likely to give shareholders a clearer picture of the health of the company they own, accounting regulator ICAI on Friday approved a new accounting standard on disclosure of all sorts of financial instruments.
It would also keep investors abreast of the steps taken by the companies to guard against potential financial losses.
The new norms come in the backdrop of various companies filing cases against their banks for the losses they suffered on exotic derivative products in the wake of the US subprime crisis. Many banks, including some of the country's biggest lenders such as SBI, ICICI Bank and Axis Bank have in the recent past announced making provisions to cover mark-to-market losses.
The new accounting standards mandates the companies to reveal various financial instruments such as derivatives, futures and options, mutual funds and loans in their financial statements. Companies are recommended to disclose these details from the beginning of next fiscal. The accounting standard AS-32 pertaining to disclosure of financial information will become mandatory from April 1, 2011.
These norms are based on international financial reporting standards, which India has formally decided to adopt. Disclosure of the financial engineering of companies allows shareholders to make more informed decisions.
AS-32 follows two other accounting standards (AS-30 and 31), wherein the regulator had laid down rules pertaining to recognition and measurement and presentation of financial instruments by companies.
AS-32 will bring greater transparency in disclosures related to financial instruments such as derivatives and how the entity manages risks associated with such a portfolio, ICAI president Ved Jain said. He also expressed hope that the new norm would be a step towards empowering the citizens.
The disclosure norms evoked sharp criticism from industry chambers, which argued that mark-to-market losses (showing the market value of an instrument) are notional and it would be difficult for companies to account for them.