ICAI to make accounting system more transparent

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New Delhi, May 16: In a move that will bring about greater transparencies in the disclosures relating to financial instruments such as derivatives, the Institute Of Chartered Accountants Of India (ICAI) has come up with a even more detailed Accounting Standard – AS-32.

Last December, ICAI had come up with detailed accounting standards — AS-30 and AS-31 — in order to establish principles for measuring and recognising financial assets & liabilities and contracts to deal in non-financial assets.

ICAI president Ved Jain said, “AS-30 and AS-31 were only the measurement and recognition of the financial statements. Whereas, AS-32 is an accounting standard that would lead to a proper disclosure of the financial statements.”

The objective of AS-32 accounting standard, is to bind financial entities to provide disclosures in their financial statements so that users can evaluate the important information in the statements. It will help client assess the significance of financial instruments for the entity’s financial position and performance. Moreover, it would also help disclose the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

ICAI is confident that there would not be any financial scam in the derivatives exposure of Indian companies, as the domestic accounting standards were quite rigorous.

Earlier, Jain told FE that there was no escape route for companies. They would need to account for losses immediately as the existing Accounting Standards (AS-1) mandates them to do so. The auditors have to make suitable disclosures otherwise, he said.

“Unless you violate the directions and instructions of the regulators, I see no reason why any scam or anything wrong can take place,” Jain said. “All issues possibly arising on financial instruments are properly addressed. I don't see any scope (for creative accounting),” he said.

Like AS-30 and AS 31, the council proposes to make AS-32 recommendatory from April 1, 2009 and mandatory from the April 1, 2011. ICAI secretary Ashok Haldia told FE that “AS-30, AS–31 and AS-32 are the three standards taken together to cover the whole gamut of financial instruments”.

Accounting Standard–30 in December 2007 asks companies to provide for mark-to-market losses as well as profits from April 2009 on a voluntary basis. “All complexities regarding derivatives have been addressed in AS-30--an internationally recognised accounting standard on lines of IFRS (International Financial Reporting Standards). In case an entity does not opt either for AS-30 and is not accordance with AS-1, then the auditors need to make a suitable disclosure,” he said.

Jain's comments are significant as a large number of Indian companies are battling over the issue of how to write in huge losses on the face of exposure to forex derivatives, when their currency bets went wrong. The ICAI standards mean the companies have a choice between either taking the losses in their balance sheets right now, as per AS-1 standards, or offset them against profits made in the same exposure, when their bets went right, as per AS-30. In both cases they have to provision the exposures as per current market values—mark to market, instead of treating them on a historical book value.

Jain had initially said that even those companies that have sued the banks would have to account for their losses. “I think probably now everything will come in the next one month when the audited results get out. From 10 April onwards, when results start pouring in, you can work out (the losses).”

Analysts note the total mark-to-market losses of Indian companies’ exposure in the forex derivatives could be in the region of $5 billion. Company auditors would need to disclose in case it does not follow any of the accounting standards. Forex exchange derivatives are used as a risk management and mitigation tool by companies having large forex exposure. A derivative is an instrument whose value is a function of an underlying commodity, bond, stock, or currency. As on December 31 2007, banks operating in India had a derivatives exposure of Rs 127.86 trillion, as per data compiled by the government.