FE Editorial : Convenient capitalist

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SummaryThe national advisory committee on accounting standards has recommended a postponement in the implementation of AS 11 accounting standards until 2011.

The national advisory committee on accounting standards has recommended a postponement in the implementation of AS 11 accounting standards until 2011. The government must think hard before accepting this recommendation. In fact, all matters considered, in our view the government should turn down the request. Here’s why. As we have argued in these columns before, industry is demanding a relaxation of AS 11 on the grounds of expediency rather than principle and that cannot be allowed. It sets a dangerous precedent of ‘exceptions’, which can then be used to make a mockery of any standards. After all, the major disclosure that AS 11 requires is for all corporate firms to report their profits/losses on foreign exchange hedges on a mark-to-market basis. Now, in an economic upturn, which will no doubt return, such a rule has its benefits, which is why industry will not oppose the implementation of AS 11 on principle. It’s only in a period of downturn that companies want to avoid marking their losses on foreign exchange hedges to the market. Obviously, reporting these losses on a mark-to-market basis will show lower profits, which may then be judged harshly by the stock markets. But that is par for the course in a capitalist economy.

Firms cannot expect to enjoy unfettered benefit in booms and then try and hide a slowing performance in a slowdown. It is opaque strategies such as these by corporate players which are undermining public confidence in free markets—such manipulation cannot be allowed to happen so easily. There is after all, a bigger market system to protect. Also, it is not at all the case that companies reporting their results with AS 11 will suffer a complete meltdown in India—that is the case being made in the US to dilute a similar rule. In the US, many firms, particularly in the financial sector, may completely sink if forced to comply with mark-to-market. Some big corporate firms who borrowed abroad may be at some (but not likely fatal) risk, but is it wise to tweak an entire system because of some firms? Let the government think seriously about this.

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