Call it the forex factor. In the last financial year, for months together, financial officers at various companies had one thing to track?the movement of the rupee against the dollar. With the rupee depreciating by 30% in the last one year, their companies were suffering forex losses on account of foreign loans like external commercial borrowings and foreign currency convertible bonds. The losses far outweighed the profits from operations of their firms.

As a part of their global expansion in the last few years, many Indian companies had raised international debt to fund acquisitions and other capital expenditure when the rupee was at below 42 levels against the dollar. With the rupee touching 50 against the dollar, financial chiefs demanded that the implementation of Accounting Standards 11 (AS11) be postponed, arguing that it would adversely affect them at a time when they were coping with the global financial crisis.

AS11 requires all foreign currency monetary items to be reported using the closing exchange rate. The accounting standard deals with mark-to-market provisioning in corporate profit and loss accounts for foreign exchange-related gains and losses. Any exchange gain/ loss arising on the restatement of monetary items is recognised as income/expense in the period in which it arises.

The decision by the National Advisory Committee on Accounting Standards to postpone the implementation of AS11 to 2011 brought smiles to the faces of the worried financial officers.

Profits of firms would improve if they adopt the deferred option. Financial statements for the current period would not be comparable with statements for the previous year when such exchange losses were expended.

Chartered accountant Suresh Surana says the deferment of AS11 is a pragmatic move by the government and would prevent distortion of financial results happening due to extreme volatility in the foreign exchange rate. In the short-run, there would be improvement of profitability due to capitalisation of forex losses, however, in the long-run there would be overstatement of fixed assets.

Adds Surana, who has founded RSM Astute Group, a Mumbai-based accountancy firm, ?Any user of financial statements would know the impact of such exercise if this accounting option is exercised by the company because then a disclosure would have to be made of the fact and of the amount remaining to be amortised in the financial statements of the period. A prudent investor would be able to even ascertain the likely impact of the forex losses/gains based on such disclosures.?

So, what are the long-term implications of the deferment of AS11 on investors, on computing taxes and most importantly convergence to International Financial Reporting Standards (IFRS) by April 1, 2011?

* Conversion to IFRS

Finance experts say one of the main reasons behind the deferment of AS11 till March 2011 is because the Institute of Chartered Accountants of India (ICAI) is committed to adopting IFRS by April 1, 2011.

Sai Venkateshwaran, partner, Grant Thornton, feels the amendment will have only a temporary impact as companies would anyway report numbers under IFRS from 2011, wherein the balance in the Foreign Currency Monetary Item Translation Difference Account doesn’t get carried forward. ?Therefore, one can assume that although this change has been made in the light of the current circumstances, but the intent to move to IFRS continues unaffected.?

Though the relaxation represents a short-term divergence from IFRS, Jamil Khatri, head of Accounting Advisory Services, KPMG, feels that regulators have reiterated their commitment to converge Indian Generally Accepted Accounting Principles (GAAP) with IFRS.

* Tax implications

As of now there has been no change in the tax laws in response to this amendment. Therefore, firms that claimed some of these losses as deductible expenses would continue to claim these as tax deductible expenses. However, there would be more debate as these losses are not recognised in the profit and loss accounts.

Further, there will also be a deferred tax implication and this would lead to additional timing differences. However, tax experts say this amendment has a direct impact on book profits and therefore could have a direct impact on the Minimum Alternative Tax liability for companies.

Experts feel that there would be a number of other tax related issues that may come up with the deferment. For example, the accounting options need to be exercised retrospectively for all such foreign currency monetary items commencing from December 7, 2006. ?Forex gains and losses booked earlier would have to be reversed in case the company opts for the revised accounting treatment. As the returns for years ending up to March 31, 2008 have already being filed, it could lead tax authorities to reassess earlier year’s tax,? says Surana. He asserts that a clarification from the Central Board of Direct Taxes regarding tax treatment of the accounting option would be helpful.

* Impact on investors

A sophisticated investor would read this very differently from a lay investor who tracks only PAT, EPS and PE ratios. A sophisticated investor could put the pieces together and also look at what the profit situation would have been, if this amendment had not been applied.

As the amendment gives only an option to a firm, the investors would need to understand the option that a firm has adopted and its impact on profitability and net worth of the company by referring to relevant disclosure.

However, a retail investor could have a very different approach and the impact would vary. Jamil Khatri of KPMG cautions that the investor would be affected by a lack of transparency. ?The relaxation would also result in inconsistency and lack of comparability. Historically, practices in India for accounting for exchange losses have been inconsistent. This will also make the financial statements incomparable with international peers and benchmarks,? says Khatri.