The Indian corporate sector?s complaints to the Institute of Chartered Accountants of India betray a tinge of desperation. The corporates now want the institute to revise its accounting standards, especially clause AS 11. This requires them to report losses on foreign currency transactions on a mark to market basis on their profit and loss account. The reasoning behind the request for holding AS 11 in abeyance is that currency fluctuations are extraordinarily wild these days, so that companies might end up showing huge losses in a certain quarter which they might recover in the other. Hence, the quarterly numbers might not reflect the true picture of a company?s financial position. In these unusual times, industry says that AS 11 only distorts their reported earnings.
Many of these corporates showed handsome quarter on quarter profits for umpteen quarters in a row when the markets were favourable. Many of them relied on trading incomes to prop up their numbers. A year ago, the other income factor contributed to around 25% of the profit before taxes. Now, that factor doesn?t count for anything. Moreover, several leading corporates even sought protection under the current guidelines to prop up numbers by getting depreciation norms changed, by having inter-firm asset sales and so on.
AS 11, however, was the most convenient fortress and now that too has fallen. It is time that corporates realise that accounting standards are based on the concept of conservatism. They are not whims based on circumstances. Every part of the commercial community?ranging across investors, stakeholders, lenders and even vendors?bases its evaluation of the company on these standards and principles. Their trust and confidence is hit when these are frequently shaken and stirred. Already, we have the two virtues dented thanks to corporate governance issues. Additionally changing AS 11 at this stage would send out wrong signals to all members of the commercial community, creating further damage to market sentiment. There is no doubt that these are, as industry representatives plea, tough times. But what they call for are tough measures rather than escape routes.
?akash.joshi@expressindia.com