While the global financial crisis has led to calls for more lenient accounting standards in developed markets, especially with regard to mark-to-market losses, some of India?s biggest companies are about to be asked some tough questions by the government about the accounting policies they follow for their forex obligations. With the rupee slipping from Rs 40 against the US dollar at the beginning of the year to Rs 49.1 on Wednesday, accounting for forex transactions on mark-to-market basis has become particularly prickly for companies already seeing slowing business growth.
As many as 28 of India?s top 75 companies (by market cap) don?t comply with Accounting Standard 11 (AS 11) that requires them to make mark-to-market provisions in their profit & loss accounts on account of fluctuations in foreign exchange rate. These include the who?s who of India Inc – Reliance Infrastructure, Reliance Industries, Jet Airways, Reliance Capital, Punj Lloyd, Nalco, United Spirits HDFC, Cipla, NTPC and Siemens, among others. Almost all telecom majors – Reliance Communications, Bharti Airtel and Idea Cellular – who have raised huge external commercial borrowings in recent times and have little or zero dollar revenues – also feature in the list.
Though AS 11 is mandatory since 2006, these firms have taken refuge under Schedule VI of the Companies Act, 1956, which allows foreign exchange fluctuations to be adjusted in the cost of fixed assets, for which foreign currency loans were raised. A few of the companies FE spoke to, including Reliance Industries and Bhushan Steel, stressed that they are complying with Schedule VI instead of AS 11 on the basis of sound ?legal advice?.
Companies prefer Schedule VI for obvious reasons ? adhering to AS 11 norms would mean declaring lower profits at a time when the rupee is losing ground to the dollar. Ved Jain, president of the Institute of Chartered Accountants of India (ICAI) told FE, ?If a company follows Schedule VI, it can state roughly 25% higher profit (assuming rupee depreciation of 20% this year) than compliance with AS 11 will allow it to declare.?
An alarmed minister of corporate affairs Premchand Gupta says this tantamounts to ?window-dressing? accounts. Gupta has ordered his officials to investigate the matter and ask companies why they haven’t been complying with AS 11. “Though there may be a seeming contradiction between AS 11 and Schedule VI, section 211 of the Companies Act makes it very clear that companies are bound to follow the AS 11. The accounting standard takes precedence over the Schedule VI,” Gupta told FE.