With rupee hovering near record lows against the US dollar, India Inc is down with huge ‘notional foreign exchange losses’. However the companies, which had earlier approached the Institute of Chartered Accountants of India (ICAI) asking for an expansion of an existing flexible accounting treatment to accounting periods beyond March 2012, may now find a relief.
The apex audit body has asked the government to allow losses from forex rate fluctuations to be repaid over a longer period. Earlier in March 2009, the corporate affair ministry had eased accounting treatment on foreign exchange difference, which provided a breather to companies hammered by the uncertainty seen in the rupee. The Indian currency had fallen to a low of 51.95 per dollar in March 2009 from 39.50 per dollar in Jan 2008.
In March 2009, India Inc was given an option to renounce from abiding by accounting standard (AS) -11, which specified that all differences in foreign currency borrowings should be documented only in the profit-loss account.
AS-11, which governs accounting for charges in foreign exchange rates, comes with two options. If the rupee movement has a negative impact, a company can either recognise the entire notional loss that occurs as a loss immediately and reduce its profit to that extent, or it can spread that loss over a longer period, but not later than March 2012.
The problem right now is that with just two quarters to go till March 2012, at least half of the potential loss will have to be taken in the Decmber quarter, irrespective of the fact that perhaps the loan will become repayable only in 2015. So the ICAI is recommending that this deadline should be postponed by five years. This move will allow companies to take smaller hits on profit.
For instance, if a company has a notional loss of Rs 100 crore, it can spread the hit over twenty quarters, i.e. five years. In this context, the company will take a loss of only Rs 5 crore (each quarter) and can escape from the loss of Rs 50 crore in the coming quarter.
This change will benefit all other ‘assets’ apart from depreciable assets, like a loan due, or a credior for purchases made. A hedge by any company will not benefit, but the underlying outstanding for which the company has taken the hedge will.
The Institute’s central council will debate the matter either this week, in its meeting tomorrow, or just after Christmas.