prpri International Financial Reporting Standards (IFRS) norms may be diluted before rollout International Financial Reporting Standards (IFRS) norms may be diluted before rollout

With less than six months to go before the nation moves towards a globally-recognised accounting system, the government plans to dilute some key provisions relating to foreign exchange differences and overseas borrowings which will make global investors suspect Indian accounting, say three people closely associated with the development.

In the case of accounting for foreign exchange differences that rise because of currency derivatives taken by firms, the government is looking at an option where companies need not provide for any loss in the profit and loss statement but rather just carry forward the value as at the end of March 2011, according to a ministry of corporate affairs official, who declined to be named as he is not authorised to talk with the media.

Also, the National Advisory Committee on Accounting Standards (NACAS), an advisory body for the corporate affairs ministry, is in favour of allowing companies not to provide for mark-to-market (MTM) losses on their foreign currency convertible bonds (FCCBs), says a member of the advisory board.

MTM is an accounting principle where the value of the contract is marked at current exchange rate for currency derivatives and current bond price for FCCBs.

Both dilutions will be major departures from what the International Financial Reporting Standards (IFRS) prescribe. It has huge upside for India Inc in the short term by helping it to avoid reporting such MTM losses prescribed by IFRS. But it may work to its detriment in the long term by making companies unattractive to global investors.

“Our books (of account) will not be respected by the outside world (if we make such dilutions),” says V Balakrishnan, chief financial officer of Infosys, India’s bellwether information technology stock. “The whole approach is wrong. We should have adopted IFRS instead of converging.”

When companies first adopt IFRS, the standards lay out a procedure on how to treat the foreign exchange differences. It gives two options — the first is to reduce it from the profits and the second is to revalue all the assets in the balance sheet and adjust the loss arising from exchange differences with the reserve created from such revaluation.

Both will have a negative impact — one will reduce the profits and the other would shrink the balance sheet. So, companies have sought dilution of the provision. “We are now considering a third option where the companies will be allowed to carry forward whatever their values at the end of March 2011 to the next financial year when implementing IFRS,” says the MCA official.

“Allowing companies to carry forward the value of foreign exchange derivatives will ensure there is a permanent difference between Indian IFRS and IFRS,” says Jamil Khatri, executive director with KPMG, an audit and advisory firm.

The whole issue of accounting for changes in foreign exchange rates came to the forefront during global financial crisis, after Lehman Brothers collapse.

Many exporters and foreign loan holders took cross-currency derivatives to hedge their exposure not just to protect them from currency movements but also to make profit from such bets. They placed their bet on so-called safe currencies like Japanese yen or Swiss franc. But when the crisis was at the peak, both the yen and the franc moved in ways not seen for years. Japanese yen fell below 100 mark against the dollar for the first time.

The extent of losses are not known, but the Reserve Bank of India in its submission to the Orissa High Court stated the mark-to-market losses for customers who bought these derivative products were estimated at Rs 37,719 crore in December 2008. Further, it said 22 banks that sold complex derivative products lost Rs 756 crore as of December 2008.

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