life in financial markets: legalising accounting manipulation

Out goes there again India Inc with a begging bowl yet again and manages to extract much more than a few alms from the shameless Manmohan-Ahluwalias cronies in the central government. The corporate world's hypocrisy is as bad, if not worse, from the hypocrisy of politicians, bureaucracy (IAS, ICS, IPS etc) and religious fundamentalists.

Here is one recent example: (about a month back I wrote about the matter in question in the magazine I work for)

As in AS 11

After an attempt by corporate lobbies to relax an important accounting standard (AS) was thwarted by the Institute of Chartered Accountants of India (ICAI), the lobbies are continuing to exert pressure on the ICAI. AS 11 is the standard for accounting for the effects of changes in foreign exchange rates.

The depreciation of the rupee from Rs 38-39 in 2007-08 to Rs 49-50 currently has meant that companies that have borrowed in foreign currency earlier now have to repay a larger amount in rupee terms in case their forex loans have to be repaid immediately. Those forex loans that do not need to be repaid currently are, as per AS 11, required to, in their balance sheets every year till the loan is repaid, take the difference between the forex rate at which the borrowing took place and the current year-end forex rate and charge it to the Profit & Loss Account.

A depreciating rupee means the company has to repay a higher amount in rupee terms and as per AS 11 they have to show the difference as expenditure in the Profit and Loss Account. “This is consistent with international accounting standards because it makes the P&L Account reflect the going up or down of the liability of loan repayment,” says Jamil Khatri, head of IFRS and global accounting standards at KPMG India.

But since a year some companies have argued that Schedule VI of the Companies Act allowed them to capitalise this difference if the loan moneys were being used to build assets in India. Reliance Industries and some other companies such as Bharti Airtel have been following this practice. But in some cases the companies’ auditors have disagreed with this practice by qualifying the same in the auditor's report. “The AS 11 was actually revised and notified by the National Accounting Standards Committee and this committee gets it powers under the same Companies Act to formulate accounting standards for the companies,” says Khatri.

With profits declining the companies are feeling the pinch of additional expenditure items that takes their profit figures further down. Companies that were till now comfortable with recording the profits when the rupee was appreciating are now lobbying through the CII for a direct ICAI relaxation .

But some companies have borne the other end of the brunt as well. RIL’s 2007-08 annual report, for instance, stated “the Company has continued to adjust the foreign currency exchange differences on amounts borrowed for acquisition of fixed assets, to the carrying cost of fixed assets in compliance with Schedule VI to the Companies Act, 1956 as per legal advice received, which is at variance to… AS11… Had the treatment as per AS 11 been followed, the net profit after tax for the year would have been higher by Rs. 30 crore.” RIL’s net profit for 2007-08 was Rs 19,458 crore.

In presentations made to ICAI in February and early March, the CII had proposed a third alternative of allowing companies to stagger the difference amount across the rest of the loan tenure. But accountants find this proposal ludicrous. “Already, due to the Schedule VI provision there is inconsistency and adding one more layer is definitely not good for investors’ comparability purpose,” says Khatri.

But ICAI has deferred taking a stand on the issue till May. At a meeting of the ICAI’s council on 7 March, Uttam Prakash Agarwal, said that “as there were divergent views of the members of the (Accounting Standards) Board, it was decided to place the views of members before the (ICAI’s) Council at its next meeting.”

Analysts are also pointing to the fact that it is high time that corporate India learns to have some basic financial acumen and hedge their forex exposures through the OTC or exchange-traded derivatives. They should protect themselves and not rely on lobbying when the going is against them. Many foreign currencies have depreciated against the dollar and none of those currency-issuing countries have subverted their accounting standards due to it.