The government and the Institute of Chartered Accountants of India (ICAI) appear to be gearing up and pushing for all-out convergence with the global accounting standards (IFRS) within 3-4 years. And, on the other hand, our known propensity for tying ourselves up in knots, in multiple legal and regulatory contradictions, is on display like never before. A case in point is the current huge confusion about a critical item on the balance sheets of many large corporates — how to treat forex fluctuation on capital loans.
The twists and turns of the tale, in brief, are as follows:Schedule-VI of the Companies Act, 1956, is very clear. It says that in consequence of a change in the rate of exchange, if there is any increase or reduction in the liability for repayment of borrowings in foreign currency (for acquiring an asset), such increase or reduction will be added to/deducted from the cost of such fixed assets. This is the position in law which continues unchanged till date from 1966.
The ICAI published Revised Accounting Standard-11, effective from April, 2004 {AS-11 (2004)}, which had a contrary provision saying that all such exchange differences should not be adjusted to assets but taken directly to the profit & loss account.
In November, 2003, the ICAI came out with a clarification which said that till the law (Schedule-VI) was not amended, the above provision of AS-11 (2004) will not be operative. The Companies Act has not been amended till date.
However, on December 7, 2006, the Ministry of Company Affairs promulgated Companies (Accounting Standards) Rules, 2006 Rules (“the Rules”). These rules incorporated AS-11 (2004), without any change.
Now, how do these rules deal with the apparent contradiction between the Act, Schedule-VI, and AS-11 (2004)? In a unique answer, perhaps for the first time in the Indian legislative history, the Rules contain a footnote overriding the parent Act. They actually say “…the accounting treatment… contained in this standard, is required to be followed irrespective of the relevant provision of Schedule-VI to the Companies Act, 1956”.
Prima facie, this seems to be untenable since a Rule can never contradict an Act passed by Parliament. However, the entire gamut of corporate world seems to be falling in line with the Rules.
Interestingly, the Rules themselves say at a different place (and in the main body, unlike a footnote as above) that the Act is superior and intended to prevail. In order to make things more complex, the ICAI has just gone and withdrawn its 2003 November announcement about the primacy of the Companies Act.
Even for argument’s sake, assuming the Rule is enforceable, when does it come into effect? The answer is not so simple. Some say, it comes into effect from December 7, 2007, when the Rules were promulgated; others point to the fact that the Rules themselves state that the accounting standards come into effect in respect of accounting periods commencing on or after the publication of these accounting standards; which means accounting periods commencing after December 7, 2006.
All this would have been very funny if it were not for the fact that each different interpretation signifies a difference of sometimes hundreds of crores for major corporates. As of now everything is permissible and so nuanced investors would have to read the fine print in the “Notes to Accounts”, to understand which view or interpretation a particular company has taken and the impact it has on its financials.
The ICAI or other regulators have not come out with any clarifications. The next step in this drama would be, I guess, that of the regulators, who would later in the day come out with different clarifications, to be applied retrospectively. These clarifications might or might not address all the various issues raised above. This would mean more confusion and cause a lot of pain for corporates who have already taken different views and would again have to retrospectively adjust their accounts. The less said about the travails of the investors and analysts the better.
This small instance is symptomatic of the confusion that we should tackle prior to going down the route of major changes in our accounting framework.
This article appeared in the 27 August 2007 edition of Business Standard, which is available at this link.
No comments:
Post a Comment