Shaleen ShahBenefit of option to capitalise/amortise differences in forex rates.
Walking stick
Profits of Tata Motors, M&M and Sterlite Industries would have been lower but for the amendment
JSW Steel, Bharat Forge and Ashok Leyland may have slipped into losses in FY-09 if the new option had not been exercised
Relaxations in AS 11, the Accounting Standard that deals with the ‘effects of changes in foreign exchange rates’, may have helped quite a few large companies report a better profit picture for March 2009.
Even as top financial companies in the US are said to have benefited from a less stringent Accounting Standard that allows flexibility in mark-to-market accounting, some of the leading Indian companies such as Tata Motors, JSW Steel, Sterlite Industries, Ashok Leyland and Bharat Forge have come up with an improved earnings picture in March 2009 as a result of the amendment to AS 11 and some could even have slipped in to losses in FY-09 had they not chosen to adopt the changes.
Change in AS 11:
AS 11, in its original form, required companies to report their foreign currency monetary items based on the closing exchange rate at the end of an accounting period. The gain/loss arising from the exchange difference had to be recognised in the profit and loss account.
With corporate India carrying significant foreign currency loans, companies suffered mark-to-market losses on such restatement especially over the past year, when the rupee saw significant depreciation, expanding the loan value in rupee terms. Although notional, this resulted in depressed earnings.
To grant some temporary relief to corporates, the amendment made to AS 11 on March 31, provided an option to capitalise/amortise the exchange differences on long-term foreign currency monetary items (typically overseas borrowings). This provision, effective with retrospective effect from December 2006, would be available up to FY-11.
Following this amendment, companies with forex loans can now adjust the loss or gain arising from currency fluctuation by adding to or deducting from the cost of fixed asset, if such borrowing were incurred for acquiring the asset. The treatment, in essence, would help bypass the P&L account and make adjustments directly in the balance sheet, thus providing immediate relief to earnings.
Take the case of Tata Motors. The company, in its notes to accounts, has stated that its net profits for the full year were higher by Rs 418 crore as a result of opting for the amendment. The company’s reported net profits for the year were Rs 1,001 crore. It’s per share earnings of Rs 22.7 would have been lower by as much as 40 per cent had it recorded the fluctuation in its P&L.
For others such as JSW Steel, Ashok Leyland and Bharat Forge, the change in accounting practice may have been a blessing in disguise atleast for FY-09 as it reduced or averted losses.
For Bharat Forge, consolidated net profits of Rs 58.2 crore for FY-09 could have slipped to losses of Rs 110 crore, had the company charged the MTM losses to its P&L. It is to be noted that the amendments are with retrospective effect from FY-07; their impact, therefore, appears significant especially in the general reserve.
While the relief comes after prolonged depreciation in the rupee over the past year, the rupee has been appreciating against the dollar in recent times. The rupee gained as much as 9.3 per cent from its low of Rs 51.9 in March.
If this scenario persists, would companies choose to once again record any exchange gains in the P&L account?
They would not; corporates do not have a choice to opt out once they choose the amended version. This is perhaps why companies such as Larsen & Toubro and Ranbaxy Laboratories have chosen to retain the old AS 11.
[Source:www.thehindubusinessline.com]
