Shaleen ShahCompanies are getting creative in using the Company Act and Accounting Standards to avoid the impact of foreign currency loan on their profit & loss statement owing to currency fluctuations. Companies with foreign currency borrowings have now adopted various accounting tactics to ensure that their quarterly performance remains intact in the event of losses arising out of such transactions.
While some companies have taken shelter in the AS30, a newly-introduced accounting standard, others have opted for using the existing A11 standard in more ways than one. The conventional practice has suggested that some of the companies like Reliance Communications, Bharti Airtel and Reliance Industries have been following Schedule VI to the Companies Act.
This clearly allows companies to bring in the loss/gain arising out of their foreign currency liability to their balance sheets instead of their profit and loss (P&L) statements. This practice is in contrast to the AS11 (accounting standard 11). Here is where, many accounting experts feel that AS11 is a more prudent way of representing changes in liability arising out of exchange rate fluctuations.
The debate comes on the back of Indian companies that have been raising foreign currency funds for expansion in the form of foreign currency convertible bonds (FCCBs). These are usually denominated in dollars.
Last year, the appreciation of rupee against the dollar helped these companies to book profits while converting their loans in to rupees at the end of each quarter. That situation is quite the contrary now with the rupee not holding up against the dollar. Beginning with the current fiscal, companies have been scouting for ways to make sure their bottomlines are unaffected.
The companies, which have been following AS11, end up reporting extraordinary losses on account of FCCBs suffering when the rupee depreciates. There seems to be some hope, however, with the newly introduced accounting standard AS30 that allows companies to bring in such losses to their balance sheet.
This is subject to such foreign currency loans being used for acquiring a foreign operation which is non-integral in nature. “If both the liability and assets are in foreign currency, it provides a natural hedge and the impact of exchange rate fluctuations could be brought on to the balance sheet,
