Likely to post better results than expected.
Indian companies, which have taken a foreign exchange loan to buy or create an asset, are likely to post better results than expected for the year ended March 2009, as they will not be required to provide for forex losses on these loans.
CFOs said that most companies were likely to take benefit of the suspension of Accounting Standard 11 (AS 11) for two years (till 2011). AS 11 requires them to book gains or losses on such loans to their account.
The National Advisory Committee on Accounting Standards (NACAS), a government appointed body that recommends revision of accounting standards, has postponed the adoption of AS 11 till 2011.
The suspension will also help companies, which had made significant mark-to-market provisions in the past three quarters, to write back the losses they had booked, Hinduja Group CFO Prabal Banerji said.
This could considerably alter the bottomline of companies for the year ended March 2009.
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“Companies will be very happy that the adoption of AS 11 has been suspended for two years, which is a good enough time as they will be back in profits by then, and could afford to make a higher provision, if required,” said Banerji.
Many companies like Tata Steel and JSW have already implemented AS 11. Will they junk it? “Companies have to follow accounting standards. When it is not mandatory, you will find few companies not taking advantage of the relaxation,” said JSW Group CFO Seshagiri Rao.
The 158 companies that have an outstanding FCCB of $17 billion are hoping the Indian currency appreciates, so that they can reap the actual benefit of the postponement. For the time being, it would only bring a temporary relief in the profit and loss accounts of these companies that would boost their earnings per share.
However, for companies which do not have external commercial borrowings or currency position without effective hedging, the change in the accounting standard would not be of much help.
“The Indian IT industry does not have large foreign currency loans, so the change in AS 11 would not impact it,” said S Mahalingam, the chief financial officer of India’s largest software exporter, Tata Consultancy Services.
Some companies are also seeing this a step backward, as India has to adopt international accounting standards by 2011 and that would again require AS 11 provisions. “This is a wrong move and will affect the credibility of our accounting standards,” said Balakrishnan K V, CFO, Infosys Technologies, India’s second largest software exporter. “This will be viewed as an opportunistic move by international investors and will increase the cost of raising money for domestic companies,” he said.
Accountants are disappointed, as they have been arguing against relaxation of AS 11. “It doesn’t mean anything. By suspending AS 11 for two years, you are allowing people to do window-dressing, procrastinate on something that is going to happen,’’ said a senior partner with a leading accountancy firm.
Some accountants said infrastructure and banking companies would be large gainers. “Banks will largely gain, as they would not have to shell out more money to maintain their liquidity ratio,” Kaushik Dutta, partner, Price Waterhouse, said.
“Once implemented, companies can book profit or losses against the asset and, hence, amortise it over a period of time,” said Uday Y Phadke, president, finance and legal affairs, Mahindra & Mahindra, India’s largest tractor and utility vehicle maker.