Needn’t show MTM losses on some counts till decade-end; many may choose to write back Sept losses.
Friday’s accounting rule relaxation order from the Union ministry of corporate affairs should again lift the shares of companies that had taken a beating due to high foreign exchange losses from a falling rupee.
MCA said the termination date for the transitional provision to Accounting Standards 11, which allow deferment/capitalisation of exchange differences on long-term monetary items, has been extended to March 31, 2020. The provision had, earlier, been disallowed with effect from March 31, 2011.
The MCA had also amended the manner in which companies could opt to defer/capitalise these exchange differences on long-term monetary items.
“Companies that had booked mark-to-market losses (MTM, writing down the value of assets or securities to reflect their current prices) on account of forex loans taken earlier can reverse that and show profits. Going ahead, they will not be required to show these losses in their quarterly results,” said V K Sharma, head of private broking and wealth management, HDFC Securities. “In the short term, this will be positive for shares of companies that have large forex loans.”
The sectors especially likely to benefit are oil, metals and telecom. Shares of companies here had suffered on this count.
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The rupee has slid from around 44 to the US dollar in July by nearly a fifth of its value since. Due to this, companies with huge foreign debt in their books had to report MTM losses in September.
According to the Business Standard Research Bureau, about 290 companies had foreign currency loans on their books at the end of 2010-11. Reliance Communications (Rs 20,350 crore), Indian Oil, Bharat Petroleum and NTPC are among those with the highest amount of foreign debt in their books. Nifty firms alone are estimated by Crisil to have a cumulative foreign currency debt of Rs 1.5 lakh crore, around 24 per cent of their total loan dues.
The latest relaxations by the ministry will allow companies that had booked MTM losses on account of forex loans due to a falling rupee to reverse those losses and show profits, say experts.
These companies now have the option of not showing the losses in their December quarter results (and of revising their earlier, September, quarter results, too. According to Crisil, the eight per cent depreciation of the rupee in the quarter was expected to result in forex losses of Rs 3,500-4,000 crore for 42 large companies in the Nifty.
According to Crisil Research, 42 Nifty companies (other than those in the financial sector) reported forex losses of Rs 4,800 crore in the July-September quarter. This amounted to eight per cent of their total profit before tax of Rs 57,200 crore. Only nine of these 42 had preferred not to show MTM losses on foreign debt. “The foremost reason for these foreign exchange losses is the high level of foreign currency debt, which needs to be reported using the closing exchange rate,” Crisil said.
Till now, if a long-term foreign currency monetary item is related to other than acquisition of a depreciable capital asset, exchange differences thereon should be accumulated in the ‘Foreign currency monetary item translation difference account’ and amortised over the life of the monetary item, but not beyond March 31, 2011. Due to this rule, many companies had reported huge MTM losses in their September quarter numbers (the June quarter had seen no such fall in the rupee). This date has now been extended to March 31, 2020.
This means companies need not immediately recognise gains/losses arising on long-term foreign currency monetary items. “Rather, it gives companies an irrevocable option to be exercised at the transition date or the date when exchange differences on a long-term monetary item arises for the first time,” said Jayesh Desai of chartered accountancy firm JC Desai & Company.
According to this option, companies can choose to recognise and accumulate exchange differences arising on the restatement of such items, directly in the balance sheet. The amount so accumulated in the capital will be transferred to profit or loss over the period of maturity of the item in an appropriate manner.
“Thus, the extension of period up to March 31, 2020, will enable the companies having forex exposure to defer the loss on such transactions till that period,” Desai added.
Firms in the oil refining & marketing, telecom, and steel sectors have high gearing ratios and a one-fourth of the debt of companies in these sectors is foreign currency denominated. More, in case of oil refining & marketing, a significant portion of the inputs, crude oil, is dollar-denominated, which can magnify the impact of foreign exchange losses.