'F&O disclosure to bring in transparency'

Chartered accountants welcome ICAI move asking firms to show losses from derivatives deals.

Leading chartered accountants (CAs) today said the Institute of Chartered Accountants of India (ICAI) had acted promptly and correctly in asking companies to disclose mark-to-market losses from derivative trades with effect from the current financial year itself.

They also expect the move to have a palliative effect on the stock market and restore investor confidence about Indian accounting standards.

Pointing out that the ICAI's move was in line with the Reserve Bank of India's expectations, several chartered accountants told Business Standard that companies would not face any undue issues in accounting for the impact of derivatives trades on their balance sheet.

Dinesh Kanabar, head of tax and regulatory practice, PricewaterhouseCoopers, said the ICAI move was a proactive step.

"This will ensure greater transparency and disclosure. We will need some clarity on whether the tax authorities will allow tax deduction on the mark-to-market losses that companies declare. You cannot have a situation where, on the one hand, profits get eroded and, on the other, companies cannot claim tax deductions," he pointed out.

"Losses incurred on foreign exchange derivatives are notional and their disclosure will only help make financial statements more transparent," said Sudhir Jain, the group finance head at auto component manufacturer NK Minda Group.

KS Mehta, managing partner, SS Kothari Mehta & Co, said the ICAI circular reiterates that companies have to recognise and provide for the losses on account of derivatives contracts.

"If companies have filed cases, that cannot be a ground for not providing for the loss on the derivative contract. At best it can be disclosed as a note that the company has filed a claim on the bank", Mehta said.

"As the accounting regulator, ICAI said it feels it is important to make Indian companies fully compliant with international standards. With a number of Indian companies revealing that they could take a financial hit on bets placed on currencies, commodities and equity contracts, this clarification was needed. The transparency, which will come about once the new standard is followed, will ensure enhanced credibility of Indian financial statements before lenders and in the financial markets," Vinod Jain, chairman, corporate law and management accounting committee, ICAI, said.

Late on Saturday, ICAI asked companies to disclose losses on a mark-to-market basis incurred due to derivatives trades from the current financial year onwards, as a precursor to making a new accounting standard -- the AS-30 -- mandatory from April 1, 2011. The norm requires companies to provide for all losses, including those that may occur due to trading in derivatives.

ICAI President Ved Jain said the advisory is aimed at encouraging the use of AS-30 by companies.

"The new standard will be made compulsory after two years in 2011," he said, pointing that it is up to companies to decide whether to adopt the standard before the deadline.

Experts added that the extent of notional losses that corporate India has incurred would take time to fully unravel.

"There is no estimate possible immediately as this is happening for the first time. We are aware of the accounting for derivative trades and it will not be difficult for companies to comprehend losses arising out of it," Amit Azad, a leading CA, said.

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KEY POINTS OF ICAI CIRCULAR

Three month ago, ICAI came out with new accounting standard AS-30, dealing with accounting for derivatives

It becomes recommendatory from April 1, 2009, and mandatory from April 1, 2011

In case a company does not follow AS-30, it has to mark-to-market all outstanding derivatives contracts on the balance sheet date with effect from FY08 onwards

In case AS-30 is followed by companies, a disclosure of the amounts recognised in the financial statements is required

Auditors to consider making appropriate disclosures in their reports if the accounting treatment, disclosures are not made