Cos will not be able to write back all kinds of exchange losses.
The AS-11 breather will bring limited relief for companies as they will be able to write back only foreign exchange losses on the capital account. They will have to continue to provide for exchange losses on the revenue account on foreign currency liabilities of less than 12 months in their profit and loss (P&L) account.
For instance, nearly 65 per cent of the Rs 815 crore exchange loss of JSW Steel for the nine months ended December 2008 is in the revenue account (the company imports coal, which has to be paid for in six months), which will have to be continued to be accounted for in the P&L account.
‘‘MTM losses on forex liabilities up to 12 months have to be provided for in the forex fluctuation reserve account. If the tenure of the forex liability exceeds 12 months, you can debit it to the capital account directly,’’ said JSW Group CFO Seshagiri Rao.
But this is no damper. India Inc is rejoicing at the suspension of AS-11 by two years, and many companies like GMR Infrastructure and JSW Steel, which were hit by forex losses, are planning to write back some of these losses (whichever qualify). But they will have to account for these since December 7, 2006, when AS-11 became effective.
GMR Infrastructure CFO A Subba Rao said that companies would be able to write back net forex losses after they adjust the forex gains they made last year (2007-08). This could have a significant impact on companies’ profits for the year ended March 2009.
GMR had provided for forex loss of Rs 130 crore for the nine months ended December 2008. After adjusting the exchange gain of Rs 18 crore in 2007-08, GMR will be able to write back Rs 112 crore in forex losses, and boost its bottomline, for the year ended March.
The government last week accepted a recommendation to suspend the accounting standard AS-11 till March 31, 2011. The standard requires companies to take any exchange differences on their foreign exchange liabilities to their P&L account.
Companies which have taken a foreign exchange loan to buy or create an asset now need not provide for the exchange differences on these loans in their P&L account but can capitalise these (add them to the cost of the asset) in their balance sheets.
Many companies that are planning to write back forex losses will be able to boost their bottomlines but the impact could be different across companies. JSW, for instance, had a net forex loss of Rs 220 crore on the capital account for the nine months ended December, after adjusting for forex gains of Rs 34 crore in 2007-08 and 2006-07, which it can write back. But this will largely go in offsetting the forex loss on its revenue account.
| FOREX LOSSES | ||||||
| Forex gain 2006-07 | Forex gain 2007-08 | Forex Loss 2006-07 | Forex Loss 2007-08 | Net profit Dec'08 | Forex Loss^ Dec'08 | |
| Tata Steel | 0.00 | 594.72 | 2.43 | 20.42 | 9486.00 | 884.76 |
| Tata Motors | 65.21 | 137.61 | 0.00 | 0.00 | 409.84 | 632.55 |
| JSW Steel | 19.22 | 107.45 | 0.00 | 0.00 | 314.84 | 815.21 |
| M & M | 2.78 | 13.45 | 0.00 | 0.00 | 387.28 | 377.66 |
| Suzlon Energy | 0.00 | 35.78 | 49.20 | 0.00 | -285.91 | 434.50 |
| Jubilant Organ. | 65.82 | 104.78 | 0.00 | 0.00 | -137.53 | 424.17 |
| JSL Ltd | 49.00 | 56.57 | 0.00 | 0.00 | -418.60 | 423.66 |
| Jindal Steel | 13.06 | 58.92 | 0.00 | 211.89 | 1179.63 | 260.19 |
| Ashapura Minech | 0.00 | 7.54 | 5.98 | 0.00 | -76.39 | 171.14 |
| Bharat Forge | 4.47 | 21.12 | 0.00 | 0.00 | 8.49 | 185.06 |
| ^Aggregate forex losses reported by companies; break-up of losses on capital/ revenue account not available Companies can write back forex losses on capital account (liabilities with tenure of 12 months & above), after adjusting for forex gains since Dec 7, 2006; Figures in Rs crore; SOURCE: Capitaline, company reports Compiled by BS Research Bureau | ||||||
Thus, the suspension of AS-11 may not be a significant impact on JSW’s bottomline, though it would not be required to provide for the exchange losses in the March quarter.
CFOs say that while companies may not have to pay higher income tax, unless the loans are getting settled, companies writing back forex losses may have to pay the minimum alternate tax (MAT), which is 11.5 per cent of book profits.
‘‘AS-11 is irrational. You use a foreign currency loan to create long-term assets, which generate cash flows for 15 years. There is no logical reason why you should provide for the exchange losses on a loan at one go,’’ said Hinduja Group CFO Prabal Banerji.
Yet, he concedes that the investing community may discount the profits companies may report by writing back losses.
