Corporates houses, banks and financial institutions have got just 18 months to begin the changeover to a new set of transparency, inducing accounting standards that will have a major impact on their financial statements. The new norms to classify, value and disclose the complex financial instruments they trade in is expected to change the way exposure to many instruments are reported now, besides capturing many unreported exposures.
Accounting standard setter the Institute of Chartered Accountants of India (ICAI) last Friday decided to introduce the new standards —recognition and measurement of financial instruments — from April 1, 2009. “All business entities are recommended to adopt them from April 1, 2009 and it will be mandatory for them to follow these standards from 2011.
Since the new standards are very complicated and will have major consequence on the presentation of shares, capital gains and valuation of investment portfolios, we will hold extensive coaching for our members across the country,” ICAI president Sunil Talati told ET.
The new norms will bring more clarity in the nature of instruments that bear more than one property. Convertible debentures, for example, have the characteristics of both loan and equity. As per international practice, they have to be split into equity and debt components as the equity value of the company reduces the interest rate payable. The standards will cover all financial instruments, including equity, debt, derivatives, convertible debentures and their combinations.
There are some areas in the new standards — called the AS 30 and AS 31 — that are in conflict with the company law and Sebi norms. For example, according to the company law, preference shares that are to be redeemed at the end of the term should be classified as equity capital on the liability side.
New accounting norms say this should be shown under the head long-term financial liability on the same side. Although equity capital and long-term financial liability come on liability side, classifying such share under long-term financial liability will have a major impact on the net profit of the company because the new norm will change the way dividends paid on such shares are accounted for.
SEBI’s regulations on how to account for mutual fund investments also differ from the new standards. During the 18 months before the norms are introduced, ICAI will work with the government and Sebi to bridge this gap. “In case of any delay, wherever both are not in agreement, the law will prevail over the accounting standards,” said Mr Talati.
The new standards are based on the international accounting standard on financial instruments. Under the new standards, financial instruments have to be classified under four main categories — financial assets and financial liabilities at fair value through profit and loss; held to maturity investments; loan and receivables; and available-for-sale financial assets.
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