Corporates see wisdom in AS 11 norms
D. Sampath Kumar
Reliance Communications has had a change of heart, in just three months, on the accounting treatment for reflecting changes in the rupee value of foreign currency loans raised to finance purchase of fixed assets.
While presenting the accounts for the quarter ended June 2009, it says that such fluctuations are better reflected as a charge in the profit and loss account rather than adjusting them to the cost of the fixed assets — a flexibility that the Government permitted of the corporates last year at the height of the global economic crisis.
The company’s notice to the stock exchange on the subject had this to say: “It would be more appropriate to account for the changes in the amounts of liabilities, consequent to changes in foreign exchange rates, as part of the profit or loss of the company for the year in which the changes take place without adjusting the amount of the change in the cost of fixed assets.”
For added effect, the company’s announcement also claimed that with the revision in the accounting treatment it is now in compliance with the Accounting Standard AS 11 issued by the Institute of Chartered Accountants of India (CA Institute). It is just as well that the company has seen the wisdom of adopting the accounting treatment mandated by the accounting profession.
Of course, the fact that the rupee has gained roughly 10 per cent relative to the dollar in the first quarter of the current fiscal might have aided Reliance Communications in arriving at the conclusion that it did.
Its first quarter performance does get a boost from the consequent contraction in such foreign currency obligations. The company’s action has the added merit of numbers of a different kind. As it happens, a belief in the appropriateness of the disclosure norms of the CA Institute is shared widely among corporate entities.
A cursory look at the accounting policies of the top 50 companies that make up the bellwether index (Nifty) of the National Stock Exchange shows that only a handful have opted for the liberalised accounting treatment permitted by the Government. All multinationals, public sector undertakings and even other domestic companies with relatively strong balance-sheets have ignored the Government’s special dispensation and chosen to prepare their financial statements as per the recommendations of the apex body of the accounting professionals. They perhaps reckoned that the effects of performance boosted by such financial steroids are short-lived.
If the framework spelt out in AS 11 is indeed the correct way of accounting for these transactions, one must now wonder if India Inc had perhaps not erred in demanding so vociferously, around March, that the Government do something to mitigate the disclosure burden cast on it by the Accounting Standard. No doubt, the circumstances were exceptional as the global community was yet to fully understand the severity of economic crisis.
Nevertheless, the question remains if it still warranted putting a gloss on performance.
Equally, the Government could have taken the position that even in the face of some vociferous corporate demand that a response to the global crisis did not lie in tinkering with accounting standards as it served little purpose other than to dress up the financial performance and make it appear a little less stark than what it actually is.
That the Government should not have rushed in where accountants tread with caution is perhaps a proposition that is so self-evident as to warrant any mention.
The capture, by the industrial oligarchy, of the regulatory apparatus of the country is, after all, a well documented phenomenon.
Maybe, it saw in the option of loosening up the requirements of accounting standards, yet another ingredient in the heady cocktail of policy measures that it came up with for stimulating the economy. It remains to be seen how effective its other policy measures are going to turn out to be. Corporates have already spoken out on what they think of the Government’s efforts at drafting accounting standards. 
CAclubindia
