The Institute of Chartered Accountants of India (Icai) has hit the fast-forward button on an accounting rule that has suddenly become very important. The apex accounting body had earlier advised its members to disclose the derivative losses of the companies they audit from next April. And its Accounting Standard 30 (AS 30) would have become mandatory only from 1 April 2011. Now, Icai has said that derivative losses should be revealed for the financial year that closed yesterday.
Illustration: Jayachandran / Mint
Icai’s decision is a timely one. The past few weeks have seen a snowballing of reports on how Indian companies are facing losses from foreign exchange and commodity derivatives. Yet, there is not enough clarity on the nature of derivative exposures and the identity of counter-parties. Even the finance minister’s statement in Parliament that Indian banks hold Rs128 trillion of derivatives does not tell us enough. The statement — which is merely based on data published last year by the Bank of International Settlements — tells us little about what the net exposure of banks really is. Many banks could have taken two-way derivative bets, which means that the losses from one set could be cancelled by the profits in another.
The point is that there is too much confusion and uncertainty about the nature of the derivatives exposure of Indian banks and companies. Such pervasive uncertainty is not good for investors, who have anyway been rattled by global financial volatility. This is why we believe Icai has done the right thing and brought the AS 30 deadline forward. At least some of the muddy waters will be clearer, giving investors a better idea of who is swimming and who is sinking.
A widely quoted estimate puts potential derivative losses at Rs20,000 crore. How significant is that number? By rough estimates, that should be a little more than one-tenth of the total profits the 50 companies in the Nifty equity index are expected to earn in 2007-08. That’s significant. But various reports suggest that many of these losses could be concentrated in small and medium firms that are not listed in the public markets. Then again, these companies have filed lawsuits against some listed banks.
In short, there is still too much confusion about the extent and nature of the derivative losses. The early implementation of AS 30 will help clear some of this confusion.
Should companies have got more time to report derivative losses? Write to us at firstname.lastname@example.org