In downturns, it’s evident that companies will make losses. That’s how business cycles work. But instead of playing along, corporations are complaining about the rules of the game.
On Monday, the Confederation of Indian Industry (CII) issued a press release where it recommended another look at currency-related accounting norms. The sharp depreciation the rupee has seen in recent weeks against the dollar —5.75% since January—has increased losses for companies. For instance, a $1,000 loan taken from a US bank last year would have meant a company owed Rs45,000 then, but now it owes Rs51,000.
At issue is Accounting Standard 11, the Institute of Chartered Accountants of India (Icai) norm that mandates that foreign exchange gains and losses be marked to market in a company’s profit and loss (P&L) account. This means that even if the $1,000 loan hasn’t matured, the P&L currently reported every quarter must show this loss as per the current exchange rate, i.e., Rs51,000, not Rs45,000. CII has been clamouring for a change, suggesting that companies adjust the value of a loan after maturity. CII says these times are exceptional; yet, currency markets are still very liquid.
No one raised this issue two years ago, when in the midst of a bull run, rupee appreciation reduced what companies owed foreign banks. Now, drowning in red ink, accountants want to avoid declaring these losses. CII says it doesn’t want “negative perceptions (of companies) to continue” at a time when profits are anyway down. But it appears happy promoting misleading perceptions where investors can’t tell what assets or liabilities are worth.
That’s not to say companies aren’t already misleading. Many have resorted to a Companies Act measure where they can deduct these forex losses from their annual balance sheet and not their quarterly P&L. Now, a month before these consolidated balance sheet results have to be declared, CII is scrambling for another way out.
Icai seems to have demurred on its decision so far; it should give CII a firm no. Accounting disclosures exist to inform the public, not deceive them. Corporations across India should have learnt this lesson by now.
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