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THE government has suspended a key accounting norm on foreign exchange losses for the period starting December 7, 2006, to March 31, 2011, allowing companies like Tata Steel, Suzlon Energy and Wockhardt to protect their profits from a sudden increase in their foreign loan liability on account of adverse currency movements. This marks a rare occasion where companies are being allowed to restate their past accounts.
Before the suspension of Accounting Standard 11, the weakening of the local currency meant a rise in the repayment obligation in terms of rupees, which had to be captured in the accounts as an expenditure, reducing profits. Under the amended rule, forex losses (or gains) can be kept on the balance sheet itself, and not brought to the profit and loss account.

The ministry of corporate affairs notification allows companies two options to show the extra money they have to shell out for paying off a foreign currency loan taken when the rupee was stronger. Companies can either add the forex loss into the cost of acquiring an asset for which the loan was taken or show it in a separate account.

Cushion against exchange rate fluctuation:

GRADUALLY during the term of the loan, this amount in the separate account can be charged to the profits so that profits do not take a sudden hit in any given year on account of sharp currency movements.

“Corporate houses can benefit because the current financial meltdown and unusual movements in exchange rates will not impact their current years’ results,” said Ernst & Young India director Rahul Roy. For companies like Tata Motors, JSW Steel, Suzlon Energy, GMR Infrastructure and Wockhardt Ltd, it is good news. They need not show lower profits on account of forex loss due to a sharp erosion in the value of rupee against the US dollar. However, companies will have to disclose the forex losses or gains as part of their annual accounts, to keep investors informed. Companies like Reliance Industries, RCOM and Jet Airways that had not chosen to adopt AS 11 will not be affected by the suspension of this standard till 2011, with retrospective effect from December 7, 2006.

“The amendment of AS11 will not affect the net worth of a company if the exchange loss or gain is recognized in the balance sheet that is the ‘foreign currency monetary item translation difference account’. However, if exchange loss is capitalised to fixed assets, that would enhance the networth compared to existing AS11 requirements. The decision to extend the benefit only till the accounting period ending March 31, 2011 indicates the government’s strong commitment to adopt international financial reporting standards by 2011, which entails fair value accounting,” said Dolphy D’Souza, partner E&Y.

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