Payment default by corporates may get highlighted in accounts
Investors may soon be able to find out easily if a company has defaulted on its loan payment. The government is working on a revised accounting format under which a company would have to disclose clearly a default in payment of interest or the principal in the notes to accounts. The change is relevant in the context of the financial crisis which is likely to result in many companies defaulting on loan payments. The changes are part of the government's ongoing process to revise a Schedule VI provision of Companies Act, 1956, that lays down the format in which financial statements should be prepared. The borrowings-related details, which are gathered during the auditing process, and are part of the auditor's report will now be made available as disclosures made along with financial statements. The proposed move will ensure that investors can see the details at a single place rather than sniffing through technical reports of auditors, which are difficult to comprehend — and often hard to find. The government believes that using reams of paper to disclose information is an act of obscuring useful information with excessive and irrelevant details. Under the proposed changes, stress is being laid on detailed disclosures while removing several mandatory disclosures considered redundant in today's age. The revised schedule proposes to make it mandatory for companies to account for any gain or loss incurred due to exchange rate fluctuations. Accounting experts have extended a guarded welcome to the steps for revising Schedule VI. Says Ernst & Young Partner Dolphy D'Souza, "The proposed move to bring uniformity over accounting for foreign exchange losses and withdrawing the disclosure needs for capacity details and statistical information, among others, is welcome." The revision — which aims at bridging the gap between domestic accounting practices and global standards over presentation of financial data — will mandatorily require all companies to reflect their assets and liabilities with greater clarity and prudence. The move will serve as a step towards bringing regulatory changes considered necessary before India converges with the International Financial Reporting Standards (IFRS) by April 2011. Schedule VI has come under serious scrutiny in the current fiscal with some companies hiding behind it to hide foreign exchange-related losses. However, Mr D'Souza says that even though the proposed changes align the Indian accounting format with IFRS norms, the changes should have been made in the accounting standards rather than the Companies Act. He said with the global accounting standards subject to frequent interpretations and possible changes, a future change could be best adopted by amending the accounting rules rather than Schedule VI, which is a part of the Companies Act.
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