Mar. 18, 2009 (The Hindu Business Line) -- There is an element of expediency in the demand by Corporate India that the Institute of Chartered Accountants of India dilute Accounting Standard 11 that deals with the effects of changes in foreign exchange rates. The Standard currently provides for writing off as loss the entire sum of rupee depreciation relative to the foreign currency (often the dollar) in a year; the industry would much rather prefer that such losses be amortised over the residual life of the loan. The Accounting Standard has been in vogue since 2006 and the current clamour is thus inexplicable from a theoretical standpoint. The industry’s case rests on the ground that the global economy as a whole and India’s in particular, is going through an extraordinarily testing phase. Everything possible should be done to soften the external appearance of a deteriorating corporate performance, as the argument goes. Indeed the current situation, if anything, only makes the case for retaining the Standard unaltered that much stronger. After all, the first step towards mounting an effective strategic response to a challenging business environment is for financial statements to reflect the true extent of the deterioration in performance so that investors get the correct picture of the challenge confronting the company. If a sharp depreciation of the rupee against the dollar dents shareholders’ funds to the point where it exposes the company’s financials to high leverage, the enterprise is better off recognising and doing something about it rather than shelter behind a facile belief that the currency depreciation is a passing event or that performance is actually a lot better than what it actually is. It can be nobody’s case that the thermometer needs recalibration just because a patient’s febrile condition is causing anxiety in the minds of those close to him. The notion that the value of an asset at the time of acquisition is a combination of the cost expressed in foreign currency and the exchange rate at which it can be converted to the Indian rupee has been generally well accepted and has thus stood the test of time. However a few companies in the late 1970s and early 1980s began to tinker with this and sought to extend the concept of “acquisition cost” to cover expenses associated with the underlying financial arrangement in fixed asset acquisition. They were in the midst of massive and frenzied expansion in productive capacities requiring constant infusion of equity funds and were thus under a strategic compulsion to shelter profits from the debilitating effects of exchange rate fluctuations. The new Accounting Standard rightfully rejected the argument and there is no reason to revisit the subject on the specious plea that the current economic conditions warrant it. Principles in whatever discipline should not be regarded as something akin to fashion that will change with the times.
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