The ICAI has said that the companies should reveal their mark-to-market losses of all outstanding derivative contracts under AS 30 norms (Accounting Standard) norms. If these are not revealed under AS 30 norms, they should reveal the losses under the Principle of Prudence.
Currently companies do not need to reveal MTM losses on account of derivatives. The ICAI wants the companies to provide for the losses. The auditors should ask companies to disclose losses, the ICAI has said.
Explaining the implications of this ruling, Viren Mehta, Director, Ernst & Young India said this announcement has encouraged companies to adopt AS30 early. “What the ICAI has essentially done is to throw some more light on the financial instrument that companies are carrying and encouraging them, either to do an AS 30 or at least do a mark-to-market using the Principles of Prudence, and then record these in your financial statements,” he explained.
Excerpts of CNBC-TV18’s exclusive interview with Viren Mehta:
Q: Can you take us through the implications of this ruling that the ICAI has gone forward with? Do you expect companies to really go ahead and declare their losses or disclose the kind of losses they have made in the past couple of months?
A: Essentially what this announcement has actually done is to give encouragement to companies early adopting AS 30. What it also does is if companies are not early adopting AS 30, then the financial instruments, which have been undertaken by these companies, need to be reported using the Principles of Prudence in AS 1.
So essentially what the ICAI has done is to throw some more light on the financial instrument that companies are carrying and encouraging them, either to do an AS 30 whereby you do mark-to-market and report those in your financial statements or, at least do a mark-to-market using the Principles of Prudence, and then record these in your financial statements.
Q: Do you think that the companies are really going to go and do this because the estimated losses on the account of forex derivatives-everyone is nearly USD 4-5 billion, imagine this sort of a number actually coming up in Q4 results for companies?
A: The guidance or the announcement that the ICAI has come out in is not new. It actually just draws light from the fact that there was this concept of prudence, which was to be used by the financial statement makers of this concept. They need to look at it more strongly when they draw financials for this quarter as well.
So if there are losses which are more likely to occur using the principles of prudence that you record all known liabilities and losses, and you are using your best estimates, you need to do that and it is to that extent not new. But it does highlight this factors through this announcement.
Q: Do you think Q4 earnings for companies who have taken speculative positions on the derivative currencies, derivative products, especially in the yen positions and Swiss Bank positions, what kind of losses are you expecting from these companies? Are you expecting a huge amount of losses to be reported this quarter if companies really do go ahead and report these numbers?
A: The quantification of these losses could be anybody’s guess, but whether these instruments as per taken by these corporates actually went in and covered an actual exposure that the companies were sitting on, to that extent there is offsetting items in your financial statements itself. But if the companies have overextended themselves in taking on financial instruments for which there was no underlying exposure, to that extent there will be mark-to-market losses, if the rates have moved unfavourably to them.
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