AS 11 breather

Posted on    30 March 2009

Author : Pallavi Pengonda/DNA

Reported profits of companies are likely to be better for the quarter ending March following the expected suspension of the revised Accounting Standard 11 (AS 11) mark-to-market (MTM) accounting rule.

The National Advisory Committee on Accounting Standard has recently recommended that the adoption of the revised rule be postponed to 2011.AS 11 deals with MTM provisioning for gains and losses in foreign currency. Under this, companies are required to post loss/ gain each quarter after considering their forex debt value on the basis of the quarter-end currency rates.The suspension benefits companies that have taken foreign exchange loans, as they will not have to provide for forex losses on these loans.In the last few years, many companies have raised their exposure to foreign debt in the forms of foreign currency convertible bonds (FCCBs) and external commercial borrowings. But, adverse fluctuations in Indian currency have impacted companies that did not hedge their forex loans in the nine months ended December.The rupee appreciated about 8% against the US dollar in FY2008 and this helped companies post MTM gains in their profit and loss account. But with rupee depreciating by over 25% in the last one year, the trend is expected to reverse.Around 158 companies with outstanding FCCBs of $17 billion expect to benefit from this move if the rupee appreciates in these two years.Companies that are expected to benefit substantially from this move are Tata Motors, Tata Steel, Mahindra & Mahindra, JSW Steel and Ranbaxy Laboratories.Tata Motors posted an exchange loss of Rs 632.6 crore in the nine months ending December. Tata Steel's exchange loss was Rs 775.6 crore, while Ranbaxy's exchange loss stood at Rs 1,592.9 crore. In fact, Ranbaxy posted a loss before tax of Rs 1,758.1 crore for the nine months ending December.

But will the move really help these companies?
Experts reply in the negative. It would only offer interim relief and help them inflate their numbers, they say."True economic profits of companies are likely to remain unaffected, but cash flows could be hit as companies may have to pay additional current taxes (MAT is applicable if current taxes are lower than 11.33% of adjusted book profits)," Manoj Bahety of Edelweiss Securities wrote in a note to clients on Friday.

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