Top companies (RIL) ignore ICAI rule on forex loss treatment

First-quarter results of several big companies such as Reliance Industries, Reliance Communications etc., would have been a lot worse had they followed the Accounting Standards (AS) 11 rules prescribed by the Institute of Chartered Accountants of India (ICAI).

For example, if the forex loss on this account were taken to the profit and loss (P&L) account as required under AS11, THE NET PROFITS OF RELIANCE INDUSTRIES FOR THE QUARTER-ENDED JUNE09 WOULD HAVE BEEN 23 PER CENT LOWER THAN REPORTED.

“The effect of changes in foreign exchange rates has to be charged to the profit and loss account. The standard has been notified by the government and is part of the rules. Any violation has to be dealt with by the government,” said ICAI President Ved Jain.

A Reliance Industries spokesperson said the company has continued to adjust the foreign currency exchange differences on amounts borrowed to buy fixed assets to the carrying cost of fixed assets in compliance with Schedule VI to the Companies Act based on legal advice it received. Had the accounting treatment under AS11 been followed, the net profit for the first quarter would have been lower by Rs 940 crore.

But who will challenge these companies? “Companies are governed by the listing agreement that require them to follow the accounting standards. Why are stock exchanges not asking any questions?’’ asked a corporate observer.
Experts feel that ICAI should clarify that pending the amendment of the Act, companies will have to follow the accounting standard. The problem is that the institute can’t pull up companies or accountants, who will say ‘I have disclosed’.
“The three agencies (Sebi, ICAI and the ministry of company affairs) need to work in tandem so that there’s no ambiguity,” said Sanjay Aggarwal, head, financial services, KPMG.

(Source: Business Standard)

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Now, (due to satyam’s fraud SEBI issued instruction to peer review on Sensex 30 and Nifty 50 companies with prominent auditor) the three agencies should look in to this issue and should take appropriate actions on such companies.

Then the valuations of the above said companies will stretch further and more down grades likely to come, importantly THEY WERE NOT PRICED IN.

WITH THANKS
BE AND MAKE