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ICAI: delay in new accounting norms will hit shareholders

AS-11 is a new accounting method for industry that the government is planning to bring Indian accounting procedures to internationally accepted standards. AS-11 will be applied to non-corporate organisations with immediate effect, Suprotip Ghosh reports.

business Updated: Apr 07, 2009 23:18 IST
Suprotip Ghosh

The president of the Institute of Chartered Accountants of India (ICAI) has said that postponement to 2011 of accounting standard AS-11 linked to foreign currency issues will hurt other shareholders at the expense of company promoter-managers who may hurry to pay themselves dividends before tougher rules set in.

The AS- 11, or Accounting Standards 11, requires that liabilities and assets such as receivables denominated in a foreign currency should be presented in the balance sheet in rupee terms by converting the same at the exchange rate on the balance sheet date.

“We believe that foreign currency fluctuations and other possible reasons for a company’s less-than- expected performance could in fact benefit the management, at the expense of shareholders,” Uttam Prakash Agarwal, president, ICAI said on Monday.

AS-11 is a new accounting method for industry that the government is planning to bring Indian accounting procedures to internationally accepted standards. AS-11 will be applied to non-corporate organisations with immediate effect.

Currently, if a company makes a foreign exchange loss due to currency fluctuations, and a dividend is declared before 2011, any loss in the promoter’s dividend has to be paid for by the company, at the expense of shareholders, Agarwal said.

This means dividends before 2011 would not be truly linked to the company’s performance, consequently creating hurdles in valuation, ICAI officials say.

The ICAI has stressed the need to re-examine the provisions of deferring the AS-11 guidelines “on the principles of consistency, prudence and going concern basis” in the best interest of all concerned.

There is a process of hedging against foreign exchange loss, and any loss due to bad hedging practices is naturally a failure of the management, says the association. Deferment of the AS-11 rules means that the promoter would enjoy dividend payments despite bad business practices, Agarwal said.

Various industry bodies, at various points have lauded the decision to defer AS-11 practices to 2011.