AS11: Impact on Indian companies

Accounting Standard 11 was introduced by the Institute of Chartered Accountants of India (ICAI) in 1989 and was revised in 1994 & 2003. While finalising the profit and loss (P&L) account and balance-sheet of the enterprise, AS 11 prescribes the rate at which the foreign currency transactions are required to be translated into rupees. AS-11 requires all foreign currency monetary transactions of companies to be reported on the basis of closing exchange rate at the end of an accounting period. The gain/loss arising out of this restatement (due to exchange rate changes between the date of transaction and the end of that quarter) had to be charged to the profit and loss account, as an income/expense.

The year 2008 was marked by extreme volatility in commodity as well as forex markets. Indian Rupee depreciated against the Dollar by over 24% during 2008. In the second half of 2007, when the Rupee was appreciating against other currencies, many Indian companies undertook huge CAPEX plans and borrowed through cheap foreign currency loans in the overseas markets. Immediately afterwards the trend changed following a sharp reversal in the equity markets. These companies took a massive hit in their profitability due to MTM (Mark to Market) losses on their Foreign Currency portfolio (as required under AS 11). The companies that suffered huge MTM losses in the first 3 quarters of FY 2008-09 include JSW Steel, Tata Steel, Tata Motors, Suzlon Energy among others. The stocks of these companies took a heavy beating on the bourses.

To overcome this extraordinary situation, National advisory committee on Accounting standards (NACAS) has come out with recent amendments in AS 11. As per the amendment, that is retrospectively effective from December 7, 2006 and will be enforced from March 09 quarter onwards, companies will have the option to account for the impact of long term foreign currency loans in their books upto March 2011. This would translate into a significant relief in the balance sheet of these companies for FY 2008-09 and 2009-10. The amendment to AS 11 has been one of the significant contributors to the ongoing rally on the stock markets.