There is this major hullabaloo being made about the directive issued by the Institute of Chartered Accountants of India (ICAI), the body that seeks to regulate the profession of accountancy in India. Accusatory fingers are being pointed at ICAI stating that it is responsible for the markets falling by over 726 points on 31st March 08’, the last day of fiscal FY08.
So now the confusion is - what exactly did ICAI announce, was it some new policy or guideline? Absolutely not! ICAI has merely clarified the already existing directive and it had to do this due to the current storm brewing up between the banks, which had entered into contracts in forex derivative, at the behest of its clients. Now the clients are suing the banks, stating that they were responsible for booking losses on these “exotic currency” contracts.
Actually this storm has been brewing for quite some time now. It all started with Hexaware, a profit making company which was forced into booking exceptional losses of Rs.102.99 crore when one if its employees entered into certain foreign currency transactions which were not disclosed to the senior management and the Board of Directors. This had happened when the markets were booming and at that time, no one was in any mood to listen to any bad news. And now, with the markets down and one skeleton after the other tumbling out of the cupboards, this one about the companies posting huge derivatives losses is choking the markets.
A fortnight ago, Sundaram Multi Pap had sued ICICI Bank, alleging it of having sold by mistake some forex derivatives contracts for speculative purposes. And now there is another company, Sabare International, which has taken ICICI Bank to court over similar forex derivatives contracts. There is news in the market that many banks, mainly the private sector banks, have got involved in such forex derivatives contracts and there are many companies that will now be forced to declare losses.
Naturally, this led to people pointing fingers at the banks, accusing them of putting their clients into losses. And now this is where it needs to be said that it is unfair to point the fingers at the banks. Yes, they can be blamed for getting into such transactions but then; did they not invest the money after having got the approval from the clients? Hexaware booking losses, now that is the responsibility of the company, how can it allow its employee to do such a thing right under its nose? That’s a question of corporate responsibility and governance but what we are dealing with here is different. Its like this – there is a client A and his bank B tells him about an opportunity where he could park his funds for better returns. Now A does not understand the complex financial instruments but yet, signs on the dotted line and gives the go-ahead to B. Then B invests and the markets go haywire, currencies fall and B is left with no option but to book losses as that is actually the most prudent thing to do as per the stipulated accounting standards. A is now crying foul and suing B.
And it is here that ICAI has stepped in for clarifications. It has merely quoted the Accounting Standards (AS) norms, wherein under AS-30, which deals with such forex derivative instruments, it is stated that accounting for derivatives is to become recommendatory from 1.04.2009 and mandatory from 1.04.2011. And if the companies decide not to follow this AS-30, then they have to follow AS-1, which explains the principles of prudence, stating that losses are to be considered and profits are to be excluded.
ICAI has urged the companies to adopt AS-30 as soon as possible. This will promote greater integration with international practices and will also promote greater transparency, which could probably help avert similar such situations arise in the future.
There is no ambiguity about the enforceability of this AS-30 and the timing when companies should adopt it. ICAI urging the companies to adopt it early is recommendatory which means that companies will have to consider the AS-30 norm while making the financial statements for the year ended 31/03/08.
The markets are construing this AS-30 as a new accounting standard and this is where all the confusion lies. But the underlying truth in all this is that companies who have parked their funds in exotic forex derivatives will certainly take a hit on their balance sheets for which they themselves are more responsible than the banks, which did the transactions. This uncertainty of losses is what is actually keeping the sentiments low. We can only now wait and watch, the financial figures will start coming out soon. If we enjoyed the party, we have to nurse the hangover too!
So investors / traders this are the days where you have to do your own homework to park your funds in banks, bonds, mutual funds, stocks etc. AFTER ALL ITS ALL ABOUT MONEY HONEY !
