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April 28, 2009

Indian amendments spark conversion fears

India’s commitment towards global accounting rules has been questioned following the government suspension of a foreign exchange standard that is largely in line with IFRS.

The suspension will likely benefit the balance sheets of larger companies and has been opposed by the Institute of Chartered Accountants in India, the nation’s accounting regulator.

India is desperate to be seen as embracing global best practices in the wake of its largest corporate fraud in January. This makes the suspension of AS11 all the more peculiar, according to one academic.

R Narayanaswamy, a professor of finance and control at the Indian Institute of Management, said the move raised doubts about whether convergence will happen, and if it does, what shape India’s IFRS could take.

“You have a European IFRS, so we will probably have an Indian IFRS. This is the Indianisation of international standards,” Narayanaswamy said.

“I don’t think that at this rate they will ever accept international accounting standards in the spirit in which they have to be accepted. They will accept them on paper and make these periodical changes.”

AS 11 almost fully conforms to international standard IAS 21, The Effects of Changes in Foreign Exchange Rates.

But under the changes, companies will be allowed to capitalise foreign exchange losses on capital assets instead of charging to revenue. They will also be permitted to create a special reserve to park mark-to-market foreign exchange losses and amortise up until 31 March 2011, which is the day before the scheduled convergence with IFRS.

Narayanaswamy suggested the government made the change due to pressure from the private sector. A lot of large companies stand to benefit from the relaxation of AS 11, he said.

AS 11 came into effect in 2006 and in the following two years the Indian rupee appreciated. This meant foreign currency borrowings were diminishing in Indian rupee terms, so affected companies were recording gains.

“This is somewhat like this mark-to-market complaints by banks,” Narayanaswamy said. “When they were all showing gains they were happy with the mark-to-market, but when there are losses they are not.”

According to the Ministry of Corporate Affairs, the changes were recommended by the National Advisory Committee on Accounting Standard.

Narayanaswamy said he was surprised by the move. He thought the government would be afraid to ease accounting rules in the wake of the accounting fraud revealed this year at Satyam Computer Services.

“This now looks like Satyam has not had any effect on these people at all, it does not have a sobering effect on them,” he said.

He added that these changes have a detrimental effect on the post-Satyam appearance of accountancy and transparency in India.

“There is a lot of foreign investment in Indian companies and nobody will believe us when we say we want to follow globally acceptable standards,” he said.

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