The National Financial Reporting Authority (NFRA) has proposed key changes in the accounting standards, with an aim to more accurately capture the impact of transactions conducted by firms in foreign currency on their financial statements. The proposed amendments to Ind AS21 will give clearer guidance to companies to determine “appropriate exchange rate,” a move which could come handy for them in dealing with countries witnessing undue short-term currency volatility or are not adequately transparent about the exchange values of their currencies.
The revised audit norms will take effect from April 1, 2005.
Industry sources said the improvement in financial reporting from the proposed amendments would help enhance investors’ trust in Indian firms with substantial foreign operations, including the export-intensive ones. A major benefit being seen is in terms of capital inflows from global patient capital such as sovereign funds, pension funds.
According to sources, the revised Ind AS21 standards will be more precise in terms of how companies report their foreign currency transactions or translate their foreign operations, especially in regard to countries where the information on exchange rates are not readily available. It will also remove the current arbitrariness in which the Indian companies are reporting “foreign currency transactions and operations” in their financial statements.
“The proposed changes will specifically help domestic companies who have business engagement in countries going through political turmoil, are in hyper-inflationary phase, or are afflicted by war or any other kind of instability leading to the lack or obfuscation of of currency exchangeability. The amended standards have been harmonised with the International Financial Reporting Standards (IFRS) to enhance global accessibility and transparency for Indian businesses,” said a NFRA source.
Experts said that the revised standards – which are in line with IFRS’ revised IAS 21 standard – could come in handy in case the foreign authorities restrict the issuance of exchange rates for foreign countries which have a trade imbalance with India.
“There could be cases where the authorities would typically provide foreign exchange rates for exports but aren’t forthcoming when it comes to imports. Such practices, in the absence of the proposed guidance, could make it difficult to reconcile imports reported by foreign countries and exports data of Indian firms,” said a senior auditing expert.
“Indian companies are getting global, and any company with significant operations in overseas jurisdictions will get impacted, especially in case of countries where the currency volatility is high. It will change the way foreign currency transactions are reported and presented in the country. This amendment, which would significantly improve the financial reporting structure, and could potentially help attract patient capital from abroad,” said a Confederation of Indian Industry (CII) spokesperson.
The amended Ind AS21 give a clear guidance to companies to determine an “appropriate exchange rate,” where the exchangeability between two currencies is lacking. Essentially, the new rules mandate a firm to estimate the spot exchange rate via two methods – observable exchange rate and suitable estimation technique.
Under the observable exchange rate, companies can take the exchange rates for one type of transaction (export or import), and do an appropriate adjustment to arrive at the exchange rate for other types of transactions. In case where the observable exchange rate cannot be calculated, the companies will have to apply suitable estimation technique and prescribes certain disclosures.
However, some experts point out the limitation of the proposed rules. “We welcome these proposed amendments. It will provide useful information to the users of financial statements. However, more clarity is needed about how to tackle cases where a lack of exchangeability is not temporary. Therefore, Ind AS 21 had a limited guidance in this regard,” said Charanjot Singh Nanda, president at ICAI.