Tuesday, August 12, 2008

New regulations help auto firms mask forex losses

A change in the accounting standard helped auto majors mask the actual extent of foreign exchange losses in the quarter ended June, brokerage firm First Global securities has said in a research note.

The June quarter saw auto majors such as Bajaj Auto, Tata Motors and Maruti Suzuki apply the principles of hedge accounting set out in Accounting Standard 30 (AS 30)
issued by the Institute of Chartered Accountants of India.

which qualify for hedge accounting’ to be accounted to the hedging reserve account in their balance-sheets.

Such MTM losses, however, will have to be eventually taken to the profit & loss (P&L) account, when the underlying transaction arises. Till last quarter, these companies used to take such loss/ gain to the P&L account at the end of every accounting period.

“All exchange gains/ losses arising from the revaluation of assets and liabilities are taken as ‘other expenses’ in their P&L... Until Q4 FY08, auto companies earned forex gains due to the appreciation of the rupee, which was adjusted in their P&L by lowering other expenses, resulting in higher profits,’’ said the report.

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