ICAI gives firms leeway in reporting derivative losses

No need to report if transaction is not speculative.

Companies may get to avoid reporting losses on derivative contracts provided they can prove that the transaction was a hedge and not speculative in nature.

A recent clarification by the Institute of Chartered Accountants of India (ICAI) regarding disclosure norms for derivative contracts had specified that companies would have to disclose mark-to-market losses from such transactions, financial year 2007-08 onwards.

Sources now say companies have the leeway to avoid reporting losses on derivative contracts, as there are enough mechanisms in accounting standards that lay out the guiding principles in this regard.

Pointing out that the March 29 circular on derivatives transactions was a reiteration of existing positions, ICAI President Ved Jain said the accounting standards authority was not planning to issue any further clarifications on the matter.

"There are enough guidelines on hedging transactions in standards like AS-11 and AS-30," he said.

Derivative transaction-related disclosures were expected to hit corporate profits for the fourth quarter of financial year 2007-08.

A hedge is a technique aimed at reducing or eliminating financial risk. A basic example of a hedge would be the automobile insurance that an owner buys, while at the other end of the spectrum companies participate in sophisticated hedges on currency or equities using derivatives.

Accounting experts agree that companies can get away from reporting derivative losses if they declare them as hedges.

"This is possible, provided there is an underlying business contract for which a hedge has already been done. Both the business contract, as well as the hedging contract, would have to be looked at before deciding on the losses," K S Mehta, managing partner, SS Kothari Mehta & Co, said.

"Going by the RBI guidelines, no company can speculate in foreign currency. So there cannot be trading or speculative losses in foreign currency. The position can only be taken for hedging the company's risks," another accounting expert added.