The Reserve Bank of India has decided to bar commercial banks from taking unrealised profits out of their overseas operations into the profit and loss account in order to boost the bottomline.
This decision sets at rest the year-old controversy between banks and the RBI on one side and the Institute of Chartered Accountants of India (ICAI) on the other. A circular will be issued in this regardshortly.
The ICAI was against taking unrealised profits to the P&L accounts. The RBI, however, had allowed banks to take unrealised profits, which resulted in auditors making qualifications in the balance sheets of banks.
The controversy had resulted in the formation of a committee comprising representatives of the RBI, commercial banks and ICAI. It has recommended to the RBI that banks should not be allowed to take unrealised profits from their foreign operations.
The earlier practice followed by banks boosted the bottomlines but created a lot of attendant problems. The problems were related to tax and to an unrealised loss in the overseas assets.
If banks booked the unrealised gains, say in real estate, they would have to pay taxes on this income. Since the income has not been realised, it hits banks adversely. On the flip side, the real estate markets overseas fluctuate and, if there is a loss, banks will be forced to provide for it.
Most of the unrealised profits that banks booked were, however, not out of the revaluation of assets but due to the depreciation of the rupee. These assets were accounted for at historical rates, but if they are converted into rupees at the current exchange rate, there is a tremendous appreciation. Many banks took these unrealised gains to the P&L account to boost the bottom line.
