Another big corporate finds itself in AS–11 tangle. ADAG company Reliance Communciations declared quarterly profit of just over Rs 1,500 crore. Well, that figure would have been lower by almost Rs 1,062 crore (over 66%) if the company had accounted as per rules prescribed by Institute of Chartered Accountants of India (ICAI).
As per Accounting Standard 11 (AS-11), exchange differences arising on account of foreign currency borrowings for buying fixed assets have to be adjusted through the Profit & Loss account.
Companies like Reliance Communications, Reliance Industries and Bharti Airtel, however, have taken legal advice, and capitalised the exchange difference on the ground that Schedule 6 of the Companies Act allows them to do so.
This is strange. They don’t have a problem booking gains on the way up (except for Reliance Industries, which refused to recognise the gain also last year, so they are slightly better off.)
Bharti and RCOM had a huge set of forex gains last year; so reversing them at this point, during a slowdown will obviously hit their net profit hard. So they get legal help to not have to show the losses. Which is okay, except they have to choose either way and restate all the past accounts as well – then we’ll see their real growth.
But our regulators are weak. They don’t do anything of significance. If they have some substance they should be sending their accountants to RCOM and Bharti and RIL right now, conducting an impartial independent audit and revealing the numbers. Or at least warning the companies to strictly adhere to AS-11 or else they get delisted or something of that sort.
Still, this means one more thing: Must not bother too much about declared results. Managements will do anything, even quasi legal methods, to fudge numbers. Only one thing shows you the picture – the price.
And RCOM is down 13% today.
Disclosure: For some obscure reason we are long RCOM. But it’s intraday so we’re out by the end of the trading day. At a small loss, I may add.