Indian cos to disclose risks of financial instruments holding

New Delhi, May 18 (UNI) In a step that is expected to have widespread repercussions, Indian companies will now have to disclose the risk arising from holding of financial instruments and steps taken to manage such risks.

This follows the decision of the Institute of Chartered Accountants of India (ICAI) which this week approved Accounting Standard 32 (AS 32) for disclosure of losses and gains from investment in market-linked instruments such as derivatives, futures and options, mutual funds and government securities.

Though the new norms aimed at bringing transparency come into force in 2011, companies have been given the option to enforce the accounting standards from next year itself.

ICAI President Ved Jain told reporters here that AS-32 would bring "greater transparency in disclosures related to financial instruments such as derivatives and how the entity manages risks associated with such portfolio." According to ICAI, henceforth, shareholders will be able to evaluate "the significance of financial instruments for the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and how the entity manages the risks." Till now, companies managed to hide derivative losses in the financial statement as marked to market.

In fact, derivative losses due to selling of these products by some private Indian banks has been in the news recently.

Cases have been filed by various companies against leading banks including ICICI Bank and Axis Bank for the losses suffered on account of banking on derivative products due to the US subprime crisis.

The norms are based on international financial reporting standards being adopted by India and are an extension of the recently-adopted accounting standards AS-30 and AS-31 regarding recognition of measurement and presentation of financial instruments by companies.

While shareholders will welcome the disclosure norms clarifying the nature and extent of risks due to holding of the financial instruments, the reaction from industry bodies has been critical. They have argued that marked-to-market losses are notional and difficult to compute.

UNI SD RAI1101