The Institute of Chartered Accountants of India, or ICAI, has urged companies to reveal their mark to market, or MTM, losses of all outstanding derivative contracts in their balance sheets this quarter.

It wants companies to reveal their MTM losses of all outstanding derivative contracts under AS 30, or accounting standard norms. If these are not revealed under AS 30 norms, they should reveal the losses under the Principle of Prudence.

At present, Indian companies do not need to reveal MTM losses on account of derivatives. However, ICAI wants the companies to provide for the losses.

So, what prompted ICAI to come out with such a ruling? Ved Jain, President, ICAI, said the move was prompted by confusion prevailing in the market as how these losses are to be accounted for. “By this announcement, we have clarified the position as per AS 30 and AS 1. The main confusion arose because of the recently notified AS 30 was made recommendatory from April 1, 2009. There was a thinking going on in many sectors that this being a recommendatory from April 1, 2009, probably corporates are not suppose to comply with this. We do agree that AS 30 is recommendatory from April 1, 2009, but an early compliance is always encouraged. Even otherwise, the situation is covered by AS 1, which deals with the prudence whereby a provision is required to be made of all known liabilities and losses.”

Explaining the implications of this ruling, Viren Mehta, Director, Ernst & Young India, said this announcement has encouraged companies to adopt AS30 early. “What ICAI has essentially done is to throw some more light on the financial instrument that companies are carrying and encouraging them, either to do an AS 30 or at least do a MTM using the Principles of Prudence, and then record these in your financial statements,” he added.

Sharing Mehta opinion is Shashank Khade, Vice-President Portfolio Management Services, Kotak Securities. He feels there would be cases where smaller companies will have exposure to forex derivatives, which are equal to their networth. “Investors will tend to know the magnitude of these sort of numbers. Though notional in nature, it’s going to be unnerving for lot of investors. There would be cases where smaller companies will have numbers, which are equal to the networth of their balance sheets. So, this earnings season is going to be wait, watch and go.”