The Hindu Business Line : Recession accounting?

There is a comment doing the rounds that the credit crisis has assisted in the good health of a number of people, as they are on their feet with their cars having been repossessed. The situation appears to be getting grimmer every day with factories shutting off for some days, no-wagehike announcements, layoffs and a general sense of gloom all around.

Governments across the world are busy creating stimulus packages to tide over the present situation. Can accounting regulators assist in these times? The International Accounting Standards Board (IASB) has an accounting standard IAS 29 - `Financial reporting in hyper-inflationary economies'. The question to be asked is whether we need a `Financial reporting during recession'.

IAS 29

IAS 29 identifies five criteria to decipher whether an economy has been hit by hyper-inflation - the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.

Amounts of local currency held are immediately invested to maintain purchasing power - the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency.

Prices may be quoted in that currency, sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period. Even if the period is short, interest rates, wages and prices are linked to a price index and the cumulative inflation rate over three years. The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical-cost approach or a current-cost approach, shall be stated in terms of the measuring unit at the balance-sheet date.

The restatement of financial statements in accordance with this Standard requires the application of certain procedures as well as judgment.

The consistent application of these procedures and judgments from period to period is more important than the precise accuracy of the resulting amounts included in the restated financial statements. Balance-sheet amounts not already expressed in terms of the measuring unit current at the balance-sheet date are restated by applying a general price index.

FINANCIAL REPORTING

Financial reporting can be broken up into accounting and financial reporting. Accounting cannot be escaped even though recent developments prove that there could be exceptions. The devil lies in financial reporting which could also be broken up into quantitative and narrative disclosures.

The IASB has taken baby-steps towards formulating some criteria for fair value reporting during recessionary times but this has to be further developed as the very concept of fair value is coming under the scanner.

A part of the stimulus package announced in India involved shaving four percentage points off the Cenvat rate. Cost-saving measures announced by companies would have an impact on the bottom-line.

But some external measures, such as deferring depreciation by a year, removing artificial disallowances under the Income- Tax Act, partial relaxation in the provisions made under Accounting Standard 15 (Employee benefits, and soft impairment norms) could be thought of as well.

The recent example of a large retailer who is required to test his principal assets for impairment due to a combination of slackening demand and tight-fisted bankers fortifies this view.

After all, when the Government picks up a cess in its time of need, should it not pass something back to the taxpayers in their time of need?

(The author is a Hyderabad-based chartered accountant.)

More Stories on : Accounting Standards | Economy | Contra Entry

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Recession accounting?

Spend, but wisely

Internal auditor from within and without

Multiple element contracts

Can Satyam make good law?
The hard case for directors' liability

Tasks ahead for audit committees

Gather invisible information

Relevance of economics

Levying user fee