The debate on suspension of this norm was triggered by the Confederation of Indian Industry (CII) on grounds that the said accounting norm had distorted the reported earnings of companies. It had contended that the relevant accounting standard, designed to address normal conditions should be suspended for the time being as the present market conditions were not normal.

If the proposed accounting recommendations are accepted, many Indian corporates, which burnt their fingers after the Indian Rupee (INR) depreciated 27 per cent over the past year, could post better results. By extension, it will help the government realise higher corporate income tax. (The news item further says, perhaps in justification of the proposed suspension that a similar debate is raging in the US on whether its capital market regulator, the Securities & Exchange Commission (SEC) should suspend the MTM requirement that has forced banks to report billions of dollars in asset write-downs). Usually, the government accepts NACAS recommendations. Reportedly, the NACAS decision was opposed by the accounting regulator, the Institute of Chartered Accountants of India (ICAI).

There is a vast difference between the debate raging in US and the debate raging in India over the MTM requirement, which is conveniently ignored by vested interests. In the US, the demand has arisen in the context of the inability to mark to market the now-illiquid assets, which are nothing but assets impaired by the crisis that engulfed the sub-prime mortgage sector. Since the said sub-prime mortgage-related assets (or toxic derivative assets) are not being traded, price discovery has not been possible. It is not possible to mark them to market because none knows their market price. It is this fact, which forced the US government to offer major incentives so private investors may be tempted to buy the said toxic derivative assets from large US banks. In the process, the US government hopes to impart some semblance of liquidity to the US dollar (USD) 1 trillion worth of toxic assets the US banks are burdened with. So private entities and individuals can now buy some of the toxic assets in the books of the said banks, for a song.

In addition, the private investor is required to bring in just under 10 per cent of the acquisition cost and the balance of 90 per cent plus will be funded by the government! What is more, the said private entities and individuals will be protected, if the toxic assets fall in the market after the acquisition. The US capital market lapped up this sweetener - the market indices rose impressively and bank stocks in particular, performed even more impressively. It is however not clear to what extent the said major incentives will help the US government in imparting liquidity to the now-illiquid toxic assets.

Thus, if India Inc cites the debate raging in US on MTM requirement in support of its demand, it is using it as a red herring. India Inc has conveniently availed of another benefit with the full knowledge of the government of India and ICAI – it has not routed the loss arising from impairment of assets through the profit and loss account. It has straightaway set off the said loss against reserves (a balance sheet item), to which items like share premium are credited. Schedule VI of the Companies Act has been exploited for the purpose, apparently. Clearly, India Inc would not like to let go of even regulatory arbitrage, would it? That neither the government of India nor the ICAI objected to it shows that the two had acquiesced in the arrangement. Corporate India can’t have the cake and eat it too! For all we know, some corporates may end up paying dividend out of capital in FY 2008-09, thanks to window-dressing of this kind!

In particular, ICAI’s acquiescence in the arrangement is disappointing, to say the least. It could have at least insisted that India Inc amortise the foreign exchange – related losses. Initially, ICAI was against relaxation of the application of AS-11. So, the volte-face on its part is surprising, to say the least.