Friday, June 26, 2009

Impact of changes in Accounting Standards

RBI changed the accounting standards to report foreign exchange gain/loss directly to balance sheet instead of showing them in P&L account. This has resulted in many companies hiding their foreign exchange losses in balance sheets. There are prudent companies like Infosys, Bharti, TCS and Ranbaxy who, instead of following the new accounting standard, adhered to the old standard and showed the exchange losses in their P&L account. If all the companies in Sensex had followed this practice the Full Net Profit of Sensex companies would have been lower by around INR 10K Crore and Free Float Net Profit would have been lower by INR 5660 Crore resulting in Sensex EPS lower by INR 68 and instead of INR 752, it would have been INR 674 on 25 June 2009. The P/E for Sensex at 14345.62 would have been 21.28 instead of 19.06.

This is not just the case with companies in Sensex. When the going was good, aka there was foreign exchange gains, the companies didn't hesitate to report them as profits in their P&L account. As soon as the standard changed, most of the companies started taking advantage of it. I would suggest investors to keep reading the fine print.
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