mark to market losses and financial markets

IMPACT ON FINANCIAL MARKETS

Mark to Market• Mark-to-Market accounting refers to the

Accounting Standards of assigning a value to a position held in Financial Instrument based on the current fair Market Price for the instrument

Difference in MTM Perspective,Global vs. Domestic• US - The problem is in valuation illiquid

assets and that is not as per fair value accounting or MTM rules per se (IAS1 – 21)– Mortgage Based Securities

• India - In the case of Indian companies the problem is with forward contract related MTM losses (AS2 – 11)– Due to exchange rate movements– Hybrid instruments– Bonds– Valuation of acquired assets

1 International Accounting Standards2 Accounting Standards

• AS - 11– Accounting Standard (AS) 11 - Accounting for

the Effects of Changes in Foreign Exchange Rates

– AS 11 demands all foreign currency monetary transactions of companies to be reported at the end of accounting period

• Impact / Bone of Contention– Companies had to book notional losses– Share prices - plummeted by ‘notional foreign

exchange losses’ over the last three quarters

Companies not making MTM provision

Companies making MTM provision

Qtr. July-Sep. 2008

Is there a way out?• Schedule VI of the

Companies Act– This allows

capitalization of fixed assets acquired through foreign currency in case of fluctuations

• Govt. has Amended AS-11 based on National Advisory Committee on Accounting Standards

MTM Effect in Various Financial Instruments

• Forex Transactions• FCCBs

MTM in Forex Transactions

• Outline a high-level financial plan that defines your financial model and pricing assumptions.– This plan should include expected annual

sales and profits for the next three years.– Use several slides to cover this material

appropriately.