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IMPACT ON FINANCIAL MARKETS
Mark to Market <ul><li>Mark-to-Market  accounting refers to the Accounting Standards of assigning a value to a position he...
Difference in MTM Perspective, Global  vs. Domestic <ul><li>US - The problem is in valuation illiquid assets and that is n...
<ul><li>AS - 11 </li></ul><ul><ul><li>Accounting Standard (AS) 11 - Accounting for the Effects of Changes in Foreign Excha...
Companies not making MTM provision Companies making MTM provision Qtr. July-Sep. 2008
Is there a way out? <ul><li>Schedule VI of the Companies Act </li></ul><ul><ul><li>This allows capitalization of fixed ass...
MTM Effect in Various Financial Instruments <ul><li>Forex Transactions </li></ul><ul><li>FCCBs </li></ul>
MTM in Forex Transactions
<ul><li>Outline a high-level financial plan that defines your financial model and pricing assumptions. </li></ul><ul><ul><...
MTM in Forex Transactions  <ul><li>The gain/loss arising due to exchange rate changes to be charged to the profit and loss...
FCCB <ul><li>185 companies issued FCCBs worth $20 billion from 2004-05 to 2007-08 </li></ul><ul><li>As the rupee depreciat...
Redemption of FCCBs Sectors having high FCCB exposure
Our Opinion <ul><li>Consistency in accounting policies </li></ul><ul><li>Allocating the MTM losses in Capital for deprecia...
<ul><li>Bibliography </li></ul><ul><li>www.fimmda.org </li></ul><ul><li>CRISIL Research </li></ul><ul><li>www.rbi.org </li...
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Mark To Market Losses and Financial Markets

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  • Transcript of "Mark To Market Losses and Financial Markets"

    1. 1. IMPACT ON FINANCIAL MARKETS
    2. 2. Mark to Market <ul><li>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 </li></ul>
    3. 3. Difference in MTM Perspective, Global vs. Domestic <ul><li>US - The problem is in valuation illiquid assets and that is not as per fair value accounting or MTM rules per se (IAS 1 – 21) </li></ul><ul><ul><li>Mortgage Based Securities </li></ul></ul><ul><li>India - In the case of Indian companies the problem is with forward contract related MTM losses (AS 2 – 11) </li></ul><ul><ul><li>Due to exchange rate movements </li></ul></ul><ul><ul><li>Hybrid instruments </li></ul></ul><ul><ul><li>Bonds </li></ul></ul><ul><ul><li>Valuation of acquired assets </li></ul></ul>1 International Accounting Standards 2 Accounting Standards
    4. 4. <ul><li>AS - 11 </li></ul><ul><ul><li>Accounting Standard (AS) 11 - Accounting for the Effects of Changes in Foreign Exchange Rates </li></ul></ul><ul><ul><li>AS 11 demands all foreign currency monetary transactions of companies to be reported at the end of accounting period </li></ul></ul><ul><li>Impact / Bone of Contention </li></ul><ul><ul><li>Companies had to book notional losses </li></ul></ul><ul><ul><li>Share prices - plummeted by ‘notional foreign exchange losses’ over the last three quarters </li></ul></ul>
    5. 5. Companies not making MTM provision Companies making MTM provision Qtr. July-Sep. 2008
    6. 6. Is there a way out? <ul><li>Schedule VI of the Companies Act </li></ul><ul><ul><li>This allows capitalization of fixed assets acquired through foreign currency in case of fluctuations </li></ul></ul><ul><li>Govt. has Amended AS-11 based on National Advisory Committee on Accounting Standards </li></ul>
    7. 7. MTM Effect in Various Financial Instruments <ul><li>Forex Transactions </li></ul><ul><li>FCCBs </li></ul>
    8. 8. MTM in Forex Transactions
    9. 9. <ul><li>Outline a high-level financial plan that defines your financial model and pricing assumptions. </li></ul><ul><ul><li>This plan should include expected annual sales and profits for the next three years. </li></ul></ul><ul><ul><li>Use several slides to cover this material appropriately. </li></ul></ul>Notional Loss Rupee at appreciated value Present value of rupee Rate of foreword contract MTM in Forex Transactions Notional Gain
    10. 10. MTM in Forex Transactions <ul><li>The gain/loss arising due to exchange rate changes to be charged to the profit and loss account, as an income/expense </li></ul><ul><li>Exporting companies made handsome gains during rupee appreciation against the dollar </li></ul><ul><li>Heavy losses on hedging during rupee depreciation </li></ul><ul><li>Few Indian Companies which hedged their foreign currency revenues </li></ul><ul><ul><li>TCS – 80 Cr. Loss </li></ul></ul><ul><ul><li>Mind Tree and Ranbaxy – 250 – 300 Cr. Loss </li></ul></ul>
    11. 11. FCCB <ul><li>185 companies issued FCCBs worth $20 billion from 2004-05 to 2007-08 </li></ul><ul><li>As the rupee depreciates, their liability increases in rupee terms towards foreign currency borrowed money </li></ul><ul><li>Out of this, about $15 billion are still outstanding while the balance got converted into equity </li></ul><ul><ul><li>JSW Steel, Tata Steel and Suzlon Energy, outstanding FCCBs MTM losses ranging from 500 to 100 Cr </li></ul></ul>
    12. 12. Redemption of FCCBs Sectors having high FCCB exposure
    13. 13. Our Opinion <ul><li>Consistency in accounting policies </li></ul><ul><li>Allocating the MTM losses in Capital for depreciation and amortization separately </li></ul><ul><li>Government measures like (reducing duties etc.) for export driven businesses during Rs. Appreciation and current rates reduction to boost up </li></ul>
    14. 14. <ul><li>Bibliography </li></ul><ul><li>www.fimmda.org </li></ul><ul><li>CRISIL Research </li></ul><ul><li>www.rbi.org </li></ul><ul><li>MTM Provisioning in Corporate Sector, Business Standard </li></ul><ul><li>www.livemint.com </li></ul><ul><li>www.economictimes.indiatimes.com </li></ul><ul><li>www.wikipedia.com </li></ul>
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