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Aligning cash flow and accounting risk through adoption of AS-30/IAS-39 - EY - India

Cash flow stability for oil refining and marketing companies

Aligning cash flow and accounting risk through adoption of AS-30/IAS-39

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Risk management decisions for oil refining and marketing companies have long been driven by reflection of risk management strategies in financial statements. 

The introduction of AS-30/IAS-39 provides an opportunity to ensure that risk management strategies that are cash flow neutral are also P/L neutral.

Inadequate accounting standards, coupled with the principle of conservatism, have led to incomplete reflection of the risk management strategy in financial statements. This has, at times, deterred oil refining and marketing companies from pursuing risk management strategies that are cash flow neutral and instead focusing on strategies that are P/L neutral.

The introduction of AS-30/IAS-39 provides an opportunity to ensure that risk management strategies that are cash flow neutral are also P/L neutral.

A summary of challenges relating to current accounting practices and the manner in which the same can be addressed is given in the table below:

 

SNo.Accounting challengeImpact on the treasury management strategyAddressing the challenges
1.Practice of taking mark-to-market losses from commodity derivatives to the P/L and ignoring gainsFocus on stop losses on genuine hedging positions without reference to underlying exposureAdopt cash flow hedge accounting and carry mark-to-market gains/losses in the balance sheet until the underlying exposure materializes
2.Impact of revaluation of foreign currency denominated loans on INR functional balance sheetHedging foreign currency denominated loans into the INR thereby enhancing cash flow risk and increasing the cost of hedgingAdopt cash flow hedge accounting by tagging repayment of foreign currency loans with forecasted US$ earnings. Revaluation gain/loss from foreign currency loans may be carried in the hedge fluctuation reserve until US$ receivables are recognized
3.Revaluation of inventory based on cost of fair market valueLack of certainty in undertaking inventory hedging since increase in inventory valuation is not reflected in P/L whereas loss on the corresponding inventory hedge affects the P/LDesignate inventory as part of a fair value hedging relationship thereby reflecting both gains and losses from inventory valuation in the P/L


*Refer to the attached PDF for source information

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