Wipro's net profits could have been lower by Rs 13.9 crore (Rs 139 million) for quarter-ended September 2004 and by Rs 49.4 crore (Rs 494 million) in the first half of the year had the company stuck to the earlier policy of accounting for gains or losses on the total hedged forward contracts in every accounting period.
In the earlier policy, Wipro's forward hedges were marked-to-market that is on the market rate prevailing on accounting date. The new policy called Cash Flow Hedging came into effect in the current fiscal.
"In the new policy, hedges that are part of the projected cash flow in a particular quarter will reflect in the P&L account. The balance gets into the P&L account over a period of time. As a result, there will be an impact on the P&L over a period of time. But, this need not be negative," Suresh Senapaty, corporate executive vice president-finance, Wipro said.
With Wipro treating forward contracts on forecasted transactions for the quarter, the gain or loss on the contracts will reflect in the P&L account only during the quarter when the transaction is expected to occur. As a result, contracts that are not part of the reporting quarter will not impact the P&L account for that quarter.
As of September 2004, Wipro assigned forward contracts to the extent of $263 million, though it had forward contracts to sell $860 million. According to Senapaty, this amount has been forecast to be used over a 5-6 quarter timeframe.
The effect of the marking-to-market and on intermediary rollover expiry of the forward contracts now stands at Rs 187.8 crore (Rs 1.88 billion) and this will only reflect in the P&L account of the periods when forecasted transactions are expected to occur. For the just-ended quarter though, the company has charged the P&L account only Rs 11.4 crore (Rs 114 million) as negative exchange difference.
Further, in certain cases, Wipro has entered into forward contracts which matures earlier than when the hedged transaction is to occur. Until the time when the gain or loss in the contract would reflect in the P&L account, it would be grouped under loans and advances.
More from rediff