LARGE Indian companies could likely report a sharp fall in the valuation of their assets as new accounting norms prompt these firms to reassess the fair value of their units, a mandatory condition under globalised reporting standards.
Adoption of the International Financial Reporting Standards, or IFRS, a modern accounting system that Indian companies have to migrate to from next year, could see local firms publicly admit to any erosion in the value of their subsidiaries or other assets — like Vodafone, which recently shaved off $3.2 billion (about Rs 14,600 crore) from its Indian unit due to adverse market conditions.
Such instances may also be found in Indian companies that had acquired large foreign firms in the past three to four years as the global economic situation took a toll on most of these companies.
Companies like Tata Steel, Tata Motors and Hindalco which acquired big companies overseas through borrowed funds, paid additional amounts above the enterprise value for the goodwill of the foreign firms, which typically reflects the extra amount for synergy benefits, research and development and other off-balance sheet items.
These acquisitions have suffered a drop in their values due to the economic crisis. Such drop in values will now have to be reported by the companies and charged to their profit and loss accounts, which implies a run on their profitability, say auditors who deal with the financial statements of large Indian companies.
“Under IFRS, companies have to do an impairment test annually to determine what is the fair value of their business today, compared to the price at which it was acquired. If there is a fall, it is charged to the profit and loss account,” says Jamil Khatri, an executive director with global consultancy KPMG.
Apart from direct loss in business, companies also suffer from a loss in intangibles such as R&D, intellectual property, loyal customers and customer relations. The modern accounting norms also find it impossible to value such items.
“It’s high time people realise that valuation of companies have shifted out of the tangibles. Testing the valuation of intangibles is different under IFRS-3. Even Western companies are grappling with the concept and it’s already showing in the way Vodafone wrote down the valuation of its Indian subsidiary,” says Unni Krishnan, MD of Brand Finance, a brand evaluation consultancy.
While Indian accounting norms have also pressed for reporting such impairment, many Indian companies typically took refuge under a small provision in the Companies Act that allows such change in valuations to be adjusted against reserves. “Also, boards of many companies need to take a call on whether any drop in valuations is typical to that industry,” says KH Viswanathan, an executive director with audit firm RSM Astute.
Shareholders and investors in Indian companies are yet to know that there are differences between IFRS and Indian accounting norms. The Indian norms permit reversal of impairment of goodwill when certain conditions are met. This is not there under IFRS. There is also a difference in the types of assets to be tested, with the Indian GAAP including all intangible assets with a useful life of more than 10 years. Under IFRS, only intangible assets with indefinite useful life are taken.
However, it also needs to be mentioned that impairment charges do not necessarily mean a cash drain. It is only a fallout of stringent accounting rules, say auditors.
Adoption of the International Financial Reporting Standards, or IFRS, a modern accounting system that Indian companies have to migrate to from next year, could see local firms publicly admit to any erosion in the value of their subsidiaries or other assets — like Vodafone, which recently shaved off $3.2 billion (about Rs 14,600 crore) from its Indian unit due to adverse market conditions.
Such instances may also be found in Indian companies that had acquired large foreign firms in the past three to four years as the global economic situation took a toll on most of these companies.
Companies like Tata Steel, Tata Motors and Hindalco which acquired big companies overseas through borrowed funds, paid additional amounts above the enterprise value for the goodwill of the foreign firms, which typically reflects the extra amount for synergy benefits, research and development and other off-balance sheet items.
These acquisitions have suffered a drop in their values due to the economic crisis. Such drop in values will now have to be reported by the companies and charged to their profit and loss accounts, which implies a run on their profitability, say auditors who deal with the financial statements of large Indian companies.
“Under IFRS, companies have to do an impairment test annually to determine what is the fair value of their business today, compared to the price at which it was acquired. If there is a fall, it is charged to the profit and loss account,” says Jamil Khatri, an executive director with global consultancy KPMG.
Apart from direct loss in business, companies also suffer from a loss in intangibles such as R&D, intellectual property, loyal customers and customer relations. The modern accounting norms also find it impossible to value such items.
“It’s high time people realise that valuation of companies have shifted out of the tangibles. Testing the valuation of intangibles is different under IFRS-3. Even Western companies are grappling with the concept and it’s already showing in the way Vodafone wrote down the valuation of its Indian subsidiary,” says Unni Krishnan, MD of Brand Finance, a brand evaluation consultancy.
While Indian accounting norms have also pressed for reporting such impairment, many Indian companies typically took refuge under a small provision in the Companies Act that allows such change in valuations to be adjusted against reserves. “Also, boards of many companies need to take a call on whether any drop in valuations is typical to that industry,” says KH Viswanathan, an executive director with audit firm RSM Astute.
Shareholders and investors in Indian companies are yet to know that there are differences between IFRS and Indian accounting norms. The Indian norms permit reversal of impairment of goodwill when certain conditions are met. This is not there under IFRS. There is also a difference in the types of assets to be tested, with the Indian GAAP including all intangible assets with a useful life of more than 10 years. Under IFRS, only intangible assets with indefinite useful life are taken.
However, it also needs to be mentioned that impairment charges do not necessarily mean a cash drain. It is only a fallout of stringent accounting rules, say auditors.
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