The Hindu Business Line : ‘Impairment’ loss may come under Indian GAAP accounting

Mumbai, March 22 Many Indian companies, especially those that had made acquisitions in the recent past, are grappling with accounting for “impairment losses” that could dent their consolidated profits this quarter.

When an acquired company’s valuation falls, and its performance dips, then the acquirer company has to write off the extra amount that it has paid for it; this is what impairment loss broadly means in terms of acquisitions.

“This assessment has not been done so far because things were going well. Companies ignored it, and auditors did not look at it. There was no reason earlier to believe that the value of assets (own or acquired) could have come down,” said Ms C.G. Srividya, Partner, Valuation Services, at Grant Thornton.

Different scenario

But now the situation is different; and this would be the first time under regular scrutiny that impairment is being considered under the Indian GAAP accounting, she said:

“Most auditors are insisting on it, as acquisitions are coming under a scanner in terms of impairment.”

MANY INDIAN COS VULNERABLE

Quite a few Indian companies appear vulnerable to impairment losses arising from acquisitions; a Grant Thornton study says there were 454 M&A deals in 2008 and 676 in 2007 involving Indian companies.

Out of these outbound deals (Indian companies acquiring overseas) numbered 196 and domestic deals 172 in 2008.

The larger Indian deals involve acquirers such as Tata Motors (which acquired Jaguar and Land Rover), Tata Steel (Corus), Tata Chem which acquired an American chemicals unit, United Spirits (Whyte & Mackay); Tata Power (stake in coal assets in Indonesia). ONGC (Imperial Energy); HCL tech (Axon) among others.

Novelis buy

The first off the block has been Hindalco’s US company Novelis, acquired in 2007, which reported a net loss of $1.8 billion for the Oct-Dec 2008 including $1.5 billion in asset impairments.

At that time, the CFO of Hindalco, Mr S. Talukdar, said that the assessment took into account increased market cost of capital, the market cost of debt, and future cash flows discounted in current terms.

To that extent, 80 per cent of the losses were notional, he remarked. This would impact Hindalco’s consolidated results too.

Under the Indian GAAP, the impairment test is supposed to be done every year or if there is a trigger event (sudden fall in market cap, loss of a contract, etc).

ACQUISITIONS OVER LAST 2 YEARS

“Impairment assessment would be required in a lot of acquisitions that have happened in the last two years,” said Mr Jamil Khatri, Head of Accounting Advisory services, at KPMG.

“Business fortunes have dropped off considerably and the downturn has been very recent and sudden. I would be surprised if there were no impairment losses announced over the next couple of quarters.”

If the impairment loss is on account of liquidity problems, then the situation will reverse when liquidity resumes; but if it is due to business fundamentals, then it will not, said Mr Khatri.

“If the loss is due to market cap fall, then it could be sentiment and may not reflect the intrinsic value of the asset or the company. But if the situation is beyond the control of a company, involves a contract loss, key employees leaving, or clients going bankrupt, the impact would be serious, and definitely auditors are not going to let it go easily, said Ms Srividya. Of course companies could have their own assets impaired too, and not just those of their acquisitions.

THERE COULD BE WAYS OUT

However, said there is enough mechanism in the Indian framework which one could use to escape the impact of impairment loss, said a partner with another accounting firm.

“If an acquired entity is still a separate entity it is easy to determine its value, for e.g. at what price will Novelis be acquired today. But if the entity is amalgamated with the company, then what remains is goodwill on which there is no impairment under the Indian system. That can be amortised over a period of ten years.”

“Impairment is a very tricky subject; companies can always argue that the current situation is an aberration and reversible,” he said.

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