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The March quarter results of Vedanta Ltd (formerly Sesa Sterlite) were roiled by the massive ₹19,180 crore non-cash charge for impairment of goodwill generated on the acquisition of oil producer Cairn India.
After the group restructuring, Vedanta holds about 60 per cent stake in Cairn India and so consolidates the latter’s accounts in its books.
The goodwill impairment charge, primarily, resulted in Vedanta posting a huge consolidated loss of ₹18,718 crore in the quarter.
The company said that the impairment charge was necessitated by the steep decline in the price of crude oil.
It calculated the present value of long term cash flows based on oil price of $60 a barrel in FY 2016, increasing it to $84 a barrel by FY 2020, and an annual escalation of 3 per cent annually thereafter.
Since the carrying value of the asset was higher than this present value, the goodwill had to be impaired.
In the post-results conference call, DD Jalan, CFO of Vedanta, said that the company’s total investment in Cairn India was computed as ₹54,000 crore, of which ₹35,000 crore was considered as goodwill.
Almost half the goodwill amount has been written off. Even if the crude oil price goes up in the future, the impairment of goodwill cannot be written back.
Rahul Chattopadhyay, Partner, Price Waterhouse, explains that under International Financial Reporting Standards (IFRS) accounting rules, it is mandatory to test goodwill for impairment annually.
He adds that under IFRS, while impairment on other assets can be reversed in the future, goodwill impairment cannot be reversed. Sai Venkateshwaran, Partner and Head, Accounting Advisory services at KPMG, in India says that as per IFRS, goodwill impairment cannot be reversed under any circumstances.
Has the company been overcautious to take such a huge write-off due to a commodity cycle downturn that could reverse in the future?
Rahul Chattopadhyay says that rather than being overcautious, the company has only followed accounting requirements — it would have done a firm assessment of the market, and based on its judgment would have come to the conclusion that crude price may remain weak.
Sai Venkateshwaran says that the company would not have looked just at the current price alone but would have also factored in future cash flows taking into account its estimates of crude oil price.
He says that the company is not being overcautious but trying to ensure that its assets are not carried at more than their recoverable value, as required by the accounting rules.
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