Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Companies / News/  Covid pandemic sparks wave of write-offs
BackBack

Covid pandemic sparks wave of write-offs

If businesses cannot realise those value either by using or selling these assets, they are impaired, which needs to reflect in the balance sheets
  • The economic crisis is a litmus test for the value of these assets as any write-down will make balance sheets weaker without any change in liabilities
  • Several companies are revisiting revenue and cash flow projections to ascertain the quantum of write-offs. (REUTERS)Premium
    Several companies are revisiting revenue and cash flow projections to ascertain the quantum of write-offs. (REUTERS)

    India Inc. may have to write down the value of their acquired assets as the turbulence from the pandemic causes uncertainty about sustaining cash flows, accounting experts said.

    Several companies are revisiting revenue and cash flow projections to ascertain the quantum of write-offs even as it is becoming evident that an economic recovery may be prolonged, they said.

    Since 2015, Indian companies have made 552 acquisitions of local and foreign firms valued at 6.48 trillion, according to data compiled by advisory firm Duff & Phelps. The economic crisis is a litmus test for the value of these assets as any write-down will make balance sheets weaker without any change in liabilities; something that rating agencies and lenders will take note of.

    According to Indian Accounting Standard (Ind AS) rules on impairment of assets, businesses that have made acquisitions in the past need to re-evaluate them in view of the changed economic conditions, consumer behaviour and supply-chain disruptions to see if they are still worth the value they carry in the books. If businesses cannot realise those value either by using or selling these assets, they are impaired, which needs to reflect in the balance sheets.

    While accounting for acquisitions, firms show the difference between the net value of the asset and the purchase price as goodwill coming from factors such as the synergy expected from the deal, new customers secured and expectations of higher future growth. These assumptions take a severe hit during an economic downturn, warranting a test of goodwill impairment under Ind AS 36.

    Numerous firms are revisiting cash flow projections, said Dolphy D’Souza, senior partner, SRBC & Co, an audit firm.

    A substantial goodwill impairment can weaken a company’s balance sheet, changing the way financial institutions and rating agencies view the firm, said Santosh N., managing partner at D and P India Advisory LLP, an arm of Duff & Phelps in India.

    The adverse impact caused by measures to stop the spread of covid such as closures of factories can be considered an impairment indicator, said D’Souza. When assessing impairment, firms need to determine the recoverable amount of the assets, he said.

    “The more the environment is uncertain, the more important it is for the firm to provide detailed disclosures of the assumptions made, the evidence on which they are based and the impact of a change in key assumptions," he said.

    A fall in stock price may be a trigger for an impairment test but the stock price remaining buoyant does not mean firms do not have to undergo an impairment test, said Carla Nunes, managing director, valuation advisory services at Duff & Phelps. This is because share prices may rise due to good fortunes in one business but there may be another line of business in which an acquisition may not be doing well, which warrants a goodwill impairment test.

    Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

    ABOUT THE AUTHOR
    Gireesh Chandra Prasad
    Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
    Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
    More Less
    Published: 12 Aug 2020, 07:55 AM IST
    Next Story footLogo
    Recommended For You
    Switch to the Mint app for fast and personalized news - Get App

    Chat with MintGenie