The stock market rout due to the Covid-19 could trigger a different kind of a face-off between sections of India Inc promoters, shareholders and their auditors.
The massive fall in share prices of key companies that are subsidiaries of holding firms or other big companies is leading to heated discussions and debate on how to account for this fall with auditors likely to take a dim view of any attempts to obfuscate reality.
Boards of some big companies, their audit committee members have been engaged in discussions with their auditors about how to resolve this thorny issue by the time the annual results are announced.
One will have to carefully evaluate the impairment of carrying value of investments in the present scenario.
In the standalone financial statements, impairment will be triggered if the market price falls below the carrying value of an investment.
The Companys accounting policy in respect of accounting for investments (cost or fair value) will also have to be considered.
Similarly in their consolidated financial statements, companies will have to assess impairment of goodwill and other intangible assets, said Khazat Kotwal, Partner, Deloitte.Asset impairment happens when the market value of that asset is lower than the value listed on the holding companys balance sheet.
Companies are supposed to write down the value of the asset on their books if it falls below the investment value but in reality this is easier said than done.
Managements and promoter shareholders often argue that the slide in value is temporary and caused by market forces beyond their control.
Some experts agree with this view.
While fall in market price or share price dont necessarily lead to impairment, uncertainty in cash flows means that the question of impairment cannot be shrugged off.
Audit committees and boards are discussing this issue with the statutory auditors and a decision has to be taken soon, said a senior official in one of the major conglomerates.He added that in many cases companies and conglomerates are roping in an independent expert to value the subsidiaries.
Companies can then depend on this certificate and even auditors can rely on the valuation done by the third party.
While the situation is fluid, many auditors may still take a stringent view of the situation, said a senior audit partner in the middle of several such situations.In this situation, management and auditors are finding themselves in opposite corners.Many companies and conglomerates are treating the fall as temporary and hope that they would recover within the next few months so they dont have to account for asset impairment but auditors are saying that since the impairment trigger has been raised after fall in share value below investment price, they will have to provide for it.The company management doesnt have to do a mark-to-market but they have to make an assessment on how the underlying business is doing and they have to take a judgement call on asset impairment.
The auditors will challenge the managements position in some cases after looking at uncertain cash flow situations and they might even go to the board.
I foresee a lot of auditors challenging the cash flow projection of companies, says a partner of a Big Four Firm.However, the situation may not be as simple, points out a senior executive who was present during an emergency meeting held in one of Indias largest conglomerates.
There is huge value erosion due to the fall in share prices.
The promoters do not want to discuss anything but how to tackle this, and the impact this would have on our balance sheet, he said.He explained that the share price of one of the subsidiaries of a company had grown four times over the years.
It has now fallen so dramatically that its only 60% of the initial investment made by the group company.The shareholders would ask if this company is worth even the investment that has gone into it, the answer may have been simple but fall in sales is just not helping the situation, the person quoted above said.