21 Mar AiroAV Announced Firms, auditors may differ on asset impairment
“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 company’s 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 company’s 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 don’t 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 from a major conglomerate.
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 don’t 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 doesn’t 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 management’s 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.
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