Accounting norms
Firms may have to elaborate on goodwill impairment….Aman Malik
If firm claims a loss due to goodwill impairment in subsidiary, reasons will have to be included in the latter�s accounts
New Delhi: The government is considering a proposal that will mean companies having to elaborate on any impairment of �goodwill� in the books of subsidiaries, according to two government officials with knowledge of the matter.
The corporate affairs ministry decided to refer the issue to the Institute of Chartered Accountants of India (ICAI) at a 23 July meeting, said one of the officials on condition of anonymity.
Simply put, if a company�s global consolidated balance sheet shows a loss due to goodwill impairment in a subsidiary, the reasons will have to be included in the latter�s accounts. This will relate to both foreign companies operating in India as well as Indian ones that have subsidiaries abroad.
�The government wants companies to disclose any change in the cash flows, on account of which they are claiming goodwill impairment, to be reflected on the books of the local subsidiaries,� said one of the officials.
Goodwill is an accounting concept that measures the premium that an entity enjoys over and above the value of its assets. The concept is often used when a company acquires another and needs to value the latter. Such goodwill is said to have been �impaired� if, over time, it has become or is considered to be of a lower value than at the time of acquisition. In accounting terms, when the �carrying value� of such goodwill becomes more than its �fair value�, it is said to have been impaired.
Typically, factors ranging from negative publicity to branding issues, which can have a bearing on the future expected cash flows of a firm or any of its subsidiaries, can impair its goodwill.
Issues related to goodwill impairment are governed by Accounting Standard 28, which is a part of the Indian Accounting Standards that have been notified by the corporate affairs ministry.
Both officials cited above said that the government�s move would require making changes to the accounting standards.
They said the move was prompted by the recent case involving Reebok India, a subsidiary of global sportswear maker Adidas AG. Adidas accused two former Reebok India executives of a Rs.870 crore fraud.
Following this, the government asked the Serious Fraud Investigation Office (SFIO) to investigate the matter and issue a report in four months.
Adidas bought Reebok International Ltd in August 2005 for $3.8 billion (around Rs.21,130 crore today), but the merger of their Indian operations was completed only in 2011.
On 3 July, Business Standard newspaper, citing an unnamed government official, reported that Adidas had disclosed to SFIO that it had lost Rs.170 crore on account of goodwill impairment after it bought Reebok.
�When we asked the local arm of the company (Reebok India) about the loss due to goodwill impairment, they said they had no idea about it. We then went back to the parent company Adidas, who said they could not share any more details with us,� said one of the officials cited above.
�Reebok India company is extending full cooperation to the authorities in their investigation. Please understand that we cannot share any further details,� a company spokesperson said in an emailed response to Mint�s query on 17 August.
Accounting experts are divided over the move.
Amarjit Chopra, former ICAI president, said that while he agreed with desirability of the government�s move, he was not in agreement with the procedure that was being followed. �I am all for bringing about a change where companies and bankers should show a change in cash flows, even if it is not in conformity with IFRS (International Financial Reporting Standards). Such a change is required,� he said. �But I have a problem with the fact that a technical committee of the government, rather than NACAS (National Advisory Committee on Accounting Standards) or the ASB (Accounting Standards Board) is doing it,� he added.
At least three other auditors that Mint spoke to said that there was no provision in the so-called generally accepted accounting principles (GAAP) that would allow the Indian government to mandate companies to reflect goodwill impairment losses in the books of local entities.
GAAP refers to accounting rules pertaining to a particular jurisdiction.
�Goodwill impairment, most often, does not mean that there is any reduction in the cash flow at the level of the local entity. So, it makes no sense for the government to try and ask companies to reflect the same in the books of their local entities,� said an auditor who is a partner with a global consultancy and did not want to be identified. �Only in rare circumstances when the expected cash flows are lower than the book value of the assets, does the local subsidiary have to reflect it in its books.�
Jamil Khatri, who heads the accounting advisory service at KPMG in India, echoed this view. �Only the US GAAP has a concept of push-down accounting,� he said.
�Push-down accounting� is a concept in mergers and acquisitions, in which both the debt as well as the assets acquired are reflected in the accounts of the new subsidiary rather than the parent company that is making the acquisition. Chopra disagreed. �If we can have a better system than what is in practice currently, there is nothing wrong with it,� he said.
Vidhi Choudhary contributed to this story.