International Financial Reporting Standards (IFRS) could be introduced in India in a rather diluted form but a key clause pertaining to valuation of intangible assets would stay as proposed in the draft, and this would significantly impact every Indian company looking to make acquisitions.
As per this, an acquiring company would have to assign certain fair value to the intangible assets of the acquiree. That is, the company which is going in for acquisition, would have to put a fair value to invisible assets like brand, customer relationships and service networks of the acquiree company. The total value of these invisible assets has to be duly reflected in the balance sheets.
Further, the intangible assets, just like fixed assets, would have to be amortised over a period of time, the depreciation to which has to be accounted for in the profit and loss account.
On the IFRS, the government is likely to make two significant compromises: Indian companies won’t require to show currency losses on the balance sheets and real estate companies can account for properties that are under construction.
According to official sources, what the IFRS would stipulate in respect of accounting for invisible assets is starkly different from the prevailing norm. As per the current practice under the Indian GAAP, acquiring companies only have to fair value the fixed assets of the acquiree company, the remaining is shown as goodwill which does not fall under depreciation.
Even in case of impairment or the sudden loss in brand value of the acquiree company due to an unforseen event, the intangible asset would have to be re-valued, and depreciation re-assessed. This is the mechanism that is already followed in case of fixed assets like plants and equipment.
An MCA official said that the move is an attempt to value invisible assets like brand which would create more transparency for investors. ?Often the investors are in the dark when it comes to the amount paid by an acquiring company. Once companies converge with IFRS then it would break down the deal giving investors a better understanding,? the official said.
Partner at PricewaterhouseCoopers Rahul Chattopadhyay explained that the move would reflect the underlying value of a company. ?Amortising intangibles is an important step. This would prompt companies to re-look at mergers & acquisitions from a completely new standpoint,? he said. He said that Indian companies would have to clearly value the brand and duly reflect it in the balance sheets.
Executive director and head accounting advisory services at KPMG Jamil Khatri said that once the clause kicks in, it would lead to higher depreciation and amortisation costs for companies post-acquisition. ?The acquiring companies would have to evaluate the earnings impact of the acquisitions,? Khatri said. He said that the move would prompt Indian companies to reassess transaction structures and post-acquisition earnings scenarios, in view of the change in the treatment of intangibles.
Partner at Ernst & Young Dolphy D’Souza said that often large sized companies pay huge sums of money to acquire smaller entities which have no real assets. ?The high value of such transactions is because of the invisible assets of the smaller company like technology which is not reflected in the current accounting standard,? he said.