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Rabindra Nath Sinha

KOLKATA, Jan. 26

CORPORATES have at their disposal one year and two months to equip themselves to comply with ICAI's Accounting Standard (AS) 28, which deals with impairment of assets.

AS 28 warrants companies to set up a regular system of annual long range planning. While companies do undertake a yearly budgeting exercise not many of them have in place a system for long-term planning on a year on year basis. Keeping this ground reality in view and to see that corporates have sufficient time to prepare themselves, ICAI released AS 28 two years prior to the date of implementation, which is April 1, 2004.

It seeks to ensure that assets are carried in the books at a value not higher than their respective recoverable amounts. An asset is considered as carried at more than its recoverable amount if its carrying amount exceeds the amount recoverable through use or sale of the asset. When that happens, the asset has to be reckoned as impaired and a company has to recognise an impairment loss in its books.

But several questions arise when the stipulations and prescriptions in AS 28 are given a closer look. According to it, a sure indication of impairment is a carrying amount higher than market capitalisation. It is pertinent to ask: On which date market capitalisation is to be considered? How market capitalisation is to be determined for unlisted companies?

Secondly, about the clause dealing with value in use, which has been defined as the present value of estimated future cash flows arising from continuing use of an asset and its disposal. According to senior corporate sources, determination of the net cash flow during the remaining useful life of an asset is easier said than done. A management's best estimate of the likely output, price, cost and other factors can, perhaps, be the only basis; but the estimate may not necessarily be acceptable to others.

Obviously, companies will be required to establish internal systems and procedures for long-term planning with focus on likely business scenario. This will naturally entail periodic analysis of the business environment. Considering the volatilities that business has to reckon with, it is, perhaps, a tall ask.

A related issue is about the possible impact of the value-in-use clause on companies with a low capital base and those making losses. A widely shared view in corporate circles is that they will be hit by this clause. The ones with low capital base will have to establish that value in use of the assets is higher than book value and impairment loss need not be recognised merely on the ground that market capitalisation is lower than book value. The losing ones may find themselves going deeper into the red.

Finally, about the one-time opportunity to write off impairment loss in the first year, that is, 2004-05 against revenue reserves. Subsequently, impairment loss has to be debited to the profit & loss account. This provision may tell upon a company's dividend paying capacity when it finds that it has no option but to debit an impairment loss to the profit & loss account. This is because that charge will be in addition to depreciation.

Senior executives who have studied AS 28 in detail are of the opinion that the first priority of corporates has to be establish capabilities for long-term planning and organise in-house training of officials who will be assigned to implement the standard. The exercise has to be repeated on each balance sheet date.

This is the key task, as companies will have to assess the technological, economic and legal environment in which they are operating and determine whether significant changes have since occurred or are likely to occur before long. Stretching a point, they suggest that even auditors have to undergo training before they study compliance by companies.

For the record, it may be mentioned that the standard applies to all assets other than inventories, assets from construction contracts, financial assets including investments and deferred tax assets. Goodwill as an intangible asset is covered by the standard.

As for implementation, it may be pointed out that April 1, 2004 is applicable to companies already listed or are in the process of being listed and enterprises whose turnover in the accounting period exceeds Rs 50 crore. All other business entities will have to in fall in line from April 1, 2005.

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