Goodwill risk for Indian companies

As various company boards meet to finish their audited accounts, three items are definitely going to be on their agenda apart from the financial results: foreign exchange losses, derivatives losses and impairment of assets (or goodwill). The last mentioned is something that firms are wary of discussing in public. So, what exactly is goodwill?

Goodwill normally arises when a company pays a premium over the asset value of the business acquired. This happens in bull markets where a firm is compelled to pay a higher price due to multiple bidders. A goodwill loss is the fall in the value of the purchased assets, which is accounted for by the fall in the premium value.

“Market valuations have dropped as economies around the world have plunged into crises in the last one year, making it necessary for companies to test their assets for impairment, especially goodwill,” says Shrenik Baid, Executive Director (Global Capital Markets Group), PricewaterhouseCoopers.

Sanjay Aggarwal, Executive Director, KPMG, believes companies should declare impairment of assets, though he wonders how many would actually do so. Accounting rules require that these impairments be charged to the profit and loss account of the company.

Globally, many companies have made provisions for impairment of assets, especially with the fall in global valuations. For instance, Novellis, a subsidiary of Hindalco Industries, made a provision of $1.5 billion for goodwill impairment which led to the firm’s reported net loss of $1.8 billion in the December 2008 quarter.

Experts feel most Indian firms will go for innovative accounting to cover such loss of goodwill. “Companies may resort to creative accounting strategies, since they fear that an admission could impact stock prices and credit ratings,” says Ajay Parmar, Head of Research, Emkay Global Finance Services.

—Virendra Kumar Verma