New Delhi, Nov. 2: The new accounting standard on impairment of assets, AS-28, slated to come into effect from next fiscal, can lead to the reporting of large write-offs by loss-making companies in the first year of its operation.
AS-28, issued by the Institute of Chartered Accountants of India (ICAI), would make it mandatory for all companies to make a provision for any decline in the realisable value or future earnings potential of their fixed assets.
Implementation of impairment-loss provisions is meant to reflect the true net worth of companies and increase their gearing levels.
Loss-making firms or firms with loss-making subsidiaries are expected to report large write-offs in the first year of implementation of the standard, says an impact analysis by credit rating agency Icra.
AS-28 leaves ample scope for subjective judgements and the agency said clarifications are required from ICAI on this issue.
Technical director of ICAI, Avinash Chander, told The Telegraph:“It is not necessary that this problem can arise in the case of loss-making units only. If it has to arise, then it can happen in the case of profit-making companies which may have impaired assets. The basic idea is to reflect the true values of the assets, and therefore of the company, in its account books.”
Chander also ruled out the possibility of over-estimation or under-estimation of impaired assets to window dressing of the account books.
“Such apprehensions have been raised but the auditor will have to use her/his judgements in the same way as it would in dealing other accounting standards which require estimation. Even depreciation is an act which requires estimation,” said Chander.
AS-28 will be applicable from April 1 to all companies that are listed, about to be listed and those with a turnover of over Rs 50 crore. For all other enterprises, AS-28 will be applicable from April 1, 2005.