THEprofitability and net worth of companies and banks are set to see a drastic change in April 2010 as they prepare for adopting international accounting norms a year later.
The acquisitions made by companies, derivatives held by them, stock options issued by them and errors noticed on previous financial statements are going to be major areas where balance sheets of companies and banks would witness drastic changes. In some cases, their reserves and networth might go down significantly as they adopt the principle of fair valuation of financial and physical assets in place of the current practice of showing their actual cost of purchase which may not show their real market value.
This drastic change in the balance sheet of corporate houses and their susceptibility to volatility in market conditions will happen earlier than initially thought.
Earlier it was thought that companies have to make the changes in their book of accounts only on April 1, 2011—the date fixed by the accounting regulator in India for compulsorily shifting to international norms. Now, experts point out that companies have to make the changes one year early—that is, on April 1, 2010 so that they could compare this opening balance sheet on the date of transition with that of next years, a mandatory requirement.
For this, companies have to first find out the differences between their present accounting practices and the international norms, quantify them and adjust it in their reserves—accumulated profits. As reserves is one of the components of networth, it might go up or down depending on the market value of the physical and financial asset the company holds.
One of the major areas of difference could be acquisition accounting. For example, now companies show the cost of acquisition in their books. This is written off over the period of its useful life.
“The depreciation would be higher when we take the market value of the asset instead of the historical cost of purchasing it. Besides, under the International Financial Reporting System, we have to take into account the value of intangible assets too. So the higher depreciation leads to lower profits of the merged entity”, said Jamil Khatri, executive director of KPMG.