Valuation Insight - India Edition, February 2017

Valuation Insights is a quarterly e-newsletter that provides you with the latest news from Duff & Phelps and the trends and changes in valuation and accounting that could affect your business transactions in Asia.

Our top story features the latest 2016 U.S. Goodwill Impairment Study, which analyses the general industry trends of goodwill impairment, and how it affects businesses in India.

We will also look at the important update of a strategic analysis of property, plant and equipment fair valuation under Indian Accounting Standard 16.

Top story:
  • Record Levels of Goodwill Impairment Found in Recent 2016 Study
Valuation Update in India:
  • Property, Plant and Equipment Fair Valuation – A Strategic Analysis under Indian Accounting Standard 16
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Top Story

Record Levels of Goodwill Impairment Found in Recent 2016 Study

A recent study on goodwill impairment in the U.S. found that it has climbed to the highest levels since the 2008 financial crisis. U.S. companies recorded $57 billion of goodwill impairment in 2015 – these record impairment levels occurred despite a robust year for M&A activity in 2015, which resulted in $458 billion of goodwill being added to U.S. companies’ balance sheets.

“The results are not very surprising,” opines Santosh N, Director of Duff & Phelps' Valuation Advisory Services in Bangalore. “Goodwill impairments are a result of an unfavorable event. Unless the economy improves drastically in 2017, there will be similar quantum or more goodwill impairment in 2017 compared to 2016.”

The 2016 U.S. Goodwill Impairment Study, prepared by Duff & Phelps in partnership with the Financial Executives Research Foundation, analyzed general and industry-specific trends for goodwill impairment for over 8,500 U.S. publicly-traded companies.

The report also includes the results of the annual goodwill impairment survey of Financial Executives International (FEI) members representing both privately-owned and publicly-traded companies.

The interconnectedness of global industry means that the findings in the study have repercussions even in India. “Is the situation different in India? I would say to a large extent it remains the same,” explains Santosh. “If you look at the top industries in the list, there are factors which are to a large extent global which have resulted in these goodwill impairments.”

“Why is energy on top of that list? Mainly because crude oil prices have dropped, from a hundred-odd dollars to 40 dollars in 2015-2016 – that is one of the major reasons why large amounts of goodwill got written off in energy companies,” suggests Santosh.

“The reason why technology industry has seen large amounts of goodwill impairments is because obsolescence in that industry is very fast,” Santosh tells us. “And it's not just in the US; this technology factors are impacting the entire globe.”

The 2016 Survey found that 59 percent of respondents opted to use the Step 0 test, the highest number since the option was first made available. Subsequently, on 26 January 2017 the FASB has announced1 the removal of Step 2 to simplify the goodwill impairment test and by computing any goodwill impairment based on the difference between the fair value and the carrying amount of the reporting unit.

“The Step 0 test does not increase accuracy of reporting, it only reduces cost of the entire reporting,” explains Santosh. “It's allowing companies to avoid certain analyses if there are indication that there is no impairment on a qualitative basis.”

1Accounting Standards Update No: 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.

Read the 2016 U.S. Goodwill Impairment Study

Valuation Update in India

Property, Plant and Equipment Fair Valuation – A Strategic Analysis under Indian Accounting Standard 16

First Time Adoption (FTA) of Indian Accounting Standards (Ind AS) raises several questions.

For Ind AS-compliant companies, uncertainty remains around how book profit is calculated for the purposes of levy of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act 1961. In response, the Central Board of Direct Taxes in association with the Ind AS Committee issued a clarification dated July 23, 2016 recommending treatment for MAT regarding Ind AS 16 and Ind AS 38.

Prior to July 23, 2016, some companies were undecided whether to measure an item of property, plant and equipment (PPE) using recomputed value, deemed cost or carrying value. The election of valuation method raised concern regarding taxation of unrealized gains/losses under MAT.

The analysis presented here aims to dispel some of the remaining uncertainty surrounding the fair valuation of PPE in the context of the July 2016 clarification.

The analysis presents a framework that contextualizes the two permitted accounting models under Ind AS 16 (the Cost Model and the Revaluation Model), and in the instance of the latter, factors for consideration when measuring PPE at its fair value and using that fair value as its deemed cost.

Full Analysis on IAS 16

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