The recently introduced accounting standard (AS) on deferred taxes will have a major impact on the bottomline of Corporate India in the current financial year.
Add to that the other accounting standards on consolidated financial statements and segmental reporting and India Inc will be hit by a triple whammy.
Bhaskar Banerjee, member of the Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) said, "The introduction of these standards will mean lower profits for companies, reduced dividend payouts and lower valuations for companies." Banerjee pointed out that this will have a significant impact on the share prices of companies.
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ICAI recently introduced AS 22 on Taxes on Income, which has now made it mandatory for companies to make provisioning on the book profit, strictly 'putting an end to provisioning on tax payable'. The effect on most companies will be to raise tax provisions, lowering profits.
The most severe impact will be felt by capital-intensive companies, especially corporates with mega expansion plans who used the additional depreciation provided as a tax shield.
Banerjee pointed out that all major companies like Reliance, Hindustan Lever, Goenkas, Birlas, Singhanias, Nicco Group, Khaitans to name a few, are going to be hard hit due to the new mandatory provisions, and that the new rules could also affect large investments.
Also, the new mandatory standard says that adjustment on account of deferred tax liability would be given retrospective effect, which would affect companies severely this year. While this would be a sizable amount, the rule allows such liabilities to be provided for in the books against the reserves, if any, or be set off against the profit and loss account.
This means depletion of existing reserves, which have a significant impact on the balance sheet, and the company's market value. Higher provisioning due to this method would in the initial years affect the company's bottomline negatively, leading to lower dividends. Says Abhijit Sen, the co-chairman of Nicco group and a chartered accountant, "These changes would adversely impact an already reeling stock market." But that's not all. The ICAI is also drafting a new standard dealing with investments in associates. This would essentially entail the marking to market of companies' investment in associates. It would also block the escape route of companies trying to escape the consolidation clause by spinning off loss-making subsidiaries into associate companies.
However, P M Narielvala, an eminent chartered accountant, feels the tightening effect on the companies' balance sheet was precisely what was intended by the accounting standards.
Sources say that the reason for the ICAI's pro-activeness on these issues stems from the pressure exerted by the Securities & Exchange Board of India to adopt these standards.
According to the sources, Sebi had indicated that in the absence of any action by the ICAI, they would enforce the much-more stringent international accounting standards.