Auditors and valuers typically use income projections to value investments in subsidiaries and joint ventures. However, uncertainty created by Russia’s invasion of Ukraine has made it difficult to arrive at values for investments in that country, experts said.
For instance, the Russian rouble has faced devaluation, affecting realisations from sales in that country. In some cases, sales have stopped altogether.
Russia’s stock markets were closed for three weeks at a stretch before finally reopening recently, while several countries, led by the US, have imposed sanctions on Russia. Nobody knows how long the war will prolong, given the strong resistance from Ukraine and slow progress in talks to end the conflict.
“Given the current war situation, there may even be a need for managements to evaluate and change the technique used for valuation of investments in the affected areas,” said Vishesh Chandiok, chief executive of accounting and advisory firm Grant Thornton.
‘No Clear Solution’
“For example, it may not be appropriate to follow the market approach in case there is no active market… as at the reporting date,” said Chandiok of Grant Thornton.
Dr Reddy’s and Sun Pharma have subsidiaries in Russia while a joint venture of ONGC, BPCL and Indian Oil owns stakes in oilfields in Russia through a special purpose vehicle located in Singapore.
Dr Reddy’s declined to comment when contacted. Russia accounted for nearly 10% of the Indian drug maker’s total income in 2020-21, with sales of Rs 1,580 crore.
Sun Pharma did not respond to queries till press time on Wednesday.
ONGC said it would provide suitable disclosures in its year-end financial statements.
Accounting standards require companies and their auditors to record the carrying value of their investments in subsidiaries and joint ventures at the close of the financial year and to account for any impairments. The carrying value is effectively the recoverable value of an investment.
“All companies are working towards this, but I don’t see a very clear solution in the current environment,” said an auditor with a Big Four firm on condition of anonymity. “Ultimately, we may have to emphasise these issues in financial statements.”
Change in Perspective
Other than using income projections, valuers can use the cost or market approaches to determine the carrying value of an investment.
In the cost approach, replacement cost of an asset is arrived at to determine the carrying value. In the market approach, the value of listed securities could be used. However, if the business is not publicly traded, then this approach cannot be used. None of the Indian companies referenced earlier have listed entities in Russia.
If companies have to take write-downs on investments due to impairment of their value, that needs to be charged to their profit and loss account, resulting in a loss. Typically, this leads to hard bargaining between companies and their auditors and valuers, because companies would want to avoid taking such losses that could impact their overall financials.
“I have a client who has an investment in a listed Russian company,” said Rishi Aswani, managing director of the valuation arm of Kroll. “We have had to use the traded value of that company’s bonds to derive a valuation for the client’s equity investment because Russia’s stock markets remained closed for long.”
It is likely that such unusual approaches may come in handy as the rush to close books gets hectic across India Inc in the approach to the end of this financial year.