Equity accounting shift to erode JV size & valuation

NEW DELHI: Corporate houses that have joint venture companies are set to see a major drop in their valuation and size when they adopt international financial reporting standards, which would become mandatory in India soon.

The global norms for joint venture accounting are expected to deprive companies of the freedom to show in their financial statements the revenue and assets due to them from their jointly controlled companies.

They will only be allowed to consolidate profits from joint ventures in their financial statements, in what is called equity accounting. Accounting experts said this could immensely impact the revenue of financial services and technology companies that are mostly into joint ventures.

���The status of companies in a growing economy depend mainly on their revenue, unlike in a matured economy where profits are more important. Revenue is also important in the valuation of a company in certain sectors. Adoption of international financial reporting standards mean losing the option for proportionate consolidation of the revenue of the joint venture company, which may affect the consolidated revenues of the parent company,��� PricewaterhouseCo-opers partner Sunder Iyer said.

When companies strike joint ventures, both the partners try to capture in their respective consolidated financial statements as much revenue from the JV as possible. They, therefore, adjust their respective shareholding and the board strength ��� the two parameters of control ��� in the JV in such a way that both could consolidate the JV���s revenue in their books proportionately.

A company having 49% holding in a JV can, therefore, show an equal measure of the JV���s revenue, assets and profits in its financial statements. Under the proposed norms, this right will be reduced to consolidation of only profits.

For example, a company having an investment of 49% in a JV that has a turnover of Rs 100 crore and a profit of Rs 10 crore can show in its books a proportion of the revenue and profits ��� Rs 49 crore top line and Rs 4.9 crore as profit. Adoption of the IFRS would reduce the revenue to zero while retaining the profit of the parent at Rs 4.9 crore.

This is likely to lead to a massive drop in the consolidated revenue of many companies that have joint ventures, experts said. International Accounting Standards Board, which issues IFRS, has already unveiled a draft on the proposed change taking away the freedom of proportionate consolidation.