FAIR VALUATION IN ACCOUNTING - A MAJOR ISSUE FOR TAXATION AND CORPORATE GOVERNANCE.
The Government of India and the Institute of Chartered Accountants of India have taken a decision to implement IFRS i.e. international financial reporting standard (International accounting standards) based on fair value accounting. The regulator, the government as well as the accounting community
is yet to determine as to how a reliable fair value will be determined in case of assets and liabilities for which there is no active market or the market is shallow or market has a high impact cost. The determination of fair value for property, plant & equipment, which are under a specific use, pose a larger challenge of reliable valuation. In terms of challenge from the angle of taxation, the Central
Board of Direct Taxes is yet to determine its approach on fair value gains or losses recognized by business enterprises either in its profit & loss account or in the balance sheet. Will Income Tax Department ignore unrealized gains or will only like to ignore unrealized losses are very critical questions? In case some unrealized gains are directly taken to statement of change in equity or to some other head in the balance sheet, how the Income Tax Department will really treat the same is not clear and the 1st April, 2011 dead line is right in front of all. The position is alarming. In case of corporate governance, the recent trend of very high managerial remuneration or linking Executive salaries to an incentive mechanism based on the bottom-line in the profit and loss account, will be directly affected by the fair value accounting. The fair value principle does not take into account the basic principle of prudence being followed by Indian corporate for last several centuries. In case managerial remuneration, Executive salary, dividend and bonus are allowed to be sourced from unrealized gains, we may see some of our banks or large corporate tumbling like Lehman Brothers in the times of crisis. Derivatives: The government is encouraging more and more use of derivative products including very complex instruments, without even appreciating the risk generated
in the market places. Most of the Indian businesses and more specially the investors are not able to understand the intricacies and the real risk involved in derivative or swaps or collars and various other credit enhancement products or securitised instruments. The financial literacy in India is not very deep and even the top professionals in banking, finance and accounting and legal are not able to
fully understand and appreciate the reality of the cruel world of derivative, when it is used for speculation and not restricted to mere hedging. The valuation of Derivatives and chances of manipulation therein are adding to challenges. The matter is loud and clear for SEBI, RBI, Ministry of Corporate Affairs and Ministry of Finance to initiate necessary checks and balances on urgent basis so that not only we are able to achieve the international benchmark of fair valuation but are also be able to control the menace which is created or is capable of being created. The American and European economy has already tasted the poison of Fair Value, the real taste is whether we can have
a Neelkanth (Bhagwan Shiva) who can swallow the poison and purify it for its real positive use.
is yet to determine as to how a reliable fair value will be determined in case of assets and liabilities for which there is no active market or the market is shallow or market has a high impact cost. The determination of fair value for property, plant & equipment, which are under a specific use, pose a larger challenge of reliable valuation. In terms of challenge from the angle of taxation, the Central
Board of Direct Taxes is yet to determine its approach on fair value gains or losses recognized by business enterprises either in its profit & loss account or in the balance sheet. Will Income Tax Department ignore unrealized gains or will only like to ignore unrealized losses are very critical questions? In case some unrealized gains are directly taken to statement of change in equity or to some other head in the balance sheet, how the Income Tax Department will really treat the same is not clear and the 1st April, 2011 dead line is right in front of all. The position is alarming. In case of corporate governance, the recent trend of very high managerial remuneration or linking Executive salaries to an incentive mechanism based on the bottom-line in the profit and loss account, will be directly affected by the fair value accounting. The fair value principle does not take into account the basic principle of prudence being followed by Indian corporate for last several centuries. In case managerial remuneration, Executive salary, dividend and bonus are allowed to be sourced from unrealized gains, we may see some of our banks or large corporate tumbling like Lehman Brothers in the times of crisis. Derivatives: The government is encouraging more and more use of derivative products including very complex instruments, without even appreciating the risk generated
in the market places. Most of the Indian businesses and more specially the investors are not able to understand the intricacies and the real risk involved in derivative or swaps or collars and various other credit enhancement products or securitised instruments. The financial literacy in India is not very deep and even the top professionals in banking, finance and accounting and legal are not able to
fully understand and appreciate the reality of the cruel world of derivative, when it is used for speculation and not restricted to mere hedging. The valuation of Derivatives and chances of manipulation therein are adding to challenges. The matter is loud and clear for SEBI, RBI, Ministry of Corporate Affairs and Ministry of Finance to initiate necessary checks and balances on urgent basis so that not only we are able to achieve the international benchmark of fair valuation but are also be able to control the menace which is created or is capable of being created. The American and European economy has already tasted the poison of Fair Value, the real taste is whether we can have
a Neelkanth (Bhagwan Shiva) who can swallow the poison and purify it for its real positive use.
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