Understanding Impairment of Intangible Assets

Modified: 27-Jun-20

www.drvijaymalik.com has a section dedicated to answering queries from readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. We have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to the following queries:

  • Understanding the impairment of intangible fixed assets for EPC contractors

 

Understanding the impairment of intangible fixed assets for EPC contractors

Advised to read this article first: Analysis: KNR Constructions Ltd

Hello Dr Malik,

I wish to seek some clarity on “other intangible assets” with respect to this statement that you mentioned for KNR Constructions Ltd:

“An investor would notice that the projects on whose sale price, the company has to take a loss were operational annuity projects. Therefore, the reported financial numbers in the profit & loss statement of an infrastructure/EPC player may not communicate its true financial position/money making ability for its shareholders.”

However, in the FY2017 annual report (page 134), it is mentioned that the impairment “is shown under exceptional items in the statement of profit and loss.”

(1) Given this note, the profit & loss statement (P&L) does show the impairment loss. Right? Then what exactly do you mean when you say the P&L may not communicate its true financial position for its shareholders?

(2) I do not exactly understand the term “other intangible assets” in consolidated financials, especially the term “carriageway” used for intangible assets in Notes to Financial Statements (Note 3.3, page 165). Does it mean all contracts under HAM & BOT model? Therefore, P&L transactions (revenue and expenses) only include EPC-related transactions.

Regards,

 

Author’s Response:

Hi,

Thanks for writing to us! We are happy to see that you are doing your own equity analysis and spending time and effort to understand different concepts.

1) The impairment in the P&L will only be present for the year in which the company decides to recognize the loss/diminution of value. However, an investor would acknowledge that the diminution of value might not have happened in a single year. Many times, companies keep poorly performing projects/assets in their balance sheet at unimpaired/original value for many years before the impairment becomes so significant that it can no longer be avoided. In case, such period of delay in recognition may extent even in decades.

Therefore, an investor should keep in mind that any point of time, there might be projects in the balance sheet shown at unimpaired value, which actually may have witnessed significant impairment in true value.

Further advised reading: Understanding the Annual Report of a Company

2) Most of the companies explain their usage of accounting norms in the “Significant Accounting Policies” section of the annual report. Referring to this section also may help an investor understand the conventions being followed by any company. In case, an investor needs further clarity regarding these accounting terms and conventions, then we would request her to take an opinion from a chartered accountant as only he/she may be in the best position to explain them.

All the best for your investing journey!

Regards

Dr Vijay Malik

P.S.

 

DISCLAIMER

Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of any of the companies discussed above

 

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