| 25 Feb 2010 |
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Firms Must Have Realistic Outlook Regarding Future Results: KPMG
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ABU DHABI -- Company managements must be rigorous in assessing the value of assets they are investing in, and therefore, they should base their projections of future performance on solid facts, says Sharad Bhandari - Head of Transactions and Restructuring at KPMG (UAE), the renowned global accounting and advisory firm.
"It is good to have dreams; without dreams you cannot advance with your business. But translating dreams into value when accounting for transactions must be realistic, and should not be based on wishful thinking. Managements must closely monitor market conditions and scrutinise all the related facts available before writing assets up or down," Bhandari told Khaleej Times on the sidelines of a KPMG hosted breakfast seminar on "Fair Value and Impairment".
"Most companies in the UAE are adopting a realistic and mature approach when assessing and projecting the future growth path of the assets in which they invest. A few companies, however, expose themselves in some cases to major write-downs due to insufficient due diligence conducted on their transactions. Such lack of financial rigor and scrutiny could have serious repercussions on the balance sheets of those companies as they may have to make significant provisions due to impairment in the value of their investments,'' he said.
"A few companies in the UAE - including the financial institutions - had to make significant provisions for impairment last year. In some cases, this was because of impairment in the carrying value of the assets they acquired at higher values. This trend could continue if investors fail to make a rigorous scrutiny of the market conditions," Bhandari said.
Several property developers and banks had to write off or provide for bad assets worth billions of dirhams on their balance sheets last year after real estate prices crashed in the UAE in wake of the global financial crisis. Financial analysts expect the balance sheet clean up to continue this year as more projects are scrapped or put on hold and more loans turn non-performing.
According to Bhandari, intervention of the regulators and increased level of awareness among investors and shareholders have persuaded many companies to be more realistic on their fair value assessments. Companies are also increasingly relying on professionals to assess the fair value of the assets they have or will invest in.
Chicago based partner, Steve Sherman, Chair of Global Valuations at KPMG, keynoted the session. He highlighted greater attention in the US by regulatory authorities regarding fair value and impairment issues.
Sherman noted that in his dealings with US public companies, the recent global financial crisis has increased scrutiny of these issues among US public companies.
This pattern of greater scrutiny is likely to be mirrored in all financial centers including the UAE.
By T. Ramavarman
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