E-waste provisioning may put pressure on electronic goods companies

http://www.chinaiol.com   2017/12/26 13:45:09   Source:https://economictimes.indiatimes.com  

Electronic goods companies, including multinationals that have been operating in India for at least a decade, could see pressure on profit due to a proposed rule on electronic waste disposal and its treatment under current accounting standards. Companies such as Samsung, LG, Apple and Nokia will be required to collect a predetermined percentage of the goods they sell every year, stretching back over the past 10 years.

 

Under Indian Account Standards (Ind-AS), the companies will be required to provision for this cost in the current fiscal, leading to a possible erosion in earnings. They have asked the Ministry of Environment, Forests and Climate Change to amend the rule and strip out its retrospective nature.

 

E-waste includes mobile phones, tablets, computers, television sets, washing machines and refrigerators. The regulations also indicate the life span of a product— such as five years for mobile phones and 10 years for washing machines.

 

If the rules are put in place without changes, companies may look to pass on the costs to consumers, experts said, estimating that prices could rise 1-4% in that case.

 

Later Entrants Would Benefit

"ACE (appliance and consumer electronic) and phone makers could have significant financial implications on their books as they will have to provision for e-waste they collect on their last eight to 10 years' sales," said Manish Sharma, president of the Consumer Electronics and Appliances Manufacturers Association (CEAMA).

 

"Under the current Indian accounting standards (Ind-AS), the entire provision for such obligation must be booked in the first year, which makes the rules retrospective."

 

The lobby group has said the rules should be prospective as this will promote ease of doing business, Sharma said. CEAMA had asked the ministry to reconsider the draft rule in a December 14 letter. "There is a year-wise liability for past sales going back to 10 years (for electronic goods manufacturers). Under prevailing accounting rules, any obligation of a retrospective nature must be accounted in the year from when law takes effect," it said. "This places unimaginable financial burden on the companies."

 

A South Korean consumer goods company executive told ET that this has emerged as one of its main concerns this year, especially since later entrants would benefit.

 

"We operate on wafer-thin margins and such a provisioning could potentially impact the bottom line heavily," he said.

 

"We already have a strict e-waste policy but the accounting implication would not benefit us and would put some of the other late entrants in the segment from China in a better position."

 

Accounting experts said provisioning has to be made in the current financial year for most consumer goods companies. "Due to the new requirements, many consumer goods companies will have to make a provision for the cost of meeting the e-waste collection targets, which in turn is linked to the past sales of the product and its expected life," said Sai Venkateshwaran, head of accounting advisory services at KPMG in India. "As per Indian accounting standards, this provision needs to be made taking into account sales of past periods, and this impact will come in the current fiscal which would impact the bottom line of a company."

 

Putting a number on the exact cost will be difficult and depend on the company.

 

"I would say for every Rs 5,000 crore of sales, the estimated cost could be anywhere around 1% to 4% of the cost," said an accounting expert helping some companies. "So it would come to Rs 50 crore to Rs 200 crore per year for a company with such revenue."

 

The multinationals have asked accounting experts to arrive at provisioning estimates.

 

"We have already made substantial capital expenditure in India. Now how do I go back to global (headquarters) and say we will make losses this year due to e-waste provisioning," said the finance head of a multinational consumer goods company. The company has also commissioned an estimate of the cost.

 

To be sure, there are some experts who said there is ambiguity over the retrospective element.

 

"While the percentage of collection for each product is mentioned by in the October draft notification, there is still no clarity on whether the collection targets are for past or just for sales going ahead for the companies," said Sandip Khetan, partner in a member firm of EY Global. "Because if it's retrospective then companies may have to provision the present value of future obligation for applicable past period sales, something on the lines of how warranty provision is treated in the books. ..

 

Estimates costs won't be easy for companies.

 

 

"It will be difficult for companies to estimate both the quantum of historical e-waste as well as the related costs associated with this obligation," said Venkateshwaran of KPMG. "Companies that have been in existence for over five-ten years and have had significant sales during this period are likely to see a greater impact on their P&L this year due to the provisioning."

 

An e-waste company head said costs won't be as high as companies fear.

 

"The cost of managing e-waste is not as high as some people claim," said BK Soni, chairman, Eco Recycling Ltd (Ecoreco), an e-waste management company. "These norms are the need of the hour and I think they are in line with global e-waste management norms."