Search the Internet          Tips  Sites: Finance, Investment

Crisil study lists accounting gaps in blue chips' books

Janaki Krishnan & Freny Patel in Mumbai

A Crisil study of annual reports for 2000-2001 suggests that the profits of 139 companies, including blue chips such as Wipro, Reliance, Zee Telefilms, Videocon, Spic and Bombay Dyeing, were at variance for years, though Crisil clarified that the accounting policies adopted by the companies are not illegal. Nor do they violate any accounting norm.

Among the cases the Crisil study highlights is that of Wipro, which transferred land from fixed assets to current assets at the market price and adjusted the excess value under capital reserves instead of revaluation reserves. This resulted in Rs 430 million being added to the Rs 1.96-billion reserves of the company.

When contacted, Suresh Senapati, chief financial officer of Wipro, said that land is generally put under fixed assets. But since we were planning to sell it, we transferred it to current assets and the excess was put under capital reserves. This is entirely in accordance with the Companies' Act and strictly in line with the accounting standards.

Many corporates like Reliance, Chordia Foods and Explochem have capitalised on the incentives from the state government in terms of the sales tax deferrals.

Many of these companies have taken the present value of this sales tax deferral as debt and have transferred it to the profit and loss account as income for the year.

In a two-page response, a Reliance spokesperson said "Reliance's accounting policy on sales tax benefits is fully in accordance with the accounting standards of the Institute of Chartered Accountants of India, and is adequately supported by legal opinion from leading accounting firms. Reliance's accounting policy on sales tax benefits is also fully in accordance with US GAAP, as stated in Accounting Principles Board, Opinion 21 (APB-21)."

The Reliance response further said that the "accounting treatment of sales tax benefits is further in line with the schemes of the state governments, which permit discharge of the deferred sales tax liability by paying the commuted net present value thereof."

Referring specifically to the Crisil comment that Reliance has taken "the present value of this sales tax deferral as debt and have transferred it to the profit and loss account as income for the year," the Reliance spokesperson said "Reliance's accounting policy on sales tax benefits has transparently been disclosed in its annual report for 2000-01 as circulated to over 2 million shareholders."

The Reliance response refers to Schedule N (j) in the section on "Significant Accounting policies, where the company has said "sales include inter-divisional transfers, excise duty, sales tax and are adjusted for discounts (net) and gains/loss on corresponding hedge contracts."

Further in section K, the company spokesman said the company had said: "sales tax charged to profit and loss accounts includes payments made for assignment of deferred sales tax liabilities," and in Schedule O of the Notes to accounts, item 22, Reliance had put a figure of Rs 13.70 billion under sales tax deferral liabilitise assigned for 2000-01, and a figure of Rs 4.10 billion for 1999-2000." the spokesperson added.

A Reliance official explained that the accounting was in line with the state government's sales tax policy. For instance, if the company has a tax liability of Rs 1 billion after 15 years, then the policy allows the company to pay, the net present value now to settle the future liability. This is how the item had come into the balance sheet, the official explained.

Crisil says Spic has been following the accounting policy of capitalising borrowing costs on advances given to its subsidiary. These were adjusted eventually against equity to be issued by that subsidiary. The net result of this jugglery ended with an overstatement of profit for the petrochemical company during the fiscal 2001.

Further, the credit rating agency says Bombay Dyeing has been overstating its profits over the years by routing some of its expenses directly through its reserves.

For instance, for the fiscal 2001, gratuity expenses of Rs 18.8 million was written off against general reserve, and loss on sale of long term investments amounting to Rs 228.9 million was written off against investment reserve. "The recomputed figures show a loss after tax of Rs 66.4 million as against a profit after tax of Rs 181.3 million," stated Crisil in its study.

Neither Spic nor Bombay Dyeing offered any comment on this. Crisil said it had found that Zee Telefilms had in the past been claiming 100 per cent exemption under section 80 HHC on exported programmes.

However, the Income Tax Department put a spoke in the wheel by disallowing such a practice.

This leading entertainment company in its March 2001 accounts had thus provided for tax related to earlier years amounting to Rs 569.5 billion.

Zee Telefilms officials told Business Standard that the company has provided for the tax as a contingent liability as claims of tax deduction are under dispute in an appeal with the Income Tax department.

In a faxed response Zee said, "During financial year 2001 the company is availing exemption for its export profits under section 80HHF which is clearly allowable under the IT Act.

The disputed tax demands on disallowance of the claims under 80HHC are contested by the Company in earlier years in an IT appeal which is yet to be decided. The company has provided for all known liabilities.

For any contingent tax liability, the company has reported clearly in its published accounts that in case these demands are determined against the company, to that extent the Reserves and surplus are overstated and liabilities understated."

According to Crisil, Videocon International changed its accounting policy of deferring preliminary and capital raising expenses, and started charging the whole amount in the year of expenses.

The resulting write-off to the tune of Rs 499.7 million in March 1999 was withdrawn from the general reserve and the impact on profit for the year was concealed.

The company during the year also charged premium on redemption of debentures Rs 4 million to the profit and loss account and withdrew the same from general reserve which resulted in zero impact on the declared profits.

Videocon International spokesperson Mahesh Pugalia said that in 1998-99, the company changed its accounting policy and wrote off the preliminary and capital issue expenses, expenses in connection with raising of external commercial borrowings and deferred revenue expenses in the year in which they are incurred.

"Accordingly, the expenses which were not written off up to March 31, 1998 amounting to Rs 499.7 million have been written off in the year 1999 and an equivalent amount has been withdrawn from general reserve and credited to profit and loss account".

Powered by

ALSO READ:
Accounts of 226 firms fail Crisil test
The Rediff Budget Special
Money