The Hindu Business Line : Dissect the disclosed numbers

TO FACE a tough adversary, you need all the ammo you can gather. So too when trying to understand accounts. A good addition to your arsenal for this can be Accounting & Analysis: The Indian Experience 2004 from Global Data Services of India Ltd (GDSIL), a subsidiary of CRISIL. Lest you lapse into terrifying memories of grad course tomes on `advanced accounting', let me assure you this is no academic input but a presentation of an analyst approach to company accounts.

The book begins with an introduction to company accounts, with the analogy of home bookkeeping. "In personal accounting, `profit' is generally called `saving'. In company accounts, the surplus is called `profit' which is then distributed to the owners as `dividend' or kept as a saving in the company as a `reserve and surplus'."

The chapter on `fixed assets' points out how it may be difficult to decide whether an asset is tangible or intangible. Zuari Industries shows `Books - Marketing know-how' as part of fixed assets, though the Institute of Chartered Accountants of India notes that books with higher technical content may be intangibles. `Water-drawing rights' appear in fixed assets schedule of Gujarat Ambuja Cement; one may argue that they're intangible in physical form, while another may say that such rights give tangible benefits and can be sold.

In the discussion of Accounting Standard (AS) 28, the book lists companies that have "directly deducted impairment loss on assets from reserves". Not what AS mandates, states the book, because impairment should go through P&L. "Tax benefit of this adjustment has been routed through the P&L A/c in the form of deferred tax asset! That is like having the cake and eating it too."

Let's move on to investments. "Forbes Gokak Ltd is a rare case that shows immovable property under `investments'," though the normal practice is to show such properties under fixed assets. Yet Gokak "has been making annual provisions for depreciation, although, theoretically, depreciation should be provided for an asset that is in use." The question that the book poses is, "If the asset is in use, then should it remain as an investment or be transferred to fixed asset?" Thus, depreciation, in Gokak's case, "could be equivalent to `diminution in the value of investments'."

The discussion on `inventory' quotes the AS that inventories of mineral oils, ores, and gases are to be valued at net realisable value. An `interesting case' is that Ashapura Minechem, a mining company engaged in mining bauxite and bentonite: "A major part of its turnover arises out of trading activities. It is not clear whether stocks of minerals not mined by the company should be valued at cost or net realisable value. An analysis of closing stock valuation shows that some of the stocks are valued at prices higher than purchase prices."

`Receivables' chapter shows the two ends of the `days receivable' spectrum. For Hindustan Construction Co Ltd, the measure is only 0.44, and for Hero Honda 3. But Snocem has a collection period of 1270 days; debtors stood at Rs 167.3 crore against gross sales of Rs 48.07 crore for 2003-04. In the case of Shree Rama Multi-tech Ltd, the auditors had this to say: "Debts outstanding for period exceeding six months are Rs 9764.90 lakh. The company has not considered any amount as doubtful out of it. In our opinion, if not pursued rigorously, Rs 6852.74 lakh may become doubtful of recovery in coming years."

Whirlpool's treatment of SAP software implementation cost of Rs 12.95 crore was to put it under `miscellaneous expenditure to the extent not written off' in the year 2002-03. A year later, the company "regrouped this as `intangible assets' under fixed assets in view of transition provision of AS 26." Don't forget to read excerpts from a Board resolution of Aptech that tells the sorrowful story of creating goodwill of Rs 120 crore because of obsolescence setting on computer hardware, software and courseware.

Deferred tax examples can make a cerebral reading. On ESOP, you come across a model analysis as Infosys provides. However, during the year ended March 31, 2004, the company discontinued the practice of allocating ESOPs for want of "clarity in the regulations relating to grant of stock options as well as the accounting regulations relating to the same."

Cash flow is the holy grail that analysts swear upon, even if it meant reworking reported figures. An example is Mukand Ltd that reported a PAT of Rs 12.93 crore and net cash flows from operating activities of Rs 4.8 crore for the year ended March 31, 2004.

GDSIL's analysis pegs the loss at Rs 161.34 crore and cash accruals at a minus Rs 108.86 crore, after deducting interest expense, and factoring in this adjustment:

"The company recognised gain on one time settlement of debt, representing waiver of interest and principal, amounting to Rs 162.30 crore as income even before the relevant scheme was approved and settled by the monitoring committee. We have ignored this amount."

A book that you can't ignore.

BookValue@TheHindu.co.in

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