The Hindu Business Line : The concealed parts

RECENTLY, I saw the quarterly unaudited accounts of TELCO. I was looking for information on the contribution made by Indica to the (mis?)fortunes of the company, but was surprised to find no separate report on this count. The company seems to have fobbed off investors without making any segment-wise reporting on the ground that automobiles is its only counter. It has not occurred to the company that passenger cars are a different kettle of fish vis-à-vis commercial vehicles. What does the accounting standard on segment reporting say in this regard?

-- Sonali Sagar, New Delhi

The Accounting Standard 17 of the ICAI indeed gives room for wriggling out. Its definition of business segment, meaningful as it is, fails to visualise a situation where there can be sub-segments. Its definition of a segment permits one to group similar products, although, in the same breath, it also talks about difference in the risks-rewards profile as a criterion for classifying various products and services into segments. Moreover, the accounting standard gives a leg-up to omnibus reporting as it were, when it prescribes the 10 per cent rule-of-thumb.

The 10 per cent rule says that a business or geographic segment should be identified as a reportable segment if it, among other things, earns at least 10 per cent of the total revenue, or contributes to at least 10 per cent of the total profit or loss, or accounts for at least 10 per cent of the total assets.

While this was perhaps done lest a financial statement is cluttered with too many details, it does give latitude to companies to brush significant statistics under the carpet. The ICAI ought to address this issue with seriousness it deserves. Difference in risk-reward profile must be accorded the primacy to the exclusion of all other considerations. Had this been the touchstone, Indica would have had to be separately reported (I suggest you read the article on this topic in Business Line dated January 27, 2002, which discusses the apprehensions nursed by many-a-discerning follower of the capital market).

Repair forex

AN INDIAN company earns foreign exchange by repairing the machinery in India belonging to the branches of a foreign company. Can this be treated as export turnover so as to qualify for income-tax benefits?

-- Gurudat Kaiwar, e-mail

No. The Income-Tax Act is obsessed with exports which presupposes goods having headed for a foreign destination. Domestic foreign exchange earnings are generally cold shouldered by it. Duty free shops which earn foreign exchange do not get any tax sops. Similarly, foreign exchange earned in India by performing services in India of the type described by you, do not get any tax benefit.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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