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THEIR FAILINGS, OUR LEARNINGS

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FAIR AND TRUE

Context:

Inconsistencies between accounting treatment and accounting policies, understandably give rise to questions that impact on credibility.

  • Financial statements of a Company in the telecom industry, showed that it had been following an accounting system which was different from the standard followed by most of the companies in the same industry.
  • In February, 2017, the Company announced that its paid services will be provided from April, 2017. The Company offered three months of free services in a four-month package.
  • In the reporting period for July-September, 2017, revenue for 6 months was mentioned, whereas expenses for only 3 months were included, due to which the revenues were projected to be higher than they were. Some analysts felt that 13-20% of the revenue stated in the 6-month period had come from the first 3 months.
  • This was justified by the Company on the grounds that the service for 3 months was free.
  • However, some financial analysts did not agree. They felt that services provided, irrespective of whether or not they were free, should be considered in the respective quarter.
  • Some analysts also pointed to the irregularity in sales. The income statement of the Company, during the rollout period did not show the expenses incurred during that period.
  • The expenses such as salaries, sales and distribution costs, interest payments etc. incurred during the roll out period were classified as capital expenses. These expenses were transferred to the balance sheet as an asset, that were to depreciate over a period of time. This resulted in the expenditure being low.
  • This practice was unusual. However, according to the Company, this was compliant with local laws which state that such expenses can be capitalised till a commercial launch of the product was done.
  • The Company also reported lower average tower rent costs due to self-owned towers.
  • Company’s depreciation and amortization costs/ rate were also described by analysts as “too good to be believed.” The annualised rate was 2%, which was a quarter of the rate reported by its competitors. The estimate of depreciation made by the Company was almost less than half than earlier stated, and the straight line method was used. Analysts said that this could be a warning signal that they could write down the assets later on.
  • The Company’s response was that it was depreciating the wireless portion of the business since it had been put to commercial use, though it was spending on other future services too, like broadband for business, which were yet to be capitalised.
  • 99% of equity was from the holding company, a listed company, and the debt was shown at a lower rate. Analysts believed that this was not correct since the holding company had taken the debt, and part of it was passed on to this Company, and so the interest was being paid by the holding company.
  • The Company reported a loss of Rs. 271 crores in July-September, 2017.
  • As per the Company, accounting treatment was reviewed and approved by Audit Committee and the Auditors, one of the big 4 audit firms. The approach followed by the Company was stated to be very aggressive.
  • The October- December, 2017 quarter showed profits of INR 504 crores, with INR 1192.6 crore depreciation and amortisation charge in the quarter.
  • Some analysts believed that if the Company had followed the accounting methods practiced by its competitors, the Company would have reported a loss of INR 2,410 crore in Q3. The loss in Q2 would have been INR 2,700 crore.
  • As per the Auditors’ Report for FY 2017-18, the company has followed all the relevant accounting policies.

Points to ponder

  • Does the Board have the duty to ensure that accounting policies are complied with?
  • Should IDs acquiesce in the accounting treatment, by remaining silent or ineffective?