Question (a)

Case 10.1: Disputed Dues of Wim Plast Limited

a)
 The above mentioned items in the case should be taken as contingent liabilities according to
Ind-AS 37.
 The aim of Ind-As 37 is to ensure that applicable recognition criteria and measurement bases
are applied to provisions, contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to enable users to understand their nature, timing and
amount.
 Ind AS 37 requires disclosure of contingent liabilities in the financial statements when the
outflow of economic benefits is possible. The disclosure, however, should avoid misleading
indications of the likelihood of decreasing income.
 Therefore, in Notes these contingent liabilities must be mentioned.

b) Since the items mentioned are classified as the contingent liabilities, therefore total contingent
liabilities are:

Items Amount (in ₹ Lacs)

Service Tax 3.40
Excise Duty .93
Outstanding Letters of Credit 56.31
Guarantees Issued by Company’s Bankers 162.75
Total Contingent Liabilities 223.39

c) Following additional information should be provided by the company regarding above items to
ensure good financial reporting practices:
 The criteria required to be met for the maturity of the Letter of Credit should be mentioned in
the notes.
 The credit period for the maturity of the letter of credit should be mentioned in the notes.
 The obligations required to be fulfilled under the contract of Bank Guarantee should be
mentioned in the notes.
 The name and details of the guarantor/bank should be mentioned in the notes.

Case 10.4: Anomalies in a Cash Flow Statement

a)

The following anomalies can be identified as compared to the ICAI accounting standards:

 Interest received should be included under either investing or operating activities, but not
financing activities

 Profit from sale of fixed assets / investments should be a part of investing activities.
  Increase in share capital should be a part of financing activities.

Note: ICAI allows for dividend paid to be classified under either operating activities or financing
activities, and although it is preferred to classify it under financing activities, the given classification
cannot be considered to be a violation of ICAI accounting standards.

b)

Both insiders as well as outsiders should be should share the responsibilities for the errors made. The
insiders, knowingly or unknowingly, followed incorrect accounting practices in their bookkeeping
activities. The internal auditors may also have turned a blind eye towards the errors. It is also likely that
the external auditors were incompetent or careless. Thus the blame must be attributed to all parties
involved.

c)

The changes recommended as per Ind-AS are:

 Interest received should be accounted for in investing activities

 Dividend paid should be accounted for in financing activities

Accordingly,

Particulars Current year Previous year

Cash flow from operating activities

Net profit after tax and extraordinary items 114 16
Adjustments for:
Depreciation 104 100
Deferred tax 37 43
Income tax (provision) 32 12
Fringe benefit tax (prior period taxes)
Income tax (prior period taxes) 8 11
Interest paid 239 210
Miscellaneous expenditure written off 3
Interest received -6 -6
Operating profit before working capital changes 528 389
(Increase)/Decrease in trade and other receivables -192 -145
(Increase)/Decrease in inventories -13 -50
Increase/(Decrease) in trade payables 19 317
(Increase)/Decrease in loans and advances -41 -2
 Other current assets cash deficit from operations -227 120
Direct tax paid -33 -23
Cash generated from operations -260 97
Net cash flow from operating activities 268 486

Cash flow from investing activities

Purchase of fixed assets -238 -79
Sale proceeds from fixed assets
Interest received 6 6
Purchase of investments -1
Capital work in progress 43 -63
Net cash used in investing activities -189 -137

Cash flow from financial activities:

Proceeds from long-term borrowings 50 0
Repayment of term liabilities -362 -26
Increase in bank borowings working capital 105 -8
Other unsecured loans 223 -117
Interest paid -239 -210
Dividend paid
Increase/(Decrease) in share capital 100 75
Net cash used in financing activities -123 -286

Net increase/(decrease) in cash and cash equivalents -44 63

Cash and cash equivalents as on 01-04-2010 122 59
Cash and cash equivalents as on 31-03-2011 78 122

Case 10.7: Financial Restructuring at Tata Motors

1. The financial restructuring of the accounts of the Tata Motors was approved with the consent of
shareholders in the General Meeting. Following balances were set-off against the Securities Premium
Account:

Particulars Amount (in Rs Cr)

Deferred Revenue Expenditure 950.06
Capital Work-In-Progress 197.61
Diminution in the value of investment 31.25
Total 1178.91
 The impact of the above set-off on the financial statements are as follows:

a) The Deferred Revenue Expenditure, which is a part of balance sheet will be written-off and
hence there will be a decrease in the value of the Net Assets (from ₹3823.30 Cr. in last financial
year to ₹ 3478.34 Cr in the current financial year).

b) The Capital Work-In-Progress, which is a part of balance sheet will be set-off and hence again
the Net Assets will be decreased.

c) Diminution is basically the reduction in the value of the investment. Here, since the diminution
is written-off from the income statement, therefore the Net Profit will increase (from a loss of ₹
500.34 Cr to a profit of ₹ 53.73 Crore)

d) Also, since a sum of ₹ 1178.9 Cr. is being written-off against the Securities Premium Account,
thus here will be a decrease in the same.

e) The Net Worth also might see a decrease because of the reduction in the value of the assets
(from ₹ 3253.78 Cr in the previous financial year to ₹ 2465.06 Cr. in the current financial year)

2. According to the GAAP of India (of earlier times), writing-off of the expenditures and
impairments/diminutions (as in the present case) are allowed. Earlier, the Deferred Revenue
Expenditures were a part of Intangible Assets. However, as per the Ind-AS norms, the Deferred
Expenditure is not considered a part of Balance Sheet. But, writing-off of the expenditures is as per
the Ind-AS 37 norms (with the consent of the shareholders).

3. The writing-off of the expenditures and impairments/diminutions does not provide a true picture of
the company’s assets and the income/profit. The writing-off in this case has a significant effect on
increasing the profits. This might also provide a false pictures regarding the dividend being paid.
Therefore, such set-offs might deceive the investors and the shareholders.

However, since the writing-off is done with the agreement from the shareholders, the process might
help the company to provide a better picture of its financial statements and operational profits as
well. Therefore, it might also help in increasing the share price of the company that can help in raising
higher funds. And therefore, keeping the positive cash flows.
Question (b)

1) From a financial reporting practice lens, what do you observe interesting as part of the
company’s annual report? Please be brief (to the extent possible)

Answer: Some of the interesting points are:

 The figures mentioned in the financial statements of the annual report 2015-16 are in
Rs. crores, whereas the figures mentioned in the financial statements of the annual
report 2014-15 are in Rs. millions. This would make it difficult for a stakeholder to
compare the financial reports of more than 2 years. There should have been more
consistency in the reporting of the figures.

 The report mentions that the company follows General Accounting Practices (GAAP)
according to the Companies Act 2013. As mandated by the government of India, all
companies will have to shift to Ind-As by the financial year 2016-17, and thus ITNL will
follow the same route.

 In the Cash Flow statement, the proceeds and repayment of long and short-term
borrowings are mentioned separately. In many annual reports, only net borrowings are
provided and the break-up if not provided.

 The balance sheet statement doesn’t have the figure of accumulated depreciation or
amortization; the same is mentioned only in the notes present thereafter.

2) From corporate governance and compliances perspective, do you observe anything iffy or
unanswerable in the company’s annual report? Please elaborate with rationale to the red flags
being hinted by you.

Answer: Some of the important points are:

 The company is taking unsecured loans of Rs. 1013 Cr from ‘related parties’, other than
banks and financial institutions, which might raise suspicion on the source of these
funds.

 The company has 12 Directors out of which only 2 are executive Directors and remaining
10 are Non-Executive Directors. There should be more number of Executive Directors in
the company.

 Even though the company is involved in the construction-leasing sector that involves
projects extending even more than a year, the capital work in progress is very less. This
shows that the company might be reporting these projects as assets, which shows over-
accounting of the projects. On the other hand, the company might not be reporting
these projects that would lead to severe under-reporting.

 Even though this sector requires lot of working capital, amount received from the issue
of shares are used up in paying loans, and hardly any money is kept for working capital
requirements.