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WINB0W BRESSINu

Window dressing is presenting company accounts in a manner which enhances the financial
position of the company. It is a form of creative accounting involving the manipulation of
figures to flatter the financial position of the business.
It is also defined as: A form of accounting, which while complying with all the regulations,
nevertheless, gives a biased impression of the companys performance.
A company can use window dressing when preparing financial statements to improve the
appearance of its performance or liquidity. In this case, window dressing may consist of
changing asset depreciation or valuation policies, making short-term borrowings, or engaging in
sales and leaseback transactions at the end of a period. By doing so, management embellishes the
companys results or liquidity and obtains some benefits.
Other examples of window dressing by companies may include advertising, selling, and
marketing. In these cases, window dressing occurs when positive characteristics of products or
services are a little exaggerated to increase demand for them while negative characteristics are
not mentioned or kept hidden.
Though it is not illegal, it is considered by many financial pundits as unethical.
Reasons for Window Dressing:
To show a stronger market position than is warranted
To influence share price
To reduce liability for taxation
To hide liquidity problems
To ward off takeover bids
To encourage investors
To re-assure lenders of finance
To hide poor management decisions
To satisfy the demands of major investors concerning the level of return
To achieve sales or profit target thereby ensuring that management bonuses are paid










Illustration 1: Reasons for window dressing
Beneficiary Reason Window dressing Action Who is misled
Company To obtain funding
(to borrow
money)
Increase profits and
liquidity ratios
Borrowers (banks,
other financial
institutions)
To reduce tax
payments
Decrease profits by
increasing expenses
Government
To smooth
financial data
(sales, expenses,
accounts
receivable, etc.)
Record sales or purchases
in an inappropriate
period;
give large discounts to
debtors for payments
received before period
end
Owners
To hide some
problems
(liquidity,
profitability, poor
management
decisions)
Increase cash account
balance at the period end;
increase useful life of fixed
assets
Owners
Mutual Fund To improve fund
portfolio structure
Buy more well-performing
stocks and selling
nonperforming ones
Investors
To increase
portfolio value
Buy additional well-
performing stocks at a
higher price
Investors












Methods used for Window Dressing:
1. Sale and leaseback
This involves selling fixed assets to a third party and then paying a sum of
money per year to lease it back
The business retains the use of the asset but no longer owns it
The liquidity or cash position of the improves but:
the asset no longer features on the balance sheet
there is a continuing commitment to pay rental to use the asset
the business is not tackling the cause of the liquidity problem
2. Short term borrowing
Short term borrowing just before the date on which the balance sheet is
drawn up
This enhances the apparent ability to pay its short term debts
But creates an additional liability
3. Chasing debtors
Special effort to chase debtors before the balance sheet is drawn up
This might involve discounts for prompt payment
Conversion of debtors into cash will improve the balance sheet and cash
position of the organisation
Liquidity does improve but at the expense of sales revenue




4. Bringing forward sales
Sales show up in the P&L account when the order is received - not when the
cash is received
Encouraging customers to place orders earlier than planned will increase the
sales revenue figure in the P&L account
This can bring sales forward from next year to this year
The drawback is that the sales cannot be included in next years figure
It fails to tackle the underlying problem

5. Changing depreciation policy
Increasing the expected life of the asset will reduce the depreciation provision
in the P&L account
This will increase the net profit shown in the account
Lengthening expected life boosts profits - shortening it reduces profits.
It will also mean that net book value in the balance sheet will be higher for a
longer period thereby increasing the firms asset value on the balance sheet
6. Including intangible assets
Intangible assets: brand names, goodwill
Normally only included if purchased
They are subject to depreciation (known as amortisation) like other fixed
assets
But if they are not depreciated the firm can maintain the value of its assets
thus giving a misleading view of the asset value of the firm



7. Stock valuation
There are various methods of stock valuation: LIFO,FIFO,AVCO
A change in method will lead to different figure for
issue price used in costing
closing stock which then impacts on profits
stock in the balance sheet which then impacts on the value of the
firms assets
Anything which increases the value of closing stock will increase profits
8. Capitalising expenditure
The distinction between revenue expenditure and capital expenditure is not clear
cut
Example: computer software with a useful life of 3 years
If treated as revenue expenditure it is treated as a negative item on the P&L
account
If treated as capital expenditure it is treated as an asset on the balance sheet
(with yearly depreciation as a negative item on the P&L)
























Examples of window dressing in Indian Companies:
1. Tata Motors transferred 24% stake in Tata Automotive Components (TACO), a company
with revenue of $675 in FY07, to Tata Capital, a group company, and booked a profit of
Rs 110 crore in Q1 FY09. Management declined to disclose the valuation methodology.
Tata Motors also changed its methodology for calculating provisions for doubtful
receivables, which resulted in higher reported Ebitda to the extent of Rs 50.7 crore (10%
of Ebitda).
2. TCS, the software major, increased its depreciation policy on computers from two years
to four years. As a result, Q1 FY09 PBT was higher by an estimated Rs 50 crore (4% of
net profit in 1QFY09). TCS followed cash-flow hedge accounting and till FY08, it used
to recognise hedging gains on effective hedges in its revenue line, thus boosting the
reported revenue growth and Ebit margin. In FY08, TCS had Rs 421crore from hedging
gains, of which, Rs 137 crore was included in the revenue line. However, from Q1 FY09,
TCS is expected to report all forex losses/gains below the Ebit line in other income. Thus,
the losses it had on its hedge position will no longer be booked in the operating line.
3. Jet Airways, changed its depreciation policy from WDV to SLM, and thereby wrote back
Rs 920 crore into its P&L, which helped the company to report profits during the quarter.
It also helped Jet to report a higher net worth, which will help in keeping reported gearing
low.
4. Dr Reddys adjusted mark to market losses (Q1 FY08) on outstanding $250 million of
hedges in the balance sheet, while P&L reflects forex gains realised.
5. Reliance Communications adjusted short-term quarterly fluctuations in foreign
exchange rates related to liabilities and borrowings to the carrying cost of fixed assets.
The company adjusted Rs 109 crore of realised and Rs 955 crore of unrealised forex
losses in the above manner. In addition, the company has not recognised Rs 399 crore of
translation losses on FCCBs, since the FCCBs can potentially get converted, although the
FCCBs are out of money. Adjusted for all the above, the company would have virtually
no profits in Q1 FY09.