>ANALYSIS BEYOND CONSENSUS (EDELWEISS)

Earnings Barometer

With Q4FY09 earnings broadly beating Street’s expectations, an analysis of the quality of reported numbers becomes increasingly important. We have analysed quarterly results of BSE 2001 companies (excluding BFSI) for the quality and nature of reported earnings and discussed in this report companies that have one or more issues mentioned below:

1) Amendment in AS 11 used to defer MTM losses on fluctuation in foreign currency monetary items.
2) Early adoption of AS 30 w.r.t. derivatives contracts.
3) Deviation from accounting standards / guidance notes / GAAP.
4) Change in accounting policy.
5) Auditor’s qualification/comments.
6) One timers, other income and exceptional items significantly impacting PAT.



Significant observations

Amendment in AS 11 to facilitate deferment of MTM losses
In FY09, AS 11 was amended, providing companies an irrevocable option to either continue charging foreign exchange difference on long-term foreign currency monetary items through the P&L account as provided in erstwhile AS 11 or retrospectively (for all accounting period commencing on or after December 7, 2006) follow the amended treatment that provides for the following:

1) Exchange difference on long-term foreign currency monetary borrowing incurred for acquisition of depreciable capital asset can be adjusted to the carrying cost of the respective asset and depreciated over the balance life of the asset.

2) Exchange difference on other long-term foreign currency monetary items (not related to acquisition of a depreciable asset) can be accumulated in ‘Foreign Currency Monetary Item Translation Difference Account’ and amortised over the balance life of the long-term asset/liability or till FY11, whichever is earlier.

Findings
Many companies, including Bajaj Hindusthan, Educomp Solutions, GE Shipping, GMR Infra, Hindustan Constructions, IOCL, Jindal Steel, Jubilant Organosys, Sterlite Industries, Tata Motors, Welspun Gujarat, amongst others, have opted to account for foreign exchange fluctuations as per the amended AS 11. The recent amendment allows foreign exchange losses on long-term monetary assets to be charged to the balance sheet and deferred instead of being charged in the year in which they originate.

On an aggregate basis, forex loss of INR 153.1 bn for FY09 has not been charged to the P&L and deferred to be charged in future years.

With a reversal of the trend and now the INR appreciating against USD, companies that had deferred MTM losses by adopting amended AS 11 will book forex gains with a lag.

Early adoption of AS 30 with respect to derivatives
AS 30 allows companies to classify hedges as fair value hedge and non-fair value hedge. The new standard allows the loss/ gain on effective non-fair value hedge (cash flow hedge / hedge of a net investment in a foreign operation) to be accumulated in reserves instead of charging it to the P&L, to be ultimately adjusted in the P&L account for the period in which the transaction is closed or net investment in foreign investment hedged is disposed.


Quarterly Earnings

Findings
Many companies including Ashok Leyland, GE Shipping, Great Offshore, Tata Motors amongst others, have adopted AS 30 w.r.t. derivatives accounting.

On an aggregated basis, MTM loss of INR 9.8 bn for FY09 is charged to the balance sheet instead of being charged in the P&L.

Deviation from accounting standards / guidance notes / GAAP

Findings
■ Reliance Communications has continued its policy of charging forex fluctuation on borrowings related to acquisition of fixed assets to the carrying cost of fixed assets. It has, however, not opted for the amended AS 11.

■ Jindal Saw has not provided for the MTM losses on outstanding derivatives contracts.

Change in accounting policy

Findings
■ IOCL has changed the accounting policy of charging know how/ license fee related to production process as a revenue expense to capitalising the same as an intangible asset.

■ Tata Teleservices has changed the accounting policy for term of amortising the subsidy.

To see full report: ANALYSIS BEYOND CONSENSUS