RCom a/cs on Rs1,126 crore expenses unusual

The footnotes accompanying Reliance Communications’ (RCom) annual consolidated results announced on Monday, where the company said net profit stood at Rs1,345 crore for the last fiscal, have many a story to tell.

In all, about Rs1,126 crore of expenditure entries, apart from a Rs2,500 crore bullet credit of income, stand out because of the way they have been treated in the company’s books.

Were these to be done in the traditional way, the bottomline would have looked very different indeed, say experts.

RCom clearly has used smart accounting, a combination of court-sanctioned merger/demerger schemes and taken assistance of legal opinion to arrive at the numbers. Within the phalanx of footnotes, there are three specific instances that would strike intriguing to any accountant worth his salt:

1. Rs890 crore prepaid expenses adjusted against the Securities Premium Account:

This has been effected through the amalgamation of Reliance Global IDC with parent Reliance Infratel. Now, the Companies Act requires any such scheme to be sanctioned by a high court. But here’s the interesting part: Any such accounting treatment sanctioned by av high court overrides the accounting standards issued by Institute of Chartered Accountants of India. This has been exploited by almost all big corporate groups in the past. For listed companies, the Securities and Exchange Board of India shut this loophole recently by ordering that an auditor’s certificate should be produced every time such accounting treatment is done. Unlisted companies, however, can continue to use the loophole, and Reliance Infratel and Reliance Global IDC are both unlisted.

Now what does this accounting treatment mean for an investor? It means the Rs890 crore of expenses, which should have otherwise been reflected in RCom’s profit & loss account, will now be hidden in its balance sheet. What is also unclear is the nature of these prepaid expenses, how were they incurred.

Interestingly, RCom has resorted to at least three such amalgamations between different unlisted subsidiaries, according to its notes to accounts.

2. Adjusting Rs159 crore bad debts and Rs77 crore fuel costs against General Reserve

This is a little hazy since the notes do not clearly reveal whether it has been done through a court scheme or legal opinion or both. The notes to accounts only state the following:

“Pursuant to the scheme for the transfer of passive infrastructure … by the company to Reliance Infratel Ltd, a subsidiary, Reliance Infratel, based on a legal opinion, considers the general reserve created pursuant to the scheme to be a free reserve and available for any purpose and consequently, has been withdrawn and credited to the profit & loss account, an amount of Rs15,941 lakhs in respect of bad debts and Rs7,735 lakhs in respect of fuel costs, incurred during the year in preference to Indian Generally Accepted Accounting Principles.”

What this does is a total Es236 crore of expenses, which should have been in the profit & loss account, were spent from in the reserves of the company.

3. Rs2500 crore income credited in one shot, instead of amortisation over the tenure of a contract:

RCom says in its notes it relied on ‘legal opinion’ to recognise almost Rs2,500 crore of income in the last fiscal. The income is from “exclusive and indefeasible right of use” granted for network capacity to customers.

Had the company followed a conservative accounting policy, it would have spread this income equally over the period of contract, which is the accounting policy followed by rival Bharti Airtel. Bharti Airtel has spread a similar income over a period of 18 years.

Surprisingly, both companies claim they are following the accounting standards laid down by the Institute of Chartered Accountants of India.

What is also unclear is the view the RCom auditor KPMG has on such accounting practices, since its audit report is not yet in the public domain.

But according to sources familiar with the development, most of these accounting treatments have been done in the books of subsidiaries, which have not been audited by KPMG.

Despite repeated attempts over the last two days, RCom refused to respond to queries on the accounting treatment.

Chennai-based investment analyst R Balakrishnan said such accounting liberties “are an insult to the shareholder and also an attempt to portray good health, when the truth is far from it. It also raises the question as to whether RCom’s auditors will go along with this. It is also surprising that we Indians like to involve the legal profession in the matters of book-keeping.”