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Sunday, May 15, 2011

Reliance Industries-back to cooking subsidiary books?

Reliance Industries(both brothers) is known for many things, but transparent financial reporting is not one of them. Financial journalists(Hamish Mc Donald, S Gurmoorthy and a succession of others over the years) have revealed many of the accounting, legal and tax tactics used by Reliance, and indeed it is an open secret that many tax plugging provisions(like Minimum Alternate Tax) were brought in to counter the clever structuring by RIL. Though being India's 2nd largest corporate house has rubbed off positively, there is a long way to go. And nothing illustrates the need for continued monitoring than the example below.  Maybe other companies do the same/are worse but as India's premier corporate house, Reliance has a much bigger responsibility to uphold like Caesar's wife!!

Reliance Haryana SEZ has been incorporated to develop and operate Special Economic Zones (SEZs) in the State of Haryana. The project is at start up stage of development. In the 2009-10 Annual Report(http://www.ril.com/rportal1/DownloadLibUploads /8%20Reliance%20Haryana%20SEZ%20Limited.pdf), I noticed this unusual note(Note 8 Schedule O).
During the year the Company has taken steps to consolidate the purchased land, constructed boundary wall around the notified SEZ land, undertaken land development activities, coordinated various government approvals etc. The developed land will be provided to the end users for various purposes, such as industrial activity, residential, commercial etc. Presently the intention of the Company is to provide substantial part of the land on long term lease with upfront lease premium which would qualify to be finance lease as per the requirement of Accounting Standard 19, ‘Accounting of Leases’. Accordingly the Company has been advised that it is appropriate to presently classify the entire land as inventory and also interest and finance charges of Rs.353 37 09 633 incurred during the year have been considered as part of inventory(emphasis added).

I feel this accounting treatment needs some analytical adjustment because given the uncertainty attached to the Haryana SEZ(and consequent likelihood of changes in plans), adding 3530 million Rs in inventory instead of expensing in P&L, does need some extra explanation.

I agree that without access to the underlying records, it is unfair to accuse the company of cooking the books. More so when auditors(whose experience probably exceeds my age!) have signed off on this treatment. But then, this intention driven accounting defies logic, specially of this order. And given that SR Batliboi(Indian affiliate of Big 4 firm E&Y) resigned from the audit in 2009-10,  an heightened standard of scrutiny should be applied. 

To be fair, they took a Rs 121Cr charge by following the prescribed(in an ICAI technical guide) non mandatory accounting treatment in an unrelated issue. But this does not right a mistake elsewhere.

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