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Sunday, August 21, 2011

Depreciation Reserve Fund-it can happen only at Indian Railways!

Those well versed with even basic accounting, may remember that famous edict that depreciation is not a reserve but a provision, also that it is not a source of funds, but a non cash expense. But,

While commenting on the deplorable finances of the Indian Railways, the CAG remarked in its report(http://saiindia.gov.in/english/home/Our_Products/Audit_Report/Government_Wise/union_audit/recent_reports/union_compliance/2010_2011/Railways/Report_No_33/exe-sum.pdf) that for the period 2009-10, Indian Railways reduces its appropriations to the depreciation reserve fund by Rs 2313 crore, and that CAG was worried about the impact on safety/renewal of capex.

To understand this oddity,one must appreciate its structure. It is a departmental undertaking of the Railway Ministry, and prides itself on giving a fat dividend cheque to the Finance Ministry. Hence, any cash operating surplus(after 'appropriating' depreciation) would largely be paid out as dividend. The reason depreciation is an appropriation is because railways still follows cash system of accounting, where depreciation does not figure. Hence, a seperate entry is passed for that, which in fact understates the operating ratio.

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