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Saturday, February 28, 2009

Read notes to accounts or auditors' qualifications

Read notes to accounts or auditors' qualifications along with the December 2008 quarter results to the know the real health of companies

Following the December 2008 results, even the March 2009 and June 2009 quarterly results of Indian companies are expected to be discouraging. Though this is largely factored in by the market, what is still to be factored in is the quantum of de-growth in overall earning. A lot of uncertainty surrounds Indian companies' financial performance. At this juncture, it is crucial to read between the lines and carefully analyse the quarterly results of companies.

It is necessary to scrutinise statement of accounts for any change in accounting policies, auditor qualification and comments, treatment of exceptional items of expense and income, and contingent liabilities. For instance, losses arising from foreign exchange exposure due on volatility in exchange rates (rupee compared with the dollar). Ironically, the treatment given by different companies varies. A few companies have taken shelter under the Companies Act, 1956, while a few have applied different accounting standards (AS). Interestingly, a company has completely ignored the impact of foreign exchange exposure, saying the loss is not crystallised and, hence, not accounted for at this stage.

It is important to invest in companies with consistent accounting policies. Assign higher significance to companies that follow conservative accounting principles and believe in showing the real financial picture. Indeed, there are companies which are upfront about booking losses and give a straightforward treatment to such items in the books of accounts without any "ifs" and "buts". For instance, Balkrishna Industries, has booked any foreign exchange gain or loss due to foreign exchange difference between two reporting dates on various foreign currency accounts as per the AS-11 under, ‘The Effects of Changes in Foreign Exchange Rates'. As a matter of prudence, this has been shown after profit from core operational activities to show a true performance of its business operations.

Capital Market reviewed the December 2008 quarter results and attempted to spot instances that required special attention of investors. For this, quarterly results of over 500 companies published in newspapers were analysed and so also the notes to accounts that formed part of the quarterly results. Further, quarterly results filed with the stock exchanges (Bombay Stock Exchange and National Stock Exchange) were also checked. This was necessary as a few companies have published consolidated results as per the provision of Clause 41 of the amended listing agreement. Auditors have qualified quarterly results of some companies under "limited review" and also annual accounts. Thus, an exmination at the annual reports of such companies was necessary to depict a complete picture.

Auditor qualification in certain companies due to change in accounting policies is really significant. These companies could collapse due to weak financials. For some companies, the amount is a fraction of the profit or sales. However, in the present scenario of fragile market sentiments and bear rampage, misadventure of any magnitude could put the company in trouble.

Ashok Leyland:-Ashok Leyland (ALL) (Automobiles-LCVs/HCVs) reported a net profit of Rs 18.8 crore in the quarter ended December 2008, while its peer Tata Motors reported a record loss. Consider the notes to accounts published along with the results of ALL. The company has just managed to keep its head above the water thanks to change in accounting policies."Due to high volatility in financial markets including foreign exchange market, industry association has represented to the Institute of Chartered Accountants of India (ICAI) and the National Advisory Committee on Accounting Standard (NACAS) that the AS be modified on matching principle and, as a matter of prudence, to amortise unrealised exchange difference over the tenor of such monetary assets and liabilities. The issue is under consideration of the concerned authorities. Pending this, the company has adopted this amortisation principle for long-term monetary assets and liabilities from 01 April 2008," reads the notes to accounts. This has resulted in lower charge of Rs 34.7 crore and Rs 145.5 crore, respectively, for the quarter and nine months ended December 2008. This matter has been dealt with in the limited review report of the statutory auditors.Further, ALL adopted the principles of AS-30 Financial Instruments: Recognition and Measurement, with effect from 01 April 2008. Certain forward contracts have been designated as meeting the necessary criteria of "cash-flow hedges". Thus, gain and loss on effective cash-flow hedges are recognised in the ‘Hedge reserve account' till the underlying forecast transaction occurs. This is different from the earlier year method of reckoning all gains and losses on forward contract to the profit and loss (P&L) account. The profit would have been higher by Rs 14.0 crore and lower by Rs 33.5 crore, respectively, in the quarter and nine months ended December 2008 if the earlier practices had been followed of adjusting gain and profit on all forward contracts to the P&L account.The net impact on the profit would have been a loss of Rs 1.9 crore (Rs 1.8 crore plus Rs 14 crore minus Rs 34.7 crore) instead of the profit reported.

HT Media:-HT Media (Entertainment-Content Providers) changed its accounting policy in the period ended December 2008. The company has adjusted foreign exchange fluctuation on borrowing for acquisition of fixed assets against the cost of fixed assets instead of adjusting the same in the P&L account as followed earlier. This treatment complies with schedule VI to the Companies Act, 1956. This policy has resulted in pushing up the profit after tax by Rs 42 lakh in the quarter ended December 2008. The company reported profit after tax of Rs 7.8 crore in the quarter ended December 2008.

KPIT Cummins Infosystems:-KPIT Cummins Infosystems (Computers-Software-Medium/Small) entered into options contracts amounting to US$ 42.6 million for hedging its US dollar/euro revenue and was linked to the euro-US dollar cross-rate movement for the next four years. As per the investor update posted on its website, two of the three derivative contracts were completely knocked out at the beginning of October 2008. The mark to market (MTM) on the third contract was Rs 21.2 crore at the end of the quarter. This has not been taken to the P&L account in the December 2008 quarter. This MTM valuation of the balance portion of the partially knocked-out contract is provided by a bank. The Pune-based company reported a net profit of Rs 14.6 crore in the quarter ended December 2008 — down from Rs 17.1 crore in the corresponding quarter of the last fiscal."There is material uncertainty arising from future events mentioned in the option contract and rate over the period of 3.5 years. The liability under the option contracts is dependent on the euro/US dollar exchange rate. The company has significant exports in euro and, therefore, is not able to estimate the actual liability on these contracts and, therefore, no provision for the liability and loss on account of option contracts have been made in the books," says the company in its notes to accounts.The statutory auditors of KPIT Cummins Infosystems have qualified the quarterly results but have expressed their inability to quantify the loss. The auditors have qualified the annual accounts for the year ended March 2008 on the same issue. It is an exotic option contract with various terms and conditions. For instance, the rate of US dollar-rupee has been fixed for the entire period of the option. Under the option contract, the company is also liable to pay premium if the euro-US dollar cross-rate moves above the knock-in level on the fixing date (various specified dates on which the option contract would mature in part over a period of four-and-a-half years from the date of the balance sheet). Also, the obligation to pay premium in future would be waived if on any day during the tenure of the option contract, the euro-US dollar crossrate goes below a knock out level.If one strictly goes by the conservative accounting and deducts the loss of Rs 21.2 crore, KPIT Cummins Infosystems would dip in the red.

Punjab Chemicals & Crop Protection:-Punjab Chemicals & Crop Protection (Chemicals-Organic-Large) reported a net profit of Rs 2 crore in quarter ended December 2008 compared with a net profit Rs 7.5 crore in the December 2007 quarter. It has not made provision for loss arising out of its foreign currency exposure. According to the notes to account, the company has entered into a three-year derivative contract for sale of foreign currency starting from January 2008 to December 2010 to hedge its foreign currency exposure. Based on the MTM concept, the approximate loss is Rs 11.4 crore. Besides, the statutory auditors have qualified the quarterly results in their limited review report for the quarter ended December 2008. The management is of the view that in view of the significant uncertainties associated with the outstanding derivative contracts, whose ultimate outcome depends on future events, the exchange gain or loss, if any, can be accounted for in the P&L account only when it crystallises.Not only this, the statutory auditors have qualified the annual accounts for the year ended March 2008 and quarterly results for the period ended December 2008 for not make provision for diminution other than temporary in value of long-term investment amounting to Rs 1.8 crore. According to the board, the long-term investment is a strategic investment and, accordingly, no provision is considered necessary.

Ashapura Minechem:-Ashapura Minechem (Mining/Minerals) contracted structured foreign currency products from banks with maturity up to February 2013 to hedge its foreign currency exposures. The basic notional loss on account of hedging foreign currency exposure as converted to the MTM was Rs 247.8 crore end December 2008. The company has not accounted this notional loss in its books of accounts. ‘Since the foreign currency against the contracts is intended to be delivered on and around the specified dates, the said loss is not crystallised and, hence, not accounted for at this stage," says the extract from the notes to accounts. Ashapura Minechem reported a loss of Rs 77.8 crore in the quarter ended December 2008.

Tamil Nadu Newsprint & Papers:-Tamil Nadu Newsprint & Papers (Paper-Large) reported a net profit of Rs 21.2 crore in the quarter ended December 2008. However, the company has not taken into consideration the impact of changes in exchange rate pertaining to unhedged foreign currency assets and liabilities end December 2008. If the MTM of the unhedged position, based on closing exchange rate end December 2008, is taken into account, Tamil Nadu Newsprint & Papers would suffer a loss of Rs 2.2 crore.

South Asian Petrochem:-South Asian Petrochem (Petrochemicals-Polymers-Large) issued zero per cent unsecured foreign currency convertible bonds (FCCBs) aggregating US$ 20 million. It has not made any adjusted pertaining to realignment of the bond value as prescribed in the AS-11 on ‘The Effects of Changes in Foreign Exchange Rates'. The notes to accounts, published along with December 2008 quarter results, read as follows: "The company is of the view that the subject bonds may not ultimately be redeemed as the same may be convertible into equity shares within the assigned date and, hence, the effect of realignment of the bond value has not been considered and also not provided for premium on redemption of the said bonds." As per the terms and conditions of the FCCB offering, South Asian Petrochem has reset its FCCB conversion price from Rs 22 to Rs 17.01. It reported a loss of Rs 15.7 crore in the quarter ended December 2008.

Piramal Healthcare:-Piramal Healthcare (Pharmaceuticals - Indian - Bulk Drugs & Formln Lrg) follows the depreciation accounting policy to amortise brands acquired from third parties over their estimated economic life not exceeding 10 years. For certain brands acquired subsequent to end March 2008, it changed its accounting policy with effect from 01 April 2008 amortise the brands over their estimated economic life not exceeding 15 years. This is based on the management's view that the estimated economic life of these brands is a minimum 15 years.The amortisation for the quarter ended and nine months ended December 2008 would have been higher by Rs 1 crore and Rs 3 crore, respectively, if Piramal Healthcare had not changed its account policy. Subsequently, net profit would have been lower by Rs 96 lakh and Rs 2.7 crore, respectively, in the quarter and nine months. It posted net profit of Rs 38.6 crore in the quarter ended December 2008.

KLG Systel:-Gurgaon-based KLG Systel (Computers - Software-Medium/Small) has continued with its accounting policy of adjusting foreign exchange fluctuation on loans/liabilities for fixed assets as per the requirement of Schedule VI of the Companies Act, 1956, which is not in sync with AS Rules, 2006. The profit after tax would have been lower by Rs 1.5 crore if AS were applied. The statutory auditors have stated this in its limited review report. The company reported a net profit of Rs 8.3 crore in the quarter ended December 31, 2008.

Punj Lloyd:-The auditors of Punj Lloyd, (Construction-Civil/Turnkey-Large) invited attention to deduction made/amount withheld by some customers aggregating to Rs 47.4 crore and also work-in-progress (WIP) inventory of Rs 6.4 crore in their report for the quarter ended December 2008. As per the notes to accounts, the company management is taking appropriates steps to recover these deductions/withheld amounts and believes that these amounts are fairly stated.Further, one of the clients of Punj Lloyd has terminated its long-term contract with the company's wholly owned subsidiary and the company is in the process of recovering the cost overrun through dispute resolution provision specified in the contract. The client was issued advance payment and performance bonds with total value of Rs 217.6 crore (pound 28.5 million). The client has terminated the contract and called the bonds. The subsidiary has commenced legal proceedings against the client, seeking restitution of bonds, which the management feels is wrong. It is confident of recovery of bond amounts and has shown this amount under recoverable from the client. The company's auditors, without qualifying the accounts, made this a matter of emphasis in their report.Besides, Punj Lloyd has entered into an agreement to sell its Internet service provider (ISP) division (including all assets, liabilities, contract and licenses) to Citycom Networks. The completion of this transaction "awaits regulatory approvals". Despite this, the company has booked profit on sale of division. According to Punj Lloyd, the risks and rewards and operational control of the ISP division has been transferred to Citycom. Standalone net profit of Rs 12.6 crore and consolidated net profit of Rs 14.2 crore in the nine months ended December 2008 includes sale of assets, investment and business of the ISP division.Punj Lloyd reported a consolidated loss of Rs 226.6 crore in the quarter ended December 2008 as against a consolidated profit of Rs 91.6 crore in the quarter ended December 2007.

Kanoria Chemicals & Industries:-Kanoria Chemicals & Industries (Chlor-Alkali) reported a loss of Rs 4.4 crore in the quarter ended December 2008. The quantum of loss would have been substantially higher if it had not changed its accounting policy and wrote back interest and finance charges. It decided to utilise the balance in its securities premium account to make provision for premium payable on redemption of FCCBs net of tax in the quarter in accordance with Section 78 of the Companies Act, 1956. Due to this change, the interest and finance charges are lower by Rs 6.2 crore. This includes Rs 4-crore writeback of the earlier quarters. The end result is that the net loss is lower by Rs 4.1 crore in the December 2008 quarter.

Cosmo Films:-This is a typical case. In its notes to accounts, Cosmo Films (Packaging - BOPP Film) says: "The impact of foreign exchange fluctuation on the amounts outstanding in assets and liabilities end December 2008 has not been considered. This will be considered at the year end." Profit before tax would have been lower by Rs 1.3 crore if it had done the needful. The company reported a net profit of Rs 7.1 crore in the December 2008 quarter.

SPEL Semiconductor:-SPEL Semiconductor (Computers - Peripherals/Accessories) has stated in its notes to accounts: "The impact on restatement of external commercial borrowings pursuant to AS-11 will be provided for in the results for the year ending March 2009." Basically, it has not considered the effect in the quarter ended December 2008.

TVS Motor Company:-TVS Motor Company (Automobiles - Motorcycles / Mopeds) has not considered the impact on restatement of external commercial borrowings. It says this would be considered at the time of finalisation of accounts for the year ending March 2009.

Solectron EMS India:-Solectron EMS India (Miscellaneous-Medium/Small) has given reasons for slowdown in its revenue and also talked about its current quarter (Q4 March 2009). "The significant drop in the Q3 December 2008 revenue compared with Q2 September 2008 revenue is attributable to a major customer deciding to change their strategy from outsourcing the products from the company to manufacture them within their own facilities." Further, the notes to accounts state: "Due to the economic slowdown having affected the company's customers, the company expects a drop in Q4 March 2009 revenue compared with Q3 December 2008." Electron EMS India reported a sharp drop in sales to Rs 38.4 crore in the quarter ended December 2008 from Rs 80 crore in the December 2007 quarter.

Bilcare:-Bilcare (Packaging - Lamination / Processors - Large) has changed its accounting policy on fluctuations in foreign exchange rates related to borrowing in FCCBs for acquisition of fixed assets. The impact is adjusted in carrying cost of fixed assets from 1 April 2008 in compliance with Schedule VI of the Companies Act, 1956. However, the company has not given impact of the change in accounting policy on its profitability.

Navin Fluorine International:-Navin Fluorine International's (Chemicals - Organic - Large) auditors have expressed their inability to comment on the possibility of impairment with regard to its organic chemical plant at Dewas in Madhya Pradesh, which has been operating at a considerably reduced level owing to lack of market demand. The carrying value of the asset is Rs 9.1 crore. The company says "it is in the process of evaluating the possibility and the extent to which these assets can be put to effective use in its other projects currently under implementation. Only after completing this exercise of identification of the usable assets will the company be in a position to ascertain the value of their impairment". Navin Fluorine International reported a net profit of Rs 2.7 crore in the quarter ended December 2008.

Vijay Textiles:-Vijay Textiles' (Textiles - Processing) promoters have pledged 29.9% of the total paid-up equity capital with Axis Bank as collateral security for securing credit facilities enjoyed by the company. The promoters hold 45.01% equity stake in the company.

JCT:-JCT (Textiles - Composite/Cotton/Blended/Fabric-Large) a textile company, has continued to adjust the foreign currency exchange difference on amount borrowed for acquisition of fixed assets to the carrying cost of fixed assets. Though this complies with Schedule VI of Companies Act, 1956, it is in variance with AS-11. This has lowered its loss by Rs 3.2 crore in the quarter ended December 2008 (Rs 20.1 crore in the nine months ended December 2008). The company posted a loss of Rs 12 crore in the quarter ended December 2008.

Ciba India:-The statutory auditors of Ciba India (Chemicals-Speciality-Large) have referred to fixed assets on leased premises with carrying value of Rs 7.5 crore in their limited review of the results for the quarter ended December 2008. The lease of the premises expired in August 2008 and it is in negotiation for the extension of the lease. The company has not considered any asset impairment in the books of accounts. Ciba India reported a net profit of Rs 5.8 crore in the December 2008 quarter.

Aurobindo Pharma:-Aurobindo Pharma (Pharmaceuticals - Indian - Bulk Drugs & Formln Lrg) can be termed as out-of-the box example. The auditors have commented on non-provision of premium of Rs 272.2 crore on redemption of outstanding US$ 255.5 million zero coupon FCCBs. Now read the extract from notes to accounts in the quarter ended December 2008, which is very interesting and self-explanatory: "The management is of the opinion that the determination and crystallisation of the liability is dependent on the outcome of uncertain future events or actions, not wholly within the control of the company, and, therefore, the same has been considered as ‘contingent liability' as on 30 September 2008. Further, the management continues to hold the same view as on 31 December 2008." The conversion price of FCCBs — Rs 522.036 for the FCCB issue of US$ 60 million, Rs 1014.06 for the FCCB issue of US$ 150 million (tranche A) and Rs 665 for the FCCB issue of US$ 50 million (tranche B) — is way above the current market price of Rs 146 (2 February 2009).

Chambal Fertilisers & Chemicals:-The auditors of Chambal Fertilisers & Chemicals (Fertilizers-Nitrogenous/Phosphatic) have referred to the treatment of foreign exchange variation. According to the auditors it should be as per AS, while the company has opted for Schedule VI of the Companies Act, 1956. It has adjusted the foreign exchange fluctuation on borrowings towards acquisition of fixed assets to the cost of fixed assets instead of adjusting it to the P&L account. This has resulted in higher profit after tax by Rs 184.7 crore in the nine months ended December 2008 and Rs 53.4 crore in the quarter ended December 2008.

Aro Granite Industries:-Aro Granite Industries (Granite & Marble - Large) has not given effect to foreign exchange fluctuation. It mentions in its notes to account for the quarter ended December 31, 2008 that adjustment as required under AS-11 issued by the ICAI will be made at the end of the financial year.

Himatsingka Seide:-Himatsingka Seide (Textiles-Silk) has not provided for loss arising out of foreign exchange derivative contract with a bank. As per the company, "the determination of the liability is dependent on the occurrence of a future uncertain event and in view of this significant uncertainity no provision has been made in the accounts. The MTM loss indicated by the bank amounted to Rs 20.9 crore end December 2008". The company posted a loss of Rs 20.9 crore in the quarter ended December 2008.

Varun Shipping Company:-With effect from 01 April 2008, Varun Shipping Company (Shipping - Large) adopted the principles of AS-30 for accounting of derivatives, although not mandatory. As per the notes to the quarterly results, "during the current quarter, in respect of financial instruments that qualify for hedge accounting, an amount of Rs 52.3 crore has been accounted for as ‘Hedging reserve', which along with Rs 299.2 crore, amounts to Rs 351.6 crore for the six months ended September 2008. This will be ultimately recognised in the P&L account when the underlying hedged transaction occurs as against the earlier practice of recognising the same in the P&L account on revaluation at the end of each period".It is very much evident that Varun Shipping Company has adopted AS-30 just at the right time. As a result of the adoption, profit after tax stood at Rs 51.1 crore in the quarter ended December 2008 and at Rs 116.7 crore in the nine months ended December 2008 instead of a loss of Rs 1.2 crore in the quarter and a loss of Rs 234.9 crore in the nine months ended December 2008.

Hindustan Dorr Oliver:-The auditor's report of Hindustan Dorr Oliver (Engineering - Turnkey Services) for the year ended March 2008 contains a qualification that they are unable to express an opinion on the recoverability of overdue debts and retention money aggregating to Rs 5.8 crore (Rs 4 crore end December 2008). However, no provision has been made in the books of account. Hindustan Dorr Oliver reported a net profit of Rs 7.4 crore in the quarter ended December 2008.

Ramkrishna Forgings:-Foreign exchange loss on loan taken by Ramkrishna Forgings (Forgings-Medium/Small) for acquisition of fixed assets has been adjusted to carrying cost of fixed assets in compliance with Schedule VI of the Companies Act, 1956, which is not in sync with AS-11. The loss would have been higher by Rs 1.9 crore in the December 2008 quarter if the accounting treatment would have been as per AS-11. Ramkrishna Forgings reported a loss of Rs 2 crore in the December 2008 quarter.

Supreme Petrochem:-Supreme Petrochem (Petrochemicals - Polymers-Large) intends to provide MTM losses on outstanding foreign currency exposures considering the high volatility in foreign exchange market at the end of the accounting year. The foreign currency exposure end December 2008 quarter is valued at transaction rate instead of quarter-end rates. Thus, the company has not provided for foreign exchange loss of Rs 13.5 crore, which has resulted in understatement of loss. Supreme Petrochem reported a loss of Rs 46.6 crore in the quarter ended December 2008.

Asahi India Glass:-Due to the extreme volatility of the foreign exchange rates in the current year, Asahi India Glass (Glass-Sheet/Float) has not restated long-term foreign currency borrowings/liabilities at the closing rates end December 2008 in compliance with AS-11. Consequently, loss is understated by Rs 139.6 crore for the nine-month period. It reported a loss of Rs 43.5 crore in the nine months ended December 2008. Asahi India Glass would be taking care of adjustment related to foreign currency borrowings/liabilities at the close of the financial year: March 2009.

Indo Rama Synthetics (India):-Indo Rama Synthetics (India) (Textiles - Manmade - Polypropylene Filament Yarn) has continued to adjust the foreign exchange fluctuations on amounts borrowed for acquisition of imported fixed assets to the carrying cost of fixed assets in compliance with Schedule VI to the Companies Act, 1956, which is at variance to the treatment prescribed in AS-11. If Indo Rama Synthetics provides treatment as per AS–11, its net loss would have been higher by Rs.7.89 crore in the December 2008 quarter.Further as per the notes to the account, "the company has outstanding derivative instruments taken for hedging transaction undertaken for foreign currency related exposure on which the MTM loss stood at Rs 11.3 crore end December 2008. Pending adoption of AS-30, the company has not provided for the losses on MTM basis as per the announcement of the ICAI". Had the treatment as per the above announcement been followed, the net loss after tax would have increased by Rs 7.4 crore end December 2008 on account of the cumulative effect of the above treatment.

Great Eastern Shipping Company:-With effect from 1 April 2008, Great Eastern Shipping Company (Shipping-Large) adopted the principles enunciated in AS-30 for hedge accounting and recognition and measurement of derivatives. Earlier, the revaluation gain or loss on foreign currency loan liabilities was recognised in the P&L account, whereas the gain or loss on currency, interest rate and bunker derivatives was recognised on settlement. Consequent to the designation of foreign currency loan liabilities as hedging instruments, the profit is higher by Rs 62.6 crore and Rs 252.1 crore, respectively, in the quarter and nine months ended December 2008. The shipping major has reported a net profit of Rs 241 crore in the quarter ended December 31, 2008.

JBF Industries :-JBF Industries (Textiles - Manmade - PFY / PSF - From Chips) reported a higher profit after tax of Rs 14.7 crore in the quarter ended December 2008 on change in accounting policy. From 1 April 2008, the company decided to capitalise the foreign currency exchange difference on amount borrowed for acquisition of fixed assets to the carrying cost of fixed assets as stipulated in the Schedule VI to the Companies Act, 1956. The auditors have qualified the account on this count in their limited review report.Further,JBF Industries has entered into derivative contract to hedge exposure to foreign exchange and interest rate. The MTM loss stood at Rs 54.5 crore in the nine months ended December 2008, which has not been provided in the books. As per the company, "the loss is notional in nature and may be payable only if loss conditions are triggered after June 2010". This entitles a hit of Rs 36 lakh on profit after tax. The auditors have qualified the books of account for non-provision for the year ended March 2008 and quarters ended June 2008 and September 2008.

Tata Investment Corporation:-The net asset value of Tata Investment Corporation's (Finance-Investment/Others) equity share, as computed by the management, stood at Rs 550 per share end December 2008 compared with Rs 805 per share end March 2008 on the basis of the market value for quoted investments. The holding company reported net profit of Rs 34.9 crore (Rs 44.7 crore in the December 2007 quarter) and net sales of Rs 48.3 crore (Rs 52.3 crore) in the quarter ended December 2008.

Harrisons Malayalam:-The auditors of Harrisons Malayalam (Tea-Indian-Large) have stated their inability to express an opinion on the carrying amount of investments in unquoted shares of a wholly owned subsidiary company, Harrisons Malayalam Financial Services, whose networth is eroded. Harrisons Malayalam has extended advances to this subsidiary. Now, as per the company, "the unquoted investments in the wholly owned subsidiary are strategic and long-term in nature and there is no permanent diminution in the value of such investments. Further, the advances given to the said subsidiary are for strategic investments to be made by the said subsidiary. Accordingly, no provision is considered necessary in respect of such investments and advances".As per Harrisons Malayalam's annual report, equity investment in Harrisons Malayalam Financial Services stood at Rs 10 crore and loan and advances at Rs 211.5 crore end March 2008.

Looking ahead:-Looking at auditors' comments, changes in accounting policies, and management's reluctance to write off certain assets due to value erosion, the December 2008 quarter numbers do not instill much confidence. Many companies have specified quantum of losses pertaining to foreign exchange exposure, but have not adjusted this in the P&L account. These companies are planning to do this at the end of the current fiscal year. Many have just made a passing reference to this without quantifying the amount.For retail investors, it could be better to wait and watch for results for the financial year ending March 2009, wherever transparency in books of accounts is lacking. A tussle between the company management and auditors is expected while finalising the books for the year end. On the one hand, the company management would try to justify the accounting treatments that would keep the book of accounts in good shape. On the other hand, auditors are already under pressure because of the Satyam Computer Services fiasco. This clash could get reflected in higher number of auditor qualifications. This could also lead to more transparency in annual reports. Be prepared for negative surprises. To avoid shocking disclosures in future, read between the lines.

source:Capitalmarkt

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