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Airtel's Auditor Notes: What To Make Of It?

From Airtel’s auditor’s report:

Note 7 to these financial results, regarding the revaluation of investments in Bharti Infratel Limited (‘ BIL’) at fair value, recognition of the difference between its book value and fair value as Reserve for Business Restructuring in the books of the Company and utilization of this Reserve for write off of losses on transfer of Telecom Infrastructure Undertaking, where the Company has followed such treatment prescribed in the Scheme of Arrangement as sanctioned by Hon’ble High Court of Delhi vide order dated November 26,2007, effective from January 1, 2008, in preference to relevant Indian Generally Accepted Accounting Principles, which, in the absence of such Scheme would not permit this fair valuation or utilization of Reserves for
Business Restructuring.

I honestly do not know what this means. Airtel, when it put its tower assets into BIL – a different company – should have taken the assets off the books. It decided to “revalue” the assets at the time of transfer, and presumably this value was higher than book value (which is cost minus depreciation). The difference was a positive number, which was used to offset losses on the transfer.

I don’t know what losses can happen when they demerge a unit into a subsediary company. Unless they decided that they can transition some loss into the subsediary and declare a higher profit in the main company. Is that what’s happening? Need more clarity.

If a demerger to an unlisted subsediary is a way to increase profits in the core company, a lot of demergers are going to happen. Wait. They are already happening, in a number of companies.

And there is more in the auditor’s report.

Note 11 to these financial results, where based on a legal opinion, the Company has continued with its accounting policy to adjust foreign exchange fluctuations related to purchase of fixed assets to the cost of fixed assets as per the requirement of Schedule VI of the Companies Act, 1956, which is at variance to the requirements of Companies (Accounting Standard) Rules 2006 dated December 7,2006.

Again, I think the implication of this is negative. (If it had been positive, the auditors would have said that should the real accounting standard been followed, the net profit would be higher by XX cr.) This means that some legal loophole exists that allows Bharti to have a lower forex loss from dollar appreciation by doing some accounting magic.

Note that there seems to be no evidence of any wrongdoign here. They are likely to be using the right legal and accounting methods to maintain fantastic topline and bottomline growth.

But I am wary of such reports in seemingly bad times – and if we start seeing more auditor warnings, chances are that growth has to be “created” by moving numbers around. I expect a lot of excellent bank results going forward – we’ve already seen excellent numbers from Axis Bank, Yes bank and HDFC Bank, and are likely to see phenomenal numbers from ICICI too. Because we will never understand the accounting, and we have to trust the management.

My feeling is that this quarter and the next will see all sorts of funny-money accounting, and then we will not be able to deny growth slowdown any longer. Already we have seen EPS growth of 13% on the Nifty, and in a few days we’ll know if the last quarter was any better. (All results of Nifty stocks are not out). Fun times.