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Suckered: Globus Spirits Converts Loss to Profit by Creative Accounting

A tweet by @_devesh_ brought this genius tidbit yesterday, from the Q4 2015 results of Globus Spirits :

image  It says:

As at March 31, 2015, Fixed Assets include intangible assets aggregating to Rs. 2164.95 lacks (March 31, 2014 – Rs. 2885 lacs) under the head “Knowhow and New Brand Development” representing intangibles internally generated by the Company through expenditure on advertisement and promotional expenses. Such recognition of expenses as an intangible assets is not in accordance with Accounting Standard (AS 26) “Intangible Assets”. Had the Company complied with requirements of AS-26, Fixed Assets as at March 31, 2015 would have been lower by Rs. 2,164.95 Lacs (March 31, 2014 – Rs. 2,886.60 lacs) , the Depreciation and amortisation expenses would have been lower by Rs. 721.65 Lacs, Net Profit for the year would have resulted into Net Loss after taxes of Rs. 742.45 lacs in case of consolidated financial results and Rs. 709 lacs in case of standalone financial results and the Reserves and Surplus would have been lower by Rs. 1,415.70 Lacs in case of consolidated and standalone results.

The emphasis is mine.

The company spent money on advertising and promotions. It decided, going against any accounting standard, that such an expense was creating an “asset”, which is “intangible”. The benefit? Instead of saying they spent the money today, they can spread the expense over many quarters through depreciation or amortisation. This results in a lower expenditure number today.

But does it really creating an asset? Excuse me while I sputter and choke.

You could argue this all you like, but there is no asset in people’s memories of your brand name. If you don’t really remember Hannibal Legendary Rum, or White Lace Gin, or for that matter, an alcoholic drink called Narangi, you probably will agree that this advertising and promotional expense isn’t exactly asset-worthy. (In comparison, I would say Kingfisher, owned by a different company, has a way bigger asset in their liquor brand recall). Btw, those names are actually brand names of the company.

The accountants disagree, so they put this note up. Thank goodness.

Essentially, this means that the profit that Globus showed, of Rs. 6.73 crores consolidated, is just wool over our eyes. They would have had a net loss of Rs. 7.42 crores if they used normal-human-being-accounting, in which when you spend something on marketing, it’s an expense and that’s that.

(Note: Eminent companies like AOL and in the Indian landscape, famous e-com startups have tried to use stunts like this to dress up their results. Investors, largely, are smarter, but of course many don’t care – and get suckered).

Note: 1 crore = Rs. 100 lakh. 1 Lakh = Rs. 100,000. I know non-Indian people might not understand, but that’s the terminology we use. It’s a little bit like the American fascination of measuring stuff in ounces and pounds, and that’s not going away either.

  • sandeep gupta says:

    Hello Sir
    Seems strange….How can reduction in depreciation/amortization result in changing net profit to net loss. Reducing depreciation would only increase profits, i believe.
    Pls advise.
    Sandeep

  • Santanu De says:

    Love this: “It’s (lakh and crore) a little bit like the American fascination of measuring stuff in ounces and pounds, and that’s not going away either.”