Corporate Fin Mgt NDLM.PDF

investor who takes fundamental analysis seriously will find that the time that he spends
with these notes is amply rewarded.

We will illustrate the impact of accounting policies with two examples drawn from the
published annual reports of Shatabdi Industries.

1. On reading these annual reports, we found that the Capital Reserves of
   Rs.4248 lakhs in Table 1 includes a revaluation reserve of Rs.4221 lakhs.
   Shatabdi had like many other companies revalued its fixed assets to bring
   them into closer correspondence with market values. An amount equal to
   the resulting increase in the value of the fixed assets was credited to a
   capital reserve as this notional gain belongs to the shareholders but is not
   available for declaration of dividends.


2. A perusal of the notes revealed that the company had been consistently
   charging depreciation on the Straight Line Method (SLM). In this
   method, the cost of any asset is charged off as depreciation in equal
   annual installments over the life of the asset. The alternative Written
   Down Value (WDV) method charges off higher amounts in earlier years
   and lower amounts in later years: the depreciation in each year is
   proportional to the depreciated value of the asset. For companies which
   are growing rapidly, the SLM depreciation can be below the WDV
   depreciation year after year. Since, the WDV basis is followed for
   Income Tax purposes; it is clear that the reported profits would then be
   higher than the taxable profits. Income tax as a percentage of reported
   profits would, therefore, be quite low. It will be seen from Table 2 that
   the provision for tax is less than 30% of reported PBT.

In order to see the impact of these two policies, we have eliminated the

impact of revaluation and reworked the depreciation on WDV method.

The recast summarized Balance Sheet of Shatabdi Industries as on

31.03.1991 is shown in Table 4.

TABLE 4 Summarized Balance Sheet of Shatabdi Industries Ltd.,

Impact of Accounting Policy Changes.

As on 31.03.1991

Rs. in lakhs

As Reported

As Recast

Current Assets 28437 28437

Fixed Assets (Net) 29135 21177

Other Assets 27 27

Total Assets 57598 49640

Current Liabilities 13808 13808