a) Case 9.

Q1) What do financial statement indicate? Is the company’s management correct in saying that they
are not having sufficient money to pay bonus? Are the elected union leaders just creating some
scenario to ensure enough mileage in the coming elections?

Part 1

- Profits saw a dip in X5 and increased again in X6 maybe owing to the cyclicity of the
business.
- The deferred taxes have not been increasing indicating that the company is paying their
taxes on time
- The inventory has been piling up indicating that the company is unable to sell that it is
producing,
- The long term loan has been paid off in X5 hinting that some portion of the expenses has
gone in this direction and that the company has not borrowed any more money.
- The Gross block assets have been increasing throughout the period meaning that the
company is investing in new equipment or the method of calculating depreciation is over
valuing assets.
Part 2
- It is evident that the company is not in a good financial position (decreasing profits and piling
up of inventory)
- They are investing in Fixed Assets to probably meet some future demand (as forecasted)
- Also the company invested in other companies which could have been used to pay the
bonus

Part 3

- The company has paid dividends despite the poor performance which could be a reason for
unrest among the labourers. So they could have cut down on the dividend amount to pay a
bonus.
- The VRS compensation paid to employees could also be a reason for unhappiness among the
workers.

Q2) Imagine yourself to be in place of the labour commissioner- what would be your analysis and
hence, the points in favour of the management and the union leaders?

- As the labour commissioner the management should not invest heavily in other companies
and rather focus on the workers’ bonus. If the workers’ go on strike the losses faced would
be extreme.
- On the other the management maybe sees potential in the businesses in which it has
invested and could yield better returns for the company in the future. This could ensure an
increase in profits despite the cyclic nature of the business.

Case 9.4

Q1) Mention the relevant accounts that have influenced in the presentation of the above profit and
loss account of Hatsun Agro.
 1. Due to change in the method of depreciation, the excess depreciation that was determined
has been written back for the current year in the Profit and Loss statement that is equal to
Rs. 1,105.30 Lacs.
2. Also, since the total value of fixed assets has increased, therefore, total depreciation
expense has also increased from the previous year.
3. As per the given table for fixed assets, there is an addition in the value of the fixed assets
(for the current year) because of the amalgamation. Consequently, the value of Plant and
Machinery has risen from Rs. 3,039.49 Lacs to Rs. 4,841.24 Lacs. We can, thus, infer that
Hatsun Agro has started producing a new variety of goods and this is reflected in the Profit
& Loss Statement as the expenses for the cost of traded goods have come down from Rs.
2,631.78 Lacs to Rs. 354.18 Lacs (86.5% drop).
4. The expense incurred due to Employee costs has also increased from Rs. 768.61 Lacs to Rs.
950.60 Lacs. This increase may be attributed to the amalgamation.

Q2) Analyse the impact of the change in the depreciation policy of Hatsun Agro. Is it correct for the
company to change its depreciation policy? Comment.

Ans. The change in the depreciation method from written down to straight line method has led to an
increase in the net income of the company by an amount of Rs. 1,105.30 Lacs.

It is correct for a company to change its depreciation policy because a company may change its
method of depreciation if – (a) It is required by law/legislation or (b) for a better presentation of its
financial statements.

b)

(a)

No, the company given to us, IL&FS Transportation and Networks Limited is not following Ind-AS. It
follows the ‘Generally Accepted Accounting Principles (GAAP)’ as mentioned in the Companies Act
2013. According to the new rules slated down by the Ministry of Corporate Affairs (MCA) in 2015,
companies had to voluntarily adopt Ind-AS for year 2015-16 and mandatorily from there onwards.
ITNL did not adopt Ind-AS in the current financial year.

The directors’ address to the shareholders as well as the auditors’ reports suggest that the company
follows the generally accepted accounting principles (GAAP) of the section 133 of the Companies
Act, 2013, which states that the accounting principles are to be followed by all the companies in
presenting their financial statements and other numbers. This is validated after going through the
financial statements. The possible rationale for following the GAAP and not Ind-AS for this year may
be more time required by the company to comply with the new practices. The complications
involved with the business might also have forced the company to follow the same. However, from
financial year 2016-17, the company will have to start following the Ind-AS.

(b)

Investment assets include physical investments like buildings, plants etc. as well as non-physical
investments like mutual funds, stocks, bonds etc. For physical investments, usually Ind-AS 40 is
followed and for non-physical investments, usually Ind-AS 13 is followed (both not explicitly
mentioned in the annual report). In 2015-16, the company made investments worth Rs. 5134 crores.
The investments are capitalized at actual cost including costs incidental to acquisition. Dividend
received attributable to the period prior to acquisition of investment is reduced from the cost of
investment in the year of receipt. Cost of investment property acquired in exchange for an asset is
determined by reference to the fair value of the asset given up. Few of the properties that the
company might have bought may have been paid by issuing of shares, debentures etc., which is
done at the fair value.

The long-term investments are individually valued at cost, less provision for diminution that is other
than temporary. This means that historical cost basis of accounting treatment method is followed in
this case. Current investments are valued at the lower of cost and fair value. By the principle of
conservatism, the current investments such as short-term bonds, stocks etc. are valued at the lower
of the historical cost price or the fair value price of asset.

The investment assets for the company also follow the General Accounting Principles as mentioned
in the Companies Act, 2013.