Merger schemes help RInfra, RPower over-ride accounting standards

BSR & Co and Pathak HD & Associates were the auditors to both RInfra and RPower, until 9th August, when BSR resigned as auditor for both the companies

Two Reliance group companies — Reliance Infrastructure (RInfra) and Reliance Power (RPower) — do not appear to be in sync with their auditors on how they treat their capital and general reserves. This, in turn, has adversely affected the profit and loss account for the two companies in some cases.

In the past four quarters, auditors to the firms have drawn attention to seven such withdrawals and deposits made to these reserves. Of these, three were adjustments or withdrawals amounting to Rs 7,346 crore.  

“We have withdrawn from the general reserve/capital reserve in accordance with the accounting treatment prescribed by various court approved scheme of arrangements. The auditors have not found them significant to be qualified in their reports but have just pointed out this fact which is required as per auditing standards. As a policy, we take an independent expert’s opinion on all such matters. Following the highest standards of disclosure, we have also been transparently disclosing these treatments in our notes to accounts,” said a Reliance Group spokesperson said.

In six of seven instances, the auditor said the deposits or withdrawals made override the accounting standards. At the centre of these, however, are schemes of merger or amalgamation, which permits the firms to decide on these withdrawals.  

For the FY19 results, auditors to RInfra drew attention to a withdrawal of Rs 6,616.02 crore from the general reserve and credited to the profit and loss (P&L) account against an exceptional loss. The auditors noted that the withdrawal was pursuant to a scheme of amalgamation, which overrides the relevant provisions of the Indian accounting standards.

“Most schemes of merger are approved by a court or tribunal and provide for the accounting treatment to be followed when effected. Where such treatments are at variance with the Accounting Standards, it is obligatory for the auditors to bring this out in the audit opinion so that investors could assess their impacts and adjust for comparability,” said a senior audit expert, who did not wish to be identified.

In FY19 results, RPower made a similar withdrawal of Rs 101.70 crore from its general reserve against an impairment taken over receivables for the company.

The audit expert quoted earlier added, “Normally, these largely impact how the P&L will appear and consequently the earnings per share. Where such treatments provide the use of reserves (at variance with the accounting standards) to offset the losses or impairments, these are unlikely to impact the net worth of the company.”

In addition to the above instances, RInfra also made three deposits to its general reserve owing to foreign exchange gain in the quarters ended June 2019, March 2019, and September 2018. The company also made a forex loss withdrawal to the reserve in the December 2018 ended quarter. Its auditor drew attention to all these instances as made under schemes which override accounting standards.

“It is not in accordance with accounting standards, but the high court order overrides the accounting standards. This, in turn, helps them manage their headline numbers,” said an official from an unrelated audit company who did not wish to be identified. He added, these withdrawal and deposits are not outside the legal ambit.

In another instance, RInfra reported a profit before tax of Rs 313.92 crore for the June quarter. This, according to the company’s auditors, would have been lower by Rs 629.35 crore had it not been for an offset made against the company’s capital reserve.

RInfra’s auditors, in their note, said, “The above treatment of loss on invocation of shares is not in accordance with Ind AS 28 ‘Investments in Associates and Joint Ventures’ and Ind AS 1’ presentation of financial statements.” RInfra had adjusted its Rs 629.35 crore loss arising out of invocation of shares of an associate company.

The audit expert quoted earlier is hopeful these anomalies will be a thing of the past soon. “These will now reduce as draft schemes going up for tribunal approval require an auditors certificate that the accounting treatment proposed is in line with the accounting standards,” he said.

BSR & Co and Pathak HD & Associates were the auditors to RInfra and RPower till August 9, when BSR resigned for both the companies. Pathak HD is continuing as the sole auditor for the two companies.