Financial Daily from THE HINDU group of publications
Friday, Sep 09, 2005
Financial Daily from THE HINDU group of publications Friday, Sep 09, 2005 |
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Corporate
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Announcements Depreciation reduced, but GAIL's pipelines uninsured D. Murali
Chennai , Sept. 8 INVESTORS of GAIL (India) Ltd have reason to cheer, because the company's profit is set to jump. And, the trigger is a simple shift downwards in the depreciation rate on GAIL's gas and oil pipelines. According to the company's press release, the Department of Company Affairs (DCA) has accorded approval for the change - from the present depreciation rate of 10.34 per cent per annum to 3.17 per cent per annum. The company has been computing depreciation for the purpose of tariff calculations at the lower rate of 3.17 per cent, which is based on the useful technical life of 30 years. Thus, a higher rate of 10.34 per cent for accounting purposes had all along presupposed a lower life for the pipelines, and consequently resulted in the assets being shown in the books at a lower value than their real worth. The parity that is now brought about, though on a prospective basis (from April 1, 2005), will reduce the depreciation charge and mean a larger profit available for appropriations such as dividend payout. The press release credits the interim report of the Tariff Commission for having highlighted the dichotomy in depreciation rates. The current move aligns with `international practices in developed gas economies' with regard to life of pipelines to be over three decades, says the company. GAIL also claims that the reduction in depreciation rate has been endorsed by Engineers India Ltd and the Institute of the Chartered Accountants of India. GAIL states that it has presented before the Tariff Commission a new methodology based on `cost of service', for pipeline tariff calculation. This reflects the right cost, enables periodic review and also removes the disparity between asset recovery as per books vis-à-vis that of tariff, argues the company. "It would also allow easy, structured and transparent calculation of an integrated tariff required for the inter-State gas grid, which would eventually come up in the country over time," reasons GAIL about its suggestion, which is understood to have been agreed to in-principle. Of interest should be the audited accounts of GAIL for the year ended March 31, 2004, as available on www.gailonline.com. It shows Rs 12,489.07 crore as `gross block' and Rs 7,261.57 crore as `net block' against `plant and machinery', after a depreciation of Rs 5,227.50 crore, which presumably includes the amortisation of pipelines too. Were you to chop this chunky number to a third, for simple back-of-the-envelope calculation, it should release Rs 3,000 crore back into profit, perhaps in future accounting. Yet, a disturbing fact is about insurance, in fact, the lack of it. For, though GAIL has a vast network of pipelines running to several thousand kilometres, it does not maintain insurance to cover the replacement of pipelines. In the latest annual report, GAIL justifies the lacuna thus: "The cost of replacement of a segment in the event of loss would be less than the cost of applicable insurance premiums on entire pipeline." A point about pipelines that came up for comment from the Comptroller & Auditor General was that GAIL had capitalised under the head `land' the cost of `Right-of-Use' (RoU) of land for laying pipelines, and the amount was Rs 17.42 crore. This should have been rightly classified as `intangible assets' in terms of Accounting Standard 26, notes the CAG. In response, the company has stated that RoU is shown separately in `Fixed Assets Schedule' and no depreciation has been charged as per the opinion of the ICAI's Expert Advisory Committee. "However, the matter will be reviewed in the current financial year for appropriate classification and disclosure," adds GAIL. One wished the company reviewed its policy about pipeline insurance too.
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