Why is the Profit and Loss Account called so? Because companies can report both a profit and a loss at the same time! Jokes apart, this seems to be the case with Air India; the airline claims it is profitable but the CAG insists that ‘profits’ and Air India can never match!

The airline’s financial statements show that it has made a ‘judgemental profit’ — Air India would have reported a loss had the impact of the qualifications in the auditors’ report are accounted for, instead of being disclosed as a difference in judgement.

Qualifications galore

In Air India’s audit report for the year ended March 31, 2015, there are 14 ‘qualifications’ (auditor comments) — seven of them state that the airline has not followed the prescribed accounting standards; five are on non-provision of amounts as mandated by accounting standards; one qualification is on a change in accounting policy on inventory and one is on certain balances not being reconciled.

Their report lists out 15 areas classified as ‘Emphasis of Matter’. These are, technically, not audit qualifications but areas where the airline has not followed certain accounting standards in letter and spirit.

There is no denying the fact that had Air India followed all the accounting standards and made all the necessary provisions to the satisfaction of the auditors, it would have been impossible to reflect a profit.

For the year ended March 31, 2016, the CAG’s key observation was on non-provision of depreciation amounting to ₹306 crore on nine B787 aircraft which were transferred by Air India to current assets under the head of ‘assets held under disposal’.

Ind AS

Following the desi version of the International Financial Reporting Standards (Ind AS) may help us in ascertaining the financial position of the airline. According to Ind AS, entities have to make an explicit and unreserved statement of compliance with all applicable Ind AS standards; doing so ensures that the financial statements are true and fair.

Hence, the seven qualifications in the Air India audit report will not continue once the airline presents its financials under Ind AS. Also, provisions would have to be made as per the best estimate of the management. Ind AS has a separate accounting standard dealing with non-current assets held for sale. If this standard is followed, the stance of Air India on the sale of the B787 would be justified — no depreciation is provided on assets that are held for sale.

Under Ind AS, most assets and liabilities would be fair valued; a fact that could actually help an entity like Air India which has quite a few pieces of land.

The back and forth on the financial position of Air India brings into focus the utility of an audit report where the number of lines in audit qualifications exceed the length of a normal audit report and completely change the financial position of an entity.

These days, with liabilities and punishments, auditors’ cannot be faulted for putting in every transgression into their report. Entities should be asked to inform stakeholders about what would be their financial position had they agreed with the stance of auditors. The regulator can pitch in by making a cosmetic change of name to ‘Profit or Loss Account’ or Income Statement since income can only be positive or negative.

The writer is a chartered accountant

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