Ever since the ouster of Cyrus Mistry, there have been charges, counter charges and a million opinions from just about anyone as to what actually transpired. Amidst this din, the issues of impairment provisions and aggressive accounting raised by Mistry in his chitti to the Board and Trustees cannot be ignored.
In 2007, the bid for Corus turned out to be a price slugfest between Tata Steel and the Brazilian company CSN. The Tata Steel team had a particular price in mind beyond which they planned to walk away from the deal. CSN also had the same strategy; but their walk-away price was lower. This resulted in Tata Steel shelling out in excess of ₹53,500 crore(at 2007 rates) for Corus about half of which was funded through debt.
On hindsight, Tata Steel should be regretting that they did not fix their walk-away price lower. From day one, Corus has been an albatross around the neck of Tata Steel with problems in every conceivable area of operations. The recession that commenced in 2009 only piled on the misery for Tata Steel.
Accounting Standards on Impairment state that indicators of impairment can be from internal or external factors. Once the indicator for impairment is identified and impairment is triggered, putting a value to the impairment losses is only a calculation that involves judgement. Provision for Impairment losses has been a consistent feature in the financial statements of Tata Steel.
From 2009 till date, the company has provided for impairment losses of about ₹28,000 crore of which ₹9,720 crore was in 2016. The gross number would be much higher because in one year Tata Steel had a negative impairment due to restructuring benefits and in 2012 the company did not provide for any Impairment Losses. In the letter, Mistry has hinted at potential impairment losses in excess of ₹60,000 crore.
It remains to be seen whether Tata Steel provides for a substantial increase in its provision for impairment losses after the letter; doing so would amount to a tacit admission that past provisions were inadequate while not doing so just because of the letter could be considered inappropriate accounting. Tata Steel may well follow the middle path and gradually increase its provisions for impairment every year from now on.
Development costsAccounting standards mandate expensing research costs and capitalising development costs. The letter alleges aggressive accounting by capitalising a substantial portion of product development costs creating a future liability. It can only be surmised that this translates into increasing the value of assets now by capitalising product development costs which should be routinely expensed. Since the asset is over-valued since inception, economic benefits from the asset do not match the value carried on its books.
Instead of reacting to the issues raised and levying cross-charges, Tata Sons would do well to provide a detailed and factual response to the contentious issues mentioned in the letter. Else, it would lead the media to conclude that there is some truth in the issues raised.
The Report of the Auditors and the Disclosures by Tata Steel in 2017 would make for interesting reading. When such corporate events occur, auditors normally put in additional safety clauses in their audit reports that are already full of disclaimers.
The writer is a chartered accountant