Airline companies in India and around the global were on a downtrend for quite some time and it has been projected the losses would continue this fiscal year also.Also Oil prices skyrocketed and touched a maximum of $149 /barrel.So I was little surprised when i observed that Jet Airways has posted profits for the previous quarter.
But the real story is that Jet Airways and some other major companies like Reliance and Airtel have shown profits because of their smart accounting tactics.They have not followed the norms of Accounting Standards 11 which requires firms to add the forex gains & losses on borrowing of fixed assets. Instead the Companies say they have followed Schedule VI of the Companies’ Act on the basis of legal advice.This allows them to adjust their foreign exchange losses against the carrying cost of fixed assets.
Had they followed AS 11 norms Reliance Communications’ net profit of Rs 1,500 crore would have been lower by Rs 1,000 crore, or two thirds; and Bharti Airtel’s net profit of Rs 2,100 crore lower by Rs 250 crore. Jet Airways’ net earnings of Rs 143 crore would have been wiped out and moved into the red with a forex loss under AS 11 of Rs 622 crore.
The Government notification of the Companies (Accounting Standards) Rules 2006, says in a footnote to AS 11: “it may be noted that the accounting treatment of exchange differences contained in this Standard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act 1956.”
Companies should realize that engaging in such "honest mistakes" will attract legal penalties and also tarnish their reputation among their stakeholders.
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