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Back to Newsletter Vol 2, Issue 02, May 2020
Finance
Arun Kumar (Arun) started a business consultancy firm WinTec Business Solutions Private Limited (WinTec). Three months after starting the venture, he asked his office clerk to prepare a financial statement to know more about the financial performance of the company. The clerk presented a financial statement showing a loss for the three-month period of the business. Arun sent the financial details to an audit firm for validation. The accountant at the audit firm prepared revised financial statements showing a profit. Arun then asked the clerk in his office to identify the reason for the difference in the profit margins of the company. The present case study provides scope to discuss the accounting principles of the business entity concept, the duality principle, and the importance of presenting a true view of the financial position of a company. It can also be used to discuss the application of double entry system of accounting.

The Accountant’s Dilemma at ‘WinTec’
AnandVihar Food Processing Limited (AVFP) is in the business of exporting processed poultry meat to Oman, the Maldives, and Japan. After discussions with the Marketing department on the company’s progress in terms of achievement of export targets during the third quarter of the financial year 2019-20, the top management wanted to revise the export targets for the last quarter of the fiscal year. Based on the instructions of the top management, the Marketing department revised its requirement to achieve the set targets and sent communications to each department associated with it. Each department in turn sent its requirement for the financial approvals to the accounts department. The present case study provides the scope for a discussion on the process of financial decision making and the role of the accounting process in providing the requisite financial information for each department.

Revising Budget Targets – Role of Accounting
At the end of the financial year ending on March 31, 2012, Ranganath wanted to present the financial statements of the auto ancillary manufacturing company he had started in 2011 to the banks which had provided him with financial resources. He gave them information with respect to the amount of revenues generated and expenses incurred. The information showed that he had fallen short of the expected revenues and that expenses were higher than budgeted. The main reason for higher expenses was the quality manpower that Ranganath had nurtured during the year by investing on their training and the amount he had invested in R&D. With the bankers calling for a meeting before releasing additional funds, Ranganath needed to convince them about the future prospects of his business. The case study can be helpful in discussing the nature of business transactions and application of the money measurement concept. The case can also be used to differentiate between qualitative and quantitative information and the kind of information that financial statements can communicate to stakeholders.

Money Measurement – The Challenge of Convincing the Stakeholders
Alekhya, a young entrepreneur who had successfully run a cotton bags manufacturing unit for five years, decided to expand the business by making an additional investment in the plant and machinery of the company. She approached the bank which had given her a loan to start the business for an additional loan and submitted the necessary documents. However, the bank rejected the loan request stating that the valuation of the plant and machinery looked inconsistent. The present case study provides scope for a discussion on the concept of consistency in the accounting process and how it facilitates the decision-making process by ensuring the reliability of accounting information.

Valuing of Fixed Assets – The Consistency Concept
Ramesh Kumar (Ramesh), accountant at Anirudh Furniture Spare Parts Limited (AFSPL), went on leave for 2 months (April and May) for personal reasons. Before going on leave, he assigned the task of revenue recognition for the two months to Avinash Kumar, his assistant. After returning, Ramesh found that the revenue recognition statement submitted by Avinash had not followed the actual guidelines that Ramesh followed. Hence, he started to reconcile the revenue figures by validating the record books and cross verifying with buyers. The present case study is helpful in discussing the concept of revenue recognition and the guidelines specified under Accounting Standard-9 - Revenue Recognition from the sale of goods.

 Revenue Recognition – What Went Wrong?
The risk management committee at India-based multinational information technology service and consulting company, Tata Consultancy Services – TCS Limited (TCS) – is responsible for framing the financial risk management policy of the company. Liquidity risk management forms a part of the overall financial risk management. In managing liquidity, the risk management committee, in addition to focusing on managing various current assets and current liabilities, also takes into consideration the cash flows generated from operations. The case study provides the scope to analyze the composition of current assets and current liabilities of TCS for the financial years 2018-19 and 2017-18. It also helps in understanding the liquidity risk management at TCS using liquidity ratios.

 Tata Consultancy Services: Managing Liquidity Risk
The case “SEBI and its Role in Prohibiting Insider Trading” describes the role played by the Securities and Exchange Board of India (SEBI) in regulating the securities market to prohibit insider trading activities. The case starts out with a brief history of insider trading and then explains the need for a regulatory body in the Indian Capital market. It then describes the various SEBI Acts starting with the SEBI Prohibition of Insider Trading Act 1992, and the subsequent amendments in 2002, 2015, and 2018. The case also covers the process of investigation under the SEBI Prohibition of Insider Trading, 1992. Besides, it highlights the challenges faced by SEBI in prohibiting insider trading. It also shows that the cases of insider trading have been increasing and concludes by stating that more support from the Government of India (GoI) will help SEBI in controlling insider trading more effectively.

 SEBI and its Role in Prohibiting Insider Trading
Samsung BioLogics, South-Korea based biopharmaceutical company, was established in 2011, as a future growth engine of Korean conglomerate Samsung Group. The company, one of the largest contract manufacturers in the country, operated through three plants located in South Korea. The case is about the accounting of Bioepis, a joint venture between BioLogics and US-based biotechnology company Biogen that was started in 2012 as an 85:15 joint venture. Biogen was not interested in co-managing the company and stopped investing in it after the first year. Bioepis was considered as a subsidiary in the books of BioLogics, and with BioLogics making more investments, the share of Biogen further fell to 7% by 2015. Since its inception till 2014, BioLogics had posted a net loss. In 2015, the company posted a net profit of KRW 1.9 trillion. The profit was recorded after the way BioLogics changed the status of Bioepis from subsidiary to an affiliate. This change was carried out as Biogen had the right to exercise a call option to increase its share in Bioepis to 50% minus one share. And this option could be exercised within a specified time or if Bioepis became profitable. In the wake of Bioepis obtaining approvals for blockbuster drugs, it was assumed that Biogen would exercise its option. This made BioLogics change Bioepis from a subsidiary to affiliate in which BioLogics owned 50% and a onetime gain of KRW 4543 billion was recorded as gain on disposal of the subsidiary. Bioepis was recognized at market value instead of book value. Analysts expressed doubts over the transaction itself and the fact that it had taken place just a few months before the IPO by BioLogics. They also asked why the existence of the call option had not been revealed earlier. This led to an investigation by the finance regulator in South Korea, which investigated the matter and concluded that the company had not conformed with accounting standards and had overstated the value of Bioepis deliberately. It barred the auditors from auditing the company and also asked that trading in the stock be suspended. But BioLogics contested the stance taken by the regulator, claiming that what it had done was not unethical.

 Samsung Biologics – Accounting a Subsidiary as an Affiliate
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