The Descent of Air India (24 page)

ADVENTUROUS ACCOUNTING PRACTICES

As the annual reports for the years indicate, the operating loss figure more than tripled between 2005–06 and 2006–07. The chairman of the airline at the time was V. Thulasidas, and the minister for civil aviation was Praful Patel. The figures were kept under cover from not just the public at large but also from all of us in the airline. The accounts used to be circulated among the senior management every month, but the practice was discontinued during this period. Thus, when Arvind Jadhav, chairman and managing director, revealed the real picture in June 2009 and said that the airline did not have money to even pay salaries to its employees, we were both surprised and shocked. A look at the annual report for 2006–07 (the year prior to the Air India-Indian Airlines merger) shows the extent to which the accounts were manipulated. Consider some instances:

•  The airline changed its accounting policy on forward sales to be able to recognise revenue from unutilised passenger and cargo sales for after two instead of four years. By doing this, the airline was able to transfer an amount of
235.64 crore from current liabilities to revenue. Auditors, Kalyaniwalla & Mistry and S. K. Mehta & Company, commented, ‘Hitherto, the revenue was recognised in respect of passenger and cargo sales, remaining unutilised for more than two years.’ The auditors also observed that this was not in compliance with Accounting Standard 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India (ICAI). The board and the senior management ignored the auditors’ observations..

•  The ‘sale and leaseback’ mechanism was employed to help the airline unlock its assets. Air India sold its six A310 aircraft according to its annual report to a European bank, Investec, and leased them back for operations. The cash received from the sale was booked into the airline’s accounts. There is no physical delivery of aircraft in such arrangements. The ‘sold’ aircraft are leased back to the company that ‘sold’ the aircraft (i.e., Air India, in this instance) and the monthly rentals flow to the company that ‘bought’ the aircraft. Such transactions are adopted by many airlines as it helps ease cash flow in the short run but causes enormous damage in the long run as the terms are almost always skewed in favour of the financier. Air India managed to improve its cash flow by about
200 crore in this fashion, which helped bring down the loss figure for the immediate period. The auditors highlighted this too in their report, but what was more disturbing than the irregularity of such a tactic was the attitude of the people leading the airline. No one was interested in its long-term survival but focused on the short-term objective of showing minimal losses by inflating the revenue figures. A ‘sale and leaseback’ transaction also helps to shift the accounting liability: instead of showing it as depreciation, the amount can be shown as lease rental expense.

•  Amounts that had been written off as expenses were converted into potential revenue. For instance, the total value of aircraft spares was written off in 2005–06 and then brought back into the books the following year to bring down the loss incurred in 2006–07. Air India had phased out B747-200 aircraft in 2006. The spares that had been purchased for this aircraft fleet were considered obsolete since B747-200 aircraft were also not in operation anywhere else in the world. Hence, in the 2005–06 accounts, it was decided that
135.9 crore would be written off as the cost of spares. However, as pressure mounted on the Finance Department to minimise losses, inventory worth
135.9 crore was brought back into the books of account for the next year (2006–07). The auditors questioned this, but the management’s explanation was that the spares would be sold to the Air India–Boeing joint venture—Maintenance, Repair & Overhaul (MRO)—at Nagpur. Incidentally, MRO, seven years down the line, is yet to be operationalised, and even if I were to give the management the benefit of doubt and believe that they couldn’t possibly have foretold that the venture would be stuck, why would the MRO need spares for aircraft that were not in use by any airline?

•  Losses were understated and inventories overstated. The airline recorded an amount of
15.31 crore as a result of the capitalisation of spares for its leased aircraft (B777-200 LR), which was carried forward from the previous year. However, the obsolescence amount of
5.5 crore for these spares was left out of the accounts. The airline had changed the classification of
owned A310 aircraft inventory’ worth
153.99 crore to
leased inventory’ and consequently brought back into its books the amount of
66.02 crore, which had been provided as ‘obsolescence’ up to the previous year. The auditors stated that the changes were not in compliance with Accounting Standard (AS) 2, ‘Valuation of Inventories’, and generally accepted accounting practices. The auditors commented, ‘This has resulted in understatement of losses to the extent of
216.45 crores and overstatement of inventories by
201.14 crores and capital work in progress of
15.31 crores.’