Kingfisher tweaked its accounts to understate losses by Rs 7,151 cr: SFIO

Vijay Mallya’s Kingfisher showed variable lease rentals under “loans and advances” and showed them as “advance payments” under the category of current assets.(Source: PTI)

A PROBE by the government’s Serious Fraud Investigation Office (SFIO) has alleged that Kingfisher Airlines understated losses to the extent of Rs 7,151.18 crore for financial years 2008-09 to 2011-12 by changing accounting practices, some of which were in violation of Accounting Standards.

By presenting better than actual financials, Kingfisher was able to obtain higher bank loans, some of which were used to meet continuing cash losses, the report alleged.

The government agency, which probes financial fraud, has stated in the report that the airline changed its accounting policy after consulting professors from the Indian Institutes of Management, Bangalore and Calcutta, instead of the apex accounting body, the Institute of Chartered Accountants in India (ICAI).

The SFIO report has listed a couple of areas where the airlines changed accounting methods.

One, Kingfisher showed variable lease rentals under “loans and advances” and showed them as “advance payments” under the category of current assets. Variable lease rentals are payments made by the airline to the lessor of the aircraft. Such payments are used to meet major maintenance expenses and depend upon the usage of the aircraft. Typical accounting practice calls for such payments to be shown as revenue expenditure in the profit and loss account for the period.

Till 2007-08, Kingfisher followed the correct accounting policy, the report said. From 2008-09 onwards, the airline charged these expenses to the balance sheet instead and also “reversed a sum of Rs 530.82 crore” variable lease rental charged to the profit & loss account over the previous years. “On account of the changed accounting policy, the losses after taxes were stated lesser by Rs 985.52 crore during 2008-09,” the report said.

Kingfisher’s accounting policy was “flawed”, and did not take into account the use of aircraft and the “delayed accounting of variable lease rentals effectively overstated the operating results”, claimed the report.

Two, the airline capitalised its expenses incurred for “Major Maintenance” of its aircraft as “Intangible Asset.” Capitalisation means recognising the cost over a period of time by amortizing it instead of during the period when it was incurred.

Such a practice is typically followed by airlines. However, in Kingfisher’s case, the SFIO alleged that this accounting practice was incorrect since the aircraft were taken on lease and it did not own them.

“The asset was not owned as the same was under operating lease. Hence, capitalizing expenses during the year of repairs and amortizing the same in the next three-year period was done with the intent of reporting reduced operating losses and to be continued to be eligible for bank finance. This material misstatement was violative of accounting standards,” claimed the SFIO report.

Kingfisher also “adopted changed accounting practices in other accounting heads also like accounting of initial cost of leased assets, accounting of losses incurred on novation etc,” the report alleged. “By combining all these facts / methods, KFAL (Combined) was able to understate the losses incurred during the period 2007-08 to 2011-12 to the tune of Rs 7151.18 crore,” it alleged.

When contacted by The Indian Express, Mallya’s spokesperson said they did not have any comment to offer on the SFIO report.