CAG red flags Air India's FY 17 accounts, says loss understated by Rs 35 bn

The Comptroller and Auditor General of India has said Air India underreported its FY 2017 loss by Rs 35.46 billion due to the treatment of certain receivables as other income, lower provisioning and overstatement of deferred tax assets.

The government auditor's report is a part of the airline's FY 2017 accounts which was tabled before the Parliament on Wednesday.

Last fiscal the airline made a net loss of Rs 57.6 billion on a total revenue of Rs 221 billion. Net Loss for the year widened from Rs 38.3 billion in FY 16.

In its observations, CAG has said the loss for FY 17 should have been higher and has also made certain comments with regard to the turnaround plan and its 'going concern' status. On its part Air India has claimed there was no violation of accounting practices and thus no understatement of loss.

The auditor said the airline recognised interest receivable of Rs 1.36 billion from its loss-making subsidiary Alliance Air as other income and same is not in conformity with accounting standards. This resulted in an understatement of losses and overstatement of other income by Rs 1.36 billion, the auditor said. Air India told the auditor that Alliance Air is expected to turnaround in near future and company does not anticipate in any uncertainty in the recovery of interest.

The government auditor has red-flagged another breach where the airline failed to make provision of Rs 5.68 billion for diminution in value of its investments in Alliance Air and Air India Engineering Services Limited. The auditor observed the airline should have made provision in its accounts in view of losses in two subsidiaries as this is in line with accounting norms. But the carrier defended its action and said Alliance Air is expected to break even and diminution in investment value is not considered permanent. Similarly, it said the engineering services firm (MRO) was expected to get additional business and Air India's investment in this business was expected to generate higher value at later stage.

Similarly, it has questioned the carry forward of deferred tax assets amounting Rs 28.42 billion of the year 2007-08 and 2008-09. While the company has not recognised deferred tax asset from FY 2009-10 onwards, the tax assets of prior period have not been written off.

“Accordingly carrying forward such deferred tax assets has resulted in an overstatement of deferred tax assets and understatement of losses by Rs 28.42 billion, the auditor said.

“In terms of the turnaround plan, AI is expected to be profitable with more than reasonable certainty. Hence, the Deferred Tax has been carried forward since the amount is most likely to be capable of being absorbed by future permissible profits as per Income Tax Act and this is perfectly in order with the clarification given by the Institute of Chartered Accountants of India with regard to the accounting standard,” Air India said in submission to the auditor.