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 About the Author

G. C. Pipara is a practicing Chartered Accountant holding degrees

in commerce and law. His 37 years of experience in Account-
ing, Auditing and Investigation, especially his ability to analyse
financial statement from 3600 angles, are now legendary. His
brand of analysis of financial statement is distinct and different.
The Government of India nominated him as an independent
director on the board of State Bank of Saurashtra (now merged
with State Bank of India), from 10th August, 2007. Considering
his contribution for improvement in quality of assets, corporate
governance, he was again nominated as an independent director on the board of
State Bank of Travancore (now merged with State Bank of India), for the period
May-2009 to May-2012.
While practicing as Chartered Accountants in the field of auditing, a large number
of cases have been investigated on behalf of Economic Offence Wing, CID Crime,
Special Operation Group (SOG), City Crime Branch of Government of Gujarat relating
to financial fraud and complex financial matters.
He is the founder of firm M/s. Pipara & Co. LLP having offices at Ahmedabad,
Mumbai, Delhi and Surat. The said firm M/s. Pipara & Co. LLP is empanelled as
forensic auditor with Indian Bank’s Association (IBA), the Securities and Exchange
Board of India (SEBI), Serious Fraud Investigation Office (SFIO) etc. and he has
been instrumental in delivering quality forensic audit reports, on the assignment
allotted to the firm.
He is a regular speaker on various subjects of fraud, investigation, bank audits,
balance sheet analysis etc. conducted by the Institute of Chartered Accountants
of India, Ahmedabad Branch, Nirma Institute of Management, Indian Institute of
Management, Ahmedabad & Lucknow and various other forums.
I-5
 I-6 About the Author

His trainings to the officers of the bank on analysis of the financial statement, is
one of the most sought after training, for enhancement of credit skills. In the last
7 years, large number of such trainings spanning over 2 to 3 days, have been pro-
vided to various banks, including State Bank of India, Punjab National Bank, Bank
of Baroda, Punjab & Sind Bank etc. All such trainings have been very well received.
He also has experience of working with two International Organizations, in the
field of re-writing e-Learning Modules for them, which are used in India for the
purpose of Credit Certification Programme, as mandated by the Reserve Bank of
India. He has also been invited by the various foreign countries, to impart training
on “Analysis of Financial Statements” and to deliberate on issues relating to NPAs.
He has also written large number of manuals and materials to be used for the
purpose of training on credit.
Considering the importance of the financial statement, in the year 2016 “Center
for Correct and Accurate Balance Sheet Analysis (CABSA)” has been set up by him
for the purpose of research in the field of analysis of the financial statement. The
said center is registered with the Securities and Exchange Board of India under
Research Analysts Regulation, as “Research Analyst”.
Currently, he is a practicing Chartered Accountant, as well as Trainer and Research
Analyst.
The overwhelming response of his maiden book on “BALANCE SHEET DECODED
- Keys to Unlock Balance Sheet Secrets”, speaks about depth of the book on the
various chapters relating to analysis of financial statement. The said book was
published by TAXMANN’S in the month of July-2018 and considering the response
and the feedbacks received, the revised and updated edition of the very same title
is released, in less than a year, in 2019.
He is also the author of book-“Forensic Audit Decoded - Unlocking the Secrets of
Financial Accounting and Investigation”, published by Taxmann in September, 2020.
He can be reached on the following address:

G.C. PIPARA
Centre for Correct and Accurate
Balance Sheet Analysis (CABSA)
Pipara Corporate House,
Law Garden, Netaji Marg,
Ahmedabad - 380 006, Gujarat, India.
Ph. +079-40370370
Mobile: +91 98250 38930
Email: [email protected]
Twitter: @GYANPIPARA
Instagram: gyan_pipara
 Preface

“Balance Sheet” is the centerpiece for any commercial activity. May be it

is a small, medium, large or very large organization, in the commercial
parlance it is the Balance Sheet of such organization which plays key
and vital role. Similarly even for any Government organization, may be a
Panchayat or a large Government Company or even the State Government
or the Central Government, the financial position reflected in the Balance
Sheet is the centerpiece document.
It is not only the banking industry, but shareholders, investors, CFO,
management, auditors, regulators and various Government authorities,
relies heavily on the financial statement, of course may not be the entire
bunch of financial statement, but some part or the other part of the
financial statement is being always looked into. Therefore, a need has
been felt by the Author of this book to explain how to read, analyse and
interlink the voluminous information available in the financial statement,
so that the objective of the respective agency of looking at the financial
statement is achieved, as there are various titles available in the market
which explains about how to draw and prepare the Balance Sheet, but
hardly any reading material is available, wherein in-depth analysis,
stepwise approach with use of case analysis is made available to the
reader of the financial statement, to understand the same and decode.
Every action or inaction of the organization/entity is visible from financial
statements. That is why heavy reliance has been placed on the financial
statements, since Kautilya’s time. Kautilya’s Arthashastra was written
about 2,400 years ago. The Arthashastra is not only of historical interest
I-7
 I-8 Preface

but is one of the world’s oldest manuals on the economic administration

of a state. While dealing with accounts (i.e. balance sheet) in the
Arthashastra, Kautilya states:
“All accounts shall be maintained in the proper form and legibly
written without corrections (overwriting). Failure to do so shall be a
punishable offence”.
(Verse - 2.7.35)
While dealing with financial reporting (i.e. disclosure of information), in
Arthashastra, it has been stated about the submitter of the report:
“He shall have so thorough a knowledge of the receipts and
disbursements from the city and from, the countryside that, when
questioned, he shall not falter in giving details of the income,
expenditure and net balance for (accounts relating to) a period of
even a hundred years”.
(Verse - 2.5.22)
What has been stated in the Arthashastra, 2,400 years ago, holds good
even today. The maintenance of proper accounts and the requirement
of disclosing full information in the balance sheet is not new but they
exist since Kautilya’s time. What has changed is the level of complexity
of business in a wired and globalized world (with interconnected and
interdependent economies) where financial transactions can take
place almost at the speed of thought. Consequently, there has been an
accompanying increase in the level of complexity in financial statements
and accounting.
The complexity in accounting, however, has become debilitating in many
aspects as the relevant laws in India have not kept pace with changes in
economic development, thus creating an imbalance between complex
businesses (requiring complex accounting) and laws relating to accounts
and audit.
As a result, entities have started to use creative accounting that meet the
benchmarks of outdated laws and have begun using the loopholes in both
ethical and unethical manners to suit their objectives. Diversion of funds,
fudging books of account, misrepresenting sales and profit have become
rampant. Relevant disclosures are often found missing or improper. Walls
 Preface I-9

raised in corporate governance and deterioration in the quality of audit

have added fuel to the fire.
In the present days, the most burning issue in the Indian Economy is
about the day by day increase in non-performing assets (NPAs) of banks,
increase in bad loans and a large number of frauds reported every day
by the banks relating to a loan given. As a result, the Indian banking
industry is witnessing turmoil. The Government has come up with various
measures like induction of the Insolvency and Bankruptcy Code, Prompt
Corrective Action (PCA), setting up of reconstruction firm etc. for faster
resolution of stressed assets. Even the International Monetary Fund (IMF)
in it’s recent bi-weekly news conference has asked Government of India
to address the ongoing crises in the Indian banking sector to support
investment and inclusive growth agenda.
The issue of bad loans and loan fraud in Indian banking system has
reached an alarming level, and therefore, is a cause of concern for
everyone - Government, Regulators, Banks, Investors, Shareholders and
even every citizen of India, as it is the public money which is going into
bad loan.
I have always considered balance sheet like a horoscope, if one knows
how to read and analyse it, then probably by addressing the various early
warning signs available in such accounts would have helped to a great
extent in reducing NPAs and loan fraud and also objective of analysis is
achieved.
Dr. Raghuram Rajan, former Governor of the Reserve Bank of India
highlighted six key reasons for the recent spurt in non-performing
assets (NPAs) and bad loans of banks in a note (May 2016) to the Public
Accounts Committee (PAC) of the Parliamentary Panel. The reasons he
marked include:
1. Domestic and global slowdown
2. Delays in statutory and other approvals, especially for projects
under implementation
3. Aggressive lending practices during upturn, as evidenced from high
corporate leverage
 I-10 Preface

4. Laxity in credit risk appraisal and loan monitoring in banks.

5. Lack of appraisal skills for such projects that need specialized skills,
resulting in acceptance of inflated cost and aggressive projections
6. Wilful default, loan frauds and corruption in some cases
Out of these six reasons, this book deals extensively with the last three
(reasons numbered 4, 5 and 6 above) and shows how they can be
mitigated through proper analysis of financial statements.
By reading between the lines of financial statements and by correlating
relevant information with proper analysis, the true financial history of
any entity can be revealed. Accountants already know this, but where
they differ are in their varying degree of skills and wisdom derived from
experience.
This book shows its readers how to hone their skills to a sharpness needed
to dissect financial statements with surgical precision, so that what is
really there in the financial statement can be unearthed.
On the basis of proper analysis and understanding of the facts of
each case, any fraud, diversion of funds, genuineness of investment,
sustainability of sales, quality of profit, end use of the funds, corporate
governance practice, quality of disclosure, or quality of audit etc. can be
ascertained. How to combine all these factors has been explained in this
book, so as to improve the skills for analysis of financial statements which
can be used for credit risk appraisal, analysis, research, regulation etc.
In this book, all sincere efforts have been taken to unlock these mysteries
and tricks by explaining how to analyse the various details provided in the
financial statements, so as to detect what has been disclosed or not.
The overall objective of this book is to explain step by step, how to read
the balance sheet beyond what is visible on the surface; how to analyse
the information and how to correlate the various details available - so as
to find out the strengths, early warning signs, frauds, creative accounting,
genuineness of various items, hidden secrets etc.
This is the revised and updated 3rd edition of the book, wherein CARO
2020 (which is applicable from 1st April, 2021) has been considered in
details under Key#4 - The Companies Auditor’s Report Order. Further,
 Preface I-11

all changes made in the Companies Act and latest position as at end of
March 2021 has been considered in this book.
The 38 years of my practice as Chartered Accountant, research analyst
and fraud investigation has improved my skills for analysis of financial
statements. But it was Mr. Pratip Chaudhuri, former chairman of State
Bank of India, who invited me in 2012 to share my experience and
knowledge of analysing balance sheets with his senior officers. Since
then, I have not looked back and have imparted numerous trainings to
the various banks and organisations on credit and analysis of financial
statement. These trainings and interaction with the participants have also
helped in sharpening my knowledge. The overwhelming response of the
training and my commitment to spread the knowledge and experience of
analysis and reading the financial statements, as well as, improvement
in the quality of assets of the bank by reducing NPAs and frauds, has
prompted me to pen down this book for those who see accounting as both
a science and an art that keeps the heart of commerce beating without
any falter.

Seattle G.C. PIPARA

April 15th, 2021 CA | Trainer | Research Analyst
Chaitra Shukla Tritiya Ph. +079-40370370
VS 2078 Mobile: +91 98250 38930
[email protected]
Centre for Correct and Accurate
Balance Sheet Analysis (CABSA)
 Contents

PAGE
About the Author I-5
Preface I-7
List of Abbreviations I-17
Methodology I-21
Introduction I-29

Key To unlock Chapter Unlocking Pg. Chart Case Box No.

# No. No. Analysis
No.
1 Statement of Profit & Loss 1 - - -
1 Revenue from Operations 7 - 1-2 1 -6
2 Other Income 21 - 3 7-8
3 Cost of Materials Consumed and 27 - 4 9 -12
Purchases of Traded Goods
4 Manufacturing and operating cost 39 - 5 13 - 15
5 Finance Cost 49 1 6-7 16- 17
6 Depreciation 57 2-4 8 18 - 19
7 Tax Expense 65 5 9 20
8 Other Expenses 73 - 10 21 - 23
9 Exceptional Items, Extraordinary Items 83 6 11 24 - 25
and Prior Period Items

I-13
 I-14 Contents

Key To unlock Chapter Unlocking Pg. Chart Case Box No.

# No. No. Analysis
No.
2 Balance Sheet 91 - - -
10 Property, Plant and Equipment - 97 7 12 26 - 28
Tangible
11 Fixed Assets - Intangible 109 - 13 29 - 30
12 Investments 117 - 14 - 16 31 - 40
13 Loans & Advances 137 8 17 41 - 45
14 Other Assets 149 9 18 - 19 46 - 49
15 Inventories and Trade Receivables 157 10 20 - 23 50 - 67
16 Cash, Cash Equivalent and Bank 181 11 24 - 25 68 - 71
Balances

17 Advances Recoverable in Cash or Kind 189 - 26 - 27 72 - 77

or for Value to be Received

18 Shareholders’ Funds or Net Worth or 197 12 - 28 - 33 78 - 83

Capital 14
19 Provisions & Contingent Liabilities 221 15 - 34 84 - 88
16
20 Borrowings 233 17 35 - 37 89 - 92
21 Trade Payable and Other Liabilities 251 - 38 - 40 93 - 99
3 Concept of Audit and Auditor’s Report 267 - - -
22 Understanding the Audit 269 - - 100-102
23 Report on Internal Financial Controls 283 18 41 103
24 Analysis of Opinion 291 19 42-46 104-113
25 Analysis of Emphasis of Matters/Note 309 - 47 114
4 Companies Auditor’s Report Order 315 - - -
26 Control over Resources 319 - 48 115-119
27 Related Party Transactions 341 - - -
28 Legal Compliance 353 - - -
29 Statutory Dues 363 - 49-52 120-126
30 Financial Health of the Company 373 - 53 127
31 End Use of Funds 385 - - -
32 Whistle Blower 389 - 54 128
33 Resignation of Statutory Auditor 395 - 55 129-132
 Contents I-15

Key To unlock Chapter Unlocking Pg. Chart Case Box No.

# No. No. Analysis
No.
5 Connecting Statement 403 - - -
34 Significant Accounting Policies 407 20 56-57 133-134
35 Notes on Accounts 421 - 58-64 135-143
36 Cash Flow Statement 435 - 65 144-145
6 Master Key 447 - - -
37 How to link 5 Key to decode 449 21 - -
Financial Statement
 2
4 Analysis of
Chapter
Opinion

1. Introduction
The concept of the audit, what is contained in the audi-
tor’s report, importance of the auditor’s report, the legal
framework as applies to audit in India and newly introduced
report on internal financial controls over financial reporting,
has been explained.
As discussed, it is the opinion of the auditor on the finan-
cial statements, which is provided in the auditor’s report.
The “opinion” is the heart of the auditor’s report. What
opinion is provided on the financial statements by the au-
ditor is most relevant to be seen for the purpose of analysis
of auditor’s report and so as to financial statements.
In this part, how to read and decode such opinion, what is
the meaning of such opinion, when such opinion is modified
or qualified is explained?
What is the impact of such opinion provided by the auditor
on the financial statements is also equally relevant, as the
financial statement accompanied to the auditor’s report is
subject to such opinion and therefore, for decoding the bal-
ance sheet, the secrets of auditor’s report needs to be known.

2. Type of opinion
Since it is his opinion, which is expressed by the auditor in
the auditor’s report, therefore, based on the nature of such
opinion, the auditor’s report can be classified as:
291
 CHAPTER 24
292 Analysis of Opinion

Nature of opinion Types of audit report

(a) unmodified opinion - Clean report
(b) modified opinion - Modified report
(c) qualified opinion - Qualified report
(d) adverse opinion - Adverse report
(e) no opinion - Disclaimer report
The various types of auditors report can be
summarised as per chart-19:
CHART 19

Auditor’s Report

Clean Report Modified Report

Issued where financial statements are- Issued where financial statements-

‐ Prepared and presented in accordance with
generally accepted accounting principles ‐ Does not give true and fair view of financial
‐ In conformity with books of accounts position
‐ In conformity with accounting policies Or
‐ All the material facts are disclosed
‐ Meet the statutory reporting requirements ‐ Materially mis-stated the facts
‐ Free from material mis-representation of facts Or

The Modified Auditor’s Report can be of 3 Types

Qualified Report Adverse Report Disclaimer of Report

Issued where- Issued where- Issued where-

‐ Some matter or issue not ‐ Financial statements do not ‐ In extremely rare
reported by the management but confirm with generally circumstances where
reporting of which is necessary to accepted accounting auditors find multiple
understand the financial principles uncertainties in the
statements ‐ Financial statements are financial statements
‐ Reporting of an issue which is not materially misstated ‐ Where it is not possible to
in conformity with generally ‐ Financial statements are form an opinion on the
accepted accounting principles grossly misrepresented financial statements due to
‐ Financial statements contain cumulative effect of
material misstatement uncertainties
‐ Effect of the issue is material but
not pervasive

3. Circumstances under which opinion is qualified

Broadly, the following are the circumstances under which the opinion of the
auditor is qualified:
CHAPTER 24
Analysis of Opinion 293

(a) There is violation of the Accounting Standards or Indian Accounting

Standards as applicable to the company;
(b) There is violation of the accounting policies, normally adopted by the
company;
(c) Generally accepted accounting principles are not followed by the com-
pany;
(d) Any transaction which is prejudicial to the interest of the company;
(e) There is change in accounting method or change in treatment of a par-
ticular item in this year as compared to the last year; and
(f) It is significant in nature and has a material impact on the financials of
the company

4. Action on the basis of types of report

Only after preparation of the financial statement, is the auditor’s report issued.
Therefore, one should keep in mind that any qualified opinion or modified opinion,
needs to be adjusted in the financial statements, for the purpose of analysis.
After analysing the issue as referred by the auditor in the auditor’s report,
necessary adjustments shall be made on account of such issue. The adjustment
may be reduction in profit, if the auditor has stated in the note, that the profit is
overstated. If auditor states in the opinion that profit is understated, the profit
shall be increased by such amount. There will be the corresponding effect in
the balance sheet also, if the opinion relates to the profit/loss statement and
in such cases necessary effect shall also be required to be given to the items
of the balance sheet, such as reduction in reserves etc. If the assets/liabilities
are overstated or understated, the adjustment will be needed with respect to
such assets/liabilities.
Based on the types of auditor’s report, the following actions are to be taken
to decode -
Types of report Action
Clean report No action
Qualified report Make necessary adjustments in the profit/loss or assets/liability, as
the case may be on the basis of such qualified opinion.
Modified report It is the worst type of financial report and primarily such financial
statements are not reliable and cannot be analysed. Still, in some cases,
if the amount is quantified, necessary adjustments shall be made in
profit/loss as well as in the balance sheet items, as the case may be.
 CHAPTER 24
294 Analysis of Opinion

Disclaimer Since the auditor has not expressed his opinion, such financial state-
report ments are required to be outright rejected and fresh opinion should
be obtained after correcting the mistakes.

5. Case Analysis-42
Explaining how to read and analyse the opinion of the auditor
5.1 This case analysis pertains to a leading energy company, listed on NSE and
BSE. Though this pertains to FY 2011, this is being selected as case analysis
considering the importance of the issue referred to in the auditor’s report
(qualified opinion) the amount involved, and for correlating the note with the
actual fact of subsequent years.
The purpose of this case analysis is manifold:
(a) to explain the importance of such qualified opinion,
(b) how to analyse such opinion,
(c) for the purpose of analysis, what treatment is to be given to such opinion;
and
(d) how to read between the lines of the report
5.2 The relevant portion relating to the qualified opinion of this case analysis
for FY 2011, included in auditor’s report is as per Box 104.

BOX 104
vi. Without qualifying our opinion, we draw attention to note 4(c), Schedule P in the
financial statements regarding non-provision of proportionate premium on re-
demption of US$ 479.04 million (` 2,136.27 crores as at March 31, 2011), foreign
currency convertible bonds amounting to ` 579.21 crores which has been consi-
dered by the company as a contingent liability. Since the ultimate outcome of the
matter cannot be presently ascertained, no provision for the above liability that
may result in future has been made in the accompanying financial statements.
Analysis
u While giving the qualified opinion, the auditor has drawn attention to
note 4(c) of Schedule P, relating to the issue about not making provision
of proportionate premium amounting to ` 579 crore as on March 31,
2011, on the FCCB, which has been considered as a contingent liability.
u For the purpose of analysis of the opinion, the note which has been
referred in the auditor’s report requires to be read in its entirety.
The said note being note 4(c) of Schedule P, as referred by the auditors in the
Auditor’s Report is shown in Box 105.
CHAPTER 24
Analysis of Opinion 295

BOX 105
Schedule-P
Note 4(c) - Foreign Currency Convertible Bonds
(a) Initial terms of issue
On June 11, 2007 the Company made an issue of zero coupon convertible bonds
aggregating USD 300 million (` 1,223.70 crore) [Phase I bonds]. Further, on Octo-
ber 10, 2007, the Company made an additional issue of zero coupon convertible
bonds aggregating USD 200 million (` 786.20 crore) [Phase II bonds] and on July
24, 2009, the company made an additional issue of zero coupon convertible bonds
aggregating USD 93.87 million (` 452.64 crore) at an issue price of 104.30% of the
principal amount of USD 90.00 million.
The key terms of these bonds at the time of issue were as follows:
Particulars Phase I Phase II Phase III
Issue size (USD) 300 million 200 million 90 million
Face value per bond (in USD) 1,000 1,000 1,000
No. of equity shares per bond 113.50 107.30 533.2762
Initial conversion price per 359.68 371.55 90.38
share (` )
Fixed exchange rate (` /USD) 40.83 39.87 48.1975
Redemption amount as a % of 145.23 144.88 134.198
principal amount (%)
Maturity date June 12, 2012 October 11, 2012 July 18, 2014
(b) Restructuring of Phase I and Phase II bonds
i. During the year 2009-10, the Company restructured Phase I and II Zero Cou-
pon Convertible Bonds with an approval of the Reserve Bank of India (‘RBI’)
wherein the bondholders were offered the following options as part of the
restructuring;
u Buyback of bonds @ 54.55% of the face value of US $ 1000 per bond.
u Issue of new bonds (‘Phase I New Bonds’ in case of Phase I Bonds
and ‘Phase II New Bonds’ in case of Phase II Bonds) in place of old
bonds at a fixed rate of 3:5 (60 cents to dollar) bearing a coupon of
7.5 per cent per annum, payable semi-annually. Unless previously
deemed, converted or purchased and cancelled, the Company will
redeem each Phase I New Bond at 150.24 per cent of its principal
amount and each Phase II New Bond at 157.72 per cent of its prin-
cipal amount on the relevant Maturity Date. The conversion price
is set of ` 76.68 per share. These bonds do not have any financial
covenants and are of the same maturity as the old bonds
(Box Contd.)
 CHAPTER 24
296 Analysis of Opinion

(Box 105 - Contd.)

u Consent fee of USD 15 Million to be paid across both the series, for
those bondholders who consent to the relaxation of covenants.
As a result of the restructuring, the outstanding position of the foreign currency
convertible bonds is as follows:
Particulars Phase I Phase II Total
Bonds Bonds (Amount in
(Amount in (Amount in USD)
USD) USD)
Old bonds exchanged [A] 59,332,000 34,672,000 94,004,000
New Bonds issued in the ratio 35,592,000* 20,796,000 56,388,000*
of 3:5 [B]
Bonds bought back for cash [C] 29,366,000 43,960,000 73,326,000
Cash paid for buyback [D] 16,019,702 23,980,180 39,999,882
Old bonds outstanding [E] 211,302,000 121,368,000 332,670,000
Value of total bonds outstand- 246,894,000 142,164,000 389,058,000
ing [F] = [B]+[E]
Value of old bonds [G] = 300,000,000 200,000,000 500,000,000
[A]+[C]+[E]
Consent fee paid 11,846,947 1,869,863 13,716,810
Maturity date June 17, Oct. 11,
2012 2012
Redemption amount as a % 150.24 157.72
of principal amount of New
Bonds (%)
Redemption amount as a % of 145.23 144.88
principal amount of Old Bonds
carried forward (%)
*19,000 bonds were converted into equity shares during the year 2009-10.
ii. On April 29, 2010, the Company convened meetings of Bondholders of each of
the series, who approved the respective resolutions proposed to them. Accord-
ingly post receipt of regulatory approvals, the Company changed the conversion
price of the Phase I bonds from ` 359.68 per equity share to ` 97.26 per equity
share and for Phase II bonds from ` 371.55 to ` 97.26 per equity share, subject
to adjustments in accordance with terms and conditions of the bonds. The floor
price for Phase I and Phase II bonds has been revised to ` 74.025 per equity share.
The fixed exchange rate was changed to 1 USD=` 44.60 from 1USD=` 40.83 for
Phase I bonds and 1 USD=` 39.87 for Phase II bonds. The Company has incurred
` 37.28 crore towards consent fee to bondholders and other cost and disclosed
under exceptional items for the year ended March 31, 2011.
(Box Contd.)
CHAPTER 24
Analysis of Opinion 297
(Box 105 - Contd.)
(c) Redemption Premium:

The Phase I, Phase II, Phase I New, Phase II New, and Phase III bonds are redeem-
able subject to satisfaction of certain conditions mentioned in the offering circular
and hence have been designated as monetary liability.

The Company has not provided for the proportionate premium on these bonds
aggregating ` 579.21 crore (` 377.22 crore) as shown below:
Phase March 31, 2011 March 31, 2010
Phase I 309.57 221.09
Phase II 159.12 109.98
Phase I (new) 43.22 18.53
Phase II (new) 25.40 10.98
Phase III 41.90 16.64
Total 579.21 377.22
In the opinion of the management, the likelihood of redemption of these bonds
cannot presently be ascertained. Accordingly, no provision for any liability been
made in the financial statements and hence the proportionate premium has been
shown as contingent liability. The Company has adequate securities premium to
absorb the proportionate premium on redemption as at March 31, 2011.

Analysis of the said note

u The analysis of the said note clearly reveals that the company has not
provided for the proportionate premium of ` 579 crore as on March 31,
2011 in the profit &loss account as the management has considered the
same as a contingent liability.
u The important issue is that had it really been a contingent liability, the
auditor would not have highlighted the same in the auditor’s report.
So, the preliminary analysis is that the same is not a contingent liability,
but a provision which the company has not provided - and that is the
reason the auditor has qualified his opinion on the financials of the
company. (This is known as reading between the lines).
u Accounting Standards (AS) 29 -“Provisions, Contingent Liability and
Contingent Assets” corresponding to Ind AS 37, deals with provisions
and contingent liability. It applies to all companies, and accordingly, it is
applicable to the case analysis also.
u Based on the said accounting standard, in order to fall within the defini-
tion of the ‘Provision’, there has to be marked:
n a past event;
 CHAPTER 24
298 Analysis of Opinion

n whether present obligation exists;

n whether reliable estimate can be made of such obligation; and
n whether outflow of the funds is certain
(for detailed analysis of provision and contingent liability, the separate
chapter 10 under key#1, may be referred)
u Going back to the note, it is clear that in the year FY 2010 there was
restructuring of the phase-I and phase-II bonds, where conversion price
of the phase-I bond was changed from ` 360 to ` 97 and phase-II bonds
conversion price was changed from ` 372 to ` 97.
u The conversion price for the FCCB indicates the prevailing market rate
of the shares of the company. Therefore, considering the fall in the mar-
ket rate of the shares of the company, management as well as auditors
knew that the chances of converting bonds into shares were remote and
therefore, the proportionate premium on the bonds will fall within the
definition of the “Provision” following AS-29.
u However, may be because there was no sufficient profit in the books of
the company, the management might have decided not to provide for
the proportionate premium on the bonds as it would have affected the
profitability of the company.
u The conclusion is that for the purpose of proper analysis of the finan-
cials of this particular company, on the basis of modified opinion of
the auditor, the profit shown by the company should be reduced by
an amount of ` 579 crore. Resultant reserves & surplus shown in the
balance sheet will be lower by equal amount as by not providing the
proportionate premium, which is the nature of interest, profit is inflated
and reserves & surplus are also shown higher by this amount.
u It is also clarified that the opinion in the auditor’s report begins with
use of words “without qualifying our opinion”. This does not mean that
the opinion is not qualified. Rather, it is a qualified opinion. The normal
practice in using these words means that indirectly the auditor wants to
convey that the opinion is not qualified, whereas in fact, it is a qualified
opinion.
5.3 One of the principles of analysis of financial statements is that one should
always look into the financials of a particular company pertaining to 2-3 years,
and form a comparative analysis. Further, if a particular note referred in an
auditor’s report, is of such nature which is found to be recurrent, the financials
of the subsequent year should always be looked into.
CHAPTER 24
Analysis of Opinion 299

Therefore, in case analysis 43, the financials of the very said company, for next
FY 2012 are analysed.

Case Analysis-43
In Box 106, the auditor’s report for FY 2012, on the said issue is given.

BOX 106
Auditor’s Report as at March 31st, 2012
Without qualifying our opinion we draw attention to Note 4 of the accompanying financial
statements regarding the existence of certain liabilities on account of foreign currency
convertible bonds (‘FCCB’) which are due for redemption during June 2012 and October
2012 having an aggregate redemption value of USD 568.96 million (` 2,894.58 crore). The
Company is in the process of tying up funds for redemption of these FCCB Liabilities and
consequently, there exists a material uncertainty that may cast significant doubt about
the Company’s ability to continue as a going concern, which is dependent on generating
the required funds before the redemption date. Management’s plans for raising funds for
such redemption have been more fully discussed in Note 4 to the accompanying financial
statements, in view of which the accompanying financial statements have been prepared
under the going concern assumption, and consequently, no adjustments have been made
to the carrying values or classification of balance sheet accounts.
Analysis of above observation in auditor’s report
From the above observation of the auditors in the auditor’s report of the
subsequent year March 31, 2012, it is interesting to note that:
(a) now auditors are admitting about liability relating to FCCB bonds which
are due for redemption;
(b) it is also clarified by the auditors that, the company is in the process of
tying up for funds for the redemption of the bonds liability; and
(c) the auditor has also expressed doubt about the company’s ability to
continue as a going concern.
Conclusion
5.4 It is important to note that in FY 2011, the auditor at the outset has not
qualified the opinion relating to interest, but started the note “without qualifying
our opinion”, whereas, it is a qualified opinion. It has become very clear that by
not providing the proportionate premium in the profit & loss account, sufficient
funds have not been reserved for the redemption of the bonds. Profits of the
company have been inflated and the proportionate premium has wrongly been
considered by the company as a contingent liability, which is in fact a provision.
 CHAPTER 24
300 Analysis of Opinion

5.5 In order to conclude the issue logically, the financials of the said company
for the years ending March 31, 2013 and March 31, 2014, were also looked into.

Case Analysis-44
The auditor in the auditor’s report in FY 2013 has observed as per Box 107.

BOX 107
Auditor’s Report as at March 31st, 2013
“Emphasis of Matter
5. We draw attention to Note 5 of the accompanying financial statements in respect
of material uncertainty about the Company’s ability to continue as a going concern
which is in part dependent on the successful outcome of the discussions with the
FCCB holders. Our opinion is not qualified in respect of this matter.”
Auditor’s Report as at March 31st, 2014
“Emphasis of Matter
5. We draw attention to Note 5 of the accompanying financial statements in respect
of material uncertainty about the Company’s ability to continue as a going concern
which is in part dependent on the successful outcome of the discussions with the
FCCB holders and Company’s ability to generate sufficient funds to support its
operations. Our opinion is not qualified in respect of this matter.”

Analysis of the observation of the auditors in the Auditor’s Report, as on

March 31, 2013 and March 31, 2014
u For the subsequent 2 years also, the same issue has been included by the
auditor in the auditor’s report, with the observation that there is material
uncertainty about the continuation of the business of the company as a
going concern. This is for the reason that the company failed to redeem
the FCCB bonds on the due date.
u Look at the contradiction in the stand taken by the company that in FY
2011, the company has not provided for the proportionate premium on
the ground that FCCB bonds will be converted into shares and therefore,
the premium was considered as a contingent liability.
u Whereas, truly speaking, it was a provision which has not been made by
the company and on the almost similar set of facts from the auditor’s ob-
servation in the subsequent years, it becomes very clear that the company
was not having sufficient funds to meet the redemption of the bonds and
the going concern aspects of the company had become doubtful.
CHAPTER 24
Analysis of Opinion 301

u Thus, on the basis of analysis it is clear that in earlier years the company
had defaulted in not making provision in the financials, for the propor-
tionate premium on the bonds and same was wrongly considered as a
contingent liability, resulting into higher profit.
u The auditor has also erred in not issuing a modified opinion and was
wrong in considering the said FCCB bond interest, as contingent liability.
u The auditor should have clearly stated that the company has not pro-
vided the interest and as a result the profit is overstated to the extent
of such interest.

6. Case Analysis-45: Relating to qualified opinion

In case of a leading real estate investment company which is listed on NSE &
BSE, the auditor has issued qualified opinion for FY 2017, as per Box 108.

BOX 108
BASIS OF QUALIFIED OPINION
Reference is invited to Note 49 to the consolidated financial statements according to
which an amount of ` 7,718,890,401 (Previous year ` 9,248,788,996) is outstanding
which is comprised of advances towards purchase of land, projects pending commence-
ment, advances paid to joint ventures entities and collaborators. The management
has explained that such advances have been given in the normal course of business
to land owning companies, collaborators, projects and for purchase of land. As per in-
formation made available to us and explanation given ` 1,529,898,595 (Previous year
` 6,825,516,966) have been recovered/adjusted during the current financial year. The
management, based on internal assessments and evaluations, have represented that
these advances are recoverable/adjustable and that no provision is necessary as at bal-
ance sheet date. The management has further represented that as significant amounts
have been recovered/adjusted during the previous and current financial year and since
constructive and sincere efforts are being put in recovery of the said advances, it is
confident of appropriately adjusting/recovering significant portions of the remaining
outstanding balance of such amounts in the foreseeable future. However, we are un-
able to ascertain whether all the remaining outstanding advances, as above, are fully
recoverable/adjustable since the outstanding balances as at balance sheet date are out-
standing/remained unadjusted for long period of time, and further that, neither the
amount recovered nor rate of recovery of such long outstanding amounts in the current
year, clearly indicate, in our opinion, that all of the remaining outstanding amounts are
fully recoverable, consequently, we are unable to ascertain whether all of the remaining
balances as at balance sheet date are fully recoverable. Accordingly, we are unable to
ascertain the impact, if any, that may arise in case any of these remaining advances are
subsequently determined to be doubtful of recovery.
 CHAPTER 24
302 Analysis of Opinion

Analysis of the said observation of the auditors in Auditor’s Report

u It relates to a real estate investment company wherein an amount of
` 772 crore (previous year ` 925 crore) has been given as advance by
the company for purchases of land, projects, advances to joint ventures.
u No doubt the advances are in the normal course of the business but au-
ditors are doubtful about the recovery of the same, as only an amount
of ` 153 crore has been received during the year under consideration,
as under:
Balance as on March 31, 2016 - ` 925 crore
Less: Amount received in FY 2017 - ` 153 crore
Balance outstanding as on March 31, 2017 - ` 772 crore
u Thus, the outstanding balance of ` 772 crore as on March 31, 2017 is
out of the opening balance of March 31, 2016 and does not pertain to
the amount which has been advanced in the FY 2017. That is why the
auditor expresses doubts about the recovery of the same.
u However, in the concluding part of the note, the auditor has concluded
that they are unable to ascertain the impact of the remaining balance on
the financials of the company. But reading the entire note carefully and
analyzing properly reveals that recovery of the entire amount is doubtful,
which should have been provided.
u Therefore, for the purpose of analysis of the financials of this company,
the advances shown by the company in the balance sheet as on March
31, 2017, the amount of ` 772 crore should be considered as doubtful
and the same should be considered as a provision.
u Further, the said opinion is referred under qualified opinion and not as
an emphasis of matter. Therefore, considering the same as qualified
opinion, necessary adjustment is required to be made.

7. Case Analysis-46: Relating to qualified opinion on several

points of one company
(a) This case analysis pertains to a leading tyre manufacturing company.
The auditor’s report for the financial year ending on March 31, 2017 has
issued qualified opinion on 4 points. The relevant part of the auditor’s
report is as per Box 109.
Balance Sheet
Decoded
Author : GC PIPARA
Edition : 3rd Edition
ISBN No. : 9789390831876
Date of Publication : April 2021
No. of Pages : 484
Rs. 1395

Description
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