GROUP 24

Sourabh Singhal (PGP-19-146)

Shubham Bagga (PGP-19-143)
Rashi Korjani (PGP-19-126)
Sucheta Vardhan (PGP-19-148)
Rohit Nuvvula (PGP-19-132)

Note: Group 24 has done the financial statement analysis of Mahindra and Mahindra Limited consolidated accounts.
Therefore, any uncited data related to the company’s financials and figures has been directly sourced from the annual
financial reports 2017-18.
1. Discuss the company's revenue recognition policy in detail. Link your discussion
to the nature of the company's product and your knowledge of theory discussed in
text / classroom. Critically Evaluate.
Mahindra & Mahindra Ltd. (hereafter M&M) is a $20.7 billion group with 150+
companies across 100+ countries. [Mahindra and Mahindra Ltd. (2019)] M&M adheres to Ind AS
115. The consolidated financial statement notes explain the revenue recognition for its
businesses across multiple industrial sectors. [Mahindra and Mahindra Ltd. (2018, p.270)]

Comparing the Revenue Recognition policies of Tata Motors, Maruti Suzuki India Ltd.
(hereafter MSIL) and M&M, following observations have been made.
i. Revenue is measured at the fair value of the receivables. It is realized when the
Collectability of the resulting receivable is reasonably earned.
ii. Companies base their estimates on the historical cost basis after considering the
type of the customer, the type of transactions and the specifics of each arrangement
on a case by case basis. [Tata Motors (2018, p.266)]
iii. The newly stated AS115 will also result in enhanced disclosures about revenue,
better record the transactions that were previously not addressed comprehensively
(ex: service revenue and contract modifications) [Ministry of Corporate Affairs (2017)]
iv. Certain transactions like pay-outs made to dealers as infrastructure support are to
be recognized as revenue deductions in the Ind AS format, which are presently
reported as expenses. It will have a twofold impact – decreases in both revenues and
expenses. [Tata Motors 2018, p.275]
v. Another change in the revenue recognition policy comes in way Government
incentives are recognized. They are to be now realized as Operating Revenues
rather than other income.
Revenue Recognition Breakdown of M&M:
 Revenue from Sale of Goods from manufacturing businesses like M&M Ltd., MVML
is recognized when all the below conditions are satisfied:
o The Group has transferred to the buyer the significant risks and rewards of
ownership of the goods;
o The Group retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
o The amount of revenue can be measured reliably;
o It is probable that the economic benefits associated with the transaction will
flow to the entity; and
o The costs incurred or to be incurred in respect of the transaction can be
measured reliably [M&M (2018, p.285)]

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 Income from dividends
It is recognized only when the right to receive the amount is confirmed. Interest
income is measured on probability basis when the company/group is sure that the
economic benefits will flow into the company and the amount of benefits can be
measured reliably.

 Income from financing business

The group follows the effective interest rate to recognize interest income from its
financial services business (Mahindra Finance Ltd.). The group segregates its assets
based on credit impairment. For assets which are out of credit impairment effective
interest rate is calculated based on future cash flows as per contractual terms.

 Income from construction contracts and property development:

When the outcome of the contract can be estimated reliably, revenue is recognized
till the stage of completion of contract activities when the financial statements are
being prepared. The measurement of revenue is based on the proportion of contract
terms.

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2. Discuss the company's inventory valuation policy in detail. Link your discussion to
the nature of the company's product and your knowledge of theory discussed in text /
classroom. Critically Evaluate.

M&M values the raw materials, manufactured components, work in progress, finished goods
produced and purchased for sale, all as the part of inventory either at cost or net realizable
value whichever is lower following the IAS 2 inventories. Obsolete and slow-moving items
of the company are also valued in a similar manner. However, stores, spares and tools other
than obsolete items are valued at cost. The company follows Weighted average method of
inventory valuation for measuring the cost.

The inventory of M&M is intertwined and commoditized. It is thereby impossible to assign

specific cost to each unit; thus, specific identification method does not suit the purpose. LIFO
method of inventory valuation is not allowed as per IAS 2 inventories in India. FIFO is majorly
used for FMCG products or the goods that are perishable in nature. Also, FIFO and LIFO
methods usually lead to an undervaluation or overvaluation of the inventories thus altering
the closing inventories and affecting cost of goods sold and profits for the next period. Thus,
the group is using appropriate method of valuation. [Bragg (2018)]

The other major players in the industry like MSIL use the same method of Weighted average
to value the inventory but Tata Motors follow the FIFO method of inventory valuation for
consolidated accounts. [Tata Motors (2018, p.269)], [MSIL (2018, p.205)]

The inventory costs are being calculated by adding purchases to opening inventories and
subtracting the cost of goods sold. They also include the storage and related costs to
inventories. In 2017-18, M&M has written down inventory worth ₹86.46 crores. The
company has been revising the value of its inventories according to the changes in the
market. This adds to realistic importance in the statements. Also, the group doesn’t write off
any inventories making it clear that the whole pool possesses some economic significance
for future. [Tuovila (2019)]

The M&M has following inventories in its business:

Raw materials and bought out components: It include tyres, seats, shafts, gears, interior
trims, construction material etc. which have a value of ₹3442 crores increased relative to
previous year. This category holds ~36.8 % of total inventories of the M&M.

Work in Progress: This includes costs like vehicle’s body-in-white, partially assembled
vehicles, property development activities, long term contracts etc. which has increased to
₹1901.44 crores.

Finished Goods produced for sale: This amount has been reduced from last year perhaps
because of the new policy in India due to GST norms claiming to reduce finished goods

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inventories across different sectors particularly farming, which impacted Finished goods
inventory of many industries.

Stores/Spares/Loose Tools/Food beverages/smokes and supplies: This category

possesses the most indistinguishable and intermingled materials like screws. It has a
cumulative value of ₹199.78 crores.

Conclusion: The group follows Weighted Average method of Inventory Valuation. The
inventories at the end of year 2017-18 stand at ₹9335.57 crores which has increased relative
to previous year. The group has been following the same method of inventory valuation since
quite long, thus following the consistency principle of accounting standards.

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3. Identify key items in the financial statements and corresponding accounting
policies in the notes to accounts. Link it to one/more of the seven accounting
principles discussed in class. Justify how those accounting principles apply to the
specific items/notes.

M&M a legal business entity presents its financial statements annually stating the balance
sheet as on a date 31st March 2018 and Statement of Profit and Loss for the year 2017-18
following the Time Period Principle assuming the interval as 1 year. The group also follows
the Full Disclosure principle of accounting as it clearly provides notes to accounts for almost
all the items included in the annual statements, thus reducing scope of ambiguity and
provide a clear picture to its stakeholders. All the amounts are measured in Indian Rupees
assumed as a unit under Monetary Measurement Principle. In the group’s balance sheet
and multiple notes to accounts following can be observed:

1) Property Plant and equipment: PPE form a major part in group’s assets. They are
accounted at the acquisition value and is depreciated over the years. There might be
highs or lows in the market, but value of PPE always accounted at historical cost and
not at the market fair values. However, the financial assets such as derivatives
changes as per their market value. This shows that the group follows Historical Cost
principle for accounting its Non-Current assets. They follow a consistent pattern in
useful life of Plant and Equipment, Buildings and vehicles as per the schedule II of
companies act 2013 to depreciate the asset on straight line basis. This signifies the
use of Consistency principle by the group as they have been following the same
method of depreciation over the years. Depreciation is charged on the asset annually,
signifying the Matching principle of accounting. The amount of investment is
depreciated over its useful life which signifies that the business will sustain in future
and is running on Going concern basis.

2) Other Intangible Assets: Under intangible assets, the group expenses the research
cost for intangible assets under development in the same period in which it is
incurred. Similarly, for other intangible assets like Technical Knowhow,
development expenditure, expenditure on software and brand license fee the
cost is amortized over a specific term of period thus matching the costs to the whole
period of useful economic life following the Matching principle of accounting.

3) Trade Receivables and Trade Payables (Current and Non-Current): Short-term

and long-term trade payables and trade receivables signify that actual cash
movement has not taken place even when the economic benefit has been
realized/earned or the economic ownership has been transferred. The group
recognizes its revenues when earned, but the payment is to be made later. This shows
that the group follows Accrual principle to accounting. Furthermore, the long-term
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 trade receivables and payables assumes that the group is going to persist forever in
future. It doesn’t seem to seize its operations. Thus, it clearly follows the Going
concern principle.

4) Inventories: Valuation of inventories is being consistently done on weighted

average method. Cost of goods sold is accounted specific to the period and rest is
valued in closing inventory. The group writes down its inventories by 86.46 crores to
bring down to a lower cost relevant to that period following the Matching Principle.
It does not write up to an original amount, thus not anticipating unrealized gains also
following the Conservatism principle of accounting.

5) Provisions: The group makes a certain level of provisions for current obligations as
a result of past event. These are useful for probable expenses or losses which might
occur in future as a result of current economic transactions. It follows the policy of
anticipating no profits and providing for all losses. M&M has provisions for employee
benefits, service coupons and warranty made towards the sale of different products.
The value of provision is usually estimated at the time of sale or is revised, as and
when the liability becomes reasonable. Creation of Provisions is a perfect example of
following Conservatism Principle.

6) Loans (Assets)/Borrowings (Liabilities): The loans and borrowings are a mix of

secured/unsecured structures with a fixed term extending from. It can be inferred
that the group has such financials because it is assumed that the group is going to
persist in future. It doesn’t seem to seize its operations following the Going concern
principle.

7) Other Equity: The group has created Debenture Redemption Reserve, Employees
stock options outstanding account and statuary reserve which forms a huge amount
for Equity as a whole. These are made from profits to ensure that the funds do not
lack for future payments. This act follows Conservatism Principle of Accounting.

[Narayanaswamy (2019, p. 11-288)], [Wikibooks (2018)]

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4. Comment on the presentation of the Income Statement i.e. Profit and Loss account.
Based on theory/discussion in class critically analyze the presentation and quality of
the statement. In particular, link it to the accounting principles when critically
analyzing.

The profit and loss statement of M&M consists of the following sections:

 Profit or Loss
 Total Other Comprehensive Income
 Comprehensive income i.e. total of Profit or Loss and Total Other Comprehensive
Income.

The statement does not have separate sections for operating and non-operating expenses
thus lacking a clearer understanding. While accounting for revenue from operations from
different businesses, the sales are made mostly on credit, which follows the Accrual basis
of accounting. Accrual concept gives a true depiction of financial responsibilities and
company’s resources. If only cash accounting would have been followed, the group wouldn’t
be able to make profits or take credit which ultimately affects the long-term financial
viability.

Cost of Materials consumed, Depreciation, Amortization, Employee benefits expense

etc. have been matched as per the expense of current year. It is important that a business
follows Matching principle because if the expenses or income are not realized in the period
in which incurred, it might undervalue or overvalue the profits which gives misleading
results to stakeholders. In fact, the heavy costs of Plant, machinery, inventories etc. are
spread across multiple years thus not overburdening the financials.

The group expenses the provisions for expected credit losses including the write offs which
signifies that Conservatism is followed to anticipate all the future probable credit losses.

Industry Analysis

The consolidated profit and loss statement of M&M has been compared with two other major
players, MSIL and Tata Motors. The overall presentation across the three statements is
extremely similar with small differences arising in the notes to the profit and loss statement.
Most of these differences are due to the differences in the operations. The statements of the
three companies are compared and the discrepancies (if any) have been highlighted.

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The share of owners of the company and non-controlling interests for Profit, Other
Comprehensive Income and Total Other Comprehensive Income are separately presented at
the end of statement which give a clear understanding to the reader regarding the majority
and minority shareholders of the conglomerate.

Figure 1: Profit share of owners and non-controlling assets [5]

Under Revenue from Operations, lease and rental income, though relatively small (INR
3,000,000) as compared to other line items, is displayed explicitly. However, the Others
under Other operating revenue amounting INR 7,640,000,000 is not bifurcated into sub-
components. This presents a doubtful picture as; a huge amount has not been clearly stated
while a small amount has been provided with explanation.

Figure 2: Revenue from Operations [5]

Industry Relevant Disclosures: The group has disclosed the Government grant and
incentives received from setting up manufacturing facilities in developing regions in Other
Operating Income. This signifies the use of Matching Principle. Likewise, Scrap Sales
amounting INR 2,110,000,000 is disclosed in the company’s statements benchmarking the
industry’s norms. Here, the group relevantly uses the Materiality Principle and improves
the comprehension for the readers.

Other non-operating income under notes to other income which constitutes 18.5% of the
total other income has seen a growth of 90% over last year. But, no breakup of components
is stated in the income statement. It creates a lack of understanding related to the sources of
income.

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The group has 85% of its interest income coming from hold to maturity financial
instruments which are displayed by the line item Financial assets carried at amortized cost.
Whereas 15% is available for sale instruments displayed by Financial assets carried at
FVTOCI that signifies a clear picture of investment intent of financial instruments for the
group.

Figure 3: Other Income [5]

Other expenses in the expenses heading of the statement includes an unexplained tab of
Miscellaneous Expenses which constitutes 23% of the total Other expenses section.

Figure 4: Other Expenses [5]

However, other players like MSIL in Other expenses section of Profit and Loss statement
clearly quotes regarding miscellaneous expenses - “Does not include any item of
expenditure with a value of more than 1% of the revenue from operation” [MSIL (2018,
p.232)]. This gives an idea to the shareholders that the numbers, though significant are
relatively smaller compared to revenue from operations and hence are immaterial.

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 Figure 5: Other expense (MSIL) [7]

The Tax expense in the P&L statement is clearly bifurcated into current tax and deferred
tax expenses. The group also explains the components of deferred tax assets and liabilities
in notes to tax expense which is in coherence with other major players like MSIL.

Figure 6: Tax Expense [5]

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 CITATIONS AND REFERENCES:
1. Bragg, S. (2018) Inventory Valuation [Online]. Available at:
https://www.accountingtools.com/articles/what-is-inventory-valuation.html (Accessed: 17 July
2019)
2. Copeland, A., Dunn, W., Hall, G. Inventories and the automobile market [Online]. Available at:
https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1756-2171.2010.00128.x (Accessed: 17 July
2019)
3. Corporate Finance Institute, Weighted Average Cost Method [Online]. Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/weighted-average-
cost-method/ (Accessed: 17 July 2019)
4. Kenton, W. (2019) Revenue Recognition [Online]. Available at:
https://www.investopedia.com/terms/r/revenuerecognition.asp (Accessed: 20 July 2019)
5. Mahindra and Mahindra Ltd. (2018) Integrated Annual Report 2017-18. Available at:
https://www.mahindra.com/resources/investor-reports/FY18/Announcements/Mahindra-
and-Mahindra-Annual-Report-2017-2018.pdf (Accessed: 13 July 2019)
6. Mahindra and Mahindra Ltd. (2019) Who we are [Online]. Available
at: https://www.mahindra.com/about-us (Accessed: 31 July 2019)
7. Maruti Suzuki India Ltd. (2018) Annual Report | Sustainability Report 2017-18.
Available at:
https://marutistoragenew.blob.core.windows.net/msilintiwebpdf/MSIL_AR_2017-
18_HR.pdf (Accessed: 16 July 2019)
8. Ministry of Corporate Affairs (2017) Indian Accounting Standards (Ind AS) 1. Second
Edition. Accounting Standards (online) Available at:
http://mca.gov.in/Ministry/V2/accountingstandards1.html (Accessed: 10 July 2019)
9. Narayanaswamy, R. (2019) Financial accounting a managerial perspective. 6th edition.
Delhi. PH India
10. Tata Motors (2018) 73rd Annual Report (Integrated) 2017-18. Available at:
https://www.tatamotors.com/wp-content/uploads/2018/07/12115930/Annual-Report-
2017-2018.pdf (Accessed: 16 July 2019)
11. Tuovila, A. (2019) Inventory Write-off [Online]. Available at:
https://www.investopedia.com/terms/i/inventory-write-off.asp (Accessed: 17 July 2019)
12. Wikibooks (2018) Accountancy/Principles of Accounting [Online]. Available at:
https://en.wikibooks.org/wiki/Accountancy/Principles_of_Accounting (Accessed: 17 July 2019)

Note: Group 24 has done the financial statement analysis of Mahindra and Mahindra Limited consolidated accounts.
Therefore, any uncited data related to the company’s financials and figures has been directly sourced from the annual
financial reports 2017-18.

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