Channel Stuffing and Spring Loading - Jargon of the Accounting World

  

Channel Stuffing:
Is a practice where the company tries to bolster revenue artificially by granting unsustainable or improper inducements to wholesalers and customers to get them to take its products.A channel stuffing company may also book revenue by transferring goods to an entity that is not totally separate.

Channel stuffing has been prevalent in the pharmaceutical industry over the years.
 

Spring Loading:When one company acquires another, there is usually a period of several weeks between the announcement of the deal and the actual date at which the acquired company becomes part of the acquirer. In that interim, the acquirer may find a way to book higher level of costs and lower revenue at the company being acquired.

This process, which takes place before the acquired company’s financial statements merge with those of the acquirer, is intended to suppress the profitability of the firm being bought,   solely for the interim period. Once part of the acquirer, the costs and revenue of the acquired firm return to more normal levels, enabling its profit to surge once it can benefit the bottom line of the acquirer.

Courtesy:http://www.nytimes.com/2016/03/29/business/dealbook/valeants-accounting-error-a-warning-sign-of-bigger-problems.html?smprod=nytcore-iphone&smid=nytcore-iphone-share&_r=0

New Schedule VI – Generally Asked Questions & Answers (GAQA)

In the Part 1 and Part 2 of the ‘Ten Minutes’ series of New Schedule VI an overview of the Balance sheet and Profit and Loss account changes were dealt with. In this last Part I’d like to touch upon my perspective of certain practical issues in putting Schedule VI in place.

Issue 1:

The aggregate amount of both long term and shot term loans guaranteed by directors or “others” under each head is to be disclosed. Who does this “others” signify?

Solution:

The words “others” would mean any person or entity other than a director. It is therefore, not restricted to mean only promoters or related parties. In the normal course, a person or entity will generally guarantee a loan of the company only if it is associated with the company in some manner.

Issue 2:

A liability is to be classified as current if the company has an unconditional right to defer its settlement for at least 12 months after the reporting date. How will a 5-year loan which the company has taken is repayable on demand? Based on the past experience, it is not expected that the lender will demand the repayment within next 12 months.

Solution:

As the company does not have an unconditional right to defer the settlement of loan for at least 12 months after the reporting date, it will classify the loan as current. This is despite the fact that based on the past experience, it is not expected that the lender will demand the repayment within the next 12 months.

Issue 3:

Do we need to classify Capital advances between non-current and current categories? If yes, on what basis?

Solution:

Capital advances are advances given for procurement of fixed assets which are non-current assets. Companies do not expect to realize them in cash in the next 12 months or within their normal operating cycle. Rather, over the period, these get categorized as one or more fixed assets. Hence capital advances should be treated as non-current assets.

Issue 4:

In the New Schedule VI “Proposed Dividend” needs to be disclosed in the footnotes. Earlier proposed dividend was being disclosed under the head “Provisions”. Does it mean that proposed dividend is not required to be provided for going forward?

Solution:

The Indian Accounting Standard (AS) 4 – Contingencies and Events Occurring after the Balance Sheet date requires that dividends in respect of the period covered by the financial statements, which are proposed or declared by the company after the balance sheet date but before approval of financial statements, should be adjusted. The new schedule VI has stated an accounting standards override. This simply means that accounting standards will override the New Schedule. The companies will have to continue to create a provision for dividends in respect of the periods covered by the financial statements and disclose the same as provision in the balance sheet. 

The Companies (Accounting Standards) Amendment Rules, 2011

The Ministry of Corporate Affairs (MCA as it is called generally) has given the accounting fraternity 2 notifications just before the new year's eve as a welcome gift. The notifications deal with AS - 11 relating to "The Effects of Changes in Foreign Exchange rates".

http://www.mca.gov.in/Ministry/notification/pdf/Companies_Amendent_AS_Rules_2011.pdf

In the first notification (link above), two changes are introduced:

1. The Companies (Accounting Standards) Rules 2006 will be rechristened as the "Companies (Accounting Standards) Amendment Rules, 2011" and;

2. The foreign exchange gains/ losses can now be capitalised till 2020 (31-3-2020). Earlier the capitalisation was allowed till 31-3-2012.

http://www.mca.gov.in/Ministry/notification/pdf/Companies_Second_Amendent_AS_Rules_2011.pdf

The notification now called "The Companies (Accounting Standards) (Second Amendment) Rules, 2011 inserted a new paragraph in AS 11. The paragraph 46A is reproduced as under:

” 46A. (1) In respect of accounting periods commencing on or after the 1st April, 2011, for an enterprise which had earlier exercised the option under paragraph 46 and at the option of any other enterprise (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements , in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15 of the said rules.

(2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be designated as a long term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of twelve months or more at the date of origination of the asset or the liability:

Provided that the option exercised by the enterprise shall disclose the fact of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized.”