Reliance Industries is yet to take a call on when the company will start recognising expenses on more than Rs 1.79 lakh crore it has spent on building assets like spectrum and network infrastructure for its telecom arm.
Companies that set up greenfield projects recognise expenses after they start generating revenues. Once the expenses are recognised, a company has to record depreciation in long-term assets, according to accounting practices. This provides a better insight into its profitability.
The telecom arm, Reliance Jio Infocomm, has been capitalising expenses, or delaying recognition of expenses, by adding them to its long-term assets on the balance sheet. It started generating revenues after 1 April when the company began charging for its services, after offering free data for more than six months since its launch.
Recognition of commercial operations is a subjective term and depends on the type of business, said TP Ostwal of TP Ostwal & Associates LLP Chartered Accountants. It is not at the discretion of the management; the company will take a call based on when the asset starts generating revenue, he said.
Reliance Jio had more than Rs 2 lakh crore worth of assets at the end of March, nearly 90 percent of which are work-in-progress. The company will spend an additional Rs 18,000 crore in the ongoing quarter on capital expenditure. Brokerage firm Morgan Stanley Research expects it to spend more than twice that amount in the current financial year.
The company, in notes to the audited financial results, said it will stop capitalising when “all the quality of service parameters set by the management are met”. In an interaction after the earnings, it did not elaborate on the parameters.
Anshuman Thakur, group strategy head at RIL, said the accounting is a function of other things as well such as whether the assets are being utilised in a manner that is defined.
Anshuman ThakurYou recognise expenses when you get the commensurate results out of it. When the assets are utilised, in a manner as defined by the management and therefore the auditors look at it if it’s all done that way, then you would start recognising the revenue part of it and associated expenses.
Srikanth Venkatachari, however, said the company could start recognising expenses from the next quarter.
Srikanth Venkatachari, Joint chief financial officer, RILWhether we will recognise or report for this quarter, that determination will be made at the end of the quarter. So, if it is not this quarter then it will be the next. There are no more quarters we are talking about, either we report in this quarter or the next quarter.
According to brokerage Emkay Research, Reliance Jio is expected to start reporting profit and loss accounts from the second quarter of the financial year 2017-18.
Investment advisor SP Tulsian, however, said if the company is already generating a revenue, the profit and loss statement has to be prepared for first quarter of 2017-18.
SP Tulsian If this would have been a promotional offer, then probably they would have delayed the P&L by one quarter. But it is not like that. They have already made the services paid from 1 April.
Reliance Jio will continue with its attractive pricing strategy for the next 12-18 months to gain more data customers, said Morgan Stanley Research in its report after the company released its earnings. Based on announced plans, the telecom company will have $2.7 billion (around Rs 18,000 crore) in revenue in the financial year 2017-18, earnings before interest, depreciation and amortisation (EBITDA) loss of $391 million and a net loss of $1.9 billion at the end of financial year 2017-18, the brokerage said.
Morgan Stanley expects Reliance Jio to have a negative free cash flow of $7.4 billion (Rs 48,100 crore) in the financial year 2017-18, which will be partly offset by free cash flow generated from the new petrochemical and refinery projects of RIL that are expected to start commercial production this year.
The company will be able to capture 60-65 percent of the economic benefit from the new facilities in the current financial year, said Venkatachari. A large portion of these economic benefits will accrue only in the second half of the year, he said.
(This article was first published on BloombergQuint.)