PSU defence firms get accounting exemption

The government has exempted its defence companies from segment account reporting so that these entities don't have to reveal sensitive information in their books.

Segment reporting pertains to a company's financial information with regard to the different products and services it produces and the geographical areas it operates in.

"For government companies engaged in producing defence equipment, the provisions of section 186 (loans and investments by companies) and accounting standard 17 (segment reporting) shall not be applicable," said a senior official.

OTHER RELIEF

• These firms have also been allowed to invest through layers of subsidiaries
   
• No unanimous board approval required for giving any loan, guarantee or security
  

 

These steps have been taken to protect sensitive information from coming onto books

Besides, these companies have also been exempted from complying with section 186 of the Companies Act, 2013, which prohibits a company from making investments through more than two layers of subsidiaries and requires unanimous board approval for giving any loan, guarantee or security.

Many government defence companies have more than two layers of subsidiaries.

The decisions come at a time when the government wants to increase domestic defence production by both public sector and private companies. Currently, India is the second-largest importer of defence equipment.

The government has raised the foreign direct investment (FDI) cap on defence companies from 26 per cent to 49 per cent. FDI beyond 49 per cent is also allowed in state-of-the art defence manufacturing, albeit with riders.

Harinderjit Singh, partner, Price Waterhouse, said while earlier, no exemption was given to government defence companies in terms of segment reporting, some of these companies didn't disclose segment information due to the "sensitive nature of the information". For instance, while preparing its annual report for 2013-14, Hindustan Aeronautics Ltd (HAL), the government-owned aircraft manufacturer, complied with all accounting standards except that related to accounting standard 17.

"Keeping in view the nature of business and the sensitive nature of the disclosure, it is considered prudent not to disclose the information required by accounting standard 17 regarding segment reporting. Such non-disclosure does not have any financial effect on the accounts of the company," HAL said in its annual report.

Singh says in such cases, the auditor's report is qualified for non-compliance with accounting standard 17. "Perhaps, it is in response to this practical difficulty that the government has now provided an exemption to government defence companies," he adds.

Segment account reporting is only a disclosure standard and doesn't affect the recognition or measurement of any component in financial statements. "Instead, it requires companies to provide financial information with respect to different products and services that they produce and the different geographical areas in which they operate," Singh says.

Though no such exemptions have been given to private companies engaged in defence equipment manufacturing, it is unlikely to disrupt the level playing field, as such exemptions do not have a bearing on the manner in which the performance of such companies are depicted.