Aug 31, 2016

Indian Railways set to move from surplus/shortfalls to profit/loss; here’s how

Moving a step closer to a corporate-like presentation of its financial numbers, Indian Railways, which has always fought shy of recognizing profits and losses and merely talked about surpluses/shortfalls, has made its entire northwest zone shift to accrual-based accounting.

New Delhi: Moving a step closer to a corporate-like presentation of its financial numbers,Indian Railways, which has always fought shy of recognising profits and losses and merely talked about surpluses/shortfalls, has made its entire northwest zone shift to accrual-based accounting. It had earlier launched the system on a pilot basis for the rail coach factory in Kapurthala in the zone.
The accrual-based accounting would provide for asset valuation, sharper estimates of costs and better understanding of the return on investments.

Put simply, the system could help the railways virtually become a PSU that can willingly seek profits, although governed by a special statute, as is the case of LIC and ONGC. Also, when the financial numbers are better explained, it could seek private funds and external debt a little more easily than now, although the actual financial strength is what would matter. The Cabinet is set to consider a proposal from the railway ministry for the creation of a $5-billion fund with multilateral agencies including the World Bank to step up the transporter’s capacity expansion projects.

Official sources told that four divisions and three workshops in the northwest zone have adopted the new accounting system, which will be replicated across the organisation on a war footing. An expert committee, comprising railway officials and the Institute of Chartered Accountants of India, would soon come out with accounting standards that are at once IR-specific and compliant with the Generally Accepted Accounting Principles.

Being a public utility obligated to take up many projects that won’t yield return on capital, the national transporter uses a cash-based accounting system; though a tariff regulator that will recommend fares is on the cards, it may still have a long way to go before introducing commercial pricing of its services (the passenger segment continues to be heavily subsidised). Experts have long said that the IR’s inability to attract private funds or even multilateral finance for its huge expansion needs is partly due to the opaque system of accounting it follows and lack of clarity on return on investments. Even though the gross receipts of the IR (predominantly traffic receipts) is shown to slightly exceed its ordinary working expenses, it is partly because of the flexibility it enjoys when it comes to appropriations to depreciation reserve fund and to a certain extent, even the safety fund, while the pension fund is a revenue expenditure item not much amenable to discretion. The shift to accrual-based accounting would make such accounting indiscipline difficult.

The accrual system of accounting records revenue and expenses when they are incurred; the system registers transactions carried out on credit basis, by recording these as either receivables or payables. In other words, a transaction is recorded when the right to earn income is established or when expenditure is committed. In the cash-based system being followed currently, however, transactions carried out on a credit basis are not recognised. Also, in this system, since the main objective is to record only the flow of cash, the records of assets created, purchased, disposed of, etc, are not kept.

Currently, the railways hardly pays any income tax (indirect taxes paid including service tax on passenger fares and freight are a pass-through), and the dividend it pays is nothing but the interest payable on the capital at charge (Plan expenditure), which is treated as loan in perpetuity. Corporate-like accounting might also lead to the demand that IR’s income should be taxed.

In fact, when Lalu Prasad was railway minister (2004-2009), he had introduced some changes in IR’s accounting practices. His statement of “cash and investible surplus” was apparently aimed at painting a better picture of its balance sheet to investors. Critics, however, said this practice inflated IRs cumulative cash surplus before dividend (somewhat akin to Ebitda or earnings before interest, tax and depreciation and amortisation). Cash surplus was a novel financial yardstick for the railways that used to speak of only surplus/shortfall. Later, Mamata Banerjeeas railway minister abandoned this practice. It was pointed out that Prasad’s investible surplus comprised appropriations from IR’s own revenue that can barely be classified as capital investment, as the money is used for replacement of existing assets rather than creating new capital assets that can generate income.

The government, meanwhile, is considering dispensing with the practice of presenting railway budget; it may merge the railway accounts with the general budget.