Deccan Aviation hogged the limelight on posting a profit of Rs 9.6 crore for the quarter ended December 31, 2006. It now turns out that this figure was off-the-mark. The new auditor, B K Ramadhyani & Co, who agrees with the company’s accounting practices, believes the profit should be Rs 13.3 crore—a 38% increase. But wait. If you were to accept the contentions of earlier auditor S R Batliboi & Co, the loss for the period would come to Rs 125.8 crore. Is it puzzling? Let’s take a look at two, of several, policies responsible for this variance.
One, the company took the benefit of "credit memoranda" from a supplier "in conjunction with the lease of aircraft... towards purchase of spares from the said supplier." S R Batliboi felt that such amounts should be recorded over the period of the lease. But the new auditor concurs with the company’s view.
Two, other income for the quarter ended December 31, 2006 includes Rs 132.7 crore towards "assignment of aircraft purchase contract to a third party". The company has an option for reassignment. S R Batliboi & Co claims this "does not meet the principles of revenue recognition" and "is in the nature of financing." The current auditor disagrees with that. Which auditor would you go with?