MUMBAI: Mahindra group company Tech Mahindra has been under fire for the last few days over their accounting treatment of certain transactions. Leading brokerage CLSA has, in fact, termed Tech Mahindra's accounting a 'gimmick'.

ACCOUNTING JUGGLERY?

* Tech Mahindra paid Rs 440cr for ‘exclusivity' to British Telecom in FY08
* Treated Rs 440cr as extraordinary item
* Tech Mahindra received Rs 968cr from British Telecom as restructuring fees
* Rs 968cr to be apportioned over period of contract

BT FY08 Annual Report: "A cash payment of £55 million was received (from Tech Mahindra) during 2008 representing income of £28 million and a prepayment of £27 million."

Tech Mahindra FY08 Annual Report: "During the previous year ended March 31, 2008, the company had entered into an agreement with a customer under which it will have exclusivity for 90 days in negotiating an engagement. As per the terms of the agreement, the company has made an ‘exclusivity’ payment of Rs 4,401 million to the customer which is unconditional, irrevocable and non refundable. Accordingly, this payment had been disclosed as an exceptional item in the previous year’s Profit and Loss account for the year ended March 31, 2008."
 
ACCOUNTING JUGGLERY?

CLSA Report: "When Tech Mahindra paid upfront cash to British Telecom to win "multi year" outsourcing deals, the cash payment was treated as an "exceptional item." Hence, deal margins were  over-stated by this convenient accounting treatment. Now, when business from BT is faltering, and BT has accordingly returned the cash – this inflow will be recognised over four years – the same money that was previously an exceptional item now becomes a "recurring" item over stating revenues and margins for 16 full quarters."

Tech Mahindra's response: "Certain long-term contracts have been restructured, and the restructuring fee we have received is for modifying these contracts. Services will continue to be provided over the life of the contract, and our auditors, after reviewing the transaction, have advised us that as per accounting standards, the appropriate treatment is to amortise the fee over the life of the contract."