D-FM 6-4 Detailed Understanding of Financial Statements

Training Program
FINANCIAL MANAGEMENT OF DISTRIBUTION BUSINESS

Detailed Understanding of Financial Statements
Balance Sheet (BS), Profit and Loss Account (P/L)
and Cash flows

by Pisupati Karthikeya

CORE International, Inc. DEVELOPMENT THROUGH INTERNATIONAL PARTNERSHIPS
Financial Management of Distribution Business
Distribution Reform, Upgrades and Management (DRUM) Training Program

1
Detailed Understanding of Financial Statements
Balance Sheet (BS), Profit and Loss Account (P/L) and Cash flows
Pisupati Karthikeya,

Understanding Balance Sheet

1. What is Balance sheet?

Balance sheet is a financial statement showing assets on the right side (or bottom
half of the balance sheet) and liabilities on the left (or top half of the balance sheet).
A balance sheet provides an overview of a company's financial position at a given
date. The function of the balance sheet is to show what the company owns and what
it owes. It is one of the main documents that are legally required to be produced by
the companies as part of their annual accounts.

Fixed
Assets
Equity
Surplus
=
=
Current
Assets
Other
Assets
Debt
C. liabilities

2. Composition of Balance sheet
a) Model - Balance sheet of Bescom for 2003-04

BALANCE SHEET AS AT 31ST MARCH 2004

Share holders unds

' F
Share Capital

Share Deposit Adjustm count

Loans Funds

Secured Loans

TOTAL - I
PPLICATION OF FUNDS :-

SL.
NO
PARTICULARS
SCH .
NO
I SOURCES OF FUNDS :-
1

Share Deposit
1
1A
500,000
2,059,151,353
500,000

1B

(49,281,953)
2,059,151,353
ent ac
Reserves and Surplus

2

1,285,477,690
12,607,834
567,046,143
3,295,847,090 2,639,305,330
2
3 3,310,689,866 2,672,657,145
Unsecured Loans 4 104,759,535 113,114,980
3,415,449,401 2,785,772,125
3 Other Funds
Service Line and Security Deposits 5 8,620,832,820 7,677,162,484
15,332,129,311 13,102,239,939
II A
1 Fixed Assets
(a) Gross Block 6 13,617,123,654
6,031,309,316
12,789,741,724
(b) Less: De eciation pr
(c) Net Block
5,276,877,742
7,585,814,338 7,512,863,982
(d) Capital Work in Progress 7 451,047,005 534,502,281
8,047,366,263
2 Current Assets, Loans and Advances
(a) Inventories, Sto & Spares res
(b) Sundry Debtors
8
9
434,725,983
14,253,315,110
523,769,133

10

332,536,662
9,385,454,524
(c) Cash and Bank Balances
11

147,240,968
628,346,551
(d) Loans, Advances and Deposits 107,638,665
(e) Othe rrent Assets r Cu
Total -
12 4,619,893,954
19,787,712,677
1,679,308,356
2
Less:
12,324,517,229
Current Liabilities & Provisions 13 12,492,444,709 7,269,643,553
Net Current Assets 7,295,267,968 5,054,873,676
Significant Accounting Policies and
Notes on A counts c
TOTAL - II
24
15,332,129,311 13,102,239,939
Current Year 2003-04 Previous Year 2002-03

3. Statutory overview requirement of the Companies Act, 1956

Sec 209 proper books of account to be maintained
Sec 211 every Balance sheet to conform to the accounting standards issued
Sec 212 Details of subsidiaries to be provided
Part I of Schedule VI form of presentation of Balance sheet and its contents.
o Horizontal or Vertical formats
o Description of items to be included under each subhead and their disclosures
o Notes assisting in interpretation and disclosure

4. Statutory overview Accounting Standards

Treatment and disclosure under various heads
- Assets
o Fixed Assets AS 10 (Accounting for fixed assets), AS 11 (Accounting for
the effects of change in foreign exchange rates), AS 16 (Borrowing costs),
AS 19(Leases)
o Investments AS 13 (Accounting for investments)
o Current assets
Inventories AS 2 (Valuation of inventories)
Others
o Deferred taxation AS 22 (Accounting for taxes on income)

- Liabilities
o Share capital
o Reserves & surplus
o Long term debt
o Deposits from Consumers
o Current Liabilities
o Consumers contribution towards capital assets AS 10, AS 12
o Retirement benefits to employees AS 15

Notes to include AS 1 (disclosure of detailed accounting policies), AS 4
(contingencies and events after balance sheet)

5. Statutory overview License clauses

Generally accepted accounting principles to be approved and used
Voltage wise classification of all Balance sheet items may become mandatory
especially, in view of setting costs across different voltages to allow Open
Access
Disclosure to follow Accounting Standards
Business segment wise reporting encouraged/ to be mandatory AS 17
Accounting for de-mergers AS 14 (purchase method)

2

Capex above certain limit- to be approved by ERC
Alienation of assets above certain limit to be approved by ERC

6. Fixed Assets

Generally consists of
o Gross fixed assets put to use
o Accumulated Depreciation on the above
o Capital work-in-progress

Expenditure is booked in CWIP as and when incurred materials, contract
labour or payments for turnkey contracts
Every year overheads, if specifically identifiable for projects, like the following are
capitalised:
o interest during construction
o employee costs
o administrative over heads are transferred from expense accounts to capital
work in progress accounts
On completion of assets, expenditure transferred from Capital work in progress
to Asset group.
Assets put to use are recorded in Fixed assets register along with other
particulars such as date on which put to use, residual value estimate, useful life,
rate of depreciation to be followed, additions/ deletions to the asset value etc.
Common Issues
o Works register generally not maintained in many SEBs
o Pre -1985 asset classification almost impossible in many SEBs
o Post 1985 assets completion certificate not properly issued.
o Assets capitalised in the financial record in an arbitrary fashion.
o Current situation, wherein theres no physical and financial
reconciliation.
o Corporatisation couldnt handle this situation
o Invitation of private players would create chaos (especially if theres dispute
on the value of each asset)
o Audit qualification under CARO (erstwhile MACARO) is inevitable.
o Consumers contribution to capital assets been consistently not treated as
recommended by AS 12 or AS 10. The balance as-on-date, can be safely
assumed to be fully written into the P&L account and hence should be treated
as free reserve for either Bonus shares or as part of Equity.
o Accounting policy to be modified by companies for future treatment
o ERCs are beginning to request for Voltage wise classification of assets, to
understand the cost-to-serve model better
o ESAAR suggests for depreciation in the year subsequent to the year in which
it has been put to use AS 6, AS 1 (matching principle) may not allow it (Is
there rationale to do so?)
o Better to de-activate account codes relating to Generation, Transmission in a
Discoms chart of accounts

3

Importance of this block in the Balance sheet
o Under Schedule VI (of the Electricity (supply) Act, 1948) rate of return, net
block forms the base for calculation of return. Commission or consumers can
raise serious objections, if proper accounting records are not available
Even, if Schedule VI rate approach is not taken, the net asset value is the equity
owners block and hence the correct value is critical for calculating the return to
company.

7. Investments

Investments in subsidiaries, fixed deposits, shares, bonds etc
o Investment in subsidiaries and associates would require consolidation of
accounts as per Accounting Standard
Classification according to Schedule VI to Companies Act needed (quoted,
unquoted under trade or others)
Market value to be ascertained for commenting on the permanent diminution in
value, if any.
Investments for contingency reserve as per Schedule VI of E(S) Act based on
the Cost + tariff, an allowance is made in tariff and the same is to be invested
(failing which the tariff will be deescalated to that extent) which could be
replaced
Issues
o Evaluation of quoted securities and their fair market values

8. Current Assets Stores, Spares etc

Relates to various stores, spares, tools that are held in inventory
Capital stores (insurance spares) should be identified separately
Issues
o Stores issue etc to be valued strictly according to AS 2 (FIFO or weighted
average method)
o Closing inventory needs to be valued as per AS 2
o Physical verification of year end or continuous verification processes to be
introduced
o Slow moving or obsolete stores to be identified and written-off
o Materials-at-site to be accounted separately
o Existing ESAAR rules to be modified to align with AS 2
o Standard costing system can be continued, however, the year end
reconciliation to historic accounting is crucial some SEBs carry this
differences in Reserves usually corrected at the time of corporatisation
o One of the major culprits in the inter-unit-account (IUA) balances needs an
good IT software to eliminate this issue
o Outstanding IUAs should be swept away in the corporatisation restructuring
activities?

4

o Cost accounting rules requires classification of capital spares between < 12
months and > 12 months
o Obsolete/ damaged/ unserviceable spares to be identified and written off

9. Current Assets Receivables against supply of power

On sale of power (including unbilled estimates), utility has a right to receive
monies from consumers
Sections/ Divisions raise bills on consumers and collects the same
Individual consumer ledgers are maintained in sections/ divisions and the control
account (summation of these) maintained at Divisional level
Demand Collection Balance is prepared on the consumer category wise basis for
Management control purposes
Issues
o One of the major problems in the sector no authoritative accounting of exact
status of receivables
o Weak systems in creation of consumer accounts
o Subsidiary ledgers have, in many cases, not been reconciled with control
accounts
o Similar to the fixed assets, Trial Balances carry out global accounting of DCB
o Second largest asset block in the Balance sheet in some places can equal
the fixed assets block
o Financed in myriad ways default to suppliers, lenders, government,
retaining of electricity duty etc
o Can release more cash in the system, than tariff hikes
o Delayed payment surcharges one of the components, that increase the
receivable with low probability of collections
o Evaluation of past receivables show large provisioning requirements (in some
cases as close as 75% to 100%)

10. Current Assets Cash and Bank Balances

Cash balances physical cash handled
Bank balances
o Remittance account which can be remitted into only. Balances are swept
periodically to Head office
o Disbursement account from which payments are made
o In-transit accounts to account for cheques in transit

Issues
o Floats money deposited into bank account and not yet utilised for payment
or investment is yet to managed by many SEBs opportunity cost/ gain
o Reconciliation of cash collected and deposited yet to be strengthened
o Introduction of Billing & collection agents/ franchisees need for control and
monitoring

5

o Escrow accounting & monitoring how to record the same in accounts,
management control systems

11. Current Assets - Others

Advances to suppliers
Advances to contractors
Loans and advances to employees
Tax deducted at source on payments
Loans to subsidiaries
Other sundry debtors
Subsides receivable (another major category)
Deposits
Inter-unit account pending reconciliation
Issues
o Advances reconciliation of subsidiary ledger to control accounts
o Inter-unit accounts on transfers of cash, materials, assets, others assumes
gargantuan proportions accounts are unable to treat the balances, since
there could be large compensating credits and debits leading to confusion.
Some of the states have attempted to analyse transaction with a cut-off and
treat the balance as reduction/ increase of values under natural head.
Software or systems needed to resolve this on urgent basis.

12. Current Liabilities Others

Liabilities to suppliers
Liabilities to Staff
Other Liabilities (deposits, EMDs, interest accrued but not due, tax deducted at
source on income earned etc)
Issues
o Liabilities for suppliers materials awaiting clearance liability created on
basis of past bills? (Should be created only on title rights passing to buyer
and not before. If the title rights have been assumed, then the rate should be
on the basis of Purchase Order)
o As per Schedule VI to the Companies Act, need to create classification of
dues to small scale units and others

13. Current Liabilities Power Purchase

Currently only to Transco which is also single buyer. (Position will change with
assignment/vesting of PPAs to Discoms since Transco can no longer handle the
trading activity)
May be split into individual generators should states follow assignment of
individual PPAs to discoms
Need to be managed within the payment terms failure can invite penalties
including invocation of Escrows, curtailment of power

6

Issues
o Cash flow availability single buyer had the luxury of mixed pool from all
discoms.
o Will default by one discom to NTPC, curtail power for the entire state or to a
discom area alone
o Similarly, on assignment of PPA on %basis, will default of one discom invite
invoking of escrow on all discoms
o Will state generation continue to be treated as Banker by all Discoms

14. Current Liabilities Borrowings

All short term loans (payable within 12 months), overdrafts for working capital etc
must be classified here
All capital liabilities amounts payable within one year, will also be classified here
(international practice)
As far as possible distinct classification to be made
Issues
o Regulatory treatment of interest on liabilities

15. Consumer Security Deposits

Calculated as per ERC regulations usually 2 or 3 months of minimum demand
(MMD) is collectable from consumers
Distinction is made for collection of cash and non-cash deposits (guarantees etc)
Forms the biggest funding source for many utilities
Issues
o Reconciliation of individual balances with control account
o Periodical evaluation of consumption so that higher amount can be
collected from consumers
o Many ERCs have ordered utilities to pay interest (is there any arbitrage to
collect higher MMD)
o Balances of consumers who have left the grid/ disconnected/ discontinued
whether their balances have been properly adjusted?
o Not to be confused with the amount given by consumer for creation of asset
which is treated separately

16. Long term liabilities (capital liabilities)

Loans taken for more than a year are classified under this head
Loans from each source is to be identified clearly including Bonds, debenture etc.
Loans to be classified as Secured or Unsecured
Loans from state government to be classified separately
Issues
o Interest accrued and due are to be shown along with the major head

7

17. Reserves and Surplus

Reserves & surplus
o Appropriated from profits contingency reserve, redemption reserve etc
o Specific cash received share premium, redemption of debentures/ bonds
etc
o Accounting (non-cash) revaluation reserve
o Tariff and dividend control reserve special appropriation of revenues by
regulator without reducing tariffs effect to smoothen out cyclical trends for
operators
o Surplus post-appropriation profits

Issues
o Forex variance reserve, material variance reserve etc should be settled
within the accounting period, since standard rates may be used within the
period
o Proper classification and accounting would be required for eg. Certain
reserve would require statutory investments contingency reserve and
accounts should be able to monitor the same
o Schedule VI of the Companies Act has clear definitions to be followed and
this would b important once the companies start declaring dividend or issue
bonus shares etc
o Classification would also be important to use certain reserves Eg set off
against share premium or a capital reserve

17. Share Capital

This is the shares issued to shareholders for the consideration paid by them
Usually issued as Equity but other type of instruments available
Returned last to the shareholder after repaying all the monies to other lenders,
creditors

Profit and loss account

1. What is profit and loss account?

It is a financial statement in which the profit or loss made by a business organization
during a defined period of time is shown. Its fundamental concepts are to recognize
and account all the income and expense during the period in question. It is a legal
document which must be produced periodically in the form required under the
Companies Act 1956

8

Expenses
(Operating
Interest
Tax)
Income
=
=
Subsidy
Profit Loss

2. Composition of profit and loss account

a) P&L account of Bescom for the year 2003-04
SL.
NO.
PARTICULARS SCH. NO.
I INCOME
1 Revenue from sale of power 14 32,424,670,349 23,535,024,628
2 Rural Electrificiation Subsidy - GoK 1,885,076,460 3,156,451,760
3 Other Income 15 228,633,993 210,621,425
TOTAL 34,538,380,802 26,902,097,813
II EXPENDITURE
1 Purchase of power - KPTCL 16 29,806,423,742 22,076,703,846
2 Provision for increase in power purchase (share 16 - 894,000,000
3 Repairs and Maintenance 17 312,734,988 285,857,786
4 Employee Costs 18 2,487,500,324 2,023,931,126
5 Administrative and Other Expenses 19 269,578,182 219,265,444
6 Other Charges (Debits) 20 154,306,365 142,366,567
TOTAL 33,030,543,601 25,642,124,769
7 Less: Expenses capitalised #REF!
III Profit before Depreciation and Interest 1,507,837,201 1,259,973,044
Depreciation (Net) 21 943,533,416 712,283,204 712,283,204
IV Profit before Interest and Taxes 564,303,785 547,689,840
Interest and other Charges 22 340,961,063 318,472,214 318,472,214
Profit before prior period charges or credits 223,342,722 229,217,626
V Prior period charges(+) or credits(-) 23 8,631,658 -
VI Profit before Reserve & Taxation 214,711,064 229,217,626
Reserve for Contingencies - 31,974,354
VII Profit before Taxation 214,711,064 197,243,272
Provision for Taxation 87,070,000 18,000,000
VIII Profit after Taxation 127,641,064 179,243,272
IX Balance of profit brought over from previous 179,243,272 -
Balance carried to Balance Sheet 306,884,336 179,243,272
VIII Appropriations -
Balance surplus carried to Balance Sheet 306,884,336 179,243,272
IX Significant Accounting Policies and Notes on 24
Previous Year 2002-03 Current Year 2003-04

Source: Bescom Annual Accounts 2003-04

3. Statutory overview requirement under the Companies Act, 1956
Section 209 Maintenance of proper books of accounts
Section 211 Every P&L to conform with the accounting standards issued
Section 212 Details of subsidiaries & its treatment
Part II of Schedule VI
o Vertical formats
o Aggregate amount of sales by company, with each class separately,
volume of each class sold
o Notes to guide preparation and disclosure

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- Electricity duty to be shown separately
- Major items of expenditure to be shown separately power, rent,
repairs to buildings, insurance, salaries and wages (with sub grouping
of salaries and wages, contribution to PF and other funds, workmen
and staff welfare), taxes, miscellaneous expenses
- Depreciation, interest payments, dividends to be shown appropriately
- Payments to auditors, Managerial remuneration shown separately
- Income tax provision, appropriations to various heads

Treatment and disclosure under various heads
o Income
- By category AS 9 (Revenue recognition)
o Subsidy accounting AS 12 (Accounting for Government grants)
Expenses
o AS 4 Contingencies
o AS 6 Depreciation
o AS 8 R&D
o AS 11 Forex variation
o AS 15 Retirement benefits
o AS 16 Borrowing costs
o AS 19 Leases
o AS 22 Taxes
Notes to include
o AS 1 Detailed accounting policies),
o AS 17 Segment wise reporting,
o AS 21 Consolidation of financial statements

Generally accepted accounting principles to be approved and used.
Voltage wise classification of all income and expenditure may become
mandatory especially, in view of setting costs across different voltages to
allow Open Access
Disclosure to follow Accounting Standards
Business segment wise reporting encouraged/ to be mandatory AS 17
Borrowing costs careful disclosure to avoid disentitlement

6. Income Revenue from sale of power
Category wise sale of power (both billed and unbilled)
Other tariff related charges power factor, fixed demand charges, consumer
charges etc
Electricity duty (state government levy), miscellaneous income (meter hire)
Issues:
o Billing efficiency raising of bills on all those liable to pay
o Acceptable bill without billing errors
o Raising of fuel surcharge, wherever applicable

10

o Period of bill raising and submission for payment
o Reduction of commercial losses convertibility to billing

7. Income Subsidy and Others
Subsidy Receivable from State Government on the basis as fixed by
Commission and for other policy directives
Grants from other statutory bodies/ governments
Incentives under special schemes like APRDP
Interest & other income, delayed payment surcharge (caveat is ability to
collect)
Issues
o Booking of subsidies timing of receipt, since this would affect cash flows
o Calculation, justification to ensure that subsidy bridges the gap in service
to those consumers for whom its paid not a mere gap filling between
revenue and expenses

8. Expenses Power purchase
Currently, payable to single buyer (Transco or SEB)
May be payable to individual generators in future, on full allocation of PPAs to
Discoms
Includes fuel surcharge payable
Excludes discounts received/ penalties levied on early/ late payments (to be
accounted separately)
Issues
o Fuel surcharge is a pass through (on orders of ERC) and needs to be
tracked independently
o Mix of power purchase and hence need to be passed on to consumers as
power purchase mix adjustment (part of fuel adjustment)
o In MYT, disallowance on inefficiencies of operation (not competitively
procured, higher loss than allowed draft NTP currently proposes that all
power purchase costs should be pass through)

9. Expenses Major heads
Salaries and Wages includes temporary/ contract labour
Repairs and Maintenance to network, vehicles, buildings etc
Administration and general expense rent, insurance, telecom, travelling,
training, license fee etc
Expenses capitalised should be shown as a reduction in a distinct fashion
Issues
o Ensure that the employee cost includes retirement benefit charge on
actuarial valuation
o Capitalisation of employee expenses proper records to justify such
capitalisation
o Capitalisation of Admin expenses proper records to justify inclusion
o In MYT regime (as per draft NTP), expenses could be benchmarked and
may be disallowed for inefficiency

11

10. Expenses - Depreciation
Depreciation of all assets used in a year to be charged
Disclosure of various groups network, buildings, leases etc
Assets written-off
Issues
o Unlike ESAAR, depreciation should be charged as per AS 6 on all assets
used in a year (matching principle)
o Voltage wise classification may be required in future

11. Expenses Interest and borrowing costs
Interest on all long term and short term liabilities booked here
Individual details to be presented
o Various categories and classes
o Lease charges should be distinctly displayed AS 19
Guarantee charges, premium/ discount on loans raised should be separately
disclosed
Issues
o Interest on loans not approved by regulator may be disallowed
o Interest capitalisation follows Balance of Net Assets method. More
appropriate would be to identify specific loans for specific purposes For
example in AP, Balance Net Assets method is followed, whereas in
Karnataka IDC on specific loans are debited to specific projects

12. Expenses - Tax
Companies should calculate as per AS 22 and provide for income tax
In view of government providing subsidy, there could be profit as per Income
tax calculation
Timing difference should be calculated and tax provisioning calculated
Issues
o IT may disallow expenses, in view of regulatory orders (especially power
purchase)
o Tax provision should also take into tax deferral and suitable tax planning
to be carried out

13. Others Prior period and Extraordinary items
AS 4 would require separate treatment for infrequent prior period and
Extraordinary items
Disclosure requirements as set out in the Accounting Standards
Issues
o SEBs were, over years, treating errors in accounting estimates as Prior
period charges
o These are not so and should be accounted under natural heads

12

Cash flows

1. What is a cash flow statement?

Business organizations carry on their activities to earn profit. Yet, no business entity
can rest contended unless such profits are, periodically and ultimately are converted
in to cash. Financial statements are prepared on accrual basis and therefore do not
throw light on cash management by the Company. A cash flow statement provides a
summary of cash receipts and cash payments, and displays a reconciliation of the
opening and closing balances in cash with the cash flows that occurred during the
period. Cash flows are inflows and outflows of cash and cash equivalents. A cash
flow statement (CFS) covers an accounting period.

Sources Application
Operation Investment
=
=
Finances
Working
Capital
Investments
Cash
Current

2. Composition of Balance sheet

b) Cash flow statement of Bescom

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Amount in Rs
Particulars
A Cash Flow from Operating Activities
Net Profit before Tax 214,711,064 197,243,272
Adjustments for:
Depreciation 943,533,416 712,283,204
Interest & Other Charges 340,961,063 318,472,214
Interest Income on Investment - -
Contingency Reserve 31,974,354
Other Income (228,633,993) (210,621,425)
Prior period charges(+) or credits(-) 8,631,658 -
Income Tax (87,070,000) (18,000,000)
Operating Profit before working capital changes 1,192,133,207 1,031,351,619
Adjustments for
Changes in Inventories 89,043,150 (523,769,133)
Changes in Sundry Debtors (4,867,860,586) (9,385,454,524)
Changes in Loans and Advances (39,602,303) (107,638,665)
Changes in Other Current Assets (2,940,585,598) (1,679,308,356)
Changes in Current Liabilities 5,185,186,633 7,101,939,000
Changes in Provisions 37,614,523 167,704,553
Operating Profit after working capital changes (1,344,070,973) (3,395,175,506)
Prior period charges(+) or credits(-) (8,631,658)
Extraordinary items-Contributions from Consumers 590,790,483 355,828,517
Net Cash inflow from Operating Activities (761,912,148) (3,039,346,989)
B Cash Flow from Investment Activities
Changes in Fixed Assets (Net ) (1,016,483,772) (8,225,147,186)
Changes in Capital Work in Progress 83,455,276 (534,502,281)
Net Cash Outflow from Investment Activities (933,028,496) (8,759,649,467)
C Cash Flow from Financing Activities
Changes in Capital/Share Deposit Account - 2,072,259,187
Changes in Secured Loans 638,032,721 2,672,657,145
Changes in Unsecured Loans (8,355,445) 113,114,980
Service Line and Security Deposit 943,670,336 7,677,162,484
Interest & Other Charges (340,961,063) (318,472,214)
Other Income 228,633,993 210,621,425
Net Cash available from Financing Activities 1,461,020,542 12,427,343,007
D Net Change in Cash and Cash equivalents - (233,920,102) 628,346,551
Surplus Cash [(A) + (B) +( C)]
Add: Opening Cash and Cash equivalents 628,346,551 -
394,426,449 628,346,551
E Closing Cash and Cash equivalent as on 31.03.2003 332,536,662 628,346,551
CASH FLOW STATEMENT FOR THE PERIOD ENDED 31ST MARCH 2004
Previous Year 2002-2003 Current Year 2003-2004

Source: Bescom Annual Accounts 2003-04

3. Statutory overview Companies Act

Not forming part of the requirements in Schedule VI
Sec 211 reference to the compliance of AS and hence the following of AS 3 for
reporting

14


Treatment and disclosure as per AS 3

- Operations
o Refers to the revenue producing activities. Change in working capital is also
part of the revenue producing activities
o Depreciation, interest and dividend are added back
o Taxes are set off under this head

- Investments
o Acquisition and disposal of long term assets including investments
o Interest and dividend on investments are included here

- Financing
o Interest and loan repayments are shown under this head
o Fresh borrowings are also shown under this head


Cash flows are generally not required for filing with ERC
Tariff orders generally ignore the collection efficiency (except in case of Delhi
privatization MYT principle)
MYT as proposed in NTP recognizes collection efficiency being less than 100%

6. Sources of Cash flow Operating activities

Sources
o Profit before Tax
o Add: Depreciation, Interest and any other non-cash charge
o Less: Tax
o Add/ Deduct: working capital adjustments
Opening balance of debtors closing balance of debtors, inventories
excluding cash
Applications
o Losses
o Add/ Deduct: working capital adjustments
Opening balance of creditor (PP) closing balance of creditors (PP),
suppliers and other current liabilities

Difference is the Net flows from Operating Activities

15

7. Sources of Cash flow Investment activities

Sources
o Net value of asset sold (i.e. sale value less net book value)
o Sale of investments (similar to above)
o Income from investments dividend, interest
o Receipt of loans and advances to third parties

Applications
o Capital expenditure
o Investment made
o Loans and advances to third parties

Difference is the Net flows from Investment activities

8. Sources of Cash flow Financing activities

Sources
o Fresh borrowings working capital, long term loans
o Equity raised from shareholders
o Consumer security deposits

Applications
o Loan repayments including working capital loans
o Interest payments
o Dividend to equity holders
o Consumer security deposits

Difference is the Net flows from Financing activities

9. Summary

Net flow from Operating activities Net flow from investment activities Net flow
from financing activities = Net increase/ decrease to cash position

Opening cash position Net increase/ decrease = Closing cash position

10. Exclusions in AS 3

Transactions that do not require cash or cash equivalent need not be included in
cash flow and can be disclosed elsewhere
o Eg. Acquisition of a Plant and machinery by issue of shares, debt-equity
swap, issue of bonus shares
Use of total movements in a resource of a company will reflect these changes
also.

16

Disclosure is needed, when the cash or cash equivalent held by an enterprise
that is not available to it.
o Eg. Cash balances of a branch or subsidiary that is legally prevented from
repatriating it to the company

Common abbreviations

APDRP Accelerated Power Development and Reform Programme
AS Accounting Standard
BS Balance sheet
CARO Companies (Auditor Report) Order
CERC Central Electricity Regulatory Commission
Companies Act The Companies Act, 1956, as amended from time to time
CWIP Capital Work-in-Progress
E(S) Act Electricity (Supply) Act, 1948
EA 03 Electricity Act 2003
EMD Earnest Money Deposit
ERC Electricity Regulatory Commission
ESAAR Electricity Annual Accounts Rules, 1985 Rules, 1985
FIFO First in and First Out
IT Income Tax
MACARO Manufacturing and Companies (Auditor Report) Order
MIS Managerial Information System
MMD Months of Minimum Demand
MYT Multi-year Tariffs
NTP National Tariff Policy
NTPC National Thermal Power Corporation Ltd
P/L, P&L Profit and Loss account
PF Provident fund
PPA Power Purchase Agreement
SEB State Electricity Board
SERC State Electricity Regulatory Commission

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FINANCIAL MANAGEMENT OF DISTRIBUTION BUSINESS

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