You have gone through and understood the information available from the annual reports of the company regarding nonprovision and ultimately provision after seven years of the diminution in the value of long-term investments in its joint venture, Liberty and Nino, Russia, as provided in this chapter.
The following further information about the company, as taken from annual report 2000-01, is provided below:
LIBERTY SHOES LTD.
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EXTRACTS FROM THE ANNUAL REPORT 2000-01
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Rs. In lacs
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94-95
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95-96
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96-97
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97-98
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98-99
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99-00"
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00-01"
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PAT
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627.56
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744.02
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731.30
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756.46
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837.97
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740.73
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590.19
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No. of equity shares of the face value of Rs. 10 each o/s all through these years: 50,70,000 (Except 94-95: 50,59,900).
** Annualised (by the company).
Now attempt the following requirements.
1. The joint venture closed operations in 1994. Until 1999-00 the company has been stating that it is trying realization of whatever is possible, and the amount of this realisable is not ascertainable. This in turn means that provision for diminution cannot be made. How is this possible? Is the company justified in its statements year after year for seven years? Provide a well-reasoned answer.
2. What is the impact of provision made in 2000-01 on the EPS of the company? Do you feel it is the real EPS of the company for this year? And in fact, if the company's business continues to grow as in the past, the 2001-02 EPS will show a marked improvement over 2000-01. In this case, therefore, the company should have made the provision much earlier. But it did not? Comment what considerations might have weighed in the mind of the management? Corporate tax rate for A/Y 2001-02 ... 39.55%.
3. Has the company not over-reported its profitability, EPS and net worth by not making the provision in 1994-95 or at best in 1995-96 and thus influenced its valuation in the capital market? Do you think that the non-provision in early years had a cascading effect to the advantage of the company? Why or why not? Compute the EPS for all the given years after making provision for diminution, assuming it should have been made in the earliest year and, if not, then in the next year and so on. Compare the EPS based on the information provided above with the revised EPS for all the years and comment. Corporate tax rate: 46% for A/Y 95-96 and 96-97, 43% for 97-98, 35% for 98-99 and 99-00, 38.5% for 00-01.
4. Is the company justified stating in the 2000-01 report that it will continue its efforts to realise the investment together with accrued profit despite the investment seeming to be dead. Is it prudent to paint a rosy picture of the future in such cases? Why or why not?
5. Draft a crisp two-three page report.