Tuesday, September 25, 2012

Profit AND Loss, Real or Unreal , Fact or Opinion


Definition of 'Profit and Loss Statement - P&L

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".

The statement of profit and loss follows a general form as seen in this example. It begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line (literally and figuratively) is net income (profit). Many templates can be found online for free, that can be used in creating your profit and loss, or income statement.


The balance sheet, income statement and statement of cash flows are the most important financial statements produced by a company. While each is important in its own right, they are meant to be analyzed together.

What Are the Effects of Profit or Loss in a Business Organization?


The main goal for most businesses is to earn a profit. Generating profits in a business environment often indicates that an organization is offering goods or services desired by consumers at a reasonable price. Developing a strong clientele and a competitive advantage against other companies in the market may require much time and effort on management's part as it seeks to produce desirable goods or services that produce profits. Business organizations that cannot complete these functions may face the prospect of losing money from their operations and dealing with the consequences of financial loss.

Profit Allows for Growth

A positive effect of companies generating operational profits is the ability for companies to expand and grow their operations. Companies often reinvest a certain amount of profits earned from current operations into new business opportunities or expanding current operations to increase business output. These opportunities are usually taken on so companies can increase their market share in the business environment and generate further profits from expanded operations. Companies may also choose to enter foreign economic markets to take advantage of potential profit opportunities in developed or emerging economies.

Profit Improves Employee Livelihood

Business profits often allow companies to improve the livelihood of their owners, managers and employees. This may include increasing compensation levels and offering performance bonuses or additional vacation time. These rewards may also generate positive goodwill with employees. Employees may be willing to work harder and increase their efficiency to achieve more profit for the company. This symbiotic relationship allows the business to generate more profits from business operations and pay a fraction of these profits to employees based on their performance.

Loss Reduces Operations

Losses resulting from business operations have the opposite effect of profits. Companies facing a reduced market share from lower consumer demand or a downturn in the business cycle may be forced to reduce operational output. This reduction may include laying off employees, selling equipment or assets and closing underperforming business facilities. Companies may need to take additional measures depending on the consistency of business losses and whether their initial reduction methods have lessened the impact of operational losses.

Loss Leads to Bankruptcy

Consistent business losses may force the company into bankruptcy. While many businesses try to avoid bankruptcy by selling the business to a competitor or securing additional financing to continue operations, bankruptcy may be the final option. Underperforming small businesses may require the business owner to declare personal bankruptcy, depending on how the company is organized. Business bankruptcy may be a long and arduous process, depending on the size of the company and other aspects relating to business operations. Declaring bankruptcy may also create an economic ripple affecting other companies in the business environment.

Profit and loss can be manipulated, market price gives a better picture of cos' financial position

Collected from Economic times BY 

Swaminathan S A Aiyar

Valuations are different from profits and losses. Profits and losses tell you about the past. But valuations are estimates of the future, and those are necessarily different from past performance.

(Valuations are different from profits and losses. Profits and losses tell you about the past. But valuations are estimates of the future, and those are necessarily different from past performance.)


The Comptroller and Auditor General's ( CAG) estimates of government losses and corporate gains have stirred much controversy. Supreme Court Chief Justice S H Kapadia attempted to elucidate valuation principles in a recent speech. He reportedly said, "Today, a number of controversies on valuation are discussed but the basic principle of valuation is that loss is a matter of fact and profit or gain is a matter of opinion. Please apply this test to the controversies going on. I do not want to discuss anything further. Loss is a matter of fact and profit and gain is a matter of opinion. So, if you understand these principles, we will be able to judge." 

I cannot make sense of this. I know of no principle in economics or audit that says losses are real but profits are not. One principle actually enunciated widely is "cash is a fact, but profit and loss are opinions". That's very different from the Chief Justice's claim. 

In 1975, the Press Club asked me to explain a puzzle. Its accounts showed a profit, but it had no money in the bank. Where had the profit gone? I soon found the answer. The accounts showed all receivables as 'income'. But many members had not paid their bills, so the receivables had not been received! There was a paper profit, but a cash deficit. This was no error: audit rules specifically permitted this. This accounting practice was widely used by the biggest corporations. Some showed huge profits, but showed even bigger sums owed to the company by 'sundry debtors'. Such companies had a big paper profit, and even paid taxes on this profit, yet had a cash deficit. 

Beyond a point, treating receivables as profits becomes sheer pretence: the sums should be written off as unpayable. Some companies do writeoffs honestly, but others resort to 'ever-greening' dud loans, quite legally. Given such accounting flexibility, loss and profit are clearly matters of opinion, and can be manipulated to suit the company's strategy. Again, a company's balance sheet may not show all assets and liabilities: some can legally be kept off balance sheet. This enables companies to hide enormous liabilities off the books, showing a very healthy but misleading picture on their books. A classic example of this was Enron, which looked highly profitable, but accumulated such huge debts offbalance sheet that these ultimately sank the company. Citibank's off-balance sheet activities helped sink it in the 2008 collapse. 

Profit is not a clean, unclut-tered concept. Operational profit is income minus expenses. But after that you have to deduct interest on loans, amortisation of old loans, depreciation and taxes. Here again, much flexibility is legally permissible, allowing a company to show profits or losses as it chooses. Contrary to Kapadia's claim, all losses are not a fact. Back in the 1980s and 1990s, India had many large companies (notably Reliance) that paid no corporate tax.


Why not? Because the government had provided several tax breaks. The old 'investment allowance' allowed companies to deduct a certain percentage of new investment from gross income. Investing in backward areas or highpriority industries was sometimes tax deductible. 'Accelerated depreciation' allowed companies to deduct up to 100% of the value of new equipment in the first year or use, even though the equipment might last decades. 'Weighted deductions' were given for items like R&D — that is, if a company spent Rs 100 on R&D, the tax law permitted the company to treat this as Rs 150 for tax purposes. 

In the 1990s, many companies took advantage of thesetax incentives, entirely legally, and reduced their tax liability to zero. The balance sheets they presented to the taxman showed a loss after all deductions, so no tax was payable. Yet, the law allowed the same companies to present a totally different balance sheet to investors, showing bumper profits. That's how zero-tax companies like Reliance enjoyed soaring stock market prices. This charade was finally checked by introducing a minimum alternative tax, ensuring that tax breaks could not be used to escape tax altogether. 

Valuations are different from profits and losses. Profits and losses tell you about the past. But valuations are estimates of the future, and those are necessarily different from past performance. Facebook makes little profit, yet is seen as having such a huge future that it commands an astronomical price. By contrast, some profit-making companies sell at a discount because of poor future prospects. 

A company with good corporate governance (like Nestle) will have a high market price relative to earnings. But a company with a poor image ( KingfisherBSE 8.08 %) will have a much lower price, since investors don't trust its accounts. 

If a company is believed to have huge hidden bad debts — like Citibank in the US — its market price can be just half its book value. But a bank with a solid reputation — like HDFC BankBSE 0.34 % — is quoted at five times book value. In sum, all valuations are opinions. The only reality is the actual market price, which fluctuates as valuations of buyers and sellers keep shifting. Whatever Justice Kapadia believes, losses are not a more solid ground for valuation than profits. Losses can be manipulated in balance sheets no less than profits. Cash profits and losses are more real, but even they are uncertain guides to the future. The CAG's valuations cannot but be matters of opinion.


Loss is a matter of fact and profit, of opinion: CJI   Collected from Hindu Business Line

Chief Justice of India S.H. Kapadia on Saturday rejected the notion that the rule of law was an impediment to economic growth, terming it instead the “single largest” stimulant factor.
Further, a “minimum standard of fairness” was being ensured only through the rule of law, he said at an international conference here.
In an apparent reference to the Comptroller and Auditor-General’s report on loss in coal blocks allocation, Justice Kapadia said: “The basic fact is that loss is a matter of fact, whereas profit or gain is a matter of opinion.” In the absence of economic literacy, coupled with legal literacy, “government institutions will suffer… in terms of democracy, and the economy will be in peril.”
The Constitution, he said, had mandated that the government to “… strive for economic democracy,” and without it “political democracy will be at peril.”
Quoting economic data, the Chief Justice said that even an eight per cent GDP growth would generate only 12 million jobs a year, while the country needed 10 million new jobs every year, given that 30 per cent of the population would be looking for employment in the coming years. If the growth slipped to 5.5 per cent for some reasons, a mere 8.25 million jobs would be created a year. Promoting investment, therefore, was crucial to stimulate growth.
Benchmark
He suggested that India align its tax, corporate and commercial laws with the models suggested by the United Nations and the Organisation for Economic Cooperation and Development. “Our benchmark becomes what is stated in the electronic media and the print media. We don’t go into deep studies.”


Factual losses and profitable opinions

N Sundaresha Subramanian/New Delhi 25 Sep 12 | 12:35 AM

--------------As he (Chief Justice of India  Mr. Kapadia ) entered the final week, Kapadia also made a significant contribution to discussions on the allocation of natural resources. Kapadia reportedly said, “Sometimes, we see certain (TV) programmes and we build our perceptions. How many of us know the basic principle of valuation? Today, a number of controversies on valuation are discussed, but the basic principle of valuation is loss is a matter of fact and profit is a matter of opinion."
Some people are even trying to sell this remark as an endorsement of the government’s ‘Mother Earth’ argument. In my opinion, the CJI’s limited point, as is clear from the above quote, was that people should understand these concepts before building castles on numbers.

According to the principle of conservatism, a prudent accountant has to provide for all losses, both present and future, as and when he comes to know about these, whereas profits are booked only when they are actually realised. The motive is to present a “true and fair" picture of the financial position of the enterprise. While all going concerns should ideally follow this principle, tax authorities are not very comfortable with its blanket application as indefinite postponement of profits may hit the revenue.

Interestingly, the much quoted, misquoted and abused “Report no 7 of 2012-13", more famously known as the Coalgate report, does not use the words “profit or loss". The report said, “The financial impact of the benefit to the private allottees has been estimated to the tune of Rs 1,85,591.34 crore as on March 31, 2011, for open cast mines/open cast reserves of mixed mines."

Now, what is “financial impact of benefit" to private allottees? In the hands of private companies, these are profits, therefore, it is just a matter of opinion. They can book it today, they can book it on the day they dig the coal or the day they sell it or they may use a mechanism to distribute it over years. The report added, “The government could have tapped a part of this financial benefit by expediting decision on competitive bidding for allocation of coal blocks."

In this sentence, lies the devil — the part of this financial benefit, which the government could have tapped. Is this not a fact? If this is a fact, then is it not a loss? What is your opinion?


Why is CJI taking on CAG with a flawed ‘loss’ theory

by  Sep 24, 2012

The outgoing Chief Justice of India (CJI), Sarosh H Kapadia, has given the UPA government much grief, thanks to his Vodafone judgment, but on Saturday he could not but have warmed their cockles with his indirect observations on the 2G scam and judicial activism.
Kapil “zero-loss” Sibal and Palanippan “zero-loss” Chidambaram will feel vindicated.
Though he did not actually criticise the estimates of the Comptroller and Auditor General (CAG) – who had put the presumptive loss on 2G spectrum at Rs 1,76,000 crore and the unintended “gains” in the coal block allocations at Rs 1,86,000 crore – there is no doubt he gave the CAG’s critics, which include the PM, ammunition for the same.
According to a report in The Indian Express, the CJI said: “Loss is a matter of fact and profit and gain is a matter of opinion.”  So, by implication, the CAG is talking through his hat.

Has the outgoing CJI’s words aided the cause of Manmohan Singh? Image courtesy PIB.
The CJI expanded on his basic statement thus: “Today a number of controversies on valuation are discussed, but the basic principle of valuation is that loss is a matter of fact and profit or gain is a matter of opinion. Please apply this test to the controversies going on. I do not want to discuss anything further. Loss is a matter of fact and profit and gain is a matter of opinion. So if you understand these principles, we will be able to judge. Our perceptions will become more sound and we know where the shoe pinches.”
Correction, Chief Justice Kapadia. If you are merely saying that the loss figures on 2G and coal blocks depend on the assumptions made by the CAG and are thus mere guesstimates, we are with you. But to claim that “loss is a matter of fact” is also quite wrong.
In accounting principles, loss is a matter of recognition, and not just fact. Unless you are in a business where revenues and costs are accounted for only on a cash basis, loss too is often a matter of opinion.
As any qualified CA can tell you, companies can turn losses into profits, and profits into losses, depending on what revenues or costs they choose to recognise. You can turn a loss into a profit by changing the depreciation method from written down value (WDV) method to straightline, or by valuing inventories and sales differently. A construction company can recognise revenues one quarter earlier or one quarter later, depending on how much of a project is complete, rather than when sales actually materialise. This impacts the loss figure, if any.
In the case of banks, a bad loan can be made good by rescheduling a loan and thus a loss can be turned into a profit. Conversely, by providing for a potential loss in advance, a profit can be turned into a loss – if a bank or company wants to do so. Many small-time promoters, in fact, do this to influence market prices and indulge in insider trading. Smart banks like HDFC, for example, also tweak their income, cost and bad loan recognition norms to smoothen out results from quarter to quarter.
In short, loss is as much a matter of opinion as profit or gain. The CJI could consider this fact to modify his views.
But since the purpose of his observations must have been to contradict the CAG on his 2G and coal block loss figures, let us also deal with them again.
Firstpost would readily agree that the CAG’s sensational loss figures may have grabbed media attention like never before and focused attention on the “losses” per se rather than the real problem: lack of transparency in decision-making and possible attempts to help out crony capitalists.
However, can the CJI really claim that selling 2G spectrum at prices lower than what the market can bear is not a loss to the exchequer? It’s not about the quantum of the loss, but that there was a loss is certain. Similarly, how can one say that there was no loss in handing over coal mines for free to 142 businessmen without a transparent policy?
The CJI is surely right in emphasising that the courts (and the CAG) should not transgress into the policy-making area, but surely it is the CAG’s duty to point out what the costs of a policy were?
Does it make sense for a government – any government – to decide to sell spectrum or allot coal blocks without quantifying the losses and gains?
It is possible to justify free coal block allotments of Rs 1,86,000 crore (as the CAG claims) if the government can equally quantify social or other benefits of a similar amount. It is all right to sell spectrum at 2001 prices, or even give it away free, if there are larger social benefits to be had (teledensity), but governments that want to do this must find a way to quantify the losses and gains, however, presumptive they may seem.
In the absence of this kind of costs-and-benefits calculations, on what legitimate basis can any government decide to go for an auction or a first-come-first-served scheme when it does not know why it is doing so?
CJI Kapadia is surely right to ask everyone to take the loss or gain figures with a pinch of salt, but no government should draw comfort from this. Governments have no right to take policy decisions without trying to at least estimate who will gain or lose. The figures may be wrong or wildly out of whack in hindsight, but they will at least have the legitimacy of a well-thought-out line of reasoning.
The2G and coal block allocations are scams precisely because the government did not do the calculations that the CAG did post facto. The CJI would have done well to emphasise this aspect, rather than just suggest that the loss figures are not fact.
Half-truths are of no use to anybody.

D Subbarao’s point: More revenue and welfare accrue from cheap 2G spectrum than from auctions

ET Bureau Sep 20, 2012, 05.20AM IST


The present RBI governor, Duvvuri Subbarao, was finance secretary when 2G spectrum was allotted to new entrants at 2001 prices in 2008. Deposing before a parliamentary panel on Tuesday, he said that any so-called loss to the exchequer was dependent on assumptions and the numbers anyway were notional. He is correct.

The decision to allot spectrum at Rs 1,650 crore per player, instead of auctioning it for potentially higher rates, increased competition, brought down prices and made the mobile phone a ubiquitous instrument of communication for Indians across income groups. Indeed, our telecom revolution was based on allotting spectrum at reasonable rates. What the government then gave up in terms of revenue maximisation from telecom, was more than made up by the social and economic gains made possible by the communications revolution.
The faster economic growth and superior, networked tax collection efficiency yielded higher tax collections as well, more than offsetting any direct revenue forgone in telecom. This is similar to the experience of Japan and South Korea, which have the world's highest penetration of the latest wireless communications, made possible by the allotment of spectrum by beauty parades, rather than through auctions.
India tried spectrum auctions on two occasions. Both have flopped. In the mid-1990s, the government auctioned telecom licences and companies bid the moon to acquire these. Services were priced as high as Rs 16 per minute, with charges for incoming calls as well. Consumers would not bite, most companies soon failed to pay up, and the government had to scrap the auctions and came to a revenue-sharing regime.
The second instance is more recent, when 3G and 4G spectrum was auctioned in 2010. The government netted Rs 1,06,000 crore, but services are costly, poorly distributed and generally considered a failure. The debt that telecom companies now carry to pay the government upfront for spectrum makes it tough to expand their normal businesses. The lesson should not be lost in the upcoming 2G auctions.
http://articles.economictimes.indiatimes.com/2012-09-20/news/33976900_1_upcoming-2g-auctions-spectrum-auctions-duvvuri-subbarao

CAG  VINOD  RAI Says : Imputing Motives to CAG Reports to Hit Accountability 
Imputing motives to audit reports of CAG would hinder accountability and good governance,CAG Vinod Rai has said.Ascribing political motive to the institution and its officers would only be detrimental to its task of promoting accountability and good governance, he said CPI mouthpiece Janayugam in an interview.

Several times our findings and judgment have been questioned it happened in the Bofors case in the 1980s,in the audit of disinvestment in 1990s,in the coffin case in 2002,and in the spectrum case recently.Every time we were proven right.All these years,we have maintained our objectivity,impartiality and professional competence, he claimed in the interview.He favoured open competition in both government procurement and allocation of resources to achieve value in these transactions.

Existing rules and regulations and processes do not adequately provide requisite transparency.Fair and open competition is the best and most transparent way of achieving value for money in large procurements and also in cases of allocation or lease of public assets or natural resources, he added.

In the 150 year history of the CAG,he says,it has upheld standards and is looked up to for its international levels of competence.CAG has a critical role to play in ensuring transparency and good governance in the country, he said.

The.1,86,000 crore losses to the exchequer because of allocation of coal blocks to private firms and power companies was a most conservative estimate, Rai reiterated.Rai said that the figures in the report were logical and irrefutable.The computations have been made on the basis of sound and reasonable assumptions.We have taken the most conservative alternative in arriving at the financial impact of allocation of coal blocks through the present system. He said he was confident of upholding the credibility of the audit report.
http://mobilepaper.timesofindia.com/mobile.aspx?article=yes&pageid=2&sectid=edid=&edlabel=ETD&mydateHid=25-09-2012&pubname=Economic+Times+-+Delhi&edname=&articleid=Ar00206&publabel=ET


No loss to Govt from 2G spectrum allocation: Sibal


Chidambaram clarifies on ‘zero loss’ in coal block allocations


Coalgate: Sibal gives another 'zero loss' theory after 2G

Coal licence cancellation will cause huge loss: Sibal



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