Ousted Tata Sons chairman Cyrus Mistry told the directors of Tata Sons in his email that stringent risk-evaluation processes were not followed by Tata Motors Finance, which led to bad loans of more than ₹4,000 crore. Accounting practices, which offset expenses incurred on account of product development, led to the bad loans, Mistry had said.
Ousted Tata Sons chairman Cyrus Mistry told the directors of Tata Sons in his email that stringent risk-evaluation processes were not followed by Tata Motors Finance, which led to bad loans of more than ₹4,000 crore. He also said that accounting practices, which offset expenses incurred on account of product development led to creation of future liability for the company.
Auditors said it is up to the management to decide whether the company will spread the losses over the life of the asset or deduct it one time. The latter is uncommon, but not illegal. But if expenses are written down over the life of the asset it has a lighter impact on the balance sheet compared to when it is completely written down in one go.
“The accounting standards specify clearly when you can capitalise product development expenses. The management evaluates the method to be used and the audit committee satisfies itself on the need for the method,” an auditor with one of the Big Four firms told HT. “The method involves technical evaluation. Once the criteria is met, it goes for periodic testing. If the product in question cannot be commercially developed then that product is written down or amortised over the life of the product.”
When contacted, a Tata Sons spokesperson said Mistry’s charges were untrue.
In a clarification to the BSE, Tata Motors said: “The company’s accounting policies as prescribed and appropriate to present true and fair view are reviewed by audit committee and presented in its annual financial statements. Provisions and write-offs as appropriate are being made in our audited financial statements after evaluating useful life, volumes and alternate usages….The statements are considered by the Audit Committee and approved by the chairman and all directors…”
According to Tata Motors’ annual report, the consolidated product development/engineering expenses stood at ₹3,480 crore in 2015-16 and at ₹2,875 crore in 2014-15. Depreciation and amortisation (including product development expenses) written off were 7.4% of the firm’s total revenue of ₹280,097 crore in 2015-16. It was 6.2% of the total revenue of ₹266,708 crore in the year before.