Why my baloon?

I have never believed that one could fail in an examination when he has put in the necessary efforts. Also one can never pass an examination without putting in what is necessary. This has always been my inner thought. There have been no pity whatsoever for those who had failed the examination. And now I am in a precarious situation. I am utterly under prepared. Confidence quotient also seems to be lower this time. The time I would get for my three subjects from now on seems to be 2 days (a Sunday included) – I have already got 2 days. This would easily be my worst preparation ever for an examination. What fascinates me the most was that people around me have taken things for granted? There is this inexplicable feeling amongst them that I will be passing any case. I was never offered leave for my three exams. But there will be week of absence for a single day exam. This is the pinch of truth when you become a professional. You can never expect to be treated as a child. It is upto us to take care of the needs and demands. The world around you will be ruthless. The rules are set to be flexible where you always feel that you are at the loose end with no flexibility. Considering the demands at this stage of the career, imagining a similar situation few years down the line is a nightmare. Enjoying your space as a student is important. The days will never come back. Your mom will never wake you up with a coffee for you to study. Your dad will never stop watching TV for your studies. Your relatives and friends will never hesitate to trouble you while you study. And there will be other group of people seeking your attention depending on the stage of your life. It is important to be out of student age at the appropriate time. But also its important that you are not into professional life at very early stage. You always want somebody to pamper you when you are into professional life early. But when that doesn’t happen you feel let down and disappointed. The sum and substance is “be a student when you are supposed to be and be a professional when you are expected to be”. The 'X' factor is also missing for this exam - I am to blame for it.

Lease of land

Growth in industries, both manufacturing and services has been the prime focus of the Governments – Central and State. To sprout the growth, State Governments have been offering land or land and buildings on a long-term lease to companies to set up units. These long-term leases are typically for a period of 99 years. Most cases leases will be that of a land rather than land and buildings together. These leases are characterized by lump-sum payments upfront, either refundable or non-refundable. Various accounting and taxation concerns are around these models, which are discussed in the following article.

The GAAP for companies comprise Accounting Standards notified u/s 211 (3C) of the Companies Act, 1956 and requirements of Schedule VI to the Companies Act, 1956. Present provision of Accounting Standards excludes leases from its scope. The accounting has to comply with the requirements of Schedule VI.

Model I

Lets comprehend with an example. A company takes land on lease from SIPCOT for a period of 99 years by payment of non-refundable premium of Rs. 10 Crores. The company cannot transfer the land to any third party during the lease period unless it is under a business combination. If the land is handed back to SIPCOT during the lease period, it is not entitled to refund of any portion of the premium paid.

Accounting: Schedule VI requires disclosure of leaseholds in the Fixed Assets schedule under a separate head. Hence, the land should be disclosed under “Leasehold Land” in Fixed Assets schedule. At what Value? The entire non-refundable premium should be taken as cost and amortised over the lease term (99 years) on Straight Line Basis. Each year amortization is taken to Profit and loss account.

Taxation: The primary analysis to be made is whether the expenditure is revenue expenditure or capital expenditure. The decision of tribunal in the case of Jt. CIT vs Mukand Ltd forms the basis for tax treatment. The assessee argued that the entire expenditure is revenue in nature and should be allowed as a deduction. CIT (A) held that the expenditure is revenue in nature but is attributable to 99 years and hence should be claimed as deduction in each year. The case was before the special bench of the tribunal to determine whether the stand of CIT (A) to allow 1/99^th of expenditure is correct. The tribunal noticed that the payment is a premium for leasing of land and it is not in the nature of advance rent to be adjusted against any future payments required to be made. Further, the tribunal noted that the expenditure bore the characteristics of capital expenditure, since the payment is for a benefit of enduring nature. The tribunal held that the premium is capital in nature and not allowable as a deduction to the assessee. The position of revenue is still questionable. Since, the expenditure is very much business expenditure, it can be argued that if the business expenditure is not allowed as a deduction in a single installment, the expenditure need to be allowed over the lease term.

Model II

A company takes land on lease from SIPCOT for a period of 99 years by payment of a refundable deposit of Rs. 15 crores. The company cannot transfer the land to any third party during the lease period unless it is under a business combination.

Accounting: Present GAAP position, the amount should be treated as refundable deposit. But where should it be included? Under Current Assets or Leaseholds? My view is that it should be held under “Leaseholds” rather than “Current Assets”. Considering that the present scenario will be short-lived with the introduction of AS 30,31 and 32, the new treatment needs to be looked into. The deposit which is a financial asset, should be recognised at its fair value – which will be present of value of discounted cash flows. The deposit amount would be increased each year with interest portion with a corresponding credit to profit and loss account. Again regarding the question of presentation, it is only appropriate to present under “fixed assets” rather than under “current assets”. These issues will be addressed once the existing leases standard is revamped based on the discussion paper issued by IASB.

Taxation: The revenue position is unambiguous here, since the amount is refundable it cannot be revenue expenditure or for that matter any expenditure and no expense can be claimed in this regard. On the new treatment as per AS 30,31,32 – the position of revenue cannot be speculated upon.

There will be these never ending spiral issues surrounding the topic of leases in the future as there will be lot of understanding and learning in this regard from the regulatory angle as well as the angle of revenue and professionals.

My guess of Raavan

A Mani Ratnam film will always evoke a kind of anxiety that most people would exhibit for a James Cameron or a Steven Spielberg movie. There are few directors are as articulate as Mani Ratnam is. He is a class act. The narration is crystal clear – be it his Pagal Nilavu, Nayagan, Aayutha Ezhuthu or Guru. He is also a clever director. He always bargains for best technicians to work with him – be in on screen or behind screen. He has the knack of getting the best out of all his colleagues. His latest bi-lingual flick is Raavan or Ravanan. He has roped in Abhishek and Aishwarya Rai Bachchan for the lead roles. Also Vikram plays an important role in both the languages. So casting is best in the profession. For music he stays with A R Rahman – and he weaves magic for Mani, who happens to be his debut director in the film Roja. And there is no doubt that he is the best in the business in Indian industry. He has Gulzar as lyricist for Hindi version and Vairamuthu for Tamil. No questioning of Gulzar, who won Oscar along with Rahman for Jai ho as also Vairamuthu, who easily is the best lyricist when it comes to Tamil cinema. Camera is handled by Santosh Sivan and Manikandan. Santosh Sivan is a veteran and Manikandan, off late is making his worth in Hindi cinema. So with all these quality people around him, what else can Mani produce – should be an extra-ordinary movie.

Looking at the teasers and stills of Raavan, you have to believe that the movie will never be short of expectations. The storyline is supposed to be based on naxals – burning issue in our country now. Abhishek looks to be the head of the tribal population and there is no law and order beyond him. Vikram looks to be a police officer, married to Aishwarya Rai and he is posted to the tribal area. He would resolve to bring an end to Abhishek’s rule amongst the tribe. Sprouted by Vikram’s action, Abhishek would abduct Aishwarya Rai. The kidnap though initially would be to threaten Vikram, later Abhishek would befall to the beauty of Aishwarya Rai and forces her to marry him. Here is where parallels could be drawn to Ramayan and could potentially cause a roar in our country. The climax would be how Vikram fights against Abhishek and wins back his wife and the story would be on how Aishwarya and Vikram fight Abhishek. The character of Abhishek is portrayed by Vikram in tamil version. My intuition is Vikram would have donned the role better than Abhishek. Overall it is going to be mouth-watering entertainment in both the languages. A separate blog on music will follow soon, so much to write on that.

Strategic science

This is the word that has been me fascinating since Mid 2009. Strategy happens everywhere. It is not the sacred thingy discussed at closed rooms, on corporate vacations, over a cup of drink in business-class hotels. Strategies are made by you, me and everyone. A women begging at the signal strategically chooses a signal that lasts more than a minute. A child at a super market strategically eyes for a candy and her mother strategically avoids it. Strategy is in every single moment of our life. Yet in business, strategists are considered are golden egg laying hens. They are treated as honchos. They get all the comfort in this world. They are best paid in the organisation. Why all these attention at corporates when we all are strategically sensitive?

At corporate level, strategic management is the most critical function. They set the direction for the entire business. What is a strategy - It is a systematic long term plan of action. This plan of action depends on various factors. It depends on an organisation's existing policies, procedures, control systems, position in the market, external environment comprising competitors, consumers, government policies and action, and other stakeholders. It requires a lot of inputs. It requires corporate appraisal both internally and externally to generate various alternatives. It is in most cases worked out scientifically. Strategists are statisticians and economists and they work out lot of significant theories and numbers and arrive at a course of action called their strategy for the company.

Going by the way corporates function these days and the level of importance assigned to the function of strategic management, it would be but to tend to the conclusion that strategy development is a science. If it is so perfect a science then why does it fail at all? There is something more to it. It is not mere science. If it is science, there is a definitive way of approaching and concluding it. But hardly we come across same strategy for a similar set of data and situation. This is because strategy also has a touch of human element in it. The people part of strategy making often can be taken as the lead as to how a strategy will be. The strategies will always depend on the person making it. It simply is not possible to detach human element from strategy.

And that human element which makes any strategy successful is intuition. A scientific process may generate a lot of strategic options but at last intuition of the entrepreneur or manager leads to the selection of the most successful alternative and most of the times, the successful strategy may not be even generated by the scientific methods adopted by an organisation. It comes out of repetitive learning and experience that goes into human brain. So it is not scientific strategies that are successful, it is the intuitive strategies that are behind most successful businesses in the past and will be in the future. Never count your intuition out - learn to hear to your intuition, you will be successful 9 out of 10 times.