Mohini Sharma is an investment analyst tasked with evaluating the 2008 performance of Bengal Aluminium Company. She discovered the company changed its depreciation method for its main smelter, impacting profits. If the old method was used, profits would be Rs. 141.6 million lower. Her analysis aims to determine Bengal's true 2008 profits compared to previous years and its competitor National Aluminium Company. She must also uncover the motives for Bengal's depreciation policy change.

1. Presented By :
Anshul Bansal
Dinesh Jindal
Manish Meena
Mandeep
Prateek Goyal

2. Case Detail
Mohini Sharma is an investment analyst in
Esbeeye Securities, a medium-sized stock
brokerage firm. She specializes in the stock
of non-ferrous metal companies. As a part
of her job, she provides reviews on these
stocks in the firm’s newsletter. The
newsletter is a monthly publication and is
sent to Esbeeye’s clients who are mostly
private, non-institutional shareholders.

3. In early July 2008, Mohini prepared an analysis
of Aluminium companies Based on their annual
reports for the year ended March 31, 2008. She
has come across the following footnote
appearing in the financial statements of Bengal
Aluminium Company:
During the year the company has changed the
method
of depreciation for the main smelter from the written-down-
value method to straight line method. If the
company had not made this change, the depreciation
expenses for the current year would have been
higher
by Rupees 141,586,327.

4. No other reference to the depreciation method
change was available in the companies report,
except an item in the statement of profit and loss,
“Excess provision for depreciation written back,
Rupees 782,312,370.”, shown ‘above the line.
Until last year, Aluminium companies have
followed similar accounting policies. The main
smelter of Bengal Aluminium was brought on
April 1, 2005, for Rupees 3000 million with an
estimated useful life of 10 years and was expected
to fetch rupees 150 million at the end of that
time.

5. There are 5 major producers in the Aluminium
Industry and they vary widely in terms of sales
and total assets. On these dimensions, National
Aluminium Company comes closest to Bengal
Aluminium Company. Sales and profits after tax
(in million) of the two companies in recent years
are as follows:
Bengal Aluminium National Aluminium
Sales Profit after
Tax
Sales Profit After
Tax
Year ended March
31
2005 12150 1290 11860 1090
2006 13240 1380 12520 1350
2007 15890 1630 14100 1890
2008 20660 2570 17450 2640

6. Mohini’s immediate problem is how to evaluate
Bengal Aluminium’s 2008 result in light of the
companies past performance , and
the 2008 results of National Aluminium.
Her other concern is to find out the managers
motives for the depreciation policies switch.

7. Problem Questions
1. What would have been Bengal Aluminums profit
after tax for the year ended March 31, 2008 but
for the change in depreciation method?
2. Compute the ratio of profit after tax to sales for
the two companies for each year.
3. What could have been the motives for Bengal
Aluminums depreciation policy switch?
4. Do you consider the companies disclosure of the
accounting change adequate?
5. Draft a shot paragraph on the accounting change
which Mohini should consider including in her
report on Aluminum Stocks.

8. SOLUTIONS

9. Question 1
Sol. Accounting for decrease in depreciation expenses:
Profit after tax
=2,570,000,000 -141,586,327
=2,428,413,673
Accounting for the effect of depreciation written back
method
Profit after tax
= 2,428,413,673 – 782,312,370
=1,646,101,301

10. Question 2
Bengal Aluminium Company
2005 10.61%
2006 10.42%
2007 10.26%
2008 12.44% (Including change in
depreciation valuation)
11.75% (Without Including change in
depreciation valuation)
National Aluminium Company
2005 9.29%
2006 10.78%
2007 18.86%
2008 15.10%

11. Question3
Decrease in Depreciation Expense
Should have been 923,898,697 instead of
782,312,370
Increase in net profit value
Firstly, it should have been 2,428,413,673
instead of 2,570,000,000
More importantly, in this case, 782,312,370 must
have been added back to the profit and loss account.
Therefore actual profits for 2008 would be
1,646,101,303 instead of 2,428,423,673
Actual percentage of net profit would be 7.9%
All details in Rupees INR

12. Question 4
The company’s disclosure of the accounting
change is adequate, provided that it can
justify the reason for its change. However,
the money credited to the profit and loss
account should not be considered as inflow
of cash. It is merely an accounting change.

13. Question 5
Based on the percentages from Question2, it is clear that BAC has
been lagging behind NAC in terms of net margin, specially after it
installed the new smelter.
However, one would have to consider that those figures may not be
truly representative of the actual situation and could just be bloated
figures.
Based on our estimation the actual profit/sales percentage would be
closer to 7.9 than the calculated value.
Since it has been mentioned that the other aluminium firms practice
similar accounting practices, one could assume that the figures for
these other companies could also just be bloated figures.
Caution is advised in investing in such firms.
A clear understanding of these companies' account books would be
mandatory.