Accounting jugglery by Tech Mahindra?

A new twist has surfaced in the accounting controversy surrounding Mahindra group company Tech Mahindra and its transactions with associate company British Telecom (BT). Bloomberg UTV examined British Telecom's Q3 results, which were announced on February 12, and which may put Tech Mahindra in a spot of bother.

Tech Mahindra has accounted for only Rs 50 crore as Q3 income The company says it will apportion Rs 968 crore equally over the period of the contract which is 4 years. But British Telecom has accounted for the same transaction in a very different manner. In its Q3 results released last week BT has debited the entire Rs 968 crore as expenditure in its P&L. It hasn’t ammortised it over the period of contract. Even more interesting is the fact that in 2007 and 2008, Tech Mahindra made exclusivity payments of Rs 965 crore to British Telecom, which were treated as extraordinary items in its P&L, while British Telecom even then accounted for it in the opposite manner.

A CLSA Report says: "When Tech Mahindra paid upfront cash to British Telecom to win 'multi year' outsourcing deals, the cash payment was treated as an 'exceptional item'. Hence, deal margins were over-stated by this convenient accounting treatment. Now, when business from BT is faltering, and BT has accordingly returned the cash – this inflow will be recognised over 4 years – the same money that was previously an exceptional item now becomes a 'recurring' item – overstating revenues and margins for 16 full quarters."

Sequence of events:

British Telecom Records Rs 968 cr payment to Tech Mahindra as Q3 expense; Payment made for restructuring contracts with Tech Mahindra;

Tech Mahindra Recorded Rs 50cr as income in Q3; To record Rs 968cr as revenue over period of contract;

Tech Mahindra says services rendered over period of contract; Have taken auditor's opinion over accounting treatment;

Tech Mahindra paid Rs 440cr for 'exclusivity' to British Telecom in FY08; Treated Rs 440cr as extraordinary item