The ministry of finance has not accepted a proposal by Air India to treat Rs 4,300 crore of the government’s equity infusion into the airline as a grant or income so as to prop up the bottom line of the carrier. “The finance ministry hasn’t favourably considered the request from Air India,” a senior Air India official told FE.
FE had earlier reported that the Rs 4,300 crore equity received by Air India, as part of the government’s infusion in accordance to the Turn Around Plan (TAP), will be used to fund the interest cost. Therefore, Air India executives want to treat this equity infusion as an income in the airline’s balancesheet.
“The Rs 4,300 crore of equity will be used to fund the interest cost so the correct way to account for this is to treat this as income although over the last three years it has been treated as capital in the balancesheet,” an Air India executive had observed then.
A proposal to this effect had been forwarded by the civil aviation ministry to the finance ministry. Had the proposal been accepted, the carrier hoped to report a profit in 2017-18, the first time in a decade.
Executives explained that according to Accounting Standard 12, grants could be accounted for via the ‘capital approach’, by which it is treated as part of shareholders’ funds, or the ‘income approach’, in which case the grant is taken to income over one or more periods. Analysts agree that a ‘profitable airline’ might find it easier to raise loans to fund its expansion plans.
Also, the interest payable by the airlines is funded by the government, which subscribes to the carrier’s equity capital; the airline wants this amount to be reflected as income.
With accumulated losses of close to Rs 31,000 crore, Air India has been looking to rejig its balancesheet so as to be able to report a profit. The national carrier wants to treat a part of the government’s equity infusion as a grant or income so as to prop up the bottom line.
Though the airline is expected to report reasonably good revenues of around Rs 21,290 crore for FY15, losses are estimated as Rs 4,346 crore as a big chunk of revenues of will be eaten up by interest costs on outstanding borrowings of close to Rs 40,000 crore.
The national carrier is however expected to post a small profit of about Rs 10 crore during FY16 on the back of a fall in oil prices, increasing revenues and a re-jig in its operational efficiencies.