Monday, June 11, 2012

Butwal Finance Ltd. : Usage of "provisions for losses" and "write-backs"

Provisions for losses are made by companies to smoothen out the huge and sudden impact bad debts, other unrecoverables ( default in accounts receivables) and unforeseen mishaps cause on the performance of the company. If the provisions are made for mishaps or unrecoverables assumed to take place in the next quarter, then they may be added back in the next quarter financial statement as write-backs. If the provisions are to smoothen out events of huge cash or property loss in the long run, the immediate write-backs are not done.

In my last post, I discussed about how Janata Bank was distributing the "provisions for losses" over several quarteers to give a perfect performance picture of the quarter just before the IPOs were offered. It had cleverly assigned maximum provisions for losses for the quarter previous to this.

I was going through the income statement of Butwal Finance Ltd. and saw a similar situation.

Statement Source :

The interesting facts to notice in the income statement were the "provisions for losses" and their "write-back" segment. In the previous quarter, when the reported losses is huge, surprisingly a large "provisions for losses" - Rs.7,710,000 was accompanied by very small "write-back"-Rs.93,000. Compare this with a relatively small "provisions for losses" -Rs.5,982,000 accompanied by a large "write-back" -Rs.4,980,000.

The above action is raising the profits of the present quarter and decreasing the same for the previous quarter. Like the Janata Bank statements, Butwal Finance Ltd. too is leveraging the previous quarter to produce better results for the present quarter. This act ensured that the company had profits before tax and thus enabling employees to bonuses, although the company is literally under loss( if "provisions for losses" and "write-backs" for present quarter were similar to that for present quarter).

These two segments in the income statement of two quarters may be genuine, but the varied amount of these segments written for two consecutive quarters do signal the huge probability of mal-practices in income statement reporting. One of the benefits of such mis-reporting is the availability of bonuses for the employees. So, does anyone sense a conspiracy here?

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