What is Adjusted Gross Revenue (AGR)?

Pursuant to the National Telecom Policy, 1994, the telecom sector was liberalized. The licenses were granted to the companies operating in the telecom sector. To tide over the huge fixed license fee, the government in 1994 gave an option to the licensees to follow the Revenue sharing model. Under this model the telecom operators were required to share a percentage of their Adjusted Gross Revenue (AGR) with the government in the form of License Fee and Spectrum Usage Charges (currently at 8% and 3-5% of AGR respectively). The Adjusted Gross Revenue is as per the definition set out in the License Agreement between the telecom companies and DoT (Department of Telecommunication)

Now the entire dispute revolved around the definition of Adjusted Gross Revenue.

As per DoT, AGR includes all revenues before discounts, from both telecom and non-telecom services. However telecom companies were of the view that the AGR should comprise just the revenue accrued from core services and should not include other income like dividend, interest income, and profit/loss on sale of assets/investments. It is clear that telecom companies would like to shelve on the additional revenue to the government from non-core services.

In 2015, the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) stayed the case in favor of telecom companies and held that AGR includes all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income. Interestingly as it seems, the Honorable Supreme Court on October 29, 2019 squashed the TDSAT order and upheld the definition as set by the DoT.

It is also pertinent to note that in the year 2017, CAG in its report tabled in the parliament stated that six leading private telecom players understated their revenues by over ₹61,000 crore, leading to the shortfall in the payment of dues to the government based on the Adjusted Gross Revenue. The CAG argued that the telecom players suppressed revenues through accounting adjustments for commissions or discounts paid to distributors, promotional schemes like free talk-time, as well as discounts for users of post-paid and roaming services where such set offs were not permitted by the license agreements with the DoT.

The disputes surrounding the AGR may have far-reaching accounting implications, few of which have been factored in the Published Financial Results for the September and the December Quarter of the leading telecom operators.

Let’s discuss the financial implications.

Accounting for the License fees and Spectrum Usage Charges:

Acquired licenses are amortized over the remainder of the License period from the date of commencement of the commercial operation whereas Spectrum payments are amortized from the date of commencement of commercial operation over the balance validity period, based on the expected pattern of consumption of the expected future economic benefits, as prescribed under IND AS 38/ AS 26 dealing with Intangible Assets.

The revenue-share based fee (on Adjusted Gross Revenue) on licenses / spectrum is charged to the statement of profit and loss in the period such cost is incurred.

Whether Disputed AGR dues to be treated as Prior period errors requiring retrospective adjustment in Retained Earnings or to be treated as Exceptional Items as per Schedule III of ‘The Companies Act’?

As per IND AS 8 on Accounting Policies, Changes in Accounting Estimates and Errors,

“Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

a. was available when financial statements for those periods were approved for issue; and

b. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.”

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

If the supplementary order of Supreme Court pertaining to disputed AGR dues is not modified, it can be construed that the AGR dues are the errors arising due to oversights or misinterpretation of facts.

As per IND AS 8, Prior period errors are required to be adjusted retrospectively to the earliest prior period presented by a subsequent adjustment to Retained Earnings.

However it was observed from the Published Quarterly reports of leading telecom companies that the Disputed AGR dues where classified under the head “Exceptional Items” in the “Statement of Profit and Loss”. For the entities presenting their financial statements as per Division II of Schedule III of The Companies Act, it is to be noted that IND AS does not define Exceptional Items. However IND AS 1 on Presentation of Financial Statements requires that when items of income or expenses are material, an entity shall disclose their nature and amount separately.

Adjustment on account of Deferred Taxes:

The tax effects of corrections of prior period errors and of retrospective adjustments made to apply changes in accounting policies are accounted for and disclosed in accordance with IND AS 12 Income Taxes.

Disputed AGR Dues to be disclosed as Contingent Liability or Provision?

The disputed dues arising from Adjusted Gross Revenue not crystallized to be shown as contingent liability in the Financial Statements, when the outcome is based on the occurrence or non occurrence of uncertain future event. However when the occurrence of event surrounding contingent liability is certain, the same has to be brought in the books either as provision or liability depending on the reliability of the measurement of the amount expected to outflow from the entity.

As per IND AS 37: Provisions, Contingent Liabilities and Contingent Assets

A contingent liability is:

a. a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

b. a present obligation that arises from past events but is not recognized because:

i. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

ii. the amount of the obligation cannot be measured with sufficient reliability.

As per Para 10 of IND AS 37, “A provision is a liability of uncertain timing or amount”.

Relevant extracts from the Published financials of one of the leading Telecom Company:

For FY 2018-19 when the liability was contingent in the nature:

“Demand for license fees pertaining to computation of Adjusted Gross Revenue (‘AGR’) and the interest thereon, due to difference in its interpretation. The definition of AGR is sub-judice and under dispute since 2005 before the TDSAT. Accordingly, DoT has raised the demand basis special audit done by DoT and Comptroller and Auditor General of India. The contingent liability includes such demand and interest thereto (excluding certain contentious matters, penalty and interest thereto) for the financial year for which demands have been received by the Company.”

For Quarter Ending Dec’19, when the liability was no longer contingent due to the occurrence of uncertain event (i.e Order of SC dated October 24,2019).

“In the previous quarter, arising from a judgement of the Hon’ble Supreme Court of India on October 24, 2019 (‘Court Judgement’), in the absence of any potential reliefs from the Government, the Group had recorded as a liability/provision an aggregate of Rs. 342,600 Million. The Court Judgement was in relation to a long outstanding industry-wide case upholding the view considered by Department of Telecommunications (‘DoT’) in respect of the definition of Adjusted Gross Revenue (‘AGR’)”

Material Uncertainty pertaining to Going Concern:

Kumar Mangalam Birla, chairman and co-promoter of Vodafone Idea, in December had said the company would shut shop if the government doesn’t provide relief on the liability it faces on past statutory dues after the apex court’s ruling.

As per SA 570 (R),”Going Concern” issued by ICAI,

“The going concern basis of accounting is a fundamental principle in the preparation of financial statements as discussed in paragraph 2, the preparation of the financial statements requires management to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so.

Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, at a particular point in time, about inherently uncertain future outcomes of events or conditions. The factors relevant to the judgement interalia include, “The degree of uncertainty associated with the outcome of an event or condition””

The extracts from the Published Financial Results of Vodafone Idea Limited,

“There exists material uncertainty that casts significant doubt on the Company’s ability to continue as a Going Concern and its ability to generate cash flows that it needs to settle, or refinance its liabilities including those relating to the SC AGR Judgement and Guarantees as they fall due. The company’s ability to continue as a Going Concern is essentially dependent on a positive outcome of the application for modification of the Supplementary order before the Honorable Supreme Court and subsequent agreement with DOT for the payment in installments after some moratorium and other reliefs. Pending the outcome of the above matters, these financial results have been prepared on a Going Concern Basis.”

It is also pertinent to note that the assets and liabilities would be required to be valued on Realizable basis, when the entity ceases to continue as a going concern.

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