Need for Accounting Reforms In Indian Railways & Transitioning from Cash to Accrual Accts on IR & implications A.Venkateshwar, IRAS ’79 Consultant, Railway Board Program on “Accrual Accounting in IR” 9 th – 13 th May 2016 CTARA, Sec’bad

In this presentation…. Accounting Reforms in the news. Government Accounting Rules Weaknesses and Limitations of Railway Accounts - non disclosures - Balance Sheet issues - P & L Account issues Significant changes in areas of accounting Likely impact of accounting reforms Balance Sheet, P&L A/c ; assets and comparison Work done so far and current implementation plan Switching methodology Structure and set up ; revised milestones and timelines. Accounting Reforms in Indian Rlys2

MoR – Suresh Prabhu - April 17, 2015 –Business Line “ Accounting reforms should not be confined to moving from a single entry to double entry system, which will not encompass issues such as cash-to- accrual accounting that are absolutely necessary. I feel, in addition to these two issues, expenditure should also be tracked — when it is budgeted, incurred, output, as well as the outcome of the budget. Accounting should also provide management information, so that if you want, you should also be able to get Right to Information from the system. By including this in the accounting reforms, we can revamp the present culture where the government thinks that incurring expenditure in itself is a success and does not bother to find out the outcome. Then, there is also the issue of costing of performance. There are fixed, variable costs, so apportioning is important. Pricing of a service pre-supposes all this information. You cannot have a rail regulator till you have all this.” Accounting Reforms in Indian Rlys3

MoR – Suresh Prabhu – Budget Speech 25 th Feb 2016 Mission - “ Beyond book-keeping” Accounting Reforms in Indian Rlys4 Being a Government undertaking, IR does not follow practices in accounting which aid detailed assessment of unit costs. Though we are moving from single entry to double entry systems and from cash based to completely accrual based accounting, I do not consider them as great reforms. As a thriving commercial entity, we also want IR to go a step further and establish an accounting system where outcomes can be tracked to inputs. This is a structural change which forms the bedrock of our transformation, as right accounting would determine right costing and hence right pricing and right outcomes. We intend taking up its implementation over Railways in a mission mode and complete the entire roll out in next few years

Government Accounting Rules, 1990 Rule 18 - “ Financial results of Govt U/Ts should be expressed in normal commercial form so that the cost of the service or undertaking may be accurately known. Rule 36 - “Such U/Ts functioning on commercial lines should observe the essential formalities of commercial accounts to the extent prescribed by the Govt. In such cases, a separate commercial account of U/T should be maintained outside of Govt. Accts. IR is a departmental commercial undertaking of the GOI – but it prepares only Capital and Revenue Accounts at Zonal Rlys level to comply with these rules. Accounting Reforms in Indian Rlys5

Weaknesses and Limitations of Railway Accounts … (1) Nondisclosure of significant accounting policies - these provide information about the financial position, financial performance and cash flow of an organization that is useful to a wide range of users in making economic decisions - such policies lay down the basis for recognition,measurement and disclosure of specific transactions and other events - they help comparability of fin statements both with the previous periods and with the other organizations. - a cash flow statement, (inflows & outflows) which complements the balance sheet and P&L a/c in analyzing the financial health is also not prepared Accounting Reforms in Indian Rlys6

Weaknesses and Limitations of Railway Accounts … (2) Nondisclosure of schedules & notes to the financial statements - The schedules give the break up for the major items appearing in the balance sheet and profit and loss accounts. - The notes attached to the financial statements explain the accounting treatments and estimates to give adequate information to the readers in understanding the accounts. - IR did not prepare any schedule and notes to the major items of its assets, liabilities, revenue and expenditure except the Statement of Block Assets. Accounting Reforms in Indian Rlys7

Weaknesses and Limitations of Railway Accounts … (3) Limitations and errors/omissions in the Balance Sheet - Block A/C - Assets ie Plant Property and Equipment ( original cost, depreciation on replacement, cap Work In Progress is merged) - Investments ( JVs / not at fair value/ not tested for impairment ) - Inventories ( floating – WMS, SA, MA & fixed assets - all in Block A/c ; Stores Susp in – dividend payable ) - Sundry Debtors ( no PBDD, ageing analysis, realisability review ) - Clear liabilities ( settlement dues pending, materials issues, WC payable, deferred dividend,GRPF salaries) - Contingent liabilities ( Guarantees to SPVs, disputed claims, Court cases, Arbitrations ) Accounting Reforms in Indian Rlys8

Weaknesses and Limitations of Railway Accounts … (4) Limitations and errors/omissions in the P & L Account - Dividend charged to P&L - Depreciation ( unscientific lumpsum appropriation gives leverage to manage the net revenue surplus at the desired level. Further, due to adhoc provisioning for depreciation, the P&L is not a fair view ) - Provision for Retirement Benefits ( annual contribution to PFund is being made as decided by the RCC on the basis of actual outgo without making provisions for future liabilities - discontinued from 1974) ) - Revenue Recognition ( both the entire income earned and received during the year as well as the income earned but not received during the financial year. It also recognized revenues collected during the financial year for which services have not been provided during the year (advance fare and freight charges). Accounting Reforms in Indian Rlys9

Implications of AR : Changes in accounting … Cash Accounting to Accrual Accounting B/S, P&L a/c ; cash flows ; cost a/cs ; schedules & notes Fixed assets accountal and depreciation policy – RITES study Actuarial valuation of pensionary liabilities - RCC to give decision. (approx 5.8 lakh cr as per 2006 study ; likely to be 15 lakh Cr today ) Perpetual loan” and “dividend” on such budgetary support Recognition and treatment of clear & contingent liabilities. Compliance to GASAB guidelines for IGAS & IGFRS Govt Accounting Standards Advisory Board ; Indian Govt Accounting Standards ; Indian Govt Financial Reporting Standards Accounting Reforms in Indian Rlys10

Implication of AR : Designed for growth Fullfill a regulatory requirement when the Authority is created. FDI & domestic lending - interest & inflows will be accelerate. Transparency will restore confidence in public and users. Will bring clarity to profitability/feasibility of PPP projects. Dependence on general budgetary support will reduce. Segment reporting will help generate competition and focus. Cost data and analysis will be better facilitated. Accounts will become “ fairer and truer” Accounting Reforms in Indian Rlys11

Work done so far ….and planned Condition Precedent to ADB Funding In , a consultancy contract was 18 crs funded by Asian Devpt Bank E&Y consortium was awarded the contract Final Concept Report given in July 2010 ; roll out was months Board accepted the Report partially in Jan ………………….. Original Plan Pilot project taken up in Ajmer Division in Jan Division as Unit 5 th Jan 2015 to 1 st Jan 2017 – Implementation of IPAS in phases over all Rlys, Workshops, PUs ; IPAS is an improved version of PRIME /AFRES by CRIS ; TAMS + WAMS by ( for Tfc Accts and Workshop Accts ) Roll out of CBS & OBS in all Zones, PUs, RB - by Accounting Reforms in Indian Rlys12

IR ACCOUNTING REFORMS - STATUS AND ACTION PLAN ( May 2016) Accrual Accounting - - Bl.Sheet, P&L A/c, disclosures & notes of NWR – complete by Aug Simultaneous Roll Out on 15 Zonal Rlys & 6 PUs - complete by Sept 2017 Outcome Budgeting & Performance Costing - Project Orgn headed by New Delhi – By May Implementation partners ( on nomination basis ) will be – - ICAI for Outcome Budgeting ; - ICWAI for Performance Costing - CRIS for IT development / support - - Live studies on NR - GM & team to steer outcomes / performance indices. - Award of Implementation Contracts - Aug Finalisation of functional program specs - Feb Live studies/reports on NR - Dec Roll out on all Rlys - Mar 2018

1. Implementation partners on nomination basis – - ICAI for Outcome Budgeting ( OB ) - ICWAI for Perf. Costing ( PC) - CRIS for IT development / support 2. ICAI and ICWAI to treat AR on IR as top priority assignments. 3. Declare status of OB & PC phases as critical to IR, pan India. 4. Empower Board / Project Orgn. as appropriate. 5. Approve broad milestones and timelines. 6. Consideration of Zonal Rly as a unit for all accounting reforms. 7. Presentation of OB and PC phases on cash based accounting. IR ACCOUNTING REFORMS - DIRECTION / APPROVAL FROM MoR

CO7Rev JVCap JVMCR FMIS / AFRESiPassE ReconManual Trial BalanceCash Book, Ledger, Journal, Others Basic Voucher R & C A/c Current, D H Rept.Appropriation Accounts Stdalone IT Pkg Level - I Outputs Level – II Outputs Budget WR, RARRly Bd inputs BG inputs Level – III Outputs Govt of India Finance Accts IR - ACCRUAL ACCTING - switch over modalities Bal Sheet, P&L A/c. Rly Bd inputs AccrualsAcV Accrual Allocations Back End IT Concordance Tables Bal Sheet, P&L A/c. In Red - MODIFICATIONS FOR ACCRUAL ACCTING Mod CV

Acct. R Dte PMA /AR + 2 Dy CPMs ICAI for OB ICWAI for PC RLY BOARD AGM + FA,CCM PCE, CME, CSTE, CEE + CPM Set Outcomes, Peformance indices Proj Orgn AGENCY TECH./ ADVISO RY CRIS for IT Proj. Exec & Delivery STRUCTURE – Outcome Budgeting & Perf. Costing Project Monitor, Budget, certify, pay, roll out Adv + Dir Steering Committee 4 Dir + PSU + CRIS Prepare TOR, base SRS NR HoDs GROUP MEMBERSRESPONSIBILITYROLE SUPERVISORY + FIELD

Acct. R Dte PMA /AA + 1 Dy CPM CA Firms APEX LEVEL Nodal FA&CAO + teams Implementation PMA AGENCY ZONAL LEVEL CRIS for IT Proj. Exec & Delivery STRUCTURE – Accrual Accting. Roll out on Rlys / PUs Award, Monitor, Budget certify, pay, roll out ADV. + DIR. PROJ LEADER & TEAM IMPL. TEAMS GROUP MEMBERSRESPONSIBILITYROLE Rly Hq ICAI - ARF Rly Hq Policies, Disclosures, Notes, Consolidation Assist PMA in Bid Mgmt

S.N o METHODOLOGY FOR OB & PC PHASES MILESTONE MJJASONDJFMAMJJASONDJFMA 1PRE AWARD WORK ADMN. APPROVALS REVISED BUDGETS POSITIONING STAFF TOR, DRAFT SRS AWARD CONTRACTS 2 PROPOSE AND APPROVE OUTLINES STUDY “AS IS” PROPOSE “TO BE” DISCUSS & APPROVE 3 DESIGN AND FINALISE MODULES PROPOSE DESIGN DEVELOP MODULES FINALISE MODULES 4 DEVELOP IT APPL. AND PROVE TEST RUN MODULES DEVELOP IT APPL LIVE STUDIES ON NR 5 REPLICATE ON ALL RAILWAYS TRAINING PREP WORK ROLL OUT IR - OB & PC PHASES -TIMELINES ( May 2016)

Accounting Reforms in Indian Rlys19 S. No METHOD OLOGY MILESTONE MJJASONDJFMAMJJASONDJFMA 1 ACCRUAL ACCOUNTING IN ZONAL RLYS PILOT STUDY ON NWR PREP WORK FOR ROLL OUT IT APPLICATION TEST & VALIDATE TRG & ROLL OUT ON ALL RLYS 2 ACCRUAL ACCOUNTING IN PROD UNITS PILOT STUDY AT RCF / KXN IT APPLICATION TEST & VALIDATE TRG & ROLL OUT AT ALL PUs 3 UPGRADED COSTING IN PROD UNITS PILOT STUDY AT RCF / KXN IT APPLICATION TEST & VALIDATE TRG & ROLL OUT AT ALL PUs 4 OUTCOME BUDGETING IN ZONAL RLYS PRE AWARD WORK PROPOSALS & APPROVALS DESIGN AND FINALISE MODULES IT APPL. AND LIVE STUDIES TRG & ROLL OUT ON ALL RLYS 5 PERF. COSTING IN ZONAL RLYS PRE AWARD WORK PROPOSALS & APPROVALS DESIGN AND FINALISE MODULES IT APPL. AND LIVE STUDIES TRG & ROLL OUT ON ALL RLYS

Balance Sheet of IR as on Investments from Loan – ; CF – DRF – ; DF – RSF – ; SRSF – Rev & Misc – 2382 Reserves 6873 DRF – 1777; DF – 2013 PF – 1360; CF – 1389 RSF – 97 ; SRSF – 0 ; RDSF Banking Account Pr F – ; Misc A – L&A – 145 ; Demands Payable 3731 Interdept payables 2222 Block Assets (*) Funds with GOI Misc Advances 1693 Traffic Suspense 1929 Demands Recoverable 281 Interdept recievables 120 (*) – includes C-at-C – excludes MTPs Railway Budget _AV20 LIABILITIESASSETS Rs in Crs

P & L ACCOUNT OF INDIAN RAILWAYS FOUR YEAR TRENDS Rs in Crs DESCRIPTIONACT 13-14ACT 14-15RE 15-16BE 16-17YOY % VAR WXYZX-WY-XZ-Y CAP AT CHARGE %15%14% GROSS TFC RCPTS %7%10% SUBSIDY+MISC %-8%12% TOTAL RECEIPTS %7%10% ORD WKG EXPs %4%12% APP TO DRF %-29%-42% APP TO PEN FUND % 23% TOTAL WKG EXPs %5%12% MISC EXP % 48% TOTAL EXP %5%13% NET REVENUE %18%-8% DIVIDEND PAYABLE %-7%15% EXCESS/SHORTFALL %49%-26% APP TO DEV FUND APP TO CAP FUND APP TO DEBTS FUND OPERATING RATIO 93.6%91.3%90.0%92.0%3%1%-2% NET REV TO C-AT-CHG 5.6%7.0%7.2%5.8%25%3%-19% 21

22 VALUE OF RAILWAY ASSETSRs Crs CATEGORY INCR TRACK % %3.4 Formation %160834%0.9 P Way % %2.0 Bridges 64616%210306%3.3 ROLLING STOCK % %4.3 Locos 90358%332119%3.7 Carriages 48084%194375%4.0 Wagons 44454%134584%3.0 PLANT EQPT % %2.7 BUILDINGS % %7.5 Stations 58875% %12.0 Workshops 29553%123053%4.2 Res Qtrs 32823%86622%2.6 LAND 23552%90082%3.8 STORES SUSP 13921%40721%2.9 WMS 4560%66652%14.6 MISC ADV 21072%177915%8.4 INVESTMENTS 18082%254077%14.1 TOTAL % %3.4

23 COMPARISION OF IR WITH OTHER ORGANIZATIONS ( fy ) ORGANIZATIONASSETS SALESPROFITP/SP/AS/A INDIAN RLYS %4%37% RELIANCE IND %7%86% ONGC %13%42% NTPC %5%38% PFC %3%13% IOC %4%309% HINDALCO % 74% REC %4%13% TATA STEEL %7%37% POWERGRID %4%14% L&T %8%68% TCS %36%128% BHEL %3%43% HPCL %6%308% INFOSYS %27%82% TATA MOTORS %-7%76% NMDC %21%40% COAL INDIA %76%348%

Accounting Reforms in Indian Rlys24 Thank You Keep in touch - send in your suggestions or queries to ; Come ! Be part of the accounting reform process !! And receive a commendation from Railway Board † List out one major accrual transaction (not being accounted for now) you feel would be critical, based on its impact,from any area of railway working and accounting you know. Mail your response to me or † - after due diligence of the suggestion