PLI scheme set to spruce up Ebitda of companies, even before they receive benefits | Economic Times

MUMBAI: Many companies in the manufacturing sector are set to see their operating margins improve, based on the accounting treatment of benefits under the government's production-linked incentive (PLI) scheme.A number of these companies are rushing to make themselves compliant to be eligible to receive the benefits of PLI, and when they do they are set to account for those as future revenue.“The incentive would be recognised only when the company is certain of both meeting the relevant conditions and that the incentive will be received. Whether the incentive is recognised in a single period or over many periods would depend on the conditions attached. In a situation where the primary condition is related to increased production and sales during a period, it is likely to be recognised in that period and could be disclosed as other operating income,” said Sai Venkateshwaran, partner, KPMG in India.Under the current accounting standards, companies could account for future benefits or government grants in different ways, and when the adjustments are taken into consideration, that impacts their profit and loss account and the operating (earnings before interest, tax, depreciation and amortisation, or Ebitda) margins.“The crucial question is how the company accounts the receivables from the scheme, whether at a time when they achieve production milestones, once they file for the incentive under the scheme or when they actually receive the cash from the government. We have experienced significant diversity in practice in relation to accounting for government grants and it’s a matter of judgement which varies across companies and sectors," said Sandip Khetan, partner and national leader, Financial Accounting Advisory Services, EY India.The Union Cabinet last week announced the PLI scheme of Rs 2 lakh crore for 10 manufacturing sectors, for the next five years.The benefits of the scheme are available for sectors including automobiles and auto components, pharmaceuticals, specialty steel, capital goods, technology products, white goods (ACs and LEDs), telecom and networking products, textiles, high efficiency solar PV modules and advanced battery cells. It gives incentives to companies that opt for incremental output.The government hopes that the approved package will boost production, exports and foreign exchange earnings, and create employment, at a time when the Indian economy is struggling to get back on its feet following the impact of the Covid-19 pandemic.Industry insiders said many companies — especially midscale ones that are listed — have reached out to their accountants to study the impact of accounting adjustments on company results.“Some of these companies want to account for the future cash flow when they think they are eligible for the scheme. But it’s a matter of judgement and the auditor will have to take a view based on the fair value accounting rules and the government grant rules under Ind-AS,” an audit head of a large firm said.Accounting experts said most companies that wish to benefit from PLI would have to account for the grant over five years starting from next quarter.“Most of these grants would show under other income and as per the strict regulations India has, it would be disclosed in the balance sheet as well. Though we are advising our clients that this is a deferred income and while it has to be recognised in the profit and loss account, they must disclose it,” said an auditor of an Indian firm.