Inflated earnings at Vaibhav Global

About Vaibhav Global

Vaibhav Global is a retailer of discount fashion jewellery and lifestyle accessories. It retails mostly through TV Shopping Network in US and UK.
 

The Vehicle

This note is about inflation of reported P&L earnings using Foreign Currency Translation Reserve (FCTR). It might well be within Accounting rules but doesn't  seem like a transparent representation of the Operations. First about FCTR. Annual Report 2014 describes it under Significant Accounting Policies - Foreign Currency Transactions

a. Initial Recognition:

Transactions denominated in foreign currencies are normally recorded at the exchange rate prevailing at the time of the transaction.

b. Conversion:

Monetary items denominated in foreign currencies at the year-end are translated at closing rates. Non-monetary items which are carried in terms of historical cost denominated in foreign currency are reported using the exchange rate at the date
of transaction and investment in foreign companies are recorded at the exchange rates prevailing on the date of making the investments. Contingent Liabilities are translated at closing rate.

Exchange difference arising on translation of Loan and Advances to non – integral wholly owned subsidiaries and forming part of net investment, are recognized in foreign currency translation reserve.

 

 

How is it done?

The issue is the use of FCTR to create phantom earnings in P&L as described below. Refer Consolidated Accounts in Annual Report of 2013:

1.  In FY'13 the starting FCTR per accounting note 3E was (-)6.6 cr and ending was (-)28.5 cr. During the year they transferred 38.2 cr from FCTR to P&L. In effect they created phantom money by borrowing from a negative reserve and making it more negative. This phantom money shows up in Other Income - Exchange Fluctuation (net) per accounting note 21. If we take away the 38 cr, this would become (-)17 cr. 
2. In FY'14, they became smarter and removed the specific amount of Phantom money being transferred to P&L, that call out is now missing. While for FY'13 accounts one can make out by referring to AR of FY'13, but for FY"14 accounts one has to guess the amount of Phantom money transferred to P&L. Considering the FCTR went from (-)28.5 cr to (-) 62cr one can only guess that a substantial amount must have been created.

The net of these actions is: Money was borrowed from a negative reserve to inflate earnings and make the reserve further negative.

That's just brilliant and I don't know why they stopped at transferring only 38.3cr. It's earnings on demand, why not transfer 100 cr

It's best to stay away from this accounting chicanery however much the Accountants allow it. 

Note: Edited after original post.

Disclosures:

• I sold a small starting position after finding this and paid my tuition fee. No holding now.
• I'm not an Investment Adviser. This post is for educational purpose and not any recommendation buy/hold/sell. Please perform your own due diligence.