02.8 · Deeper cuts II: group accounts, tax, provisions

Why this matters: an Indian listed company is usually a group. There is a listed parent, subsidiaries, associates and joint ventures, and promoter-owned entities trading with all of them. Where the cash sits in that group, what the tax line really means, which liabilities are only in the notes, and how much of "profit" belongs to someone else decide whether reported earnings are your earnings.

Learning objectives — after this lesson you can:

• Classify an investee as a subsidiary, associate, joint venture or joint operation, and state how each is accounted for.
• Compute goodwill and non-controlling interest on an acquisition (partial and full goodwill methods), and split consolidated profit between owners and NCI.
• Explain why Indian investors read both standalone and consolidated statements, and list what each can hide.
• Explain deferred tax assets and liabilities as timing differences, compute a DTL from book vs tax depreciation, read Kaveri's tax line, and describe the MAT legacy including the Finance Act 2026 change.
• Distinguish provisions, contingent liabilities and contingent assets under Ind AS 37, and size Kaveri's contingent liabilities per share.
• Measure ESOP cost under Ind AS 102 and explain why "adjusted EBITDA excluding ESOP" is suspect; explain FX translation, basic hedge accounting, OCI and related-party disclosures.

Prerequisites: 02.3 The income statement, 02.4 The balance sheet, 02.6 How the three statements link, 02.7 Deeper cuts I · Time: ~150 min

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1. Group accounts: who is inside the fence?

A group is a parent and the entities it controls. The accounting for each investee depends on how much power the investor has over it, not on a fixed ownership percentage.

Relationship	Test (Ind AS)	Typical holding	Accounting in consolidated statements
Subsidiary	Control (Ind AS 110): power over the investee, exposure to variable returns, and the ability to use that power to affect those returns	> 50% voting, or less with de facto control	Full consolidation: 100% of assets, liabilities, revenue and expenses line by line; the outside shareholders' share shown as non-controlling interest (NCI)
Associate	Significant influence (Ind AS 28): power to participate in policy decisions, without control	20–50% presumed	Equity method: one line on the balance sheet ("investments accounted for using the equity method") and one line in the P&L ("share of profit of associates")
Joint venture	Joint control (Ind AS 111), with rights to the net assets	Often 50:50	Equity method, as for an associate
Joint operation	Joint control, with rights to specific assets and obligations for specific liabilities	Varies	Recognise your share of each asset, liability, revenue and expense
Financial investment	None of the above	Usually < 20%	Fair value, through P&L or through OCI (Ind AS 109)

Control is about substance. A 45% holder with the right to appoint most of the board, where the other 55% is scattered among thousands of retail holders, may control the investee. A 51% holder whose partner has veto rights over the budget may not. The significant judgements note tells you which calls were made. Read it whenever a company consolidates something it owns less than half of, or fails to consolidate something it owns more than half of.

flowchart TB
  P[Listed parent<br/>standalone accounts] -->|80%: control| S1[Subsidiary A<br/>full consolidation + NCI]
  P -->|100%| S2[Subsidiary B<br/>full consolidation]
  P -->|30%: significant influence| AS[Associate<br/>equity method]
  P -->|50%: joint control| JV[Joint venture<br/>equity method]
  PR[Promoter family] -->|controls| RP[Promoter entities<br/>NOT in the group:<br/>related parties only]
  RP -. sells to / lends to .-> P
  RP -. trades with .-> S1

The bottom of that diagram matters most in India. Promoter-owned entities are outside the group. Transactions with them are disclosed as related-party transactions (§10), not consolidated. Kaveri Castings Pvt Ltd, owned by Kaveri's promoters, is one of these.

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2. Consolidation mechanics

To consolidate a subsidiary, the accountant:

1. Adds the parent's and subsidiary's statements line by line (100% of the subsidiary, even if the parent owns 80%).
2. Eliminates the parent's "investment in subsidiary" against the subsidiary's equity at acquisition, recognising goodwill and NCI (§2.1).
3. Eliminates intra-group transactions and balances: sales between group companies, loans, interest, dividends and unrealised profit on goods still held within the group at year-end. The group cannot make a profit by selling to itself.
4. Allocates profit and equity between owners of the parent and NCI.

Because step 1 adds 100%, consolidated revenue, EBITDA, debt and cash include 100% of every subsidiary, while only the owners' share of profit belongs to you. Two consequences:

• EV must add NCI, or your EV/EBITDA is too low (01.2).
• EPS is always "PAT attributable to owners of the parent" ÷ shares.

2.1 Worked example 1: Tapti Industries buys 80% of Sindhu Polymers

Fictional Tapti Industries buys 80% of Sindhu Polymers on 1-Apr-2025 for ₹400 Cr in cash. Sindhu's book net assets are ₹300 Cr. In the purchase price allocation (PPA), Tapti identifies customer relationships worth ₹50 Cr that are not on Sindhu's books (to be amortised over 10 years). The uplift has no tax base, so a deferred tax liability arises on it at 25.17%.

Step 1: fair value of identifiable net assets

₹ Cr
Sindhu's net assets at book value	300.00
+ Customer relationships (fair-value uplift)	50.00
− Deferred tax liability on uplift (50 × 25.17%)	(12.58)
= Fair value of identifiable net assets	337.42

Step 2: goodwill and NCI. Ind AS 103 lets the acquirer measure NCI either at its proportionate share of identifiable net assets ("partial goodwill") or at fair value ("full goodwill").

\[\text{Goodwill} = \text{Consideration} + \text{NCI} - \text{FV of identifiable net assets}\]

₹ Cr	Partial goodwill	Full goodwill
Consideration paid	400.00	400.00
NCI	67.48 (= 20% × 337.42)	95.00 (fair value of the 20%)
Less: FV of identifiable net assets	(337.42)	(337.42)
Goodwill	130.07	157.58

The partial method gives the familiar short-cut: goodwill = 400 − 80% × 337.42 = 130.07. The full method also grosses up goodwill for the NCI's share.

Step 3: year-1 profit (FY26). Sindhu earns PAT of ₹60 Cr on its own books and pays a ₹20 Cr dividend (₹16 Cr to Tapti, ₹4 Cr to the minority). Tapti's own PAT, excluding the dividend, is ₹120 Cr.

FY26, ₹ Cr	Tapti standalone	Tapti consolidated
Tapti's own PAT	120.00	120.00
Dividend from Sindhu (80% × 20)	16.00	eliminated
Sindhu's PAT (own books)	–	60.00
Amortisation of customer relationships (50 / 10)	–	(5.00)
Deferred tax credit on that amortisation (5 × 25.17%)	–	1.26
PAT	136.00	176.26
attributable to NCI (20% × 56.26)	–	11.25
attributable to owners of Tapti	136.00	165.01

NCI on the balance sheet at 31-Mar-2026 = 67.48 + 11.25 − 4.00 dividend = ₹74.73 Cr.

What to notice:

• The standalone P&L counts only the cash that came up as a dividend (₹16 Cr). The consolidated P&L counts the owners' share of everything Sindhu earned, cash or not.
• The PPA creates a recurring non-cash charge (₹5 Cr amortisation a year). Management may exclude this in an "adjusted PAT". That is more defensible than excluding ESOP costs (§8), but still check it.
• Goodwill is not amortised. It sits at ₹130.07 Cr until an impairment test says otherwise (02.7 §4).
• Changes in ownership that keep control (say Tapti later buys the remaining 20%) are equity transactions. No gain, no loss, no new goodwill; the difference goes straight to equity. Losing control triggers a remeasurement of any retained stake at fair value, with the gain in P&L. That is why a "stake sale" can produce a large one-off profit in one company and nothing in another.

2.2 Associates and joint ventures: the equity method

Tapti also owns 30% of Godavari Coatings, bought for ₹90 Cr. In FY26 Godavari earns PAT of ₹40 Cr and pays dividends of ₹10 Cr.

Equity-method investment in Godavari, ₹ Cr
Opening carrying amount	90.0
+ Share of profit (30% × 40) — shown in P&L below operating profit	12.0
− Dividend received (30% × 10) — reduces the investment	(3.0)
Closing carrying amount	99.0

The consolidated P&L shows one line, "share of profit of associates and joint ventures: ₹12.0 Cr". None of Godavari's revenue, EBITDA or debt appears anywhere in Tapti's consolidated statements. If Godavari has ₹200 Cr of debt, Tapti's economic share (₹60 Cr) is invisible in Tapti's net debt. Two analyst rules:

• Exclude associate income from operating metrics (EBITDA, EBIT, operating ROCE) and value associates separately, for example at market value if listed or at a multiple of the share of profit.
• Look through to associates' and JVs' balance sheets (summarised financial information is disclosed in the notes) when a big part of the group's economics runs through them. Indian groups with large JVs with foreign partners (autos, insurance, chemicals) need this.

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3. Standalone vs consolidated: why Indians read both

In the US, investors essentially read only consolidated statements. In India, listed companies publish both standalone (parent only) and consolidated statements, in the annual report and in quarterly results. Experienced Indian analysts read both, because each hides things the other shows.

Question	Where to look	Why
Is the group's cash where the listed shareholders can reach it?	Consolidated cash vs standalone cash; subsidiary-wise AOC-1	Cash in a subsidiary (especially overseas or with minority partners) can only reach the parent as dividends, loan repayments or buybacks, often with tax leakage or partner consent
Is the parent funding loss-making subsidiaries?	Standalone: loans to subsidiaries, investments, guarantees given	Consolidation eliminates intra-group loans, so the consolidated balance sheet never shows them
Are subsidiaries borrowing against parent guarantees?	Standalone contingent liabilities ("corporate guarantees given on behalf of subsidiaries")	The parent's shareholders bear that risk
Is profit growth coming from the core company or from acquisitions?	Standalone growth vs consolidated growth	A flat standalone business dressed up by acquired subsidiaries is a different story
Where are the related-party flows?	Standalone and each subsidiary's RPT disclosures	Money can leave the group through a subsidiary rather than through the listed parent
What does the auditor say about the subsidiaries?	Consolidated audit report: "other auditors", unaudited components	Material subsidiaries audited by small firms, or not audited at all, reduce reliance

A real example of why this matters: Coffee Day Enterprises. In January 2023 SEBI found that ₹3,535 Cr had been diverted from seven subsidiaries of Coffee Day Enterprises Ltd to Mysore Amalgamated Coffee Estates Ltd (MACEL), an entity related to the promoter. It imposed a ₹26 Cr penalty and directed the company to pursue recovery. Only ≈₹110.75 Cr had been recovered by 30-Sep-2022 (ThePrint, 24-Jan-2023; Business Standard). The flows ran through the subsidiaries, not the listed parent. An analyst reading only the parent's standalone statements, or only the headline consolidated numbers, would have had to dig into subsidiary-level receivables and related-party balances to see it. This is a regulatory finding, not an allegation. More in 09.5.

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4. Business combinations and goodwill

Ind AS 103 (Business Combinations) uses the acquisition method. The acquirer measures the identifiable assets acquired and liabilities assumed at fair value on the acquisition date, recognises intangibles the target never recorded (customer relationships, brands, technology, order backlog), and books the residual as goodwill.

Goodwill represents what the acquirer paid for things that cannot be separately identified: synergies, the assembled workforce, expected growth, and any overpayment. Under Ind AS:

• Goodwill is not amortised. It is tested for impairment annually at the level of the CGUs expected to benefit (02.7 §4). Old Indian GAAP amortised goodwill, so pre-Ind AS earnings were depressed by goodwill amortisation that no longer exists (02.9).
• Bargain purchase gains (paying less than the fair value of net assets) go to capital reserve (through OCI or directly in equity), not the P&L. This is an Indian carve-out from IFRS 3 (BCAJ).
• Common-control combinations (merging two companies owned by the same promoter group) are accounted for by pooling of interests at book values under Ind AS 103 Appendix C. No goodwill, no fair-value step-up. Many Indian group restructurings fall here.
• Tax. Since the Finance Act 2021, goodwill has not been a depreciable asset for Indian income tax. We could not re-verify how the Income-tax Act, 2025 words this, so check the current rules. Book goodwill and tax goodwill therefore often differ, which affects deferred tax.

Analyst checks. Compute goodwill and acquired intangibles as a % of equity. Compute ROIC both including goodwill (did the acquirer earn a return on what it paid?) and excluding goodwill (how good is the underlying business?). See 04.3. A serial acquirer whose ROIC including goodwill is well below its WACC is destroying value however fast EPS grows.

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5. Deferred tax: the timing differences

5.1 The intuition

A company keeps two sets of books by law, not by fraud. One follows Ind AS, for shareholders. The other follows the Income-tax Act, for the tax department. They disagree on timing. Tax depreciation is faster than book depreciation, some provisions are deductible only when paid, and losses can be carried forward.

Deferred tax makes the P&L tax charge reflect the tax that belongs to this year's accounting profit, whenever it is actually paid:

\[\text{Tax expense (P\&L)} = \text{current tax (payable this year)} + \text{deferred tax (change in DTL} - \text{DTA)}\]

• A deferred tax liability (DTL) arises when the tax books are ahead of the accounts in claiming deductions. Classic case: accelerated tax depreciation. You have paid less tax so far, and will pay more later when book depreciation catches up.
• A deferred tax asset (DTA) arises when the company has paid tax early, or has future deductions banked: provisions (warranty, ECL on receivables, gratuity) deductible only when paid, carried-forward tax losses, and MAT credit (§5.4).

Ind AS 12 uses the balance-sheet approach: compare each asset's and liability's carrying amount with its tax base. The difference × the enacted tax rate is the deferred tax balance. DTAs are recognised only to the extent that future taxable profit is probable. Deferred tax is not discounted.

5.2 Worked example 2: a machine's DTL, year by year

A machine costs ₹100 Cr. Book: straight-line over 15 years (the Schedule II norm for general plant), 5% residual, so ₹6.33 Cr a year. Tax: for illustration, 15% written-down value a year (check the current income-tax depreciation rules for any real asset). Tax rate 25.17%.

Year	Book depreciation	Tax depreciation	Book value	Tax base	Temporary difference	DTL (× 25.17%)	Deferred tax expense in the year
1	6.33	15.00	93.67	85.00	8.67	2.18	2.18
3	6.33	10.84	81.00	61.41	19.59	4.93	1.13
6	6.33	6.66	62.00	37.71	24.29	6.11	0.08
10	6.33	3.47	36.67	19.69	16.98	4.27	(0.72)
15	6.33	1.54	5.00	8.74	(3.74)	(0.94) = DTA	(1.21)

In year 1, if the business using the machine earns PBT of ₹20 Cr:

• taxable income = 20 + 6.33 (add back book depreciation) − 15.00 (deduct tax depreciation) = ₹11.33 Cr;
• current tax = 11.33 × 25.17% = ₹2.85 Cr, which is the cash;
• deferred tax = (15.00 − 6.33) × 25.17% = ₹2.18 Cr, which is the build-up of the DTL;
• total tax expense = ₹5.03 Cr = 25.17% × 20, so the P&L shows the "normal" rate even though cash tax was lower.

The DTL builds while tax depreciation runs ahead (to year 6) and then unwinds. For a growing company that keeps buying machines, the DTL never unwinds in aggregate. New purchases keep replenishing it. That is why many analysts treat a stable or growing DTL as quasi-equity rather than debt.

5.3 Reading Kaveri's tax line

₹ Cr	FY21	FY24	FY25	FY26
PBT	43.8	115.5	130.2	121.0
Current tax	10.0	26.1	31.8	29.5
Deferred tax	1.0	3.0	1.0	1.0
Effective tax rate (total tax / PBT)	25.1%	25.2%	25.2%	25.2%
Current tax / PBT (≈ cash tax rate)	22.8%	22.6%	24.4%	24.4%
Closing DTL	15.0	20.0	21.0	22.0

What the numbers say:

• The effective rate sits on the statutory 25.17%, as it should for a company under the concessional regime (22% + 10% surcharge + 4% cess = 25.168%).
• Kaveri pays a bit less in cash than it expenses, and the difference builds the DTL by about ₹1 Cr a year.
• The FY24 jump to ₹3.0 Cr lines up with the Hosur plant going into service: accelerated tax depreciation on a ₹190 Cr asset.
• The FY26 DTL of ₹22.0 Cr implies cumulative timing differences of about 22.0 / 25.17% ≈ ₹87.4 Cr, mostly the gap between book and tax written-down values of plant.
• Kaveri's cash-flow statement shows "income taxes paid" equal to current tax. That is a simplification; real companies have advance-tax and refund timing differences too.

When the effective rate is not close to statutory, find out why. The tax reconciliation note (03.3) lists the reasons. Typical ones are tax-exempt income, tax holidays (SEZ units), non-deductible expenses, losses in subsidiaries with no DTA recognised, prior-year adjustments, and changes in tax rates. When a rate changes, all deferred tax balances are remeasured and the difference hits P&L in one go. When companies moved to the 22% regime from FY20, many booked one-off deferred-tax gains on remeasured DTLs. Treat such items as exceptional.

5.4 The MAT legacy, and what changed in 2026

Minimum Alternate Tax (MAT) is a floor tax on book profit. It exists because some companies showed large accounting profits but little taxable income, thanks to incentives and accelerated depreciation. Such a company paid MAT instead of normal tax. The excess of MAT over normal tax became a MAT credit, usable against normal tax in later years (within 15 years) and typically carried as a deferred-tax-type asset on the balance sheet.

The regime has changed twice:

• 2019: the concessional regime (22% base rate, Sec. 115BAA of the 1961 Act) exempted opting companies from MAT, but they forfeited unused MAT credit. Companies with large MAT credit balances often delayed switching.
• Finance Act 2026 (notified 30-Mar-2026; effective from tax year 2026-27, i.e. income of FY27 onward). MAT becomes a final tax at 14% of book profit (down from 15%) for companies staying in the old regime. No new MAT credit is generated. MAT credit accumulated up to 31-Mar-2026 can be used only if the company moves to the new regime, capped at 25% of that year's tax liability, within the original 15-year window. The provisions now sit in Section 206 of the Income-tax Act, 2025, which corresponds to the old Sections 115JB/115JAA (summary of the Finance Act 2026 MAT amendment, Vishnu Daya & Co; Mondaq analysis; Finance Act 2026 notified, TeamLease RegTech; as of Sep-2026).

Illustration (assumed rates, for a company with income above ₹10 Cr: 12% surcharge, 4% cess). Book profit ₹100 Cr, taxable income ₹20 Cr thanks to incentives.

• Before FY27: normal tax 20 × 34.94% = ₹6.99 Cr; MAT 100 × 17.47% = ₹17.47 Cr. The company pays ₹17.47 Cr and books a MAT credit asset of ₹10.48 Cr, so its P&L tax charge looked like ~₹7 Cr.
• From FY27, staying in the old regime: MAT 100 × 16.31% = ₹16.31 Cr, final. No credit asset, so the P&L tax charge is now ~₹16 Cr. Old credit balances can only be used if the company switches regimes; otherwise they must be written off.

Analyst implications for FY27 results:

• Capital-intensive companies still on the old regime (power, infrastructure, some manufacturers with incentives) may show higher effective tax rates.
• Watch for MAT credit write-offs or regime switches with one-off deferred-tax effects.

Kaveri is already on the concessional regime at 25.17% (Sec. 115BAA of the 1961 Act; Section 200 of the Income-tax Act, 2025, as reported by eztax.in), so it is unaffected.

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6. Provisions, contingent liabilities and contingent assets (Ind AS 37)

6.1 The decision tree

flowchart TD
  A[Past event creates a possible obligation] --> B{Present obligation?<br/>legal or constructive}
  B -->|Yes| C{Outflow probable?<br/>more likely than not}
  B -->|Only possible| F{Outflow remote?}
  C -->|Yes| D{Reliable estimate?}
  C -->|No| F
  D -->|Yes| E[PROVISION<br/>recognised on balance sheet<br/>and charged to P&L]
  D -->|No, rare| G[CONTINGENT LIABILITY<br/>disclosed in notes only]
  F -->|No| G
  F -->|Yes| H[Nothing disclosed]

• A provision is a liability of uncertain timing or amount. Examples: product warranties, restructuring (only once there is a detailed formal plan and those affected expect it), onerous contracts, legal claims the company expects to lose, and site-restoration / decommissioning obligations. The last are discounted, and the unwinding of the discount appears in finance costs. Provisions are measured at the best estimate of the amount needed to settle.
• A contingent liability is disclosed, not recognised. Indian notes list them under headings such as "claims against the company not acknowledged as debts", "disputed income-tax / GST / customs demands under appeal", "guarantees given" and "letters of credit". Capital commitments (contracts for capex not yet executed) are disclosed alongside.
• A contingent asset (a claim the company expects to win) is never recognised until virtually certain, and is disclosed only if an inflow is probable.
• No provisions for future operating losses. Provisions cannot be used to smooth profits, though in practice estimates give room to do exactly that.

6.2 The cookie jar

Provisions are estimates, so they can be tuned. The classic pattern: in a strong year the company over-provides (for warranties, bad debts, inventory obsolescence, litigation), lowering profit that nobody will miss. In a weak year it releases the excess, lifting profit. Look for provision balances that fall as a % of the underlying exposure (warranty provision vs sales, ECL allowance vs overdue receivables) just when growth slows. Kaveri shows the mirror-image risk, under-provision: its ECL allowance is ₹4.0 Cr against ₹62.4 Cr of receivables overdue more than six months, only 6.4% cover (10.0% in FY25). See 04.7 and 09.3.

6.3 Worked example 3: sizing Kaveri's contingent liabilities

From Kaveri's FY26 notes:

Contingent item, ₹ Cr	FY25	FY26
GST demand under appeal (solar systems classification: 5% vs 12%/18%)	0.0	38.0
Income-tax disputes (old assessment years)	9.0	11.0
Bank guarantees given (performance / tender)	58.0	96.0

Step 1: scale the tax disputes. GST + income tax = 38.0 + 11.0 = ₹49.0 Cr.

Measure	Arithmetic	Result
% of FY26 equity (₹706.1 Cr)	49.0 / 706.1	6.9%
% of FY26 PAT (₹90.5 Cr)	49.0 / 90.5	54.1%
Per diluted share (6.07 Cr)	49.0 / 6.07	₹8.07
% of CMP ₹390	8.07 / 390	2.1%

Step 2: probability-weight it. You have to form a view. Suppose a 40% chance of losing the GST case and 30% on the income-tax cases: 0.4 × 38.0 + 0.3 × 11.0 = ₹18.5 Cr, or ≈₹3.05 per share. That is small against a ₹390 share price (and ignores interest and penalties, which can be material in Indian tax disputes).

Step 3: ask whether it is a one-off or a run-rate problem. This is the step most people skip. The GST dispute is about the rate on solar systems. If Kaveri loses and its state-agency tender prices are fixed inclusive of GST, the issue isn't just ₹38 Cr of past tax. The same GST-inclusive price would carry a lower taxable value on every future sale. On FY26 solar revenue of ₹355.9 Cr (27% of revenue), a 5% → 12% rate change on a fixed GST-inclusive price (355.9 × 1.05 = ₹373.7 Cr) would cut revenue to 373.7 / 1.12 = ₹333.7 Cr, about ₹22 Cr a year, and at 18% by about ₹39 Cr a year. Whether tender contracts allow a pass-through of GST changes is the question to put to management. This is a hypothetical built on the disclosure, not a known fact about Kaveri's contracts.

Step 4: guarantees. Bank guarantees of ₹96 Cr (13.6% of equity, up 65.5% in a year) are not debt. They become cash outflows only if Kaveri fails to perform on tenders. But they grow with solar exposure and use up banking limits, so include them in any stress test of the solar business (04.5).

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7. Share-based payments (Ind AS 102)

7.1 The mechanics

An ESOP (employee stock option plan) gives employees the right to buy shares at a fixed exercise price after a vesting period, usually subject to staying employed (and sometimes to performance targets). Ind AS 102 treats this as compensation:

• Equity-settled awards (options or shares): measure the fair value at grant date, using an option-pricing model (Black-Scholes or a binomial/Monte-Carlo model for market conditions). Expense it over the vesting period, with the credit to equity ("share options outstanding account"). The grant-date value is not re-marked afterwards. The expected number of awards that will vest is trued up for forfeitures (non-market conditions), but not for share-price moves.
• Cash-settled awards (stock appreciation rights paid in cash) are a liability, remeasured at fair value at every reporting date until settled.
• Graded vesting (for example, 25% vests each year for four years) is treated as four separate awards, each expensed over its own vesting period. That front-loads the expense.
• The dilution shows up in diluted EPS via the treasury-stock method (see 01.2).

Worked example 4: pricing and expensing a grant

Fictional Vaigai Software grants 10 lakh options at an exercise price of ₹500 when the share price is ₹500. Inputs: expected life 4 years, volatility 35%, risk-free rate 6.5%, dividend yield 0.5%.

\[C = S e^{-qT}N(d_1) - K e^{-rT} N(d_2),\qquad d_1 = \frac{\ln(S/K) + (r - q + \tfrac{1}{2}\sigma^2)T}{\sigma\sqrt{T}},\quad d_2 = d_1 - \sigma\sqrt{T}\]

With these inputs, \(d_1 = 0.693\), \(d_2 = -0.007\), \(N(d_1) = 0.756\), \(N(d_2) = 0.497\), giving ₹178.75 per option. Management expects 10% forfeitures.

Total expected cost = 10,00,000 × 178.75 × 0.90 = ₹16.09 Cr.

Vesting pattern	Year 1	Year 2	Year 3	Year 4	Total
Cliff vesting after 3 years	5.36	5.36	5.36	–	16.09
Graded 25%/yr over 4 years	8.38	4.36	2.35	1.01	16.09

Under graded vesting, 52% of the total cost lands in year 1. The volatility input matters too: at 25% vol the option is worth ₹148.23, at 45% ₹209.33. That ±10-point range moves the total expense by roughly ±17%.

Trader's lens

An ESOP grant is the company's shareholders writing call options to employees. The accounting marks that short call once, at inception, using a vol the company picks, and then amortises the premium over the vesting period. It never re-marks, however far the stock moves. No derivatives desk would be allowed to book a written option that way. The economic cost to existing shareholders is the current value of the options they are short, and the dilution when they're exercised is the delta finally being delivered. That is why the P&L charge is a floor, not a ceiling, on the true cost in a rising market.

7.2 Why "adjusted EBITDA excluding ESOP" is suspect

Many Indian new-age companies headline a profit measure that adds back share-based payment expense. Examples:

• Paytm (One 97 Communications) presented "EBITDA before ESOP cost". It turned positive, at about ₹31 Cr (~2% of revenue), in Q3 FY23, a quarter in which the company's consolidated net loss was about ₹392 Cr (Q3 FY23 earnings call transcript, AlphaStreet; Business Standard, Feb-2023). The gap between the two measures reflects ESOP cost and D&A, finance cost, other income and tax. It is not all ESOP.
• Zomato (now Eternal) has defined "Adjusted EBITDA" as EBITDA plus share-based payment expense minus rent paid on Ind AS 116 leases (company overview deck, May-2024). Deducting rent to undo Ind AS 116 is a sensible, conservative adjustment. Adding back ESOP is not.

The argument against the ESOP add-back is simple. Stock compensation is compensation. If the options weren't granted, employees would demand cash to stay. "Non-cash" does not mean "not a cost": the shareholders pay through dilution instead of through the bank account. Two consistent ways to treat it:

1. Treat ESOP expense as if it were cash (keep it in EBITDA and FCF) and use the basic share count, or
2. Exclude the expense but count the dilution in full (all outstanding and expected future grants in the share count). This is harder to do well.

Do not do both: excluding the expense and using the undiluted share count counts the benefit twice. For Kaveri the issue is small. Share-based payment was ₹2.4 Cr in FY26, 1.3% of EBITDA, and diluted shares (6.07 Cr) are 1.2% above basic (6.00 Cr). For some loss-making tech companies it has been the single largest cost line. More in 07.4.

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8. Foreign currency and hedge accounting (the basics)

8.1 Transactions and translation (Ind AS 21)

Every entity has a functional currency, the currency of its primary economic environment (₹ for Kaveri). Two different things get called "forex impact":

• Transactions in foreign currency. An export invoice in USD, an import payable in EUR, a USD loan. Monetary items (receivables, payables, loans, cash) are retranslated at the closing rate every balance-sheet date, and the differences go to P&L. Non-monetary items (inventory, PP&E) stay at historical rates.
• Translation of foreign operations. A US subsidiary's USD statements are translated into ₹ for consolidation. Assets and liabilities go at the closing rate and income and expenses at average rates. The difference goes to OCI, into the foreign currency translation reserve (FCTR), and is recycled to P&L only when the foreign operation is sold.

Where the FX gains/losses sit in the P&L varies. Some go in other income or other expenses; exchange differences on foreign-currency borrowings, to the extent they are an adjustment to interest cost, are treated as finance costs (Ind AS 23). Always find them before judging "operating" margins.

A legacy quirk. Companies that used the old AS 11 option (paragraph 46A) to spread exchange differences on long-term foreign-currency loans over the loan's life may continue to do so for loans taken before their Ind AS transition. This is an Ind AS carve-out (taxguru, carve-outs). Look for an "FCMITDA" (foreign currency monetary item translation difference account) balance in older infrastructure and power companies.

8.2 Hedge accounting (Ind AS 109)

Derivatives (forwards, swaps, options) are always carried at fair value, with changes in P&L by default. The problem is that the thing being hedged is often not marked to market in the same way. The hedge then creates P&L volatility instead of removing it. Hedge accounting is an optional, documentation-heavy regime that realigns them:

• Cash-flow hedge (hedging a future cash flow, such as next quarter's export sales): the effective portion of the derivative's gain or loss goes to OCI (the cash-flow hedge reserve) and is recycled to P&L when the hedged sale hits P&L. Any ineffective portion goes to P&L immediately.
• Fair-value hedge (hedging a recognised asset or liability's value): both the derivative and the hedged item are marked through P&L, so they offset.
• Net-investment hedge (hedging a foreign subsidiary): gains or losses go to OCI alongside the FCTR.

Worked example 5: an exporter's USD 10 million

Fictional Palar Textiles (functional currency ₹, year-end 31 March) invoices a US customer USD 10 million on 1-Jan, when the spot rate is ₹86.0/USD. It books revenue of ₹86.0 Cr and a receivable. The same day it sells USD 10 million forward for 30-Apr delivery at ₹86.4.

₹ Cr	FY (to 31-Mar)	Next FY (April)	Total
Receivable: spot 86.0 → 84.5 at 31-Mar → 84.0 on 30-Apr	(1.5)	(0.5)	(2.0)
Forward: 86.4 vs forward rate 84.7 at 31-Mar, settled vs spot 84.0	1.7	0.7	2.4
Net FX in P&L	0.2	0.2	0.4

Both legs are monetary or derivative items marked through P&L, so they offset without hedge accounting. The company receives 10m × ₹86.4 = ₹86.4 Cr, the locked rate.

Now suppose instead that on 1-Jan Palar sells forward USD 10 million of next quarter's forecast exports, not yet invoiced, for 30-Jun delivery at ₹86.4. At 31-Mar the 30-Jun forward rate is ₹85.2, so the forward is worth 10m × (86.4 − 85.2) = ₹1.2 Cr. There is no receivable to offset it.

• Without hedge accounting, ₹1.2 Cr of "FX gain" lands in this year's P&L, and the matching lower revenue lands next year.
• With cash-flow hedge accounting, the ₹1.2 Cr sits in the cash-flow hedge reserve in OCI and is recycled into revenue when the June sale is booked. Revenue then reflects the hedged rate.

Trader's lens

This is the familiar problem of a hedged book where one leg is marked and the other isn't: the P&L shows noise that the economics don't have. Hedge accounting is simply the accounting permission to report the package, not the legs. The cash-flow hedge reserve is the "unrealised P&L on the hedge, parked until the hedged flow arrives". When a company moves big amounts through that reserve, read its hedge note like a risk report: notional, tenor, rates locked, and what happens if the forecast exports don't materialise (then the reserve is recycled to P&L at once).

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9. Other comprehensive income (OCI)

OCI collects gains and losses that Ind AS keeps out of profit, usually because they are unrealised, long-horizon or volatile. Total comprehensive income (TCI) = PAT + OCI. Schedule III splits OCI into two buckets:

OCI item	Recycled to P&L later?	Where you'll meet it
Remeasurement of defined-benefit plans (actuarial gains/losses on gratuity)	No	Almost every Indian company; driven by discount-rate and salary-growth assumptions
Fair-value changes on equity investments designated at FVOCI	No (gain/loss on sale stays in equity)	Holdcos, groups holding strategic stakes
Revaluation surplus on PP&E (revaluation model)	No	Rare in India
Foreign currency translation reserve (FCTR)	Yes, on disposal of the foreign operation	Companies with overseas subsidiaries
Cash-flow hedge reserve (effective portion)	Yes, when the hedged item hits P&L	Exporters, importers, companies with foreign-currency loans
Fair-value changes on debt instruments at FVOCI	Yes, on sale	Insurers, NBFCs, treasuries
Share of OCI of associates and JVs	Split between the two buckets	Groups with large associates

Why it matters:

• Equity (and book value per share) moves with OCI, not just with PAT, so ROE computed on book value inherits OCI noise.
• A company whose OCI is persistently negative (recurring actuarial losses, FVOCI losses) is reporting a PAT that overstates the growth in shareholders' wealth.
• Items that are never recycled never touch EPS, so a loss on a strategic stake can quietly erode book value without appearing in any P&L. Always check the TCI line against PAT.

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10. Related-party transactions (Ind AS 24)

A related party includes persons who control, jointly control or significantly influence the company, key management personnel (KMP) and their close family members, and entities those persons control. It also covers group companies, associates, joint ventures and post-employment benefit plans. Ind AS 24 requires disclosure of each relationship, the transactions (purchases, sales, loans, guarantees, rent, royalties, remuneration) and the outstanding balances. It does not stop them happening.

In India, related-party transactions (RPTs) are central to governance analysis because promoters often own businesses that trade with the listed company. Approvals come from two sources:

• Companies Act, 2013 (Sec. 188): board or shareholder approval for RPTs outside the ordinary course of business or not at arm's length.
• SEBI LODR (Reg. 23): audit-committee approval of all RPTs, and shareholder approval for material RPTs. The materiality threshold used to be the lower of ₹1,000 Cr or 10% of annual consolidated turnover. The LODR (Fifth Amendment) Regulations, 2025 replaced it with a scale-based threshold: 10% of turnover up to ₹20,000 Cr turnover, then tapering, capped at ₹5,000 Cr. The change took effect in December 2025 (Fox Mandal summary; Lexplosion; verify the current text before relying on it). Governance detail is in 05.6.

Worked example 6: Kaveri Castings

Kaveri buys castings from Kaveri Castings Pvt Ltd, owned by the promoter family. The audit committee approves the purchases as "at arm's length".

₹ Cr	FY21	FY22	FY23	FY24	FY25	FY26
Purchases from Kaveri Castings	25.5	35.6	43.1	52.1	68.7	89.2
Material cost	391.7	507.9	575.1	635.8	754.8	858.0
RPT as % of material cost	6.5%	7.0%	7.5%	8.2%	9.1%	10.4%

• Growth: RPT purchases grew at a 28.5% CAGR over FY21–FY26 against 17.0% for total material cost. The promoter's private company is taking a rising share of Kaveri's spending.
• Leak sensitivity. If prices were just 5% above true arm's length, the overcharge would be 89.2 × 5 / 105 = ₹4.25 Cr pre-tax. That is 3.5% of FY26 PBT, or ₹3.18 Cr after tax, ≈ ₹0.53 per share against EPS of ₹15.1. Small per year. But it compounds with volume, and the benefit goes to one group of shareholders at the expense of the others.
• Approval threshold. Kaveri's turnover (₹1,318 Cr) is well below ₹20,000 Cr, so the materiality threshold is 10% of turnover under both old and new rules: ₹131.8 Cr for FY27. FY26 purchases were 68% of that. As an extrapolation, not a forecast: if RPT purchases kept growing at 28.5% while revenue followed the reference base case, they would cross the shareholder-approval threshold in FY28 (≈₹147 Cr vs ≈₹145 Cr). Tracking that line is part of monitoring the thesis.

What to ask: does Kaveri benchmark Kaveri Castings' prices against independent foundries (and disclose it)? Are the payment terms the same as for other suppliers? Is any capacity at Kaveri Castings being funded by Kaveri's advances? The forensic treatment is in 09.4 and 09.5.

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India notes

• Both sets of results. Listed Indian companies publish standalone and consolidated statements, and Reg 33 of LODR requires both in quarterly results. AOC-1 in the annual report summarises each subsidiary, associate and JV (see 03.2).
• Income-tax Act, 2025 replaced the 1961 Act from 1-Apr-2026. Section numbers changed (e.g., the concessional corporate rate formerly in Sec. 115BAA is reported to sit in Section 200; MAT in Section 206). Old annual reports and much commentary use the old numbers (Wikipedia overview).
• Finance Act 2026: MAT is a 14% final tax for old-regime companies from tax year 2026-27, with no new credit. Old credit is usable only on switching regime, capped at 25% of tax liability a year. Expect write-offs and regime switches in FY27 accounts.
• RPT thresholds under LODR became scale-based from December 2025 (lower of ₹1,000 Cr / 10% of turnover before). Section 188 approvals under the Companies Act run in parallel.
• Contingent liabilities in Indian reports are dominated by tax disputes (income tax, GST, customs), often running for a decade. Track the trend, the forum (CIT(A), ITAT, High Court) and whether the company has lost at lower levels.
• ESOPs for listed companies are governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. ESOP trusts that buy shares in the market are treated as part of the company, so the shares they hold are deducted from equity.

Common mistakes

• Using consolidated PAT instead of PAT attributable to owners for EPS or P/E, or forgetting NCI in EV.
• Adding associate income into EBITDA or operating ROCE.
• Reading only consolidated statements and missing parent-level loans and guarantees to subsidiaries (eliminated on consolidation), or reading only standalone and missing losses and debt in subsidiaries.
• Treating a growing DTL as debt that is about to be paid. For a growing capex-heavy company it rarely unwinds in aggregate.
• Treating contingent liabilities as zero because they are "only disclosed". Probability-weight them, and ask whether the dispute is a one-off or a run-rate issue.
• Accepting "adjusted EBITDA excluding ESOP" and then also using the basic share count.
• Ignoring OCI: book value and ROE move with actuarial losses, FVOCI marks and FCTR.
• Assuming "approved by the audit committee as arm's length" means the pricing has been independently benchmarked.

Key terms

Term	Meaning
Control	Power over an investee, exposure to its variable returns, and the ability to use that power to affect them (Ind AS 110)
Subsidiary / associate / joint venture	Investee that is controlled / significantly influenced (≈20–50%) / jointly controlled with rights to net assets
Non-controlling interest (NCI)	The share of a subsidiary's equity and profit belonging to shareholders other than the parent
Equity method	One-line accounting for associates and JVs: cost + share of profit − dividends received
Purchase price allocation (PPA)	Assigning the acquisition price to identifiable assets and liabilities at fair value; the residual is goodwill
Goodwill	Consideration + NCI − fair value of identifiable net assets; not amortised under Ind AS, tested annually for impairment
Common-control combination	Combination of entities controlled by the same party; accounted for by pooling at book values (Ind AS 103 App. C)
Standalone vs consolidated	Parent-only statements vs the whole group's statements
AOC-1	The annual-report form summarising each subsidiary, associate and JV
Deferred tax liability / asset	Future tax payable / recoverable arising from timing differences between book and tax (Ind AS 12)
Tax base	The amount attributed to an asset or liability for tax purposes
MAT / MAT credit	Minimum Alternate Tax on book profit; the credit for MAT paid above normal tax (no new credit from FY27)
Provision	A recognised liability of uncertain timing or amount (Ind AS 37)
Contingent liability	A possible obligation, or one not probable or measurable, disclosed in notes but not recognised
Equity-settled share-based payment	ESOPs or shares valued at grant-date fair value and expensed over vesting; not re-marked
Graded vesting	Awards vesting in tranches; each tranche is expensed separately, which front-loads cost
Functional currency	Currency of an entity's primary economic environment
FCTR	Foreign currency translation reserve: OCI balance from translating foreign operations
Cash-flow hedge reserve	OCI balance holding the effective portion of hedges of future cash flows until they hit P&L
Other comprehensive income (OCI)	Gains and losses kept out of profit; TCI = PAT + OCI
Related party	A person or entity with control, joint control, significant influence or KMP status, or a group member (Ind AS 24)

Check your understanding

1. Company A owns 45% of B; the remaining 55% is spread across 40,000 retail shareholders, and A appoints five of B's seven directors. Company C owns 55% of D, but D's other shareholder must approve D's annual budget and all capex. How is each investee accounted for, and why?

Answer

B is likely A's subsidiary (full consolidation, 55% NCI). A has de facto control: it directs the relevant activities through board appointments, and the dispersed holders are unlikely to coordinate against it. D is likely a joint venture of C (equity method, if C has rights to net assets). The partner's veto over budget and capex means decisions on relevant activities need unanimous consent, i.e., joint control. Ownership percentage is evidence, not the test.

2. Tapti pays ₹400 Cr for 80% of a company with fair-value identifiable net assets of ₹337.42 Cr. What are goodwill and NCI under the partial method? If NCI's fair value is ₹95 Cr, what is goodwill under the full method?

Answer

• Partial method: NCI = 20% × 337.42 = ₹67.48 Cr; goodwill = 400 + 67.48 − 337.42 = ₹130.07 Cr.
• Full method: goodwill = 400 + 95 − 337.42 = ₹157.58 Cr.

3. A parent's standalone balance sheet shows ₹600 Cr of "loans to subsidiaries" and ₹900 Cr of "corporate guarantees given on behalf of subsidiaries" in contingent liabilities. Neither appears in the consolidated balance sheet. Why not, and why should you care?

Answer

Intra-group loans are eliminated on consolidation: the parent's receivable offsets the subsidiary's payable. The subsidiaries' external borrowings (which the guarantees back) are in consolidated debt, but the guarantee itself is intra-group. You should care because:

• the parent's shareholders are funding and underwriting the subsidiaries;
• if the subsidiaries are loss-making or have minority partners, the value may be stuck or lost;
• rating agencies and lenders look at the standalone parent's exposure.

Check the subsidiaries' profitability in AOC-1 and whether the loans earn interest.

4. Kaveri's FY26 deferred tax expense was ₹1.0 Cr and its closing DTL ₹22.0 Cr. Roughly what cumulative timing difference does the DTL represent, and why did FY24 show ₹3.0 Cr of deferred tax?

Answer

22.0 / 25.17% ≈ ₹87.4 Cr of cumulative taxable temporary differences, mostly book written-down value of plant exceeding its tax written-down value. FY24's larger charge (₹3.0 Cr, implying ≈₹11.9 Cr of new timing difference) coincides with the ~₹190 Cr Hosur plant going into service. Accelerated tax depreciation on a large new asset widens the book–tax gap quickly.

5. A company in the old tax regime carries ₹150 Cr of MAT credit on its balance sheet at 31-Mar-2026 and has no plan to move to the new regime. What does the Finance Act 2026 imply for this asset and for its FY27 tax charge?

Answer

MAT credit accumulated up to 31-Mar-2026 is usable only if the company moves to the new regime (capped at 25% of the year's tax liability, within 15 years). If it stays in the old regime, the credit cannot be used, so the asset is not recoverable and must be written off, a one-off charge. Going forward, MAT at 14% is a final tax with no credit. Its effective tax rate rises whenever MAT exceeds normal tax, because the old "credit" that kept the P&L tax charge low no longer exists.

6. Kaveri has a ₹38 Cr GST demand under appeal and ₹11 Cr of income-tax disputes. Compute the total per diluted share and as a % of the ₹390 share price. Then give one reason the GST dispute could matter more than the ₹38 Cr suggests.

Answer

49.0 / 6.07 = ₹8.07 per share, 2.1% of ₹390. The GST dispute concerns the rate on solar systems. If lost and tender prices are fixed inclusive of GST, the higher rate would reduce the taxable value (revenue) on every future solar sale. On FY26 solar revenue that is ≈₹22 Cr a year at 12% or ≈₹39 Cr at 18%, unless contracts allow pass-through. A disclosed one-off may hide a run-rate margin issue.

7. A company reports "EBITDA before ESOP" of ₹120 Cr, ESOP expense of ₹90 Cr and reported EBITDA of ₹30 Cr. Its diluted share count is 8% above basic. A colleague values it on ₹120 Cr × an EBITDA multiple and divides by basic shares. What's wrong?

Answer

It double-counts the benefit: it excludes the compensation cost and ignores the dilution that is the form the cost takes. ESOPs are real compensation; had they not been granted, employees would need cash. Either keep the ₹90 Cr as a cost (EBITDA ₹30 Cr) with basic shares, or exclude it and use a fully diluted share count that includes current and expected future grants. The first is usually more robust.

8. An exporter's OCI shows a large cash-flow hedge reserve loss this year, while PAT is up. Where will that loss go, and what would make it hit P&L all at once?

Answer

The effective portion of losses on forwards hedging future exports is parked in the cash-flow hedge reserve. It will be recycled into P&L (typically revenue) when the hedged exports are recognised, lowering future reported revenue toward the hedged rate. If the forecast exports are no longer expected to occur, the accumulated amount is reclassified to P&L immediately. Book value already reflects the loss. Future PAT does not yet.

Go deeper

• Ind AS 110, 28, 111, 103, 12, 37, 102, 21, 109 (hedging chapter) and 24: the standards, free on the MCA website. Read the application guidance on "control" (Ind AS 110 Appendix B).
• SEBI's order in the matter of Coffee Day Enterprises Ltd (January 2023), available on sebi.gov.in under Enforcement → Orders: a case study in how money moves through subsidiaries.
• Warren Buffett, Berkshire Hathaway shareholder letters (notably 1992), free at berkshirehathaway.com: the classic argument that stock options are compensation and belong in the income statement.
• Howard Schilit, Jeremy Perler & Yoni Engelhart, Financial Shenanigans (4th ed., 2018): chapters on key-metric manipulation, "adjusted" earnings and acquisition accounting.
• ICAI's Indian Accounting Standards (Ind AS): An Overview and the Ind AS Technical Facilitation Group bulletins (icai.org): practical Indian interpretations, including MAT and deferred-tax questions.

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