Audited Financial Statements of Indian

Electricity Distribution Companies:

Accounting for accountability

Discussion Paper
Audited Financial Statements of
Indian Electricity Distribution
Companies: Accounting for
accountability
Sonali Gokhale | Shantanu Dixit

March 2025

Discussion Paper
About Prayas
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Acknowledgements
We would like to thank the various experts who have shared their views on this discussion
paper. We would especially like to thank Dr. Sanjay Kallapur, Part Time Member National
Financial Reporting Authority (NFRA), Independent Director IDBI Bank, Professor at Indian
School of Business for his comments on the report; Shri Ajay Yeshwanth V. (IA&AS) & Shri
Raghuveer Chouksey (SAO) from IA&AD (posted at Bhopal office of C&AG of India) and
Mr. Gobind Jain, senior leadership professional from the Indian banking sector for reviewing
this report. The authors also record a note of gratitude for Jaimin Bhatt, ex Chief Financial
Officer, Kotak Group for his guidance.

Authors thank their colleague Ann Josey for her keen observations, review and encouragement
on the drafts. Any shortcomings or weaknesses in the report are the authors' own. Authors
would like to note the timely and valuable support of colleagues from the publishing and
administrative team for the production and dissemination of this paper.

Suggested citation: Prayas (Energy Group). (March 2025). Audited Financial Statements of
Indian Electricity Distribution Companies: Accounting for accountability.

March 2025
Discussion Paper
For Private Circulation only

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Table of Contents

List of abbreviations: iv
Executive Summary v
1. Introduction and context: 1
2. AAFS presentation formats for Indian discoms, a brief history and a need for change 4
3. Need for a standardised Accounting Standard to be adopted for Indian discoms 6
4. Working capital borrowings treatment in AAFS – definition, presentation,
possible improvements 8
5. Adverse Comments and Qualifications by statutory auditors of the discoms:
an eye opener and a gateway to the path to improvements 13
5.1 Accounts opened post closure of financial year end for a discom AAFS under
Indian GAAP: audit comments by CAG 14
5.2 Ad hoc changes in revenue recognition policy and imperfect application of
the revised policy: 14
5.3 Inappropriate treatment of Government Grants & Consumer Contribution 15
5.4 Auditor inability to comment on appropriateness of end use of short/long term loans 17
5.5 Audit qualifications on inadequate recording of contingent liabilities and
pending litigations 18
5.6 Auditor qualifications on inadequate internal control over financial reporting 19
5.7 Issues created due to coordination committee approach for power
procurement of multiple discoms in the same state 20
5.8 Statutory Auditor’s report quashed by CAG 21
5.9 Diversion of funds and questionable loans to parties 22
5.10 Adverse auditor report for AAFS for FY2022-23 23
6. Nonstandard application of accounting norms: a worrying trend 24
6.1 Regulatory Assets 24
6.2 Receivables provisioning 25
6.3 Government Grants 26
Conclusion & Recommendations: 28
Annexure 1: 32
Annexure 2: 33

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | iii
 List of abbreviations

AAFS : Annual Audited Financial Statements

Discom : Indian Electricity Distribution Company
CAG : Comptroller & Auditor-General of India
MoP : Ministry of Power
ICAI : Institute of Chartered Accountants of India
NFRA : National Financial Reporting Authority
Indian GAAP : Indian Generally Accepted Accounting Principles
Ind AS : Indian Accounting Standards
MCA : Ministry of Corporate Affairs
MSEDCL : Maharashtra State Electricity Distribution Co. Ltd.
APSPDCL : Southern Power Distribution Company of A.P. Limited
APEPDCL : Eastern Power Distribution Company of Andhra Pradesh Limited
APCPDCL : Andhra Pradesh Central Power Distribution Corporation Limited
AVVNL : Ajmer Vidyut Vitran Nigam Limited
JVVNL : Jaipur Vidyut Vitran Nigam Limited
JdVVNL : Jodhpur Vidyut Vitran Nigam Limited
GUVNL : Gujarat Urja Vikas Nigam Limited
DGVCL : Dakshin Gujarat Vij Company Limited
MGVCL : Madhya Gujarat Vij Company Limited
PGVCL : Paschim Gujarat Vij Company Limited
UGVCL : Uttar Gujarat Vij Company Limited
CESC : The Calcutta Electric Supply Corporation
CESCOM : Chamundeshwari Electricity Supply Corporation Limited
GESCOM : Gulbarga Electricity Supply Company Limited
BESCOM : Bangalore Electricity Supply Company Limited
MESCOM : Mangalore Electricity Supply Company Limited
HESCOM : Hubli Electricity Supply Company Limited
TANGEDCO : Tamil Nadu Generation & Distribution Corporation Limited
WBSEDCL : West Bengal State Electricity Distribution Company Limited

iv | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
Executive Summary

The Annual Audited Financial Statements (abbreviated to AAFS in this paper) of any company
narrate a comprehensive story of that company’s economic activities, profitability (or the lack of)
outcomes, financial strength in terms of assets owned, financial burdens in terms of large liabilities
and borrowings from various sources, cashflows generated and so much more. AAFS are also a
singular source for economic decisions for various stakeholders of companies such as investors,
lenders, regulatory bodies and so on.

The Indian electricity distribution sector is characterized by complexity contributed to in part by

the large investments in a regulated cost plus business model, heavily regulated tariff setting and
dependence on Government Grants and subsidies. The AAFS have always formed an important part
of the discoms’ tariff regulation process. In the past, whenever there have been bailout packages
or schemes for supporting the financial health of electricity distribution companies in India, AAFS
have been one of the core documents used for the same to arrive at an understanding of the debt
outstanding, the regulatory asset buildup on a discom’s books, the various governmental dues and
liabilities etc. Hence, the importance and criticality of accurately and comprehensively prepared
AAFS, presented in a format and using language that is easy to understand for the wide variety of
stakeholders for whom such AAFS form the basis for decision making, cannot be overstated.

There are already some steps being taken by the Ministry of Power (MoP) in the form of Electricity
Distribution (Accounts and Additional Disclosure) Rules, 2024 which detail accounting guidance
for critical items such as provisioning for trade receivables and revenue recognition as well as
many additional disclosures by discoms pertaining to cross subsidy, consumer wise tariff subsidy
receivables, details of AT & C losses, and tariff order analysis including reasons for disallowances as
part of their AAFS.1 This paper only hopes to further the progress being undertaken in this area.

As part of the research approach for this paper, we sampled the FY2023 AAFS (i.e. AAFS for the year
ended March 31 2023) for discoms across Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and 1
private discom (CESC). It is important to note that this paper and its observations are not intended to
single out any specific discom or state for improvement in accounting practices; the paper is best seen
as one representing accounting related issues for the electricity distribution companies in India. The
sample was collated to include diversity in terms of geography, holding structure and type of customers.

The paper is structured into five sections. Each section discusses a common theme of observations
found in AAFS of various discoms that have formed part of our sample. At the end of these sections,
we have a section on some recommendations that may add to more comprehensive, easy to
understand AAFS for Indian electricity distribution companies which will appropriately reflect the
peculiarities of their nature of business. A brief overview of the chapters and its constituents is
provided below:

Section 1: AAFS presentation formats for Indian discoms, a brief history and a need for change
The Electricity Act 2003 has no specific chapter or comprehensive rules (barring the Electricity
Distribution (Accounts and Additional Disclosure) Rules, 2024 brought out by MoP in October 2024)1
prescribing a presentation format for annual financials for companies engaged in the business of

1. [Link]
Disclosure_Rules_2024.pdf.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | v
 generation or supply of electricity, despite there being a proviso for sector specific accounting
standards in the Companies Act for electricity sector companies. Hence, by default Indian discoms
are using the presentation format mentioned in Companies Act, 2013 which is a general-purpose
format for preparing their AAFS.

This section raises the question whether the by default application of this general-purpose format
of the AAFS is truly appropriate for Indian electricity sector and especially for Indian discoms.
Indian discoms are widely known for their various ills, operating inefficiencies and staggering
losses, massive financial debt especially from public sector sources and sectoral peculiarities such
as regulatory assets buildup, irregular tariff setting by regulatory commissions, etc. In our opinion,
this issue needs some serious introspection by sector stakeholders and regulators as due to the
by-default nature of adopting general purpose AAFS presentation format for discoms, their AAFS
have some disclosure gaps for key financial matters and a lack of standardised presentation and
accounting protocol application across various discoms.

Section 2: Need for a standardised Accounting Standard to be adopted for Indian discoms
We observe that there is a differential adoption of accounting standards of Ind AS and Indian
GAAP across various discoms and in some cases even with different discoms in the same state.
As per the Companies (Indian Accounting Standards) Rules, 2015 stipulated by the Ministry of
Corporate Affairs, Ind AS are to be mandatorily applied for AAFS for unlisted companies with
networth of Rs. 250 Cr or more from FY2018. It appears as though despite having negative
networth2, some discoms seem to have voluntarily adopted Ind AS from 2016 onwards, whereas
the rest of the sample population continue to follow Indian GAAP. In this section, in order to
enhance comparability and standardisation, we propose a uniform approach of adoption of
accounting standards may be followed for all Indian discoms.

Section 3: Working capital borrowings treatment in AAFS – definition, presentation and

possible improvements
Working capital stretch and its consequent debt raising for Indian discoms have various root
causes including buildup of actual receivables (from customers, delayed receipt of subsidies from
the Government, pending dues from various Government departments), buildup of regulatory
assets, lack of timely tariff revision, asset buildup due to change in law litigation, strict new
measures of payment discipline forcing timely payments to electricity generators, etc. This section
discusses the difficulties in correctly identifying the exact amount of working capital debt on
a discom’s balance sheet as there are multiple measurement and presentation flaws for debt
obligations on a discoms balance sheet. This section also offers some stop gap solutions to remedy
this issue whilst also examining what should be the exact definition of working capital borrowings
for a discom. This issue is a matter of debate and one deserving keen regulatory attention with
clear accounting stipulations for Indian discoms.

Section 4: Adverse Comments and Qualifications by statutory auditors of the discoms: an

eye opener and a gateway to the path to improvements
This section discusses the issue nearly all statutory auditor’s report of AAFS of various discoms
are qualified with accounting qualifications that range from mild accounting issues to serious

2. Networth as defined in Section 2 (57) of the Companies Act, 2013.

vi | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
instances of failure of a discom to provide AAFS that present a true and fair view of the company’s
affairs. We believe that these myriad auditor qualifications are a real eye-opening pathway to
understanding the many areas of improvement, standardization that are necessary for AAFS for
Indian discoms.

Below is a brief list of the areas highlighted by the various auditor qualifications:
• Accounts opened post closure of financial year end for a discom AAFS under Indian GAAP
• Ad hoc changes in revenue recognition policy and imperfect application of the revised
policy
• Inappropriate treatment of Government Grants & Consumer Contribution
• Inappropriate recording end use of short/long term loans
• Inadequate recording of contingent liabilities and pending litigations
• Inadequate internal control over financial reporting
• Issues created due to coordination committee approach for power procurement of
multiple discoms in the same state

Section 5: Nonstandard application of accounting norms: a worrying trend

In our sampling of AAFS of discoms for FY2022-23 across various states, we have found some
concerning instances of nonstandard application of accounting principles. Revenue recognition
norms, regulatory assets, receivables provisioning, government grants are a few areas that this
section discusses which denote a larger theme of lack of standardization in preparation and
presentation of AAFS for discoms.

As has been discussed at length over the five sections in this report, there are multi-fold issues
with the approach, process and outcome of the preparation and presentation of the audited
financial statements of the Indian discoms. Some of the issues require only moderate tweaks to
the existing model whereas there exist larger issues for which a systemic solution and change is
very much warranted and possible.

The below section on recommendations discusses these with some forward-looking suggestions
for effective improvements in this area.
1. A concerted high level multi-regulatory agency response in the form of a complete
overhaul of the approach and process of the preparation and presentation of AAFS for
Indian discoms:
Given the frequency and seriousness of many issues in the AAFS for Indian discoms, the
time is ripe for a multi-regulatory agency policy effort to reimagine the preparation,
presentation and standardised application of accounting principles for AAFS of Indian
discoms so that in the true spirit of the process, providing a true, fair and accessible view
of the financial matters of discoms can be achieved. The agencies who are best positioned
for spearheading efforts towards standardisation of the entire annual audited financial
statements for all electricity sector companies would be the Ministry of Power (MoP) in
close coordination with the Ministry of Corporate Affairs (MCA). This will help increase
transparency and accountability not just for DISCOMs but across the electricity sector
value chain. The National Financial Reporting Authority (NFRA) in close coordination with

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | vii
 the Institute of Chartered Accountants of India (ICAI) could also provide the required
technical expertise in accounting and auditing for this effort.3

2. Suggestions on medium term modifications to existing process of discom AAFS

preparation whilst above systemic overhaul of the approach and process of preparation
and presentation is underway:
It is well appreciated that the complete overhaul of this area as recommended in the
earlier point will be a long-term process which shall and perhaps rightfully should take
its well-considered course of action. In the mean time, following are some areas which if
included as additional disclosures in the existing AAFS formats could bolster stakeholder
confidence in assessing financial health of discoms.
A. Formats for prior period adjustments disclosures
B. Working capital disclosures
C. Regulatory Assets disclosures
D. Since, the overarching direction of ICAI is for all Indian companies to finally move to
Ind AS which is line with global accounting norms, we recommend that MoP instruct
all Indian discoms to uniformly adopt the same accounting standard of Ind AS with
effect from financial year ended March 31 2027 at the latest.

3. Suggestions for improving appropriateness of accounting principles applied by discoms

and certified by their statutory auditors:
In some instances, there exist serious differences in opinion on whether the discoms AAFS
present a true and fair view of the company’s financial affairs, between the statutory
auditor and in the supplementary audit report of the Comptroller & Auditor General of
India (CAG). In such serious cases of difference of opinion, as of today, such differences
are simply recorded in the CAG’s supplementary audit report as part of the AAFS. There
may be a section in the AAFS where rebuttal/clarifications/responses by the discom
management on statutory auditor observations is recorded. In such cases, it is important
for regulatory bodies such as MoP, CAG & NFRA to jointly work to present guidance
on best practices to avoid differences of opinion of such magnitude. Hence, to this
end, we recommend that Central CAG office & NFRA conduct a review every 3 years of
discom AAFS and publish a report cataloguing such instances. The NFRA and MoP jointly
should present guidance notes detailing the best practices to be undertaken by discom
management in areas of such disputes. Further, in order to improve the overall quality of
financial record keeping and compliance with good accounting practices, we recommend
that the Director (Finance) equivalent personnel for each discom should be necessarily a
member of the ICAI. Members are bound by ICAI code of ethics and non compliance with
such is a matter that may involve disciplinary action by ICAI.

3. The National Financial Reporting Authority (NFRA) was constituted on 01st October,2018 by the Government of
India under Sub Section (1) of section 132 of the Companies Act, 2013.
Functions and Duties
As per Sub Section (2) of Section 132 of the Companies Act, 2013, the duties of the NFRA are to:
Recommend accounting and auditing policies and standards to be adopted by companies for approval by the
Central Government;
Monitor and enforce compliance with accounting standards and auditing standards;
Oversee the quality of service of the professions associated with ensuring compliance with such standards and
suggest measures for improvement in the quality of service;
Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

viii | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
1. Introduction and context

The Annual Audited Financial Statements (abbreviated to AAFS in this paper) of any company
narrate a comprehensive story of that company’s economic activities, profitability (or the lack of)
outcomes, financial strength in terms of assets owned, financial burdens in terms of large liabilities
and borrowings from various sources, cashflows generated and so much more. AAFS are also a
singular source for economic decisions for various stakeholders of companies such as investors,
lenders, regulatory bodies and so on.

What makes the AAFS a document of immense value apart from the quantitative details of the
company’s economic performance, is the various certifications and comments included by the
statutory auditors of the company’s financial records in their statutory audit report. Such comments
regularly point to areas of inappropriate application of certain accounting principles, certain trends
in the companies’ financial performance that point to potential insolvency, financial items which
could mean sudden large outflows of cash, material inadequacy in data used for completing the
audit, etc. As per Accounting Standard SA 200 of the Institute of Chartered Accountants of India
(ICAI)4, ‘The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with an applicable financial
reporting framework. In the case of most general-purpose frameworks, that opinion is on whether
the financial statements are presented fairly, in all material respects, or give a true and fair view in
accordance with the framework’.5

The Indian electricity distribution sector is one of complexity contributed to in part by the large
investments in a cost plus business model, heavily regulated tariff setting and consequently the
Indian electricity distribution companies’ (discoms’) dependence on Government Grants and subsidies.
AAFS have always formed an important part of the discoms’ tariff regulation process. AAFS are the
basis upon which electricity distribution companies prepare their annual revenue requirement (ARR)
and submit the same to the respective state electricity regulatory commissions (SERC) as part of the
tariff approval process. Also, in the past whenever there have been bailout packages or schemes for
supporting the financial health of electricity distribution companies in India, AAFS have been one
of the core documents used for the same to arrive at an understanding of the debt outstanding,
the regulatory asset buildup on a discom’s books, the various governmental dues and liabilities etc.
Hence, the importance and criticality of accurately and comprehensively prepared AAFS, presented
in a format and using language that is easy to understand for the wide variety of stakeholders for
whom such AAFS form the basis for decision making, cannot be overstated.

Extant regulations overseeing the area of audits of companies:

The Companies Act 2013 Section 133 empowers the Central Government to prescribe the standards
of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants

4. The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament, viz.
The Chartered Accountants Act, 1949 (Act [Link] of 1949) for regulation and development of the profession of
Chartered Accountants in the country. The Institute, functions under the administrative control of the Ministry of
Corporate Affairs, Government of India.
5. [Link]

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 1
 of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in
consultation with and after examination of the recommendations made by the National Financial
Reporting Authority (NFRA).6

Comptroller & Auditor-General of India (CAG) oversight on Indian discoms’ audits:

Companies Act 2013 Section 143 (5) & (6) empower the Comptroller & Auditor-General of
India (CAG) to appoint statutory auditors for Indian state-owned discoms as well as to conduct
a supplementary audit of the financial statements of the discom and comment on such
supplementary audits. Some examples of CAG supplementary audit comments are discussed in
section 4 on auditor qualifications.

Apart from regular supplementary audits, CAG in its various compliance reports for public sector
undertakings of various states, has repeatedly pointed out that the quality of financial accounts
and compliance with accounting standards of power sector public sector undertakings including
discoms were inadequate. Following are few examples:

 During the period from October 2018 to September 2019, for the ten power sector public
sector undertakings that submitted their financials for CAG supplementary audit, the
Statutory Auditors had given unqualified opinion for eight financial statements and
qualified opinion for two financial statements. The compliance of power sector public
sector undertakings with the Accounting Standards (ASs)/ IND AS remained deficient, as
six instances of non-compliance were observed in five financial statements.7

 Compliance to the Accounting Standards by the Power Sector Undertakings was poor as
the Statutory Auditors and the CAG pointed out 21 and 19 instances of non-compliance
to the Accounting Standards in 2016-17 and 2017-18 respectively. As the Power Sector
Undertakings had not forwarded their accounts for the year 2018-19, the level of
compliance to the Accounting Standards could not be commented upon.8

The extant mechanism for follow up action for such comments in CAG Compliance reports does not
seem to be as effective as originally envisaged. Some examples of the same are provided below:

The Report of the Comptroller and Auditor General of India is the product of audit scrutiny. It is,
therefore, necessary that these elicit appropriate and timely response from the Executive. The State
Finance Department, Government of Punjab issued (August 1992) instructions to all administrative
departments to submit replies/explanatory notes to paragraphs/Performance Audits (PAs) included
in the Audit Reports of the CAG of India within a period of three months of their presentation to
the Legislature without waiting for any questionnaires from the Committee on Public Undertakings
(COPU). However, explanatory notes were not received in 25 per cent of the Performance Audits
and over 19 per cent of the Audit Paragraphs as on 30 September 2019.9

6. [Link]
7. Report of the Comptroller & Auditor General of India on Public Sector Undertakings for the year ended 31 March
2019, Government of Gujarat, Page 21
8. Report of the Comptroller & Auditor General of India on Public Sector Undertakings for the year ended 31 March
2019, Government of Kerala, Page 21.
9. Report of the Comptroller & Auditor General of India on Public Sector Undertakings for the year ended 31 March
2019, Government of Punjab, Page 26.

2 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
Not submitting replies to Audit, large arrears in preparation of annual accounts of most of the
State Entities and not laying the Annual Report/Accounts along with Separate Audit Report (SAR)
in the State Legislature adversely affects accountability and transparency in the Government and is
therefore a cause of concern.10

The above issues with CAG oversight also point towards the need for an overhaul of the approach
and process of preparation & presentation of AAFS for Indian discoms.

Structure and approach of the research paper:

We have been referring to AAFS for various discoms over the past many years as part of our work
in the area of discom regulatory engagements, while writing various papers on discom regulations,
also as a part of studying various orders of SERCs. While doing this work, we have noted some
areas of potential improvement in presentation and quality for AAFS of Indian discoms. We, the
authors of the report are not trained or licensed chartered accountants and hence we have relied
on our anecdotal experience of areas that make interpreting such AAFS difficult for us as research-
based stakeholders in the sector, for the purpose this paper. We hope that this paper will bring to
light, the need for some rather necessary attention to certain areas of weaknesses in preparation
and presentation of AAFS of Indian discoms.

As part of the research approach for this paper, we sampled the FY2023 (year ended March 31
2023) AAFS for discoms across Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and 1 private
discom (CESC). It is important to note that this paper and its observations are not intended to
single out any specific discom or state for improvement in accounting practices; and be seen
as representing accounting related issues for the electricity distribution companies in India. The
sample was collated to include diversity in terms of geography, holding structure and type of
customers.

The paper is structured into five sections. Each section discusses a common theme of observations
found in AAFS of various discoms that have formed part of our sample. At the end of these
sections, we have a section on some recommendations that may add to more comprehensive, easy
to understand AAFS for Indian electricity distribution companies which will appropriately reflect
the peculiarities of their nature of business.

There are already some steps being taken by the Ministry of Power (MoP) in the form of Electricity
Distribution (Accounts and Additional Disclosure) Rules, 2024 which detail accounting guidance
for critical items such as provisioning for trade receivables and revenue recognition as well as
many additional disclosures by discoms pertaining to cross subsidy, consumer wise tariff subsidy
receivables, details of AT & C losses, and tariff order analysis including reasons for disallowances as
part of their AAFS1. This paper only hopes to further the progress being undertaken in this area.

10. Compliance Audit Reports of the Comptroller & Auditor General of India for the year ended March 31 2020 &
March 31 2022, Government of Uttar Pradesh, Page 7 & 8 respectively.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 3
 2. AAFS presentation formats for Indian discoms,
a brief history and a need for change

As of today, AAFS for Indian discoms follow the presentation format provided in Chapter IX Section
129 (1) Schedule III of Companies Act 2013.11 This is despite the fact that the Companies Act 2013
mentions that three sectors for which a form of financial statement has been specified in or under
the Act governing such class of company; Banking, Insurance and Generation/Supply of electricity
may be excluded from following the presentation formats and instructions provided In Schedule III.

Out of three sectors mentioned above where Schedule III is not applicable, Banking and Insurance
have specific presentation formats for their AAFS as per their specific Acts/Rules under their Acts.

Same are detailed below:

Banking:
Balance Sheet is prepared in conformity with Form A of the Third Schedule to the Banking
Regulation Act, 1949 and Profit and Loss Account in conformity with Form B. They are prepared in
accordance with provisions of Section 29 of the Banking Regulation Act 1949.12

Insurance:
Audited financial statements should be prepared in line with The Insurance Regulatory and
Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance
Companies) Regulations, 2002.13

However, the Electricity Act 2003 has no specific chapter or rules prescribing a presentation format
for companies engaged in the business of generation or supply of electricity in the Act (Barring
the Electricity Distribution (Accounts and Additional Disclosure) Rules, 2024 brought out by MoP in
October 2024).14 Hence, by default Indian discoms are using the presentation format mentioned in
Companies Act 2013 which is a general purpose format for preparing their AAFS.

Further, Chapter IX Section 129 (1) Schedule III of Companies Act 2013 also mentions the
following:

Provided also that the financial statements shall not be treated as not disclosing a true and fair
view of the state of affairs of the company, merely by reason of the fact that they do not disclose-

(a) in the case of an insurance company, any matters which are not required to be disclosed
by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act,
1999;
(b) in the case of a banking company, any matters which are not required to be disclosed by
the Banking Regulation Act, 1949;

11. [Link]
12. [Link]
4b04a518487e
13. [Link]
14. [Link]

4 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
 (c) in the case of a company engaged in the generation or supply of electricity, any matters
which are not required to be disclosed by the Electricity Act, 2003;
(d) in the case of a company governed by any other law for the time being in force, any
matters which are not required to be disclosed by that law.

Again, there is no specific section, rule or proviso in the Electricity Act 2003 guiding on what kind
of financial matters if not disclosed by a company generating or supplying electricity will mean
that the company’s AAFS do not present a true and fair view of the state of affairs of the company.

Companies Act 2013 has provided for such differential treatment for presentation formats and
disclosure litmus tests for true and fair picture for AAFS of companies in these three sectors
in order for their respective governing Acts to prescribe presentation formats and accounting
guidance which can appropriately record relevant information of financial operations of the
companies taking into account sectoral peculiarities, as well as such sectors being heavily
regulated and requiring specialised licenses for operations.

Both the above points, pertaining to presentation formats and the disclosures to ensure AAFS
provide a true and fair picture of a company’s affairs, have to be seen in the context of whether
both treatments of by default application of Schedule III is truly appropriate for Indian electricity
sector and especially for Indian discoms. Indian discoms are widely known for their various ills,
operating inefficiencies and staggering losses, massive financial debt especially from public
sector sources and sectoral peculiarities such as regulatory assets buildup, irregular tariff setting
by regulatory commissions, etc. In our opinion, this issue needs some serious introspection by
sector stakeholders and regulators as due to the by-default nature of adopting Schedule III AAFS
presentation format for discoms, their AAFS have some disclosure gaps for key financial matters
and a lack of standardised presentation and accounting protocol application across various
discoms. Some of these issues are discussed in more detail in the ensuing sections. This is a serious
issue and needs further debate and thinking.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 5
 3. Need for a standardised Accounting Standard
to be adopted for Indian discoms

All companies in India, till 2016, followed accounting standards as per the Companies (Accounting
Standards) Rules, 2006 (with multiple amendments in following years, later superseded by the
Companies (Accounting Standards) Rules, 2021) for preparation of their AAFS.15 Termed as “Indian
GAAP” (Indian Generally Accepted Accounting Principles), these were standards notified by the
Central Government under the Companies (Accounting Standards) Rules, 2006 (applicable to all
companies) vide notification G.S.R.739(E) dated 7 December 2006, as amended and to the relevant
requirements of the Companies Act, 2013.

The Indian Accounting Standards (“Ind AS”) were notified on 16 February 2015 by the Ministry
of Corporate Affairs (“MCA”). MCA notified the Companies (Indian Accounting Standards) Rules,
2015 which specified the Ind AS applicable to certain class of companies and set out the dates
of applicability.16 The Ind AS were notified as a need was felt by India to converge the current
Indian accounting standards with the International Financial Reporting Standards (IFRS), a set of
international accounting standards which have found global acceptability.

As part of the research approach for this paper, we sampled the FY2022-23 AAFS for various
discoms across the different states of India and observed that there is a differential adoption of
accounting standards across various discoms and in some cases even with different discoms in
the same state. As per ICAI guidance on phase wise adoption of Ind AS standards,17 Ind AS are to
be mandatorily applied for AAFS for unlisted companies with networth of Rs. 250 Cr or more from
FY2018. In the below list, it appears as though despite having negative networth3, some discoms
seem to have voluntarily adopted Ind AS from 2016 onwards, whereas the rest of the sample
population continue to follow Indian GAAP. It is important to note that as per Ind AS adoption
rules, once a company adopts Ind AS as the standard for preparing its AAFS, it cannot change the
same in any subsequent financial year.

Following is a brief snapshot of the same:

State Discom Accounting Standard applied for FY2022-23 AAFS
Maharashtra MSEDCL Ind AS

Andhra Pradesh APSPDCL Indian GAAP

APEPDCL Ind AS
Not stated by company*
APCPDCL
Indian GAAP for FY2021-22

15. [Link]
16. [Link]
17. [Link]

6 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
 Rajasthan AVVNL Indian GAAP
JVVNL Indian GAAP
JdVVNL Indian GAAP

Gujarat GUVNL Ind AS

DGVCL Ind AS
MGVCL Ind AS
PGVCL Ind AS
UGVCL Ind AS

Private Discom (Kolkata) CESC Ind AS

Karnataka CESCOM Ind AS

GESCOM Ind AS
BESCOM Ind AS
MESCOM Ind AS
HESCOM Indian GAAP

Tamil Nadu TANGEDCO Ind AS

West Bengal WBSEDCL Ind AS

*Covered in detail in Section 4 regarding auditor qualifications

While it is outside our capabilities to comment on whether Indian GAAP or Ind AS is a more
suitable approach for Indian discoms to prepare their AAFS, we find that comparability of discom’s
financial performance may be hindered due to this disparity. We propose a uniform approach of
adoption of accounting standards may be followed for all Indian discoms. We also believe that this
is an important point of implications assessment for the sector regulators in consultation with the
accounting regulators as well as accounting standard setting bodies in India.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 7
 4. Working capital borrowings treatment in
AAFS – definition, presentation, possible
improvements

Working capital stretch and its consequent debt raising for Indian discoms have various root
causes including buildup of actual receivables (from customers, delayed receipt of subsidies from
the Government, pending dues from various Government departments), build-up of regulatory
assets, lack of timely tariff revision, asset buildup due to change in law litigation, etc. Working
capital borrowings buildup especially segregated by end use is a very critical parameter for
assessment of a discom’s state of financial affairs for a wide variety of stakeholders for discoms
including lenders, regulators, consumers and so on. In this context, we observe that the discom
AAFS do not appropriately reflect the actual working capital borrowings of the discom. Some
reasons for the same are discussed below:

i. For discom AAFS which follow the Ind AS, it is observed that classification of assets and
liabilities into current and non-current is made on the basis of a proxy operating cycle
of 12 months as per Ind AS 1 and schedule III to Companies Act 2013.18 The reasoning
provided for the same is that due to the peculiar nature of electricity distribution business
in India, it is not possible for the discom to refer to a stabilised operating cycle in order to
segregate financial items especially pertaining to debt into current and non-current.

Following are some examples of such articulation in Ind AS based discom AAFS under the
section ‘Significant Accounting Policies’:
 All assets and liabilities have been classified as current or non-current based on
the Company’s normal operating cycle i.e. 12 months and other criteria set out in
the Schedule III to the Companies Act, 2013. Deferred tax assets and liabilities are
classified as non-current on net basis. The Company has determined its operating
cycle as 12 months for the purpose of classification of its assets and liabilities as
current and non-current.19
 As the operating cycle cannot be identified in normal course due to the special
nature of industry, the same has been assumed to have duration of 12 months.
Accordingly, all assets and liabilities have been classified as current or noncurrent
as per the Group’s operating cycle and other criteria set out in Ind AS-1
‘Presentation of Financial Statements” and Schedule III to the Companies Act,
2013.20

For discom AAFS which follow Indian GAAP, the basis of such a classification of assets and
liabilities into current and non-current is not explicitly mentioned.

18. [Link] Schedule III Point 6,

Part 1, Note 2
19. [Link] Page 222
20. [Link] Page 103, 178

8 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
 In some states, Discoms disclose their working capital borrowings as part of various
regulatory petitions to state electricity regulators. However, there is no regulatory
mandate to report actual working capital borrowing in any state except Rajasthan. Four
SERCs require reporting of interest cost burden due to working capital borrowing in their
regulations.

SERC true up process regulations stipulate a normative working capital requirement, the
interest cost of which may be approved to be passed through to the tariff charged to
consumers. One example of a normative formula for working capital requirement for a
discom is provided below:21

For Distribution Wires Business - (Normative Operations & Maintenance Charges for 1
month + Maintenance spares @ 1% of the Gross Fixed Asset + 1.5 months of expected
revenue from charges) - (Consumer Security Deposit)

For Retail Supply of electricity -

(Normative Operations & Maintenance for 1 month + Maintenance spares @ 1% of

the Gross Fixed Assets + 1.5 months of expected revenue from charges including Cross
Subsidy Surcharge & Additional Surcharge) - (Consumer Security Deposit + 1 month of
power purchase cost including transmission & State Load Dispatch Centre charges)

We observe that there is a considerable amount of variance between the amounts

classified as short term loans in the AAFS of a discom vs. that which is disclosed as
working capital loans in the notes to the AAFS/the amount disclosed in regulatory filings
by the same discom. For example for FY23, a discom has classified Rs. 9800 Cr as Current
Borrowings (this excludes Current Maturities of Long Term Debt of Rs. 12200 Cr) in its
Balance Sheet.22 In the same AAFS the discom has disclosed Rs. 45,511 Cr as working
capital outstanding in the Director’s Report.23 This amount includes ~Rs. 32000 Cr of
medium term loans taken for working capital purpose under various schemes for financial
support provided to discoms such as Late Payment Surcharge Rules (LPS) with tenors
varying between 7 years to 14 years. The amount of utilised working capital for FY23
disclosed by the discom as part of various regulatory filings is ~ Rs. 44000 Cr.24

Except Rajasthan, no state requires discoms to submit their working capital borrowings
data. Most SERCs as part of the tariff true up process calculate and approve the interest
cost on normative working capital based on their stipulated parameters for passthrough
to consumers. Four SERCs also allow of passthrough of a certain proportion of actual
interest cost burden due to working capital borrowing. The components of working capital
assessment for interest cost approval by SERCs are not standard across the country.

As discussed earlier, working capital stretch and consequent borrowings by discoms have
various root causes including buildup of actual receivables, build-up of regulatory assets,
lack of timely tariff revision, asset buildup due to change in law litigation, etc. Further,

21. [Link] Page 78-79

22. [Link] Page 211
23. [Link] Page 18
24. [Link] Page 18

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 9
 the MoP provides various financial packages to aid the stretched cashflow conditions of
discoms such as the Liquidity Infusion Scheme 2021 (LIS), the Late Payment Surcharge
Rules 2022 (LPS), etc. Hence, it is a matter of debate as to what should be the exact
definition of working capital borrowings for a discom. The normative formulae used by
certain SERCs are obviously not representative and may not capture the non-operational
sources of working capital stretch and its consequent borrowing. This issue is a matter of
debate and one deserving keen regulatory attention with clear accounting stipulations for
Indian discoms.

ii. Given the above, it is evident that the short term or current borrowings in discom AAFS do
not appropriately reflect the actual working capital borrowings of the discom. There is no
standard format for explicitly arriving at the end use based classification of long term and
short-term debt in discom AAFS irrespective of Ind AS or Indian GAAP presentation. Hence
even after referencing the schedules to the AAFS, it is not possible to ascertain how much
working capital debt is actually present on a discom’s books in a consistent manner across
discoms. We have observed that for some discoms, the AAFS reflects a table representing
working capital end use of funds where the loan tenor is medium term and not strictly
less than 12 months.25 This is due to the fact that the tenors for the loans raised under
the LIS and LPS schemes may be of much longer tenors of 4-14 years due to the nature
of the payment arrears and the prescribed tenor of easing of their payment schedules.26
Raising debt from any manner of lending entity will involve detailed loan documentation
which will necessarily record the intended end use for the facilities being raised by them.
Hence, this documented end use of funds is a fair and reliable criterion to segregate
borrowings into working capital and non-working capital debt. Hence, the position of
discoms that they are unable to segregate borrowings basis non-standard operating cycle
does not sound tenable. This point of end use of loans being inadequately recorded by
majority of discoms sampled by us is discussed in detailed in section 4 as part of auditor
qualifications.

iii. Hence, keeping in view the criticality of accurate working capital borrowing disclosure
and the extant classification norms of non-current and current assets and liabilities
being followed by discoms as well as troubles with correctly defining working capital
borrowings, we recommend the addition of the below disclosure tables in a standardized
manner for all discom AAFS in notes to accounts.

25. [Link]
Page 17, Note b.
26. Under the LPS Rules 2022 scheme, for outstanding late payment surcharge dues in excess of Rs. 10000 Cr, a discom
may reschedule the payments of such dues and pay them over 48 equated monthly instalments from the date of Rules
notification. [Link]

10 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
Total Debt Snapshot
Tenor > 12 months Tenor < 12 months
Nature of financing as defined by terms of (In Rs. Cr.) (In Rs. Cr.)
sanction documentation by lender Current Previous Current Previous
FY FY FY FY
Specific to identified capex (Secured)
Specific to identified capex (Unsecured)
Non -Capex / General Purpose (Secured)
Non -Capex / General Purpose (Unsecured)
Working Capital (Secured)
Working Capital (Unsecured)
Total Borrowings

Working capital borrowings details

Tenor > 12 Tenor < 12
Nature of financing as defined by months (In Rs. Cr.) months (In Rs. Cr.) Repayment
terms of sanction documentation by Schedule/
lender Current Previous Current Previous Tenor
FY FY FY FY
Working capital under Liquidity Infusion
Scheme (LIS) (Secured)
Working capital under Liquidity Infusion
Scheme (LIS) (Unsecured)
Working capital under Late Payment
Surcharge Rules (LPS) (Secured)
Working capital under Late Payment
Surcharge Rules (LPS) (Unsecured)
Other Working capital (Secured)
Other Working capital (Unsecured)
Total Working Capital
Total revenue considered
% of Total Working Capital (net of long
tenor loans under LPS/LIS) to Total
revenue considered

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 11
 Lender wise list of Working Capital borrowings

FB NFB FB + Fungibility
FB FB NFB NFB FB+NFB
limits limits NFB FB+NFB of limits,
Name of Nature of limits o/s Limits o/s limits
utilised utilised limits o/s please
lender instrument: (Rs. (Rs. (Rs. (Rs. utilised
(Rs. (Rs. (Rs. (Rs. Cr.) provide
Cr.) Cr.) Cr.) Cr.) (Rs. Cr.)
Cr.) Cr.) Cr.) details

Total

Nature of instrument: Working Capital Demand Loan (WCDL), Working Capital Term Loan (WCTL), Cash Credit (CC), Overdraft (OD),
Bank Guarantees (BG), Letter of Credit (LC), Revolving Bill Payment Facility etc.
FB: Fund Based
NFB: Non-Fund Based
o/s : outstanding

12 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
5. Adverse Comments and Qualifications by
statutory auditors of the discoms: an eye opener
and a gateway to the path to improvements

In the AAFS (under both Indian GAAP and Ind AS), the auditor’s report may have comments termed
as ‘qualifications’ which are warning signals of some form of non compliance or inadequacy in
reporting of some financial data or financial impact of a set of activities within the company. In
ascending order of seriousness, the different types of auditors’ report for a company’s AAFS are
presented below:21
1. Unqualified audit report (no material misstatement),
2. Qualified audit report (material but not pervasive misstatement)
3. Adverse audit report (both material and pervasive misstatement). (Note: we understand
that an adverse auditor’s report is relatively a rare occurrence for companies and is
indicative of very serious lapses in accounting quality of AAFS. We have detailed one such
adverse audit report’s contents in the later part of this section)
4. Disclaimer of opinion (The auditor shall disclaim an opinion when the auditor is unable
to obtain sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.)

As per the Standard of Auditing (SA) 70527 of the ICAI, the auditor shall modify the opinion in the
auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.

The same SA 705 defines ‘material misstatement’ as such which is emanating from the following:
(a) The appropriateness of the selected accounting policies; or
(b) The application of the selected accounting policies; or
(c) The appropriateness or adequacy of disclosures in the financial statements.

We have perused the statutory auditor’s reports of various discom AAFS and found nearly all AAFS
to be qualified with accounting qualifications that range from mild accounting issues to serious
instances of failure of a discom to provide AAFS that present a true and fair view of the company’s
affairs (this case of an adverse auditor’s report is detailed further in this section). We have grouped
auditor qualifications by specific themes of impact on the AAFS that we sampled, into separate
sections. We believe that these myriad auditor qualifications are a real eye-opening pathway to
understanding the many areas of improvement, standardization that are necessary for AAFS for
Indian discoms.

27. [Link]

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 13
 5.1 Accounts opened post closure of financial year end for a discom AAFS under
Indian GAAP: audit comments by CAG
In this instance CAG supplementary audit has recorded the finding, that the discom re-opened
their AAFS for FY2022-23 post end of that financial year in October 2023. The same was done to
account the reversal of the amount of Late Payment Surcharge (LPS) of Rs. 3471.68 Cr and Return
on Equity (RoE) charged to the discom by the state government owned generating company and
another discom in the same state, in line with the directive of the Finance Department of the
State Government in September 2023. Accounting Standard AS-4 stipulates that adjustments to
assets and liabilities are not appropriate for events occurring after the balance sheet date. There
was no proposal for waiver of LPS and RoE pending with the State Government as on Balance
Sheet date of March 31 2023. The reversal post re-opening of accounts after end of financial year
has resulted in overstatement of Exception Income by Rs. 3288.38 Cr, understatement of Finance
Cost by Rs. 183.26 Cr and Power Purchase Cost by Rs. 551. Cr and understatement of Trade
Payables by Rs. 4023. 32 Cr. Loss for the year was also understated by Rs. 4023.3 Cr. After giving
the impact of the comment mentioned above, the loss for the year FY2022-23 of Rs. 221.43 Cr
would increase to Rs. 4244.75 Cr.28

As a rebuttal to the above, the discom Management stated that this was done to ameliorate
the ever deteriorating financial health of the company due to non-approval of Fuel Surcharge
Adjustment (FSA) by the SERC despite unprecedented increase in power purchase costs. Their
contention was that while formal directions were issued only after ascertaining the level of losses,
the intent of the state government in this regard was already there and the State Government
directive was clear that the effect of this reversal were to be reflected in AAFS for FY2022-23 only.

Practices such as re-opening of accounts post close of financial year end, are a slippery slope
potentially affecting the sanctity of AAFS at the end of a financial year with proper closure of audit
procedures and approval of the AAFS by investors in the Annual General Meeting by of the discom.

Also, it is to be noted that as per the CAG supplementary audit comment, the AFFS for FY 2022-
23 for the said discom do not present a ‘true and fair’ view of the company’s affair. This CAG
comment has serious implications for all the stakeholders and users of these AAFS.

5.2 Ad hoc changes in revenue recognition policy and imperfect application of the
revised policy:
In this instance an Indian GAAP adoptee discom had some inhouse unwritten accounting policies
for revenue recognition which the discom changed in FY2022-23 AAFS. The articulation by the
management is provided below in Notes to the accounts. The reason for this ad hoc change in
policy in FY2022-23 is not mentioned.

The tariffs are determined based on the costs (Aggregate Revenue Requirement) estimated and
approved by the Hon’ble APERC. The actual costs incurred will vary from the approved costs,
and such variation are commonly known as true up/true down/Fuel and Power Purchase Cost
Adjustment (FPPCA). As per APERC Regulations, the company has a right to recover/refund such
variations from consumers and Government (in respect of agricultural consumption under
the free category). In respect of true up/true down/FPPCA or any other recovery/rebate, the

28. [Link]
O_290124_38c28e89-[Link],JVVNL AAFS FY2022-23, Page 220

14 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
 company was recognising such revenue after approval of the same by the Judicial/Regulatory
Authorities and only when such amount is billed/passed on to the consumers in the manner
allowed by Judicial/Regulatory Authorities. During FY2022-23, the company changed its
unwritten accounting policy to recognise such revenue as and when petitions are filed with the
Judicial/Regulatory Authorities.

Due to the above change in policy, total income and profit for the FY2022-23 have been
increased by Rs. 3564.49 Cr.29

The auditor’s comments on the above ad hoc change state that because of above change in policy,
the discom has recognized additional revenue of Rs. 4144.35 Cr. However, the discom has recognized
the revenue as on March 31 2023 whereas as per the approvals received from SERC is to be recovered
from future dates over a period of some years in monthly instalments (FPPCA over 12 monthly
instalments from April 2023, Distribution true- up for 3rd control period (FY2014-19) over 36 months
from August 2022 to July 2025 ; discom has recognized balance 28 instalments revenue of Rs. 989 Cr
on March 31 2023). This in not in accordance with recovery manner and period prescribed by SERC.30

Further, the auditor has commented that discom has accounted for Rs. 1955.09 Cr pertaining to
FPPCA for FY2022-23 based on petitions/claims filed (and pending for regulatory approval) and
that they are of the opinion that the accounting policy of the Company to recognize revenue as
and when petitions/claims are filed with Judicial/Regulatory Authorities is not in accordance with
the Regulations/orders issued by Judicial/Regulatory Authority. The same needs rectification.
Adoption of such accounting policy resulted in overstatement of revenue and profit to the extent of
Rs. 1,955.09 crores.24

Note: Auditor qualifications in a similar vein of overstatement of revenue profit by Rs. 3253.79 Cr
are present in the discom’s AAFS for FY24. The auditor for FY23 and FY24 is the same.31

This discom AAFS does not have a section recording the responses of discom management to
auditor’s qualifications. These kinds of qualifications definitely deserve a closer look at by sector
regulators as inappropriate revenue recognition has a direct impact on the true up/true down tariff
regulation process.

5.3 Inappropriate treatment of Government Grants & Consumer Contribution

In some discoms AAFS sampled by us, we came across multiple auditor qualifications pertaining
to how discoms were treating government grants & consumer contributions in an inappropriate
manner.
Ind AS adoptee discoms:
 As stated in note no. 2(6) of the significant accounting policies, as per Ind AS 20 ‘Accounting
for Government Grants and Disclosure of Government Assistance’, government grant

29. [Link]
[Link] APSPDCL AAFS FY2022-23, Page 46, Note 19.
30. [Link]
[Link].
APSPDCL AAFS FY2022-23, Page 55 of the PDF document, Point II.
31. [Link]
[Link].
APSPDCL AAFS FY2023-24, Page 59, Note 15.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 15
 for capital assets is recognised in the Statement of Profit and Loss on a systematic basis
over the period, in which the entity amortises the related costs of such capital asset and
recognizes grant income in the pattern of the amortisation. As stated in Note No 39(18)
of the Standalone Financial Statement, the Company assumes that all grants received are
utilised and the assets are capitalised in the same year. Due to non-availability of sufficient
and appropriate audit evidence with regard to utilization of grants, we are unable to
comment on the consequential impact including depreciation on retirement of assets and
income recognition.32

Indian GAAP adoptee discoms:

 Refer to Para No. 3 ©of Note 1 of ‘Significant Accounting Policies’ with regards to policy
for recognition of Consumer Contribution, Grants and Subsidies towards cost of capital
assets on cash basis irrespective of date of completion of capital assets, which is not
in accordance with accrual system of accounting as required by Indian GAAP. Further,
policy of amortization of Consumer Contribution, Grants and Subsidies towards cost of
capital assets in 25 years without any correlation with the life of assets created, is not in
accordance with the Accounting Standard-12 ‘Accounting for Government Grants'.33

 Assets purchased under Government Grant Schemes are not shown separately as required
under AS-12 "Accounting for Government Grants". Company has received specific grants
for various projects such as IPDS, RGGVY, DDUGJY, Smart City, RDSS, DDG, etc. Company
has recorded all grants received in a single ledger account. Projects department is
maintaining the grants received and amount spent against each grant. However, on test
check information given by project department is not matching with books of accounts.
Hence such amounts are subject to reconciliation. On our test check, we have noted
grants pertaining APCPDCL portion were accounted as grants of the company. ln the
absence of relevant information, we are unable to ascertain overstatement of grants and
understatement of liability. The contributions received from consumers and specific grants
from the State/Central Governments or their agencies for creation of tangible assets are
recognized as "Reserves" on receipt basis, even before the creation of the said assets. As
stated in Note No. 27 Para 73 in Statement of Accounting Policies, these are amortized
as per weighted average rate of depreciation on the Gross Block of assets built out of
contributions and grants, instead of the specific assets created with the said contributions/
grants, which is contrary to AS-12. ln the absence of adequate information, we are unable
to comment on the consequential impact on the financial statements.34

Considering Government grants and consumer contributions forming such an important part of
the government’s efforts to support the financial rehabilitation of discoms, it is an urgent need to
ensure clear accounting guidelines to be applied in a standardized manner for all Indian discoms
for government grants and consumer contributions and presentation of the same in the AAFS.

32. [Link]
MSEDCL AAFS FY2022-23, Page 94 Point 7. a)
33. [Link]
O_290124_38c28e89-[Link], JVVNL AAFS FY2022-23, 198, Point 1.
34. [Link]
[Link].
APSPDCL AAFS FY2022-23, Page 68 of the PDF document.

16 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
 5.4 Auditor inability to comment on appropriateness of end use of short/long term loans
In nearly all of the discom AAFS that we sampled, statutory auditors have commented on their
inability to comment on the end use of term loans raised by discoms whether they were utilised
for the purposes such loans were raised for due to inadequate record keeping by discoms. Some
examples of such comments are provided below:
 In absence of proper and complete records, we are unable to comment whether the term
loans obtained during the year were applied for the purpose for which the loans were
obtained.
In absence of proper and complete records, we are unable to comment if the Company has
used funds raised on short-term basis for long-term purposes.35

 According to the information and explanation given to us, the Company has not
maintained any records/details to verify the end use of terms loans. The Company has not
provided utilisation certificate to us hence we are unable to comment whether the term
loan has been applied for the purposes for which they were raised or not.36

This is a very serious issue and one that invites immediate attention from sector regulators.
Considering that this comment of end use not being to be tracked by auditors being present in
nearly all AAFS of discoms point out to a systemic problem; one that has a fairly straightforward
solution. For a discom, raising debt from any manner of lending entity will involve detailed loan
documentation which will necessarily record the intended end use for the facilities being raised
by them. Hence, some discipline needs to be introduced by regulators to ensure compliance of
disclosure of end use of funds by discoms to auditors. The following format as an additional
disclosure to the AAFS may be a good step towards resolving this problem:

Name of Date of Sanctioned Outstanding Sanctioned Residual Repayment End use Secured/ If
Lender Sanction Amount in amount in Tenor Tenor Schedule mentioned Unsecured secured,
Rs. Cr Rs. Cr. On in sanction mention
Balance documentation security/
Sheet Date by lender collateral

Long term
borrowings:
(sanctioned
tenor >12
months)

Total (A)

35. [Link]
MSEDCL AAFS FY2022-23, Page 171
36. [Link]
O_120424_775c1d95-[Link]
AVVNL AAFS FY2022-23, Page 53

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 17
 Short term
borrowings :
(sanctioned
tenor <12
months)

Total (B)

Grand Total
(A) + (B)

5.5 Audit qualifications on inadequate recording of contingent liabilities and pending

litigations

In some discom AAFS sampled by us, we came across this qualification pertaining to inadequate
recording of contingent liabilities and pending litigation. Some examples of the same are presented
below:
 The Company has not maintained proper records and details for compilation and
ascertainment of the pending litigation as required by AS-29. In the absence of such
records and sufficient details, we are unable to verify whether the impact of all the pending
litigations has been properly disclosed in the financial statements or not.37

 The Company has not maintained proper records and details for compilation and
ascertainment of the pending litigation as required by AS-29. In the absence of such
records and sufficient details, we are unable to verify whether the impact of all the pending
litigations has been properly disclosed in the financial statements or not.38

This nature of comments is more critical in the context of discom AAFS where regulatory assets are
not recorded or disclosed. Further, given change in law litigations with potentially large financial
impact relating to historical power and fuel costs are a reality for most Indian discoms, the
financial impact of such litigations should be appropriately recorded in AAFS for discoms.

Under the contingent liabilities section in a discom’s audited annual statements, there are some
disclosures currently being made by discoms in varying depths regarding major disputed liabilities
not acknowledged as debts. Most of such contingent liabilities will have an ongoing legal process
underway. In order to provide more nuanced disclosure on specifically the litigations being dealt
with at each discom will bring a lot more clarity on the status of such litigations and potential
financial impact if any. We recommend that any litigation (fresh or ongoing) which account for
~ the top 60% (listed in decreasing value of potential liability) of outstanding disputed financial
liabilities should be disclosed in a detailed manner by each discom as part of the ADS under these
Rules in the AAFS.

37. [Link]
O_290124_38c28e89-[Link], JVVNL AAFS FY2022-23, Page 203
38. [Link]
O_120424_775c1d95-[Link].
AVVNL AAFS FY2022-23, Page 48, Point h) i.

18 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
Format for listing out contingent liabilities disclosure for ongoing litigations with financial
implications:
Sr. Particulars Name Details Nature of claim Management Previous Current
No of the of matter (Statutory dues, estimate of Financial Financial
Parties pending power purchase/ financial Year Year
before contractors/any implications in
Authority other category to case of adverse
be specified) ruling, i.e. ruling
against DISCOM
petition
(In Rs. Cr.)

5.6 Auditor qualifications on inadequate internal control over financial reporting

In many discom AAFS we sampled had multiple comments on the weaknesses in cost audits,
internal control over financial reporting, as well as on MIS processes and technology. Robust
record keeping and tight control on the day to day financial activities as well as sharp cost
recording is the backbone of well managed discoms and accurate AAFS. We have provided below
some examples of these observations impacting various important types of financial items:
 The Company has no comprehensive model for internal control over financial reporting
incorporating risk assessment, control process and gap tracking along with the description
of objective, process and risk associated thereof, as per the Guidance Note on Audit of
Internal Financial Controls over Financial Reporting issued by the Institute of Chartered
Accountants of India.39

 Power purchase cost and Change in Law invoicing:

The Company's internal financial control over accounting of Power procured is not
operating effectively as the power purchase cost is booked on the basis of bills received till
the preparation of financial statement and not on actual power purchased by the company.
This could potentially result in misstatement in the Company's Power Purchase cost and
Trade Payables. Further, Power Purchase Register is maintained in Complex Excel file and
not in specialized software which provides accurate data related to power purchase. Also,
lack of internal control is observed in Verification of Change in Law (CIL) invoices.32

The company did not have appropriate internal financial control over accounting for late
payment surcharge to power suppliers. Further, internal control system for identification
of delay in payments to suppliers and details of late payment surcharge payable thereon

39. [Link]
[Link], JdVVNL AAFS FY2022-23, Page 88

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 19
 is not operating and during the year late payment surcharge (including previous periods)
has been provided as per information received from other company which is subject to
finalization This could potentially result in material misstatement in company's liabilities
and expenses.32

 Allocation and end use of grants/subsidy received:

The Company did not have an appropriate internal financial control system regarding
correlation of capital expenditure incurred against the grants/ subsidy received, which
could potentially result in incorrect recognition of deferred revenue income.32

 Cost Audit report inadequacies:

The Central Government has prescribed maintenance of cost records u/s 148 of Act, along
with rules prescribed thereunder in respect of distribution of electricity. The same has
not been made available for our verification for the year under audit. In the absence of
such records being made available, we are unable to comment upon the accuracy and
completeness of the same. Further, the cost audit report issued in respect of FY 2021-22
mentions an inability to comment on the maintenance of cost records.40

5.7 Issues created due to coordination committee approach for power procurement of
multiple discoms in the same state
In this instance, a state has a power co-ordination committee which serves as a facilitator and
coordinator for the procurement and exchange of electricity on behalf of the three discoms
operating within the same state. The primary role of the committee entails the acquisition of
power from various generators, which is subsequently allocated to the three discoms based on the
power purchase ratio.

The committee is responsible for managing the Pool Account, which serves as the shared bank
account for the three discoms. This account is utilized for making payments related to power
procurement. The entire process of power acquisition, payment settlement, and accounting is
exclusively handled by the committee. The discoms merely accounts these transactions in their
respective books of accounts as periodically instructed by the committee. ln addition to overseeing
the Pool Account, the committee is entrusted with the operation and management of working
capital loans obtained from banks and financial institutions. These loans are secured in the name
of the three discoms, primarily for the purpose of financing power purchases. The committee
utilizes these funds to make payments to the vendors involved in the power procurement process.
Payments are made from any of the bank accounts associated with these loans, depending on the
availability of funds at the given time.

Auditors have opined that the legal status of such committee could not be ascertained.41

While the point of efficient power procurement by a common coordinating committee is duly
noted, in this instance the duties and responsibilities seem to have reached far beyond the confines

40. [Link]
MSEDCL AAFS FY2022-23, Page 115.
41. [Link]
[Link], APSPDCL AAFS FY2022-23, Page 50 of the PDF document, Point 1.

20 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
of the efficient power procurement objective. Especially, if there is a concern around the legal
character of the committee, there is potential for questionable and non-transparent decisions by
the committee prejudicial to the interests of the discoms that look to this committee for preparing
their books of accounts. Also, such practices go against the spirit of unbundling of SEB’s into
multiple discoms.

5.8 Statutory Auditor’s report quashed by CAG

In this instance, for a discom, the statutory auditor’s report for AAFS for FY2022-23 which was
submitted as a matter of regular course for approval to CAG was quashed by CAG and revised
statutory auditor’s report was republished in its place without any change in the financial
statements. The issue is quite serious as the kind of problems in accounting policy raised by the
CAG supplementary audit are very basic and fundamental. The extract of the report is provided
below:

The original audit report dated 26/07/2023, along with the financial statements of the
Company for the year ended 31st March, 2023 was submitted by the Company to the Office
of the Principal Accountant General (Audit), of the respective state. The Office of the Principal
Accountant General (Audit) has conducted the supplementary audit and issued their provisional
comments on the financial statements of the Company under section 143(6)(b) of the
Companies Act, 2013. In the light of the said provisional comments regarding –
(i) non-disclosure of basis for preparation and presentation of financial statements
(ii) Accounting policy and recognition of FPPCA/True-up charges
(iii) Short provision of differential pooled power cost
(iv) Incorrect classification with regard to Cash & Cash Equivalents, Other Current Assets, Long
Term Borrowings, Current Liabilities, current maturities of long-term borrowings, trade
receivables, property, plant & equipment and intangible assets in terms of Schedule III to the
Companies Act, 2013
(v) Non-disclosure of accounting policy and short provision of employee benefit expenses
(vi) Non-provision for claims for compensation towards electrical accidents and non-
recognition of contingent liability in respect thereof– we revised our report dated
26/07/2023.
No changes are made in the financial statements for the year ended 31st March, 2023 which
were approved by the Management on 26/07/2023 and audited by us.42

Note: The above observation is worrying as it is not easy to decipher why and what all
objectionable points the statutory auditor (who is appointed by the CAG), had failed to capture
in their original audit report of June 2023. The nature of the qualifications brings into question
the competence of the management of the discom while preparing the AAFS. Further, similar
observation has been made in the AAFS for FY24 despite there being a change in the statutory
auditor.43

42. [Link]
APCPDCL, AAFS FY2022-23, Page 41
43. [Link]
APCPDCL, AAFS FY2023-24, Page 50 of the PDF

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 21
 5.9 Diversion of funds and questionable loans to parties:
In some discom AAFS, we observed that there are auditor qualifications that point towards loans
made by the discom to various related and unrelated parties on terms which are quite vague and
non specific. Few examples of the same are provided below:

 The Company has granted loans during the year to companies where the schedule of
repayment of principal and payment of interest has not been stipulated and hence we are
unable to comment if the repayment or receipts are regular or not.
Since there are no stipulations in respect of schedule of repayment, we unable to comment
whether any amounts of loans and advances in the nature of loans granted to companies,
firms, limited liability partnerships or any other parties are overdue for more than ninety
days.
Since there are no stipulations on repayment/due date of the loan, we are unable to
comment whether the Company has not extended or granted loans to companies which
had fallen due during the year to the respective parties to settle the dues of the existing
loans.
The Company has granted loans, that are repayable on demand or without specifying any
terms or period of repayment to companies, firms, Limited Liability Partnerships or any
other parties.44

 In our opinion, the loans/advances/inter corporate deposits given to APSPDCL, APCPDCL

are prejudicial to the interests of the company as interest is not charged and terms of
repayment are not fixed.
As rate of interest and repayment schedules are not fixed in respect of the loans given to
APSPDCL, APCPDCL, we are unable to comment on the regularity of repayment of principal
and payment of interest.
As repayment schedules are not fixed in respect of loans given to APSPDCL, we are unable to
comment on whether there are any overdues in respect of these loans.45
In our opinion, to the extent of the intercorporate loans given to APSPDCL (Rs. 6660 Cr) and
APCPDCL (Rs. 408 Cr) during the year which are in the nature of diversion of funds.46

These are serious observations by auditors and read together with the point where auditors
are unable to comment on end use of loans raised by discoms due to lack of record keeping by
discoms, this is a worrying area. Immediate attention needs to be paid to the same by sector
regulators.

44. [Link]
MSEDCL AFFS FY2022-23, Page 166
45. [Link]
APEPDCL AAFS FY2022-23, Page 46 Point III (b), (c), (d)
46. [Link]
APEPDCL AAFS FY2022-23, Page 49 Point (IX) ©

22 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
5.10 Adverse auditor report for AAFS for FY2022-23
We have been given to understand that an adverse report by a company’s statutory auditors
is quite the rare phenomenon and the same is reserved only for the most extreme cases of
accounting impropriety. In our sample of discom AAFS for FY022-23, we have come across only
one AAFS which carried an adverse audit report. Relevant sections of the same are reproduced
below for reference.

In our opinion and to the best of our information and according to the explanations given to us,
because of the significance of the matters discussed in the Basis of Adverse Opinion section of
our report, the aforesaid standalone financial statements do not give the information required
by the Companies Act 2013 (‘the Act”) in the manner so required and do not give a true and fair
view in conformity with the Indian Accounting Standards prescribed under Section 133 of the Act
(Ind AS), of the state of affairs of the Company as of March 31 2023 and its loss (including other
comprehensive income), its cashflows and the changes in equity for the year ended on that date.47

The basis for adverse opinion of the auditor’s report is extremely lengthy having 95 observations
which touch upon nearly every area of the AAFS. We have added the same to Annexure 2 for
reference as the observations are too numerous to list here in the paper. For the AAFS for year
ended March 31 2024 also the auditors have given an Adverse Audit Report. In the same AAFS,
the 'Comments Certificate' by CAG of India for AAFS of March 31 2024 mentions 'The company
has not prepared its financial statements to give a true and fair view in conformity with the Ind AS
prescribed under Section 133 of the Companies Act 2013.' It is to be noted that in AAFS for FY23,
CAG India had not included the above comment.48

Further, we also observe that this discom had adopted Ind AS as per CAG’s opinion from FY2018-
19. We observe that the discom had prepared AAFS based on Indian GAAP for the FY2020-21 and
FY2021-22 in contravention of the rule that once a company adopts Ind AS, it cannot change
the accounting standard back to Indian GAAP. In the FY2021-22 AFFS, in response to the CAG
comment, the discom stated that the Board had approved the annual Accounts for FY 2021-22
under Indian GAAP for complying the timeline for enabling state government to avail financial
assistance under GSDP scheme and directed to seek the approval for voluntary revision of
accounts to comply with IND AS provisions, suitably filing before the Hon’ble NCLT. For FY2022-23,
the discom has prepared AAFS in line with Ind AS albeit with an adverse statutory audit report.

47. [Link]
TANGEDCO AAFS FY2022-23, Page 39 to 58.
48. [Link] page 44.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 23
 6. Nonstandard application of accounting norms:
a worrying trend

In our sampling of AAFS of discoms for FY2022-23 across various states, we have found some
concerning instances of nonstandard application of accounting principles. The following are a few
examples of a larger theme of lack of standardization in preparation and presentation of AAFS for
discoms for some key financial matters:

6.1 Regulatory Assets

Regulatory assets are a key metric for assessing the financial health of a discom. Regulatory
assets are a systemic feature of a discom as there is sometimes a time lag from Regulator’s side to
accommodate trued up expenses though tariff adjustment for electricity customers. We find that
regulatory assets are not uniformly disclosed in a standard format in various discom AAFS. In case
of Ind AS adoptee discoms, the Ind AS 114 permits the company to apply the requirements of this
standard in the first Ind AS financial statements if only it conducts rate regulated activities and
recognized amounts that qualify as regulatory deferral account balances in its financial statements
in accordance with its previous GAAP. In many cases, the discoms have chosen to not disclose or
account for regulatory assets on their books under the Indian GAAP and continued non-disclosure
under the Ind AS.49 Some Ind AS adoptees have applied the Ind AS 11450 and are disclosing their
regulatory assets.51 We recommend inclusion of the following table to increase transparency and
standardization of reporting of regulatory assets in discom AAFS:

Particulars/Year FY25 FY26 FY27

Opening Balance of Regulatory Deferral Rs. Cr.
Account
Aggregate Revenue Requirement of DISCOM Rs. Cr.
Revenue from retail tariffs, charges, regulatory Rs. Cr.
asset charges, non-tariff income etc.
Revenue gap (+)/ Surplus (-) gap for Rs. Cr.
the year
Carrying cost (%) %
Carrying cost Rs. Cr.
Closing balance of the Regulatory deferral
account

49. [Link]
APEPDCL AAFS FY2022-23, GUVNL AAFS FY2022-23, part of their Notes to Accounts
50. The objective of Ind AS 114 is to specify the financial reporting requirements for regulatory deferral account
balances that arise when an entity provides goods or services to customers at a price or rate that is subject to rate
regulation.
51. [Link]
MSEDCL AAFS FY2022-23, CESC AAFS FY2022-23, part of their Notes to Accounts

24 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
6.2 Receivables provisioning
In case of receivables provisioning, we have observed a wide variety of approaches across discom
AAFS. In some cases, where the discoms have adopted Ind AS for preparation of AAFS, some
form of matrix-based provisioning for expected credit loss based on classification of consumers
based on receivables ageing or other basis has been adopted in line with Ind AS 109.52 However,
even within Ind AS adoptee discom AAFS, there is little standardization of provisioning policy
for receivables. For Indian GAAP adoptee discom AAFS, there are arbitrary policies for receivables
provisioning. Some examples are reproduced below:

Ind AS adoptee discoms:

 Trade receivables being short term in nature, lifetime expected credit losses are measured,
considering the asset as credit impaired, in case the customer does not pay on due
dates. Following Ind AS 109, MSEDCL has opted to exercise the practical expedient of
determining the loss allowance on a provision matrix. This matrix takes into consideration
appropriate grouping or segmentation of Customers and their ageing profile.53
Auditor qualification pertaining to receivables provisioning in the AAFS: The
Management has made provision for ECL on the basis of a provision matrix for various
categories of consumers. In our view, the provision matrix for ECL is not commensurate with
the volumes and ageing of the trade receivables.44

 In accordance with Ind AS 109, the Company applies the expected credit loss (ECL) model
for measurement and recognition of impairment loss allowance on the trade receivable
or any contractual right to receive cash or another financial asset. For this purpose, the
Company follows a ‘simplified approach’ for recognition of impairment loss allowance
on the trade receivable balances. The application of this simplified approach does not
require the Company to track changes in credit risk. Rather, it recognises impairment loss
allowance based on lifetime ECL at each reporting date, right from its initial recognition.54

Indian GAAP adoptee discoms:

 Provision for Bad & Doubtful Debts is made on Debtors for sale of power outstanding
for a period of more than 4 years, except for receivables from Government Departments/
Government Companies and amount involved in Court Cases.55

Auditor qualification pertaining to receivables provisioning in the AAFS: According to

AS - 9 "Revenue Recognition", if uncertainty arises regarding the ultimate collection of

52. The objective of Ind AS 109 is to establish principles for the financial reporting of financial assets and financial
liabilities that will present relevant and useful information to users of financial statements for their assessment of
the amounts, timing and uncertainty of an entity’s future cash flows.
53. [Link]
MSEDCL AAFS FY2022-23 Page 325 Point II a., Page 90 Point 3. b)
54. [Link]
APEPCL AAFS FY2022-23, Page 73
55. [Link]
[Link]
APSPDCL AAFS FY2022-23, Page 47 of PDF document, Note 27, Point 2; Page 66 of PDF document, Note IX. 44.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 25
 revenue after recognition, a provision for doubtful debt should be made to the extent of
the uncertain revenue. Therefore, it is evident that the company's accounting policy is not
in accordance with AS - 9 "Revenue Recognition". As a result, the provision for bad and
doubtful debts is understated to the extent of disputed receivables of Rs. 313.15 crores.46

 The provision for bad and doubtful debts has been maintained equal to Sundry Debtors for
Nigam’s dues of PDC Consumers appearing in books of accounts.56

Hence it is evident that this issue of receivables provisioning needs standardized accounting norms
to be stipulated for discoms. This issue has been addressed in the recent Electricity Distribution
(Accounts and Additional Disclosure) Rules, 2024 through rules on age-based slabs for minimum
receivables provisioning.1 However, the said provisioning rules have excluded receivables from
Government consumers. We recommend that receivables from Government consumers be included
in the minimum provisioning requirement for discoms.

6.3 Government Grants

For Indian discoms, the Government provides grants from time to time for a variety of end uses
such as part of central government schemes such as Deen Dayal Upadhyaya Gram Jyoti Yojana
(DDUGJY), Integrated Power Development Scheme (IPDS), Revamped Distribution Sector Scheme
(RDSS), etc for capacity expansion, reimbursement of certain expenses, research and development,
network strengthening, etc. These grants are accounted for in different ways by different discoms.
Further, there are many auditor qualifications around this issue of Government grants accounting
in the AAFS for most of the discoms sampled by us. We have discussed this issue in detail in
Section 4.

Following are some examples of accounting for Government Grants across various discoms:
 Government grants relating to income are determined and recognised in the profit
and loss over the period they are intended to compensate and presented within other
income. Government grants relating to the purchase of property, plant and equipment
are presented as Capital Grant in financial statements and are credited to profit and
loss in a systematic manner over the expected life of the related assets and presented
within other income.57

 Grants that compensate the Company for the cost of an asset are initially set up as
Deferred Income and recognised in the Statement of Profit and Loss on a systematic
basis over the period and in proportions of depreciation expense of the assets. Grants
that compensate the Company for expenses incurred are recognised in the Statement
of Profit and Loss over the period in which the related costs are incurred and shown
separately.58

56. [Link]
O_290124_38c28e89-[Link]
JVVNL AAFS FY2022-23, Page 30, Point 19, (g)
57. [Link]
MSEDCL AAFS FY2022-23, page 460, Point 7
58. [Link]
GUVNL AAFS FY2022-23, page 105,Point 8

26 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
  Grants and Subsidies towards cost of capital assets on cash basis irrespective of
date of completion of capital assets, which is not in accordance with accrual system
of accounting as required by Indian GAAP. Further as per Para No. 3 (c), policy of
amortization of Consumer Contribution, Grants and Subsidies towards cost of capital
assets in 25 years without any correlation with the life of assets created, is not in
consonance with the Accounting Standard-12 "Accounting for Government Grants".59

59. [Link]
[Link]
JdVVNL AAFS FY2022-23, page 59, Point 1

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 27
 Conclusion & Recommendations:

As has been discussed at length over the five sections in this report, there are multi-fold issues
with the approach, process and outcome of the preparation and presentation of the audited
financial statements of the Indian discoms. Some of the issues require only moderate tweaks to
the existing model whereas there exist larger issues for which a systemic solution and change is
very much warranted and possible. The below section on recommendations discusses these with
some forward-looking suggestions for effective improvements in this area.

1. A concerted high level multi-regulatory agency response in the form of a complete

overhaul of the approach and process of the preparation and presentation of AAFS for
Indian discoms:

The Companies Act 2013 has provided for differential treatment for presentation formats of
AAFS for companies in three specific sectors of banking, insurance and electricity in order for
their respective governing Acts to prescribe a presentation format which appropriately records
relevant information of financial operations of the companies taking into account sectoral
peculiarities, as well as such sectors being heavily regulated and requiring specialised licenses
for operations. The banking and insurance sectors have specific and differentiated AAFS
formats and rules enshrined in their respective governing acts.

The Electricity Act 2003 has no specific chapter or rules prescribing a presentation format for
annual financials for companies engaged in the business of generation or supply of electricity
in the Act despite there being a clear proviso for the same in the Companies Act 2013. Hence,
by default Indian discoms are using the presentation format mentioned in Companies Act,
2013 which is a general-purpose format for preparing their AAFS.

In the current form and substance of the AAFS for Indian discoms, in part, due to the by-
default nature of adopting Schedule III AAFS presentation format for discoms, their AAFS have
some disclosure gaps for key financial matters and a lack of standardised presentation and
accounting protocol application across various discoms.

Hence, in our opinion, the time is ripe for a multi-regulatory agency policy effort to reimagine
the preparation, presentation and standardised application of accounting principles for AAFS
of Indian discoms so that providing a true, fair and accessible view of the financial matters
of discoms can be achieved. The agencies who are best positioned for spearheading efforts
towards standardisation of the entire annual audited financial statements for all electricity
sector companies would be the Ministry of Power (MoP) in close coordination with the
Ministry of Corporate Affairs (MCA). This will help increase transparency and accountability
not just for DISCOMs but across the electricity sector value chain. The National Financial
Reporting Authority (NFRA) in close coordination with the Institute of Chartered Accountants
of India (ICAI) could also provide the required technical expertise in accounting and auditing
for this effort.

28 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
2. Suggestions on medium term modifications to existing process of discom AAFS
preparation whilst above systemic overhaul of the approach and process of preparation
and presentation is underway:

It is well appreciated that the complete overhaul of this area as recommended in the earlier
point will be a long-term process which shall and perhaps rightfully should take its well-
considered course of action. In the mean time, following are some areas which if included as
additional disclosures in the existing AAFS formats could bolster stakeholder confidence in
assessing financial health of discoms.

A. Formats for prior period adjustments:

Particulars/Year Year ARR Actual Deviation Reference Impact Impact on
of Petition allowed to Judicial on Profit Balance
order Amount amount Authority & Loss Sheet
(Rs. Cr.) as per document Statement of the
Tariff in case the of the current
Order amount of current year
deviation is year (Rs. Cr.)
above (Rs. Cr.)
Rs. 250 Cr
Revenue
Power Purchase
Cost

Capex Cost

Finance Cost

Any other item

Total

B. Working capital disclosures:

Total Debt Snapshot
Tenor > 12 months Tenor < 12 months
Nature of financing as defined by terms
(In Rs. Cr.) (In Rs. Cr.)
of sanction documentation by lender
Current FY Previous FY Current FY Previous FY
Specific to identified capex (Secured)
Specific to identified capex (Unsecured)
Non -Capex / General Purpose (Secured)
Non -Capex / General Purpose (Unsecured)
Working Capital (Secured)

Working Capital (Unsecured)

Total Borrowings

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 29
 Working capital borrowings details
Tenor > 12 months (In Tenor < 12 months (In
Rs. Cr.) Rs. Cr.) Repayment
Nature of financing as defined by terms
Schedule/
of sanction documentation by lender Current Previous Previous
Current FY Tenor
FY FY FY
Working capital under Liquidity Infusion
Scheme (LIS) (Secured)
Working capital under Liquidity Infusion
Scheme (LIS) (Unsecured)
Working capital under Late Payment
Surcharge Rules (LPS) (Secured)
Working capital under Late Payment
Surcharge Rules (LPS) (Unsecured)
Other Working capital (Secured)
Other Working capital (Unsecured)

Total Working Capital

Total revenue considered

% of Total Working Capital (net of long

tenor loans under LPS/LIS) to Total revenue
considered

Lender wise list of Working Capital borrowings

Name of Nature of FB FB limits FB NFB NFB NFB FB + FB+NFB FB+NFB Fungibility
lender instrument: limits utilised o/s Limits limits o/s NFB limits o/s of limits,
(Rs. (Rs. Cr.) (Rs. (Rs. utilised (Rs. limits utilised (Rs. Cr.) please
Cr.) Cr.) Cr.) (Rs. Cr.) (Rs. (Rs. Cr.) provide
Cr.) Cr.) details

Total

Nature of instrument: Working Capital Demand Loan (WCDL), Working Capital Term Loan (WCTL), Cash Credit (CC), Overdraft (OD),
Bank Guarantees (BG), Letter of Credit (LC), Revolving Bill Payment Facility etc.

FB: Fund Based

NFB: Non-Fund Based

30 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
 C. Format for regulatory assets disclosure:
Particulars/Year FY25 FY26 FY27
Opening Balance of Regulatory Deferral Account Rs. Cr.
Aggregate Revenue Requirement of DISCOM Rs. Cr.
Revenue from retail tariffs, charges, regulatory asset charges, Rs. Cr.
non-tariff income etc.
Revenue gap (+)/ Surplus (-) gap for the year Rs. Cr.

Carrying cost (%) %

Carrying cost Rs. Cr.
Closing balance of the Regulatory deferral account

D. Standardisation of accounting standards for all discoms by March 2027

Many discoms (irrespective of net worth) seem to have adopted Ind AS accounting standard
voluntarily since 2016. Others have not due to not having a minimum net worth of Rs. 250 Cr
(above which Ind AS becomes mandatory). Since, the overarching direction of ICAI is for all Indian
companies to finally move to Ind AS which is line with global accounting norms, we recommend
that MoP instruct all Indian discoms to uniformly adopt the same accounting standard of Ind AS
with effect from financial year ended March 31 2027 at the latest.

3. Suggestions for improving appropriateness of accounting principles applied by discoms

and certified by their statutory auditors:
In some instances, there exist serious differences in opinion on whether the discoms AAFS
present a true and fair view of the company’s financial affairs, between the statutory auditor
and in the supplementary audit report of the Comptroller & Auditor General of India (CAG).
In such serious cases of difference of opinion, as of today, such differences are simply
recorded in the CAG’s supplementary audit report as part of the AAFS. There may be a section
in the AAFS where rebuttal/clarifications/responses by the discom management on statutory
auditor observations is recorded. In such cases, it is important for regulatory bodies such as
MoP, CAG & NFRA to jointly work to present guidance on best practices to avoid differences
of opinion of such magnitude. Hence, to this end, we recommend that Central CAG office
& NFRA conduct a review every 3 years of discom AAFS and publish a report cataloguing
such instances. The NFRA and MoP jointly should present guidance notes detailing the best
practices to be undertaken by discom management in areas of such disputes.

Further, in order to improve the overall quality of financial record keeping and compliance
with good accounting practices, we recommend that the Director (Finance) equivalent
personnel for each discom should be necessarily a member of the ICAI. Members are bound
by ICAI code of ethics and non compliance with such is a matter that may involve disciplinary
action by ICAI.

Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability | 31
 Annexure 1:
Extract of Section XI, Section 129 (1) of Companies Act 2013

Section 129. Financial Statements (1) The financial statements shall give a true and fair view of
the state of affairs of the company or companies, comply with the accounting standards notified
under section 133 and shall be in the form or forms as may be provided for different class or
classes of companies in Schedule III:

Provided that the items contained in such financial statements shall be in accordance with the
accounting standards:

Provided further that nothing contained in this sub-section shall apply to any insurance or banking
company or any company engaged in the generation or supply of electricity, or to any other
class of company for which a form of financial statement has been specified in or under the Act
governing such class of company:

Provided also that the financial statements shall not be treated as not disclosing a true and fair view
of the state of affairs of the company, merely by reason of the fact that they do not disclose—-

(a) in the case of an insurance company, any matters which are not required to be disclosed by the
Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;

(b) in the case of a banking company, any matters which are not required to be disclosed by the
Banking Regulation Act, 1949;

(c) in the case of a company engaged in the generation or supply of electricity, any matters which
are not required to be disclosed by the Electricity Act, 2003;

(d) in the case of a company governed by any other law for the time being in force, any matters
which are not required to be disclosed by that law.

Annexure 2:
Tangedco basis for adverse opinion by auditors for FY 2023.

Tangedco basis for adverse opinion by auditors for FY 2024.

32 | Audited Financial Statements of Indian Electricity Distribution Companies: Accounting for accountability
The Annual Audited Financial Statements (abbreviated to AAFS in this paper) of any
company narrate a comprehensive story of that company’s economic activities, profitability
(or the lack of) outcomes, financial strength in terms of assets owned, financial burdens in
terms of large liabilities and borrowings from various sources, cashflows generated and so
much more. AAFS are also a singular source for economic decisions for various stakeholders
of companies such as investors, lenders, regulatory bodies and so on.

The Indian electricity distribution sector is characterized by complexity contributed to in

part by the large investments in a regulated cost plus business model, heavily regulated
tariff setting and dependence on Government Grants and subsidies. The AAFS have always
formed an important part of the discoms’ tariff regulation process. The importance and
criticality of accurately and comprehensively prepared AAFS, presented in a format and
using language that is easy to understand for the wide variety of stakeholders for whom
such AAFS form the basis for decision making, cannot be overstated.

For this paper, we sampled the FY2023 AAFS (i.e. AAFS for the year ended March 31
2023) for discoms across Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and 1 private
discom (CESC). The sample was collated to include diversity in terms of geography, holding
structure and type of customers. The paper is structured into five sections each discussing
a common theme of observations. At the paper’s conclusion, we have a section on some
recommendations that may add to more comprehensive, easy to understand AAFS for Indian
electricity distribution companies which will appropriately reflect the peculiarities of their
nature of business.

There are already some steps being taken by the Ministry of Power (MoP) in the form of
Electricity Distribution (Accounts and Additional Disclosure) Rules, 2024 which detail
accounting guidance for critical items such as provisioning for trade receivables and revenue
recognition as well as many additional disclosures by discoms pertaining to cross subsidy,
consumer wise tariff subsidy receivables, details of AT & C losses, and tariff order analysis
including reasons for disallowances as part of their AAFS. This paper only hopes to further
the progress being undertaken in this area.