Financial Statement Analysis of Hero Honda Motors Ltd

Accounting for Taxes

Deferred Taxes
Accounting for taxes
For the financial year 2009-2010, it has been noted that Hero Honda recorded Deferred Tax Assets (DTA) worth INR 7.88 crores. This is on account of timing differences in accrued expenses which amounted to 1.38 crores and the remaining 6.50 crores is attributed to Other sources which have not been disclosed by Hero Honda Motors. There has been a reduction in the amount of Deferred Tax Assets disclosed by Hero Honda compared to the previous year, which implies that some of the Deferred Tax Assets have been reversed in the current year.

The company also recorded Deferred Tax Liabilities (DTL) worth INR 160.63 crores. A major portion of this is attributed to timing differences in depreciation and amortization. There are also other sources which contribute to this but these have not been disclosed by the company. Its competitor, Bajaj Auto Limited, recorded a comparable figure for DTL (for financial year 20092010) at INR 270.2 crores. This is solely on account of timing differences in depreciation and amortization. The balance of Deferred Tax Liabilities carried as of March 2010 was 1918.1 crores. It also recorded a figure for DTA, at INR 321.4 crores. This is mainly on account of timing differences in the following: Voluntary Retirement Scheme Inventory valuation Diminution in the value of investments Provision for bad and doubtful debts Provision for decrease in value of investments Provision for privilege leave etc. Taxes, duties etc. Amortization of premium / discount on acquisition of fixed income securities Adjustments on account of gratuity provisions Of these, Bajaj recorded increase in the Deferred Tax Assets in Voluntary Retirement Schemes, Inventory Valuation and Provision for privilege leave while it recognized a decrease in the other categories. The total value of Deferred Tax Assets as of March 2010 was 1901.2 crores. Deferred Taxation policy For Bajaj Auto Limited, deferred taxes resulting from timing difference between book profits and taxable profits are accounted for to the extent deferred tax assets and liabilities are expected to crystallize with reasonable certainty. Also, deferred tax assets are recognized if there is virtual certainty that there would be adequate future taxable income against which such deferred tax assets can be realized. Deferred tax is recognized on adjustments to revenue reserves to the extent the adjustments are allowable as deductions in determination of taxable income and they would reverse out in future periods.

Implications
Both Hero Honda Motors and Bajaj Auto Ltd have not booked operating losses over the past few years. The changes in the deferred tax assets and liabilities have been primarily because of reversal of taxes from the earlier periods. There has been no balancing out of operating losses from other periods against the deferred tax assets of the current period.