Case All That Glitter Is Gold TS4B

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ALL THAT GLITTERS IS GOLD: A CASE OF
INVENTORY ACCOUNTING POLICY
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PADMINI SRINIVASAN
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No
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Padmini Srinivasan, Professor of Finance & Accounting, prepared this case for class discussion. This case is not intended to serve
as an endorsement, source of primary data, or to show effective or inefficient handling of decision or business processes.
Copyright © 2017 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or transmitted
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Permissions@hbsp.harvard.edu or 617.783.7860
All That Glitters is Gold: A Case of Inventory Accounting Policy
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Our inventory of gold (including finished jewellery) was earlier valued on a "Weighted
Average Cost" system. However, when one adopts hedge accounting, this method of
inventory valuation gives a slight distortion to the operating results. FIFO gives a much
lower distortion (in theory, no distortion at all) and Titan Industries Ltd. has therefore
simultaneously adopted FIFO. For the year 2009-10, the change in stock valuation is
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Rs.134.1 million, which has been accounted under “Decrease/Increase in stock-in-trade”.
Titan Annual Report, year ended March 31, 2010
Inventories are a significant part of the total assets of a company, both in absolute size and in proportion to
the company’s other assets for retailing firms such as Big Bazar, TESCO, WalMart, and for manufacturing
firms. Furthermore, selling inventories for a price higher than their cost represents the main source of a
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firm’s sustainable income. Inventories are assets that are held for sale in the ordinary course of business or
goods that will be used or consumed in the production process. Inventory of a company consist of raw
material, work in progress, and finished goods. Matching concept in accounting requires cost of goods sold
to match the revenue earned. This means related inventory has to be accounted for while calculating the
cost of goods sold. The question is – how do we identify the inventory in raw material that goes into the
production process and how to ascertain which inventory is sold in the case of finished goods? Inventory
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accounting is thus exceedingly important as it can affect the profitability of a business as well as its balance
sheet.
TITAN INDUSTRIES LIMITED (TITAN COMPANY LTD. IN 2016)1
Titan has been India’s leading brand in the industry segment manufacturing watches, jewelry, and personal
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accessories. Incorporated in 1984, Titan revolutionized the watch market in India by introducing quartz
technology under the brand “Titan Quartz” when the market had mainly mechanical watches dominated by
a state-owned enterprise. In a very short time, the company established itself as a market leader. The
company was recognized as a leader in terms of its savvy marketing style and product design.
Titan Limited was a joint venture between the Tata Group and the Tamil Nadu Industrial Development
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Corporation together holding about 25.17% and 27.88%, respectively of the share capital. Titan completed
25 years of existence in 2005 with revenue crossing billion dollar, that is, Rs. 47,0312 million. The company
set up an integrated watch manufacturing facility at Hosur in Tamil Nadu. Subsequently, the company also
established an assembly unit in the state of Uttarakhand and other places to increase capacity. During 2010,
the company added 52 new stores with a total of 539 stores across India, having over 685,000 square feet
of retail space. Titan products were sold under various brands including Sonata, Fastrack, XYLYS, Tanishq,
etc. Other diversified but allied products included precision engineering products and eye-wear including
frames, lenses, contact lenses, and accessories. Titan had won several awards including the most admired
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brand award.3
1
http://www.titan.co.in/control/company-profile
2
Conversion rate of $0.213 to Rupee. 1. Rs refers to Indian Rupees.
3
Some of the awards include Award for the Most Admired Timewear Brand, Most Admired Jewellery Brand of the Year for the seventh
consecutive time, and President of India award for the Best Employer of Physically Challenged: Annual Report of Titan, 2010 &
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1n 1995, Titan entered the jewelry business under the brand name “Tanishq”. The term ‘‘Tanishq’’ is
derived from two words – ‘‘Tan’’ meaning body and ‘‘Ishq’’ meaning love.4 The Indian jewelry business
at that time was largely fragmented with mostly regional players and no known brands. The purity5 of gold
was not standardized across jewelers and fraudulent practices existed, as there was no non-intrusive way to
test the same. Titan at that time launched the “Karatmeter” testing creating a stir in the industry. Karatmeter
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machine tested the purity of gold in a non-invasive way, and required only a few seconds to test. Jewelry
business underwent a sea change after the entry of Tanishq.
During 2009-2010, the company had 114 Tanishq stores across India. Titan launched several new
collections during the year such as ‘Glam Gold” Collection, Red Carpet Collection, and the Valentines
Collection. Marketing initiatives such as “Gold Harvest Scheme”, an instalment-based buying scheme,
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loyalty programs, and contests ensured growth of 22% in the jewelry segment.
JEWELRY INDUSTRY IN INDIA
Gold has been of emotional, religious, cultural, and financial importance to people in India, and attracted
demand across people of all walks of life and ages. Gold was always treated as an “insurance” mechanism
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against potential risk from inflation, war or a family misfortune. In India, gold and gold jewelry has carried
‘‘emotional’’ and religious connotations as well. People have bought gold on certain religious occasions to
bring them prosperity and good luck. Gold jewelry was an important part of every bride’s wedding
trousseau. Apart from jewelry, gold is also used in machines such as medical diagnostics machines and
smart phones. In India, certain Ayurvedic medicines and cosmetics have also used gold.
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Gold has played a significant investment role in the small sector as it is used as collateral which could be
easily pledged for cash any time particularly as it was easily transferable and a highly liquid asset. As an
investment instrument, gold has been used to manage risk in financial portfolios. Gold in its physical form
as well as an instrument (gold linked exchanged traded fund) form has attracted investors the world over.
In investment parlance, gold could be used in portfolios to reduce portfolio volatility, protect global
purchasing power, and minimize losses during periods of market shock. Being highly liquid and of tangible
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value, gold has historically moved independent of other classes of assets. With such wide application,
naturally gold as an investment product will always have great appeal to investors.
India has been one of the largest importers of gold in the world along with China. The demand for jewelry
makes up for half the demand for gold in the world. In 2010, the demand for gold jewelry in the world was
approximately 2051 tonnes and that of India was 657 tonnes. World demand for gold includes those for
jewelry, industrial use, reserves held by governments & institutions, and for gold bars and coins. Details of
demand for gold in jewelry are presented in Exhibit 16. Gold price data is provided in Exhibit 2. The prices
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http://www.titan.co.in/TitanEcom/ corporate/pdflinks/Investors%20Meet /2009 /Investor%20Meet%20-17th%20Nov%20ENAM% 20Conf%

2009.pdf
4
http://www.titan.co.in/control/tanishqStory
5
Purity refers to the percentage of gold in the gold jewelry. Pure gold
6
Source : World Gold Council, accessed at www.Gold.org
http://www.titan.co.in/TitanEcom/corporate/pdflinks/Investors%20Meet/2009/Investor-Meet-JUNE2009.pdf
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show an increase over the period from 2008 until June, 2012 when it peaked with occasional fluctuations.
Subsequently, the price declined for a brief period.
Retail jewelry prices for customers have two major components: the quantity of gold in the jewelry and the
conversion charges including a profit component. Gold quantity (weight) in the jewelry is billed to the
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customer at the prevailing rate of gold on that day. The conversion charges (which include labor charges,
normal wastages, and profits) depend on the complexity of design, uniqueness and the purity of gold (22
carat or 24 carat). In essence, any increase in gold prices is indirectly built into the price of jewelry.
RECESSION IN 2009
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Jewellery sales were impacted by the high gold prices. Sales increased by 3% in value
terms, but with a gold price increase of almost 20%, the volume de-growth of Q4 continued
in Q1.
Investors Meet Presentation, 20097
The financial crisis triggered by the failure of Lehman Brothers and other investment banks, resulted in
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large-scale unemployment and economic crisis leading to recession around the world.8 In this uncertain
environment, businesses struggled and people turned more frugal cutting down spending on jewelry
resulting in a fall in the demand for gold. Subsequently, the demand picked up though slowly.
The year started on a sombre note against the backdrop of a slowdown worldwide but the
recovery of the Indian economy and strategic steps taken by Titan Industries have helped
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register a historic performance.

Directors Report, Titan Annual Report 2009-10
Titan recorded revenue of Rs. 46,744 million in 2010 compared to the previous year’s revenue of
Rs.38,033.7 million registering an increase of 22%. Profit after tax increased from Rs. 1,589.6 million to
Rs. 2,503.2 million registering an increase of 57.5%. Exhibit 3 provides the Income statement and Balance
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sheet of Titan for 5 years. Titan Jewelry Division reported sales of Rs. 34,974 million during the year
showing an increase of 26% compared to the previous year’s jewelry sales of Rs. 27,602 million. Exhibit
4 presents the jewelry division data. Segment results also show an increase of profit before interest and tax
from Rs. 1614 million in 2009 to Rs. 2,479 million in 2010. The rise in profit is partly attributed to the
change in the accounting policy. Stock price of Titan also grew steadily during this period. The stock prices
are provided in Exhibit 5.
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INVENTORY ACCOUNTING POLICY OF TITAN
Results were also impacted by the adoption of AS 30 and inventory valuation by FIFO.
7
https://www.titan.co.in/TitanEcom/corporate/pdflinks/Investors%20Meet/2009/Investor-Meet-JUNE2009.pdf
8
http://documents.worldbank.org/curated/en/819221468163752128/pdf/501750WBAR02009.pdf
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Jewelry manufacturing (gold) and retailing entail a huge investment in inventory, both as a raw material
and finished goods. Titan reported an inventory of Rs. 13,403 million in 2010. Out of that, jewelry division
alone reported an inventory of Rs. 10,000 million.9 Inventory forms an important part of the balance sheet
and indirectly the income statement, and hence the accounting for inventory assumes great importance.
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Accounting for inventory
Titan followed the following inventory accounting policy:
Inventories: Inventories were valued at lower of cost and net realisable value. The cost of various
categories of inventory was determined as follows:
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a) Gold was valued on first-in-first-out basis (refer to Note 4).
b) Consumable stores, loose tools, raw materials and components were valued on a moving
weighted average rate.
c) Work-in-progress and manufactured goods were valued on full absorption cost method based
on the average cost of production.
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d) Traded goods were valued on a moving weighted average rate/cost of purchases.
Consequent to the adoption of hedge accounting for gold, for a more accurate reflection
of the operational performance and appropriate presentation of the financial statements,
the Company has adopted First-in-First-Out (FIFO) method of valuing gold from April 1,
2009 as against weighted average method adopted up to March 31, 2009. This change has
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resulted in a higher profit before taxes of Rs. 1341.23 lakhs (Rs. 134.12 million) during the
year ended March 31, 2010.
Note 4 from Annual Report, 2010, page 58
During any particular period, raw material/merchandise is purchased at several different prices. If
inventories were to be priced at cost and numerous purchases have been made at different unit costs, which
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of the various cost prices should be used to value inventory? Ideally, specific identification was the best
method. However, it may not be possible to achieve this for various reasons. When the goods sold were
few in number, tracking was easy and the goods could be identified specifically. However, when items sold
were indistinguishable and were in large quantity, then some assumptions are to be made regarding the cost
of goods sold (i.e. which lot was sold). Thus, cost flow of goods was considered for accounting of inventory
instead of the physical flow of goods.
Cost flow of inventory was applicable to purchase of raw materials consumed as well. Thus, we need some
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assumptions related to the cost flow when physical flow is not possible. There are three widely followed
methods for cost flow assumption: First-in-First-Out (FIFO method, Weighted Average method and Last-
in-First-Out (LIFO) method.
9
Annual Report
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Titan reported the following explanation in its investor presentation.10
India will be adopting International Financial Reporting Standards (IFRS) from 1 April
2011. Essentially, this involves the adoption of several new (and different) accounting
standards. One way of doing this is to wait until April 2011 and change over in one shot.
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However, the more prudent course is to progressively adopt these standards over the two-
year period available to us. One of the new standards is AS 30 which covers hedge and
derivative accounting. Our gold stocks are completely hedged and this standard is
therefore applicable to us and we decided to adopt it from 1 April 2009.
HEDGE ACCOUNTING
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Firms often face increasing prices on the raw materials that are used in the production of goods. Higher
costs for raw materials would reduce the profit margins particularly when the price is not flexible. Many
companies hedge their raw material purchases, that is, have protection from future increase in prices. A
hedge is a trade that offsets a loss in another trade or position. Derivatives are financial instruments that
can be used for hedging. Titan used derivative financial instruments to manage the risks related to gold
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prices.
Titan adopted hedge derivative accounting from April 1, 2009.11 The accounting policy related to financial
instruments is stated as follows:
With effect from April 1, 2009, the company has applied hedge accounting principles set
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out in Accounting standard 30 – Financial Instruments: Recognition and Measurement and

has designated derivative financial instruments taken for gold price fluctuations as ‘cash
flow’ hedges relating to highly probable forecasted transactions (refer to Note 40). All such
derivative financial instruments are supported by an underlying transaction and are not
for trading or speculative purposes. The use of derivative financial instruments is governed
by the Company’s policies approved by the board of directors, which provide written
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principles on the use of such instruments consistent with the Company’s risk management
strategy.
Hedging instruments are initially measured at fair value, and are re-measured at
subsequent reporting dates. Changes in the fair value of these derivatives that are
designated and effective as hedges of future cash flows are recognised directly in hedging
reserve and the ineffective portion is recognised immediately in the profit and loss account.
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Changes in the fair value of derivative financial instruments that do not qualify for hedge
accounting are recognised in the profit and loss account as they arise.
10
https://www.titan.co.in/TitanEcom/corporate/pdflinks/Investors%20Meet/2009/Investor%20Meet%20-
17th%20Nov%20ENAM%20Conf%2009.pdf
11
The Accounting standard 30 is now Ind-AS 109, dealing with classification, recognition and measurement principles and certain disclosure
requirements for financial instruments. The corresponding IFRS is IFRS 9, Financial Instruments.
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Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting. For forecasted
transactions, any cumulative gain or loss on the hedging instrument recognized in hedging
reserve is retained until the forecast transaction occurs upon which it is recognized in profit
and loss account. If a hedged transaction is no longer expected to occur, the net cumulative
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gain or loss accumulated in hedging reserve is recognized immediately to the profit and
loss account.
Hitherto, the company recognised marked to market losses arising from outstanding
derivative financial instruments taken to hedge gold price fluctuations in the profit and loss
account, while net gains were ignored, in accordance with the announcement issued by the
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Institute of Chartered Accountants of India on Accounting for Derivatives.12
Titan managed the gold price related risks through hedging instruments. Such hedging includes an associated
cost; however, the benefit is that the price of the product gets fixed. The gold futures/forwards contract
outstanding as at the year-end was 390 kg, Rs. 6410.04 lakhs (2009: 2765 kg, Rs. 41231.49 lakhs) (1 lakh =
0.1 million).
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Accounting is not an exact science and preparation of financial statements involves good judgement.
Accounting assumptions such as those in an inventory have an impact on the income statement with a rise
or fall in prices. Accounting for certain transactions found in financial instruments is complex and involves
critical assumptions, and will affect financial statements for the current period as well as the future periods.
While the judgments are based on the management’s best assessment of the situation, they have to be careful
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in assessing its implications for the future as well.
ASSIGNMENT QUESTIONS
1. What are the various items of inventory and what method of accounting does Titan follow for each of
them?
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2. Evaluate the relative advantages and disadvantages of each method of inventory valuation, specifically
with respect to balance sheet, income statement and income tax.
3. Given that the three or more methods of inventory valuation (cost flow assumption), how does a
company decide on which method to follow and why?
4. Gold prices have risen sharply during the years. The prices also decreased for a brief period. What
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would be the impact of the cost flow assumption in the income statement under the following situations?
a) Rising price situation
b) Falling price situation
12
Titan Annual Report for the year ended 31 March 2010 at page 56
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5. What is hedging? How are hedge instruments accounted in Titan’s books? How will it impact the
income statement and the balance sheet?
6. Why would a company want to change the method of inventory valuation? What reason does the
management attribute to the changing policy? Is it justified? What is the impact of the change in the
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accounting policy on its net earnings? Does the hedge accounting warrant the change in the inventory
accounting?
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No
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Exhibit 1
World & India Gold Demand for Jewelry during 2008-2013
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Demand in Tonnes*
Year World India

2008 2,306.2 501.6
2009 1,816.3 405.2
2010 2,051.7 657.0
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2011 2,091.1 619.6
2012 2,129.3 552.0
2013 2,682.7 612.7
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Source: * World Gold Council @ http://www.gold.org/statistics#supply-and-demand-data Figures are for calendar year. The figures of gold
demand may vary slightly depending on the report taken. Figures exclude gold as investments in the form of bars and coins. .
Exhibit 2a
Quarterly Gold Price Movements during 2008–2013
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GOLD PRICES 2008-2013

Rupees Per Gram
3,500.00
3,000.00
No
2,500.00
2,000.00
1,500.00
1,000.00
SEP-08
SEP-09
SEP-10
SEP-11
SEP-12
SEP-13
DEC-08
MAR-09
JUN-09
DEC-09
MAR-10
JUN-10
DEC-10
MAR-11
JUN-11
DEC-11
MAR-12
JUN-12
DEC-12
MAR-13
JUN-13
DEC-13
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Gold Prices Source: www. worldbank.org
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Exhibit 2b
Gold Prices during 2008-2013
Price per gram in Price per gram in

Quarter Ended Quarter Ended
Indian Rupees Indian Rupees
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Sep-08 1,312.00 Jun-11 2551.11
Dec-08 1362.51 Sep-11 2614.27
Jan-09 1495.13 Dec-11 2723.35
Mar-09 1439.46 Mar-12 2869.85
Jun-09 1540.21 Jun-12 3012.06
Sep-09 1627.23 Sep-12 2920.08
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Dec-09 1610.30 Dec-12 2793.08
Mar-10 1857.80 Mar-13 2277.64
Jun-10 1888.43 Jun-13 2670.27
Sep-10 2020.80 Sep-13 2395.64
Dec-10 2063.41 Dec-13 2480.60
Mar-11 2163.97
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Gold Prices Source: www.worldbank.org
Exhibit 3a
Income Statement for the Year Ended March 31
Million Rupees
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2013 2012 2011 2010 2009

Net Sales 1,01,126.7 88,383.8 65,209.0 46,744.2 38,033.8
Other Income 1,007.7 941.1 560.7 118.6 52.6
Total Income 1,02,134.4 89,324.9 65,769.7 46,862.8 38,086.4
Expenditure
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Operating & Other Expenses 91,020.4 80,054.3 59,089.7 42,794.6 35,068.9

Depreciation & Amortization 544.9 449.0 344.8 600.8 417.6
Interest 506.4 437.2 345.2 254.2 294.3
Total Expenses 92,071.7 80,940.5 59,779.7 43,649.6 35,780.8
10,062.7 8,384.4 5,990.0 3,213.2 2,305.6
Profit Before Tax
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Income Tax Expenses (including 2,810.9 2,382.8 1,685.9 709.9 716.0

deferred tax)
Profit after tax 7,251.8 6,001.6 4,304.1 2,503.3 1,589.6
Source: Collated from Annual Reports available at www.titan.co.in
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Exhibit 3b
Summarized Balance Sheet as on March 31
Million Rupees
2013 2012 2011 2010 2009
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Equity and Liability
Shareholder Funds 19648.7 14499.0 10253.8 7243.8 5512.4
Non-Current Liabilities 629.0 748.8 550.2 775.5 1935.8
Current Liabilities 38470.2 31747.5 26551.6 12843.3 10345.7
Total 58747.9 46995.3 37355.6 20862.6 17793.9
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Assets
Fixed Assets 4903.0 3935.7 2997.1 2749.2 2940.0
Other Non-current Assets 2109.6 1477.7 1306.5 76.3 76.6
Current Assets
Inventories 36779.4 28786.7 19938.3 13403.3 12026.9
Other Current Assets 14955.9 12795.2 13113.7 4633.8 2750.4
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Total Assets 58747.9 46995.3 37355.6 20862.6 17793.9
Exhibit 4
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Details of Inventory
Million Rupees
For the year ended 31 March 2013 2012 2011 2010 2009
Raw Material 4,630.7 4,977.4 3,657.6 2,143.2 1,877.6

1,328.6 1,210.0 869.4 1,089.8 724.2
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Work in Progress
Finished Goods 30,498.6 22,494.5 15,316.5 10,093.3 9,342.3
Others* 321.5 104.8 94.8 77.0 82.8

Total 36,779.4 28,786.7 19,938.3 13,403.3 12,026.9
*includes Consumable stores & loose tools

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Exhibit 5
Segment Information
Million Rupees
For the year ended 31 March 2013 2012 2011 2010 2009
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Net Sales
Jewelry 81079 70641 50120 34974 27602
Watches 16758 15297 12651 10253 9069
Others 4140 3288 2437 1516 1361
Profit before Interest, Other
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Income and Taxes
Jewelry 8908 6975 4138 2479 1614
Watches 2018 2167 1849 1363 1614
Others -31 -44 -182 -390 -242
Source: Collated from Annual Reports available at titan.co.in

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Exhibit 6
Share Price Data
Titan Share Price Data 2009-2013

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300
250
200
150
No
100
50
0
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Aug-10
Dec-10
Feb-11
Aug-11
Dec-11
Feb-12
Aug-12
Dec-12
Feb-13
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Jun-10
Jun-11
Jun-12
Source: CMIE Data Base

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Case All That Glitter Is Gold TS4B

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TITAN INDUSTRIES LIMITED (TITAN COMPANY LTD. IN 2016)1

JEWELRY INDUSTRY IN INDIA

http://www.titan.co.in/TitanEcom/ corporate/pdflinks/Investors%20Meet /2009 /Investor%20Meet%20-17th%20Nov%20ENAM% 20Conf%

register a historic performance.

INVENTORY ACCOUNTING POLICY OF TITAN

Titan followed the following inventory accounting policy:

out in Accounting standard 30 – Financial Instruments: Recognition and Measurement and

in assessing its implications for the future as well.

World & India Gold Demand for Jewelry during 2008-2013

Year World India

GOLD PRICES 2008-2013

Gold Prices Source: www. worldbank.org

Price per gram in Price per gram in

2013 2012 2011 2010 2009

Operating & Other Expenses 91,020.4 80,054.3 59,089.7 42,794.6 35,068.9

Income Tax Expenses (including 2,810.9 2,382.8 1,685.9 709.9 716.0

Source: Collated from Annual Reports available at www.titan.co.in

Total 58747.9 46995.3 37355.6 20862.6 17793.9

Raw Material 4,630.7 4,977.4 3,657.6 2,143.2 1,877.6

Finished Goods 30,498.6 22,494.5 15,316.5 10,093.3 9,342.3

Others* 321.5 104.8 94.8 77.0 82.8

*includes Consumable stores & loose tools

Profit before Interest, Other

Source: Collated from Annual Reports available at titan.co.in

Titan Share Price Data 2009-2013

Source: CMIE Data Base

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