Biocon's accounting issues
Biocon's quarterly results are raising eyebrows and for the wrong reasons. CNBC-TV18's Payaswini Upadhyay reports that analysts are questioning the way it has accounted for the compensation received from Pfizer at the premature termination of their insulin drug development agreement.
Kiran Mazumdar-Shaw is facing some tough questions from analysts. The questions are regarding the manner in which Biocon has accounted for the USD 164-million compensation received from Pfizer when their USD 350-million deal to develop an insulin portfolio fell through.
Now Biocon had recognized USD 34 million earlier on the basis of the percentage of completion method. But the remaining USD 130 million was not recognized in this year's quarterly results.
Biocon's argument is that it will continue to develop the insulin portfolio and set off the expenses against the retained income in the ratio of 1:1 has not found traction with accounting experts.
PR Ramesh, head - audit, Deloitte India, "If a contract is terminated and you receive compensation for termination on contract, there is no continuing obligation under the contract."
"And therefore all gains or losses or revenues in relation to the contract become recognisable, provided of course, there is no uncertainty regarding collectability and perhaps, in this case, there may not be uncertainty regarding measurability because the termination amounts- if they are specified- as part of the arrangement, then there is no uncertainty regarding measurability."
But Biocon insists it has a continuing obligation to develop this portfolio.
Kiran Majumdar-Shaw, CMD, Biocon,"The terms of reference, in terms of the original Pfizer contract, were that Biocon was to take on the obligation of development. And we were supposed to start the development and carry it all the way through to regulatory approval."
"So this is not an outright licensing deal. In an outright licensing deal, when the licencee takes on the development obligation, any fees payable to the licensor can be booked to profit. But in our case, the licensor, which is Biocon, had the obligation."
Even after repeated questioning, the management did not divulge two things. One: is Biocon obligated to continue work on this portfolio as part of the contractual agreement with Pfizer or has Biocon decided to develop this on its own without any specific conditinality in its agreement with Pfizer?
This is important because experts say that deferring of revenues can only be justified if the continuing obligation is a consequence of the condition in the contract between Pfizer and Biocon.
Two: If this is a continuing obligation under the contract, at what stage was this put in the contract- in October 2011 when the contract was signed or in March 2012 when the contract was terminated?
The answer to this second question will dictate the kind of tax implications Biocon will have to face. Biocon's statutory auditors have provided 'a matter of emphasis' on this issue, but former ICAI President Amarjeet Chopra disagrees.
Amarjeet Chopra, former president, ICAI, "If I am the auditor and have to comply with the code of conduct and best auditing practices, I would have qualified the report because it cannot be an 'emphasis of matter'. The amount is so huge and if it has not been booked, then naturally you should say to this extent that the income has been understated and to that extent, the profit is understated."
Several accounting experts have opined that a company cannot hold on to profits as a provision for future risk, but only for incurred losses or impairment of assets. Add to this the willingness of the statutory auditors to let this pass as true and fair. And the case is not of just poor corporate governance, but also a breach of best practices in accounting.
In Mumbai, Payaswini Upadhyay