The retail giant’s profits may be hurt as it adopts IFRS from FY12, which involves making provision for customer loyalty programs. Some auditor qualifications in its accounts are also a cause for concern

The piling debt burden may not be the only worrying aspect for shareholders of Pantaloon Retail. What could raise eyebrows higher is the treatment of certain expenses by the retailer, which has also attracted qualifications by its auditor. And with the mandatory migration to International Financial Reporting Standards (IFRS) just round the corner, the company could possibly get hit slightly on its bottom-line. 

Several wrongful treatments in the books of accounts of the company have even led its auditors to make qualifications in their report, according to a report by BRICS Securities. In the first instance, Pantaloon's auditors pointed out that the company, in its consolidated financials for the year ended 30 June 2009, recognised deferred tax assets by certain subsidiaries and joint ventures amounting to Rs46.4 crore, which led to profits being reported that much higher.

The report also points out that the company revised its method of valuation of finished goods for the year ended 30 June 2008, and that the same has been adjusted against brought forward balance in the profit & loss account. In doing so, reported profit for this period was higher to that extent.

The report has also found that there is a significant variation on treatment of expenditure on brand development between Pantaloon and its peers. Pantaloon, which spends a substantial amount on advertisements has capitalised the expenditure incurred on the same. However, none of its peers have the same practice. In fact, Pantaloon's auditors have qualified their report stating that "capitalising brand expenditure and treatment of royalty and advertisement expenditure as pre-operative by certain subsidiaries is not in accordance with accounting standards".

BRICS Securities points out in the report that Pantaloon may need to provide for its loyalty programs under the IFRS since over 50% of its sales come from loyalty card members. "With a higher proportion of sales from Green card members, Pantaloon will have to make provision for its loyalty program which will impact net income," says the report. Currently, provisions in the Indian Accounting Standards do not require companies to account for rewards accrued under loyalty programs. 

However, from fiscal year 2012, companies with a net-worth exceeding Rs1,000 crore will have to migrate to the IFRS, which includes provision for customer loyalty programs. Pantaloon's management, however, has signalled that they may not be required to make any such provisions as their program does not provide any freebies for shopping at their stores and only gives discounts.