1-air india book-2017-2018

COMMENTS OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA UNDER SECTION 143(6)(b)

OF THE COMPANIES ACT, 2013 ON THE FINANCIAL STATEMENTS OF AIR INDIA LIMITED FOR THE

YEAR ENDED 31 MARCH 2018.

The preparation of nancial statements of Air India Limited for the year ended 31 March 2018 in accordance

with the nancial reporting framework prescribed under the Companies Act, 2013 is the responsibility of the

management of the company. The statutory auditor/auditors appointed by the Comptroller and Auditor General

of India under section 139(5) of the Act are responsible for expressing opinion on the nancial statements

under section 143 of the Act based on independent audit in accordance with the standards on auditing

prescribed under section 143(10) of the Act. This is stated to have been done by them vide their Audit Report

dated 20 November 2018.

I, on the behalf of the Comptroller and Auditor General of India, have conducted a supplementary audit under

section 143(6)(a) of the Act of the nancial statements of Air India Limited for the year ended 31 March 2018.

This supplementary audit has been carried out independently without access to the working papers of the

statutory auditors and is limited primarily to inquiries of the statutory auditors and company personnel and a

selective examination of some of the accounting records.

Based on my supplementary audit, I would like to highlight the following signicant matters under section

143(6)(b) of the Act which have come to my attention and which in my view are necessary for enabling a better

understanding of the nancial statements and the related audit report:

A� COMMENTS ON PROFITABILITY

Profit and Loss account

Expenses

Employee Benefit Expenses (Note 22): ₹. 29,126.4 million

1. Above does not include provision amounting to the extent of ₹. million towards medical benets 7924

made during the year and booked to Prior period expenses. As per para 37 of Ind AS 8, 'to the extent

that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an

item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or

equity item in the period of the change.'

During 2016-17 the company, in the absence of statistics of required beneciaries for post-

retirement medical benets, had decided to make an adhoc provision during the year. During the

current year 2017-18 the company has made an estimate based on actuarial valuation. As it is only a

change in estimate, the amount should have been recognized by adjusting the medical expenditure

during the current year i.e., in the period of change.

Hence charging of medical benets to Prior Period Expenses is not in compliance with Ind AS 8 and

has resulted in understatement of current year expenses, current year loss and overstatement of

prior period expenses by ₹.7924 million.

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B.� COMMENTS ON FINANCIAL POSITION

Balance Sheet

Assets

Investments- ₹.17461.6 million (Note 2)

2. This includes an amount of ₹.15979.4 million towards investments made in shares of ve subsidiary

companies of Air India Limited. Statutory Auditors in their report have qualied that no impairment

has been made in the carrying value of investment in Subsidiary Company, Hotel Corporation of

India Limited (carrying value of investments aggregating ₹.1106 million), though there is uncertainty

in implementation of proposed revival plan. It was further qualied that no provision has been made

in respect of advances (₹.2281 million including interest) given to the Subsidiary Company.

The above also includes an amount of ₹.1666.7 million towards investments made in shares of

subsidiary Company, Air India Engineering Services Ltd (AIESL) and ₹.4022.5 million in the shares

of another subsidiary, Airlines Allied Services Ltd (AASL).

The Company has stated in note 48 (b) & (c) that though AASL & AIESL are in losses, they are

showing improvement in performance on a year to year basis. Note further stated that the Company

has not considered impairment in value of investments in the above subsidiaries. However, the

annual accounts of the AASL for the year 2017-18 indicated that AASL has incurred loss of ₹.2641.7

million and its accumulated losses as on 31.03.2018 were ₹.21000.4 million as against share capital

of ₹.4022.5 million (fully contributed by Air India Limited). While nancial position of AIESL indicated

that the subsidiary has incurred loss of ₹.4444.4 million during the year 2017-18 and total

accumulated losses as on 31.03.2018 were ₹.19448.7 million.

As per Ind AS 36 on 'Impairment of assets', at each balance sheet date the entity should test whether

there is an indication of impairment of an asset and the entity should estimate the recoverable

amount. Thus, as per provisions of Ind AS, the Company has not carried out impairment of

investment in shares in the above two subsidiaries and loss, if any, has not been provided.

Other financial assets (Note 5)

3. The Company has also provided advances to AASL amounting to ₹.15426.2 million (Advances

₹.14085.5 million plus interest accrued ₹.1340.7 million). The Company has also provided an

advance of ₹.14369.2 million (Principal: ₹.13444.9 million plus interest accrued: ₹.924.3 million) to

AIESL. As explained in comment (2) above, the nancial position of above subsidiaries was not

sound and Company should have assessed the fair value of advances outstanding as on

31.03.2018 and diminution in the value should have been provided as per provision of Ind AS 36.

Current Assets

Inventories –₹.9031.9 million (Note 8)

4. The Inventory balances (in various GL) grouped inNote 8: Inventoriesdo not match with balances of

respective GLs as per RAMCO Inventory Certicate as on March 2018. In absence of matching

gures, audit is unable to vouch safe the Inventory balances grouped in inventory in note 8

amounting to ₹.9031.9 million.

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C.� COMMENTS ON DISCLOSURE

Notes to Standalone Financial Statements for the year ended 31 March 2018

Physical Verification of Assets (Note 3 (I) d)

5. During the course of review of physical verication of asset done by the Company, audit observed

that the Company is having Aero engine, APU, rotables and repairable amounting to ₹.16,438.7

million in RAMCO system. RAMCO system is basically for inventory management and is not

interfaced with SAP hence discrepancies were noticed with xed asset register maintained in SAP.

Further aircraft repairable which is an asset for the Company is noted as expenses in RAMCO in

many places and reconciliation is not done.

For and on behalf of the Comptroller & Auditor General of India

Sd/-Roop Rashi

Director General of Commercial Audit&ex-officio Member, Audit Board–II, Mumbai

Place: MumbaiDate: 18 January 2019

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Management Replies to the comments of the Comptroller and Auditor General of India under section 143(6)(b) of the Companies Act, 2013 on the Financial Statements of Air India Limited for the year ended

st31 March 2018

CAG Observation Management Comments

A COMMENTS ON PROFITABILITY

Profit and Loss account Expenses Employee Benefit Expenses (Note 22): ₹. 29,126.4 million

1. Above does not include provision amounting to the extent of ₹.7924 million towards medical benets made during the year and booked to Prior period expenses. As per para 37 of Ind AS 8, 'to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.'

During 2016-17 the company, in the absence of statistics of required beneciaries for post-retirement medical benets, had decided to make an adhoc provision during the year. During the current year 2017-18 the company has made an estimate based on actuarial valuation. As it is only a change in estimate, the amount should have been recognized by adjusting the medical expenditure during the current year i.e., in the period of change.

Hence charging of medical benets to Prior Period Expenses is not in compliance with Ind AS 8 and has resulted in understatement of current year expenses, current year loss and overstatement of prior period expenses by ₹.7924 million.

(Ind AS) 8 deals with the treatment of Changes in accounting estimates as well as Prior Period Errors and requires that Changes in accounting estimates are to be adjusted prospectively, whereas Prior period Errors are to be adjusted retrospectively.

The provisions of IND AS -8 under the two scenario viz i) Change in Accounting Estimates and ii) Prior Period errors are given below

i) Change in Accounting Estimate as per Ind AS 8

Change in accounting estimate is dened as an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benets and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

As a result of the uncertainties inherent in business activities, many items in nancial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required of:

(a) bad debts; (b) inventory obsolescence; (c) the fair value of nancial assets or nancial

liabilities; (d) the useful lives of, or expected pattern of

consumption of the future economic benets embodied in, depreciable assets; and

(e) warranty obligations.

The use of reasonable estimates is an essential part of the preparation of nancial statements and may

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need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience.

By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error.

Corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error.

ii) Prior period errors (Refer definition under Para 5 of Ind AS 8)

In contrast with Change in Accounting Estimates, Prior period errors are omissions from, and misstatements in, the entity's nancial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

(a) was available when nancial statements for those periods were approved for issue; and

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those nancial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of nancial statements.

The Ind AS-8 Para 42 requires that an entity shall correct material prior period errors retrospectively in the rst set of nancial statements approved for issue after their discovery by:

(a) restating the comparative amounts for the prior period(s) presented in which the error occurred;

or

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(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

In the earlier years Provision for Medical Benets was accounted in the books of Accounts on an adhoc basis. The Statutory Auditors in the earlier years qualied the same as provision on an Adhoc basis was not in line with the mandatory requirements.

During the current year the company rectied the error by making correct provisions based on actuarial valuation which included consequential adjustment to earlier year liabilities also.

Since it was in error the company followed the provisions of IND AS 8 in respect of Prior Period error.

In this regard our comments are given below:

Hotel Corporation of India Ltd (HCI) :

Various initiatives are being taken by HCI for improving the operational performance of the company and increasing the revenues to improve its operational and nancial performance/Net Worth such as:

l� Equity infusion of Rs 270.0 million upto 31st March 2018 by Government of India.

l� The renovation of 80 guest rooms and other allied works at Centaur Delhi was completed in the quarter ended June 2017 which augmented the revenue during the year.

l� The Company has appointed a consultant for upgradation and refurbishment of 75 guest rooms and allied works at Centaur Srinagar

B. COMMENTS ON FINANCIAL POSITION

Balance Sheet Assets Investments- ₹.17461.6 million (Note 2)

2. This includes an amount of ₹.15979.4 million towards investments made in shares of ve subsidiary companies of Air India Limited. Statutory Auditors in their report have qualied that no impairment has been made in the carrying value of investment in Subsidiary Company, Hotel Corporation of India Limited (carrying value of investments aggregating ₹.1106 million), though there is uncertainty in implementation of proposed revival plan. It was further qualied that no provision has been made in respect of advances (₹.2281 million including interest) given to the Subsidiary Company.

The above also includes an amount of ₹.1666.7 million towards investments made in shares of subsidiary Company, Air India Engineering Services Ltd (AIESL) and ₹.4022.5 million in the shares of another subsidiary, Airlines Allied Services Ltd (AASL).

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l� The holding company Air India Limited converted Rs 700.0 million of Advance to the Company into Share Capital.

l� The Company had reduced the retirement age for its employees from 60 to 58.

In view of measures taken by HCI to improve the operational/nancial performance of HCI, the company is hopeful that HCI will be able to sustain its requirements from its own revenues in the near future. As regards its investment in HCI, Air India is condent that it would retrieve its investment in HCI as well as the loans given to HCI in the event of the closure/sale of HCI as HCI will receive compensation for surrender of land/properties and sale of assets.

Accordingly, no impairment has been considered for the investment made by the company in HCI.

Airline Allied Services Limited (AASL) :

AASL has emerged as a major player in the Government of India's premier scheme UDAN, which connects to various Tier II and Tier III cities with the development of unserved / underserved airports. The growth in Tier II and Tier III cities is still largely untapped and Alliance Air is likely to emerge as a largest player with its ATR 72-600 eet suitable for serving these smaller airports. Alliance Air, with the induction of 10 new ATR-72-600 aircraft will have a eet of 16 aircraft in 2017-18 and 20 aircraft in 2018-19.

Alliance Air is presently operating to 51 destinations with 110 departures per day and 602 ights per week. It is projected to carry approximately 1.6 million passengers in Financial Year 2018-19, which is a 22% growth year on year over Financial Year 2017-18. The projected capacity increase for Financial Year 2018-19 is 30 % over Financial Year 2017-18. The aircraft utilization has increased close to 75% in rst half of 2018-19 as compared to 2017-18.

The airline is also planning to participate heavily in the coming UDAN 3rd round, so that majority of the routes are able to meet total cost of operation thereby enabling the airline to turnaround and declare operating prot.

The Company has stated in note 48 (b) & (c) that though AASL & AIESL are in losses, they are showing improvement in performance on a year to year basis. Note further stated that the Company has not considered impairment in value of investments in the above subsidiaries. However, the annual accounts of the AASL for the year 2017-18 indicated that AASL has incurred loss of ₹.2641.7 million and its accumulated losses as on 31.03.2018 were ₹.21000.4 million as against share capital of ₹.4022.5 million (fully contributed by Air India Limited). While nancial position of AIESL indicated that the subsidiary has incurred loss of ₹.4444.4 million during the year 2017-18 and total accumulated losses as on 31.03.2018 were ₹.19448.7 million.

As per Ind AS 36 on 'Impairment of assets', at each balance sheet date the entity should test whether there is an indication of impairment of an asset and the entity should estimate the recoverable amount. Thus, as per provisions of Ind AS, the Company has not carried out impairment of investment in shares in the above two subsidiaries and loss, if any, has not been provided.

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The airline is consciously increasing the yield which is about 13% higher than the previous year. With the increase of additional two aircraft by December' 2018,more routes are being deployed under UDAN. The airline also has the Board approval to further lease 15 aircraft in the near future and expand under UDAN, which will add substantially to the bottom line.

With the various measures taken towards improving company's operational and nancial activities, it is expected that the nancial position of the company would improve in the near future.

Air India Engineering Services Ltd (AIESL):

AIESL is the largest MRO set up in India that can serve as an one-stop-shop for all aircraft engineering requirements. At present, in India, major checks of every commercial wide body aircraft of Indian Operators is done by AIESL. The company has got hangar facilities available in all major airports in Mumbai, Delhi, Chennai, Hyderabad, Kolkata, Trivandrum and Nagpur. AIESL commenced its operations from January 2015 after receiving its DGCA Licence.MRO business is a highly capital intensive industry and it generally has a gestation period of 4-5 years for consolidation of operations.

However, AIESL has taken various initiatives to improve its overall revenues such as signing of activity based SLA with Air India Ltd, starting MRO facility in Sharjah and plans to expand the same to Dubai, developing dedicated marketing teams to capture MRO business, offering training services, handling VVIP ights to generate additional revenue.

Although, AIESL is in losses in the current year it is showing improvement in its performance on a year to year basis. With the above measures and the Make in India thrust of the Govt. of India which will ensure that maintenance of aircraft is within the country, the rapid growth of Aviation in the country and large number of aircraft orders by Indian carriers, AIESL is best poised for taking advantage of the growth in maintenance activities and MRO business within India. In view of this AIESL is likely to earn enhanced revenues and be protable in the near future.

In view of the above, the company is of the opinion that there is no diminution in the value of its

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Other financial assets (Note 5)

3. The Company has also provided advances to AASL amounting to ₹.15426.2 million (Advances ₹.14085.5 million plus interest accrued ₹.1340.7 million). The Company has also provided an advance of ₹.14369.2 million (Principal: ₹.13444.9 million plus interest accrued: ₹.924.3 million) to AIESL. As explained in comment (2) above, the nancial position of above subsidiaries was not sound and Company should have assessed the fair value of advances outstanding as on 31.03.2018 and diminution in the value should have been provided as per provision of Ind AS 36.

Current Assets Inventories –₹.9031.9 million (Note 8)

4. The Inventory balances (in various GL) grouped in Note 8: Inventories do not match with balances of respective GLs as per RAMCO Inventory Certicate as on March 2018. In absence of matching gures, audit is unable to vouch safe the Inventory balances grouped in inventory in note 8 amounting to ₹.9031.9 million.

C. COMMENTS ON DISCLOSURE

Notes to Standalone Financial Statements for the year ended 31 March 2018

Physical Verification of Assets (Note 3 (I) d)

5. During the course of review of physical verication of asset done by the Company, audit observed that the Company is having Aero engine, APU, rotables and repairable

investments in the above Subsidiary Companies namely HCI, AASL and AIESL.

As stated in para B2 above, regarding improvement in nancial and operational performance of AASL & AIESL, the company is of the opinion that advances to AASL and AIESL are recoverable.

The difference in amounts between the Inventory Certicate and the Note (which reects Accounts GL balances) is due inclusion of Capitalised Repairables and Part Account Group (PAG) changes in Inventory certicate which are not effected in Accounts.

Enterprise Change CR has been implemented in the current year and Fixed Assets module to be implemented along with data cleansing are expected to resolve such issues in future.

Aero engine: Fixed Asset Register is maintained in SAP and the same is updated after obtaining the relevant Assets code. The Fixed Assets Register reects the correct Aero Engines held by AI.

Internal audit have carried physical verication of Engines / Airframes and has not found any discrepancies' with the Fixed Asset Register as disclosed in Note No. 37(a)(i).

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amounting to ₹.16,438.7 million in RAMCO system. RAMCO system is basically for inventory management and is not interfaced with SAP hence discrepancies were noticed with xed asset register maintained in SAP. Further aircraft repairable which is an asset for the Company is noted as expenses in RAMCO in many places and reconciliation is not done.

Auxiliary Power Unit: (APU) – For Boeing Aircraft, the APUs which were received alongwith the Aircraft are capitalized alongwith the Aircraft costs as the separate cost of APU is not reected in the Aircraft Invoice. However, the APUs which were separately procured, the same have been capitalized separately at its cost.

The Aircraft repairable which are assets are properly accounted as assets in the books although they appear in RAMCO as an expense.

With regard to Repairables & Rotables, proper records are maintained in Fixed Assets Register (FAR). The reconciliation of Repairable & Rotables, between SAP and RAMCO will be carried out as soon as the interface implementation of RAMCO and SAP is completed.

1-air india book-2017-2018

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