Jet Airways Case Analysis Presentation

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NOW YOU SEE IT, NOW YOU DON’T
The case of Jet Airways and its Accounting Policies

Presentation Outline
1. Jet Airways - Company Background
2. Airline Industry Background
3. Main Issues
a. Highlights of First Quarter 2008 Results
b. 1st New Policy: Adoption of New Depreciation Method
c. 2nd New Policy: Foreign Currency Exchange Differences
d. 3rd New Policy: Revaluation of Fixed Assets
4. Summary
2

Company Background
 India's largest private domestic and international airline  Promoted by Naresh Goyal, its founder and chairman
 Launched in 1992 and commenced its operations in 1993
 By 2008, operated around 380 flights daily to 64 destinations both within India and overseas
 Went public and was listed at the National Stock Exchange and Bombay Stock Exchange in 2005

3

Airline Industry
 India saw the emergence of many airlines such as Air Deccan, Spice Jet, Indigo, GoAir, Kingfisher Airlines, etc. after the year 2000.  Air travel increased in volume with the advent of low-cost airlines  Turbulence in the Airline Industry

 In 2008-2009, crude oil price hike coupled with global recession led to difficult times for the airline companies
 Slowing down of demand
 Surplus of Supply

4

The Main Issue
First Quarter of 2008-09
Increase in net profit: 364%
 Increase in income (sales): 58% (18,066.7 to 28,671.6)
 Net profit after tax: 1,433.8 million from 308.8 million

• Increase Airfares

Revaluate Routes

Restructure

5

Accounting Policy Changes

• Depreciation Method

- Change from Written-Down
Value Method to Straight
Line Method

• FOREX P/L recognition
- Gains/Losses from loans
denominated in foreign
currency is adjusted in B/S
instead of I/S

tion
l ua

Accounting
Policy

a
Rev

De
pre
cia
tio
n

Summary

Foreign Exchange

NOW YOU SEE IT, NOW YOU DON'T: The case of Jet Airways and its Accounting Policies

• Revaluation Model
- Revaluation was accounted
in the current period with
its full cumulative effect is
applied in I/S

6

Depreciation Policy

a
Rev

De
pre
cia
tio
n

• Change from Written-Down Value Method to Straight Line Method of Narrow Body Aircraf
• Assumptions:
• SLM Effective Rate = 5.6% (Service life of 18 years)
• WDM Effective Rate = 16.2%

tion
l ua

Depreciation
Expense
Net Fixed Assets

90,000
500,000
450,000
80,000
400,000
70,000
350,000
60,000
300,000
50,000
250,000
40,000
200,000
30,000
150,000
20,000
100,000
- Gains/Losses
10,000
50,000from loans
denominated00in foreign
11
22
33

Accounting
Policy

- Revaluation was accounted
in the current period with
its full cumulative effect is
applied in I/S

Foreign Exchange

• FOREX P/L recognition

currency is adjusted in B/S
instead of I/S

• Revaluation Model

44

55

66

77

88

99
SLM

10
10

11
11

12
12

13
13

14
14

15
15

16

17

18

WDM

NOW YOU SEE IT, NOW YOU DON'T: The case of Jet Airways and its Accounting Policies

7

8

Depreciation Policy

• FOREX P/L recognition
- Gains/Losses from loans
denominated in foreign
currency is adjusted in B/S
instead of I/S

tion
l ua

Accounting
Policy

a
Rev

De
pre
cia
tio
n

• Reversal of “Overcharged” Depreciation in FY2009 totalling 9,158.70 • Effective Increase in Profit of 8,497

Foreign Exchange

NOW YOU SEE IT, NOW YOU DON'T: The case of Jet Airways and its Accounting Policies

• Revaluation Model
- Revaluation was accounted
in the current period with
its full cumulative effect is
applied in I/S

9

Depreciation Policy

De
pre
cia
tio
n

• Alternative Courses of Action
Implications

Adjust in Current Year

• Cumulative effect of previous years were reflected
in the current period
• No need to correct previous FS

Accounting
• Possible Loss of Confidence in FS
of current FS
• Accuracy
Policy
• Revaluation Model
• Comparability

-...
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