The Annual Audited Financial Statements (abbreviated to AAFS in this paper) of any company narrate a comprehensive story of that company’s economic activities, profitability (or the lack of) outcomes, financial strength in terms of assets owned, financial burdens in terms of large liabilities and borrowings from various sources, cashflows generated and so much more. AAFS are also a singular source for economic decisions for various stakeholders of companies such as investors, lenders, regulatory bodies and so on.
The Indian electricity distribution sector is characterized by complexity contributed to in part by the large investments in a regulated cost plus business model, heavily regulated tariff setting and dependence on Government Grants and subsidies. The AAFS have always formed an important part of the discoms’ tariff regulation process. The importance and criticality of accurately and comprehensively prepared AAFS, presented in a format and using language that is easy to understand for the wide variety of stakeholders for whom such AAFS form the basis for decision making, cannot be overstated.
For this paper, we sampled the FY2023 AAFS (i.e. AAFS for the year ended March 31 2023) for discoms across Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and 1 private discom (CESC). The sample was collated to include diversity in terms of geography, holding structure and type of customers. The paper is structured into five sections each discussing a common theme of observations. At the paper’s conclusion, we have a section on some recommendations that may add to more comprehensive, easy to understand AAFS for Indian electricity distribution companies which will appropriately reflect the peculiarities of their nature of business.
There are already some steps being taken by the Ministry of Power (MoP) in the form of Electricity Distribution (Accounts and Additional Disclosure) Rules, 2024 which detail accounting guidance for critical items such as provisioning for trade receivables and revenue recognition as well as many additional disclosures by discoms pertaining to cross subsidy, consumer wise tariff subsidy receivables, details of AT & C losses, and tariff order analysis including reasons for disallowances as part of their AAFS. This paper only hopes to further the progress being undertaken in this area.