When it comes to gauging the financial health of a company, few tools are as indispensable as the balance sheet. More than just a ledger of numbers, it serves as a strategic map, revealing what the company owns, owes, and how its equity has evolved. For investors and analysts, understanding this financial statement isn't just helpful, it's essential.
This post is here to help you unravel the complexities of the balance sheet within the framework of the Indian Accounting Standards (Ind AS). It’s not about memorizing definitions or simply checking boxes but about equipping you with a keen eye for detail.
Each section of the balance sheet tells a story, whether it's the untapped value hidden in assets or the red flags buried in liabilities. Our mission is to guide you through interpreting every line item with clarity and confidence.
Whether you’re an experienced investor looking to refine your analysis or someone newer to understanding financial statements, this guide strikes a balance, accessible enough for beginners yet insightful enough for seasoned professionals.
You’ll learn to connect the dots, ask the right questions, and identify risks that could affect a company’s true value. By the end, you'll see the balance sheet not as a static document, but as a dynamic tool for making better and more informed investment decisions.
The balance sheet is divided broadly into Equity & Liabilities (which include shareholders’ funds and obligations) and Assets (resources and holdings). In India, companies prepare both standalone financials (for the individual entity) and consolidated financials (including subsidiaries).
Shareholders’ Funds (Equity)
Share Capital (Including Share Warrants)
Share capital represents the funds that shareholders have invested in the company by purchasing its shares (equity capital). It appears on the balance sheet at the face value (par value) of shares issued.
For example, if a company issued 1 million shares of ₹10 each, the share capital would be ₹10 million. This line indicates the base ownership stake in the company.
Some balance sheets also include “Money received against share warrants”, which is an amount paid (often 25% upfront) by warrant holders (usually promoters or investors) to reserve the right to subscribe to shares in the future at a fixed price. Until the warrants are converted to shares, this money is listed separately in equity.
While share capital itself is harder to “fudge” (since it’s a legal number of shares issued), malpractice can occur via share issuance processes. One common abuse is issuing shares (often at a high premium, see next section on reserves) to obscure entities or shell companies to launder money or inflate equity.
For instance, a company might receive a large infusion from unknown investor companies at an exorbitant premium, which boosts share capital + share premium on paper. In reality, the funds might be round-tripped from the company’s own promoters. Indian authorities have identified cases where companies raised share capital from shell entities as part of a “sophisticated laundering racket”, where the only purpose of those investors was to funnel illicit money into the company.
Another angle is preferential warrants issued to promoters: Promoters need only pay 10% of the price upfront for warrants and can pay the rest within 18 months to convert to equity. If the stock price rises above the exercise price, promoters convert and gain a windfall; if not, they let the warrant lapse, but the 10% they paid is forfeited and remains with the company as equity.
This can be misused to temporarily boost equity or give promoters risk-free options. Such practices can hurt minority shareholders by effectively diluting ownership only when it’s favorable to insiders, or by creating illusory equity infusions (if warrants lapse, the company got a small equity boost without issuing shares, which wasn’t a genuine investment but essentially a fee from promoters gambling on stock price).
Real-life example: Leena Powertech Engineers, a company scrutinized by tax authorities, received an ₹8 crore equity infusion by issuing shares at a high premium to certain investors. The Income Tax Appellate Tribunal found those investors were likely shell companies, part of a ₹240+ crore web of fund transfers, indicating that the share capital and premium raised were simply routing of funds in a laundering scheme.
Another example is many penny stock companies in India that issued shares at huge premiums to obscure entities as a way to bring unaccounted money into the books (this was a common modus operandi in certain stock manipulation scams). While regulators have tightened such routes, investors should be wary if a small company’s equity base suddenly balloons due to private placements to unknown parties.
Reserves and Surplus (Other Equity)
Reserves and Surplus represent the accumulated net worth of the company other than the basic share capital.
It includes components like securities premium (the amount received over face value when shares were issued), retained earnings (profits earned over the years that haven’t been distributed as dividends), and other specific reserves (e.g. revaluation reserve, general reserve, debenture redemption reserve, and items of Other Comprehensive Income such as foreign currency translation reserve or fair value through OCI gains/losses). Under Ind AS, this is often presented as “Other Equity” on the balance sheet, comprising all these subcomponents of equity.
Essentially, reserves tell us about profits reinvested in the business and other accumulated gains or funds set aside for specific purposes.
Retained earnings grow when a company makes profits and plows them back (or shrink with losses/dividends), indicating long-term sustainability of earnings.
Other reserves may exist due to legal requirements (e.g., certain percentage of profit transferred to general reserve historically) or due to specific accounting treatments (like revaluation reserve when assets are revalued, or a securities premium reserve which can only be used for limited purposes like issuing bonus shares, writing off preliminary expenses, etc.)
Reserves are directly linked to profitability and asset valuation, so manipulation here is usually a result of inflated profits or aggressive asset revaluations.
One way is through overstating profits, if a company cooks its books to report higher income, retained earnings (part of reserves) will be artificially high. A classic example is the Satyam Computers fraud: over many years, Satyam’s management falsified revenues and profits, creating a massive fictitious surplus on the balance sheet.
When the fraud came to light, the purported reserves evaporated. In his 2009 confession, Satyam’s chairman admitted to inflating profits and thus misrepresenting ₹7,136 crore of nonexistent assets and profit. Those fake profits had been boosting retained earnings, so the balance sheet’s equity was grossly overstated.
Ind AS allows certain assets (like land or buildings) to be revalued to fair value. While this can provide a truer picture of asset worth, unethical management might use overly optimistic appraisals to inflate asset values and create a large revaluation reserve in equity.
This reserve isn’t real cash, it’s just paper gain, but it can make the company’s net worth look healthier. For instance, companies in real estate or capital intensive industries have in the past revalued land upwards during boom times, boosting equity to leverage more debt. If those values prove too optimistic, the reserve may quietly dwindle with impairment charges later.
Real-life examples: Beyond Satyam’s inflated retained earnings, consider companies that had to dramatically write-down reserves due to fraud or errors. Ricoh India, the Indian arm of a Japanese company, in 2015-16 discovered that its revenues, receivables and even inventories were overstated, essentially, profits were padded for years. When the truth came out, huge losses had to be recognized, wiping out the accumulated surplus.
Another example on the revaluation side is the infamous Kingfisher Airlines brand valuation. Kingfisher had recorded a massive intangible asset for its “Kingfisher” brand/trademark, valuing it at about ₹4,100 crore in 2011-12, which went into its balance sheet and indirectly bolstered its reserves (via a capital reserve for the brand value). This valuation was used to secure loans, effectively treating the brand as equity collateral.
However, later independent valuations pegged the brand’s true value at mere ₹100–200 crore once the airline was defunct. The initial overvaluation meant Kingfisher’s net worth was grossly overstated, a manipulation that misled banks and investors regarding the company’s solvency.
Non-Controlling Interest (Minority Interest)
Non-Controlling Interest (NCI), also known as minority interest, appears only in consolidated balance sheets. It represents the portion of equity in subsidiary companies that is not owned by the parent company.
For instance, if Company A (parent) owns 70% of Subsidiary B, the remaining 30% of B’s net assets belongs to other shareholders, that 30% is shown as NCI in the consolidated balance sheet of A.
NCI exists due to partial ownership of subsidiaries. Consolidated financials merge all assets and liabilities of subsidiaries as if they were one economic entity with the parent, but equity must be split between the portion attributable to the parent vs. the portion attributable to outside owners.
One subtle manipulation is to not fully consolidate some entities by design, for example, structuring a venture as an “associate” or 49%-owned affiliate rather than a 51% subsidiary means its results aren’t fully combined in the consolidated accounts (only a share of profit/loss is taken). This can hide indebtedness or poor performance from the main books.
A notorious case was IL&FS (Infrastructure Leasing & Financial Services), it had hundreds of subsidiaries, associates, and JVs. By keeping some operations in entities where IL&FS’s stake was not above 50%, certain liabilities remained off the parent’s consolidated balance sheet, delaying the recognition of just how debt-laden the group was.
An extreme example internationally was Enron (which hid debt in unconsolidated special entities); in India, while we haven’t seen a carbon copy of Enron, we have seen creative use of consolidation rules. No major Indian scam explicitly centered on NCI, but awareness of how NCI works is important.
In analysis, a very high NCI relative to total equity could signal that a lot of the assets (and possibly debts) are tied up in not-wholly owned units, which might warrant a deeper look into those units’ financials.
Non-Current Liabilities
Long-Term Borrowings
Long-term borrowings are debts and loans that are due beyond one year (or one operating cycle) from the balance sheet date. These include bank term loans, debentures or bonds, long-term corporate loans, and other forms of financing such as lease obligations (under Ind AS 116, lease liabilities are recorded, the portion due beyond a year would be non-current).
Debt is one area where companies try to hide or misclassify their obligations, as high debt can ring alarm bells.
A common shenanigan is to keep debt off the balance sheet. This can be done via off-balance-sheet entities or arrangements, for example, using a subsidiary, joint venture, or a third-party special purpose vehicle to take on debt for the benefit of the company, but not consolidating that entity’s debt.
IL&FS and some other large groups had intricate webs of subsidiaries where loans were raised at arm’s length entities. Before its 2018 collapse, IL&FS’s disclosed debt was enormous, but the full extent was even larger when one accounted for debt in partially-owned subsidiaries and associate companies (which wasn’t immediately apparent in the holding company’s standalone balance sheet).
Another trick is misclassification of debt: for instance, classifying a short-term loan as a long-term loan (if a rollover or refinancing is obtained just at year-end) to avoid showing a working capital crunch. Companies have been known to temporarily pay down short-term borrowings right before reporting dates (using various means) so that the reported number is low, only to borrow again afterwards, a form of window dressing.
Real-life examples: A stark case of liability concealment was Cox & Kings, a travel company that went bankrupt in 2019. Investigations revealed the company failed to disclose over ₹3,000 crore of liabilities on its books. In other words, a huge chunk of its debt was simply not recorded in the official balance sheet, a blatant manipulation. This hidden debt only came to light during the post-mortem forensic audit, by which time the company had already defaulted on ₹5,500+ crore of disclosed loans.
Furthermore, some companies have used structured deals like sale-and-leaseback or factoring of receivables to keep liabilities off-books. Before Ind AS 116, operating leases (like long-term property or aircraft leases) didn’t appear on the balance sheet, airlines, for instance, could lease planes for 10 years and none of that obligation showed up as debt. Now such leases are on the books as lease liabilities (removing a traditional off-BS trick).
The key lesson: Dig into notes and subsidiaries and, always check for contingent liabilities and debt-like commitments in footnotes.
Deferred Tax Liabilities (Net)
Deferred Tax Liability (DTL) represents taxes that a company has accrued for accounting purposes but will pay in the future due to timing differences.
Imagine a company buys a machine for ₹10 lakhs.
For accounting, it depreciates the machine straight-line over 5 years — ₹2 lakhs per year.
For tax, the government allows accelerated depreciation, say ₹4 lakhs in year 1.
🔸 Year 1:
Accounting depreciation: ₹2 lakhs
Tax depreciation: ₹4 lakhs
🔸 Profit before depreciation: ₹20 lakhs
Accounting profit: ₹20L - ₹2L = ₹18 lakhs
Taxable profit: ₹20L - ₹4L = ₹16 lakhs
So:
Accounting says: You owe tax on ₹18 lakhs
Tax department says: You owe tax on ₹16 lakhs
You pay less tax today (on ₹16L), but you’ll pay more tax later when depreciation reduces.
The ₹2 lakh difference creates a Deferred Tax Liability.
On the balance sheet, DTL is usually shown as “Deferred tax liabilities (Net)” which means after offsetting any deferred tax assets if allowed.
Typically, DTL is less often a target of intentional manipulation compared to other items, because it’s a byproduct of differences between accounting and tax rules.
In terms of misrepresentation, one red flag is if a company consistently shows large DTL increases without corresponding cash tax payments, it might be deferring too much tax via aggressive tax planning (which could backfire). Additionally, some companies structured leases or exports via tax havens to defer taxes; they’d show low current tax and growing DTL. This is more tax strategy than fraudulent accounting, but it can mask the true long-term tax burden.
In summary, DTL is less a tool of manipulation and more a flag of how a company’s accounting choices differ from tax reality. Investors should watch consistent growth in DTL, it means the company is pushing taxes to the future, which is fine up to a point, but beyond that it could indicate tax risks or eventual cash outflows that shouldn’t be ignored.
Other Long-Term Liabilities
Other long-term liabilities cover any non-current obligations not classified under borrowings or provisions. This often includes things like security deposits received (for example, if the company has leased out property and holds a deposit from the tenant for several years), deferred revenue that will be earned after a year (e.g. advance payments for long-term service contracts), or payables that are not due within the next 12 months.
Essentially, this is a catch-all for long-term obligations that don’t neatly fit elsewhere.
This line item is less frequently manipulated directly, but it can be a place to hide debt or inflate liabilities purposely in some cases. Dishonest management might classify something under “other liabilities” to avoid calling it debt.
For example, related-party loans might be disguised as “security deposits” or “advance from customer” if they wanted to avoid scrutiny on borrowings. This can mislead analysts who usually focus on debt in the borrowings category.
Real-life example: A real example in India was seen in some corporate frauds where funds were routed in as fake “advances from customers.” Take the case of a fictitious scenario inspired by certain investigations: Company X, controlled by promoters, might receive ₹100 crore from a promoter-controlled entity but instead of recording it as a loan (which would increase borrowings and ring alarm bells), they record it under “Other liabilities” as an advance for future sales or a deposit.
Cox & Kings, again, is illustrative: while its main issue was undisclosed debt, it also took large customer advances for tours that never took place, and those funds were siphoned. Post bankruptcy, it was found that a lot of entries in their books (including some under other liabilities) were non-existent or misleading.
The broad lesson: for this line item, scrutinize unusually large or growing balances.
Long-Term Provisions
Long-term provisions are estimated liabilities that are expected to materialize in the future (beyond one year). Companies set aside provisions for obligations like employee benefits (gratuity, pension liabilities) that will be paid years later, asset decommissioning or site restoration costs (for example, a provision to dismantle a plant at end of its life), warranties on products (if a product sold has a warranty beyond a year, an estimated cost is provisioned), or legal and environmental liabilities if they are likely and can be estimated.
Provisions ensure that expenses are recognized in the period they are incurred (matching principle), even if the actual payment will happen later. By recording a provision, the company acknowledges a future obligation and doesn’t overstate its equity by ignoring looming costs.
Provisions are inherently based on estimates and assumptions, which makes them susceptible to manipulation in two ways: under-provisioning or over-provisioning.
Under-provisioning is a common trick to inflate profits, if management deliberately underestimates a liability (say, assumes a lower pension liability by using optimistic actuarial assumptions, or underestimates how many products will require warranty repairs), then the provision recorded is too small.
This means expenses are held low and profits (and equity) are higher than they should be. The result is a nasty surprise in later years when the company has to acknowledge higher costs.
On the other hand, over-provisioning can be a way to create “cookie jar reserves”, a company in a very good year might conservatively (or cynically) overestimate certain provisions, which records extra expense (reducing profit when they can afford to) and piles up a reserve. Later, if they face a weak period, they can reverse those excess provisions to boost income.
Both practices mislead stakeholders about the true performance.
Real-life examples: In India, one example involved some banks/NBFCs with regard to NPA provisions (those are current, but conceptually similar). By delaying recognizing a loan as NPA, they avoided making provisions, thereby inflating profits, Yes Bank was accused of hiding bad loans and thus under-provisioning before its 2020 crisis.
One famous global scandal involving provisions was at Toshiba (in Japan) where they had overprovisioned profits from projects and later released them to smooth earnings.
Always read the notes: companies usually explain the basis of major provisions like gratuity (with actuarial assumptions) or legal cases. If those assumptions seem overly rosy (or suddenly changed to be rosier), that’s a red flag for potential manipulation.
Current Liabilities
Short-Term Borrowings
Short-term borrowings are loans and debt obligations that are due to be repaid within the next 12 months.
These include things like working capital loans from banks (cash credit, overdrafts), short-term corporate loans, commercial paper, current portion of long-term loans (sometimes shown separately, but essentially any part of debt due within a year), and other short-term arrangements. It can also include borrowings against inventory or receivables (trade finance).
Companies rely on short-term debt to manage cash flow timing differences (e.g., buying inventory or funding receivables before cash comes in), to finance short projects, or to bridge temporary needs. It’s a normal part of corporate finance, nearly every company will have some short-term borrowings unless it’s debt-free and extremely cash-rich.
Window dressing is common with short-term debt. Companies may temporarily pay down some of these borrowings right before the balance sheet date to show a healthier position, only to borrow again immediately after the reporting date. This makes the year-end debt look lower than typical.
Another trick is misclassification: sometimes firms classify a borrowing as a trade payable or other liability to keep it out of the debt tally. Also, some companies might move short-term borrowings off books through bill discounting or factoring. For instance, instead of borrowing, they might ask a bank to discount a receivable (which if done with recourse, is effectively a loan, but it may not show up as borrowing if improperly accounted).
Essentially, because short-term borrowings are a key component of liquidity analysis (like current ratio, debt-equity ratio), companies in distress may try to make this number look smaller.
Real-life examples: An illustrative case of window dressing was hinted in the Cox & Kings forensic report: just before it defaulted, the company had been showing reasonable working capital on its books, but investigators later found a lot of the cash and bank balances were fictitious and that debt was higher. This implies that the short-term debt reported wasn’t the full story.
Another example: Lehman Brothers’ “Repo 105” transaction (though an American case) is a textbook scheme, Lehman temporarily moved ~$50 billion off its balance sheet at quarter-ends by treating repurchase-agreement loans as sales, making its short-term borrowings drop dramatically, then brought them back after the reporting date.
In India, companies facing banking covenant pressures have been known to request banks not to show certain overdraft usages on the balance confirmation as of year-end or to provide last-minute funds to square off.
While specific names often only emerge in confidential audits, one can suspect window dressing if, say, the year-end debt is far lower than the quarterly average debt (some companies’ annual reports do give average or maximum daily indebtedness).
Yes Bank’s disclosure in its final days showed that many borrowing companies indulged in evergreening, essentially taking new short-term loans to pay off old ones right before default, to postpone recognition of default.
In summary, look out for inconsistent patterns: if a company’s cash flows don’t explain how it paid down a large short-term loan by year-end, or if current borrowings drop while other liabilities mysteriously jump, it could be classification magic.
Investors should also check notes for “post-balance sheet events”, sometimes companies borrow right after year-end (which could indicate they held off till just after reporting). A healthy practice by analysts is to use average debt (if available) rather than point-in-time debt to avoid being misled by such dressing.
Trade Payables
Trade payables are amounts the company owes to its suppliers for goods and services purchased on credit. This line item is often split into dues to micro and small enterprises and dues to other creditors (per Indian law, MSME payables must be disclosed separately).
The level of trade payables can indicate the company’s purchasing volume and also how it manages payments. Stretching payables (paying suppliers slower) can be a source of short-term financing for the company (essentially using suppliers as a source of funds).
Understating trade payables is a straightforward way to make the financial position look better, it would understate liabilities and overstate profit (since an unrecorded payable often means an expense wasn’t recorded).
A company could achieve this by simply not booking supplier invoices in the period they relate to. This might be done near period-end: e.g., goods received in March, but the invoice is “mistakenly” recorded in April, so March’s books show lower payables (and higher profit, since the expense is delayed).
There is also the practice of using channel financing or letter of credit (LC) facilities: if a company’s supplier is paid by a bank (through an LC or bill discounting) and the company then owes the bank, sometimes companies gross that differently or temporarily omit it. In essence, window dressing of payables often goes hand in hand with overstating cash or understating expenses.
Real-life examples: A clearer example comes from the NSEL commodity scam (2013) – while not a manufacturing company’s trade payable scenario, it’s analogous: NSEL (National Spot Exchange) had obligations to pay investors for commodity contracts, which were like payables backed by inventory.
It turned out these “payables” far exceeded the real assets because the underlying inventory was fake or insufficient. Essentially, NSEL misrepresented its liabilities – when the bubble burst, ₹5,600 crore was due to clients that it couldn’t honor.
A more traditional example: small-cap frauds. There have been cases where companies vanish after running up huge trade payables to suppliers. One known modus operandi is a company orders a lot on credit, sells the goods for cash, siphons off the money, and never pays the suppliers, then the company folds. In the last published balance sheet, trade payables might look large (which actually would be a warning, not a pretty picture).
Cox & Kings, again, had issues here: it was reported that some of its payables (like certain defaulted vendor payments) were not fully reflected, tying to the ₹3,000 crore hidden liability mentioned earlier. Auditors in that case flagged that the company wasn’t providing accurate aging of payables and some liabilities were completely undisclosed or classified incorrectly.
A sudden spike in payables might indicate liquidity issues (they can’t pay bills, which is an honesty issue but signals distress). Always check if payables include any related-party amounts or unusual terms. In forensic analysis, large unpaid dues to small suppliers could hint at either poor working capital management or an intent to mislead by pushing payments out beyond due dates.
Other Current Liabilities
Other current liabilities encompass all short-term obligations that are not trade payables or short-term borrowings or provisions.
It often includes accrued expenses (expenses incurred but not yet billed, like accrued salaries, rent, or interest), statutory dues payable (like GST, TDS, PF that have been collected or are owed and must be remitted soon), advances from customers for goods/services to be delivered within a year, unearned revenue (deferred revenue) for the next 12 months, and the current portion of long-term borrowings (if the company chooses to show it here).
Essentially, this line is a mix of items: any kind of payment the company needs to make within the year that hasn’t been covered in payables or loans.
A notable misuse of customer advances was seen in the real estate sector during the last decade. Some developers collected huge booking amounts from buyers (shown as “Advance from customers” under other liabilities) but diverted the money elsewhere instead of building the homes.
When the projects stalled, those advances effectively became funds siphoned. For instance, a few high-profile Delhi and Mumbai developers (now in bankruptcy courts) had more customer advances than actual work done, a red flag that was sitting in “other liabilities”.
Another concrete example: Zee Entertainment in 2019 had an incident where an fixed deposit was encashed by a lender due to a related party’s default. In Zee’s books, before things were resolved, they had to show ₹200 crore as a receivable from that party and a payable to the bank under other liabilities (essentially a current liability that popped up unexpectedly). The disclosure of that in notes alerted investors to governance issues. If a company wanted to hide something like this, they might try to bury it.
Other current liabilities is a section to watch for unusual spikes or large unexplained amounts. A sudden increase could mean the company has taken large customer advances (good or bad?), or has big accrued expenses (maybe a sign of trouble if they’re deferring payments).
When analyzing, always parse the note: if “others” is a big number without breakdown, that’s a governance red flag. In scams, this category can be a dumping ground for misc. short-term obligations that management hopes won’t draw attention individually. A healthy balance sheet typically has a relatively small and stable “other current liabilities”.
Short-Term Provisions
Short-term provisions are similar to long-term provisions, except they represent estimated liabilities that are expected to materialize within the next year.
Common short-term provisions include provisions for employee benefits due within a year (like current portions of leave encashment, bonus provisions), provisions for taxes (current tax) if the company expects to pay additional tax for the fiscal year (after advance tax and TDS, etc.), provision for warranty claims that are expected to be settled within a year, and other provisions for restructuring or litigation that are likely to be paid soon.
Essentially, any anticipated expense or loss that is probable and can be reasonably estimated, which will happen in the short term, is recorded as a provision here.
Like long-term provisions, short-term provisions exist to adhere to prudent accounting by recognizing obligations when they are incurred, not when paid. By setting up a provision, the company acknowledges a charge to the P&L now for something that will be paid in the near future. This gives a more accurate picture of current period performance and current liabilities.
For example, if a company sold products this year that carry a 6- month warranty, it should set aside a provision for the estimated warranty claims rather than wait for claims to actually come (which might be next year). This ensures this year’s profits are not overstated. Short-term provisions therefore improve the accuracy of current liabilities and expenses.
The tactics here mirror those for long-term provisions, just on a shorter horizon. A company might under-provide for known short-term obligations to make the current profit look higher. One frequent area is the provision for expenses: at year end, many expenses are in process (electricity used but bill not received, or employee bonuses earned but not yet paid). If management wants to boost earnings, they might deliberately underestimate these accruals.
Real-life examples: One suspected case in India involved certain IT service companies historically deferring expenses like bonuses, by under-provisioning bonuses, they reported higher quarterly profits, then later “true-up” adjustments would hit.
A concrete instance of provisions playing into fraud was Satyam’s case: Satyam, when cooking its books, also created fictitious accrued liabilities (provisions) that it would later write back to inflate income. In the investigations, it was found that some “provisions” in Satyam’s accounts were not actually needed and were reversed to boost profits in later quarters, as part of the juggling.
Another case in point: telecom AGR dues, telcos were treating that as a contingent liability (no provision) for years. When the Supreme Court ruled against them, they had to take an enormous short-term provision for the payable, resulting in record quarterly losses. This revealed that prior period profits were effectively overstated by not provisioning for a very probable liability.
Investors should watch for unusually low provisions. For example, if a company with warranty obligations (say a car maker) suddenly shows much lower warranty provision as a % of sales than peers or past trends, it may be low-balling the estimate to puff up earnings.
Likewise, consistent big “write-backs” of unused provisions into other income could indicate they were historically over-cautious (good) or were creating reserves to draw upon (possibly dubious)
Non-Current Assets
Property, Plant, and Equipment (PPE) and Capital Work-in-Progress (CWIP)
PPE represents tangible fixed assets that a company uses in its operations and which have a useful life of more than one year. This includes land, buildings, factories, machinery, vehicles, furniture, and so on. It’s shown net of accumulated depreciation (except land which isn’t depreciated).
Capital Work-in-Progress (CWIP) is closely related, it represents capital projects that are under construction or not yet ready for use. For example, if a company is building a new plant or installing a new machinery line that isn’t finished by year-end, the costs incurred so far are put in CWIP. Once the asset is ready for use, the amount is capitalized to PPE. Essentially, CWIP is a temporary holding for ongoing capex.
Together, PPE and CWIP show the investment in physical infrastructure that the company uses to generate revenue.
Fixed assets can be manipulated in several ways, primarily through capitalization policies and asset valuations.
One major trick is overcapitalizing expenses: Companies can falsely boost assets by recording what should be a regular expense as part of the cost of an asset. For instance, suppose a company incurs ₹50 crore in repairs and maintenance, normally that’s an expense in the P&L. But management might improperly capitalize a chunk of it into PPE, saying it improves the asset, thereby inflating assets and profits (since expenses are lower).
Another manipulation: ghost assets, claiming an asset exists when it doesn’t, or inflating the value/quantity. In the notorious Satyam fraud, aside from fake cash, there were reports of Satyam having assets on its books that were not actually there (like computers, etc.).
Revaluation is another area: as discussed under equity, companies might revalue PPE (like land/buildings) to reflect fair value. While revaluation per se (if according to standards) is legal, it’s ripe for bias. Management could get an overly rosy valuation from a pliable valuer to boost the asset’s carrying amount. This increases PPE and creates a revaluation reserve in equity. It’s not through P&L, but it improves debt/equity ratios and can be used to justify more borrowing.
CWIP can be manipulated by parking costs indefinitely. If a project is essentially abandoned or impaired, it should be written off or provisioned. But companies might leave costs in CWIP for years, avoiding depreciation (since depreciation starts only when assets are put to use) and thus avoiding a hit to P&L.
This is a form of hiding expenses, especially interest costs can be capitalized to CWIP (Ind AS allows capitalization of borrowing costs for qualifying assets). If a project is stalled but the company continues to capitalize interest, assets bloat and interest expense is underreported.
Real-life examples: The infrastructure and power sectors in India around 2010-2015 had several instances of massive CWIP that never turned into completed assets. For example, Reliance Power raised funds for big power projects; some got shelved but a lot of expenditure sat in CWIP for a long time. Eventually, if a project is scrapped, that CWIP should be written off.
A distressing example was Lanco Infratech and some other infra developers, which went bankrupt, they had incomplete projects (CWIP) that were later found to be impaired. As a specific illustration, Jaypee Group had an under-construction power plant’s costs capitalized for years; when it became clear it wouldn’t be finished or profitable, there had to be a write-down, but until then the assets were likely overstated.
Another stark case: Kingfisher Airlines, they had a significant aircraft fleet on leases (off B/S initially) but also owned some assets. Post-closure, it was found many of their remaining assets (like spares, stores) were very scant compared to what was expected. In PPE, an example is they had capitalized a lot of expenses as preoperative expenses when starting international routes. Those were essentially losses deferred as “an asset”.
From a forensic perspective, consider asset turnover ratios: If a company’s sales are not commensurate with its PPE, it might signal idle or fake assets. For instance, if PPE jumped due to capitalization but revenue didn’t, the assets might be overvalued or not productive.
Tata Steel’s acquisition of Bhushan Steel – after takeover, Tata’s assessment of Bhushan’s plant value was lower than what Bhushan had recorded, Bhushan was under financial stress and had taken an impairment charge to show a healthy balance sheet.
Aggressive accounting in PPE can range from subtle (capitalizing borderline costs, slow impairment) to egregious (recording fictitious assets). Always check notes for capital expenditure details, related-party asset purchases (buying a fixed asset at an inflated price from a friendly party is a way to move cash out), and CWIP ageing, if CWIP contains projects that have seen no progress for long, the value is questionable.
Intangible Assets (including Goodwill)
Intangible assets are non-physical assets that still have value to the business, such as patents, copyrights, trademarks, software, licenses, franchise rights and goodwill.
Goodwill exists as a byproduct of acquisitions, it captures things like the acquired company’s reputation, customer relationships, know-how, etc., which aren’t separately identified as assets but are paid for. Investors look at intangibles to understand what portion of a company’s assets are “real” hard assets versus more nebulous ones.
If Company A acquires Company B for ₹100 Cr, But Company B has book value(Total Assets - Liabilities) of only ₹60 Cr then Company A records the premium it paid above ₹60 Cr, ~ ₹40 Cr as goodwill.
High goodwill indicates a history of acquisitions (and potential risk of overpayment if those acquisitions don’t perform).
Other intangibles can be acquired (buying a patent or a software license) or internally developed (though internally generated goodwill, brand value, etc., are generally not capitalized under Ind AS, except development costs under certain conditions).
Intangibles typically amortize (similar to how physical assets are depreciated) over their useful life, except goodwill which is not amortized under Ind AS but tested for impairment annually. Ind AS also has a category for Intangible Assets under Development, which is akin to CWIP, for example, ongoing software development that’s not yet ready for use.
Intangibles are often a playground for aggressive accounting. Goodwill, in particular, can mask problems until there’s an impairment. A company that overpays for an acquisition will record large goodwill. If that acquired business underperforms, accounting rules require a goodwill impairment (writing it down as an expense).
However, management might delay or avoid this as long as possible to not admit a mistake or hit earnings. This means carrying goodwill at inflated values longer than justified. There have been cases where companies repeatedly assert goodwill is fine, until one day a huge impairment hits (meaning all those years the assets were overstated).
For other intangibles, one manipulation is capitalizing costs that don’t qualify. For example, capitalization of R&D: Ind AS 38 allows development phase capitalization only if certain criteria are met (technical feasibility, probable future economic benefits, etc.).
If management bends these criteria, they might put a lot of R&D cost on the balance sheet as an intangible under development rather than expensing it. This inflates profit now and assets. IT companies could capitalize extensive software project costs, pharma companies could capitalize clinical trial costs.
Also, intangibles like brands: normally, internally developed brands are not recorded. But companies can record a brand value if they acquired it or through some revaluation (not common under Ind AS).
There’s an example: Kingfisher Airlines, which we touched on – it recorded its brand/trademark as an intangible asset valued over ₹4,000 crore based on a consultant’s valuation. This dramatically inflated its asset base. As we know, that valuation was vastly optimistic; lenders relied on it, but in reality upon Kingfisher’s collapse the brand was almost worthless (later valued at ₹100–200 crore).
Real-life examples: A clear one is Tata Teleservices (TTSL) 2018, they had accumulated a lot of intangible assets (mainly telecom spectrum licenses and goodwill from absorbing Tata Docomo etc.). When Tata Tele decided to sell its consumer business to Airtel, it had to reckon with reality: they took an impairment loss of ₹7,708 crore on assets in one quarter.
This essentially acknowledged that the intangibles on their books were far too high relative to what those assets could earn. It was a catch-up of years of losses into one big hit, implying prior financial statements were carrying inflated asset values.
Another case: Bharti Airtel acquired Zain’s Africa business in 2010, recording multi-billions of goodwill. After years of underperformance in some African regions, Airtel took impairment charges (e.g., in 2012- 13) on goodwill. Initially, management can justify no impairment with future plans, but at some point auditors or regulators might question it if performance lags.
Key red flags: A company with very large goodwill relative to its market cap or earnings (could signal impairment risk), rapidly growing capitalized intangibles (might be capitalizing costs aggressively), or an intangible asset that is hard to value (like a brand) carried at huge value. The Kingfisher brand example is cautionary, banks lent against an intangible that was likely overhyped, and they paid the price. Goodwill and intangibles require a lot of judgement; forensic-minded investors should track whether management assumptions (for impairment tests) are reasonable.
Non-Current Investments
Non-current investments are equity shares, bonds, joint venture stakes, or other investments that the company intends to hold for the long term (more than one year).
This can include investments in subsidiaries, associates, or JVs, strategic equity investments in other companies, debt securities meant to be held to maturity, investment properties held through investment vehicles, etc. Under Ind AS, investments are usually measured at fair value through profit or loss (FVTPL) or fair value through OCI.
This line would not include subsidiaries (since those are consolidated), but would include associates (under equity method, shown as one-line investment) and other investments.
Long-term investments can yield returns (dividends, interest) and can appreciate in value; they also might have synergy purposes. Listing them helps investors assess what hidden value might exist (like holdings in other companies) or what exposure the company has to other businesses or instruments.
Investment accounts can be manipulated primarily via valuation and impairment games.
If an investment’s fair value falls significantly (say the market price of shares held drops), Ind AS generally would require taking that hit (depending on classification). However, earlier under Indian GAAP, many investments were at cost unless permanent diminution was evident.
Even under Ind AS, if classified as FVOCI (fair value through OCI), declines may go to equity (OCI) rather than P&L, which could be less noticed by investors focusing on profit. A company might choose a classification or use valuation techniques to avoid showing a big loss.
For example, if an unlisted investment’s value fell, management has some discretion in estimating fair value, they might delay a write-down hoping it recovers, thereby keeping assets higher.
If the subsidiary is performing poorly, the parent should impair that investment. Not doing so is a form of denial that keeps the parent’s assets and net worth inflated. Many Indian companies have long carried investments in units that have eroded net worth, without writing them down until very late. This is manipulation by omission.
Another avenue: round-tripping or parking funds under guise of investment. There have been cases where companies invest in each other to inflate assets. For instance, Company A might buy shares of Company B and Company B buys shares of Company A – both show higher investments (and maybe even book gains if valued up), but it’s essentially circular and can unravel if one side pulls out.
Relatedly, Evergreening loans via investments: a company might “invest” in preference shares or debentures of another entity owned by promoters, which in substance is a loan. By calling it an investment, they may not classify it as a loan (to avoid provisioning or NPA tagging). This happened in some NBFC-related party transactions.
Real-life examples: A vivid example is from the financial scandal at IL&FS. IL&FS and its group companies had numerous cross-holdings, one entity would invest in another’s equity or preference shares. These investments were used to mask lending and siphoning. When IL&FS collapsed, many such investments had to be written off, revealing that assets were overstated.
Another case: Videocon Industries in its later years showed large investments in subsidiaries/joint ventures (like overseas oil ventures). Many of those turned valueless, but Videocon didn’t impair them timely, giving an impression its asset base was strong when it wasn’t. Eventually, in bankruptcy, those were recognized as near zero.
On cross-investment shenanigans: A classic stock market ploy in India involved groups like the Ketan Parekh era stocks, where companies in a circle would own shares in each other (forming a web of investments). This propped up share prices artificially and also gave them assets on balance sheets (shares of fellow companies) that were valued based on market prices that they themselves were manipulating, a dangerous self-reinforcing scheme. When that bubble burst, those investments became near worthless, decimating the balance sheets of all involved.
Always read the notes for investments: who are the investees, are they related parties, and how are they doing? That can reveal potential overstatement or even conflict of interest transactions via that line.
Deferred Tax Assets (Net)
Deferred Tax Asset (DTA) is the opposite of DTL, it represents taxes that have been paid or recorded in accounts but are recoverable in future periods, or future tax savings due to current losses or timing differences. A DTA arises when accounting income is less than taxable income.
Suppose a company sells electronics and estimates ₹2 lakhs in warranty costs this year.
For accounting, it records ₹2L as an expense immediately (conservative estimate).
For tax, the government only allows deducting actual warranty expenses when paid, say ₹0.5L this year.
So:
Accounting profit is lower (because of ₹2L expense).
Tax profit is higher (only ₹0.5L deducted).
Difference = ₹1.5L × 30% = ₹45,000
That’s a Deferred Tax Asset, because in the future, when the remaining ₹1.5L is paid out, you get a tax relief.
This happens because the company takes the average estimated warranty cost, whereas the tax department only lets you deduct the actual expense.
In the future when warrant costs rise, your taxable profit declines while your accounting profit remains higher because you have already accounted for higher costs, allowing you to pay lower taxes.
Another case is if a company has tax losses that it can use to avoid taxes on future profits, it records a DTA for those losses (to the extent it is probable it will use them)
On the balance sheet, DTA is often presented net of DTL if from the same jurisdiction (the line might say “Deferred tax assets (Net)” or “Deferred tax liabilities (Net)” depending which side prevails after offset).
The judgment of recoverability is key. Under Ind AS (like IFRS), you can only recognize DTA if it’s probable you’ll have future taxable profit to utilize it. Companies can be overly optimistic in this assessment.
A struggling company might still record a large DTA for losses, effectively assuming it will bounce back. This inflates net assets and can boost profit (because forming a DTA often comes via recording a tax credit in P&L for the loss carryforward). If those profits never materialize, the DTA is impaired later, in the meantime, the balance sheet looked stronger than it was.
Another subtle manipulation: timing of recognizing DTAs, companies might recognize a DTA on say MAT (Minimum Alternate Tax) credit or other items in a period where they need a boost to earnings. That adds to PAT (as a tax credit) and to assets.
Real-life examples: Many Indian companies in cyclical or downturn-hit sectors have carried large DTAs. For example, several public sector banks around 2015-2018 had huge DTAs on their balance sheets arising from years of bad loans and losses. These were allowed by accounting since theoretically they’d return to profit. But if a bank was near insolvency or needed merger, those DTAs were questionable.
When Bank of Baroda merged with Dena Bank and Vijaya Bank (2019), the combined entity had to reassess DTAs of the weaker banks. If I recall, some write-down of DTA happened because maybe not all could be used within time.
Another case: telecom companies after the AGR ruling, Vodafone Idea had astronomical losses creating a giant DTA (because of spectrum fee write-offs and such). However, given its precarious condition, one might question if it will ever earn enough to use that DTA. Investors usually discount such DTAs entirely if the business outlook is poor, but the company’s balance sheet might still show it until a formal impairment.
Similarly, MTNL/BSNL (telecom PSUs) in their statements often carried DTAs on huge losses hoping for future profits that never came; eventually, these became useless and would be written off against government bailouts or so.
Tata Motors a few years ago had to write off some deferred tax assets in its Indian operations because of sustained losses (they had accumulated tax losses but weren’t sure of utilizing them fully as domestic business struggled). Indeed, Tata Motors in 2019 took a one-time hit partly because it reassessed deferred tax assets amid losses.
Overall, while DTA is not a flashy item, it can be significant. A manipulative management could use DTA recognition as an earnings management lever. For instance, a company just missing consensus profit estimates might suddenly recognize an extra DTA because they now believe future profits will allow use of more past losses and voila, a tax credit increases profit this year.
This is hard for outsiders to challenge, but one can monitor the consistency: if a company repeatedly increases DTA when in loss but then never turns enough profit to use it, eventually an implosion or correction is likely.
Long-Term Loans & Advances / Other Non-Current Assets
Long-term loans and advances would cover things like loans given to employees or other parties that are not due within a year, security deposits (e.g., deposits for electricity or rental deposits which will be returned at contract end), advance payments for capital expenditures, or inter-corporate loans to other companies expected to be received back after a year.
Other non-current assets can include items like capital advances (money paid to suppliers for capital goods, where delivery will happen after a year), prepaid expenses that are long-term (maybe prepaid multi-year insurance).
Essentially, this category is a catch-all for long-term receivables and misc. Assets.
This line is often fertile ground for parked funds and related party dealings. A classic abuse is using loans & advances to siphon money.
For example, a company controlled by Person X might give a “loan” or advance to another private entity also controlled by Person X (or his family) under the pretext of some business purpose. This loan sits on the balance sheet as an asset (the company claims it will get it back). In reality, that money might be misused or round-tripped. By keeping it non-current, there’s less pressure to demand immediate repayment, and it may escape attention for a while.
This was exactly the method in the Fortis Healthcare scandal (2018): over several years, Fortis gave inter-corporate deposits (ICDs) and short-term loans totaling about ₹400 crore to companies controlled by its promoters (the Singh brothers).
These were recorded as “loans and advances” in the assets. Fortis’s cash went out the door, but on the books it still appeared as an asset, so things looked normal – until it was exposed that these advances were given under false pretenses and likely wouldn’t come back. Auditors refused to sign accounts when they found large unexplained advances like these.
Similarly, Reliance Communications was found to have transferred thousands of crores to related parties, likely some of that through inter-corporate loans that were not recoverable.
Satyam Computers did a version of this: Raju invested company money into real estate (land) via front companies, effectively advances for land purchases. When Satyam blew up, one of the revelations was huge amounts parked in what looked like advances for land acquisition (an asset), which were part of the misappropriated funds. These had to be eventually written off as they weren’t genuine recoverable advances.
Also, DHFL (Dewan Housing Finance Ltd): While an NBFC’s balance sheet is mostly loans, the scandal there showed creation of a dummy branch and fake loans ~₹29,000 crore to shell entities. Those appeared as assets (loans) on DHFL’s books. Because they were long-term housing loans, they sat as non-current loans over years, completely fraudulent entries to siphon money.
It underscores how easily “loans & advances” can be misused to remove cash while keeping an illusory asset recorded.
Investor tip: Look for large related-party loans in the notes. SEBI mandates disclosure of related party transactions; if Company A has given ₹100 crore to a promoter-owned entity as a loan, that will usually show up. If you see that, it belongs to this line item and is a big flag – as seen in Fortis, Cox & Kings, etc. Also, check if old advances keep recurring: e.g., year after year “Capital advances” of X amount to some vendor remains on books, ask why the project isn’t done or money recovered.
Loans and advances can be “the black hole of the balance sheet”, money goes in and doesn’t come out, yet accounting says it’s an asset. Many Indian financial frauds were executed exactly through this line, making it one of the most critical to scrutinize.
Current Assets
Current Investments
Current investments are investments that are readily realizable and intended to be cashed or sold within a short period (typically within 12 months).
These often include mutual funds, short-term bonds or deposits, marketable securities, or even shares that the company holds as a temporary parking of surplus cash. In many companies, surplus cash is parked in liquid mutual funds or bank deposits, these would be current investments (or sometimes classified under cash equivalents if very short term).
Under Ind AS, these are usually measured at fair value through P&L, meaning fluctuations in value affect profit.
Companies often optimize cash management by investing excess funds in short-term instruments to earn a return until the cash is needed for operations or capex.
There’s less opportunity for outright fraud here compared to other assets because these are typically in the form of liquid, well-tracked instruments.
One has to watch out for valuation tricks: If investments are not actively traded, valuation could be subjective. Usually current investments are in liquid things, but say a company invested surplus in a startup’s convertible debentures planning to sell in a year, valuing that at period end can be judgmental. They might overvalue it to avoid a loss recognition.
By and large, current investments aren’t usually the focal point of accounting scandals, they’re too transparent if in legit instruments. The bigger risk is when companies use this category to do something unconventional with cash.
For example, DSQ Software (an early 2000s scam) diverted money to buy shares (as investments) in various dubious outfits as part of a stock price rigging scheme. On the books it might have shown up as shares in other companies (current investments) when in fact it was a way to funnel money to promoters and manipulate stock float.
Investors should check the details: Is a large chunk of “current investments” actually in a related party or unusual instrument? If a software company has ₹500 crore in “investments” but those turn out to be high-risk corporate debt or lent to a promoter-group entity labeled as CP, that’s suspect.
Also note the yield: if interest income seems low for the supposed cash level, maybe some “investments” aren’t yielding because they’re dud – implying they might be impaired assets in disguise.
A clean balance sheet will have current investments in safe, liquid funds or deposits; a red flag is exotic or opaque placements.
Inventories
Inventories are stocks of goods and materials that a company holds for the purpose of sale or production. It encompasses raw materials, work-in-progress (WIP), finished goods, and also stores & spares or consumables in some manufacturing contexts.
Trading companies will mainly have finished goods (merchandise) inventory. Inventory is a current asset because it’s expected to be sold or consumed in the company’s operating cycle (typically less than a year). It’s usually valued at the lower of cost or net realizable value, as per accounting standards, to avoid overstatement.
By analyzing inventory, one gauges efficiency (inventory turnover) and potential issues (like obsolescence). A healthy inventory level aligns with sales; too high might indicate slow sales or overproduction, too low might signal shortages.
Inflating inventory is one of the oldest tricks to boost financial appearances. Overstating inventory directly inflates profits because of how cost of goods sold (COGS) is computed: Beginning Inventory + Purchases – Ending Inventory = COGS. If ending inventory is overstated (too high), COGS is under-reported, hence profit is higher.
There are multiple ways to manipulate inventory:
Counting nonexistent inventory: Literally fake the counts. This could be done by creating false inventory records or moving the same batch of goods around different warehouses during audit counts. In extreme frauds, companies have created fictitious warehouse receipts or bills. .
Capitalizing costs into inventory improperly : Some companies may shove general overhead or even R&D costs into inventory (like into WIP) to defer expenses. For example, a construction firm might park project overhead in WIP when it’s not directly related, thus boosting inventory and profit in the short term.
Fictitious inventory purchases at period end: A trick to inflate inventory and accounts payable is to record fake purchase invoices for goods (to boost inventory) that were never received. This increases inventory and payables. If the goal is to inflate assets (maybe to meet bank covenants), one could do this and later reverse it (the payable gets written off or the inventory is written off next period)
Real-life examples: The NSEL scandal was exactly about that, brokers sold commodities that weren’t actually in the warehouses; when investors went to claim, the goods weren’t there. People thought there was sugar, rice, etc. backing contracts (NSEL showed inventory via warehouse receipts), but it was fake or inflated.
Manufacturer manipulations: In heavy industries, one common issue is to overproduce and stockpile inventory to absorb fixed costs (i.e., keep factory running to defer expensing overhead to COGS, since inventory absorbs it). If you then overstate how much of that inventory is usable, you’re essentially deferring expenses.
For example, a steel company might keep producing even if demand is low, pile up steel in yards (some of which might degrade or be unsellable), yet keep it valued at cost. Financially it looks like assets are high and costs are normalized, but in truth there’s a hidden loss when that inventory eventually has to be sold at a discount or written off.
Inventory is a common area for cooking books because physical verification can be lax or manipulated. Investors should watch for signs like: inventory growing much faster than sales (could indicate potential overstatement or obsolescence), gross margins suddenly improving (could be lower COGS due to inflated inventory), or very high inventory levels relative to peers (maybe they’re capitalizing too much into inventory).
An example red flag: if days inventory outstanding (DIO) shoots up without explanation, check if they are piling up unsold goods (possible future write-downs) or if something fishy is going on. In audits, inventory fraud is usually caught by surprise counts or third-party confirmations.
Companies have tried clever moves (there are anecdotes like moving the same stock to multiple locations to double-count, or painting empty boxes to look like full crates during audits). Where there’s a will, there’s a way, inventory manipulation has been at the heart of many corporate frauds worldwide (e.g., the famous Leslie Fay case in the US, etc.) and India is no exception.
Trade Receivables
Trade receivables (debtors) are amounts owed to the company by its customers from sales of goods or services on credit. After a company delivers its product or service, if it doesn’t collect cash immediately, it records a receivable until the customer pays.
Offering credit is a normal business practice to facilitate sales, few/none B2B transactions are cash on delivery. The level of receivables shows both the company’s sales volume on credit and its credit policy effectiveness.
Analysts watch receivable days (Average Receivables / sales * 365) to gauge if the company is collecting money timely or allowing too lenient credit (or worse, struggling to collect).
Inflating receivables is one of the most direct ways to inflate revenue and profit, just book fake sales (with corresponding fake receivable) or accelerate revenue recognition. Fictitious sales will sit as receivables (since no real cash comes).
Fraudsters might create bogus customer accounts and invoices to record revenue; this props up sales and profit, and the balance sheet shows higher receivables. They might even collect some initial round of cash to make it look legit (round-trip funds), but often these receivables age and eventually are written off once the scheme collapses.
Satyam Computers epitomizes this: Raju confessed that they had created fake invoices and falsified customer accounts to inflate revenue. As a result, Satyam’s reported trade receivables were massively overstated (since those customers and bills were fictitious). To support the lie, they even created fake bank statements to show collections that never happened. That’s an extreme case: tantamount to creating an entirely false layer of business.
Not writing down bad debts is another manipulation: management might know some customers won’t pay (so those receivables are bad), but delay making a provision or write-off to avoid hitting the P&L. That overstates assets and past income.
An example: Deccan Chronicle Holdings (a media company) before it collapsed had a large trade receivable (and loans) that were likely uncollectible, but they hadn’t provided for them, painting a healthier picture. Once default came, huge write-offs followed.
Moving receivables off-books: Some companies use factoring, selling receivables to a financier. If done with recourse and they still bear risk, they should ideally still show it or at least disclose. Aggressive accounting might hide debt by factoring receivables: you get cash, receivable goes off balance sheet, but if you quietly have guaranteed it, it’s like a hidden liability
Real-life examples: Zee Entertainment had a more nuanced but very public receivables issue: by FY2019, Zee had accumulated about ₹700 crore in receivables from related entities Dish TV and Siti Network (both part of Essel group, along with ZEE).
This raised investor concerns that Essel Group was shuffling money, essentially, Zee sold content or services to these sister companies on credit (boosting Zee’s revenue and receivables), but those companies were in weak financial shape, so collection was doubtful. Indeed, Zee had to eventually provide for some of these or get a repayment plan.
The overhang of these related-party receivables hammered Zee’s stock, demonstrating how investors view aggressively high receivables as a red flag.
Another case: Cox & Kings (travel). It had reported significant receivables (from what, one might ask, since travelers usually pay upfront). Turns out many might have been from related entities or just bogus. The PwC forensic audit found that receivables and revenue numbers were manipulated to window-dress the company’s financials.
Key forensic clues: A jump in receivables without a corresponding jump in revenue (or far outpacing revenue growth) is alarming. Days Sales Outstanding (DSO) spiking suggests either the company loosened credit to boost sales or started booking revenue earlier. For example, if DSO goes from 60 to 120 days, either customers are struggling to pay (indicating potential bad debts) or the company stuffed channels.
Also, large related-party receivables are big warning signs (like Zee’s case). If a substantial portion of receivables is owed by entities under the same promoter, one wonders if those are genuine sales or funds moved around.
Another sign: receivables written off shortly after being recorded, that means they were never collectible (pointing to possibly fake initial sale). Patterns like booking huge Q4 sales and then quietly taking credit loss next year.
In sum, trade receivables are a frequent casualty in accounting scandals, either being inflated or not properly impaired. It directly ties to revenue recognition, anytime revenue is suspect, receivables will be too, as they are two sides of the same coin in credit sales. We have to watch both quality (aging, related parties) and quantity relative to sales.
Cash and Cash Equivalents
Cash and cash equivalents represent the most liquid assets of the company, actual cash on hand, balances in bank accounts, and short-term, highly liquid investments that are readily convertible to known amounts of cash (typically with original maturity of 3 months or less, like treasury bills or very short-term money market funds).
Some industries maintain high cash for working capital; others might have low if they operate on negative working capital (like retail taking cash upfront).
Stakeholders look at cash to gauge solvency and also how much “dry powder” the company has for expansion, debt repayment, or weathering downturns.
Faking cash balances is a notorious fraud technique because cash is a highly trusted asset, after all, what’s more straightforward than cash?
The most infamous case is Satyam: they created fake bank statements and FD certificates to claim huge cash and bank balances that didn’t exist. Investors and auditors saw over ₹5,000 crore of cash on Satyam’s books and assumed the company was extremely liquid, whereas in reality that cash was fictitious.
How can one fake cash?
Through forged bank confirmations, false bank accounts under the company’s name controlled by insiders, or simply a web of lies counting on auditors not independently verifying all accounts.
Satyam’s auditors relied on fixed deposit receipts handed to them by management (which were bogus) and confirmation emails allegedly from banks that were actually from dummy accounts. This shows collusion can undermine even straightforward line items.
Another manipulation is Not disclosing restricted cash properly: Companies might include in “cash and equivalents” some amounts that are not freely available (pledged as collateral, or held in escrow). If they don’t clarify, one might assume more free cash than reality.
For instance, some infrastructure companies had large cash, but much was DSRA (debt service reserve accounts) which are effectively locked for lenders – if not disclosed, it’s misleading.
Real-life examples: We’ve already cited Satyam, it’s the hallmark case of fake cash in India. It had reported over $1 billion in cash that wasn’t there. Another company, Metrobank (not in India), had similar issues, but focusing on India: Shraddha Sarees scam (1990s) was where promoters cooked up bank balances, but that’s old and small
Cash is ironically one of the simplest yet historically most manipulated items because if you can fool the oversight, it’s hard for others to doubt a cash number (it’s either there or not, we think). Satyam’s fallout changed that, now auditors often independently verify big bank balances.
Yet, small companies and even big ones with collusion can still attempt to cheat. The presence of big 4 auditors and tighter norms has reduced blatant cases, but investors should still be vigilant
Short-Term Loans & Advances / Other Current Financial Assets
This category includes various receivables and short-term advances not classified under trade receivables.
It can cover loans given to employees or other companies repayable within a year, advances to suppliers for goods/services to be received in the near term, security deposits that are short-term, interest accrued on investments, and other financial assets like receivables from related parties (not trade).
Essentially, any short-term amount the company expects to get back that isn’t from a normal sale. It might also include things like claims receivable, short-term ICDs (intercorporate deposits), or current portion of long-term loans given.
This line is another favorite hiding spot for dubious transactions, similar to the non-current version but on a shorter leash. Siphoning funds via advances is common: money is moved out as an “advance to supplier” or “loan to other entity” with the ostensible expectation it will return. If management doesn’t intend to get it back (siphon), they may keep rolling it or writing it off eventually as some expense.
Related-party mischief: Many Indian firms had a practice: “advances recoverable from employees or others” which were actually amounts given to people who acted as conduits for promoters.
One famous case is the Singh brothers with Ranbaxy and Fortis, they allegedly took out money through layers of advances to shell companies controlled by them.
Another is Vakrangee Ltd, accused by short-sellers of giving large advances to vendors who were related or didn’t deliver, possibly to siphon cash (Vakrangee denied wrongdoing, but the unusual advances raised eyebrows).
Real-life examples: Fortis we covered, Religare Enterprises (financial services firm) had a scandal where its promoters routed money out through short-term loans to shell companies, similar to Fortis (the Singh brothers were involved there too).
They took funds from Religare’s NBFC arm to entities that looked unrelated but were promoter-controlled – shown as short-term loans on asset side. When Religare couldn’t recover them, it imploded. SEBI and SFIO investigations found those advances were fraudulent.
Cox & Kings had short-term lending (589 Cr to related parties without agreements. These sat as short-term loans. They also extended ₹1,100 Cr loan to Alok Industries (a distressed firm) for no reason, likely a short-term arrangement to siphon or do favours (Alok’s CFO was brother of Cox & Kings CFO).
Zee Entertainment, the snippet from their results had an interesting note: they gave an inter-corporate deposit of ₹150 Cr to a group, which got reassigned to related parties and eventually provisioned. This is exactly the type of short-term advance misuse, Zee had parked ₹150 Cr as an ICD (short-term loan) to someone; recovery was delayed, they provided for it (took an exceptional loss).
Investor watch-outs: Large “loans and advances to related parties” = giant red flag.
Frequent large advances to suppliers that remain unadjusted = potential sham.
If “other current assets” is a big chunk of current assets, dig into notes.
Often it’s benign like GST credits or prepaid expenses, but if it’s major, ensure it’s not a disguised loan. Also, a sudden spike in such advances can signal last-minute cash diversion (say in last quarter insiders pull cash under guise of advance).
Other Current Assets
Other current assets typically include non-financial current assets that haven’t been captured in receivables or cash.
Commonly, this includes short-term prepaid expenses (payments made for services to be received within a year, e.g., prepaid rent, insurance), advance tax and GST credits pending (like input tax credits that will offset tax payable soon), other recoverable taxes (VAT/GST refunds receivable within a year), and sometimes assets held for sale (if a small asset is being sold and expected to close within a year, though often that’s shown separately).
It can also include accrued income (like if some income is earned but not yet invoiced, e.g., interest accrued on a deposit maturing soon).
Manipulation in this category often overlaps with what we discussed for advances: it’s about classification and hiding. It might not independently be the star of a fraud, but can be a supporting actor (to plug a hole or route funds).
For thorough analysis, any significant amount here demands explanation: e.g., if 20% of current assets is “others”, find out what that is. Many times, it’s just taxes paid in advance or prepaid expenses, which is fine. If it’s not, then perhaps there’s more to the story.
Conclusion
Mastering the balance sheet is less about tallying columns and more about sharpening your judgment as an investor or steward of capital. Beneath every line — asset, liability, or equity — lie stories of ambitions fulfilled and corners occasionally cut. The nuances of Indian Accounting Standards (Ind AS) do not just offer a framework for disclosure; they often reveal where management’s optimism ends and reality begins.
We’ve walked through the anatomy of each balance sheet component, using real-world examples to highlight both strengths and blind spots in corporate reporting. Along the way, we’ve seen how a number can flatter or mask, how reserves can be built or raided, and how a creative accountant might try to keep uncomfortable truths out of the limelight.
Ultimately, your ability to spot these patterns, to question the outliers and dig deeper when something feels “off”, remains your best defense against misrepresentation. Treat each note and footnote as an invitation to look past the obvious. The knowledge you’ve gained here is valuable not only for flagging potential pitfalls, but also for uncovering underappreciated strengths within a business.
As you apply these insights, remember: sound analysis is about staying curious, skeptical, and, when the numbers call for it, willing to challenge accepted narratives. By doing so, you contribute to a culture of transparency and wisdom in financial decision-making, both for yourself and those who rely on your judgment.
Honestly, a fantastic read
🙌 Brilliant post, Mannsher. Easily one of the most insightful breakdowns of the balance sheet I've come across. Looking forward to more of your work.
I do have a few questions I'd love your thoughts on:
1. Cash manipulation – How can we identify if a company is playing games with its cash position, especially tactics like window dressing (e.g., paying off liabilities just before the reporting date to inflate PAT)?
2. Bill discounting – How to find if a company might be using bill discounting to fudge numbers or inflate cash flows?
3. Non-controlling interest (NCI) – Any signals that suggest manipulation or misrepresentation of NCI on the balance sheet?
4. Lastly – and I could be wrong here – but is it fair to say that a good starting point for spotting forensic shenanigans is checking whether CFO (Cash Flow from Operations) closely tracks reported PAT? Or are there nuances that make this unreliable?
Would really value your perspective.