As discussed in the Q3 concall, I asked RACL to clarify the OCF accounting issue via email. I received a reply from the company yesterday. Reproducing the text of my email below. Based on this reply and the couple of posts above, I am considering the matter closed for now.
Hello Prabh,
Good morning. This is Nirvana reaching out as discussed to get a clarification on the method used for OCF calculation for RACL Geartech. Please find my original email below which highlights the difference in treatment of taxes in FY18 and FY19 and in general the unconventional practice of calculating OCF by starting with PAT and then adding taxes.
I request you to provide the following clarifications so that the matter stands resolved and understood
- Till FY17 RACL used to calculate OCF via the conventional method – starting with PBT and subtracting taxes paid. Why was this practice changed starting in FY18?
It was our auditor’s opinion as per their understanding to changes to the IND AS7
- In my opinion, the present method used to calculate OCF for the company may be overstating the OCF by the amount of taxes paid because the calculation starts from PAT and then again adds back taxes, which in my opinion amounts to pre tax cash flows, not post tax cash flows. Please clarify this and correct my understanding if wrong.
I don’t think anything is being overstated. Its a way of presentation. If you start with PBT then you subtracting taxes, if you are starting with PAT you are adding taxes, end impact is same.
- In the call Mr. Singh mentioned it would be a good idea to go back to the conventional method of calculating OCF starting from PBT. Can we expect the FY23 annual report to present OCF using the conventional method?
Yes, we are going to start cash flow from PBT from FY23 onwards
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