ACCOUNTING REFORMS IN INDIAN RAILWAYS

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ACCOUNTING REFORMSININDIAN RAILWAYS
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NEED FOR ACCOUNTING REFORMS

• Economic transition in India and expectations of
  users of IRs financial statements.
• IRs need to improve the quality of financial
  statements, procedures and policies in view of
  changes like declining market share, competition
  from other modes of transport.
• The need to achieve high level of investors
  confidence particularly in the context of IR
  seeking out private investments/PPP.

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NEED FOR ACCOUNTING REFORMS (contd)

• To adopt Internationally accepted rail industry
  accounting practices.
• Conformity with accounting standards set by
  Govt. Accounting Standards Advisory Board
  (GASAB)- India.
• For the prognosis of loss making Railway lines,
  Rail services/activities.

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NEED FOR ACCOUNTING REFORMS (contd)

• For facilitating computation of subsidies to be
  claimed from the Govt. for safe and mandatory
  upkeep fixed rail infrastructure.
• To provide a rational basis for identification of
  joint costs and its allocation.

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NEED FOR ACCOUNTING REFORMS (contd)

• To facilitate reorganisation of accounts of the
  seven major segments of rail service providers
  viz.

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OBJECTIVES OF ACCOUNTING SEPARATION

• Inter Lines of Business (LOB) and Inter Lines of
  Service (LOS) competition.
• Rational pricing mechanism
• Competitive inter-service and intra-rail pricing
• Facilitate cost analysis by Lines Of Services
  (LoS) and sub-services within these Lines of
  Railway Services
• Establishing each Line of Business/Line of
  Service as a separate profit centre.

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ACCOUNTING REFORM PROJECT CONSULTANCY CONTRACT

• ADB Funded Project (part of Rail Sector
  Improvement Project).
• Project Cost Rs. 18.31crs.
• Contract awarded to a consortium consisting of
  Ernst Young, SNCF, Wipro, M/s SF Ahmed Co.
  Bangladesh and Mr. Murali in February, 2006.
• Contract commenced in April 2006.
• Project to be completed in 30 months.

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TERMS OF REFERENCE

• to give recommendation for restructuring
  accounting system, facilitating a complete
  accounting separation of the seven major
  profits centre anchored on the lines of
  business
• that will encourage each segment to generate
  dynamism independently and synergize the
  inter-segment competitive process

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TERMS OF REFERENCE Contd.

• by means of an acceptable accounting architecture
  together with the framework for a chart of
  accounts that will present IRs financial
  statements in conformity with the commercial
  accounting standards internationally adopted in
  rail industry and also enable restatement of
  those financial statements into ones that conform
  to government reporting requirements

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TERMS OF REFERENCE (Contd.)

• Support existing government reporting
  requirements and meet the Governments
  Accounting Standards Advisory Board (GASAB).
• provide activity based revenue and cost data
  which would be capable of identifying and
  mitigating systemic, maintenance and operating
  inefficiencies.
• and so on.

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CURRENT STATUS OF THE ACCOUNTING REFORM PROJECTS

• The consultants submitted the Inception Report
  in May, 2006.
• The Current State Report was submitted
• by the Consultants in August 2006.
• The Mid-term Report was submitted in January,
  2007.
• Draft Final Report was submitted in May, 2007.
• Revised draft Final Report was submitted in
  July, 2007.
• The Final Report is yet to be submitted.

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The Salient features of the Consultants
recommendations in the Draft Final Report

• The LOSs identified by the consultants under each
  of the LOBs are
• INFRASTRUCTURE
• Construction and Maintenance of P. Way, ST, OHE
  and other fixed assets, Access and Train
  Planning, Scheduling and control
• NON-SUBURBAN
• Main/Express ACC, Mail/Express 1st AC,
  Mail/Express 2nd AC, Mail/Express 3rd AC
• SUBURBAN
• Western Line Class 1, Western Line Class II,
  Central Line Class 1 Central Line Class II

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• FREIGHT
• Coal, Fertilizer, Iron ore, Steel, Cement,
  Mineral Oils, Grain, Containers Others
• MANUFACTURING
• Diesel locomotives, Electrical Locomotives, EMUs,
  DMUs, Coaches, Wagons, Axles ,etc.
• MAINTENANCE
• Major refurbishment, Scheduled Maintenance,
  Unplanned Maintenance, General Services others
• NON-CORE SERVICES
• Railway Schools, Railway Hospitals, Rest Houses
  and institutes, RPF establishment and so on.

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• Fixed Infrastructure costs to be charged to
  operating LOBs (Sub-urban, non sub-urban and
  freight) on access Charge basis
• Maintenance to be offered under Service Level
  Agreements
• 4. Recovery of costs incurred by support services
  on monthly basis

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• 5. Charges for use of facilities owned by other
  LOBs.
• 6. A Sale invoice to automatically generate 4
  sets of double entries
• a. Sale and receipt in books of the vendor LOB
• Purchase and payment in books of the buyer LOB
• Transactions are to be billed and paid
  automatically.

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• 8. Aligns Coding Structure of Indicative Chart
  Of Account (ICOA) to LOBs.
• 9. Double Entry Accrual-based and general ledger
  systems of book-keeping via subsidiary ledgers.

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• 10. Subsidiary ledgers and cost accounts for
  Stores, Fixed Assets, Cash Book,
  Manufacturing, Maintenance, Purchases, Sales,
  Payables, Receivables, Construction Accounts and
  contract ledgers.
• General Ledger will be a Summary Ledger which
  will not have individual transaction details
  that are captured in the subsidiary ledger and
  cost accounts.

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• Costing module is separated from accounting
  module though interface provided.
• 13. IR to value its assets and quantify Long
  term Liabilities - compilation of assets
  register assumes critical importance

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• 14. IR to adopt Institute of Chartered
  Accountants of India (ICAI) Standards and keep
  pace with transition to International Financial
  Reporting Standards (IFRS)
• 15. Will support Govt. Reporting requirements
• 16. BUDGETS shall continue to be presented in
  the current formats

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• Existing IT systems of other departments
  including Payroll, PRS, FOIS, Crew/Power
  Recording etc. have to be interfaced with the
  General Ledger of the proposed accounting system
• Cost Ledgers would be linked to General Ledgers
  through summarizing journals on a monthly basis

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The Salient features of the Consultants
recommendations in the Draft Final Report Contd.

• 19. Each Job to be costed against an asset or a
  service (Identified by a unique fixed asset code)
  and TAMS (Total Asset Management System)
• 20. IR to provide monthly information on physical
  parameters like GTKM, NTKM, LKM, TKM etc.
• a. To create interfaces to extract data from
  current systems
• b. Actual Train service level data on monthly
  basis

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ROAD MAP FOR IMPLEMENTATION

• 1. Comments of the Railway Ministry based on the
  feed back received from FACAOs draft Final
  Report have been communicated to the
  Consultants. These comments broadly include
• The core of the existing F2 (Finance Code
  Volume II Revised Accounting
  Classification) is to be retained as far as
  possible and through necessary
  expansion/modification/regrouping of F2 the
  proposed reform has to be carried out.
• The accounting reform has to be accomplished
  within the existing vertically integrated
  organisational structure of IR and
  corporatisation of railways as suggested by
  the consultants for implementing the proposed
  reforms is beyond the mandate of the
  assignment.

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ROAD MAP FOR IMPLEMENTATION (Contd.)

• Ability of the recommended system to meet the
  requirement of government accounts and related
  reporting needs has to be demonstrated through a
  pilot study to be done in one of the zonal
  railways
• The consultant has indicated a period of 99
  months for the complete implementation in three
  stages viz. HQ general ledger, enterprise-wide
  accounting system and roll out across IR
• The cost of implementation of the proposed reform
  in terms of hardware and software procurement,
  training and other infrastructure has to be
  quantified by the consultants

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ROAD MAP FOR IMPLEMENTATION (Contd.)

• A counter part team from the railways is under
  constitution to enable intense and regular
  interaction with the consultants for commencing
  the implementation

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