Insights

Reported financials have to follow accounting guidelines when they are presented to investors. However, while analyzing, it is important for an investor to make necessary adjustments to the reported numbers in order to make them relevant and understand the underlying economics of the business. 

Below is case study of SBI Cards wherein we discuss how the accounting policies and changes therein impact the reported profits vis-a-vis economic profits of the business. 

Customer Acquisition Costs 

Credit card companies incur customer acquisition cost which comprise of:

a. Costs for acquiring customers through various channels and 

b. Marketing cost – costs for advertisements and discounts or cashbacks offered. For SBI Cards, these cost mainly form part of “Advertisement and Sales promotions”. This has shown an increasing trend as % of total income over years. 

How has SBI Cards been accounting for these costs? 

Till 2014 – Amortized over a period of 12 months

Change in 2015 – Recognizing upfront – as and when incurred

Change in 2019 – Adopted Ind AS norms – Amortizing over the behavioral life of the customer

 How has Ind AS impacted the profitability? 

• The change has led to PBT under Ind AS being higher by ~ 15.4% on average during 2017-19 period. 
• Impact on RoE is not significant, since along with lower PAT even the denominator i.e. net worth is lower (due to lower profits) under old method. 
• The company has followed normal accounting norms. The change has led to matching concept i.e. costs are matched with expected benefits into the future. However, from an investor’s perspective, the benefits may not be certain and the costs may remain part and parcel of the regular business for a long period of time. During high growth phase, actual cash costs incurred would generally be higher than amortized costs. One may want to consider profits after adjusting for entire customer acquisition costs that the company has incurred. 
• While company has stated that Membership Fee Income and Sales & Promotion Expense are recognized over 12 months, as per Ind AS the customer acquisition cost is to be recognized over the behavioral life of the customer. Management discretion and estimates are involved while assessing the “behavioral life”. (For SBI Cards, our calculation in table #2 suggests amortization period of 2-3 years. One may even want to seek clarity from the management on this policy). 
• One may want to use such adjusted profits to compare numbers with peers considering estimates used by the management of different companies could differ. 

To conclude

Given the nature of cost, this may be a recurring expense while the expected benefits may not be certain for the company. The company itself had been recognizing costs upfront before adopting Ind AS, probably an indication that this may be more practical way of looking at the profits of this business. 

Thus, while the reported profits are in line with the prevalent accounting standards, an investor may want to use adjusted numbers to get closer to economic reality, before taking an investment decision.