FINA/008

IBS Center for Management Research

Maruti Udyogs Accounting Policies

This case was written by Ravi Madapati, IBS Center for Management Research. It was compiled from published sources, and
is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.

2003, IBS Center for Management Research. All rights reserved.

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FINA/008

Maruti Udyogs Accounting Policies

Introduction
In 2003, Maruti Udyog Ltd. (Maruti), a joint venture between Suzuki Motors1 of Japan and the
Indian government, dominated India's automobile market with a 54% market share.2 Maruti had
the widest product range among Indian car manufacturers, with ten basic models and more than 50
variants. Three out of the five top selling car models in India (Maruti 800, Zen and Omni)
belonged to Maruti. The company dominated the Indian small car market with a 100% share in 'A'
segment and 36% in 'B' segment.3 Maruti produced 359,960 vehicles, operating at a capacity
utilization of 103%, against the industry average of 57.8%.4 In 2002-03, Maruti reported a net
profit of Rs 146.4 crores, a 40% increase from Rs 104.5 crores in 2001-02 compared to a net loss
of Rs 269 crores in 2000-01. In 2003, Maruti was ranked 12th amongst the "Most Respected
Companies" in India by Business World. In 2000, 2001, 2002, and 2003, J.D.Power Asia Pacific,
had ranked Maruti No.1 in the India Customer Satisfaction Index study. 5
Figure (i)

Maruti: Sales and Profit

Profit After Tax

Sales

10000
s
e
r
8000
ro
C
6000
in
s
R
4000

800
s
600
e
r
o
r
400
C
n
i
200
s
R0

2000

-200

-400
1997

1999

2001

1997

2003

1999

2001

2003

Source: Adopted from various sources by IKC

Eleventh largest vehicle manufacturer in the world and the fourth largest manufacturer in Japan.

CMIE database, June 2003.

Business India, 26th May 2003. Segment A: cars priced lower than Rs. Three lakhs, Segment B: cars
priced between Rs. three to five lakhs.

Draft Redherring Prospectus, Maruti Udyog limited, May 2003.

This annual study, which began in 1997, assessed customer satisfaction with product quality and dealer
service. The factors used for measurement were problems experienced, quality of service advisor, service
performance, and service timings and facility appearance.
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Maruti Udyogs Accounting Policies

Background Note
In the early -1980s, the Indian government decided to produce a small car, which would be
affordable to the Indian middle class. It procured technology from Japan, which had developed
world-class capabilities in small cars by that time. It was not Toyota or Nissan or Honda, the three
largest players in Japan, with whom the government tied up, but Suzuki, a much smaller company,
with strong capabilities in making small cars.
Maruti was incorporated in 1981 by taking over the assets of the erstwhile Maruti Ltd, (set up in
1971 and wound up in 1978). The assets of Maruti Ltd. were acquired by the government under
the Maruti Ltd. (Acquisition and Transfer of Undertakings) Act, 1980. In 1982, the government
signed a joint venture agreement with Suzuki, which was offered a 26% equity stake in Maruti.
In December 1983, Maruti launched its first car, Maruti 800, targeted at the masses, as the
peoples car with a price tag of Rs.40,000 (ex-show room price). Maruti rapidly consolidated its
competitive position by launching various other models. In 1984, Maruti introduced a utility
vehicle, Omni that could seat up to eight people. In 1985, another utility vehicle Gypsy, designed
for tough road conditions, was launched. In the late 1980s, Suzuki increased its equity stake in
Maruti from 26% to 40% and further to 50% in 1992. This converted Maruti into a nongovernment company and gave Suzuki a much freer hand in managing the affairs of the company.
Exhibit: I

Maruti: Major Brands

Segment

Brand

Ex-showroom Price of
Base Models in Delhi as
on 31st March 2003

Engine
Capacity
(cc)

Launch
Date

Percentage of Total
Sales Volume in the
Six Months Ended
30th September 2002

Maruti
800

Rs.184, 121 (M800,

Bharat Stage I)

796

Dec-83

71.60%

Omni

Rs.221, 040 (Omni E)

796

Nov-84

28.40%

Zen

Rs.330, 236 (LX Bharat

Stage II)

993

May-93

19.60%

Wagon R Rs.323, 065 (Wagon R

LX)

1061

Dec-99

8.90%

Alto

Rs.287, 213 (Alto LX)

796/1061

Sep-00

7.80%

Esteem

Rs.465, 865 (LX Bharat

Stage II)

1298
(petrol)
1527
(diesel)

Nov-94

13.30%

Baleno

Rs.654, 917 (Baleno

Sedan)

1590

Dec-99

0.50%

Versa

Rs.399, 876 (DX)

1298

Oct-01

3.00%

Utility
Vehicle

Gypsy
King

Rs.452, 538 (Gypsy

King Soft Top)

1298

Dec-85

4.40%

Utility
Vehicle

Grand
Vitara

Rs.15, 96,000
(XL7/Standard)

2700

Apr-03

N.A.

Source: MUL Red Herring Prospectus.

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Maruti Udyogs Accounting Policies

In 1990, Maruti introduced a 3-box car, Maruti 1000. In 1993, it introduced a new model, the Zen
with a 1300 cc engine, and Esteem, a variation of Maruti 1000 (which was replaced) with more
power and a new exterior. In the same year, the first sign of conflict between the joint venture
partners surfaced, when Suzuki proposed a Rs.22 billion expansion and modernization plan. The
transfer of gearbox technology was also a bone of contention between the two partners. The
government felt that Suzuki was deliberately withholding this technology so that it could export it
to Maruti and make windfall profits at the cost of Maruti. However, in mid-1996, the government
approved the plan and Suzuki agreed to transfer its technology.
Meanwhile, in 1994, Maruti had become the first Indian company to reach a cumulative
production of one million vehicles. In 1995, Maruti received ISO 9002 certification. In 1997,
Maruti crossed the two million mark in cumulative vehicle production. In 1997-98, Marutis
overall market share was 83.1%.6
In 1997, Suzuki and the government again faced a series of disputes over management control and
the appointment of Bhargavas successor. It was Bhargava who had played a significant role in
getting Maruti up and running. Bhargava had also managed the relations between Suzuki and the
government well. When the government announced R.S.S.L.N. Bhaskarudu would succeed
Bhargava, Suzuki claimed that the appointment was illegal since a majority (five out of nine) of
the board members had objected. Suzuki even alleged that Bhaskarudu was incompetent and
unsuitable for the post of MD. Later, the two partners decided to settle their differences amicably.
Bhaskarudu indicated he would step down two years ahead of schedule, and Jagdish Khattar would
replace him in January 2000.
This dispute between Suzuki and the government distracted Maruti. Delays in introducing new
models proved costly for Maruti. Hyundai launched the Santro (September 1998), Daewoo, the
Matiz (October 1998) and Tata Motors, the Indica (March 1999). All these models began to offer
stiff competition to Maruti.
After Khattar took charge in August 1999, Maruti went through various restructuring exercises to
strengthen its competitive position. Khattar also embarked upon an aggressive product
development strategy. This was prompted by a decline in Marutis overall market share from 65%
(1999) to 52% (2000). The company realized the profile of the Indian car market had changed.
Leaving the basic 800 model unchanged for over 15 years had been a strategic blunder.
After launching the Baleno and Wagon R in 1999, Maruti finalized plans for a more complete
product range. The company announced it would launch one new model every 6-12 months with
price gaps of about Rs. 25,000. In 2000, Maruti introduced 'Alto' (premium small car) especially
for export market, in two versions -- Alto LX with 800 cc capacity and Alto VX with 1,061 cc
capacity and Altura. The two versions were offered in seven colors. Maruti also launched Versa,
its first Multi Purpose Vehicle, in October 2001.
As competition intensified, Maruti realized the importance of getting closer to its customers. The
company launched various initiatives to improve customer service. In 1999, Maruti established a
chain of model workshops Maruti Service Masters (MSM) across the country. Operated by
franchisees, these one-stop shops met all the vehicle needs of Maruti owners, offered maintenance
service, spares, accessories, insurance related services and took care of warranty claims. Maruti
also set up Customer Call centers in the National Capital Region, Bangalore, Hyderabad, Chennai
and Mumbai. The customers could interact with the company through a toll free telephone number.
In March 2002, Maruti strengthened its interactive web site, www.marutiudyog.com, to provide a
wealth of information and practical help to customers. Maruti also entered four related businessescorporate lease and fleet management (Mid-2001), buying and selling of used cars (October 2001),
auto finance (January 2002), and car insurance (May 2002).

Source: Maruti Red Herring Prospectus.

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Maruti Udyogs Accounting Policies

Maruti had started with a weak distribution and service network, compared to players like
Hindustan Motors and Tata Motors, when it started its operations. But by the early 2000s, Maruti
had the largest network of dealers and service stations amongst all car manufacturers in India. In
2003, it had 178 authorized dealers with 243 sales outlets in 161 cities, 342 dealer workshops and
1,545 Maruti Authorized Service Stations (MASS) covering 898 cities, and express service
stations on 30 highways across the country.
In May 2002, the government and Maruti executed a Revised Joint Venture Agreement (RJVA). In
the process, the government offloaded 6.06 lakhs shares to Suzuki at a premium of Rs.1,000
crores. After the issue, Suzukis holding in Maruti rose to 54.2% from 50%, while that of the
government dropped to 45.54% from 49.6%. The government also indicated it would divest its
remaining equity through a public offer in two phases by April 2004.
In 2002, Maruti found itself with a lower market share of 42%. However, in 2003, Maruti
improved its market share through its efficient operations to 54%.7 Maruti launched an AC version
E2 M800, a small Alto Celebration and a sports utility vehicle, Grand Vitara XL.
In early 2003, Maruti made an initial public offer (IPO), comprising 7.2 million equity shares of
Rs.5 each along with a green shoe option8 for 10% of the issue. The IPO opened in June 2003 with
a floor price of Rs.115. The issue was finally priced at Rs.125 per share. After divesting 27.5% of
its holding in Maruti, the government continued to hold an 18% stake in the company.

Accounting Policies
Marutis financial statements were prepared in accordance with historical cost convention, the
applicable accounting standards issued by the Institute of Chartered Accountants of India (ICAI)
and the relevant provisions of the Companies Act, 1956. The consolidated financial statements of
Maruti included accounts of the company and its subsidiary undertakings. Subsidiary undertakings
were those companies in which Maruti had more than 50% of voting power or otherwise had the
power to exercise control over the operations. Subsidiaries were consolidated from the date on
which effective control was transferred to the group till the date such control existed.

Revenue Recognition
Marutis revenue consisted of two main componentstotal sales and other revenue. Total sales
comprised sales of products manufactured by Maruti and sales of products manufactured for its
vehicles by vendors and sold by Maruti. The revenue was recognised as and when the ownership
of the goods was transferred to the buyer. Other revenue consisted primarily of the sale of scrap,
interest on investments and receivables, net gains from sale of investments, sale of power 9, sales
tax incentives granted under the Haryana Sales Tax law for a period of 14 years beginning August
2001 and revenue from new business initiatives.
Exhibit: II

Maruti: Revenue
Rs. Millions

2002

2001

Sales:
Of products manufactured by the company
Vehicles

8
9

Anupama Arora & Soumya K Ghosh, ICRA Industry Watch Series, The Indian Automotive Industry,
September 2003.
An option that allows additional shares to be sold to the public if the demand is high.
Sale of power is discontinued in April 2002, after natural gas became unavailable as a fuel for generating
power in its captive power plant.
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Maruti Udyogs Accounting Policies

Rs. Millions

2002

2001

Domestic

81881

80830

Exports

2379

2766

Spares, dies and moulds

893

803

85153

84399

Spares and accessories

4227

3635

Dies and moulds

1429

1253

Sub total (II)

5656

4888

Total sales (I+II)

90809

89287

Other revenue

3294

3246

Revenue

94103

92533

Sub total (I)

Of products traded by the company

Source: Maruti Red Herring Prospectus.

Other revenue or revenue from new business initiatives comprised revenue from services provided
by Maruti in connection with automobile finance, leasing and fleet management and sale of preowned cars. Domestic and export sales were recognized on dispatch of goods from the
factory/stock yard and port respectively. Agency commission was recognized, based on the total
net premium collected/handed over to the principal.

Fixed Assets
Fixed assets (except freehold land) were carried at the cost of acquisition or construction or at
manufacturing cost (in case of own manufactured assets) in the year of capitalization less
accumulated depreciation.
In respect of the various project related activities, carried on concurrently with production, the
expenses on administration and supervision incurred, whose bifurcation between production and
construction activities was not ascertainable, were charged to revenue.
Exhibit: III

Maruti: Fixed Assets

Rs. Crores

2002

Land and Building

2001

252.10

238.90

4083.50

3581.00

Other fixed assets

49.10

46.80

Capital WIP

72.40

368.40

Gross Fixed Assets

4457.10

4235.10

Less: Cumulative depreciation

1954.60

1619.60

Net Fixed Assets

2502.50

2615.50

Plant and Machinery

Source: Prowess Database.

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Maruti Udyogs Accounting Policies

Depreciation
Maruti depreciated fixed assets except for leasehold land on straight-line method on a pro rata
basis from the month in which the asset was put to use. Depreciation for assets capitalized before
1987, was provided at the rates computed in terms of section 205 (2) (b) of the Companies Act,
195610, in terms of circular No. 1/86 dated 21st May 1986, of the Government of India.
Depreciation for assets capitalized on or after 2nd April 1987, was provided at the rates prescribed
in Schedule XIV of the Companies Act, 1956, except for certain fixed assets where higher
depreciation based on managements estimate of the useful life of the assets was changed.
Exhibit: IV

Maruti: Plant and Machinery

Single shift

07.31%

Double shift

11.88%

Triple shift

15.83%

Dies and Jigs

19.00%

Source: Maruti Red Herring Prospectus.

Leasehold land was amortized over the period of lease. Plant and Machinery whose written down
value at the beginning of the year was Rs. 5000 or less and other assets whose written down value
at the beginning of the year was Rs. 1000 or less were depreciated at the rate of 100%.
In case the historical cost of an asset underwent a change due to an increase or decrease in longterm liability on account of foreign exchange fluctuation, change in duties, etc., the depreciation on
revised, unamortized, depreciable amount was provided prospectively over the residual useful life
of the asset.

Inventory
Maruti valued inventory at lower of cost, and determined on weighted average basis, and net
realisable value11. When there was a decline in the price of a material and it was estimated that the
cost of the finished product would exceed net realisable value, the material was written down to
net realisable value. In such circumstances, the replacement cost of the material was the best
available measure of their net realisable value.
Exhibit: V

Maruti: Inventories
Rs. Crores
Raw materials
Stores and spares
Raw materials and stores
Finished goods
Semi finished goods
10

11

2002

2001

371.50

582.50

74.90

180.70

446.40

763.20

219.20

69.60

24.90

32.70

Depreciation shall be provided in respect of each item of depreciable asset, for such an amount as is
arrived at by dividing 95% of the original cost thereof to the company by the specified period in respect
of such asset.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
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Maruti Udyogs Accounting Policies

Rs. Crores

2002

Finished and semi finished goods

2001

244.10

102.30

Incomplete construction contracts

0.00

0.00

Stock real estate

0.00

0.00

Stock of shares and securities

0.00

0.00

Other stock

0.00

0.00

Inventories

690.50

865.50

Source: Prowess Database.

Tools were written off over a period of three years except for those valuing Rs. 5000 or less
individually, which were charged off to revenue in the year of purchase. Machinery spares (other
than those supplied along with main plant and machinery, which were capitalized and depreciated
accordingly) were charged off to revenue on consumption, except those valuing Rs. 5000 or less
individually, which were charged off to revenue in the year of purchase. Those whose values were
not individually ascertainable were written off over a period of three years.

Investments
Investments were assets held by an enterprise for earning income by way of dividends, interest,
and rentals, for capital appreciation, or for other benefits to the investing enterprise. Current
investments were by nature readily realizable and were intended to be held for not more than one
year. Such investments were valued at lower of cost or at fair value. Investments other than current
investments were classified as long-term investments. Long-term investments were valued at cost,
except in case of permanent diminution in their value, for which the necessary provision had
already been made.
Exhibit: VI

Maruti: Investments
Rs. Crores

2002

2001

Investment in group/associate companies

0.10

0.00

In mutual funds

0.00

0.00

Other investments

105.70

105.50

Total investments

105.80

105.50

14.50

14.50

0.00

0.00

Quoted investments

14.50

14.50

Market value of quoted investments

42.80

27.60

Marketable investments
In group/associate companies

Source: Prowess Database.

Foreign Currency Translation

Transactions involving foreign currency translation other than those covered by forward contracts
were recorded at the exchange rate prevailing on the date of transaction. Exchange differences,
which arose on settlement of transactions, except those relating to fixed assets, were recognized as
income or expense in the year in which they occurred. The cost of the respective fixed assets was
adjusted for exchange differences, which arose on repayment of liabilities incurred for the purpose
of acquiring such fixed assets.
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Maruti Udyogs Accounting Policies

Exhibit: VII

Maruti: Foreign Exchange Transactions

Rs. Crores

2002

2001

Foreign Exchange Earnings

Export of goods (FOB)

199.50

218.40

Services rendered

0.00

0.00

Dividend received

0.00

0.00

Interest received

0.00

0.00

Other Forex Earnings

0.20

0.20

199.70

218.60

1005.80

1193.20

Stores and Spare (CIF)

6.40

96.50

Finished Goods (CIF)

0.00

0.00

Capital Goods (CIF)

103.60

303.00

Royalties and Technical Know-how fees

138.30

110.10

13.00

15.60

Dividends

0.00

16.50

Travel

2.70

3.20

Others

64.90

45.20

1334.70

1783.30

(1135.00)

(564.70)

Total Foreign Exchange Earnings

Foreign Exchange Spending
Raw Materials (CIF)

Interest Remittances

Total Foreign Exchange Spendings

Net Foreign Exchange Earned
Source: Prowess Database.

On the balance sheet date, all assets other than fixed assets and liabilities denominated in foreign
currency but not covered by forward contracts were reported at the exchange rate prevailing as on
the balance sheet date. The cost of the respective fixed assets was adjusted for increase or decrease
in liabilities, incurred for the purpose of acquiring such fixed assets due to application of exchange
rates prevailing on the balance sheet date.
Foreign currency transactions covered by forward contracts 12 were recorded at the exchange rate
prevailing at the inception date of forward contracts. On the balance sheet date, all assets and
liabilities covered by forward contracts were stated at the forward contract rates.
The difference between the forward rate and the exchange rate at the inception of a forward
contract was recognized as income or expense over the life of the contract except in case of
liabilities incurred for acquiring fixed assets in which case, such difference was adjusted in the cost
of the respective fixed assets.
12

A contract in which a seller agrees to deliver foreign currency to a buyer sometime in the future at a price
which is fixed at the time of agreement.
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Maruti Udyogs Accounting Policies

Profit or loss arising on cancellation or renewal of a forward contract was recognized as income or
expense in the year in which such cancellation or renewal had been made except in case of a
forward contract relating to liabilities incurred for acquiring fixed assets, where profit or loss was
adjusted in the cost of the respective fixed assets.

Deferred Taxation
Maruti followed the Accounting Standard 22, for calculation of tax expense for the period,
comprising current tax13 and deferred tax.14
Deferred tax assets15 and liabilities16 were recognized for all timing differences 17 subject to
consideration of prudence with respect to deferred tax assets. The accumulated deferred tax
liability at the beginning of the year was recognized with a corresponding charge to the general
reserve in the year of transition. Deferred tax assets were recognized for all deductible timing
differences. They were carried forward to the extent that future taxable profits would be available,
against which such deferred tax assets could be realized. Deferred tax assets were reviewed on
each balance sheet date and written down to reflect the amount that was reasonably certain to be
realized.
Unrecognized deferred tax assets were reassessed on each balance sheet date and were recognized
to the extent that it was certain that such previously unrecognized deferred tax assets would be
realized. Deferred tax assets and liabilities were measured using tax rates that had been enacted or
substantively enacted by the balance sheet date.

Research and Development (R&D)

Revenue Expenditure on R&D was charged off against the profit, in the year in which it was
incurred, except expenditure incurred on development and testing of components, which were
deferred over the period of three years. Capital expenditure on R&D was shown as an addition to
fixed assets and was depreciated accordingly.
Exhibit: VIII

Maruti: Research and Development

Rs. Crores

2002

2001

R&D Capital

16.80

19.50

R&D Current

29.90

26.10

Total R&D Expenditure

46.70

45.60

Source: Prowess Database.

13

14

15

16
17

The amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax
loss) for a period.
The tax attributable to timing differences or a liability that has resulted from income already earned that
has been recognized for accounting purposes, but not for tax purposes and that is recorded on the balance
sheet.
Amounts of income taxes recoverable in future periods in respect of deductible temporary differences,
the carry forward of unused tax losses and the carry forward of unused tax credits.
Amounts of income taxes payable in future periods in respect of taxable temporary differences.
Differences between profits or losses as computed for tax purposes and results as stated in financial
statements, which arise from the inclusion of items of income and expenditure in tax computation in
periods different from those in which they are dealt with in the financial statements.
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Maruti Udyogs Accounting Policies

Contingent liabilities
Maruti accounted for contingent liabilities as per Accounting Standard 4, on Contingencies and
Events occurring after balance sheet date issued by the ICAI. The accounting treatment of a
contingent loss was determined by the expected outcome of the contingency. Contingent loss that
arose from tax disputes and other claims was provided for, when it was probable that, a liability
was incurred as on the balance sheet date and an amount could be reasonably estimated. This
required significant management judgments, which might be based on the opinions of legal experts
wherever necessary.
Exhibit: IX
Maruti: Contingent Liabilities
Rs. Crores
Bills Discounted

2002

2001

0.00

0.00

Disputed Taxes

1414.30

675.50

Letter of Credit

67.70

147.60

418.80

389.50

0.00

0.00

84.50

126.80

Total Guarantees
Future lease rent payable
Liabilities on Capital Account
Source: Prowess Database.

Contingent gains were not recognised in financial statements since their recognition might result in
the recognition of revenue, which might never be realised. However, when the realisation of a gain
was virtually certain, then such gain was not a contingency and accounting for the gain was
appropriate.

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Maruti Udyogs Accounting Policies

Bibliography
1. Driving out of Maruti, Business India, 13th May 2002.
2. Maruti poised for growth after Suzuki takeover, www.indiainfo.com, 15th May 2002.
3. Nandini Sen Gupta, Managing Maruti, The Economic Times, 19th May 2002.
4. S. Muralidharan, Maruti disinvestment -- Releasing the clutch, Business Line, 19th May 2002.
5. Corporate Reports The race begins, Business India, 11th November 2002, pg. 64-72.
6. Draft Red Herring Prospectus, Maruti Udyog Limited, May 2003.
7. Joseph Lancelot, First in class, Business India, 26th May 2003.
8. Compendium of Accounting Standards, The Institute of Chartered Accounts of India, 1st
July 2003.
9. Mitra Kushan, Maruti: Ace Driving, Business Today, 17th August 2003, pg. 118-121.
10. Anupama Arora & Soumya K Ghosh, ICRA Industry Watch Series, The Indian
Automotive Industry, September 2003.
11. CMIE Prowess Database.
12. CMIE Industry Analysis Service.
13. www.marutiudyog.com.
14. www.icai.org.
15. www.investopedia.com.
16. www.agencyfaqs.com
17. www.5paisa.com

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