An add-back
A lender may treat a promoter's subordinated loan as capital, because the money cannot be withdrawn ahead of other creditors.
Net Worth & Solvency Glossary · Net Worth Mechanics
Adjusted Net Worth in Indian Financial Certification
noun · also "adjusted TNW" when the starting point is tangible net worth
Definition
Adjusted net worth is net worth after the specific add-backs and deductions that a particular reader, such as a lender, regulator or tender authority, requires.
The word "adjusted" has no fixed meaning of its own. It always means "adjusted on the rules of whoever asked for the figure".
One company, one day, three figures
Each figure is correct for the reader who asked for it.
- A lender asksAdds back a promoter's subordinated loan. Removes amounts due from directors and related parties.
- A regulator asksApplies the computation it prescribes for the entities it regulates.
- A tender authority asksRemoves the revaluation reserve. Its own definition sits in the bid document.
Hand the lender's figure to the tender committee and it is simply the wrong figure.
The mechanics
01What the word "adjusted" adds back and strips out
Ordinary net worth is assets less liabilities. Adjusted net worth starts there and applies a reader's own list of changes.
From net worth to the adjusted figure
The shapes show the direction of each step, not a value. Whether the adjusted figure ends higher or lower than book net worth depends entirely on the adjustment list.
A deduction
A lender may remove amounts due from directors and related parties, because money lent inside a group is not available to repay a loan taken outside it.
Another deduction
A tender authority may remove the revaluation reserve, because an unrealised uplift is not real capacity.
The same company can therefore carry several adjusted figures on the same date, each correct for the reader who asked. "Adjusted TNW" is the same idea applied to tangible net worth. Whether the adjusted figure is higher or lower than book net worth depends entirely on the adjustment list. Deductions usually outweigh add-backs, but not always.
The most common mistake with the term is treating adjusted net worth as one fixed quantity. It usually comes to light when a figure prepared for one recipient is handed to another.
On the certificate
02How add-backs and deductions are disclosed by the certifying CA
Because the adjustments are the substance of the figure, a CA discloses each one separately rather than netting them into a total.
- States the starting net worth
The figure before any change, so the reader can see where the bridge begins.
- Lists each add-back and each deduction on its own line
Each line names the requirement that called for it. Nothing is netted into a single "adjustments" total.
- Arrives at the adjusted figure
The total that the reader asked for, on the reader's own basis, with the basis named.
Why the workings travel with the figure
The reader can then check that the adjustments made are the ones they asked for. An adjusted figure without its workings is close to useless, because the recipient cannot tell whose definition was applied.
Where a requirement is ambiguous, the CA records the reading taken, so that it can be corrected openly if needed.
The party that needs the figure
decides which adjustments apply. The list comes from the lender, the regulator or the bid document, never from the CA's own preference.
The certifying CA
applies the stated basis and names it on the certificate, so that anyone reading the figure later knows whose rules produced it.
This is how a Net Worth Certificate is prepared on an adjusted basis, and a Net Worth Certificate for Bank Loan often follows the lender's covenant definition. How to work out the figure yourself is covered in a separate guide.
Three directions
03Adjustments RBI, SEBI and tender authorities specify in India
In Indian practice, required adjustments come from three main directions.
The Reserve Bank of India
Prescribes computations for the entities it regulates. The most familiar is the deduction that turns an NBFC's owned funds into its net owned fund.
For an NBFC, owned funds are reduced by accumulated losses, intangible assets and deferred revenue expenditure; then investments in, loans to and other exposures to subsidiaries, companies in the same group and other NBFCs are deducted to the extent they exceed 10 per cent of paid-up equity capital and free reserves.
Tender authorities and public sector bodies
Publish their own definitions in the bid document. These vary between departments, and sometimes between two tenders from the same department.
Read first
None of these can be assumed from the last file. The requirement is read from the document that imposes it before any computation begins.
Where a certificate prepared for another authority already exists, its workings often carry over even when its total does not.
Written by Subham Jhunjhunwala · Reviewed by CA Sundram Gupta
Sources: this entry quotes no statutory provision. This entry describes Indian practice in general terms and is not advice on a particular certificate.
Need help with a certificate that uses adjusted net worth? See our Net Worth Certificate.
This entry describes Indian practice in general terms. The document that requires the figure governs its definition.