Cookie jar reserves

Over-providing in good years and releasing the excess in bad ones, so reported profit looks steadier than the business is.

A company that provides ₹80 crore more than it needs against warranty claims this year has ₹80 crore available to release when trading disappoints. Profit of ₹615 crore in the release year was ₹535 crore of trading and ₹80 crore of accounting.

The evidence is in the provisions movement note, which shows opening balance, charge, utilisation and reversal. A firm whose reversals cluster in weak years and whose charges cluster in strong ones is managing its earnings, and the note says so plainly to anyone who reads it.

Smoothed earnings are worth less than steady earnings, and they are usually valued as though they were the same thing.