STUDY MATERIAL
Integrated Professional Competence Course

PAPER : 5

ADVANCED ACCOUNTING
VOLUME – I

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text books. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material. © The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Revised Edition Website E-mail Committee/ Department ISBN No. Price Published by : : : : : : : July, 2012 www.icai.org bos@icai.org Board of Studies 978-81-8441-134-8 ` 280/The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi 110 002, India. Sahitya Bhawan Publications, Hospital Road, Agra 282 003 July/2012/30,000 Copies (Revised)

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A WORD ABOUT STUDY MATERIAL
The study material has been divided into two parts, namely, Volume I dealing with conceptual theoretical framework; and Volume II comprising of practice manual. The Study Material has been designed having regard to the needs of home study and distance learning students in mind. The students are expected to cover the entire syllabus and also do practice on their own while going through the practice manual. Volume I of the study material deals with the conceptual theoretical framework in detail. The main features of it are as under: • • The entire syllabus has been divided into nine chapters. In each chapter, learning objectives have been stated. The learning objectives would enable you to understand the sequence of various aspects dealt within the chapter before going into the details so that you know the direction of your studies. In each chapter, the topic has been covered in a step by step approach. The text has been explained, where appropriate, through illustrations and practical problems. You should go through the chapter carefully ensuring that you understand the topic and then can tackle the exercises. Number of questions have been included in each chapter of Volume I for practice of questions given in Volume II. In the chapter of ‘Financial Statements of Banking Companies’, relevant notifications recently issued by RBI have been incorporated. The chapter of ‘Financial Statements of Electricity Companies’, have been written based on the provisions of the Electricity Act, 2003. Also, the financial statements of the Companies Accounts have been revised as per Revised Schedule VI. Some of the chapters like Financial Statements of Banking and Insurance Companies, Departmental accounts and Dissolution of Partnership firm have been rearranged in more logical manner at required places to make the chapters more explicable.

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Any theoretical additions made in the chapters have been highlighted in bold and italics and practical illustrations added have been formatted with grey background in both the volumes of the study material for easy identification. "We would like to thank CA. Dhaval Pathak for his contribution in Study material Vol.I in the chapter of 'Financial Statements of Electricity Companies' and CA. S.S. Prathap for his contribution in the chapters of 'Financial Statements of Banking and Insurance Companies'."

STUDY TIPS AND EXAMINATION TECHNIQUE
The aim of this section is to provide general guidance as to how to study for your exams. The guidance given herein is supplementary to the manner of study followed by you and is intended to improve your existing technique, but aims to give ideas on how to improve your existing study techniques, as it is essential that you adopt methods and techniques with which you feel comfortable. Passing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. In this section we briefly outline some tips for effective study during the earlier stages. Know your Syllabus
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Go through the syllabus carefully. Volume I has been divided in nine chapters/topics based on syllabus. Main topics are as under:
Ch. No. 1 2 3 Unit 1 Unit 2 4 Unit 1 Unit 2 Unit 3 Unit 4 5 6 Topics Conceptual framework for presentation and preparation of financial statements Problems based on Accounting Standards Advanced issues in Partnership Accounts Dissolution of firms Amalgamation, conversion and sale of partnership firm Company Accounts ESOPs and Buy-back of shares Underwriting of shares and debentures Redemption of Debentures Amalgamation and Reconstruction Financial Statements of Insurance companies Financial Statements of Banking Companies

7 8 9 • • • •

Financial Statements of Electricity Companies Departmental Accounts Accounting for Branches including Foreign Branch Accounts

Understand the linkages between chapters at macro-level. Make a study plan covering the entire syllabus and then decide how much time you can allocate to the subject on daily/weekly basis. Allocation of time must be done keeping in view your office commitments as well as social needs and personal hobbies. Maintain the time balance amongst various subjects such as purely descriptive type and numerical-based papers. Allocate time in such a manner that your interest is well sustained and you are able to score well in the final examination as well. Always assess your preparation periodically, say, on monthly basis. If necessary, revise your plan and allocate more time for the subject in which you feel deficient. Read, understand and assimilate each chapter. First of all, have an overview of the chapter to understand the broad contents and sequence of various sub-topics. Do the introspection while going through the chapter and ask various questions to yourself. Read each chapter slowly to ensure that you understand and assimilate the main concept. If need be, read once again with concentration and then try to attempt exercise at the end of the chapter or given in the Practice Manual. Recapitulate the main concept after going through each chapter by way of brief notes. Prepare notes in the manner you feel comfortable covering all key points. Use mnemonic form e.g. C V P denoting cost, valuation and price. One may use highlighter/underlining the significant points or writing down in the margin. The fact that how well you have understood the topic is your ability to attempt the questions given in the exercises as well as in the practice manual. Make a serious attempt at producing your own answers but at this stage do not be much concern

Plan your Study

Preparing Study Strategy
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about attempting the questions in examination based conditions. In particular, at initial stages, it is more important to understand and absorb the material thoroughly rather than to observe the time limits that would apply in the actual examination conditions.
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Always try to attempt the past year examination question paper under examination conditions. Revision of material should never be selective in any case. Because broad coverage of the syllabus is more important than preparing 2-3 chapters exhaustively. Read through the text along with notes carefully. Try to remember the definition and important formulae. Reach examination hall well in time. Plan your time so that equal time is awarded for each mark. Keep sometime for revision as well. Always attempt to do all questions. Remember that six average answers fetch more marks than five best answers. Therefore, it is important that you must finish each question within allocated time. Read the question carefully more than once before starting the answer to understand very clearly as to what is required by the paper-setter. Always be concise and write to the point and do not try to fill pages unnecessarily. In case a question is not clear, you may state your assumptions and then answer the question. While writing answers in respect of essay-type questions, try to make sub-readings so that it catches the examiner’s eye. In case of case-study, be very precise and write your conclusion in a clear manner. Reference to standards, guidance notes, section of various legislation, etc be done in a clear-cut manner. Revise your answers carefully underline important points before leaving the examination hall.

Examination Technique
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Happy Reading and Best Wishes!

SYLLABUS
GROUP II PAPER 5: ADVANCED ACCOUNTING (One paper – Three hours – 100 Marks) Level of Knowledge: Working Knowledge Objectives: (a) To have an understanding of the conceptual framework for the preparation and presentation of financial statements, (b) To gain working knowledge of the professional standards and application of accounting principles to different practical situations, and (c) To gain the ability to solve advanced problems in the case of different entities. Contents : 1. Conceptual Framework for Preparation and Presentation of Financial 2. Accounting Standards Working knowledge of: AS 4 : AS 5 : Contingencies and Events occurring after the Balance Sheet Date Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Statements

AS 11 : The Effects of Changes in Foreign Exchange Rates (Revised 2003) AS 12 : Accounting for Government Grants AS 16 : Borrowing Costs AS 19 : Leases AS 20 : Earnings Per Share AS 26 : Intangible Assets AS 29 : Provisions, Contingent Liabilities and Contingent Assets.

3. Advanced Issues in Partnership Accounts Dissolution of partnership firms including piecemeal distribution of assets; Amalgamation of partnership firms; Conversion into a company and Sale to a company. 4. Company Accounts (a) Accounting for employee stock option plan, Buy back of securities, Equity shares with differential rights, Underwriting of shares and debentures, Redemption of debentures Advanced problems for business acquisition, Amalgamation and reconstruction (excluding problems of amalgamation of inter-company holding) Accounting involved in liquidation of companies, Statement of Affairs (including deficiency/surplus accounts) and Iiquidator’s statement of account of the winding up. Financial Reporting of Insurance, Banking and Electricity Companies and legal and regulatory requirements thereof

(b) (c)

(d) 5.

Accounting for Special Transactions Departmental and branch accounts including foreign branches Note – If either old Accounting Standards (ASs), Announcements and Limited Revisions to ASs are withdrawn or new ASs, Announcements and Limited Revisions to ASs are issued by the Institute of Chartered Accountants of India in place of existing ASs, Announcements and Limited Revisions to ASs, the syllabus will accordingly include/exclude such new developments in place of the existing ones with effect from the date to be notified by the Institute.

CONTENTS
CHAPTER 1 : CONCEPTUAL FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS .................................................... 1.1 – 1.21 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1. 2. Introduction ................................................................................................... 1.1 Purpose of the framework .............................................................................. 1.2 Status and Scope of the Framework ............................................................... 1.2 Components of Financial Statements .............................................................. 1.3 Objectives of Financial Statements ................................................................. 1.3 Fundamental Accounting Assumptions ............................................................ 1.4 Qualitative Characteristics ............................................................................. 1.7 Elements of Financial Statements .................................................................. 1.8 Measurement of Elements of Financial Statements ....................................... 1.14 Capital Maintenance .................................................................................... 1.17 Introduction ................................................................................................... 2.1 Overview ....................................................................................................... 2.1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 AS 4: Contingencies and events occurring after the Balance Sheet date ...... 2.1 AS 5: Net profit or loss for the period, prior period items and changes in accounting policies ..................................................... 2.6 AS 11: The Effects of changes in Foreign Exchange Rates ................... 2.12 AS 12: Accounting for Government Grants ........................................... 2.23 AS 16: Borrowing Costs ...................................................................... 2.29 AS 19 : Leases ................................................................................... 2.32 AS 20: Earnings per share .................................................................. 2.49 AS 26: Intangible Assets ..................................................................... 2.57 AS 29: Provisions, Contingent Liabilities and Contingent Assets ........... 2.68

CHAPTER 2: ACCOUNTING STANDARDS ...................................................... 2.1 – 2.78

CHAPTER 3 : ADVANCED ISSUES IN PARTNERSHIP ACCOUNTS ................. 3.1 – 3.59 Unit 1 : Dissolution of Partnership Firms 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction ................................................................................................... 3.1 Circumstances Leading to Dissolution of Partnership ...................................... 3.1 Consequences of Dissolution ......................................................................... 3.2 1.3.1 Dissolution before expiry of a fixed term ................................................ 3.3 Closing of Partnership Books on Dissolution ................................................... 3.3 Consequences of Insolvency of a Partner ....................................................... 3.9 Loss arising from Insolvency of a Partner ..................................................... 3.10 Piecemeal Payments ................................................................................... 3.24 1.7.1 Maximum loss Method ........................................................................ 3.24 1.7.2 Highest Relative Capital Method ......................................................... 3.27 Unit 2 : Amalgamation, Conversion and Sale of Partnership Firms 2.1 Amalgamation of Partnership firms ............................................................... 3.39 2.1.1 Closing the books of old Firm .............................................................. 3.39 2.1.2 Opening the books of the new Firm ..................................................... 3.39 2.2 Conversion of Partnership firm into a Company ............................................. 3.48 2.2.1 Apportionment of shares amongst the partners .................................... 3.59 CHAPTER 4 : COMPANY ACCOUNTS ........................................................... 4.1 – 4.132 Unit 1 ESOP and Buy-back of Shares 1.1 Employees stock option plan .......................................................................... 4.1 1.1.1 Accounting Policies of ESOS ................................................................ 4.3 1.1.2 Disclosure in the Director’s Report ........................................................ 4.6 1.1.3 Provisions of Guidance Note on Employee Share-Based Payments ........ 4.7 1.2 1.3 Buy-back of Securities ................................................................................. 4.14 1.2.1 Provisions of Section 77b of the Companies Act .................................. 4.16 Equity shares with differential rights ............................................................. 4.28

Unit 2 : Underwriting of shares and debentures 2.1 2.2 2.3 2.4 Introduction ................................................................................................. 4.30 Underwriting Commission ............................................................................ 4.30 Provisions in the Companies Act Affecting Underwriting ................................ 4.31 Underwriting Contract ................................................................................... 4.31 2.4.1 Determination of Liability in respect of a Normal underwriting contract ....... 4.31 2.4.1.1 2.4.1.2 Determination of Liability where whole of the issue has been underwritten by one person ......................................... 4.31 Determination of Liability where only part of the issue has been underwritten ......................................................... 4.31 When the issue is fully underwritten [with Firm Underwriting] ..... 4.34

2.4.2 Firm Underwriting ............................................................................... 4.34 2.4.2.1 3.1 3.2 3.3 3.4 4.1 5.1 5.2 5.3 5.4 5.5 5.6 Unit 3 : Redemption of Debentures Introduction ................................................................................................. 4.43 Redemption of debentures ........................................................................... 4.43 Purchase of debentures in open market ........................................................ 4.46 Liability of the company to create security and debenture redemption reserve ........ 4.73 Advanced Problems ..................................................................................... 4.74 Statement of affairs .................................................................................... 4.108 Deficiency account ..................................................................................... 4.109 Overriding preferential payments ................................................................. 4.110 Preferential creditors .................................................................................. 4.110 Liquidator’s final statement of account ......................................................... 4.123 B list contributories ..................................................................................... 4.130

Unit 4 : Amalgamation and Reconstruction Unit 5 : Liquidation of Companies

CHAPTER 5 : FINANCIAL STATEMENTS OF INSURANCE COMPANIES ....... 5.1 – 5.104 Unit 1 : Introduction to Insurance Business 1.1 Introduction ................................................................................................... 5.1

1.1.1 Principles of Insurance ......................................................................... 5.5 1.2 Various types of insurance ............................................................................. 5.5 1.2.1 Life Insurance Policy ............................................................................ 5.5 1.2.2 General Insurance It means Insurance other than Life Insurance ............ 5.6 1.3 Various Types of General Insurance ............................................................... 5.6 1.3.1 Fire Insurance ...................................................................................... 5.8 1.3.2 Marine Insurance ................................................................................. 5.9 1.3.3 Miscellaneous Insurance Policies ........................................................ 5.12 1.4 1.5 1.6 Distinction between Life Insurance and other forms of Insurance .................. 5.13 Some relevant provisions of the Insurance Act, 1938 .................................... 5.13 Insurance Regulatory and Development Authority Act, 1999 (Some Relevant Amendments in Insurance Act, 1938) .................................. 5.15 Functional divisions and books of account maintained therein ....................... 5.20 Claims provision at divisional offices ............................................................ 5.21 Claims paid ................................................................................................. 5.22 Co-insurance ............................................................................................... 5.23 Outstanding premium ................................................................................... 5.23 Commission ................................................................................................ 5.24 Loans ......................................................................................................... 5.24 Investments ................................................................................................ 5.25 Unexpired risk reserve ................................................................................. 5.27 Re-insurance ............................................................................................... 5.29 Introduction ................................................................................................. 5.32 Structure of Schedules A and B .................................................................... 5.32 Financial statements .................................................................................... 5.33 IRDA Regulations, 2002 ............................................................................... 5.33

Unit 2 : Accounting Technique of General Insurance Business 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 3.1 3.2 3.3 3.4

Unit 3 : Financial Statements of Insurance Companies

3.5

Preparation of financial statements............................................................... 5.34

Annexure I: Schedule A for Life Insurance Business .................................................. 5.60 Annexure II: Schedule B for General Insurance Business........................................... 5.84 CHAPTER 6 : FINANCIAL STATEMENTS OF BANKING COMPANIES .......... 6.1 – 6.119 Unit 1 : Some relevant provisions of Banking Regulations Act, 1949 1.1 Meaning of banking ....................................................................................... 6.1 1.1.1 Types of Banks .................................................................................... 6.2 1.1.2 Banking company Business .................................................................. 6.3 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 2.1 Prohibition of trading .................................................................................... 6.5 Disposal of non-banking assets ...................................................................... 6.5 Management ................................................................................................. 6.5 Capital and reserve ....................................................................................... 6.6 Reserve funds ............................................................................................... 6.6 Restriction as to payment of dividend ............................................................. 6.7 Cash reserve ................................................................................................. 6.7 Licensing of banking companies ..................................................................... 6.8 Liquidity norms .............................................................................................. 6.8 Restriction on acquisition of shares in other company ..................................... 6.9 Restriction on loans and advances ................................................................. 6.9 Prohibition of charge on unpaid capital and floating charge on assets .............. 6.9 Unclaimed deposits ..................................................................................... 6.10 Accounts and audit ...................................................................................... 6.10 Main characteristics of a bank’s book-keeping system ................................... 6.11 2.1.1 Slip (or voucher) system of ledger posting ........................................... 6.12 2.1.2 Need of the slip System ...................................................................... 6.13 2.2 Principal books of accounts ......................................................................... 6.13

Unit 2 : Books of Accounts, Returns and Forms of Financial Statements

2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 3.1 3.2 3.3

Subsidiary books ......................................................................................... 6.14 Other subsidiary registers ............................................................................ 6.14 Departmental Journals ................................................................................. 6.15 Other memorandum books ........................................................................... 6.15 Statistical books .......................................................................................... 6.17 Returns to be filed by banking companies ..................................................... 6.17 Forms of balance sheet and profit and loss account ...................................... 6.18 Notes on Accounts ...................................................................................... 6.20 Disclosure of Accounting Policies ................................................................. 6.24 Capital framework of bank functioning in India .............................................. 6.25 Capital Funds .............................................................................................. 6.25 Tier I and Tier II Capital for Indian Banks ...................................................... 6.26 3.3.1. Tier I Capital Comprises ..................................................................... 6.26 3.3.2 Tier II Capital ..................................................................................... 6.26 3.3.3 Deductions from Tier I and Tier II Capital ............................................ 6.28

Unit 3 : Capital Adequacy Norms

3.4 3.5 3.6 3.7 4.1

Ratio of Tier II Capital to Tier I Capital ......................................................... 6.29 Tier I and Tier II capital for foreign banks ..................................................... 6.29 Risk – Adjusted Assets ................................................................................ 6.29 Reporting for capital adequacy norms ........................................................... 6.30 Income recognition ...................................................................................... 6.33 4.1.1 A Regularisation of Accounts by year-end ........................................... 6.38 4.1.2 Interest application ............................................................................. 6.39

Unit 4 : Income Recognition, Classification of Assets and Provisions

4.2 4.3

Classification of Bank advances on the basis of asset performance for determining loss provisions .......................................................................... 6.41 Provisions ................................................................................................... 6.43 4.3.1 Provisioning for advances covered by ECGC Guarantee ...................... 6.46

..............1 Electricity Act....................... 7............... 6........1 – 7.....................................7 5..............1 Drafts and telegraphic Remittances .....................1 1..........................................1 Classification of investments ............67 Annexure I: Schedules forming part of Balance Sheet ...........................................................4 Central Electricity Regulatory Commission .....6 Central Electricity Authority .......2 Letters of Credit and Travellers’ Cheques ................ 6........2.........................7 .........................................................2 Features of the Act.................................... 6.......................1 Historical Background of Legislative Initiatives ................................ 6.............................................................2 1........................ 7................... 7.............48 Shifting among categories of Investments .......1.................. 6..1 Introduction ...................................54 5............. ................ 6.............5 4........................................109 CHAPTER 7 : FINANCIAL STATEMENTS OF ELECTRICITY COMPANIES ...........5 State Electricity Commission ............1 Discounting ...............87 Annexure II: Schedules forming part of Profit and Loss Account ..........58 Unit 1 : Relevant Legal and Administrative Provisions 1......... Collection & Acceptance of Bills....... 6.............1...1 1.. 7......5 1........2 Introduction ........... 6.................................. 7............... 7............................3............................................51 Investment Fluctuation Reserve .....54 5.... 6................52 Discounting.2 Collection of Bills .....................61 5........ 7...1.............62 Unit 5 : Some Special Transactions of Banks Unit 6 : Preparation of Financial Statements of Banks 6.............................6 4................2 1...............4.......... 7.......................... 7...........1................... 6.........6 Generating Companies ...2............4 4................................1 Objectives ............. 7..................2 1....... 6............... 6....................................4 1.......................50 Valuation of investments ..................................3 1..................62 5.3............. 2003 ..................................................93 Annexure III: Guidelines of Reserve Bank of India for Compliance of Financial Statements 6..........1........95 Annexure IV: Risk weights for calculation of capital charge for credit risk ............ 6.3 Acceptance and Endorsement .............. 6...................................1....60 5............................................................

....................14 Capital Service Line Contributions ....4 2............15 Implementation of Accelerated Power Development and Reforms Program (APDRP) ...................................9.................3 2..............18 2......................................16 2................................ 7......6............................................................. 2009 Statement of Objects and Reasons ......5...........................................1 Regulation 20 ........................ 7.. 7.............5.............. 7..... 7.10 1... 7............8 1............................... 7........2 Captive Generation .................................................................. 7.... 7.....9 Tariff .............25 Comparison between depreciation as per provision of Schedule XIV of the Companies Act................ 1956 and as per tariff policy under Electricity Act..................... 7........ 7......................................10 Unit 2 : Accounting Terms 2...............................................28 2..............2 Philosophy of depreciation .....6..............17 2.................. 7............................................................ 7.............2 Funding Pattern ................................................10 Determination of tariff ......................... 7...7 1..................7 1.19 2..............6.....1 Generating Company and requirement for setting up of generating station ........... 7........12 Kerala Electricity Supply Code 2011 ....28 2.............................. 7.........................................3 Accounting of Grant received under APDRP ........ 2003 .....9 1.......................18 2....................... 7....................... 7.......................................11 Licensee and bulk licensee ......20 2.............................1....19 2..........................................................................3 Duties of generating Companies ..... 7..................................................6...............1 Purpose of Depreciation ........... 7................................................2 2.........5................8 Transmission of electricity ............. 7.....................9 Open access ....................1 Objectives of APDRP .....9 .........................................1 2.............8 1.27 2004 Regulations ..................... 7............6...............................6 Depreciation ....8 1............5 Relevant Transaction of Electricity Supply Company .........................................................................7 2...8 CERC (Terms and Conditions of Tariff) Regulations......13 Accounting and Reporting of Security Deposit ....................................................................... 7..

....................1 Dependent branches ....... 9......................................................25 Adjustment and reconciliation of branch and head office accounts ....1 – 8............................. When goods are invoiced at cost ........................... 8........ 7.... Introduction ..............43 CHAPTER 8 : DEPARTMENTAL ACCOUNTS ......................1 5.................................26 Other Points .............9..........40 ODRC Method (Optimised Depreciated Replacement Cost) ..................1 3....34 2..........................3 CHAPTER 9 : ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCHES ..............1 Methods of Departmental Accounting .. 5.........................................2 3.........10 2009 Regulations .......................29 2............... 5.................... 7...........................26 5....1 – 9...... 7...39 Foreign branches ....................... 8... 8...........................................1 2..... 9............... 8.................................... 8......2 3...... 4................. 7...........2...................................... 9......... 2.............. 9....10............................ 2.3 Inter-departmental Transfers .... 9...... 9.2 Methods of charging goods to branches ........2 Reasons for Disagreement .............11 2............................ 9.............................. 9...............................................................34 Additional Capital Expenditure ...... 9......42 Recommendation ..... 9.... 7............................. 9.12 2.......... 7..... 6.2 When goods are invoiced at selling price .................... 8... Incorporation of branch balance in head office books ...............................................................21 1................................................................................................. 8..........................................1 Advantages of Departmental Accounting .......................................3 4......28 6................. 3........................ Introduction .46 ................................................... 9................................. 7.......................................54 1.............................. 9............................................................ 9...................................................................................................................................2 Regulation 21 ................................2 Basis of Allocation of Common Expenditure among different Departments ..............24 Independent branches .................................10 Goods invoiced at wholesale price to retail branches .....13 Regulation 17: Depreciation .. 8.............29 Incomplete information in branch books ................ 3............2 Types of Departments .

.............. Accounting for foreign branches .................... 9................. Change in classification ...II-1 Net Profit or Loss for the Period...........................................II-20 Borrowing Costs………………………………………………………………………... 9......................II-45 Intangible Assets………………………………………………………………………II-61 Provisions..........................II-32 Earnings Per Share………………………………………………………………….1 9. 9......47 10..............48 APPENDIX I : FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS ............................... 9............. …………………………………… I-1 – I-18 APPENDIX II : ACCOUNTING STANDARDS ......................2 Non-Integral Foreign Operation ...................II-25 Leases…………………………………………………………………………………..9..... 9................................47 10........46 10................................... Prior Period Items.................1 Integral Foreign operation (IFO) .............. 9.........48 11......47 11..........................2 Non Integral to integral ........... Techniques for foreign currency translation.............2 Integral foreign operation (IFO) ..II-5 The Effects of Changes in Foreign Exchange Rates…………………………...........................46 Non Integral foreign operation (NFO) .. …………II-1 – II-109 AS 4 : AS 5 : AS 11 : AS 12 : AS 16 : AS 19 : AS 20 : AS 26 : AS 29 : Contingencies and Events Occurring After the Balance Sheet Date…………....46 9.............................................. 9.......... and Changes in Accounting Policies……………………………………………………………………........... Contingent Liabilities and Contingent Assets………………………II-88 ...........48 11........1 Integral to non integral .. 9.........................II-10 Accounting for Government Grants………………………………………………..... 9........................................................

The Accounting Standards Board (ASB) of the ICAI has issued a framework which provides the fundamental basis for development of new standards as also for review of existing standards. Significance of the Conceptual Framework for the Preparation and Presentation of Financial Statements.1 Introduction The development of accounting standards or any other accounting guidelines need a foundation of underlying principles. 1.1 Conceptual Framework for Preparation and Presentation of Financial Statements Learning Objectives After studying this chapter. The principal areas covered by the framework are as follows: (a) Components of financial statements (b) Objectives of financial statements (c) Assumptions underlying financial statements (d) Qualitative characteristics of financial statements (e) Elements of financial statements (f) Criteria for recognition of elements in financial statements (g) Principles of measurement of financial elements (h) Concepts of Capital and Capital Maintenance . you will be able to: ♦ ♦ Understand the meaning of Conceptual Framework for the Preparation and Presentation of Financial Statements.

The exchange losses increases the rupee payment required to settle the foreign currency liability but definitely does not increase the service potential of the asset. Paragraph 37 of the conceptual framework requires exercise of prudence in preparation of financial statements. Example: Shares or other securities held as stock-in-trade by dealers of shares or securities are neither inventory nor investments. for example prospectuses and computations prepared for tax purposes are outside the scope of the framework. . Example: As per AS 11. In view of this.3 Status and Scope of the Framework The framework applies to general-purpose financial statements usually prepared annually for external users. (e) To assist the users in interpretation of financial statements. exchange losses arising on increase in foreign currency liability incurred for acquisition of fixed assets can be recognised as expense in the statement of profit and loss in the accounting period in which the loss is incurred. whether in public or private sector. by all commercial.2 Advanced Accounting 1. industrial and business enterprises. (d) To assist auditors in forming an opinion as to whether financial statements conform to the accounting standards. The special purpose financial reports. an expense is recognised immediately in the statement of profit and loss when it produces no future economic benefits. the relevant accounting standard requires such exchange losses to be recognised as expense immediately. It is therefore advisable to value shares or other securities held as stock-in-trade at lower of cost and fair value.2 Purpose of the Framework The framework sets out the concepts underlying the preparation and presentation of generalpurpose financial statements prepared by enterprises for external users.1. (b) To assist ASB in its task of development and review of accounting standards. accounting standards and procedures relating to the preparation and presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by accounting standards. Also. 1. such that the losses are anticipated but gains are not. (c) To assist ASB in promoting harmonisation of regulations. as per paragraph 96 of the framework. The reason appears to be that the paragraph 93 of the framework states that ‘expenses are recognised in the statement of profit and loss when a decrease in future economic benefit related to decrease in an asset or an increase in liability has arisen that can be measured reliably’. The main purpose of the framework is: (a) To assist enterprises in preparation of their financial statements in compliance with the accounting standards and in dealing with the topics not yet covered by any accounting standard.

Users of financial statements expect the statements to provide useful information needed to make economic decisions. Profit & Loss A/c presents the result of operations of an enterprise for an accounting period. segmental reports. Although each statement provides information that is different from each other. a Profit & Loss Account and a Cash Flow Statement together with notes. 1. e. It also provides information about liquidity and solvency of an enterprise which is useful in predicting the ability of the enterprise to meet its financial commitments as they fall due. . (b) Employees.g. the requirements of the Accounting Standard will prevail over those of the framework. (c) Lenders. They may include disclosures about the risks and uncertainties affecting the enterprise and such items as disclosure of accounting policies. (a) Investors. In case of conflict between an accounting standard and the framework. (f) Government and their agencies. The major information contents of different components of financial statements are as below: Balance Sheet portrays value of economic resources controlled by an enterprise. (e) Customers.5 Objectives of Financial Statements The framework identifies seven broad groups of users of financial statements. All parts of financial statements are interrelated because they reflect different aspects of same transactions or other events. namely. report on operations in the process of discontinuation and so on.Conceptual Framework for Preparation and Presentation of Financial Statements 1. The financial statements provide information to suit the common needs of most users. (d) Suppliers and other trade creditors.4 Components of Financial Statements A complete set of financial statements normally consists of a Balance Sheet. (g) Public. Notes and Schedules present supplementary information explaining different items of financial statements. they do not provide non-financial data even if they may be relevant for making decisions. However. none in isolation is likely to serve any single purpose nor can any one provide all information needed by a user. statements and other explanatory materials that form integral parts of the financial statements. 1. to the extent not inconsistent with their requirements. Cash Flow Statement shows the way an enterprise has generated cash and the way they have been used in an accounting period. they cannot and do not intend to provide all information that may be needed.3 Nevertheless. Nothing in the framework overrides any specific Accounting Standard. the framework may be applied in preparation of such reports.

30. Financial statements prepared on going concern basis recognise among other things the need for sufficient retention of profit to replace assets consumed in operation and for making adequate provision for settlement of its liabilities. As long as financial statements are prepared in accordance with these assumptions.000 Deferred costs Bank 1.000 1. rather than with the time of cash payments or receipts and (iii) the enterprise did not change its accounting policies from those followed in previous accounting periods. a user may assume (i) (ii) the enterprise has no plan of liquidation or significant curtailment of its activities the expenses and income recognised coincide with the concerned event. no separate disclosure in financial statements would be necessary.000 20.6 Fundamental Accounting Assumptions These are assumptions.1.000 Stock 35.000 10. nor there is need to materially curtail the scale of operations. the basis used should be disclosed. Going concern assumption is not likely to be compatible with the intention or necessity to enter into a scheme of arrangement with the enterprise’s creditors or to liquidate in near future. If any financial statement is prepared on a different basis. As per the framework. three assumptions underlying a financial statement are (a) Going Concern (b) Accrual basis of accounting (c) Consistency. Let us discuss these assumptions in detail. Example: Balance sheet of a trader on 31/03/10 is given below: Liabilities Capital Profit & Loss A/c 10% Loan Trade payables ` Assets 60.000 30. e.g. Unless contrary is disclosed.000 Trade receivables 10.000 5. However.000 . (i) Going Concern: The financial statements are normally prepared on the assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention.30. If nothing has been written about the fundamental accounting assumption in the financial statements then it is assumed that they have already been followed in their preparation of financial statements.000 Fixed Assets 25.4 Advanced Accounting 1. when assets of an enterprise are stated at net realisable values in its financial statements.000 ` 65. the users of financial statements take for granted. if any of the above mentioned fundamental accounting assumption is not followed then this fact should be specifically disclosed.

(f) Closing debtors is ` 25.000 2.50.000 2.50. which is likely to be settled at 5% discount.000 Assets Fixed Assets ` 52. (b) The trader’s purchases and sales in 2010-11 amounted to ` 4 lakh and ` 4.000 10.000 is doubtful.000 32. The net realisable value of fixed assets on 31/03/11 was ` 60. The Profit and Loss Accounts and Balance Sheets of the trader are shown below in two cases (i) assuming going concern (ii) not assuming going concern.000 6.000.000 ` 60.000 2. of which ` 2.000 40.000 Case (i) 4.500.000 600 − − 19.000 depends on successful re-installation of certain product supplied to the customer. (d) Expenses for the year amounted to ` 14.500 ` 30. (c) The cost and net realisable value of stock at the end of 31/03/11 were ` 32.000 4. The use pattern of the asset is even.000 and ` 40.900.5 lakh respectively.900 13.200 By Sales By Closing Stock By Trade payables ` 4.82.5 (a) The remaining life of fixed assets is 5 years.100.000 4.000 ` 4. (e) Deferred cost is amortised equally over 4 years.00.000 14. (g) Closing trade payable is ` 12. (i) There is an early repayment penalty for the loan ` 2.000 4.000 respectively.000 .Conceptual Framework for Preparation and Presentation of Financial Statements Additional information 1.600 Case (ii) ` 60.000.500 22.82.900 5.90. Profit & Loss A/c for the year ended 31/03/11 Case (i) Case (ii) Case (i) Case (ii) ` To Opening Stock To Purchases To Expenses To Depreciation To Provision for doubtful debts To Deferred cost To Loan To Net Profit 30. (h) Balance of closing cash is ` 37.000 14.90.600 Balance Sheet as at 31/03/11 Liabilities Capital Case (i) Case (ii) 4.000.000 ` 60. Collection of another ` 4.600 4.00.

Accrual basis ensures better matching between revenue and cost and profit/loss obtained on this basis reflects activities of the enterprise during an accounting period.6 Advanced Accounting 44.100 (ii) Consistency: The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods.500 Stock 32. any income/expense is recognised on cash basis.000 Nil 37.000 1.000 (b) He also purchased article B in period 1 for ` 2. the fact should be stated. Despite the possibility of distribution of profit not actually earned. whether or not cash or cash equivalent is actually received or paid. It is not necessary to expressly state that accrual basis of accounting has been followed in preparation of a financial statement. Section 209(3)(b) of the Companies Act makes it mandatory for companies to maintain accounts on accrual basis only.500 37. accrual basis of accounting is generally followed because of its logical superiority over cash basis of accounting as illustrated below.000 12. The accrual basis can therefore overstate the divisible profits and dividend decisions based on such overstated profit lead to erosion of capital.000 40. It exposes an enterprise to the risk of recognising an income before actual receipt. accounting standards require that no revenue should be recognised unless the amount of consideration and actual realisation of the consideration is reasonably certain.500 on credit . Example: (a) A trader purchased article A on credit in period 1 for ` 50.56.600 47. transactions are recognised as soon as they occur. Hence. For this reason.100 1.56. In case.100 23. An accounting policy can be changed if the change is required a.000 Profit & Loss A/c 10% Loan Trade payables Trade receivables (less provision) 11.400 Deferred costs Bank 1. rather than cash flows generated by it. c.600 35.000 cash (c) The trader sold article A in period 1 for ` 60.200 37.000 7. The consistency improves comparability of financial statements through time. (iii) Accrual basis of accounting: Under this basis of accounting. b.51. by a statute or by an accounting standard or for more appropriate presentation of financial statements. accrual basis is a more logical approach to profit determination than the cash basis of accounting.600 19.100 1.000 in cash (d) He also sold article B in period 1 for ` 2.51.1.

000 Period 1 By Sale ` 60. which is likely to influence the economic decisions by the users. present or future events or may help in confirming or correcting past evaluations. Relevance: The financial statements should contain relevant information only. A mass of irrelevant information creates confusion and can be even more harmful than non-disclosure.000 50. Profit & Loss A/c ` Period 1 To Purchase To Net Profit To Purchase 2.000 2.500 62.500 62. The relevance of a piece of 2.500 1. . Profit & Loss A/c ` Period 1 To Purchase To Net Profit 52.7 Profit & Loss A/c of the trader by two basis of accounting are shown below.000 58.000 60. 1.000 10.500 50.Conceptual Framework for Preparation and Presentation of Financial Statements 1.500 47. It is not right to think that more information one discloses the better it is.000 60. No relevant information can be however withheld on the grounds of complexity. Such information may help the users to evaluate past.7 Qualitative Characteristics The qualitative characteristics are attributes that improve the usefulness of information provided in financial statements.500 Period 1 By Sale ` 62. A look at the cash basis Profit & Loss A/c will convince any reader of the irrationality of cash basis of accounting.000 50. In cash basis of accounting – Cash purchase of article B and cash sale of article A is recognised in period 1 while purchase of article A on payment and sale of article B on receipt is recognised in period 2. Understandability : The financial statements should present information in a manner as to be readily understandable by the users with reasonable knowledge of business and economic activities. The framework suggests that the financial statements should observe and maintain the following five qualitative characteristics as far as possible within limits of reasonable cost/ benefit.000 Period 2 Period 2 By Sale By Net Loss In accrual basis of accounting: Credit purchase of article A and cash purchase of article B and cash sale of article A and credit sale of article B is recognised in period 1 only. is said to be relevant. Information.

gains and losses are not recognised as separate elements of financial statements. 1. These five financial elements are Assets. Liabilities. that is to say. The information provided are not likely to be reliable unless: (a) Transactions and events reported are faithfully represented.8 Elements of Financial Statements The framework classifies items of financial statements in five broad groups depending on their economic characteristics. An item is material if misstatement or omission of the . (asset. yet application of the principal qualitative characteristics and appropriate accounting standards normally results in financial statements portraying true and fair view of information about an enterprise. 5. (b) Transactions and events are reported in terms of their substance and economic reality not merely on the basis of their legal form. liability. the information must be reliable. The financial statements should permit both inter-firm and intra-firm comparison.8 Advanced Accounting information should be judged by its materiality. (c) The reporting of transactions and events are neutral. expense or income) is recognised in financial statements if both the following criteria are met: (a) It is probable that any future economic benefit associated with the item will flow to or from the enterprise. free from bias.e. economic characteristics of gains are same as income and those of losses are same as expenses. they must be free from material error and bias. (d) Prudence is exercised in reporting uncertain outcome of transactions or events. True and Fair view : Financial statements are required to show a true and fair view of the performance.1. In assessing whether an item of financial element meets the recognition criteria regard should be given to the materiality consideration. 3. Equity. Except for the way they arise. and (b) It has a cost or value that can be measured reliably. This principle is called the principle of 'substance over form'. Comparability : Comparison of financial statements is one of the most frequently used and most effective tools of financial analysis. One essential requirement of comparability is disclosure of financial effect of change in accounting policies. The framework does not deal directly with this concept of true and fair view. A piece of information is said to be material if its omission or misstatement can influence economic decisions of a user. An item of financial element. Concept of probability is used to ascertain the degree of uncertainty associated with the flow of economic benefits. 4. Reliability : To be useful. Gains and losses differ from income and expenses in the sense that they do not arise in the ordinary course of business. i. financial position and cash flows of an enterprise. For these reasons. Income/gains and Expenses/ losses. equity.

Likewise.Conceptual Framework for Preparation and Presentation of Financial Statements 1. 1. e. An asset without physical substance can be either intangible asset. because one of the users of the financial statements is the taxation authority. profit on sale. Sales) and asset (i. patents. it must be probable that the resource generates future economic benefit. In other words. e.g. A resource cannot be recognised as an asset if the control is not sufficient. For example recognition of an asset implies that corresponding liability. he does not control the asset. Such purchases of machinery is therefore booked as an expense rather than capitalised in the Machinery A/c. an expense even if small. income or equity should also be recognised. e. debtors and bills receivable. where lessee recognises the asset taken on lease. The failure to recognise an item of financial element that meets the above criteria. Such is the case of financial lease.e. If the economic benefit from a resource is expected to expire within the current accounting period. closing stock. e.e. recognition is possible only when both of the related financial elements satisfy the specified recognition criteria. To be considered as an asset. For example. in case of credit sale. For example.e. i. i. This means it is possible to recognise a resource not owned but controlled by the enterprise as an asset. When the control over a resource is protected by a legal right. debtors and bills receivable. copyright. copyrights.: (a) The resource regarded as an asset. profit is expected to be earned in the next accounting period. Debtors) can be recognised if on the basis of evidence available on balance sheet date. The readers may note the following points. from machinery purchased by a machinery dealer is expected to expire within the current accounting period.g.g. For example.g. it is not an asset. the income (i. the unsold items are recognised as an asset. because despite of ownership. need not have a physical substance. patents and copyrights or monetary assets. Assets : An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. is not rectified by disclosure of accounting policies used nor by notes or explanatory material. The resource may represent a right generating future economic benefit. even if ownership lies with the lessor. For this reason specific management or technical talent of an employee cannot be recognised because of insufficient control.e. (b) (c) (d) . should be recognised if it is not tax-deductible. if the articles purchased by a dealer remain unsold at the end of accounting period. because the sale of the article and resultant economic benefit. economic benefit. it is probable that the customer shall not return the goods and cash shall actually be realised. However. The recognition criteria of financial elements are inter-related. i.e. An asset is a resource controlled by the enterprise.9 item can influence economic decision of the user. the resource can be recognised as an asset. the lessor do not recognise the asset given on finance lease as asset in his books. The monetary assets are money held and assets to be received in fixed or determinable amounts of money.

if possibility of losing the suit is more than not losing it and if the amount of damages payable cannot be ascertained with reasonable accuracy. the company reports the damages payable as ‘contingent liability’. The enterprise should create a provision for damages payable by charge against profit. to buy a custom-made for ` 40. which can be measured only by using a substantial degree of estimation. the expenditure incurred is recognised as an expense rather than as an asset. The expected scrap value is nil. . the related asset / expense should also be recognised. The damage suit is pending on the balance sheet date. A liability is recognised when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. 2. which does not meet the definition of liability. When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable. A provision created under AS 29 is therefore a type of liability. A liability is recognised when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. These provisions are outside the scope of AS 29 and hence should not be considered as liability. the company had to change its method of production. i. provisions for depreciation and provisions for impairment losses. the resource must have a cost or value that can be measured reliably. At the end of 2010-11.000 to P Ltd. that a provision is a liability. (b) (c) Example A company has entered into a binding agreement with P Ltd. an obligation the existence of which. It may be noted that certain provisions. If in some circumstances such an obligation is recognised as liability.g.10 (e) (f) Advanced Accounting To considered as an asset. e. The new method will not require the machine ordered and shall be scrapped after delivery. before delivery of the machine. The enterprise should recognise a liability for damages payable by a charge against profit if possibility of losing the suit is reasonably certain and if the amount of damages payable can be ascertained with reasonable accuracy. provisions for doubtful debts.e. the settlement of which is expected to result in an outflow of a resource embodying economic benefits. Obligations under contracts equally unperformed (for example obligations against inventory ordered but not received) are not usually recognised as liabilities. represent diminution in value of assets rather than obligations. The following points may be noted: (a) A liability is a present obligation.1. In other cases.000. The company should recognise a liability of ` 40. an enterprise may have to pay compensation if it loses a damage suit filed against it. AS 29 defines. Liabilities: A liability is a present obligation of the enterprise arising from past events. For example. based on the evidence available on the balance sheet date is considered more probable than not.

liabilities and equity of a trader are ` 5 lakh. e. In the present case. flow of future economic benefit from the machine to the enterprise is improbable. the expenditure incurred is recognised as an expense rather than as an asset. Income: Income is increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases in liabilities that result in increase in equity other than those relating to contributions from equity participants. Where: A = Aggregate value of asset B = Aggregate value of liabilities C = Aggregate value of equity Suppose at the beginning of an accounting period. The definition of income encompasses revenue and gains. 4. The accounting entry is suggested below: ` Loss (due to change in production method) To P Ltd. . aggregate values of assets. ` 2 lakh and ` 3 lakh respectively. This means. equity represents owners’ claim consisting of items like capital and reserves. profit on disposal of fixed assets. Income earned is always associated with either increase of asset or reduction of liability. e. It is important to avoid mixing up liabilities with equity.000 ` 40.11 When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable. no income can be recognised unless the corresponding increase of asset or decrease of liability can be recognised by application of the recognition criteria stated above. Example Balance sheet of an enterprise can be written in form of: A – L = E. sales by a trader. which are claims of parties other than owners. which may or may not arise in the ordinary course of activity of the enterprise. Gains are income.g. The entire amount of purchase price of the machine should be recognised as an expense. Revenue is an income that arises in the ordinary course of activities of the enterprise. In other words. Equity: Equity is defined as residual interest in the assets of an enterprise after deducting all its liabilities. Gains are shown as a separate line item in the statement of income because knowledge of them is useful in assessing performance of the enterprise.g. which are clearly distinct from liabilities.Conceptual Framework for Preparation and Presentation of Financial Statements 1. 40. Equity is the excess of aggregate assets of an enterprise over its aggregate liabilities. The definition of income and expense makes use of this fact.000 3. The value of equity may change either through contribution from / distribution to equity participants or due to income earned /expenses incurred.

000 (b) Earned income from investment ` 8.1. e.g. Also note that income earned is accompanied by either increase of asset (Cash received as investment income) or by decrease of liability (Discount earned). loss on disposal of fixed assets. (a) Introduced capital ` 20. Incomes are therefore increases in equity without introduction of capital. application of matching concept should not result in recognition of an item as asset (or liability).000 (Income from investment + Discount earned).000 (c) A liability of ` 31.28 3. Balance sheets of the trader after each transaction are shown below: Transactions Opening (a) Capital introduced (b) Income from investments (c) Settlement of liability Assets `lakh 5.00 1.g.28 4.000 was finally settled on payment of ` 30.00 5.00 3.00 2. Example A bank does not recognise interest earned on non-performing assets because the corresponding asset (increase in advances) cannot be recognised.69 = = = = = Equity `lakh 3. which does not meet the definition of asset or liability as the case may be. the losses may or may not arise in the ordinary course of activity of the enterprise.20 5.000 during the accounting period.000 and (ii) Income earned ` 9. due to (i) Capital introduction ` 20. wages paid. Expense: Paragraph 69(b) of the framework defines an expense as decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity participants. However.20 3. The definition of expenses encompasses expenses that arise in the ordinary course of activities of the enterprise.12 Advanced Accounting Also suppose that the trader had the following transactions during the accounting period. Expenses are always incurred simultaneously with either reduction of asset or increase of liability. Losses are shown as a separate line item in the statement of income because knowledge of them is useful in assessing performance of the enterprise. .29 The example given above explains the definition of income. as flow of economic benefit to the bank beyond current accounting period is not probable. Expenses are recognised in Profit & Loss A/c by matching them with the revenue generated.98 – – – – – Liabilities `lakh 2. Thus.000. e. 5. expenses are recognised when the corresponding decrease of asset or increase of liability are recognised by application of the recognition criteria stated above. The equity increased by ` 29.00 2.

Example Continuing with the same example given under para 4 above.00 5.00 2.000 (Wages paid + Rent). Also note that expenses incurred is accompanied by either decrease of asset (Cash paid for wages) or by increase in liability (Rent outstanding).26 lakh to ` 3.26 3.20 3. Balance sheets of the trader after each transaction are shown below: Transactions Opening (a) Capital introduced (b) Income from investments (c) Settlement of liability (d) Wages paid (e) Rent Outstanding (f) Drawings Assets ` lakh 5.20 5.000.25 4.24 3.000 from ` 3.000.19 lakh due to (i) Drawings ` 4.00 3.93 4.000 and (ii) Expenses incurred ` 3.25 3.95 4. Expenses are therefore decreases in equity without drawings.13 Where economic benefits are expected to arise over several accounting periods.19 The example given above explains the definition of expense.23 3. as is the case when a liability under a product warranty arises.70 = = = = = = = = Equity ` lakh 3.89 – – – – – – – – Liabilities ` lakh 2.93 4.69 1.00 1.69 1.000 (c) Drawings ` 4. The obvious example is that of depreciation.00 2. An expense is recognised immediately in the Profit & Loss A/c when it does not meet or ceases to meet the definition of asset or when no future economic benefit is expected. Note: The points discussed above leads us to the following relationships: Let us take: Closing equity (CE) = Closing Assets (CA) – Closing Liabilities (CL) Opening Equity (OE) = Opening Assets (OA) – Opening Liabilities (OL) Capital Introduced = C Drawings = D Income = I . The equity decreased by ` 7. An expense is also recognised in the Profit & Loss A/c when a liability is incurred without recognition of an asset.Conceptual Framework for Preparation and Presentation of Financial Statements 1.70 1. suppose the trader had the following further transactions during the period: (a) Wages paid ` 2. expenses are recognised in the Profit & Loss A/c on the basis of systematic and rational allocation procedures. (b) Rent outstanding ` 1.

The valuation of income or expenses.1. The point to note that reported figures of profit change with the changes in the valuation basis. In some circumstances a liability is recorded at the amount of cash or cash equivalent expected to be paid to satisfy it in the normal course of business.00.00. i.a..it is historical cost of the transactions. For example. 10%. You know every individual has to pay income tax on his income if it exceeds certain minimum limit. The framework recognises four alternative measurement bases for the purpose.000 loan from a bank @ 10% interest p. which is technically called assessment year.00. The income tax authority settles it some time later. Take another case regarding payment of income tax liability. Then how does he record this liability? As per historical cost base it is to be recorded at an amount expected to be paid to discharge the liability.e.000. The historical cost of machine would be ` 7. the reported profits are mostly based on historical cost conventions. Conceptually.9 Measurement of Elements of Financial Statements Measurement is the process of determining money value at which an element can be recognised in the balance sheet or statement of profit and loss. When one Mr. by the value of change in assets and liabilities.e. Since historical costs are mostly used for valuation. assets are recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition. Historical Cost: Historical cost means acquisition price. . According to this base. Proceeds received are ` 5. the businessman paid ` 7. it is to be recorded at the amount of proceeds received in exchange for the obligation.000.14 Advanced Accounting Expenses = E CE = OE + C + (I – E) – D Or Or Or CE = OE + C + Profit – D Profit = CE – OE – C + D Profit = (CA – CL) – (OA – OL) – C + D From above one can clearly see that profit depends on values of assets and liabilities. this is the foundation of idea of Capital Maintenance. profit is implied. In preparation of financial statements. Here the obligation is the repayment of loan as well as payment of interest at an agreed rate i. A brief explanation of each measurement base is as follows: 1.000 to purchase the machine.000 . Liabilities are recorded at the amount of proceeds received in exchange for the obligation.00.00. These bases relate explicitly to the valuation of assets and liabilities. takes ` 5. The framework recognises other methods of valuation of assets and liabilities. 1. But the income tax liability is not settled immediately when one earns his income. X a businessman. its acquisition price including installation charges is ` 8. all or any of the measurement base can be used in varying combinations to assign money values to financial items.

e.75.000 at the amount or proceeds received in exchange for obligation and asset is recorded at ` 7.000 ` 1. 1.50.000. Assets are carried out at the amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired currently. The current market value of similar machine in India is ` 5 lakhs. the acquisition price.000 Carrying amount Historical cost of the machine = Fair value of car given on exchange + Cash paid 2.2011.000 1. 2000 at ` 7.75.000 i.000.70. As on 1.00.00. As per historical cost the liability is recorded at ` 5. X purchased a machine on 1st January. 5. X took loan from a bank as on 2000 ` 5.00.a repayable at the end of 15th year together with interest.00.000.15 Historical cost of an asset is cash or cash equivalent paid or fair value of other consideration given at the time acquisition of the asset.000.000 – ` 1. The carrying amount of the car was ` 1. By historical cost convention liabilities are recorded with the amount of proceeds received in exchange of the obligation or in some cases (for example liability for income tax) the amount that is likely to be paid for settlement of liability in the normal course of business.000. The accounting entry to record the exchange is suggested below: ` Machinery A/c Loss on disposal of car A/c To Car A/c To Bank A/c Dr. Current Cost: Current cost gives an alternative measurement base.000. Example: A machine was acquired in exchange of an old car and ` 20. By historical cost convention. ` Machinery A/c To Deferred Payment Obligation To Revaluation Reserves (Note 1) Dr. As on 1. X found that it would cost ` 25.000 ` 4.1. the machine would have been recorded at ` 4.50. Take also that Mr.000 to purchase that machine. Mr.50. Dr.2011 the bank announces 1% prepayment penalty on the loan amount if it is paid within 15 days starting from that day. The fair value of the car on the date of exchange was ` 1.75.90.000 paid in cash. The payments are to be made in 5 equal annual instalments together with 10% interest per year.000 Current cost of the machine = Current market price = ` 5. The rate of exchange on the date of acquisition was ` 49/$.000 @ 18% p. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently.00.000 + ` 20.000 25. Take that Mr.00. As per historical cost base he has to record it at ` 7.000 20.000 10.Conceptual Framework for Preparation and Presentation of Financial Statements 1. .000 ` ` 1.00.90.000 on deferred payment basis.1.00. Example: A machine was acquired for $ 10.

one has to invest on current date to have A after n years. If the rate of interest is R then. The rate of interest used for discounting is called the discounting rate.16 Advanced Accounting To settle the deferred payment on current date one must buy dollars at ` 49/$.1)1 Or Present value of ` 11.10 )1 Or Present value of ` 11.000 after 1 year = 11. this is the amount currently realisable on sale of the asset in an orderly disposal.000 after 1 year.000 (1. 4. Present Value: Present value of an amount A. the undiscounted amount of cash or cash equivalents expressed to be paid to satisfy the liabilities in the normal course of business. A = ` 11. they are not included in the Profit & Loss A/c under certain concepts of capital maintenance.000 = 10.1. Realisable (Settlement) Value: For assets. Liabilities are carried at their settlement values.000 (future cash outflow) after 1 year. The liability is therefore recognised at ` 4. While these increases or decreases meet the definition of income and expenses. Haphazard disposal may yield something less.000 (future cash inflow) after 1 year. in current cost convention. Let us take a numerical example assuming interest 10%. A = P(1 + R)n Or P (Present value of A after n years) = A 1 = A× n (1 + R ) (1 + R )n The process of obtaining present value of future cash flow is called discounting. 3.000 Note that a receipt of ` 10.000 (present value) now is equivalent of a receipt of `11. i.000 (present value) now is equivalent of paying of ` 11.90. For liabilities. assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the assets in an orderly disposal.000 and n = 1 year 11. Instead these items are included in equity as capital maintenance adjustments or revaluation reserves.000 now he can invest to collect ` 11.e.909 = ` 10. a payment of ` 10. Likewise. called discounting factor depends on values of R and n.000 after 1 year = 11.000 × 0. .000 × 1 (1.10 ) 1 = 11.000(1 + 0. liabilities are recognised at undiscounted amount. this is the undiscounted amount expected to be paid on settlement of liability in the normal course of business. As per realisable value.000 ($ 10.000 × ` 49). This is because. Note 1: Paragraph 80 of the conceptual framework provides that revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity. Note that the amount of liability recognised is not the present value of future payments. after n years is the amount P. The expression [1/(1+R)n]. because if one gets ` 10.

000 for 5 years. The asset is currently overstated by ` 2.17 Thus if an asset generates ` 11.751 + 0. The enterprise can either use the machine to earn ` 10. The machine is expected to generate ` 10.000 – ` 37.100 ` 2. The overstatement of the asset is called impairment loss.909 + 0. as to ensure continued operations at least . The enterprise’s required earning rate is 10% per year.000 The company should use the asset to realise ` 37.10 Capital Maintenance Capital refers to net assets of a business.000 at the current date if the rate of earning required is 10% (` 11.100 2. If an asset generates ` 11.100 2.000 × 0. Value in use = ` 10. and ` 12. Dr.Conceptual Framework for Preparation and Presentation of Financial Statements 1. The value realised by use of the asset is called value in use.826 + 0.100 (` 40. it is actually contributing ` 20. It is therefore important for any business to maintain its net assets in such a way.900 The value of the asset is ` 37.e. assets are carried at present value of future net cash flows generated by the concerned assets in the normal course of business.000 (0. The value in use is the value of asset by present value convention. Example: Carrying amount of a machine is ` 40.100 × 0.000 at the current date if the rate of earning required is 10%.909 + ` 12.000 for 5 years at discounting rate 10% on current date.000 net cash inflow. it is actually contributing ` 10. a fall in net assets will usually mean a fall in its activity level. Under present value convention. The net realisable value (or net selling price) of the machine on current date is ` 35. Since a business uses its assets for its operations.621) = ` 37. Liabilities under this convention are carried at present value of future net cash flows that are expected to be required to settle the liability in the normal course of business.100 after two years.100 1.000.000 after 1 year. which is called its recoverable value.900 Net selling price = ` 35. In other words the value of the asset is ` 10.000. In other words the value of the asset is ` 20.000 (Historical cost less depreciation).683 + 0. which is the present value of net future cash inflow it generates. The accounting entries to recognise the impairment loss and to bring down the asset to its recoverable value are suggested below: ` Impairment Loss A/c To Machinery Profit & Loss A/c To Impairment Loss A/c Dr. 2. This is equivalent of receiving present value of ` 10.000 after 1 year.900. It is obviously not appropriate to carry any asset at a value higher than its recoverable value. i.900). the present value of net future cash inflow it generates.826). 000.

the capital is said to be maintained at historical costs. dividends should not exceed profit after appropriate provisions for replacement of assets consumed in operations. The opening equity at closing prices is ` 3. If retained profit is greater than zero. opening and closing equity at historical costs are restated at closing prices using average price indices.00. this may not be enough in case of rising prices. closing equity should not be less than capital to be maintained.18 Advanced Accounting at the same level year after year.000 if closing price index is 120).60. It should be clear from above that the value of retained profit depends on the valuation of assets and liabilities. closing date.e. The opening and closing equity at closing current costs are obtained as excess of aggregate of current cost values of assets over aggregate of current cost values of liabilities.000 and opening price index is 100. In other words. (For example. which is sum of opening equity and capital introduced.e. whether or not retained profit is negative. . opening and closing assets are stated at respective historical costs to ascertain opening and closing equity. i. we can use any of the following three bases: Financial capital maintenance at historical cost: Under this convention. price of a machine can increase by 30% while the average increase is 20%.1. the Companies Act does not permit distribution of dividend without providing for depreciation on fixed assets. This is quite right as long as prices do not rise. Physical capital maintenance at current costs: Under this convention. For example. In order to check maintenance of capital. the historical costs of opening and closing assets are restated at closing prices using specific price indices applicable to each asset. Unfortunately. This means the business will have enough funds to replace its assets at historical costs. This may not serve the purpose because in reality prices of all assets do not change at average rate. For this reason. The liabilities are also restated at a value of economic resources to be sacrificed to settle the obligation at current. i. The point is explained below: We have already observed: P = (CA – CL) – (OA – OL) – C + D Where: Profit = P Opening Assets = OA and Opening Liabilities = OL Closing Assets = CA and Closing Liabilities = CL Introduction of capital = C and Drawings / Dividends = D Retained Profit = P – D = (CA – CL) – (OA – OL) – C Or Retained Profit = Closing Equity – (Opening Equity + Capital Introduced) A business must ensure that Retained Profit (RP) is not negative. suppose opening equity at historical cost is ` 3. A positive retained profit by this method means the business has enough funds to replace its assets at average closing price. A positive retained profit by this method ensures retention of funds for replacement of each asset at respective closing prices. Financial capital maintenance at current purchasing power: Under this convention. i.e.

000 – ` 6.000 – ` 12. Thus: Opening Equity = ` 12.000 is not sufficient to buy 6.000) represented entirely by cash.50 per unit.400 (6.600 instead of `6. Retained Profit = ` 12.000) represented entirely by cash.40) Closing Equity at closing price = ` 12.000 / 100) x 120 = ` 14.000 – ` 2.000 (` 6.000 The negative retained profit indicates that the trader has failed to maintain his capital. Example (Financial capital maintenance at current purchasing power) In the previous example.000 (` 18.000 units at ` 2. Had the trader withdrawn ` 3.000 units again at increased price ` 2.000 (` 18.Conceptual Framework for Preparation and Presentation of Financial Statements Example (Financial capital maintenance at historical costs) 1.000 – ` 6. Retained Profit = ` 12.600 (` 6. Closing Equity = ` 12.40 per unit.000.000 Retained Profit = ` 12. The whole process can repeat endlessly if there is no change in purchase price of the product.000 represented by 6.19 A trader commenced business on 01/01/2010 with ` 12.400 The negative retained profit indicates that the trader has failed to maintain his capital. In other words.000 units again at increased price ` 2. .000 (` 18.400.000 units of a certain product at ` 2 per unit. During the year 2010 he sold these units at ` 3 per unit and had withdrawn ` 6.000 units at ` 2 per unit once again for selling them at ` 3 per unit.000 units at ` 2 per unit.000 is not sufficient to buy 6. Current cost of opening stock = (` 12. the fund required to buy 6.000) Opening equity at closing current costs = ` 15.000 – ` 14.000 – ` 15. the specific price index applicable to the product is 125.50 per unit. The available fund ` 12.50 = ` 15.000 – ` 3.400 = (-) ` 2. he should have restricted his drawings to ` 3.000 x ` 2.000 Current cost of closing cash = ` 12.000 = Nil The trader can start year 2011 by purchasing 6. suppose that the average price indices at the beginning and at the end of year are 100 and 120 respectively. In fact. The available fund ` 12.40 per unit.000 Closing equity at closing current costs = ` 12.000 x ` 2.400). he would have left with ` 14. The drawings should have been restricted to ` 3.000 – ` 6.000 units at ` 2 per unit.000 / 100) x 125 = 6.000 represented by 6. suppose that the price of the product at the end of year is ` 2. Example (Physical capital maintenance) In the previous example. Opening equity at closing price = (` 12.000 = (-) ` 3.000 represented by 6. Opening Equity = ` 12.000).000.

000.000 Nil ` 12.50 per unit. .000 units at ` 2. iv) Suppliers and other trade creditors. ii) Profit & Loss A/c. vii) public.400 Nil ` 12. iv) Notes • Users of Financial Statements i) Investors. he would have left with `15.000) Nil ` Closing capital (At closing price) Less: Capital to be maintained Opening capital (At closing price) Introduction (At closing price) Retained profit Physical Capital Maintenance 14.000 Nil ` 12.400) ` Closing capital (At current cost) Less: Capital to be maintained Opening capital (At current cost) Introduction (At current cost) Retained profit 15. v) Customers.000 instead of ` 6. the fund required to buy 6. The three ideas of capital maintenance are summarised below for convenience Financial Capital Maintenance at historical costs ` Closing capital (At historical cost) Less: Capital to be maintained Opening capital (At historical cost) Introduction (At historical cost) Retained profit Financial Capital Maintenance at current purchasing power 12.400) (2.20 Advanced Accounting Had the trader withdrawn ` 3.000 (14. iii) Cash Flow Statement.1.000 (15. vi) Governments and their agencies.000) (3. iii) Lenders. ii) Employees.000.000) Summary • Components of Financial Statements i) Balance Sheet.000 (12.

ii) Financial capital maintenance at current purchasing power Opening and closing equity at historical costs are restated at closing prices using average price indices iii) Physical capital maintenance at current costs The historical costs of opening and closing assets are restated at closing prices using specific price indices P = (CA – CL) – (OA – OL) – C + D Where: Profit = P Opening Assets = OA and Opening Liabilities = OL Closing Assets = CA and Closing Liabilities = CL Introduction of capital = C and Drawings / Dividends = D Retained Profit = P – D = (CA – CL) – (OA – OL) – C or Retained Profit = Closing Equity – (Opening Equity + Capital Introduced) . iii) Accrual • Qualitative Characteristics of Financial Statements i) Understandability. ii) Liabilities. iv) Income/gains and v) Expenses/ losses.21 • Fundamental Accounting Assumptions i) Going Concern. v) True & Fair View • Elements of Financial Statements i) Assets. iii) Equity. iii) Realisable (Settlement) Value and iv) Present Value. ii) Relevance. • Capital Maintenance i) Financial capital maintenance at historical cost Opening and closing assets are stated at respective historical costs to ascertain opening and closing equity. iii) Reliability. ii) Current Cost.Conceptual Framework for Preparation and Presentation of Financial Statements 1. iv) Comparability. ii) Consistency. • Measurement of Elements in Financial Statements i) Historical Cost .

you will be able to: ♦ Understand the provisions of the given Accounting Standards.2 Accounting Standards Learning objectives After studying this chapter. You must have already studied the concept. impairment of receivables (i. it also helps to reduce the cost of capital because investors can have faith in financial reports and consequently perceive lesser risks. in the interests of users of financial statements. “Provisions. pursuant to AS 29. measurement. 2. all paragraphs of this standard that deal with contingencies stand withdrawn except to the extent they deal with impairment of assets not covered by other Indian Accounting Standards. . Solve the practical problems based on application of Accounting Standards ♦ 1. objectives. consistency and transparency.2004. in Chapter 1 of “Accounting” IPCC Study Material – Group I.4. 2.e. Introduction Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition. The accounting standards aim at improving the quality of financial reporting by promoting comparability. Contingent Liabilities and Contingent Assets’ becoming mandatory in respect of accounting periods commencing on or after 1. For example. in detail. However.1 Overview AS 4: Contingencies and Events Occurring After the Balance Sheet Date Accounting Standard 4 ‘Contingencies and Events Occurring after the Balance Sheet Date’ covers accounting treatment of (i) (ii) contingencies and events occurring after the balance sheet date. benefits and limitations. Good financial reporting not only promotes healthy financial markets. applicability and compliance of Accounting Standards. provision for bad and doubtful debts) would continue to be covered by AS 4. presentation and disclosure of accounting transactions in the financial statements.

Out of it. impairment of assets and doubtful debts. the ultimate outcome of which. ASB has clearly stated that as per AS 29 ‘provisions’ are liabilities which can be measured only by using a substantial degree of estimation. both favourable and unfavourable. It is obvious that all financial events upto the balance sheet date should be taken into consideration in preparation of financial statements for an accounting period. It is impractical to require enterprises to report events after approval of financial statements because such a requirement necessitates fresh approval of financial statements and thus starts an endless cycle of change of report and fresh approval. provision for bad and doubtful debts).Accounting Standards 2. It further says that the term ‘provision’ is also used in the context of items such as depreciation.2 The ASB has issued an announcement on ‘Applicability of AS 4 to impairment of assets not covered by present Indian Accounting Standards’. will be known or determined only on the occurrence. these are adjustments to the carrying amounts of assets. both favourable and unfavourable. Events Occurring after Balance Sheet Date Transactions are financial events. that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company. or non-occurrence. However.e. In view of this. of one or more uncertain future events. by the corresponding approving authority in the case of any other entity. the knowledge of which is important for making assessment of performance and affairs of the reporting enterprise during the accounting period and also for making projections for the future. gain or loss. depreciation is dealt with as per AS 6 and impairment is dealt with as per AS 28. it has been decided that the paragraphs of AS 4 which deal with contingencies would remain operational to the extent they cover the impairment of assets like receivables (i. Certain significant events may however occur after the balance sheet date. Events occurring after the balance sheet date are those significant events. In the announcement. and (b) those which are indicative of conditions that arose subsequent to the balance sheet date. Two types of events can be identified: (a) those which provide further evidence of conditions that existed at the balance sheet date. and. the impairment of financial assets like receivable (provision for bad and doubtful debts) is not dealt with by any of the existing mandatory standards. that occur between the balance sheet date and the date on which the financial statements are approved by the • . Definitions The following terms are used in this Statement with the meanings specified: • A contingency is a condition or situation. It is clearly important to communicate such events to the users of financial statements as far as possible. Paragraph 3 of the standard define that events occurring after the balance sheet date are those significant events.

Also. . income and equity for the accounting period. The sale of land after the balance sheet date is therefore an adjusting event. its nature and an estimate of its financial effect are generally disclosed by way of note unless the possibility of a loss is remote. Pending the agreement for sale and due to non-receipt of valuers report. If a contingent loss is not provided for. liability.. When the events occurring after the balance sheet date are disclosed in the report of the approving authority.2. i. expenses. existed on the balance sheet date. The company received the report on April 7. if a fraud during the accounting period is detected after the balance sheet date but before approval of the financial statement. Adjusting Events • An event after the balance sheet may require adjustment of reported values of assets. if the event is such as to provide further evidence of conditions that existed at the balance sheet date.3 Advanced Accounting Board of Directors in case of companies and by the corresponding approving authority in case of other entities. the sale of the land could not be completed up to 31/03/11. Such events are adjusting events. The financial statements for 2010-11 were approved by the board on May 12.e. Directors’ Report in case of companies and report of corresponding approving authority in case of other entities. which means the sale transaction should be recorded in books of A Ltd. 2011. If a reliable estimate of the financial effect cannot be made. For example. (Paragraph 13) The disclosure requirements herein referred to apply only in respect of those contingencies or events which affect the financial position to a material extent. which led to the sell. for the purpose of its financial statements for 2010-11. • Disclosure • • • Example 1 A Ltd. this fact is disclosed. The sale of land is an event occurring after the balance sheet date. whose accounting year ends on 31/03/2011. The signing of the agreement provides further evidence as to the condition that existed on the balance sheet date. The events occurring after the balance sheets can be reported either by (i) making appropriate adjustments in the financial statements or (ii) through report of the approving authority. 2011 and the agreement was signed on April 10. it is necessary to recognise the loss and change the reported values concerned elements of financial statement. agreed in principle to sell a plot of land on 18/03/2011 at a price to be determined by an independent valuer. the condition. the information given comprises the nature of the events and an estimate of their financial effects or a statement that such an estimate cannot be made. 2011.

expenses. in reporting non-adjusting events. As per paragraph 17 of the standard. The last accounting year of the company ended on 31/03/11 and the financial statements for the year were approved on May 8. as the case may be) should state the nature of the event along with their estimate of financial effect of the event. i. but since the earthquake did not exist on the balance sheet date. The company recognizes cheques dated 31st March or before. Such events do not justify change in the reported values of assets. the directors (or other approving authority. All Cheques in hand are presented to bank in the month of April and are also realised in the same month in normal course after deposit in the bank. Example 3 A company follows April-March as its financial year. 2011. the destruction by earthquake is a non-adjusting event. Such events should be disclosed in the report of approving authority (Paragraph 15). The Report of the Directors for 2010-11 should disclose the fact of earthquake together with an estimate of loss on earthquake. the collection of cheques after balance sheet . Such events. should be disclosed in the report of approving authority. Recognition of cheques in hand is therefore not consistent with requirements of AS 4.Accounting Standards Non-adjusting events • 2. an announcement after balance sheet date but before approval of financial statement. Where estimate of financial effect cannot be made. For example. The destruction of warehouse is a significant event occurring after the balance sheet date. 2011. Thus the collection of cheques after balance sheet date is not an adjusting event. income or equity. of a formal plan to discontinue an operation does not justify adjustment of financial statement of the accounting period already over. the report should state the fact that such an estimate cannot be made. received from customers after balance sheet date but before approval of financial statement by debiting Cheques in hand A/c and crediting the Debtors A/c. Even if the cheques bear the date 31st March or before. if they represent material changes and commitments affecting financial position of the enterprise. the cheques received after 31st March do not represent any condition existing on 31st March. Moreover. on April 20. The Cheques in hand is shown in balance sheet as an item of cash and cash equivalents. liabilities. The value of property lost by earthquake therefore need not be recognised in financial statement of 2010-11.e. Directors’ Report in case of companies and report of corresponding approving authority in case of other entities. but is indicative of material change in future. • • • Example 2 An earthquake destroyed a major warehouse of C Ltd.4 Events after balance sheet date may result from conditions arising subsequent to the balance sheet date. If no estimate of loss can be made. the report should state that loss on earthquake could not be estimated.

. liabilities. Yet. as per paragraph 14 of the standard. theft of cash of ` 5 lakhs by the cashier in January. it does not have any control over the cheques on 31st March and hence cheques in hand do not qualify to be recognized as asset on 31st March. Since the fire occurred after 31/03/11.5 Advanced Accounting date does not represent any material change or commitments affecting financial position of the enterprise. 2011 was detected only in May. 2. the proposed dividend should be treated as adjusting event and be recognised in balance sheet as provision. Exception to rule: 1. Solution (i) As per paragraph 13 of AS 4 (revised) ‘Contingencies and Events occurring after the Balance Sheet Date’. do not reflect any condition existing on the balance sheet date. Yet. 2011. if the event is such as to indicate that the fundamental accounting assumption of going concern is no longer appropriate.2011. Proposed Dividend: The directors propose dividends after balance sheet date for the obvious reason that no dividend can be proposed till the year is over and profit is ascertained. an event occurring after the balance sheet date shall be an adjusting event even if it does not reflect any condition existing on the balance sheet date. The accounts of the company were not yet approved by the Board of Directors of the company. and so no disclosure of such collections in the Directors’ Report is necessary. the loss should be recognised in the statement of profit and loss for 2010-11 and the assets lost should be written off from the balance sheet dated 31/03/11. Illustration 1 In X Co. expenses or incomes. the Framework for Preparation and Presentation of Financial Statement defines assets as resources controlled by an enterprise as a result of past events from which economic benefits are expected to flow to the enterprise. The loss on fire is of such a magnitude that it is not reasonable to expect the enterprise to start operations again. an event occurring after the balance sheet date may require adjustment to the reported values of assets.3. Ltd. Since the company acquires custody of the cheques after 31st March. The dividends proposed by the directors however.2. the loss on fire is not a result of any condition existing on 31/03/11. Suppose a fire occurred in the factory and office premises of an enterprise after 31/03/11 but before approval of financial statement of 2010-11. Events indicating going concern assumption inappropriate: As per paragraph 13 of the standard. Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31. It should also be noted that. Decide..

6 If a fraud of the accounting period is detected after the balance sheet date but before approval of the financial statements.2012.Accounting Standards 2. it is necessary to recognize the loss amounting `5. Accounting standard 5. However.2012. if such events do not relate to conditions existing at the balance sheet date. to recur in future. losses on fire. loss occurred due to earthquake is not to be recognised in the financial year 2011-2012. therefore fundamental accounting assumption of going concern is called upon.g. rather than an actual transaction. the fact of earthquake together with an estimated loss of `30 lakhs should be disclosed in the Report of the Directors for the financial year 2011-2012.6 of the standard. 2. For example. This is definitely not true for profit/loss on disposal of fixed assets. some can be adjustments for prior period errors. Also.000 and adjust the accounts of the company for the year ended 31st March.2012. one can reasonably expect profit / loss from ordinary activities like purchases and sale of goods by a trader. Solution Para 8. As per the information given in the question. e. some can be rare.5. Illustration 2 An earthquake destroyed a major warehouse of ACO Ltd. prescribes classification and disclosure requirements for items of income/gains and expenses/losses recognised in a statement of profit and loss. The accounts were approved on 30.g. e. profit/loss on disposal of fixed assets.3 of AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”. Hence.2012. 31. Some of them can be irregular. states that adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date. Financial implications of these are not same. the earthquake has caused major destruction.6. according to para 8.3. whether the loss due to earthquake is an adjusting or non-adjusting event and how the fact of loss is to be disclosed by the company. State with reasons.e. There can also be certain items reflecting changes in accounting policies and estimates. on 20.3. . increase in profit due to expenses saved is not same as increase in profit due to change in depreciation methods. unusual changes affecting the existence or substratum of the enterprise after the balance sheet date may indicate a need to consider the use of fundamental accounting assumption of going concern in the preparation of the financial statements. The accounting year of the company ended on 31. Prior Period Items and Changes in Accounting Policies The items of income/gains and expenses/losses recognised in a statement of profit and loss differ in financial implications. Therefore. The loss from earthquake is estimated at ` 30 lakhs.2 AS 5: Net Profit or Loss for the Period. 2007.00. The destruction of warehouse due to earthquake did not exist on the balance sheet date i.

7 Advanced Accounting For the purpose. Definitions The following terms are used in this Statement with the meanings specified: • Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of. these activities. By setting a uniform basis of preparation and presentation of statements of profit and loss. or arising from. Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. incidental to. AS 5 puts items recognised in statements of profit and loss in six broad groups. The presentation and disclosure requirements are such that special nature of an item is apparent to the reader of financial statement. are not expected to recur frequently or regularly. • • • The important requirements regarding different items are as below: Ordinary Activities Where income or expenses arise out of ordinary activities but are of exceptional size. Circumstances. they should be disclosed as separate line item in the statement of profit and loss. the AS 5 improves comparability financial statements of same enterprise of different accounting periods and of different enterprises for same accounting period. nature or incidence. which may give rise to the separate disclosure of items of income and expense in accordance with paragraph 12. include: (a) the write-down of inventories to net realisable value as well as the reversal of such writedowns. Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. (Paragraph 12). .2. Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and. namely :(i) (ii) Ordinary Ordinary but exceptional (iii) Extra-ordinary (iv) Prior period items (v) Changes in accounting policies (vi) Changes in accounting estimates. The standard is mandatory and applies to all enterprises. therefore.

Therefore. losses sustained as a result of an earthquake may qualify as an extraordinary item for many enterprises. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived. (d) disposals of long-term investments. The prior period items are normally included in determination of net profit or loss for the current period. refers only to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. (Paragraph 8) Whether an event or transaction is clearly distinct from the ordinary activities of the enterprise is determined by the nature of the event or transaction in relation to the business ordinarily carried on by the enterprise rather than by the frequency with which such events are expected to occur. Examples of events or transactions that generally give rise to extraordinary items for most enterprises are attachment of property of the enterprise.. However.g. or an earthquake. claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks. arrears payable to workers as a result of revision of wages with retrospective effect during the current period. they can be added (or deducted as the case may be) from the current profit • • Prior Period Items • • • . (c) disposals of items of fixed assets. (Paragraph 15) The term ‘prior period items’.Accounting Standards 2. e. For example. where the prior period items are not taken in computation of current profit. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on current profit or loss can be perceived. The term does not include other adjustments necessitated by circumstances. as defined in this Statement.8 (b) a restructuring of the activities of an enterprise and the reversal of any provisions for costs of restructuring. are determined in the current period. and (g) other reversals of provisions Extraordinary Items • • The extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. an event or transaction may be extraordinary for one enterprise but not so for another enterprise because of the differences between their respective ordinary activities. (e) legislative changes having retrospective application. (f) litigation settlements. Alternatively. which though related to prior periods.

800 3. this fact should be disclosed.000 (2.9 Advanced Accounting In either case. The nature and amount of change in accounting estimate which has a material effect in the current period.2. if the change affects both.g. the disclosure should be such as to clearly show the effects of such items. or which is expected to have a material effect in subsequent periods. provision for doubtful debts and depreciation. If it is impracticable to quantify the amount. while a change in estimated working life of a depreciable asset affects current as well as future periods. or the period of change and the future periods. (Paragraph 27) • • Illustration 3 An extract from the statement profit and loss of a company for 2010-11 is given below: ` 000 Sales Opening stock Production cost Less: Closing Stock Gross Profit Expenses Profit before tax Tax Profit after tax 500 2.700) 300 (250) 50 20 30 .300 (600) ` 000 3. the effect of change should also be taken as extraordinary item. are estimates rather than precise measures. (Paragraph 25) If the change of accounting estimate affects an item previously classified as extraordinary item. The effect of a change in accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate. the change in accounting estimate should be included in the determination of net profit or loss in: the period of change. (Paragraph 19) Changes in Accounting Estimates • • The students are aware that many items of financial statements. • • A change in estimate for doubtful debts affects current period only. if the change affects the period only. should be disclosed. e. As per paragraph 23 of the standard.

000 (2.000 should be classified as extra ordinary item in 2009-10 as well. The revised estimate of net realisable value included in closing stock of 2010-11 is ` 5. Since paragraph 25 does not permit change in classification. Paragraph 8 of the standard requires the extraordinary items to be disclosed in such manner that their impact on current profit or loss can be perceived. ` 000 Sales Opening stock (500 – 15) Production cost Less: Closing Stock (600 – 5) Gross Profit Expenses Profit before loss on fire Less: Loss on fire Profit before tax Tax Profit after tax Accounting Policies • • These are specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. A change in accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.10 The closing stock includes stock damaged in a fire in 2009-10.Accounting Standards 2.000. The loss on fire is an extraordinary item. On 31/03/10.690) 310 250 60 (10) 50 20 30 .000. Solution The fall in estimated net realisable value of damaged stock ` 10. As per paragraph 25 of the standard. enterprises should present profit/loss before and after extraordinary items.000 is the effect of change in accounting estimate.800 3. the fall in net realisable value of damaged stock ` 10. The difference between cost of the stock and its net realisable value after fire was presumably classified as loss on fire in 2009-10. 485 2.285 (595) ` 000 3. Rewrite the statement of profit and loss if necessary to comply with requirements of AS 5. To comply with this requirement. the estimated net realisable value of this stock was ` 15. the effect of a change in accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate.

to reflect the effect of such change. Illustration 5 When can an item qualify to be a prior period item as per AS 5? Solution According to para 16 of AS 5 on ‘Net Profit or Loss for the Period.00. and the adjustments resulting from such change. the fact of change should be appropriately disclosed in the current period. any material effect of change in accounting policy should be disclosed in the financial statement.500 x 2 = ` 81.000 – ` 9. Where the change does not have any material effect in current period. In such cases the change is treated as change in accounting estimate. which .321) is regarded as effect of change in accounting estimate as per paragraph 22 of the standard. The new rate shall apply with retrospective effect from 01/04/08.000 (1 – 0.000 – ` 68. Since it is difficult to segregate impact of these two changes. and adoption of reducing balance method of depreciation instead of the straight-line method is change in accounting policy.000 WDV of asset at the end 2009-10 (by reducing balance method) = ` 1. For and from 2010-11. the fact should be indicated. The machine is expected to realise ` 5.11 • Advanced Accounting As per paragraph 32 of the standard.500 = ` 14. the entire amount of difference between depreciation at old rate and depreciation charged in 2010-11 (` 23. but is reasonably expected to materially affect the later periods.17) 2 = ` 68. should be shown in the financial statements of the period in which such change is made. Solution WDV of asset at the end of 2009-10 = ` 1.000 at the end of its working life of 10 years. Prior Period Items and Changes in Accounting Policies’.890 Depreciation to be charged in 2010-11 = (` 81.821 – ` 9. if material.890 = ` 23.a. Where the effect of change in accounting policy is not ascertainable.00. the revision of remaining useful life is change in accounting estimate. • • • Illustration 4 Cost of a machine acquired on 01/04/2008 was ` 1. As per paragraph 22 of the standard. sometimes it is difficult to distinguish between change in accounting policy and change in accounting estimate.2.821 In this example.500 per year has been charged upto 2009-10. The new rate of depreciation is based on revised useful life of 13 years. reducing balance method of depreciation in respect of the machine.000. Straight-line depreciation of ` 9.00. prior period items refers to those income or expenses. The impact of. with appropriate disclosure. the company switched over to 17% p.890) + 17% of ` 68.

Illustration 7 Explain the provisions of AS -5 regarding accounting treatment of prior period items. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss.4. 2011 with reference to AS 5. in the current period as a result of errors or omission in the preparation of financial statements of one or more prior periods. for the year ended 31st March. As per para 19 of the standard. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in manner that their impact on current profit or loss can be perceived. comes into effect in respect of accounting periods commencing on or after 1-4-2004 and is mandatory in nature from that date. Example: arrears payable to workers in current period as a result of retrospective revision of wages.. Solution As per AS 5. the objective is to indicate the effect of such items on the current profit or loss.3. In either case.2010 did not include two pages containing details of inventory worth `20 lakhs. Illustration 6 The company finds that the stock sheets of 31.2010. prior period items are normally included in determination of net profit or loss for the current profit. State. An alternative approach is to show such items in the statement of profit or loss after determination of current net profit or loss. (revised 2003).12 arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods. they can be added (or deducted as the case may be) from the current profit. The term does not include other adjustments necessitated by circumstances. The term does not include other adjustments necessitated by circumstances.. 2. arrears payable to workers in current period as a result of revision of wages with retrospective effect. As per para 19 of AS 5. prior period items are income or expenses. are determined in the current period.3 AS 11: The Effects of Changes in Foreign Exchange Rates AS 11.3. which though related to prior periods.2010 is a prior period item. . how will you deal with this matter in the accounts of A Ltd.Accounting Standards 2. which though related to prior periods. Accordingly. which arise. prior period items are normally included in the determination of net profit or loss for the current period. Prior Period Items and Changes in Accounting Policies’.g. `20 lakhs must be added to opening stock of 1. In either case. omission of two pages containing details of inventory worth `20 lakhs in 31. are determined in the current period e. the objective is to indicate the effect of such items on the current profit or loss. Solution As per para 16 of AS 5 on ‘Net Profit or Loss for the Period.

Fair value is the amount for which an asset could be exchanged. or incurs or settles liabilities. (c) This Statement also deals with accounting for foreign currency transactions in the nature of forward exchange contracts. Exchange rate is the ratio for exchange of two currencies. A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency. including transactions arising when an enterprise either: (a) Buys or sells goods or services whose price is denominated in a foreign currency. joint venture or branch of the reporting enterprise. Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates. denominated in a foreign currency.2. (b) Deal with the presentation in a cash flow statement of cash flows arising from transactions in a foreign currency and the translation of cash flows of a foreign operation. Foreign currency is a currency other than the reporting currency of an enterprise. (b) Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency. Foreign operation is a subsidiary. This Statement does not (a) Specify the currency in which an enterprise presents its financial statements. Closing rate is the exchange rate at the balance sheet date. Definitions The following terms are used in this Statement with the meanings specified: • • • • • • • Average rate is the mean of the exchange rates in force during a period. willing parties in an arm’s length transaction. the activities of which are based or conducted in a country other than the country of the reporting enterprise. (b) In translating the financial statements of foreign operations.13 Scope Advanced Accounting This Statement should be applied (a) In accounting for transactions in foreign currencies. . or a liability settled. (c) Becomes a party to an unperformed forward exchange contract or (d) Otherwise acquires or disposes of assets. (c) Deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. associates. between knowledgeable.

. In such circumstances. fixed assets. • • Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. or required to disburse. Non-integral foreign operation is a foreign operation that is not an integral foreign operation. cash. the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from. the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from or required to disburse. Reporting currency is the currency used in presenting the financial statements. For example.Accounting Standards • • • • • • • • 2. inventories and investments in equity shares. Forward rate is the specified exchange rate for exchange of two currencies at a specified future date. the activities of which are an integral part of those of the reporting enterprise. receivables and payables. where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. Non-monetary items are assets and liabilities other than monetary items. in certain circumstances. e. For example. such item at the balance sheet date. a foreign currency monetary item at the balance sheet date. Integral foreign operation is a foreign operation. . an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. the use of the average rate for a period is unreliable. if exchange rates fluctuate significantly. A rate that approximates the actual rate at the date of the transaction is often used. At each balance sheet date (a) Foreign currency monetary items should be reported using the closing rate. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. (b) Non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction. However. Non-monetary items are assets and liabilities other than monetary items. However.g. for example.14 Forward exchange contract means an agreement to exchange different currencies at a forward rate. Net investment in a non-integral foreign operation is the reporting enterprise’s share in the net assets of that operation. Initial Recognition A foreign currency transaction on initial recognition should be recorded by applying the foreign currency at the date of the transaction.

or reported in previous financial statements. On the disposal of a non-integral foreign operation. the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period. all the exchange difference is recognised in that period.15 Advanced Accounting (c) Non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined. 2009 and 2011. According to the recent Notification. can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset. should be recognised as income or as expenses in the period in which they arise. exchange differences arising on reporting of longterm foreign currency monetary items at rates different from those at which they were initially recorded during the period. When the transaction is settled in a subsequent accounting period.Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates. When the transaction is settled within the same accounting period as that in which it occurred. However. and in other cases. the cumulative amount of the exchange differences which have been deferred and which relate to that operation should be recognised as income or as expenses in the same period in which the gain or loss on disposal is recognised. or reported in previous financial statements. in substance. Recognition of Exchange Differences Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period. Note: Central Government in consultation with National Advisory Committee on Accounting Standards made an amendment to AS 11 “The Effects of Changes in Foreign Exchange Rates” in the form of Companies (Accounting Standards) Amendment Rules. insofar as they relate to the acquisition of a depreciable capital asset. An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. exchange differences arising on a monetary item that. forms part of an enterprise’s net investment in a non-integral foreign operation should be accumulated in a foreign currency translation reserve in the enterprise’s financial statements until the disposal of the net investment.2. (d) The contingent liability denominated in foreign currency at the balance sheet date is disclosed by using the closing rate. can be accumulated in the Foreign Currency Monetary Item .

which will be repaid as on 31/07/2012.50. 2012 Foreign Exchange Difference Account Dr. The treatment availed at the option of the company shall be irrevocable and shall be exercised till 31st March. ” in the enterprise’s financial statements.000x(49-48)] Jul. ` (Dr.000 x 48) Dr. disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized.000 4.000 on 01/01/2012.) 21. to the general reserve. by recognition as income or expense in each of such periods) but not beyond 31st March. borrowed US$ 4. as the case may be.000 4. prepares financial statement ending on 31/03/2012. previously. 2012 Bank Account (4. recognised in the profit and loss account before the exercise of the option shall be reversed insofar as it relates to the acquisition of a depreciable capital asset by addition or deduction from the cost of the asset and in other cases by transfer to Foreign Currency Monetary Item Translation Difference (FCMITD) Account. 31.50 . 01.60. Any difference pertaining to accounting periods which commenced on or after 7th December. if the asset or liability is expressed in a foreign currency and has a term of 12 months or more at the date of origination of the asset or liability.00 1 US$ = ` 49.50. 2006.000 1 US$ = ` 48. an asset or liability shall be designated as a long-term foreign currency monetary item. 2020. 2012 Foreign Exchange Difference Account Dr.” For the purposes of exercise of this option. Illustration 8 Kalim Ltd.00 1 US$ = ` 49. To Foreign Loan Account Mar.000 2.50.000 ` (Cr. If the above option is exercised.Accounting Standards 2.50. 01. Rate of exchange between reporting currency (INR) and foreign currency (USD) on different dates are as under: 01/01/2012 31/03/2012 31/07/2012 Solution Journal Entries in the Books of Kalim Ltd.16 Translation Difference (FCMITD) Account and should be written off over the useful life of the assets (amortized over the balance period of such long term assets or liability. 2020.60. X Ltd.) 21.50.25. To Foreign Loan Account [4. Date Particulars Jan. and by debit or credit.

of the non-integral foreign operation should be translated at the closing rate. Translation of Foreign Integral Operations (a) The individual items in the financial statements of the foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself. if the asset is carried at fair value or other similar valuation. The recoverable amount or realisable value of an asset is translated using the exchange rate that existed when the recoverable amount or net realisable value was determined. (c) The cost of inventories is translated at the exchange rates that existed when those costs were incurred. For example.000 To Bank Account 28. joint venture or branch of the reporting enterprise.2.10. the reporting enterprise should use the following procedures: a b c The assets and liabilities. the activities of which are an integral part of those of the reporting enterprise. both monetary and non-monetary. When there is a change in the exchange rate between the reporting currency and the local currency. there is little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the reporting enterprise.17 Advanced Accounting Foreign Loan Account Dr. • Non-integral foreign operation is a foreign operation that is not an integral foreign operation. (b) The cost and depreciation of tangible fixed assets is translated using the exchange rate at the date of purchase of the asset or. that value is translated using the exchange rate at the date as at which the net realisable value is determined. In translating the financial statements of a non-integral foreign operation for incorporation in its financial statements. The change in the exchange rate affects the reporting enterprise's net investment in the non-integral foreign operation rather than the individual monetary and non-monetary items held by the non-integral foreign operation. associate. 26. the activities of which are based or conducted in a country other than the country of the reporting enterprise.35.000 Foreign operation is a subsidiary. • Integral foreign operation is a foreign operation. using the rate that existed on the date of the valuation. when the net realisable value of an item of inventory is determined in a foreign currency. . and All resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment. A foreign operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension of the reporting enterprise's operations. The rate used is therefore usually the closing rate. Income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions.

accumulated exchange differences arising from translation and attributable to minority interests are allocated to. A contingent liability disclosed in the financial statements of a non-integral foreign operation is translated at the closing rate for its disclosure in the financial statements of the reporting enterprise. a rate that approximates the actual exchange rates. such as the elimination of intra-group balances and intra-group transactions of a subsidiary. An enterprise may dispose of its interest in a non-integral foreign operation through sale. A write-down of the carrying amount of a non-integral foreign operation does not constitute a partial disposal.Accounting Standards d 2. repayment of share capital. cannot be eliminated against a corresponding amount arising on other intra-group balances because the monetary item represents a commitment to convert one currency into another and exposes the reporting enterprise to a gain or loss through currency fluctuations. In the case of a partial disposal. The incorporation of the financial statements of a non-integral foreign operation in those of the reporting enterprise follows normal consolidation procedures. However. is often used to translate income and expense items of a foreign operation. an exchange difference arising on an intra-group monetary item. that operation. When the financial statements of a non-integral foreign operation are drawn up to a different reporting date from that of the reporting enterprise. whether short-term or long-term. The exchange differences are not recognised as income or expenses for the period because the changes in the exchange rates have little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the reporting enterprise. the minority interest in the consolidated balance sheet. The payment of a dividend forms part of a disposal only when it constitutes a return of the investment. or part of. Any goodwill or capital reserve arising on the acquisition of a non-integral foreign operation is translated at the closing rate. statements as at the same date as the reporting enterprise. only the proportionate share of the related accumulated exchange differences is included in the gain or loss. e f g h i j The following are indications that a foreign operation is a non-integral foreign operation rather than an integral foreign operation: . or abandonment of all. no part of the deferred foreign exchange gain or loss is recognised at the time of a write-down. for purposes of incorporation in the financial statements of the reporting enterprise. the non-integral foreign operation often prepares.18 For practical reasons. for example an average rate for the period. Accordingly. and reported as part of. liquidation. When a non-integral foreign operation is consolidated but is not wholly owned.

2011: Account Name Fixed Assets (Purchased on 01.100 Amount in £ Cr.2008) Debtors Opening Stock Goods received from Head Office Account (Recorded in HO books as ` 4. The following is the trial balance of Head Office and Branch as at 31. Transactions with the reporting enterprise are not a high proportion of the foreign operation's activities. Sales prices for the foreign operation’s products are not primarily responsive on a shortterm basis to changes in exchange rates but are determined more by local competition or local government regulation. Cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign operation rather than being directly affected by the activities of the foreign operation. Costs of labour.000 1. 5.2. material and other components of the foreign operation's products or services are primarily paid or settled in the local currency rather than in the reporting currency. exchange differences arising on the translation of non-monetary assets at the date of the reclassification are accumulated in a foreign currency translation reserve. b c d e f g h Change in the classification of a Foreign Operation • • Illustration 9 A business having the Head Office in Kolkata has a branch in UK. the translated amounts for non-monetary items at the date of the change are treated as the historical cost for those items in the period of change and subsequent periods.19 a Advanced Accounting While the reporting enterprise may control the foreign operation. The foreign operation's sales are mainly in currencies other than the reporting currency.600 400 6. Exchange differences which have been deferred are not recognised as income or expenses until the disposal of the operation.02. When a non-integral foreign operation is reclassified as an integral foreign operation. The activities of the foreign operation are financed mainly from its own operations or local borrowings rather than from the reporting enterprise. . the activities of the foreign operation are carried out with a significant degree of autonomy from those of the reporting enterprise.03.000) Dr.04. When a foreign operation that is integral to the operations of the reporting enterprise is reclassified as a non-integral foreign operation. There is an active local sales market for the foreign operation’s products. although there also might be significant amounts of exports.

000 Average Rate Average Rate Average Rate Average Rate Closing Rate Actuals 7.37.000 .91.200 2.000 1.) 13.000) Creditors • • • • Closing stock at branch is £ 700 on 31.000) Head Office Account (Recorded in HO books as ` 4.03.90.000 2.) 5.14.2008– ` 61.) Conversion Basis Transaction Date Rate Closing Rate Opening Rate Actuals 20.800 20.400 Actuals 4.200 25.50. Exchange rates of Pounds on different dates are as follow: 01.000 1.000 490.000 Trial Balance of the Foreign Branch converted into Indian Rupees as on March 31.20 20.400 Closing Stock Depreciation 700 500 31.2011 – ` 67 Solution 2.900 7.400 Closing Rate Fixed Asset Rate 10.100 £ (Cr. 01.400 4.58.200 2.000 1.200 402.500 6.000 107.04.000 1.00.200 3.900 30.2010– ` 63 & 31.900 £ (Dr.000 ` (Cr.000 46.000 1.a.600 400 6.400 1.200 3.03.91.000 65. Depreciation @ 10% p.000 78.000 268.000 10.Accounting Standards Sales Purchases Wages Salaries Cash Remittances to Head Office (Recorded in HO books as ` 1.04. Prepare the trial balance after been converted in Indian Rupees. 2011 Particulars Fixed Assets Debtors Opening Stock Goods Received from HO Sales Purchases Wages Salaries Cash Remittance to HO HO Account Creditors Exchange Rate Difference 31.) 305.000 Closing Rate Balancing Figure 20.2011.000 ` (Dr. is to be charged on fixed assets.

was ` 48. How will you recognize the profit or loss on forward contract in the books of Rau Ltd. The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract. Accordingly. purchased a plant for US$ 1.00.2. payable after three months. which is not intended for trading or speculation purposes. Forward rate is the specified exchange rate for exchange of two currencies at a specified future date. Exchange rate per dollar on 01st Feb.00. 1 After issuance of AS 30. the premium or discount on the contract is ignored and at each balance sheet date. the value of the contract is marked to its current market value and the gain or loss on the contract is recognised. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period.15 Less: Spot Rate (` 48. to establish the amount of the reporting currency required or available at the settlement date of a transaction. forward exchange contracts will be dealt with as per the provisions of AS 11 only.85) Premium on Contract ` 0. therefore loss to be recognized (30.21 • Advanced Accounting Forward exchange contract means an agreement to exchange different currencies at a forward rate1.000 will be recognized in the following year.30 Contract Amount US$ 1. Company entered into a forward contract for three months @ ` 49.30) ` 30. Rest ` 10.000 Contract period 3 months Two falling the year 2010-11.000/3) x 2 = ` 20. . However. ASB issued a clarification regarding applicability of AS 30 in February.00.85. limited revision was made to AS 11 to withdraw the requirements concerning forward exchange contracts from AS 11. Solution Forward Rate ` 49.000. Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. 2011 which states that limited revisions due to AS 30 will not be given effect to in respect of any existing notified accounting standards.000 Total Loss (1. • • • • • Illustration 10 Rau Ltd.000 on 01st February 2010. An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract.000 x 0. In recording a forward exchange contract intended for trading or speculation purposes.15 per dollar.

000 When the reporting currency is different from the currency of the country in which the enterprise is domiciled. ` 47.e. The reason for any change in the reporting currency should also be disclosed. The amount of exchange differences included in the net profit or loss for the period.02. Solution Since the forward contract was for speculation purpose the premium on contract i. . b. and The impact on net profit or loss for each prior period presented had the change in classification occurred at the beginning of the earliest period presented.10) ` 0.Accounting Standards Illustration 11 2.10 when exchange rate was US$ 1 = ` 47. On 31st January. he decided to sell the contract at ` 47. the reason for using a different currency should be disclosed.18 (` 47. The reason for the change.000 x 0. c. The impact of the change in classification on shareholders' funds. Change in classification of a significant foreign operation When there is a change in the classification of a significant foreign operation. Show how the profits from contract will be recognized in the books.00. b. On 31st December when he closed his books exchange rate was US$ 1 = ` 47. Only when the contract is sold the difference between the contract rate and sale rate will be recorded in the Profit & Loss Account. The nature of the change in classification.000 on 1st December at 1 US$ = ` 47.00. A bought a forward contract for three months of US$ 1.08 US$ 1. the difference between the spot rate and contract rate will not be recorded in the books. Sale Rate Less: Contract Rate Premium on Contract Contract Amount Total Profit (1. d.000 ` 8. Net exchange differences accumulated in foreign currency translation reserve as a separate component of shareholders’ funds. an enterprise should disclose: a.08) Disclosure An enterprise should disclose: a.18 per dollar.15.00. and a reconciliation of the amount of such exchange differences at the beginning and end of the period.22 Mr.

duty drawbacks. Firstly.4. it is desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period. (b) This Statement does not deal with i. Government participation in the ownership of the enterprise. etc. The enterprise earns grants through compliance with their conditions and meeting the envisaged obligations. The special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature.e. This facilitates comparison of an enterprise’s financial statements with those of prior periods and with those of other enterprises.4 AS 12 : Accounting for Government Grants The Standard comes into effect in respect of accounting periods commencing on or after 1.23 Advanced Accounting 2. Arguments in support of the ‘income approach’ are as follows: i. Accounting Treatment Capital Approach versus Income Approach Two broad approaches may be followed for the accounting treatment of government grants namely: the ‘capital approach’. . under which a grant is taken to income over one or more periods. if a government grant has been received. ii. The receipt of government grants by an enterprise is significant for preparation of the financial statements for two reasons. an appropriate method of accounting therefore is necessary. Introduction (a) This Statement deals with accounting for government grants. iii. and the ‘income approach’. Many government grants are in the nature of promoters’ contribution. under which a grant is treated as part of shareholders’ funds. i. they are given by way of contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such grants. ii.1992 and will be recommendatory in nature for an initial period of two years. Secondly. They should therefore be taken to income and matched with the associated costs which the grant is intended to compensate. Government grants are sometimes called by other names such as subsidies. cash incentives.2. They are not earned but represent an incentive provided by government without related costs. Those in support of the ‘capital approach’ argue as follows: i. Government assistance other than in the form of government grants..

It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant grant. . or virtually the whole. such as land or other resources. which are an extension of fiscal policies. Mere receipt of a grant is not necessarily conclusive evidence that conditions attaching to the grant have been or will be fulfilled. in the profit and loss statement. it is usual to account for such assets at their acquisition cost.Accounting Standards ii. the asset is shown in the balance sheet at a nominal value. The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge. and Where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. it is logical to deal also with government grants. iii. Income approach may be more appropriate in the case of other grants. Where the grant equals the whole. of the cost of the asset. Non-monetary Government Grants Government grants may take the form of non-monetary assets. Where there is reasonable assurance that the enterprise will comply with the conditions attached to them. Presentation of Grants Related to Specific Fixed Assets Two methods of presentation in financial statements of grants related to specific fixed assets are regarded as acceptable alternatives. In most cases. Recognition of Government Grants Government grants available to the enterprise are considered for inclusion in accounts: i. Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of shareholders’ funds. no correlation is done between the accounting treatment of the grant and the accounting treatment of the expenditure to which the grant relates. Method I : • • • The grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value.24 As income tax and other taxes are charges against income. In these circumstances. 2. In case grants are credited to shareholders’ funds. given at concessional rates. the periods over which an enterprise recognizes the costs or expenses related to a government grant are readily ascertainable and thus grants in recognition of specific expenses are taken to income in the same period as the relevant expenses. ii. Non-monetary assets given free of cost are recorded at a nominal value.

000 Grants related to depreciable assets are treated as deferred income which is recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset.00. the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. purchased a fixed asset for ` 50 lakhs.00. ` (Dr. 7.00.000 ` (Cr. 7.000 Dr.00.00.000 7.00.00. Year Particulars 1st Fixed Assets Account To Bank Account (Being Fixed Assets purchased) Bank Account To Fixed Assets Account (Being grant received from the government) Depreciation Account To Fixed Assets Account (Being Depreciation charged on SLM) Profit & Loss Account To Depreciation Account (Being Depreciation transferred to P/L Account) 2nd Depreciation Account To Fixed Assets Account (Being Depreciation charged on SLM) Profit & Loss Account To Depreciation Account (Being Depreciation transferred to P/L Account) Method II: • Dr.2.000 Dr.00.) 50.000 7. On purchase of the assets government granted it a grant for ` 10 lakhs. 7.000 Dr.00.00. 7. 10. Solution Journal in the books of Z Ltd.) 50.000 Dr.00. Grants related to non-depreciable assets are credited to capital reserve under this method. • • .25 Advanced Accounting Illustration 12 Z Ltd.000 7.00. which has the estimated useful life of 5 years with the salvage value of ` 5.000 10.000. If a grant related to a non-depreciable asset requires the fulfilment of certain obligations. as there is usually no charge to income in respect of such assets.000 7.00.000 Dr. Pass the necessary journal entries in the books of the company for first two years.

000 10. Solution Journal in the books of Z Ltd.000 2.000 2.00.00.000 .000.00.00.000 ` (Cr.00. Year Particulars 1st Fixed Assets Account Dr.00.00. On purchase of the assets government granted it a grant for ` 10 lakhs. To Deferred Government Grant Account (Being grant received from the government) Depreciation Account Dr. To Fixed Assets Account (Being depreciation charged on SLM) Profit & Loss Account Dr. purchased a fixed asset for ` 50 lakhs.000 7.000 7. which has the estimated useful life of 5 years with the salvage value of ` 5.000 7.000 7.00. To Depreciation Account (Being depreciation transferred to P/L Account) Deferred Government Grants Account Dr.00. To Fixed Assets Account (Being depreciation charged on SLM) Profit & Loss Account Dr. Pass the necessary journal entries in the books of the company for first two years.) 50.000 7.00. To Profit & Loss Account (Being proportionate government grant taken to P/L Account) 2nd Depreciation Account Dr. e. To Profit & Loss Account (Being proportionate government grant taken to P/L Account) ` (Dr.00.00.00.) 50.000 7..000 2. ‘Deferred government grants’.000 10. To Depreciation Account (Being depreciation transferred to P/L Account) Deferred Government Grant Account Dr.26 The deferred income is suitably disclosed in the balance sheet after ‘Reserves and Surplus’ but before ‘Secured Loans’ with a suitable description.000 2.Accounting Standards • 2.000 7.00.00. To Bank Account (Being fixed assets purchased) Bank Account Dr. Illustration 13 Z Ltd.00.00.g.000 7.

000.00. the amount is charged immediately to profit and loss statement. Alternatively. ` 7. Grant was considered as refundable in the end of 2nd year to the extent of ` 7. by the amount refundable. Grant was considered as refundable in the end of 2nd year to the extent of ` 7. purchased a land for ` 50 lakhs. as appropriate.2. Pass the journal entry for refund of the grant. Solution Fixed Assets Account To Bank Account (Being government grant on asset refunded) Illustration 15 Z Ltd.000. or where no deferred credit exists. they are deducted in reporting the related expense.000 ` 7. • • Illustration 14 Z Ltd. On purchase of the assets government granted it a grant for ` 10 lakhs.00. Refund of Government Grants • • Government grants sometimes become refundable because certain conditions are not fulfilled and are treated as an extraordinary item (AS 5). Presentation of Grants of the nature of Promoters’ contribution Where the government grants are of the nature of promoters’ contribution. On purchase of the assets government granted it a grant for ` 10 lakhs. either separately or under a general heading such as ‘Other Income’.00.00. which has the estimated useful life of 5 years with the salvage value of ` 5. Where a grant which is in the nature of promoters’ contribution becomes refundable. To the extent that the amount refundable exceeds any such deferred credit.27 Advanced Accounting Presentation of Grants Related to Revenue Grants related to revenue are sometimes presented as a credit in the profit and loss statement. The amount refundable in respect of a government grant related to revenue is applied first against any unamortised deferred credit remaining in respect of the grant. The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance. the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. to the government on non-fulfillment of some specified conditions. in part or in full. Pass the journal entry for refund of the grant.000. purchased a fixed asset for ` 50 lakhs. Dr. the relevant amount recoverable by the government is reduced from the capital reserve.000 .00.

ii. the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. Grant Account Dr. Government grants may take the form of non-monetary assets such as land or other resources. it is usual to account for such assets at their acquisition cost. of the cost of the asset.00. In these circumstances. However. given at concessional rates. government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value.000 Profit & Loss Account Dr. such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. including grants of non-monetary assets given at a concessional rate or free of cost.00. 2. ` 6. or virtually the whole. Non-monetary grants given free of cost are recorded at a nominal value. as there is usually no charge to income in respect of such assets. Where the grant related to a specific fixed asset equals the whole. Alternatively. i. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss account. The nature and extent of government grants recognized in the financial statements. if a grant related to a non-depreciable asset requires the fulfillment of certain obligations..1 of AS 12 ‘Accounting for Government Grants’. including the methods of presentation in the financial statements. ` 1. Grants related to non-depreciable assets are credited to capital reserve under this method.28 ` 7. the asset should be shown in the balance sheet at a nominal value. Illustration 17 How would you record a non-monetary grant received from the Government as per AS 12? Solution According to para 7. .Accounting Standards Solution Deferred Govt.000 To Bank Account (Being government grant on asset refunded) Disclosure i. Illustration 16 How Government grant relating to specific fixed asset is treated in the books as per AS-12? Solution In accordance with AS 12.00. government grants related to depreciable fixed assets may be treated as deferred income which should be recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset.000 The accounting policy adopted for government grants.e.

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. In estimating the period. Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be ∗ Accounting Standard Interpretations are now added as an explanation to the relevant para of the respective accounting standards. and Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. power generation facilities. Other investments and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time. d. Interest and commitment charges on bank borrowings and other short-term and longterm borrowings. Examples of qualifying assets are manufacturing plants.5 AS 16 : Borrowing Costs This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature. substantial period of time primarily depends on the facts and circumstances of each case.29 Advanced Accounting 2. It further states that. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. are not qualifying assets. inventories that require a substantial period of time to bring them to a saleable condition. Borrowing costs may include: a. Amortisation of discounts or premiums relating to borrowings. Amortisation of ancillary costs incurred in connection with the arrangement of borrowings. According to it. . a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of the facts and circumstances of the case. 2002 had issued an accounting standard interpretation. (ASI)∗ which clarifies the meaning of the expression ‘substantial period of time’. ordinarily. and investment properties. including preference share capital not classified as a liability. e. The ASB in June. b. time which an asset takes technologically and commercially target if ready for its intended use or sale should be considered. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. c. Finance charges in respect of assets acquired under finance leases or under other similar arrangements. It does not deal with the actual or imputed cost of owners’ equity.2.

transfers of other assets or the assumption of interestbearing liabilities. . The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during that period. It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided. Commencement of Capitalisation The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: a. In determining the amount of borrowing costs eligible for capitalisation during a period. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset. The financing arrangements for a qualifying asset may result in an enterprise obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditure on the qualifying asset. Other borrowing costs are recognised as an expense in the period in which they are incurred. The average carrying amount of the asset during a period. is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period. the borrowing costs that directly relate to that qualifying asset can be readily identified. Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value. the funds are often temporarily invested pending their expenditure on the qualifying asset. The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset. Borrowing Costs Eligible for Capitalisation The borrowing costs that are directly attributable to the acquisition.30 measured reliably. In such circumstances. Expenditure is reduced by any progress payments received and grants received in connection with the asset.Accounting Standards 2. the carrying amount is written down or written off in accordance with the requirements of other Accounting Standards. Expenditure for the acquisition. In certain circumstances. other than borrowings made specifically for the purpose of obtaining a qualifying asset. construction or production of a qualifying asset is being incurred: Expenditure on a qualifying asset includes only such expenditure that has resulted in payments of cash. including borrowing costs previously capitalised. the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. the amount of the write-down or write-off is written back in accordance with those other Accounting Standards. any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred. construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.

2012.2011. They include technical and administrative work prior to the commencement of physical construction. Advanced Accounting Borrowing costs are being incurred.3. A business park comprising several buildings. The machinery was put to use from 1. b. such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. Activities that are necessary to prepare the asset for its intended use or sale are in progress: The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. Such costs are costs of holding partially completed assets and do not qualify for capitalisation. Suspension of Capitalisation Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Pass journal entry for the year ended 31. c. and The amount of borrowing costs capitalised during the period. capitalisation of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete.1. Interest on loan is 9% per annum. Disclosure The financial statements should disclose: a.2. The accounting policy adopted for borrowing costs. if such high water levels are common during the construction period in the geographic region involved. However. each of which can be used individually. For example: capitalisation continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge. Capitalisation of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts.31 b.000 for purchase of machinery on 1.6. Cessation of Capitalisation Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. is an example of a qualifying asset for which each part is capable of being used while construction continues for the other parts. capitalisation of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out.2012 to record the borrowing cost of loan as per AS 16. . However.00. Illustration 18 An industry borrowed `40.

by the Institute of Chartered Accountants of India.000) 90.10.6 AS 19 : Leases A Lease is an agreement whereby the Lessor (owner of an asset) conveys to the Lessee (another party) in return for a payment or series of periodic payments (Lease rents).00.10. The finance leases are those. Leases. all leases were treated as a mode of off-balance sheet finance.10.000 × Amount to be charged to P&L A/c Pre-operative interest to be capitalized Journal Entries ` Machinery A/c To Loan A/c (Being interest on loan for pre-operative period capitalized) Interest on loan A/c To Loan A/c (Being the interest on loan for the post-operative period) Profit and Loss A/c To Interest on loan A/c (Being interest on loan transferred to P&L A/c) Dr. The policy of recognition of assets taken on finance lease is an example of principle of ‘substance over form’ described in paragraph 17 of Accounting Standard (AS) 1.Accounting Standards Solution 2. Prior to issuance of the Accounting Standard (AS) 19. called finance leases. The Accounting Standard (AS) 19. the right to use an asset for an agreed period of time. 90. Disclosure of . The leasing may in effect be same as hire purchase because the ownership of the asset can be transferred to the lessee for a small sum at the termination of lease agreement.000 Dr. in which risks and rewards of ownership are substantially transferred from the lessor to lessee.00.000 2.3.32 ` Interest upto 31.10.00. 90. has reduced the scope of this kind of window dressing by requiring enterprises to recognise assets taken on certain types of leases.000 90. Leases.000 90.000 × 9% × 10 months) 12 7 10 = = = = 3.000 Dr.000 ` 2. 2.000 (2.000 Less: Interest relating to pre-operative period 3.2012 (40. This allowed enterprises not to recognise assets taken on lease in their balance sheets and thus to understate their net assets and capital employed and consequently to overstate their return on investment (ROI).000 2.

gas. . patents and copyrights. The standard applies to all enterprises. and (b) licensing agreements for items such as motion picture films. should disclose that fact. By the principle of ‘substance over form’ in selecting accounting policies. A Finance Lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not be eventually transferred. Situations. 2001 and was declared mandatory from that date. (these situations may commonly arise in hire purchase) (b) The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that. Applicability of Accounting Standard The Accounting Standard (AS) 19.33 Advanced Accounting Accounting Policies. and (c) lease agreements to use lands (d) agreements that are contracts for services. usually attached with ownership. effectively enjoys all rights and accepts all liabilities. enterprises are required to give precedence to substance of a transaction over its legal form. manuscripts. A lease is classified as an Operating Lease if it does not transfer substantially all the risk and rewards incident to ownership. and Operating leases. such as oil. at the inception of the lease. Leases came into effect in respect of all assets leased during accounting periods commencing on or after April 1. plays. video recordings.2. The standard applies to all leases other than: (Paragraph 1. which would normally lead to a lease being classified as a finance lease are: (a) The lease transfers ownership of the asset to the lessee by the end of the lease term. it is reasonably certain that the option will be exercised. timber metals and other mineral rights. leases are classified as: (i) (ii) Finance leases. that do not transfer right to use assets from one contracting party to the other. It is therefore rational for the lessee to recognise the assets taken on finance leases as assets in its books. AS 19) (a) lease agreements to explore for or use of natural resources. Types of leases For accounting purposes. The Level II and Level III enterprises are however exempted from making certain disclosures. In case of finance leases. (See the Scheme for Applicability of Accounting Standards) Any enterprise that does not make disclosures in pursuance of this exemption. despite not being legal owner. the lessee.

Accounting for Finance Leases (Books of lessee) Following is the accounting treatment of Finance Leases in the books of Lessee: (i) On the date of inception of Lease. these payments are called the minimum lease payments. Indicators of Finance Lease (a) If the lessee can cancel the lease and the lessor’s losses associated with the cancellation are borne by the lessee. the asset should be fully depreciated over the lease term. Together. which is substantially lower than market rent. Lease Payments Lease payments may consist of specified periodic payments. (Under US GAAP. . called the guaranteed residual value.Accounting Standards 2. Lessee should show it as an asset and corresponding liability at lower of: • • Fair value of leased asset Present value of minimum lease payments (present value to be calculated with discount rate equal to interest rate implicit in the lease) (ii) Lease payments to be apportioned between the finance charge and the reduction of the outstanding liability. e.g. amount of usage etc. Contingent rents are lease payments based on a factor other than passage of time. The excess of expected residual value over the guaranteed residual value is the unguaranteed residual value.34 (c) The lease term is for the major part of the economic life of the asset even if title is not transferred. a threshold limit of 75% or more of economic life is set. and (c) If the lessee can continue the lease for a secondary period at a rent. (b) If gains or losses from the fluctuations in the residual value accrue to the lessee (for example if the lessor agrees to allow rent rebate equaling most of the disposal value of leased asset at the end of the lease). See details at the end of chapter) and (e) The leased asset is of a specialized nature such that only the lessee can use it without major modifications being made. a threshold limit of 90% or more of fair value is set. (iv) Charge depreciation on leased asset on the same lines as any other asset. See details at the end of chapter) (d) At the inception of the lease. If there is not certainity that the lessee will obtain ownership by the end of the lease term. (iii) Finance charges to be allocated to periods during the lease term so as to produce a constant rate of interest on the remaining balance of liability for each period. present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. called lease rents and a terminal payment. (Under US GAAP. percentage sales.

g.340 . provided the information required.000 25.35 Advanced Accounting Computation of interest rate implicit on lease Discounting rate = R% p.683 0.826 0. at the end of each year) Lease period = n years. the unguaranteed residual value can be reasonably ascertained.2.14.. = ` 25.000 50. PV of minimum lease payments and unguaranteed residual value at guessed rate 10% Year 1 2 3 4 5 5 5 Lease Payments DF (10%) 0.450 41. L2 ……… Ln (Payable annually.909 0.050 15.000 Interest rate implicit on lease is computed below: Interest rate implicit on lease is a discounting rate at which present value of minimum lease payments and unguaranteed residual value is ` 2 lakhs.00.315 2. = 5 years.621 0.000 50. (1) The interest rate implicit on lease can be computed by trial and error.000 50. Example 1 Annual lease rents Lease period Guaranteed residual value Unguaranteed residual value = ` 50.621 0.000 50.a.300 37.525 9.550 34.000 15.000 at the end of each year.000 = ` 15. Guaranteed residual value = GR.000 ` 45.621 PV ` 50. e. Lease Rents = L1.751 0. Unguaranteed residual value = UGR Fair Value at the inception (beginning) of lease = FV L1 L2 Ln GR PV of MLP = + + + 1 2 n (1 + R ) (1 + R ) (1 + R ) (1 + R )n Present value of unguaranteed residual value = UGR (1 + R )n If interest rate implicit on lease is used as discounting rate: Fair Value = PV of Minimum Lease Payments + PV of unguaranteed residual value ….000 Fair Value at the inception (beginning) of lease = ` 2.150 31.

360 At the inception of a finance lease.6%) 0.000 15.785 1.519 0.519 PV ` 43.790 0.14. Example 2 Present value of minimum lease payment using data for example 1 is computed below: Year 1 2 3 MLP PV ` 50. in such cases: PV of minimum lease payment < Fair Value. similar to lease arrangement.890 0. From (1) above. The discounting rate should be interest rate implicit on lease. the asset and liability is recognised at PV of minimum lease payments.) Where interest rate implicit on lease is determinable. the lessee should recognise the lease as an asset and a liability at lower of (i) (ii) present value of minimum lease payments and fair value of leased asset.Accounting Standards PV of minimum lease payments and unguaranteed residual value at guessed rate 14% Year 1 2 3 4 5 5 5 Lease Payments 2. the lessee’s incremental borrowing rate should be used as discounting rate.340 − 2.00. where interest rate implicit on lease is determinable.000 50.000 50.36 ` 50.000 50.500 39.675 0.950 12. (As distinguished from rate of interest on lessee’s existing loans.360 Interest rate implicit on lease is computed below by interpolation: Interest rate implicit on lease = 10% + Recognition of asset and liability 14% − 10% × (2.000) = 12.000 25.519 0.92. the incremental borrowing rate is the rate of interest at which the lessee can borrow fresh funds under terms. the present value of minimum lease payments is determined using the interest rate implicit on lease as discounting rate.877 0.6% 2.000 DF (14%) 0.000 50.700 ` 44.000 50.450 33. Hence.592 0.850 38.000 DF (12.000 50.500 35.14.750 29. Where interest rate implicit on lease is not determinable.975 7.769 0.000 .340 − 1.600 25.92.

000 50.763 1.000 50.000 The accounting entry at the inception of lease to record the asset taken on finance lease in books of lessee is suggested below: ` Asset A/c To Lessor (Being recognition of finance lease as asset and liability) Recognition of Finance Charge (Paragraph 16) Dr.91.498 1.75.100 27.131 32.500 Fair value of leased asset = ` 2. 1.129 20.800 1.552 31.500 ` -25.801 36.697 66. the rate of interest to be used for analysis of lease rents is the discounting rate. The principal components reduce the liability to the lessor.36.91. The finance charge components are recognised as expenses in the periods the lease payments are incurred.65.066 8. a constant periodic rate of interest is used.03.871 29.000 50.00.500 ` 1.6%=8412] is due to approximation in computation. Where the liability is recognised at fair value.000 2.2.91.934 66. e.500 ` 1.000 25.763×12.g. the rate of interest must be determined by trial and error as the discounting rate at which present value of minimum lease payments equals the fair value.000 ` -24.600 13.91.6%) Principal Principal due ` -50.500 Present value of minimum lease payment = ` 1.000 0.763 The difference between this figure and finance charge [66.552 0.237∗ 83.622 0.000 50. Where the liability is recognised at present value of minimum lease payments.000 75.629 1.91.500 1. In analyzing the lease payments.91.500 Minimum lease payments consist of finance charges and the principals. where interest rate implicit on lease is determinable. ∗ .199 13.869 17. allocation of finance charge over lease period is shown below: Year 0 1 2 3 4 5 Minimum Lease Payments Finance Charge (12.37 Advanced Accounting 4 5 5 50. Example 3 Using data for example 1.

621 0. 50. the present value of minimum lease payments should be determined using lessee’s incremental borrowing rate.00. 24. interest rate implicit on lease cannot be determined unless unguaranteed residual value is known.450 41.525 2.826 0.000 50.000 24.129 Dr.150 31.000 .129 ` 24.909 0.683 0. Present value of minimum lease payment using lessee’s incremental borrowing rate 10% is computed below: Year 1 2 3 4 5 5 MLP DF (10%) 0.000 50.000 ` 45.38 Accounting entries in year 1 to recognise the finance charge in books of lessee are suggested below: ` Finance Charge A/c To Lessor (Being finance charge due for the year) Lessor To Bank A/c (Being payment of lease rent for the year) P & L A/c To Finance Charge A/c (Being recognition of finance charge as expense for the year) Example 4 Dr.550 34.025 Present value of minimum lease payment = ` 2.751 0.025 Fair value of leased asset = ` 2.05.000 25.129 50.Accounting Standards 2. suppose unguaranteed residual value is not determinable and lessee’s incremental borrowing rate is 10%.050 15.000 50.300 37. If interest rate implicit on lease is not determinable.05.000 Dr. 24.621 PV ` 50.129 In example 1.000 50. Since interest rate implicit on lease is discounting rate at which present value of minimum lease payment and present value of unguaranteed residual value equals the fair value.

95% 2.379 67.425 Required discounting rate = 10%+ 12% − 10% × (2.247∗ 75.850 35.000 ` -21.000 50.000 75.823 15.000 ` 2.000 ` 2.723 1.600 31.132 67.00.000 50.425 Finance Charge (10. PV of minimum lease payments at guessed rate 12% Year 1 2 3 4 5 5 Minimum Lease Payments PV ` 50.650 39.000 1.621 7.000 50.000 50.900 18.753×10.567 0.900 1.025 − 1.800 28.177 34.175 1.636 0. we need to ascertain a discounting rate at which present value minimum lease payments equals ` 2 lakh.712 0.000 ` -28.00.00.000 50.000 2.39 Advanced Accounting The accounting entry at the inception of lease to record the asset taken on finance lease in books of lessee is suggested below: ` Asset A/c Dr.2.95% = 7418] is due to approximation in computation ∗ .000) = 10.753 2.409 11.567 ` 44.94.06.350 14. To Lessor (Being recognition of finance lease as asset and liability) 2.94.95%) Principal Principal due Allocation of finance charge over lease period is shown below: Year Minimum Lease Payments ` 0 1 2 3 4 5 -50.893 0.05.000 50.100 31.753 The difference between this figure & finance charge [67.025 − 2.000 DF (12%) 0.00.71.000 50.591 38.75.40. The discounting rate can then be used for allocation of finance charge over lease period.000 Since the liability is recognised at fair value ` 2 lakh (total principal).05.00.000 25.797 0.

and . which are owned.Accounting Standards 2. the net carrying amount at the balance sheet date. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term. Depreciation Accounting. and their present value. Contingent Rents and other costs Contingent rents.000 50. costs for services and taxes are recognised as expense as and when incurred. Disclosures made by the Lessee (Paragraph 22) The lessee should. Accounting for Fixed Assets.900 50. an enterprise should disclose the total of minimum lease payments at the balance sheet date.000 21. the asset should be fully depreciated over the lease term or its useful life. make the following disclosures for finance leases: (a) assets acquired under finance lease as segregated from the assets owned. (e) the total of future minimum sublease payments expected to be received under noncancelable subleases at the balance sheet date. To Bank A/c (Being payment of lease rent for the year) P & L A/c Dr. in addition to the requirements of AS 10. and the governing statute.900 21.900 The depreciation policy for a leased asset should be consistent with that for depreciable assets. (c) a reconciliation between the total of minimum lease payments at the balance sheet date and their present value.900 ` 21. whichever is shorter. (d) contingent rents recognised as expense in the statement of profit and loss for the period. Depreciation Accounting. (b) for each class of assets. AS 6. for each of the following periods: (i) (ii) not later than one year. (iii) later than five years. later than one year and not later than five years. To Finance Charge (Being recognition of finance charge as expense for the year) Depreciation 21. To Lessor (Being finance charge due for the year) Lessor Dr.40 Accounting entries in year 1 to recognise the finance charge in books of lessee are suggested below: ` Finance Charge A/c Dr. and the depreciation recognised should be calculated in accordance with Accounting Standard (AS) 6. In addition.

any residual value guaranteed by or on behalf of the lessee. i. and (iii) restrictions imposed by lease arrangements. The lessor recognises the net investment in lease (which is usually equal to fair value. (e) and (f). Gross Investment Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor. additional debt. an analysis of definitions given in paragraph 3 shows that the Net Investment in Lease is fair value of leased asset. (See paragraphs 26 and 32) If discounting rate is interest rate implicit on lease. but not limited to. the lessee effectively buys the leased asset sold by the lessor. the difference between the sale value recognised and cost of the asset gets recognised as profit / loss on transfer to the statement of profit and loss of the period of inception of lease.2.e. as shown below) as receivable by debiting the Lessee A/c. the existence and terms of renewal or purchase options and escalation clauses. Where the lessor is a manufacturer or dealer. usual market price of the asset. In the later case. together with: (i) in the case of the lessee. Gross investment in Lease (GIL) = Minimum Lease Payments (MLP) + Unguaranteed Residual value (UGR) Minimum Lease Payments Minimum Lease Payments (MLP)are the payments that the Lessee is to make to the Lessor. the corresponding account credited is Bank. such as those concerning dividends. the following: (i) (ii) the basis on which contingent rent payments are determined.41 Advanced Accounting (f) a general description of the lessee's significant leasing arrangements including. Note: The Level II and Level III enterprises need not make disclosures required by paragraphs 22(c).or by an independent third party financially capable of meeting the gurantee Unguaranteed Residual Value Unguaranteed Residual Value of a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residual value. Accounting for finance leases (Books of lessor) In a finance lease. Where the lessor pays to purchase the asset for giving on finance lease. any residual value guaranteed to the Lessor: • • by or on behalf of the lessee. or (ii) in the case of the lessor. . and further leasing. the corresponding account credited is Sales.

As per paragraph 32. either the interest rate implicit on lease or the commercial rate of interest. This income allocation is based on a pattern reflecting a constant periodic return on the net investment in lease outstanding. In case any reduction in the estimated unguaranteed residual value is identified. The constant periodic return is the rate used for discounting.e. i. Initial direct costs should be recognised as an expense in the statement of profit and loss at the inception of the lease. the discounting rate in such situations should be the commercial rate of interest. Unearned finance income (UFI) = GIL – (PV of MLP + PV of UGR) 2. where the interest rate implicit on lease is artificially low. Also. Review of unguaranteed residual value by lessor Paragraph 30 requires a lessor to review unguaranteed residual value used in computing the gross investment in lease regularly.Accounting Standards Net investment in Lease (NIL) = Gross investment in Lease (GIL) – Unearned Finance Income (UFI).42 The discounting rate for the above purpose is the rate of interest implicit in the lease. the income allocation over the remaining lease term is to be revised. any reduction in respect of income already accrued is to be recognised immediately. The above definitions imply that: (a) Unearned Finance Income (UFI) = GIL – Fair Value (b) Net Investment in Lease = GIL – UFI = GIL – (GIL – Fair Value) = Fair Value Since the sale and receivables are recognised at net investment in lease. Such is the case. . Contingent Rents and Initial Direct Costs Contingent rents. Recognition of Finance Income The unearned finance income is recognised over the lease term on a systematic and rational basis. fees for services and taxes recovered from lessee are recognised as income as and when they accrue. An upward adjustment of the estimated residual value is not made. From the definition of interest rate implicit on lease: (PV of MLP + PV of UGR) = Fair Value. which is equal to fair value: Profit recognised at the inception of lease = Fair Value – Cost Total earning of lessor = GIL – Cost = (GIL – Fair Value) + (Fair Value – Cost) = Unearned Finance Income + (Fair Value – Cost) The above analysis does not hold where the discounting rate is not equal to interest rate implicit on lease.

a lease term may provide for low initial rents and high terminal rent. A revision of unguaranteed residual value affects the interest rate implicit on lease having consequential effect on allocation of finance income. In addition. Note: Accounting for Operating Leases Operating leases are non-payout leases. To have better matching between revenue and costs. an enterprise should disclose the total gross investment in the lease and the present value of minimum lease payments receivable at the balance sheet date. Disclosures The lessor should make the following disclosures for finance leases: (a) a reconciliation between the total gross investment in the lease at the balance sheet date. (f) and (g). (e) contingent rents recognised in the statement of profit and loss for the period. including profit recognised at the inception of lease. paragraph 23 of the standard . a revision of unguaranteed residual value affects net investment on lease. Lease payments under an operating lease should be recognised as an expense in the statement of profit and loss of a lessee on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit. i. For example. for each of the following periods: (i) (ii) not later than one year.43 Advanced Accounting Interest rate implicit on lease is a discount rate at which sum of present value of minimum lease payments and present value of unguaranteed residual value (both from the standpoint of lessor) is equal to fair value. an individual contract of operating lease does not usually recover the entire cost of leased asset for the lessor. later than one year and not later than five years.2. and the present value of minimum lease payments receivable at the balance sheet date. (c) the unguaranteed residual values accruing to the benefit of the lessor. (iii) later than five years. (d) the accumulated provision for uncollectible minimum lease payments receivable. having consequential effect on income allocation. Accounting treatment in the Books of lessee Lease payments are frequently tailor made to suit the payment capacity of the lessee. Where a commercial rate is used for discounting. Such payment patterns do not reflect the pattern of benefit derived by the lessee from the use of leased asset. (g) accounting policy adopted in respect of initial direct costs. and The Level II and Level III enterprises need not make disclosures required by paragraphs 37(a).e. (f) a general description of the significant leasing arrangements of the lessor. (b) unearned finance income.

Suppose outputs from a machine taken on a 3 year operating lease are estimated as 10. To Lessor (Being lease rent for the year due) Lessor Dr.000 15. the Lease Rent Adjustment A/c will close in the terminal year.000 10. P & L A/c Dr. The accounting entries for year 1 in books of lessee are suggested below: ` Lease Rent A/c Dr.000 25.000 in year 3.000 ` 25. ` 45.000 respectively. The difference between lease rent due and lease rent recognised can be debited / credited to Lease Rent Adjustment A/c. Disclosures by lessees The paragraph 25 requires lessees to make following disclosures for operating leases: (a) the total of future minimum lease payments under non-cancelable operating leases for each of the following periods: (i) (ii) not later than one year.000 and ` 50. The total lease payment ` 1. (iii) later than five years.000 units in year 3.44 requires lessees to recognise operating lease payments as expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit.000 units in year 1. (c) lease payments recognised in the statement of profit and loss for the period.000 in this example should be recognised in proportion of output as ` 15.000 in year 1. 20. (b) the total of future minimum sublease payments expected to be received under noncancelable subleases at the balance sheet date. To Lease Rent A/c (Being recognition of lease rent as expense for the year) 25. with separate amounts for minimum lease payments and contingent rents.000 25.000 in year 2 and ` 75. the balance of Lease Rent Adjustment A/c can be shown in the balance sheet under "Current Assets" or Current Liabilities" depending on the nature of balance. ` 30.000 units in year 2 and 50. 20.000.000 Since total lease rent due and recognised must be same. The agreed annual lease payments are ` 25.000 25. . To Bank A/c (Being payment of lease rent for the year) Lease Rent Adjustment Dr. Till then. later than one year and not later than five years.Accounting Standards 2.

000 units = ` 2.00. The machine was given on 3-year operating lease by a dealer of the machine for equal annual lease rentals to yield 20% profit margin on cost ` 5. (ii) the existence and terms of renewal or purchase options and escalation clauses.e. No selling profit should be recognised on entering into operating lease. in the proportion of 10 : 20 : 30.000 units in year 5 and 5. 20. additional debt. (e) a general description of the lessee's significant leasing arrangements including. ` 96. and the depreciation charge should be calculated on the basis set out in AS 6. because such leases are not equivalents of sales (Paragraph 45) Suppose outputs from a machine of economic life of 6 years are estimated as 10. The depreciation of leased assets should be on a basis consistent with the normal depreciation policy of the lessor for similar assets. such as those concerning dividends. i.000 and ` 1.000 units in year 4.000 units in year 1. and further leasing.000 units in year 6. 40. 20. Note: The Level II and Level III enterprises need not make disclosures required by paragraphs 25(a).000 units Annual lease rent = ` 2. and (iii) restrictions imposed by lease arrangements.45 Advanced Accounting (d) sub-lease payments received (or receivable) recognised in the statement of profit and loss for the period.000 units in year 2 and 30.000 respectively.88 lakhs 125.88.44. . but not limited to. (b) and (e). (Paragraph 44) A manufacturer or dealer lessor should bring the asset given on operating lease as fixed asset in their books by debiting concerned Fixed Asset A/c and crediting Cost of Production / Purchase at cost. the following: (i) the basis on which contingent rent payments are determined. Straight-line depreciation in proportion of output is considered appropriate.2. Total lease rent = 120% of ` 5 lakhs × = ` 6 lakhs × Output during lease period Total output 60. 2 and 3 are ` 48.000 units in year 3.000 Total lease rent should be recognised as income in proportion of output during lease period. Accounting treatment in the books of lessor (i) Paragraph 39 requires a lessor to treat assets given under operating leases as fixed assets in its balance sheets and (ii) Paragraph 41 requires depreciation to be recognized in the books of lessor. (Paragraph 43) (iii) The impairment losses on assets given on operating leases are determined and treated as per AS 28.000.000. Hence income recognised in years 1.000 / 3 = ` 96.

Disclosures by lessors As per paragraph 46. the depreciable amount ` 5 lakh should be allocated over useful life 6 years in proportion of output. the accumulated depreciation and accumulated impairment losses at the balance sheet date.000 40.000 40.000 Dr.000 Dr.000 Dr. 96. 5. The accounting entries for year 1 in books of lessor are suggested below: ` Machine given on Operating Lease To Purchase (Being machine given on operating lease brought into books) Lessee To Lease Rent (Being lease rent for the year due) Bank To Lessee (Being receipt of lease rent for the year) Lease Rent To P & L A/c To Lease Rent Adjustment (Being recognition of lease rent as income for the year) Depreciation To Machine given on Operating Lease (Being depreciation for the year) P & L A/c To Depreciation (Being depreciation for the year transferred to P & L A/c) Dr.000 48.000 Since total lease rent due and recognised must be same. the balance of Lease Rent Adjustment A/c can be shown in the balance sheet under "Current Assets" or Current Liabilities" depending on the nature of balance. 96.46 Since depreciation in proportion of output is considered appropriate. and .000 96. the Lease Rent Adjustment A/c will close in the terminal year.000 48. AS 10. the gross carrying amount.Accounting Standards 2.000. Till then.000 96. in proportion of 10 : 20 : 30 : 40 : 20 : 5. and the governing statute.e.000 Dr. Depreciation for year 1 is ` 40.000 ` 5. make the following disclosures for operating leases: (a) for each class of assets.000 Dr.00. 40. in addition to the requirements of AS 6. 40. the lessor should. i. 96.00.

(b) the future minimum lease payments under non-cancelable operating leases in the aggregate and for each of the following periods: (i) not later than one year. The requirements of paragraph 50 are summarized below: Case 1: Sale price = Fair Value Profit or loss should be recognised immediately. The asset subject to such sale and leaseback agreement is generally property. under paragraph 52. (d) accounting policy adopted in respect of initial direct costs. (ii) later than one year and not later than five years. Note: The Level II and Level III enterprises need not make disclosures required by paragraphs 46(b) and (d).47 Advanced Accounting (i) the depreciation recognised in the statement of profit and loss for the period.2. (iii) impairment losses reversed in the statement of profit and loss for the period. a loss equal to the amount of the difference between the carrying amount and fair value should be recognised immediately. . The lease payments and the sale price are generally interdependent as they are negotiated as a package. • Where sale and leaseback results in finance lease The excess or deficiency of sales proceeds over the carrying amount should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. Accounting treatment of profits / losses on sale of asset. The accounting treatment of a sale and lease back depends upon the type of lease involved. Sale and Leaseback The basis of a sale and leaseback agreement is simply that one sells an asset for cash and then leases it back from the buyer. (Paragraph 52) After recognition of loss if any. • Where sale and leaseback results in operating lease If the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset. Under such an agreement the property owner agrees to sell the property at an agreed valuation and lease it back from the buyer. (iii) later than five years. The lessee or seller receives cash immediately and makes periodic payment in form of lease rents for right to use the property. as required by the standard in respect of sale and lease-back transactions. the profit / loss on sale of the asset should be treated in the manner required by paragraph 50. (c) total contingent rents recognised as income in the statement of profit and loss for the period. are summarised below. (ii) impairment losses recognised in the statement of profit and loss for the period.

(c) When fair value of leased machinery is ` 45 lakhs & sales price is ` 38 lakhs. (f) When fair value is ` 35 lakhs & sales price is ` 39 lakhs.Accounting Standards Case 2: Sale Price < Fair Value 2.48 Profit should be recognised immediately. to A Ltd. if the loss is compensated by future lease payments at below market price. then the loss of ` 5 lakhs (4035) to be immediately recognized by A Ltd. A Ltd.e. in its books provided loss is not compensated by future lease payment. The loss should also be recognised immediately except that. Solution Following will be the treatment in the given cases: (a) When sales price of ` 50 lakhs is equal to fair value. (e) When fair value is ` 46 lakhs & sales price is ` 50 lakhs. then loss of ` 2 lakhs (40 – 38) to be immediately recognized by A Ltd. (d) Fair value is ` 40 lakhs and sale price is `50 lakhs. profit of ` 6 lakhs (46 . it should be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. Case 3: Sale Price > Fair Value The excess over fair value should be deferred and amortised over the period for which the asset is expected to be used. (b) Fair value is ` 60 lakhs. (e) Fair value is `46 lakhs and sale price is ` 50 lakhs (f) Fair value is `35 lakhs and sale price is `39 lakhs. for ` 50 lakhs and the same machinery was leased back by B Ltd.40) to be immediately recognized in its books and balance profit of `4 lakhs (50-46) is to be amortised/deferred over lease period. (b) When fair value is ` 60 lakhs then also profit of `10 lakhs should be immediately recognized by A Ltd. sold machinery having WDV of ` 40 lakhs to B Ltd. (c) Fair value is ` 45 lakhs and sale price is ` 38 lakhs. should immediately recognize the profit of `10 lakhs (i. (d) When fair value is ` 40 lakhs & sales price is ` 50 lakhs then. 50 – 40) in its books. The lease back is operating lease. profit of ` 10 lakhs is to be deferred and amortized over the lease period. Illustration 19 A Ltd. in its books and profit of ` 4 lakhs (39-35) should be amortised/deferred over lease period . Comment if – (a) Sale price of `50 lakhs is equal to fair value.

Note :This Statement requires an enterprise to present basic and diluted earnings per share. An enterprise should present basic and diluted earnings per share with equal prominence for all periods presented. if the contract so provides. • • An equity share is a share other than a preference share.49 Advanced Accounting 2. An enterprise should present basic and diluted earnings per share on the face of the statement of profit and loss for each class of equity shares that has a different right to share in the net profit for the period. b.7 AS 20 : Earnings Per Share This AS comes into effect in respect of accounting periods commencing on or after 1-4-2001 and is mandatory in nature. Options including employee stock option plans under which employees of an enterprise are entitled to receive equity shares as part of their remuneration and other similar plans. d. even if the amounts disclosed are negative (a loss per share). that are convertible into equity shares. A potential equity share is a financial instrument or other contract that entitles. Applicability This Statement should be applied by enterprises whose equity shares(ordinary shares) or potential equity shares(potential ordinary shares) are listed on a recognised stock exchange in India. A preference share is a share carrying preferential rights to dividends and repayment of capital. so as to improve performance comparisons between different entities in the same reporting periods for the same entity. or may entitle.2. Objective The objective of this standard is to prescribe principles for the determination and presentation of earnings per share. Debt instruments or preference shares. its holder to equity shares. The focus of this standard is on the denominator of the earnings per share calculation. Share warrants. and Shares which would be issued upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares). c. Examples of potential equity shares are: a. An enterprise which has neither equity shares nor potential equity shares which are so listed but which discloses earnings per share should calculate and disclose earnings per share in accordance with this Standard. or shares issuable under a loan contract upon default of payment of principal or interest. . such as the acquisition of a business or other assets.

All items of income and expense which are recognised in a period. The time-weighting factor is the number of days for which the specific shares are outstanding as a proportion of the total number of days in the period.50 Basic earnings per share should be calculated by dividing the net profit or loss for the period attributable to equity shareholders of the parent entity (the numerator) by the weighted average number of equity shares outstanding (the denominator) during the period. are included in the determination of the net profit or loss for the period unless AS – 5 requires or permits otherwise. the number of ordinary shares shall be the weighted average number of equity shares outstanding at the beginning of the period.800 600 Sold 300 Balance 1. net profit or loss for the period is apportioned over the different classes of shares in accordance with their dividend rights.400 2.Accounting Standards Basic Earnings Per Share 2.800 2. For the purpose of calculating basic earnings per share. whether or not the dividends have been provided for. If an enterprise has more than one class of equity shares. . The amount of preference dividends and any attributable tax thereto for the period is deducted from the net profit for the period (or added to the net loss for the period) in order to calculate the net profit or loss for the period attributable to equity shareholders. Illustration 20 Date 1st January 31st May 1st November Particulars Balance at beginning of year Issue of shares for cash Buy Back of shares Purchased 1. including tax expense and extraordinary items. a reasonable approximation of the weighted average is adequate in many circumstances. b. and The full amount of the required preference dividends for cumulative preference shares for the period. The amount of preference dividends for the period does not include the amount of any preference dividends for cumulative preference shares paid or declared during the current period in respect of previous periods. The amount of any preference dividends on non-cumulative preference shares provided for in respect of the period. The amount of preference dividends for the period that is deducted from the net profit for the period is: a.100 Calculate Weighted Number of Shares. adjusted by the number of equity shares bought back or issued during the period multiplied by the time-weighting factor.

A share split. or the number of shares outstanding may be reduced.100 shares. d. Where an enterprise has equity shares of different nominal values but with the same dividend rights. b. A bonus element in any other issue.100 x 2/12) = 2. Partly paid equity shares are treated as a fraction of an equity share to the extent that they were entitled to participate in dividends relative to a fully paid equity share during the reporting period.400 x 5/12) + (2. and A reverse share split (consolidation of shares). without a corresponding change in resources. for example: List of shares issued Weight to be considered from Equity shares issued in exchange for cash Date of cash receivable Equity shares issued as a result of the Date of conversion conversion of a debt instrument Equity shares issued in lieu of interest or principal on other financial instruments Date when interest ceases to accrue Equity shares issued in exchange for the Date on which the settlement becomes settlement of a liability of the enterprise effective Equity shares issued as consideration for the acquisition of an asset other than cash Date on which the acquisition is recognised Equity shares issued for the rendering of When the services are rendered services to the enterprise Equity shares issued as part of the consideration in an amalgamation in the nature of purchase are included in the weighted average number of shares as of the date of the acquisition and in an amalgamation in the nature of merger are included in the calculation of the weighted average number of shares from the beginning of the reporting period.800 x12/12) + (600 x 7/12) . Equity shares may be issued.800 x 5/12) + (2. for example a bonus element in a rights issue to existing shareholders.51 Advanced Accounting Solution Computation of Weighted Average: (1.(300 x 2/12) = 2. . shares are included in the weighted average number of shares from the date the consideration is receivable.2. Examples include: a.100 shares In most cases. The weighted average number of shares can alternatively be computed as follows: (1. A bonus issue. c. the number of equity shares is calculated by converting all such equity shares into equivalent number of shares of the same nominal value.

00.000 = ` 1.00. Solution No. of Shares 1. number of partly paid equity shares would be taken as 300 for the purpose of calculation of earnings per share.00. equity shares are issued to existing shareholders for no additional consideration. Therefore.00 (20.800 x 12/12) + (300 x 2/12) = 1. of equity shares outstanding until 30th September 2010 ` 18.00. 2010 Calculate Basic Earnings Per Share.00.00.000 ` 60. .000 + 40.000) 18. the earliest period reported.000 20.00.Accounting Standards Illustration 21 Date 1st January 31st October Solution Particulars Balance at beginning of year Issue of Shares No.52 Paid up Value ` 10 ` 10 ` 10 `5 Calculate Weighted Number of Shares.00. Illustration 22 Net profit for the year 2009 Net profit for the year 2010 No.00.000 shares = 60.000 = ` 0. the number of equity shares outstanding is increased without an increase in resources. Computation of weighted average would be as follows: (1.000) Earnings per share for the year 2010 Adjusted earnings per share for the year 2009 = Since the bonus issue is an issue without consideration.00. of Bonus Issue 20.850 shares In case of a bonus issue or a share split.30 (20. the issue is treated as if it had occurred prior to the beginning of the year 2009.800 600 Face Value 2. The number of equity shares outstanding before the event is adjusted for the proportionate change in the number of equity shares outstanding as if the event had occurred at the beginning of the earliest period reported.000 Bonus issue 1st October 2010 was 2 equity shares for each equity share outstanding at 30th September. Assuming that partly paid shares are entitled to participate in the dividend to the extent of amount paid.000 × 2 = 40.000 + 40.00.

and dividing by the number of shares outstanding after the exercise of the rights.000/ (5.00 x 1.000/5.00.00.05) = ` 2.20 EPS for the year 2009 restated for rights issue: ` 11.00. 1.00. Therefore.00. Solution Fair value of shares immediately prior to exercise of rights + Total amount received from exercise.00. on the other hand.000 shares) 5.53 Advanced Accounting In a rights issue.00 x 5. the exercise price is often less than the fair value of the shares.00.00. Illustration 23 Net profit for the year 2009 Net profit for the year 2010 No. The number of equity shares to be used in calculating basic earnings per share for all periods prior to the rights issue is the number of equity shares outstanding prior to the issue.00 Computation of adjustment factor: Fair value per share prior to exercise of rights Theoretical ex-rights value per share ` ( 21. multiplied by the following adjustment factor: Fair value per share immediately prior to the exercise of rights Theoretical ex-rights fair value per share The theoretical ex-rights fair value per share is calculated by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds from the exercise of the rights.10 ` ( 20.000 5.000 shares = ` 2.e.00.000 shares) + (` 15.00.00 1st March 2010 Rights issue is one new share for each five outstanding (i.00. a rights issue usually includes a bonus element. of shares outstanding prior to rights issue Rights issue price Last date to exercise rights ` 11.00.2.000 shares x 1. Number of shares outstanding prior to exercise + number of shares issued in the exercise (` 21.000 ` 15.000 shares Theoretical ex-rights fair value per share = ` 20.000 shares + 1.00 ) = 1.00 ) Computation of earnings per share: EPS for the year 2009 as originally reported: ` 11.000 shares ` 15.000 new shares) Fair value of one equity share immediately prior to exercise of rights on 1st March 2010 was ` 21.00. Compute Basic Earnings Per Share.05 .

500 = ` 2. If the conditions have not been met.00. the new equity shares will be entitled to participate in the net profit attributable to equity shareholders. for the effects of all dilutive potential ordinary shares Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments are converted. that is: a. Instead.87. The weighted average number of equity shares outstanding during the period is increased by the weighted average number of additional equity shares which would have been outstanding assuming the conversion of all dilutive potential equity shares. contingently issuable shares are .05 x 2/12) + (6. and the weighted average number of shares outstanding. the dividends. and reduced by the amount of income that will cease to accrue.00.000/5. an entity shall adjust profit or loss attributable to ordinary equity shareholders of the parent entity. interest and other expenses or income associated with those potential equity shares will no longer be incurred (or earned). The amounts of dividends. the net profit for the period attributable to equity shareholders calculated in Basic Earnings Per Share is increased by the amount of dividends. interest and other expenses or income are adjusted for any attributable taxes. for computing the diluted earnings per share. After the potential equity shares are converted into equity shares. b. or that ordinary shares are issued upon the satisfaction of specified conditions Effect is given to all dilutive potential equity shares that were outstanding during the period. and Adjusted for the after-tax amount of any other changes in expenses or income that would result from the conversion of the dilutive potential equity shares. Increased by the amount of dividends recognised in the period in respect of the dilutive potential equity shares as adjusted for any attributable change in tax expense for the period. that options or warrants are exercised.87. Increased by the amount of interest recognised in the period in respect of the dilutive potential equity shares as adjusted for any attributable change in tax expense for the period. Equity shares which are issuable upon the satisfaction of certain conditions resulting from contractual arrangements (contingently issuable shares) are considered outstanding and included in the computation of both the basic earnings per share and diluted earnings per share from the date when the conditions under a contract are met.54 EPS for the year 2010 including effects of rights issue: (5. The net profit for the period attributable to equity shares is: i.000 x 1. interest and other expenses that will be saved.00. iii. Therefore. ii.000 x 10/12) = 5. on the conversion of the dilutive potential equity shares into equity shares.500 shares EPS = 15.55 Diluted Earnings Per Share In calculating diluted earnings per share.Accounting Standards 2.

Potential equity shares are anti-dilutive when their conversion to equity shares would increase earnings per share from continuing ordinary activities or decrease loss per share from continuing ordinary activities.000/60.000 ` 3. capitalisation or share split or decreases as a result of a reverse share split (consolidation of shares).00.000 ` 12.000) = ` 1.000 ` 2.2.00.000 + 10. .000 + 12.00. The number of contingently issuable shares included in this case in computing the diluted earnings per share is based on the number of shares that would be issuable if the end of the reporting period was the end of the contingency period. of equity shares outstanding Basic earnings per share No.000 No.00 1.000) = 60. the potential equity share is considered most dilutive and vice-versa. each issue or series of potential equity shares is considered in sequence from the most dilutive to the least dilutive. of 12% convertible debentures of ` 100 each Each debenture is convertible into 10 equity shares Interest expense for the current year Tax relating to interest expense (30%) Compute Diluted Earnings Per Share.000 Shares No. the earnings per incremental potential equity share is calculated.000 Shares Diluted earnings per share: (1. In order to maximise the dilution of basic earnings per share.00.00. The provisions of this paragraph apply equally to potential equity shares that are issuable upon the satisfaction of certain conditions (contingently issuable potential equity shares).000 – 3. For the purpose of determining the sequence from most dilutive to least dilutive potential equity shares.00. Restatement is not permitted if the conditions are not met when the contingency period actually expires subsequent to the end of the reporting period. if later). Solution ` 1.40.60. Where the earnings per incremental share is the least. of equity shares used to compute diluted EPS: (50.55 Advanced Accounting included as of the beginning of the period (or as of the date of the contingent share agreement.00.00.000 50.00. the calculation of basic and diluted earnings per share should be adjusted for all the periods presented.000 Adjusted net profit for the current year (1.81 Restatement If the number of equity or potential equity shares outstanding increases as a result of a bonus issue. Illustration 24 Net profit for the current year No.00.00.00.08.40.000) = ` 1.00.60. of equity shares resulting from conversion of debentures: 10. The effects of anti-dilutive potential equity shares are ignored in calculating diluted earnings per share.08.

00 1.000 ` 2. Basic and diluted per share amounts should be disclosed with equal prominence. c.00.00.56 If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors.000 12. Solution Computation of earnings per share Earnings Shares Earnings/ Share ` 12. If an enterprise discloses. in addition to basic and diluted earnings per share. per share amounts using a reported component of net profit other than net profit or loss for the period attributable to equity shareholders.00.40 . and a reconciliation of those amounts to the net profit or loss for the period. Illustration 25 Net profit for the year 2010 Weighted average number of equity shares outstanding during the year 2010 Average fair value of one equity share during the year 2010 Weighted average number of shares under option during the year 2010 Exercise price for shares under option during the year 2010 Compute Basic and Diluted Earnings Per Share. b.00 ` Net profit for the year 2010 Weighted average no.00. The weighted average number of equity shares used as the denominator in calculating basic and diluted earnings per share.000 5.00. the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. of shares during year 2010 Basic earnings per share Number of shares under option 1.000 shares ` 20. If a component of net profit is used which is not reported as a line item in the statement of profit and loss. and a reconciliation of these denominators to each other. a reconciliation should be provided between the component used and a line item which is reported in the statement of profit and loss.000 5. such amounts should be calculated using the weighted average number of equity shares determined in accordance with this Statement.000 shares ` 15.00.Accounting Standards 2. The amounts used as the numerators in calculating basic and diluted earnings per share. and The nominal value of shares along with the earnings per share figures. Disclosure An enterprise should disclose the following: a.

In respect of all other enterprises. d. 7.000) 5. This Statement also applies to: (i) (ii) expenditure on advertising. oil. start . comes into effect in respect of expenditure incurred on intangible items during accounting periods commencing on or after 1-4-2003 and is mandatory in nature from that date for the following: i.00 Diluted earnings per share 12. b. However. 19. AS 8. and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognized stock exchange in India as evidenced by the board of directors' resolution in this regard. except: a. Mineral rights and expenditure on the exploration for. AS 6 & AS 10 stand withdrawn for the aspects relating to Intangible Assets. and other expenditure (such as start-up costs).000 x 15.00)/20. Enterprises whose equity or debt securities are listed on a recognized stock exchange in India. Intangible assets that are covered by another Accounting Standard like AS 2. 14.2. c.000 2. minerals. industrial and business reporting enterprises. Scope This Statement should be applied by all enterprises in accounting for intangible assets.up cost Research and development activities .8 AS 26 : Intangible Assets AS 26. the Accounting Standard comes into effect in respect of expenditure incurred on intangible items during accounting periods commencing on or after 14-2004 and is mandatory in nature from that date. training.000 (75. whose turnover for the accounting period exceeds ` 50 crores. in extractive industries or by insurance enterprises. natural gas and similar non-regenerative resources and Intangible assets arising in insurance enterprises from contracts with policyholders.57 Advanced Accounting Number of shares that would have been issued at fair value (100. All other commercial. ii. 21 & 22. or development and extraction of. Financial assets. From the date of this Standard becoming mandatory for the concerned enterprises.29 2.25.00. this Statement applies to other intangible assets used (such as computer software).

A financial asset is any asset that is: a. A contractual right to exchange financial instruments with another enterprise under conditions that are potentially favourable or An ownership interest in another enterprise. A contractual right to receive cash or another financial asset from another enterprise. plays. Cash. video recordings. b. c. d. Right under licensing agreements for items such as motion picture films. or incur liabilities. for rental to others.58 (iii) (iv) (v) a. The items traded within the market are homogeneous. Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. Intangible Assets An intangible asset is • • • • an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services. An active market is a market where all the following conditions exist: a. c. on the acquisition. b.Accounting Standards 2. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Willing buyers and sellers can normally be found at any time and Prices are available to the public. maintenance or enhancement of intangible resources such as scientific or technical . or for administrative purposes. manuscripts Patents. Enterprises frequently expend resources. development. An asset is a resource: Monetary assets are money held and assets to be received in fixed or determinable amounts of money. b. copyrights and trademarks goodwill Controlled by an enterprise as a result of past events and From which future economic benefits are expected to flow to the enterprise.

that is.2. the asset is identifiable if the enterprise can identify the future economic benefits that will flow from the asset. we treat them as Fixed Assets like Operating system for computers. the knowledge is protected by legal rights such as copyrights. control over a resource and expectation of future economic benefits flowing to the enterprise. . An intangible asset can be clearly distinguished from goodwill if the asset is separable. inseparable. To be identifiable. An asset is separable if the enterprise could rent. exchange or distribute the specific future economic benefits attributable to the asset without also disposing of future economic benefits that flow from other assets used in the same revenue earning activity. As employees may quite the concern anytime or even loyal customers may decide to purchase goods and services from other suppliers. The capacity of an enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. If physical element is just to support intangible part of it. expenditure to acquire it or generate it internally is recognised as an expense when it is incurred. Judgement is required to assess as to which element is predominant. If an item covered by this Statement does not meet the definition of an intangible asset. licences.59 Advanced Accounting knowledge. Not all the items described above will meet the definition of an intangible asset. Market and technical knowledge may give rise to future economic benefits. we treat them as intangible assets. design and implementation of new processes or systems. in practice. Moreover these items don’t even qualify as intangible asset as per the definition given in this AS. intellectual property. If use of physical assets is possible only with the intangible part of it. Though Separability is not a necessary condition for identifiability. an asset may incorporate both intangible and tangible elements that are. • Control An enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing from the underlying resource and also can restrict the access of others to those benefits. Identifiability • • The definition of an intangible asset requires that an intangible asset be identifiable. However. for example. If an asset generates future economic benefits only in combination with other assets. a restraint of trade agreement or by a legal duty on employees to maintain confidentiality. An enterprise controls those benefits if. legal enforceability of a right is not a necessary condition for control since an enterprise may be able to control the future economic benefits in some other way. sell. In some cases. identifiability. it is necessary that the intangible asset is clearly distinguished from goodwill. Future economic benefit is also flown from the skill of labour and customer loyalty but usually this flow of benefits cannot be controlled by the enterprise. market knowledge and trademarks.

The appropriate market price is usually the current bid price. Acquisition as part of an Amalgamation An intangible asset acquired in an amalgamation in the nature of purchase is accounted for in accordance with AS 14. An intangible asset should be measured initially at cost. Quoted market prices in an active market provide the most reliable measurement of fair value. the cost of the intangible asset can usually be measured reliably. its cost reflects the amount that the enterprise would have paid. It is probable that the future economic benefits that are attributable to the asset will flow to the enterprise. the price of the most recent similar transaction may provide a basis from which to estimate fair value. provided that there has not been a significant change in economic circumstances between the transaction date and the date at which the asset's fair value is estimated. that asset is not recognised as a separate intangible asset but is included in goodwill.60 The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services. and The cost of the asset can be measured reliably. This is particularly so when the purchase consideration is in the form of cash or other monetary assets.Accounting Standards Future Economic Benefits 2. at the date of the acquisition. fair value) of an intangible asset acquired as part of an amalgamation in the nature of purchase cannot be measured reliably. An enterprise should assess the probability of futue economic benefits using reasonable and supportable assumptions that represent best estimate of the set of economic conditions that will exist over the useful life of the asset Separate Acquisition If an intangible asset is acquired separately. fair value) of an intangible asset acquired in an amalgamation can be measured with sufficient reliability for the purpose of separate recognition. If no active market exists for an asset. cost savings. or other benefits resulting from the use of the asset by the enterprise. b. Hence. judgement is required to determine whether the cost (i. even if that intangible asset had not been recognised in the financial statements of the transferor and If the cost (i. Recognition and Initial Measurement of an Intangible Asset The recognition of an item as an intangible asset requires an enterprise to demonstrate that the item meets the definition of an intangible asset and recognition criteria set out as below: a.e.e. If current bid prices are unavailable. A transferee recognises an intangible asset that meets the recognition criteria. In accordance with this Statement: a. b. for the asset in an arm's length transaction between .

Research Phase Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. d. processes. or for nominal consideration. . Internally Generated Intangible Assets Internally generated goodwill should not be recognised as an asset. systems or services. products. as appropriate. or for nominal consideration. b. The cost initially recognised for the intangible asset in this case is restricted to an amount that does not create or increase any capital reserve arising at the date of the amalgamation. Examples of research activities are: a. Acquisition by way of a Government Grant In some cases. evaluation and final selection of possible alternatives for new or improved materials. given at a concessional rate should be accounted for on the basis of their acquisition cost. devices. The formulation. Activities aimed at obtaining new knowledge. intangible asset acquired free of charge. c. products. applications of research findings or other knowledge. devices.2. evaluation and final selection of. the enterprise treats the expenditure on that project as if it were incurred in the research phase only. an enterprise classifies the generation of the asset into Research Phase & Development Phase If an enterprise cannot distinguish the research phase from the development phase of an internal project to create an intangible asset. Expenditure on research or on the research phase should be recognised as an expense when it is incurred. Internally generated goodwill is not recognised as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost. The search for alternatives for materials. by way of government grant is recognised at a nominal value or at the acquisition cost. processes. The search for. No intangible asset arising from research or from the research phase should be recognised.61 Advanced Accounting knowledgeable and willing parties. AS 12. To assess whether an internally generated intangible asset meets the criteria for recognition. based on the best information available. Accordingly. by way of a government grant. systems or services. requires that government grants in the form of non-monetary assets. any expenditure that is directly attributable to making the asset ready for its intended use is also included in the cost of the asset. design. an intangible asset may be acquired free of charge.

if applicable: a Expenditure on materials and services used or consumed in generating the intangible asset. products. e. The design of tools. to creating. mastheads. systems or services. An enterprise assesses the future economic benefits to be received from the asset using the principles in Accounting Standard on Impairment of Assets. construction and operation of a pilot plant that is not of a scale economically feasible for commercial production and The design. The cost includes. producing and making the asset ready for its intended use from the time when the intangible asset first meets the recognition criteria. processes. b. b. moulds and dies involving new technology. and only if. Cost of an Internally Generated Intangible Asset The cost of an internally generated intangible asset comprises all expenditure that can be directly attributed. The technical feasibility of completing the intangible asset so that it will be available for use or sale. processes. systems or services prior to the commencement of commercial production or use.62 Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials. c. The availability of adequate technical. if it is to be used internally. Among other things. the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or. such items are not recognised as intangible assets. publishing titles. construction and testing of pre-production or pre-use prototypes and models. Examples of development activities are: a. d. or allocated on a reasonable and consistent basis. How the intangible asset will generate probable future economic benefits. financial and other resources to complete the development and to use or sell the intangible asset and Its ability to measure the expenditure attributable to the intangible asset during its development reliably. customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. An intangible asset arising from development or from the development phase should be recognised if. Therefore. devices. construction and testing of a chosen alternative for new or improved materials. products. This Statement takes the view that expenditure on internally generated brands. jigs. d. the usefulness of the intangible asset. devices. The design. c. Its ability to use or sell the intangible asset. The design. . an enterprise can demonstrate all of the following: a. Its intention to complete the intangible asset and use or sell it. f.Accounting Standards Development Phase 2.

b. Clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned performance and Expenditure on training the staff to operate the asset. d. If these conditions are met. Recognition of an Expense Expenditure on an intangible item should be recognised as an expense when it is incurred unless: a.63 Advanced Accounting b. . Selling. b. It forms part of the cost of an intangible asset that meets the recognition criteria or The item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset. customer lists and items similar in substance is always recognised as an expense to avoid the recognition of internally generated goodwill. c. an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses. publishing titles. The following are not components of the cost of an internally generated intangible asset: a. Any expenditure that is directly attributable to generating the asset. Subsequent Expenditure Subsequent expenditure on an intangible asset after its purchase or its completion should be recognised as an expense when it is incurred unless: a. Subsequent expenditure on brands. Expenses recognized as expenses cannot be reclassified as cost of Intangible Asset in later years. It does not apply to payments for the delivery of goods or services made in advance of the delivery of goods or the rendering of services. It forms part of the amount attributed to goodwill (capital reserve) at the date of acquisition.2. b. After initial recognition. Allocations of overheads are made on bases similar to those discussed in AS 2 & AS 16. administrative and other general overhead expenditure unless this expenditure can be directly attributed to making the asset ready for use. It is probable that the expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and The expenditure can be measured and attributed to the asset reliably. wages and other employment related costs of personnel directly engaged in generating the asset. mastheads. the subsequent expenditure should be added to the cost of the intangible asset. c. such as fees to register a legal right and the amortisation of patents and licenses that are used to generate the asset and Overheads that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset. The salaries. Such prepayments are recognised as assets.

The method used for an asset is selected based on the expected pattern of consumption of economic benefits and is consistently applied from period to period. the presumption that the useful life generally does not exceed ten years is rebutted and the enterprise: a. Residual Value Residual value is the amount. Estimates of the useful life of an intangible asset generally become less reliable as the length of the useful life increases. In some cases. which an enterprise expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal. unless there is a change in the expected pattern of consumption of economic benefits to be derived from that asset. Estimates the recoverable amount of the intangible asset at least annually in order to identify any impairment loss and Discloses the reasons why the presumption is rebutted and the factor(s) that played a significant role in determining the useful life of the asset. In these cases. be persuasive evidence to support an amortisation method for intangible assets that results in a lower amount of accumulated amortisation than under the straight-line method. This Statement adopts a presumption that the useful life of intangible assets is unlikely to exceed ten years. b. If control over the future economic benefits from an intangible asset is achieved through legal rights that have been granted for a finite period. Amortisation should commence when the asset is available for use. the diminishing balance method and the unit of production method. the useful life of the intangible asset should not exceed the period of the legal rights unless the legal rights are renewable and renewal is virtually certain. if ever. The useful life is the shorter of the periods determined by these factors. The amortisation charge for each period should be recognised as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset.64 The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. there may be persuasive evidence that the useful life of an intangible asset will be a specific period longer than ten years. Amortisation Method A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. Amortises the intangible asset over the best estimate of its useful life. . c. legal factors may restrict the period over which the enterprise controls access to these benefits. These methods include the straight-line method.Accounting Standards Amortisation Period 2. There will rarely.There may be both economic and legal factors influencing the useful life of an intangible asset: economic factors determine the period over which future economic benefits will be generated.

There is a commitment by a third party to purchase the asset at the end of its useful life or There is an active market for the asset and: i.2. AS 28 “Impairment of Assets” is not covered under IPCC curriculum and will be discussed in the Final level of CA course. the impairment loss is recognised as an adjustment to both the amount assigned to the intangible asset and the goodwill (capital reserve) recognised at the date of the amalgamation. Residual value can be determined by reference to that market and It is probable that such a market will exist at the end of the asset's useful life. but the useful life is extended by subsequent expenditure to exceed ten years from when the asset became available for use. b. Recoverability of the Carrying Amount-Impairment Losses Impairment losses of intangible assets are calculated on the basis of AS 28. If an impairment loss occurs before the end of the first annual accounting period commencing after acquisition for an intangible asset acquired in an amalgamation in the nature of purchase. Retirements and Disposals An intangible asset should be derecognised (eliminated from the balance sheet) if disposed or when no future economic benefits are expected from its use. an enterprise performs the required impairment test and makes the disclosure required.65 Advanced Accounting The residual value of an intangible asset should be assumed to be zero unless: a. . An intangible asset that is not yet available for use and An intangible asset that is amortised over a period exceeding ten years from the date when the asset is available for use. However. In addition to the requirements of AS 28. ii. b. an enterprise should estimate the recoverable amount of the following intangible assets at least at each financial year end even if there is no indication that the asset is impaired: a. if the impairment loss relates to specific events or changes in circumstances occurring after the date of acquisition. If the useful life of an intangible asset was estimated to be less than ten years at initial recognition. the impairment loss is recognised under AS 28 and not as an adjustment to the amount assigned to the goodwill (capital reserve) recognised at the date of acquisition. The recoverable amount should be determined under AS 28 and impairment losses recognised accordingly.

indicating separately those from internal development and through amalgamation. The amortisation methods used. A reconciliation of the carrying amount at the beginning and end of the period showing: I. the enterprise should describe the factor(s) that played a significant role in determining the useful life of the asset. The existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities and The amount of commitments for the acquisition of intangible assets. an enterprise is following an accounting policy of not amortising an intangible item or amortising an intangible item over a . c. II. IV V VI Additions. Impairment losses recognised in the statement of profit and loss during the period. 2.66 Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss. A description. d. the carrying amount and remaining amortisation period of any individual intangible asset that is material to the financial statements of the enterprise as a whole. Impairment losses reversed in the statement of profit and loss during the period. Disclosure The financial statements should disclose the following for each class of intangible assets. distinguishing between internally generated intangible assets and other intangible assets: 1. III. Transitional Provisions Where. The financial statements should disclose the aggregate amount of research and development expenditure recognised as an expense during the period. The useful lives or the amortisation rates used. Amortisation recognised during the period and Other changes in the carrying amount during the period. Other Disclosures The financial statements should also disclose: a. Retirements and disposals. The gross carrying amount and the accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period. In giving these reasons. 4.Accounting Standards 2. If an intangible asset is amortised over more than ten years. 3. on the date of this Statement coming into effect. b. the reasons why it is presumed that the useful life of an intangible asset will exceed ten years from the date when the asset is available for use.

The useful life of the asset is 10 years from the year of commencement of its use. as if the accumulated amortisation had always been determined under this Statement. 12. ii.00. In the event the period determined has not expired on the date of this Statement coming into effect and: a.00. Illustration 26 ABC Ltd. the carrying amount of the intangible item should be amortised over the remaining period as per the accounting policy followed by the enterprise.000 ∗ 14. Amortisation should commence when the asset is available for use.4. with the corresponding adjustment to the opening balance of revenue reserves.2012.2005. the carrying amount of the intangible item should be restated. 2. Solution Journal Entry ` ` Profit and Loss A/c (Prior period item) Dr. b. Is shorter as compared to the balance of the period determined.3. Pass Journal entry to give effect to the value of know-how as per Accounting Standard-26 for the year ended 31.000 To Know-how A/c [Being depreciation of 7 years (out of which depreciation of 6 years charged as prior period item)] ∗ As per para 63 of AS 26 “Intangible Assets”. If the remaining period as per the accounting policy followed by the enterprise: i. Is longer as compared to the balance of the period determined. The know-how was used by the company from 1. The restated carrying amount should be amortised over the balance of the period. developed know-how by incurring expenditure of `20 lakhs. The company has not amortised the asset till 31. If the enterprise is following an accounting policy of not amortising an intangible item.2. with the corresponding adjustment to the opening balance of revenue reserves. The restated carrying amount should be amortised over the balance of the period.2012. the carrying amount appearing in the balance sheet in respect of that item should be eliminated with a corresponding adjustment to the opening balance of revenue reserves.67 Advanced Accounting period longer than the period determined under this Statement and the period determined has expired on the date of this Statement coming into effect.00. . the carrying amount of the intangible item should be restated. there is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use.3.000 Depreciation A/c Dr. as if the accumulated amortisation had always been determined under this Statement.

Where any other Accounting Standard like 7. based on the evidence available. i. Definitions Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. iv.. the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. ii. contingent liability or contingent asset. iii. 15. Contingent Liabilities and Contingent Assets This Statement should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets.9 AS 29 : Provisions.68 2. A Contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.Accounting Standards 2. 9.e. Present obligation . an enterprise applies that Statement instead of this Statement. more likely than not. and Those covered by another Accounting Standard. A Liability is a present obligation of the enterprise arising from past events. . its existence at the balance sheet date is considered probable. or (b) A present obligation that arises from past events but is not recognised because: (i) (ii) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. An Obligating event is an event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation. A Contingent liability is: (a) A possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. or A reliable estimate of the amount of the obligation cannot be made. 19 deals with a specific type of provision. Those arising in insurance enterprises from contracts with policy-holders. except: i. Those resulting from executory contracts. A Provision is a liability which can be measured only by using a substantial degree of estimation. Those resulting from financial instruments that are carried at fair value.an obligation is a present obligation if.

For an event to be an obligating event. For the purpose of this Statement. Present Obligation An enterprise determines whether a present obligation exists at the balance sheet date by taking account of all available evidence. Past Event A past event that leads to a present obligation is called an obligating event. the enterprise discloses a contingent liability. based on the evidence available. the enterprise recognises a provision (if the recognition criteria are met). Where it is not probable that a present obligation exists. . On the basis of such evidence: (a) Where it is more likely than not that a present obligation exists at the balance sheet date. For example. An event that does not give rise to an obligation immediately may do so at a later date. unless the possibility of an outflow of resources embodying economic benefits is remote.2. Probable Outflow of Resources Embodying Economic Benefits For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event. Main features are: The liabilities to be recognised in an enterprise's balance sheet are those that exist at the balance sheet date. because of changes in the law. the causing of the damage will become an obligating event when a new law requires the existing damage to be rectified. an obligation arises only when the legislation is virtually certain to be enacted. an outflow of resources or other event is regarded as probable if the probability that the event will occur is greater than the probability that it will not.69 Advanced Accounting Possible obligation . an enterprise discloses a contingent liability. the future conduct of its business) that are recognised as provisions. It is only those obligations arising from past events existing independently of an enterprise's future actions (i.e. when environmental damage is caused there may be no obligation to remedy the consequences. its existence at the balance sheet date is considered not probable. Where details of a proposed new law have yet to be finalised. Examples: Penalties or clean up costs for unlawful environmental damage.an obligation is a possible obligation if. However. and (b) Where it is more likely that no present obligation exists at the balance sheet date.

a provision is recognised in the financial statements of the period in which the change in probability occurs. they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. A contingent asset is not disclosed in the financial statements. Contingent Assets Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability. The balance is recognized as a provision. Therefore. The provision is measured before tax. are dealt with under AS 22. Recognition: Where an enterprise is jointly and severally liable for an obligation. A contingent liability is disclosed. . unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent Liabilities An enterprise should not recognise a contingent liability but should be disclosed. supplemented by experience of similar transactions and. However. when the realisation of income is virtually certain. a liability exists that cannot be recognised.Accounting Standards Reliable Estimate of the Obligation 2. the tax consequences of the provision. The amount of a provision should not be discounted to its present value. The risks and uncertainties that inevitably surround many events and circumstances should be taken into account in reaching the best estimate of a provision. reports from independent experts. It is usually disclosed in the report of the approving authority. Measurement Best Estimate The estimates of outcome and financial effect are determined by the judgment of the management of the enterprise. in some cases. That liability is disclosed as a contingent liability. since this may result in the recognition of income that may never be realised. and changes in it.70 In the extremely rare case where no reliable estimate can be made. Contingent liabilities may develop in a way not initially expected. except where no reliable estimate can be made. then the related asset is not a contingent asset and its recognition is appropriate. the part of the obligation that is expected to be met by other parties is treated as a contingent liability. Recognition: An enterprise should not recognise a contingent asset.

In this situation. the enterprise will not be liable for the costs in question if the third party fails to pay. an enterprise does not anticipate the development of a completely new technology for cleaning up unless it is supported by sufficient objective evidence. Thus. and a separate asset for the expected reimbursement is recognised when it is virtually certain that reimbursement will be received if the enterprise settles the liability. Reimbursements In most cases. the enterprise will remain liable for the whole of the amount in question so that the enterprise would have to settle the full amount if the third party failed to pay for any reason. For example. a provision is recognised for the full amount of the liability. an enterprise recognises gains on expected disposals of assets at the time specified by the Accounting Standard dealing with the assets concerned. In some cases. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation.71 Advanced Accounting Future Events Expected future events may be particularly important in measuring provisions. it is appropriate to include. In such a case. Instead. even if the expected disposal is closely linked to the event giving rise to the provision. an enterprise may believe that the cost of cleaning up a site at the end of its life will be reduced by future changes in technology. . The amount recognised reflects a reasonable expectation of technically qualified. Use of Provisions Only expenditures that relate to the original provision are adjusted against it. Adjusting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events. for example. the provision should be reversed. Expected Disposal of Assets Gains on the expected disposal of assets are not taken into account in measuring a provision.2. the enterprise has no liability for those costs and they are not included in the provision. However. taking account of all available evidence as to the technology that will be available at the time of the clean-up. objective observers. expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex clean-up operation than has previously been carried out. Changes in Provisions Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate.

. Identifiable future operating losses up to the date of a restructuring are not included in a provision. (b) The closure of business locations in a country or region or the relocation of business activities from one country or region to another. These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the balance sheet date. eliminating a layer of management. A restructuring provision does not include such costs as: (a) Retraining or relocating continuing staff. Such expenditures are recognised on the same basis as if they arose independently of a restructuring. (c) Changes in management structure. i. for example. which are those that are both: (a) Necessarily entailed by the restructuring. or ii.e. Restructuring A restructuring is a programme that is planned and controlled by management and materially changes either: i. there is a binding sale agreement. and (b) Not associated with the ongoing activities of the enterprise. the enterprise will be able to change its mind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. and (d) Fundamental re-organisations that have a material effect on the nature and focus of the enterprise's operations. The scope of a business undertaken be an enterprise. Until there is a binding sale agreement.Accounting Standards Application of the Recognition and Measurement Rules Future Operating Losses 2.72 Future operating losses do not meet the definition of a liability and the general recognition criteria. No obligation arises for the sale of an operation until the enterprise is committed to the sale. The manner in which that business is conducted. A restructuring provision should include only the direct expenditures arising from the restructuring. . or (c) Investment in new systems and distribution networks. A provision for restructuring costs is recognised only when the recognition criteria for provisions. (b) Marketing. The following are examples of events that may fall under the definition of restructuring: (a) Sale or termination of a line of business. therefore provisions should not be recognised for future operating losses.

Where any information required for contingent liability is not disclosed because it is not practicable to do so. Where necessary to provide adequate information. 4.e. This being in the nature of interest the company has decided to exclude it from closing stock valuation for the year 2009-10. an enterprise should disclose the major assumptions made concerning future events. stating the amount of any asset that has been recognised for that expected reimbursement. Miscellaneous Illustrations Illustration 27 How would you deal with the following in the annual accounts of a company for the year ended 31st March. Additional provisions made in the period. For each class of provision. incurred and charged against the provision) during the period. an enterprise should disclose: • • • • • • The carrying amount at the beginning and end of the period. Amounts used (i. An indication of the uncertainties relating to any outflow. gains on the expected disposal of assets are not taken into account in measuring a restructuring provision.2.73 Advanced Accounting As required by paragraph 44 of the satndard. A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits. and Unused amounts reversed during the period. An indication of the uncertainties about those outflows. the fact should be stated properly. and The amount of any expected reimbursement. Disclosure 1. the company has regularly included such charges in the valuation of closing stock. Unless the possibility of any outflow in settlement is remote. 2. 2011? (a) The company has to pay delayed cotton clearing charges over and above the negotiated price for taking delayed delivery of cotton from the Suppliers' Godown. even if the sale of assets is envisaged as part of the restructuring. Up to 2009-10.60 lakhs . and The possibility of any reimbursement. an enterprise should disclose for each class of contingent liability at the balance sheet date a brief description of the nature of the contingent liability and. An enterprise should disclose the following for each class of provision: • 3. where practicable: • • • An estimate of its financial effect. including increases to existing provisions. This would result into decrease in profit by ` 7.

For better understanding. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. year ended 31st March. "In compliance with the Accounting Standards issued by the ICAl. Final bill for fuel surcharge of ` 5. Although abnormal in amount or infrequent in occurrence. the value of closing stock as well as profit before tax for the year would have been higher by ` 7. However it seems that as a result of error or omission in the preparation of the financial statements of prior period i.e. As per para 19 of AS 5 (Revised). 2009 has been received and paid in February. this accounting policy adopted for valuation of inventories including the cost formulae used should be disclosed in the financial statements. prior period items are normally included in the determination of net profit or loss for the current period. As per AS 2. Therefore it should be treated as 'Prior period item' as per para 16 of AS 5. Solution (a) Para 29 of AS 5 (Revised) ‘Net Profit or Loss for the Period. the under mentioned note should be given in the annual accounts. Therefore. the objective is to indicate the effect of such items on the current profit or loss. 2010 should have been accounted for in the annual accounts of the company for the year ended 31st March.e. 2010. Also. delayed cotton clearing charges which are in the nature of interest have been excluded from the valuation of closing stock unlike preceding years. this material charge has arisen in the current period i..Accounting Standards 2." (b) The final bill having been paid in February. 2005 to September. 2011. 2010. Therefore the change in the method of stock valuation is justified in view of the fact that the change is in line with the recommendations of AS 2 (Revised) ‘Valuation of Inventories’ and would result in more appropriate preparation of the financial statements. Prior Period Items and Changes in Accounting Policies” states that a change in an accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate presentation of the financial statements of an enterprise. Had the company continued the accounting practice followed earlier. In either case.60 lakhs. AS 2 and AS 5.' .30 lakhs for the period October.74 (b) Fuel surcharge is billed by the State Electricity Board at provisional rates. appropriate disclosure of the change and the amount by which any item in the financial statements is affected by such change is necessary as per AS 1.. for the year ended 31st March 2010. such an expense does not qualify an extraordinary item as per Para 10 of AS 5 (Revised). It may be mentioned that it is an expense arising from the ordinary course of business. the fact that power bill is accounted for at provisional rates billed by the state electricity board and final adjustment thereof is made as and when final bill is received may be mentioned as an accounting policy.

both favourable and unfavourable. for the year ended 31st March. In this case the incidence.2 of AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines 'events occurring after the balance sheet date' as 'significant events.2.11 and the accounts for that period were considered and approved by the board of directors on 20th August. You are required to state with reasons. 2011. the acquisition of another company is an event occurring after the balance sheet date. you come across the following information. the views have been given on the basis that the financial statements are yet to be completed and approved by the Board of Directors.2 of AS 4 (Revised) defines "Events occurring after the balance sheet date" as those significant events. So that was not an 'event occurring after the balance sheet date'. 2011 are under preparation.9. how you would deal with this in the financial statements: The company invested 100 lakhs in April. Applying para 15 which clearly states that/disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise. However no adjustment to assets and liabilities is required as the event does not affect the determination and the condition of the amounts stated in the financial statements for the year ended 31st March. that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company. Solution Para 3. Illustration 29 A Limited Company closed its accounting year on 30. Accordingly. However. which was expected to push up cost became evident after the date of approval of the accounts.6. Solution As it is stated in the question that financial statements for the year ended 31st March. that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors in the case of a company'. how the event would be dealt with in the financial statements for the year ended 30. Para 3.2011 it had met a rocky surface for which it was estimated that there would be an extra cost to the tune of ` 80 lakhs. The given case is discussed in the light of the above mentioned definition and requirements given in paras 13-15 of the said AS 4 (Revised). . the negotiations for which had started during the financial year. both favourable and unfavourable.11. 2011. 2011 in the acquisition of another company doing similar business. this may be mentioned in the Directors’ Report. 2011.75 Advanced Accounting Illustration 28 In preparing the financial statements of R Ltd.6. While doing the boring work on 1. the investment of ` 100 lakhs in April. 2011 in the acquisition of another company should be disclosed in the report of the Board of Directors to enable users of financial statements to make proper evaluations and decisions. State with reasons. The company was engaged in laying pipe line for an oil company deep beneath the earth.

Can the company provide for the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March. 2011 a company made a provision for bad debts @ 5% of its total debtors. Illustration 31 At the end of the financial year ending on 31st December.000 2. 2011. In April. 2008 the debtor became a bankrupt. It is because earthquake took place before the balance sheet date. 2011.000 2. would have been sufficient. then mere disclosure required as per para 15. The possible outcome as estimated by the Board is as follows: Probability In respect of five cases (Win) Next ten cases (Win) Lose (Low damages) Lose (High damages) Remaining five cases Win Lose (Low damages) Lose (High damages) 50% 30% 20% 100% 60% 30% 10% Loss (` ) − − 1. a company finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors.00. So full provision for bad debt amounting to ` 2 lakhs should be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31st March.00.000 − 1. In the last week of February.2 and 13 of Accounting Standard 4 on Contingencies and Events Occurring after the Balance Sheet Date.Accounting Standards Illustration 30 2.000 Outcome of each case is to be taken as a separate entity.20. . 2011 a debtor for ` 2 lakhs had suffered heavy loss due to an earthquake. 2010. the loss was not covered by any insurance policy. Ascertain the amount of contingent loss and the accounting treatment in respect thereof.76 While preparing its final accounts for the year ended 31st March. 2011? Solution As per paras 8. Assets and Liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist estimation of amounts relating to conditions existing at the balance sheet date.10. Had the earthquake taken place after 31st March.

question of providing for contingent loss does not arise.000 (` 56.20.00. contingent liability should be disclosed in the financial statements if following conditions are satisfied: (i) (ii) There is a present obligation arising out of past events but not recognized as provision. the better approach will be to disclose the overall expected loss of ` 9.000 + 10% of ` 2. As per AS 29. (iii) The possibility of an outflow of resources embodying economic benefits is also remote.000 + ` 20.77 Advanced Accounting Solution According to AS 29 ‘Provisions. As the loss does not appear to be probable and the possibility of an outflow of resources embodying economic benefits is not remote rather there is reasonable possibility of loss. (iv) The amount of the obligation cannot be measured with sufficient reliability to be recognized as provision.000 Expected loss in remaining five cases = 30% of ` 1. we make a provision if the loss is probable.00.000 Year 2011 : ` 30.000 To disclose contingent liability on the basis of maximum loss will be highly unrealistic.000 × 5) as contingent liability.000 = ` 56.00. therefore disclosure by way of note should be made. Therefore. the probability of winning of first five cases is 100% and hence. Illustration 32 X Co.20. amount may be calculated as under: Expected loss in next ten cases = 30% of ` 1.000 × 10 + ` 72.000 + 20% of ` 2.2010) Net Profit No. You are required to compute the basic earning per share: (Accounting year 1.000 = ` 30.000 10.12.000 + ` 42.1. It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. of shares outstanding prior to Right Issue Right Issue : : : : Year 2010 : ` 20. supplied the following information. For the purpose of the disclosure of contingent liability by way of note. Ltd.000 = ` 36.2.000 shares One new share for each four .10.00.00.000 = ` 72. Contingent Liabilities and Contingent Assets’.2010 – 31. In this case. The probability of winning of next ten cases is 60% and for remaining five cases is 50%.

000 = ` 24 12.04∗)] EPS for the year 2008 including effects of rights issue ` 30.00.500 shares Working Notes: 1.000 shares) + (` 20 × 2.000 shares.00.00.000 shares × 1.000 shares) EPS for the year 2007 restated for rights issue = [` 20.00.000 11..000 shares) = 10.2011.92 (approx. Computation of theoretical ex-rights fair value per share 2.000 / 10.000 shares + 2.00.78 Last date of exercise rights – 31.e.000 shares 2.00 1.00.000 / (10. . Fair rate of one Equity share immediately prior to exercise of rights on 31.51 (approx.50.00.00.00.97.) Year 2011 ` ` 30.00.000 (10. Right Issue price – ` 20 2.04 × 3 /12) + (12.50.) Fair value of all outstanding shares immediately prior to exercise of rights + Total amount received from exercise Number of shares outstanding prior to exercise + Number of shares issued in the exercise = (` 25 × 10.rights value per share = ` 25 ` 24 (Re fer Working Note 1) = 1.2011 Solution Computation of Basic Earnings Per Share (as per paragraphs 10 and 26 of AS 20 on Earnings Per Share) : ` 25 Year 2010 ` EPS for the year 2010 as originally reported Net profit of the year attributable to equity shareholders = Weighted average number of equity shares outstanding during the year = (` 20. Computation of adjustment factor = Fair value per share prior to exercise of rights Theoretical ex .000 shares ` 3.50.3.50.50.000 shares × 1.) ∗ Refer working note 2.Accounting Standards Out standing i.00.000 shares × 9 /12) 2.04 (approx.3. 2.

2 Circumstances Leading to Dissolution of Partnership A partnership is dissolved or comes to an end on: (a) the expiry of the term for which it was formed or the completion of the venture for which it was entered into. we shall discuss the circumstances leading to dissolution of a partnership firm and accounting treatment necessary to close its books of accounts. Learn the accounting technique relating to disposal of assets and payment of liabilities.1 Introduction Apart from readjustment of rights of partners in the share of profit by way of change in the profit sharing ratio and admission of a new partner or for retirement/death of a partner.1 : Dissolution of Partnership Firms Learning Objectives After studying this unit. 1. another important aspect of partnership accounts is how to close books of accounts in case of dissolution. ♦ Learn how to settle the partner's claims in case of surplus and how to raise money from partners in case of deficit. Also we shall discuss the special problems relating to insolvency of partners and settlement of partnership's liabilities. (b) death of a partner. . ♦ Understand that on dissolution of a partnership all assets are sold out and all liabilities are discharged. In this Unit.3 Advanced Issues in Partnership Accounts Unit . ♦ Deal with piecemeal distribution to partners of amount realized from assets net of liabilities. 1. you will be able to: ♦ Go through the circumstances in which a partnership is dissolved.

Where a partner transfers his interest or share to a third party. and (v) The court orders dissolution. by the partners individually in the proportion in which they are entitled to share profits. When the business comes to an end then only it will be said that the firm has been dissolved. it is distributed among the partners in their profit-sharing ratio. the mutual rights of the partners. including goodwill. and Where it appears to be just and equitable. a partner gives notice of dissolution. 3. is applied first towards repayment of liabilities to outsiders and loans taken from partners. next out of capital and. In such case there will be a new partnership but the firm will continue. A firm stands dissolved in the following cases: (i) (ii) The partners agree that the firm should be dissolved. Where a partner is guilty of misconduct of the business. lastly. Where the business cannot be carried on except at a loss. if there is still surplus. after payment of liabilities of the firm and repayment of loans from partners. if the assets of the firm left over are insufficient to repay in full the capital contributed by each partner. upon dissolution of partnership. afterwards the capital contributed by partners is repaid and. The court has the option to order dissolution of a firm in the following circumstances : (a) (b) (c) (d) (e) (f) (g) Where a partner has become of unsound mind. . the assets of the firm. are settled in the following manner: (a) Losses including deficiencies of capital are paid. are realized. According to the provisions contained in section 48 of the Partnership Act. Where a partner suffers from permanent incapacity. 1. first out of profits.Advanced Issues in Partnership Accounts (c) insolvency of a partner. (d) retirement of a partner. Where a partner persistently disregards the partnership agreement.2 However. the deficiency is borne by the partners in their profit-sharing ratio. unless otherwise agreed upon. (iv) In case of partnership at will. insolvency or retirement) may continue to do the business. Then the amount realized. Conversely. firstly. the partners or remaining partners (in case of death.3 Consequences of Dissolution On the dissolution of a partnership. All partners except one become insolvent. (iii) The business becomes illegal. if necessary.

000 Stock Sundry Debtors Less: Prov. pays a premium to the other partners with a stipulation that the firm will not be dissolved before the expiry of a certain term. Any amount that becomes due will be borne by other partners in their profit.3.000 6.000 19. 1.sharing ratio.4 Closing of Partnership Books on Dissolution We will illustrate the required journal entries to be made for closing the books of a firm with the example given below: Balance Sheet of Fast and Quick as at Dec. on admission. will be entitled to a suitable refund if the firm is dissolved before the term has expired. 1.000 (1. [Section 50] The amount to be repaid will be such as is reasonable having regard to the terms upon which the admission was made and to the length of period agreed upon and that already expired.000 95. The death or retirement of a partner would not result in the dissolution of the partnership. to be divided among the partners in the proportion in which they are entitled to share profits.000 6. 2011 Liabilities Sundry Creditors Fast's Loan General Reserve Capitals: Fast 30.3 Advanced Accounting (b) The assets of the firm.000 25. and (3) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.000 Patents 10. (2) the dissolution is mainly due to the partner’s (claiming refund) own misconduct. 31. including any sums contributed by the partners to make up deficiencies of capital have to be applied in the following manner and order: (i) (ii) in paying the debts of the firm to third parties.000 Plant and Machinery 10. if any.000 Cash 95.000) 18. in paying to each partner rateably what is due to him from the firm in respect of advances as distinguished from capital. (iii) in paying to each partner what is due to him on account of capital. for doubtful debts 55.000 ` ` 40. and (iv) the residue.000 Assets 20. No claim in this respect will arise if: (1) the firm is dissolved due to the death of a partner.000 Quick 25.1 Dissolution before expiry of a fixed term A partner who.3.000 .

000 18. ` 90.000 19.. In the above example the entry will be: Realisation Account To Plant and Machinery Account To Patents Account To Stock Account To Sundry Debtors (Transfer of various assets to the debit side of Realisation Account) II.000 1. The steps to close the books are given below: I. The accounts of the liabilities and provisions will be debited and thus closed.500 The Sundry Creditors were paid off at a discount of 5%. Dr. The entry should be at book figures.000 22. On 1st January.000 Note: Accounts denoting accumulated losses or profits should not be transferred to the Realisation Account. The expense amounted to ` 3.000 ` 40.000 ` 21.500.000 Transfer of liabilities to outsiders and provisions and reserves against assets (e.500 85.4 Fast and Quick share profits in the ratio of 3:2. ` 20. The other assets realised as under: ` Goodwill Plant and Machinery Stock Sundry Debtors Total 15. Open a Realisation Account and transfer all assets except cash in hand or at bank at book values. It should be remembered that Sundry Debtors and Provisions for Bad Debts Accounts are two separate accounts and the gross amount of debtors should be transferred.Advanced Issues in Partnership Accounts 3. Provision for Doubtful Debts) to the credit side of Realisation account. Dr.000 30.g. The entry will be: Sundry Creditors Account Provision for Doubtful Debts Account To Realisation Account (Transfer of liabilities to outsiders and provision against debtors to Realisation Account) Dr. 2012 the firm was dissolved. Realisation Account is debited and the various assets are credited and thus closed.000.000 6.000 25. . Fast took over the patents at a valuation of ` 5.

. In case of profit. Thus Realisation Account To Cash Account (Payment of Expenses) Dr. reverse of this entry.500 If a partner takes over an asset. ` 85.000 ` 5. there is a loss. At this stage.000 (see account below). ` 19. Thus: Fast’s Capital Account To Realisation Account (Patents taken over by Fast at ` 5. his Capital Account should be credited and Realisation Account debited with the amount agreed upon.5 III. naturally. Cash (or Bank) Account will be debited. if the credit side is bigger.500 ` 3. The Realisation Account in the example given above shows a loss of ` 1. his Capital Account should be debited and Realisation Account credited with the value agreed upon. Expenses of dissolution or realisation of assets are debited to the Realisation Account and credited to Cash Account. If any liability is taken over by a partner.000 less 5% ) Dr. Realisation Account is debited and Capital Accounts credited.3. This should take no note of the book figures. ` 3.000 ` 19. the Realisation Account will show profit or loss. Profit or loss is transferred to the Capital Accounts of partners in the profit sharing ratio. The entry for loss is.000) Dr. Of course. ` 5. there is a profit. (i) The actual amount paid to creditors should be debited to the Realisation Account and Cash Account is credited: Realisation Account To Cash Account (Payment of Sundry Creditors ` 20.000 IV.500 V.500 ` 85. (i) Advanced Accounting The Realisation Account should be credited with the actual amount realised by sale of assets. If the debit side is bigger. Thus: Cash Account To Realisation Account (Amount realised by sale of various assets) (ii) Dr.000 (ii) VI.

600 400 3. The entry is to debit the Loan Account and credit Cash Account.000 10. Any reserve of accumulated profit or loss lying in the books (as shown by the Balance Sheet) should be transferred to the Capital Account in the profit sharing ratio. 10. Cash Account will be debited and his Capital Account credited and thus closed. should now be paid. The partner owing money to the firm will pay.000 6.6 ` 1. Thus: ` Fast’s Loan Account To Cash Account (Repayment of Fast’s Loan) VIII. The entry in the above example is seen in the Capital Accounts below: ` Fast’s Capital Account Quick’s Capital Account To Cash Account (Amount paid to partners on Capital Account) Dr.000 4. his Capital Account will be debited and the Cash Account credited. At this stage the Capital Accounts of partners will show how much amount is due to them or from them. 30.Advanced Issues in Partnership Accounts ` Fast’s Capital Account Quick's Capital Account To Realisation Account (Transfer of loss to Capital Account in the ratio of 3:2) Dr. Dr.400 28.000 ` . Dr.000 ` Dr. Partner's Loans if any. This will close the Capital Accounts as well as the Cash Account.600 59.000 ` Dr.000 VII. 10. Thus: ` General Reserve To Fast’s Capital Account To Quick’s Capital Account (General Reserve transferred to Capital Account in the ratio of 3:2) IX. Money owing to a partner will be paid to him.

000 ` 2011 25. 1 1. 1 To Realisation A/c Transfer 2011 Jan.000 ` 2011 19.Transfer Provision for Doubtful Debts Account ` 19. 1 To Realisation A/c Transfer 2011 Jan.000 ` 2011 Jan.Transfer Patents Accounts ` 40.000 Jan. 1 By Realisation A/c .000 2011 Jan.000 ` ` 10. 1 2011 Jan.000 Jan.000 Sundry Creditors Account By Balance b/d ` 1.000 Jan. 1 By Realisation A/c . 1 By Realisation A/c . 1 6.000 10. 1 20.7 Advanced Accounting Ledger Accounts Plant and Machinery Account 2011 Jan.000 10. 1 2011 Jan. 1 To Capital Accounts Fast Quick To Cash Account To Balance b/d To Balance b/d To Balance b/d ` 2011 6. 1 2011 Jan.000 Jan.Transfer Stock Account ` 6. 1 To Balance b/d ` 2011 40.000 Fast's Loan Account By Balance b/d ` 20. 1 By Realisation A/c .000 ` 2011 Jan.3.000 By Balance b/d General Reserve Account ` 10.000 4.000 10.000 ` 2011 10.Transfer Sundry Debtors Account ` 25.000 Jan. 1 2011 Jan. 1 By Balance b/d 2011 Jan.000 .

1 28.000 10.000 1.000 25.500 Fast's Capital Account 2011 Jan.000 36.400 36.000 Jan.12.000 29.500 2011 Jan.000 85. 1 To Realisation A/c-Patents To Realisation A/c-Loss To Cash Account ` 2011 5.000 6. By Realisation A/c-Creditors By Fast's Loan Acount By Fast's Capital A/c By Quick's Capital A/c ` 3.12.8 ` 2011 Jan. 1 Jan. 1 Jan.000 Note : (1) If any of the assets is taken over by a partner at a value mutually agreed to by the .000 Quick's Capital Account 2011 Jan. 1 600 Jan. 1 ` To Balance b/d To Realisation b/d 6. 1 Jan.600 91. 1 30. 1 ` By Balance b/d By General Reserve 25.Advanced Issues in Partnership Accounts Realisation Account 2011 Jan.400 28.000 3.000 30.000 6.500 19.600 29.500 2011 By Realisation A/c-Exp.500 19.500 5.000 1.patents taken over By Loss to : Fast 600 Quick 400 ` 20.000 To Realisation A/c-loss To Cash Account 400 Jan.000 19.000 Jan. To Cash AccountCreditors paid 3.500 Jan. 1 85. 1 91.000 1. 40.500 Cash Account By Sundry Creditors By Provision for Doubtful Debts By Cash Accountassets realised By Fast's Capital Account.000 4.000 ` 2011 ` By Balance b/d By General Reserve 30. To Sundry Assets Plant and Machinery Patents Stock Sundry Debtors To Cash AccountExp.000 1.

Divide it between the partners in the proportion in which they shared profits and losses. (3) (4) (5) (6) If the capital account of a partner is in debit. (2) Pay off the liabilities. 3. Liabilities to outsiders may also be transferred to the Realisation Account. 5. and The firm cannot be held liable for any acts of the insolvent partner after the date of the order of adjudication. In the case of a loss. He ceases to be a partner on the date on which the order of adjudication is made. 2. 4. crediting cash and debiting the liability accounts. In the latter case. credit Realisation Account and debit various partners’ Capital Accounts.9 Advanced Accounting partners. 1. credit cash and debit the partners’ capital account with the amount payable to them to close their accounts. The balance of the Realisation Account will represent either the profit or loss on realisation. after his share of loss or profit has been adjusted therein. . the firm will not have sufficient cash or assets to pay off the amounts due to the other partners. The estate of the insolvent partner is not liable for any act of the firm after the date of the order of adjudication. Pay off the partners’ loans or advances which are separate from the capital (if any) contributed by them. Realisation Account should be debited and the Partners’ Capital A/cs credited at the figure agreed upon.5 Consequences of Insolvency of a Partner If a partner goes insolvent then the following are the consequences: 1. Cash Account being credited. If however. If liability is taken over by a partner. The firm is dissolved on the date of the order of adjudication unless there is a contract to the contrary. the amount will not be realised. the partner is insolvent. In that case. follow the opposite course in the case of a profit. until the amount is repaid by the partner whose account is in debit. the deficiency may be borne by the solvent partners in their profit-sharing ratio or according to the principle settled in the well known case of Garner vs. after setting off against them any debit balance in the capital account of the concerned partner. In such a case. Murray. The balance of the cash account at the end will be exactly equal to the balance of capital account. the deficiency would be borne by the solvent partners in proportion to their capitals and not in the proportion in which they share profits and losses. The partner adjudicated as insolvent ceases to be a partner. the amount paid in respect of the liabilities in cash should be debited to the Realisation Account.3. debit the Partner’s Capital Account and credit Realisation Account with the price of asset taken over. provided they are in credit. the difference between the book figure and the amount paid being transferred to the Realisation Account.

. if the partnership deed provides for a specific method to be followed in case of insolvency of a partner. However. all drawings to the date of dissolution. Under such circumstances it is better not to transfer the amount of creditors to Realisation Account. Capital Ratio on Insolvency The partners are free to have either fixed or fluctuating capitals in the firm. Insolvency of all Partners When the liabilities of the firm cannot be paid in full out of the firm's assets as well as personal assets of the partners. all interest on capitals and on drawings to the date of dissolution but before adjusting profit or loss on Realisation Account. the provisions as per deed should be applied. salary etc. If they are maintaining capitals at fixed amounts then all adjustments regarding their share of profits. interest on capitals. Then Capital Accounts are closed. The unsatisfied portion of creditor account is transferred to Capital Accounts of the partners in the profit sharing ratio. Murray rule.Advanced Issues in Partnership Accounts 3. are passed through Capital Accounts then Balance Sheet of the business shall not exhibit Current Accounts of the partners and capital ratio will be determined after adjusting all the reserves and accumulated profits to the date of dissolution. then all the partners of the firm are said to be insolvent. But if capitals are not fixed and all transactions relating to drawings. interest on drawings. which may have debit or credit balances and insolvency loss is distributed in the ratio of fixed capitals. solvent partners have to bear the loss due to insolvency of a partner and have to categorically put that the normal loss on realisation of assets to be borne by all partners (including insolvent partner) in the profit sharing ratio but a loss due to insolvency of a partner has to be borne by the solvent partners in the capital ratio. The provisions of the Indian Partnership Act are not contrary to Garner vs.6 Loss Arising from Insolvency of a Partner When a partner is unable to pay his debt due to the firm he is said to be insolvent and the share of loss is to be borne by other solvent partners in accordance with the decision in the English case of Garner vs. The last account will be automatically closed. In doing so first close the Partners’ Capital Account which is having the worst position. Murray. etc. Creditors may be paid the amount available including the amount contributed by the partners. drawings. profits. interest.. If some partner is having a debit balance in his Capital Account and is not insolvent then he cannot be called upon to bear loss on account of the insolvency of other partner. The determination of capital ratio for this has been explained below. According to this decision.10 1. are done through Current Accounts.

400 20. Sale of other assets realised the following amounts: ` Goodwill Freehold Property Plant and Equipment Stock Trade Debtors nil 7.000 10. The costs of dissolution amounted to ` 1. .000 (100) ` 40.000 1.000 50.000 12.500 8.000 3.3. no partnership salary or interest on capital being allowed.000 5.900 200 400 12.800 700 3. Their balance sheet on 30th June.600 Trade Creditors were paid ` 11.11 Advanced Accounting Illustration 1 P.900 2.000 79. 2011 the partnership was dissolved.000 8.700 in full settlement of their debts. 2011 is as follows : Liabilities Fixed Capital P Q R Current Accounts : P Q Loan from P Trade Creditors 500 9.000 ` Assets Fixed assets : Goodwill Freehold Property Plant and Equipment Motor Vehicle Current Assets Stock Trade Debtors Less : Provision Cash at Bank Miscellaneous losses R's Current Account Profit and Loss Account 79. P and Q were both fully solvent and able to bring in any cash required but R was forced into bankruptcy and was only able to bring 1/3 of the amount due.000 12.900 On 1st July. Q and R were partners sharing profits and losses in the ratio of 3 : 2 : 1.000 20. The loan from P was repaid.900 1. Motor Vehicle was taken over by Q at a value of ` 500 but no cash passed specifically in respect of this transaction.500.000 9.

000 5.000 300 42.900 2.Advanced Issues in Partnership Accounts You are required to show: (a) Cash and Bank Account.500 17. Solution Cash / Bank Account 3.600 200 By Realisation A/c-Creditors By Realisation A/c-Expenses By P’s Loan A/c By P’s Capital A/c By Q’s Capital A/c ` 11.600 Realisation Account 7.12 ` To Balance b/d To Realisation A/cFreehold property Plant and Equipment Stock Trade Debtors To Capital Accounts: P Q R 25. and (c) Partners Fixed Capital Accounts (after transferring Current Accounts’ balances).500 8.000 8.000 12.700 1.000 1.500 17.400 100 7.200 24.000 1.600 16.000 80.800 700 3.000 8.500 80. Stock Debtors By Q (Car) By Capital Accounts: (Loss) P Q R ` 12.600 ` To Goodwill To Freehold Property To Plant and Equipment To Motor Vehicle To Stock To Sundry Debtors To Bank (Creditors) To Bank (Expenses) 40. (b) Realisation Account.000 14.800 59.600 .500 By Trade Creditors By Provision for Bad Debts By Bank : Freehold Property Plant and Equip.600 500 25.600 51.700 1.000 5.000 3.000 3.200 59.000 11.

400 ∗∗∗ ` 9. solvent partners P and Q have to bear the loss due to insolvency of a partner R in their fixed capital ratio.000 800 Current account balances have been arrived after adjusting profit and loss account debit balance as follows: ∗ ` 6.500 — 42.` 500 = ` 5.000 = ` 5.000 600 10.500 500 300 24. Murray rule.000 .200 45.000 .200 42.000 . On following Garner Vs. 2012 when the firm was dissolved : ` Creditors A/c Amal's Capital A/c 4.500∗ 25.` 4.13 Advanced Accounting Partners’ Capital Accounts P Q R P Q R ` To To Current A/c (Transfer) Realisation A/c (Loss) Realisation A/c (Car) R's Capital A/c (Deficiency) Bank 5.3. 2.500 By Balance b/d By Current A/c (Transfer) By Bank By Bank (realization loss) By P & Q (Deficiency) ` 20. only a notional entry will be made.500 ` — 17.800 Plant & Machinery 750 Furniture Debtors Stock ` 2.000 — ` 20. P.000 + ` 400 = ` 2.500 500 1.000 ` 2. Illustration 2 Amal and Bimal are in equal partnership.000 — — — 10.400∗∗ 8.900 25.000 — To To To — 300 14.900 Note: 1. In actual practice they will not be bringing any cash.500 ∗∗ ` 2. Their Balance Sheet stood as under on 31st March.000 5.000∗∗∗ ` 10.000 300 - — 45. Q and S will bring cash to make good their share of the loss on realization.500 — 17.

500 500 1.expenses ` 175 . Show necessary ledger accounts to close the books of the firm.975 ` March 31.975 Cash Account 1. whereas Bimal's private estate has a surplus of ` 200 only.14 200 550 5.338 By Cash A/c : Plant & Machinery Furniture Debtors Stock 1.Advanced Issues in Partnership Accounts Cash Bimal's drawings 5.300) 2.550 ` Plant & Machinery Furniture Debtors Stock 1.675 4. Solution In the books of M/s Amal and Bimal Realisation Account ` To Sundry Assets : Plant & Machinery Furniture Debtors Stock Cash A/c-expenses 2.250 150 400 500 The expenses of realisation amounted to ` 175.337 1. 2011 By Realisation A/c.fig. Amal's private estate is not sufficient even to pay his private debts. 2011 To Balance b/f 200 March 31.) Amal Bimal 4.550 The assets realised as under: 3.250 150 400 500 ` (2.000 800 175 By Partners' Capital A/c Loss on realisation (Bal.

200 800 20.525 2.275 Illustration 3 A.) 1.300 200 2.700 Bank 6.) 2.275 2.3. C and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their partnership on 31st March 2012 when their balance sheet was as under : Liabilities Creditors Employees Provident Fund Capital Accounts :A 40.000 ` Assets 15.fig.loss — ` 550 ` 750 — 587 1.300 Debtors Stock Prepaid Expenses 60.800 Bimal ` To Balance b/f To Realisation A/c .850 25.000 .337 ` — 200 1.800 Partners' Capital Account Amal Bimal Amal By Balance b/d ` 4.700 Sundry Creditors Account 2.000 8.337 1. B.888 Deficiency Account ` To Partners' Capital A/c Amal Bimal By Sundry Creditors A/c 587 1.800 4.000 B 20.fig.525 To Realisation A/c .Sale of sundry assets To Bimal's Capital A/c ` To Cash A/c To Deficiency A/c-transfer (bal.888 By Balance b/f By Cash A/c 1.275 ` 2.fig.000 Plant & Machinery Patents ` 535 15.) 2.688 1.688 2.337 1.275 4.338 By Deficiency A/ctransfer (bal.15 Advanced Accounting By Sundry (Bal.700 Creditors A/c 2.

3 The remaining assets were realised at the following values:.850 Stock 25.610 2.500 By Creditors Employee’s Provident Fund Bank A/c :Joint Life Policy Debtors Stock Plant and Machinery Patents 60% of (` 8.750 23.500.700 89.220 6.915 4. b/d To Realisation A/c 6.Advanced Issues in Partnership Accounts C’s Capital A/c D’s Capital A/c 82.305 44.000 at a valuation of ` 3.300 1.200-` 400 ) To Bank A/c Employee’s (P.000 3.700 – ` 3.600.000 20.000 Following information is given to you :1. b/d By Bank 2.800. 2 There was a joint life policy of ` 20.500 10.000 Patents 8.000 To Bank-Creditors: (` 15.915 4.300 4.220 To Bal.F) To Bank A/c (expenses) To By By By 69.200 6. Stock ` 15.200 8.000 9.800 15.305 (Realisation loss) A B ` ` 40.Debtors ` 10. and Patents at 60% of their book-values.850 12.750 C ` — D ` — — Capital Accounts A ` — 9.500.16 3.200.000 (not mentioned in the balance sheet) and this was surrendered for ` 4. Plant and Machinery ` 12.000 1.800 9.050 89. Solution Realisation Account ` Sundry Assets :Debtors 15.000) Loss transferred to :A’s Capital A/c B’s Capital A/c C’s Capital A/c D’s Capital A/c ` 15.000.600 12.200 Prepaid Expenses 800 Plant & Machinery 20.220 B C ` ` — 3.700 6.610 D ` 8.610 . One of the creditors took some of the patents whose book value was ` 5. Expenses of realisation amounted ` 1.100 6.415 By Bal.415 82. D became insolvent and a dividend of 25 paise in a rupee was received in respect of the firms claim against his estate.000 – ` 5.915 4. Balance of the creditors were paid at a discount of ` 400 . Prepare necessary ledger accounts.

810 10.800 10.000 4. Y and Z who were in partnership sharing profits and losses in the ratio of 2:2:1 respectively.000 5.000 ` Assets Fixed Assets Stock 50. 2011 and had been received but the purchase was not .860 By Realisation A/c By Realisation A/c By Realisation A/c By A’s Capital A/c By B’s Capital A/c ` 12.000 1.200) Working Note :535 44.000 90.220 26.360 — — 2. C will bring his share of loss in cash.000 90. it was discovered that goods amounting to ` 4.680 — 3.000 The firm was dissolved on the date mentioned above due to continued losses. Illustration 4 M/s X.810 10.640 17.680 7.200 — 49.000 25.000 (5.680 — 5.640 17.000 have been purchased in November.610 + 3.3.360 2.500 34.915 2.320 — — — — — — 2.000) 20.220 6.100 6.915 7.220 26. X Sundry Trade Creditors ` 29.000 25.200 10.860 D’s loss will be borne by A and B only as solvent partners having credit balance only has to bear the loss on account of insolvency.915 7. had the following Balance Sheet as at December 31.000 25.810 71.17 Advanced Accounting By Bank — (Recovery) — By A’s Capital 2/3 By B’s Capital 1/3 By Bank A/c 49. 2011: Liabilities Capital : X Y Z Z’s Loan Loan from Mrs.700 9.320 71. After drawing up the balance sheet given above.000 10.720 Bank Account ` To Balance b/d To Realisation A/c To A’s Capital A/c To B’s Capital A/c To D’s Capital A/c To C’s Capital A/c (4.720 — — To D’s Capital (Deficiency) 5.680 To Bank 34.000 Book Debts Less : Provision Cash Advance to Y ` ` 40.300 1.

and his estate is unable to contribute anything.000 25.000 29.000 By Balance b/d Mrs.080.Advanced Issues in Partnership Accounts recorded in books. the creditors allowed a discount of 2% on the average.500) By Sundry Trade Creditors (Discount) By Loss : X (2/5) Y (2/5) Z (1/5) 91. X’s Loan Account ` 5.000 By Balance b/d ` 10.500.800 ` 5.600 9.000 1.080 Sundry Trade Creditors 9. Stock ` 21. The expenses of realisation come to ` 1.000 .000 25. Y is insolvent.18 Fixed assets realised ` 20.000 61.000 91.000 ` To X’s Capital A/c . Give accounts to close the books. Murray.transfer 10.000 By Balance b/d By Sundry Capital Accounts (Purchase omitted) ` 25.500 580 24. Similarly. X.000.000 4.000 and Book Debt ` 20.000+20. work according to the decision in Garner vs. Solution Realisation Account ` To Sundry Fixed Assets (transfer) Stock Book Debts To Cash—Expenses 40. X agreed to take over the loan of Mrs.600 4.000 To Cash 580 28.080 By Provision for Doubtful Debts By Cash (20.420 29. 3.080 ` To Realisation A/c – Discount @ 2% on ` 29.000+21.000 Z’s Loan Account ` To Cash Account 5.

19 Advanced Accounting Cash Account To Balance b/d To Realisation A/cassets realised To X’s Capital A/c* To Z’s Capital A/c* By Sundry Trade Creditors By Realisation A/c .800 10.400 (difference in the two sides of his Capital Account). Capital Accounts X Y Z X Y Z ` To Sundry Trade Creditorsomission To Balance c/d 1.000 47. In actual practice they will not be bringing any cash. X’s Loan 10. capital standing up just before dissolution but after correction of error committed while drawing up the accounts for 2011.000 To Advance .50.000 20.600 9.100 76.800 10.200 9.3. ‘Short’ and ‘Fat’ were in partnership sharing profits and losses in the ratio of 2:2:1.200 10.100 47.000 34.000 .8.000 27.600 9.000 50.600 : 9. this has been debited to X and Z in the ratio of 27.600 4.000 32.900 *X and Z bring these amounts to make good their share of the loss on realisation.200 i.500 By Z’s Loan 9.200 10.4.800 By Mrs.expenses 61.9. only a notional entry will be made.420 1.500 43.100 By Cash (Realisation 9.By Balance b/d 27.800 loss) By X’s Capital A/c3.600 14.600 ` 1.900 ` 1.300 8.1.000 ` 28. On 30th September.200 13.000 29.600 .300 .600 ` By Balance b/d 800 ` ` ` 29. 2012 their Balance Sheet was as follows : Liabilities Capital Accounts : Thin Short Fat ` Assets 80..e.800 10.000 .600 14.1.300 To Cash 34.080 5.200 13.600 By X’s Capital A/c 4.000 Note : Y’s deficiency comes to ` 4.100 By Z’s Capital A/c .600 9.000 1.800 By Z’s Capital A/c 76.25.000 loss To Y’s Capital A/c 3.200 To Realisation A/c.000 Premises Fixtures Plant Stock ` 50.300 . Illustration 5 ‘Thin’.200 10.200 1.4.200 29.200 9.

216 7.480 ‘Thin’ decides to retire on 30th September.330 3.200 Plant 54. 2012 and as ‘Fat’ appears to be short of private assets.74.650 Stock 4.650 60. ‘Short’ decides that he does not wish to take over Thin’s share of partnership.630 ` 84.540 3.000 and the plant for ` 1.500.000 1.700 11.900. Realisation expenses amount to ` 4.000 41. 2012. It then transpires that ‘Fat’ has no private assets whatsoever.216 14.780 Fixtures 84. Partners’ Current Accounts.300 (14.108 35.07.630 . You are required to write up the following ledger accounts in the partnership books following the rules in Garner vs.Advanced Issues in Partnership Accounts Current Accounts : Thin Short Fat (Dr.000 and the stock is acquired by another firm at book value less 5%.07. The premises are sold for ` 60. so all three partners decide to dissolve the partnership with effect from 30th September.94.440 14.900 2.500 20.500 84. The bank overdraft is discharged and the creditors are also paid in full.000 By Sundry Creditors 1.650 44.94. Solution Realisation Account ` To Premises To Plant To Fixtures To Stock To Debtors To Bank (Creditors) To Bank (Expenses) 50.500) 3. (iii) Partners’ Capital Accounts showing the closing of the firm’s books.040 45.500 Debtors By Loss on Realisation transferred to Partners’ Current A/cs Thin Short Fat 3.500 Premises 43.000 By Bank : 32. The fixtures realize ` 20.780 26.05.05.500. Murray : (i) (ii) Realisation Account .25. Debtors realise ` 45.20 54.480 3.) Sundry Creditors Bank Overdraft Debtors 29.

710 60.216 21..216 ` – 21.710 60.74.484 – – By Bank 14.08.108 By Capital A/c Transfer – 21.21 Advanced Accounting Partners’ Current Accounts Thin Short Fat Thin Short Fat ` To Balance b/d To Realisation To Capital A/c transfer 15.484 29.682 3.608 1.216 14.12.000 50. Illustration 6 A.09.216 21. B.216 – 14.916 21.608 21.02.216 By Realisation A/c (Creditors) 14.08.700 64.608 1.500 1.682 – Capital A/cs 1.000 By Current A/c (transfer) 15.700 ` 11.330 84.09.440 By Balance b/d 14.916 14. Following was their Balance Sheet as on 31.608 ` 29.216 ` 14.608 Working Notes : (i) To Realisation A/c To Thin’s Capital A/c To Short’s Capital A/c Bank Account ` 2.872 (ii) ` 44. C and D were partners sharing profits and losses in the ratio of 3:3:2:2.608 Partners’ Capital Accounts Thin Short Fat Thin Short Fat ` To Current A/c To Fat’s Capital A/c Deficiency in the – ` ` ` ` ` ratio of 8:5 To Bank 2.3.216 ` – 14.500 By Balance b/d 7.300 2.700 – 29.872 Fat’s deficiency has been borne by Thin & Short in the ratio of their fixed capitals i.700 – 14.650 4.608 By Balance b/d 80. Murray.216 (Realisation loss) 990 618 – By Thin & Short 1.02.216 By Realisation A/c (Expenses) By Thin’s Capital A/c By Short’s Capital A/c 3.700 64.e.2011: . 8:5 following the rule in Garner vs.000 20.

500) 46.153 ` 11.05.500 81.176 .000 37. C was insolvent but ` 11.12. 2) A/c ` 12. Trademarks ` 12.000 46.66.000.500 30.153 ` 7.000 30. the firm was dissolved and B was appointed to realise the assets and to pay off the liabilities. He agreed to bear the expenses of realisation.000 30.000 18. He was entitled to receive 5% commission on the amount finally paid to other partners as capital.N.000 48.500. Creditors were paid off in full.000.176 To B’s Capital A/c (W. This was surrendered for ` 9.000. a contingent liability for Bills Receivable discounted materialised to the extent of ` 7. 1) Partners’ Capital A/c A B C D = = = = ` 11. Also.000 21.000 12.500 1.000 45.500 46. there was a joint life policy for ` 90.000. Prepare Realisation Account. Solution In the books of the Firm Realisation Account Particulars To To To To To Furniture A/c Trademarks A/c Stock A/c Debtors A/c Bank (W.000 1.N.000 Capital Accounts: C D Furniture Trademarks Stock Debtors Less: Provision for doubtful debts Bank 48.000 48.176 1.3) 1.000 21.000 ` 66. in addition. The assets were realised as follows: Debtors ` 33.100 was recovered from his estate. Expenses of realisation amounted to ` 1.500 6.176 1.2011.66.81.000 By By By By Particulars Provision for doubtful debts A/c Creditors A/c Bank A/c (W. Furniture ` 3.000 (1. Stock ` 24.81.000 1.000.22 ` Assets Accounts: 60.435 ` 7.N.000 54.000.500.435 ` 1.500 On 31.Advanced Issues in Partnership Accounts Liabilities Capital A B Creditors A’s Loan 3. Bank Account and Capital Accounts of the partners.

3.23

Advanced Accounting Bank Account

To To To

To To

Particulars Balance b/d Realisation A/c (W.N.1) Partners’ Capital A/cs A = 11,153 B = 11,153 D = 7,435 C D

` 6,000 By 81,000 By By 29,741 11,100 18,000 1,45,841

Particulars Realisation A/c (W.N.2) A’s Loan A/c Partners’ Capital A/cs: (final payment)

` 54,000 30,000

A B

34,665 27,176 1,45,841

Partners’ Capital Accounts
C D Particulars A B C D ` ` ` ` ` ` Balance b/d --- 48,000 18,000 By Balance b/d 60,000 45,000 -----Realisation 11,153 11,153 7,435 7,435 By Bank 11,153 11,153 7,435 A/c (Loss) C’s Capital 25,335 19,000 ----- By Bank A/c --- 11,100 --A/c (W.N.4) (final dividend) Bank A/c 34,665 27,176 ----- By Realisation --- 1,176 ----A/c (Comm.) (Final settlement) By Bank A/c ------- 18,000 By A’s Capital ----- 25,335 --A/c (W.N.4) By B’s Capital ----- 19,000 --A/c (W.N.4) 71,153 57,329 55,435 25,435 71,153 57,329 55,435 25,435 Particulars A ` B `

To To To To

Working Notes: (1) (2) (3) Total assets realised = ` (33,000+3,000+24,000+12,000+9,000) = ` 81,000 Total payment = ` (46,500 + 7,500) = ` 54,000. A’s loan has been paid directly. Calculation of commission payable to B: Let B’s commission = x Realisation loss before taking into account B’s commission is ` 36,000. Therefore, realisation loss after B’s commission = ` 36,000+x. Share of A = 3/10 (36,000 + x) = 10,800 + 3x/10 Share of C = 2/10 (36,000+x) = 7,200 + 2x/10

Advanced Issues in Partnership Accounts Share of D = 2/10 (36,000+x) = 7,200 + 2x/10 C’s deficiency = ` 48,000 + (` 7,200 + 2x/10)-` 11,100 = ` 44,000+x/5 Share of A in C’s deficiency = 4/7 of (44,100 + x/5) = ` 25,200 + 4x/35 A will finally get = ` 60,000 – (` 10,800 + 3x/10 + 25,200 + 4x/35) = ` 60,000- ` 10,800 – 3x/10-25,200-4x/35 = ` 24,000 – (21x + 8x)/70 = ` 24,000 – 29x/70 x = 5% [24,000 – 29x/70] or, 5/100 [24,000 – 29x/70] or, x = 1,200 - .02071x or, x +.02071x = 1,200 or, x = 1,200/ 1.02071 or, x = 1175.64= 1,176 (approx.) (4)

3.24

C’s deficiency of ` 44,335 is to be shared by A and B in their capital ratio of 60,000: 45,000 or 4:3. D will not bear any deficiency loss because his capital account has debit balance.

1.7 Piecemeal Payments
Generally, the assets sold upon dissolution of partnership are realised only in small instalments over a period of time. In such circumstances, the choice is either to distribute whatever is collected or to wait till the whole amount is collected. Usually, the first course is adopted. In order to ensure that the distribution of cash among the partners is in proportion to their interest in the partnership concern either of the two methods described below may be followed for determining the order in which the payment should be made.

1.7.1 Maximum Loss Method: Each instalment realised is considered to be the final payment i.e., outstanding assets and claims are considered worthless and partners’ accounts are adjusted on that basis each time when a distribution is made, following either Garner vs. Murray Rule or the profit-sharing ratio rule.
Illustration 7 The following is the Balance Sheet of A, B, C on 31st December, 2011 when they decided to dissolve the partnership: Liabilities Creditors A’s Loan

` Assets
2,000 Sundry Assets 5,000 Cash

`
48,500 500

3.25

Advanced Accounting

Capital Accounts : A B C 15,000 18,000 9,000 49,000 The assets realised the following sums in instalments : 1,000 3,000 3,900 6,000 20,100 34,000 The expenses of realisation were expected to be ` 500 but ultimately amounted to ` 400 only. Show how at each stage the cash received should be distributed between partners. They share profits in the ratio of 2:2:1. Solution First of all, the following table will be constructed to show the amounts available for distribution among the various interests: Statement showing Realisation and Distribution of Cash Payments Realisation Creditors Partners’ Loan Partners’ Capitals I II III IV V 49,000

`
1. After taking into account cash balance and amount set aside for expenses 2. 3. 4. Including saving in expenses 3,000 3,900 6,000 20,100 34,000 1,000

`
1,000

`
-

`
-

1,000 2,000

2,000 3,000 5,000

900 6,000 20,100 27,000

To ascertain the amount distributable out of each instalment realised among the partners, the

Advanced Issues in Partnership Accounts following table will be constructed: Statement of Distribution on Capital Account (1) Calculation to determine the mode of distribution of ` 900 Total A B

3.26

C

`
Balance Less: Possible loss, should remaining assets prove to be worthless Deficiency of A’s capital written off against those of B and C in the ratio of their capital, 18,000 : 9,000 (Garner vs. Murray) Manner in which the first ` 900 should be distributed (2) Distribution of ` 6,000 Balance after making payment of amount shown in step (1) Less : Possible Loss assuming remaining asset to be valueless Balance available and to be distributed (3) Distribution of ` 20,100 Balance after making payment of amount shown in step (2) Less : Possible loss, assuming remaining assets to be valueless Manner of distribution of ` 20,100 Summary : Balance Total amounts paid Loss 42,000 27,000 15,000 (15,000) 20,100 35,100 (35,100) 6,000 41,100 (41,100) + 900 42,000

`
15,000 (16,440) – 1,440

`
18,000 (16,440) + 1,560

`
9,000 (8,220) + 780

960

480

+ 600

+ 300

15,000 (14,040) 960

17,400 (14,040) 3,360

8,700 (7,020) 1,680

14,040 (6,000) 8,040 15,000 9,000 6,000

14,040 (6,000) 8,040 18,000 12,000 6,000

7,020 (3,000) 4,020 9,000 6,000 3,000

3.27

Advanced Accounting

1.7.2 Highest Relative Capital Method : According to this method, the partner who has
the higher relative capital, that is, whose capital is greater in proportion to his profit-sharing ratio, is first paid off. This method is also called as proportionate capital method.

For determining the amount by which the capital of each partner is in excess of his relative capital, partners’ capitals are first divided by figures that are in proportion to their profitsharing ratio; the smallest quotient will indicate the basic capital. Having ascertained the partner who has the smallest basic capital, the amount of capital of other partners proportionate to the profit-sharing ratio of the basic capital is calculated. These may be called as their hypothetical capitals. The amount of hypothetical capital of each partner is then subtracted from the amount of his actual capital; the resultant figure will be the amount of excess capital held by him. By repeating the process once or twice, as may be necessary between the partners having excess capital, the amount by which the capital of each partner is in excess will be ascertained. The partner with the largest excess capital will be paid off first, followed by payment to the other or others who rank next to him until the capitals of partners are reduced to their profit-sharing ratio. The illustration given above is now worked out according to this method. A Capital Profit-sharing ratio Capital divided by the profit-sharing ratio Proportionate Capital of B and C, taking A’s capital as the base Excess of actual over proportionate capital ` 15,000 ` nil 15,000 3,000 7,500 1,500 ` 15,000 2 7,500 B 18,000 2 9,000 C 9,000 1 9,000

This indicates that A should not get anything till ` 3,000 is paid to B and ` 1,500 is paid to C. Since capital of B and C are already according to their mutual profit-sharing ratio (2:1), they will share the available cash in this ratio. After paying off creditors and A’s loan, the available amount will be distributed as below in this method: Total Third Instalment Fourth Instalment (i) (ii) Fifth Instalment Total 900 3,600 2,400 20,100 27,000 A B C

`
960 8,040 9,000

`
600 2,400 960 8,040 12,000

`
300 1,200 480 4,020 6,000

Total payment made to each partner will, of course be same under both the methods.

Advanced Issues in Partnership Accounts Illustration 8

3.28

The partners A, B and C have called you to assist them in winding up the affairs of their partnership on 30th June, 2012. Their Balance Sheet as on that date is given below : Liabilities Sundry Creditors Capital Accounts : A B C 67,000 45,000 31,500

` Assets
17,000 Cash at Bank Sundry Debtors Stock in trade Plant and Equipment Loan-A Loan-B

`
6,000 22,000 14,000 99,000 12,000 7,500 1,60,500

1,60,500 (1) The partners share profit and losses in the ratio of 5:3:2 (2) Cash is distributed to the partners at the end of each month (3) A summary of liquidation transactions are as follows: July 2012 ` 16,500 – ` 10,000 – ` 1,000 ` 8,000 August 2012 ` 1,500 ` 2,500 September 2012 ` 75,000 – ` 1,000 – received on sale of remaining plant and equipment. liquidation expenses paid. No cash retained in the business. – – collected from Debtors; balance is uncollectable. received from sale of entire stock. liquidation expenses paid. cash retained in the business at the end of the month.

– liquidation expenses paid. As part payment of his Capital, C accepted a piece of equipment for ` 10,000 (book value ` 4,000). – cash retained in the business at the end of the month.

Required : Prepare a schedule of cash payments as of September 30, showing how the cash was distributed. Solution Statement showing distribution of cash Creditors Capitals A (` ) 55,000 B (` ) 37,500 C (` ) 31,500

`
Balance Due after loan (W.N.(i))

`
17,000

3.29 July

Advanced Accounting

Balance available Realisation less expenses and cash retained Amount available and paid Balance due August Opening balance Expenses paid and balance carried forward Available for distribution Cash paid to ‘B’ and Equipment given to C. (Excess paid to ‘C’ ` 7,333) September Opening balance Amount realised less expenses Amount paid to partners Working Note: (i) Highest Relative Capital Basis

6,000 17,500 23,500 17,000 — 8,000 4,000 4,000 — 55,000 2,500 74,000 76,500 41,500 13,500 25,400 8,100 9,600 5,400 4,000 33,500 10,000 15,000 55,000 37,500 6,500 25,000

A

B

C

`
Scheme of payment for July Balance of Capital Accounts Less : Loans Profit sharing ratio Capital Profit sharing ratio Excess of C’s Capital and B’s Capital Profit sharing ratio 67,000 (12,000) 55,000 5 11,000

`
45,000 (7,500) 37,500 3 12,500 4,500 3

`
31,500 — 31,500 2 15,750 9,500 2

Advanced Issues in Partnership Accounts Capital Profit sharing ratio Capital in profit sharing ratio taking B’s Capital as base Excess of C’s Capital over B (ii) Scheme of distribution of available cash: A B 1,500 4,500

3.30 4,750 3,000 6,500

C

`
Scheme of payment for September Balance of Capital Accounts Profit Sharing Ratio Capital/Profit sharing Ratio Capital in profit sharing ratio taking C’s Capital as base Excess of A’s Capital and B’s Capital Excess in Profit Sharing Ratio Excess in profit sharing Ratio taking A’s excess as base Excess Payment ` 500 Balance of Excess Payment ` 28,000 Balance [A-B-C] Payment (` 76,500 – ` 28,500) ` 48,000 (D) Loss Total Payment ` 76,500 [A+B+C] Illustration 9 (C) (B) 17,500 (17,500) 37,500 (24,000) 13,500 41,500 17,500 − 37,500 17,500 3,500 (A) 55,000 5 11,000

`
33,500 3 11,167 22,500 11,000 3,667 10,500 500 (500) 10,500 (10,500) 22,500 (14,400) 8,100 25,400

`
15,000 2 7,500 15,000

15,000 (9,600) 5,400 9,600

The firm of LMS was dissolved on 31.3.2012, at which date its Balance Sheet stood as follows: Liabilities Creditors Bank Loan L’s Loan ` Assets 2,00,000 Fixed Assets 5,00,000 Cash and Bank 10,00,000 ` 45,00,000 2,00,000

3.31

Advanced Accounting

Capital L M S

15,00,000 10,00,000 5,00,000 47,00,000

47,00,000

Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and distribute the cash after discharge of liabilities. Their fees which include all expenses is fixed at ` 1,00,000. No loss is expected on realisation since fixed assets include valuable land and building. Realisations are: S.No. 1 2 3 4 Amount in ` 5,00,000 15,00,000 15,00,000 30,00,000

5 30,00,000 The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You are required to prepare a statement showing distribution of cash with necessary workings. Solution In the Books of M/s LMS Statement of Piecemeal Distribution (Under Higher Relative Capital method)
Particulars Amount Available Creditors Bank Loan L’s loan L Capital A/cs M S

`
Balance due 1st Instalment (including cash and balances) bank 5,00,000 1,00,000 4,00,000 Less: Payment to Creditors and repayment of Bank

`
2,00,000

`
5,00,000

`
10,00,000

`
15,00,000

`
10,00,000

`
5,00,000

Less: Liquidator’s Expenses and fee

Advanced Issues in Partnership Accounts
Loan in the ratio of 2:5 Balance Due 2nd Instalment Less: Payment to Creditors and repayment of bank loan in full settlement

3.32

(4,00,000) (1,14,286) (2,85,714) – 15,00,000 85,714 2,14,286

– 10,00,000

– 15,00,000

– 10,00,000

– 5,00,000

(3,00,000) 12,00,000

(85,714) (2,14,286) – – 10,00,000 (10,00,000) 15,00,000 – 15,00,000 10,00,000 – 10,00,000 5,00,000 – 5,00,000

Less: Repayment of L’s Loan (10,00,000) 2,00,000 Less: Payment to Mr. L towards relative higher capital (W.N. 1) Balance Due Instalment 3rd

(2,00,000) 15,00,000

(2,00,000) 13,00,000

– 10,00,000

– 5,00,000

Less: Payment to Mr. L towards higher relative capital (W.N. 2)

(3,00,000) 12,00,000

(3,00,000) 10,00,000

Less: Payment to Mr. L & Mr. M towards excess capital (W.N. 1&2) (10,00,000) 2,00,000 Less: Payment to all the partners equally Balance due 4th Instalment 30,00,000 Less Payment to all the partners equally (30,00,000) Realisation profit creditedto Partners 5th Instalment 30,00,000 Less: payment to all partners equally (30,00,000) Realisation profit credited to partners (2,00,000)

(5,00,000) 5,00,000 (66,667) 4,33,333

(5,00,000) 5,00,000 (66,667) 4,33,333 (66,666) 4,33,334

(10,00,000) (10,00,000) (10,00,000) 5,66,667 5,66,667 5,66,666

10,00,000 15,66,667

10,00,000 15,66,667

10,00,000 15,66,666

3.33

Advanced Accounting

Working Notes: (i) Scheme of payment of surplus amount of ` 2,00,000 out of second Instalment: Capital A/cs L M S

`

`

`

Balance (i) 15,00,000 10,00,000 5,00,000 Profit sharing ratio (ii) 1 1 1 Capital taking S’s Capital (iii) 5,00,000 5,00,000 5,00,000 Excess Capital (iv) = (i) – (iii) 10,00,000 5,00,000 Profit Sharing Ratio 1 1 Excess capital taking M’s Excess Capital as base (v) 5,00,000 5,00,000 Higher Relative Excess (iv) – (iv) 5,00,000 So, Mr. L should get ` 5,00,000 first which will bring down his capital account balance from ` 15,00,000 to ` 10,00,000. Accordingly, surplus amounting to ` 2,00,000 will be paid to Mr. L towards higher relative capital. (ii) Scheme of payment of ` 15,00,000 realised in 3rd Instalment: – Payment of ` 3,00,000 will be made to Mr. L to discharge higher relative capital. This makes the higher capital of both Mr. L and Mr. M ` 5,00,000 as compared to capital of Mr. S. Payment of ` 5,00,000 each of Mr. L & Mr. M to discharge the higher capital. Balance ` 2,00,000 equally to L, M and S, i.e., ` 66,667 ` 66,667 and ` 66,666 respectively.

– –

Illustration 10 Daksh Associates is a reputed firm. On account of certain misunderstanding between the partners, it was decided to dissolve the firm as on 31st December, 2011. Their Balance Sheet as on 31st December, 2011 was follows: Liabilities Capitals: Daksh Yash Siddhart (Minor) Trade Loans

` Assets
3,00,000 2,00,000 1,00,000 Land and Buildings Other Fixed Assets Stock in Trade Debtors 6,00,000 Bills Receivable 3,00,000 Goodwill

`
7,00,000 3,00,000 2,00,000 4,00,000 1,50,000 30,000

Advanced Issues in Partnership Accounts Bank Overdraft Other Loans Creditors Siddhart’s Loan 3,00,000 Cash 2,00,000 2,00,000 2,00,000 18,00,000

3.34

20,000

18,00,000

It was decided that Mr. Daksh shall be in-charge of Realisation. He shall set apart ` 10,000 towards expenses. He shall be paid a remuneration of 5 percent on the amounts distributed to the partners towards their contribution other than loans. Assets realized are as under:

`
1-1-2012 15-1-2012 1-2-2012 15-2-2012 1-3-2012 15-3-2012 Debtors Fixed Assets Debtors Bills Receivable Fixed Assets Land and Buildings 3,50,000 4,00,000 50,000 1,40,000 50,000 8,00,000

Prepare a statement showing how the money received on various dates will be distributed assuming: (a) The actual expenses of realization amounted to ` 20,005. (b) The firm is solvent. (c) The profit sharing ratio was as under: Profit Daksh Yash Siddhart 2 2 1 5 Loss 1 1 Nil 2

(d) The final dissolution is made on 15th March, 2010

3.35

Advanced Accounting

Solution

It is assumed that trade loans, bank overdraft, other loans and creditors have equal priority at the time of payment. Therefore, they all have been paid in the ratio of their dues outstanding. Trade Bank Other Creditors Siddhart’ Daksh’s Yash’s Siddhart’ Loans Overdraft Loans s Loan Capital Capital s Capital ` ` ` ` ` ` ` ` 3,00,000 3,00,000 2,00,000 2,00,000 2,00,000 3,00,000 2,00,000 1,00,000

Particulars

Amount due Cash in hand Less: Amount kept for realization expenses

20,000

10,000 10,000 3,000 3,000 2,000 2,000 2,97,000 2,97,000 1,98,000 1,98,000 2,00,000 3,00,000 2,00,000 1,00,000

10,000 Nil 3,50,000

3,50,000 Nil

1,05,000 1,05,000 70,000 70,000 1,92,000 1,92,000 1,28,000 1,28,000 2,00,000 3,00,000 2,00,000 1,00,000

Less: Distributed among outsiders (3:3:2:2) Balance Due Debtors realised on 1-1-2010 Less: Distributed among outsiders (3:3:2:2) Balance Due Fixed Assets realized on 15-1-2010 Less: Distributed among outsiders (3:3:2:2) 1,20,000 1,20,000 80,000 80,000

4,00,000 -

4,00,000

Advanced Issues in Partnership Accounts 72,000 72,000 48,000 48,000 2,00,000 3,00,000 2,00,000 1,00,000

3.36

15,000 57,000

15,000 57,000

10,000 38,000

10,000 38,000 2,00,000 3,00,000 2,00,000 1,00,000

42,000 15,000

42,000 15,000

28,000 10,000

28,000 10,000 2,00,000 3,00,000 2,00,000 1,00,000

Balance Due Nil Debtors realized on 1-2-2010 50,000 Less: Distributed among outsiders (3:3:2:2) 50,000 Balance Due Nil Bills Receivable realised on 15-2-2010 1,40,000 Less: Distributed among outsiders (3:3:2:2) 1,40,000 Balance Due Nil Fixed Assets realized on 1-32010 50,000 Less: Distributed among outsiders (3:3:2:2) 50,000 Balance Due Nil Land and Building realised on 8,00,000 15-3-2010 Less: Additional payment of realization expenses (20,005 – 10,000) 10,005 7,89,995 Less: Payment of Siddhart’s Loan 2,00,000 15,000 15,000 10,000 10,000 - 2,00,000 3,00,000 2,00,000 1,00,000 2,00,000 -

3.37 - 3,00,000 2,00,000 1,00,000

Advanced Accounting

Amount available partners’ Capital

for

5,89,995

Less: Daksh’s Commission

5

105

(i.e. 5,89,995 ´

5

105

)

28,095

5,61,900

3,00,000 2,00,000

1,00,000 -

Less: Siddhart’s Capital is paid first because he will not share any loss on account of being minor partner 1,00,000 4,61,900 Less: Paid to Daksh to make his capital equal to that of Yash 1,00,000 3,61,900 Less: Distributed equally between Daksh and Yash 3,61,900 Balance Due

1,00,000 2,00,000 2,00,000 1,80,950 1,80,950 19,050 19,050

-

Nil*

*Siddhart will get 1/5 share (i.e., share of profit) of what remains after paying ` 19,050 to each Daksh and Yash out of the proceeds of stock-in trade. If stock does not realize any amount, then amount unpaid to Daksh and Yash will become loss on realization. Siddhart has been paid first because he is not to share any loss on realization.

38 Summary • Reasons for which a partnership could be dissolved are expiry of term for which its was formed death of a partner insolvency of a partner retirement of a partner. • Reasons when a firm stands dissolved when partners mutually decide to dissolve partners except one becomes insolvent business becomes illegal if partnership is at will any partner can give notice for dissolution Court orders. • . • On dissolution assets are realized and all liabilities are paid off (if any liability remains unpaid then it is to be realized from partners in their profit sharing ratio). Piecemeal distribution involves either of two methods Maximum loss method Highest relative capital method.Advanced Issues in Partnership Accounts 3.

2 Opening the books of the new firm: Debit assets taken out at the agreed values Credit the liabilities taken over. The other firm will record the transaction as that of a business purchase. When one firm is merged with another existing firm. S and T would be partners sharing profits and losses in the ratio of 3:2:1. (b) Entries for raising goodwill should be passed. you will be able to : ♦ Understand the procedure for amalgamation of partnership firms. Conversion and Sale of Partnership Firms Learning Objectives After studying this unit.1 Amalgamation of Partnership Firms The accounting procedures for: 2. 2011. S and T are partners of T & Co. ♦ Distribute the shares received as purchase consideration among the partners. 2. entries will be in the pattern of winding up in the books of the firm which has ceased to exist. BST & Co. ♦ Learn the accounting treatment when a partnership firm is converted in the form of a company. On 31st October.1.1. sharing profits and losses in the ratio of 2:1. . sharing profits and losses in the ratio of 3:1.3. (c) Assets and liabilities not taken over by the new firm should be transferred to the capital accounts of partners in the ratio of their capitals. Illustration 1 B and S are partners of S & Co. wherein B. 2. the assets should be credited and liabilities debited. and Credit individual partner’s capital accounts with the closing balances in the erstwhile firm.1 Closing the books of old firm: (a) Each firm should prepare a Revaluation Account relating to its own assets and liabilities and transfer the balance to the partners’ capital accounts in the profit-sharing ratio. (d) The new firm should be debited with the difference between the value of assets and liabilities taken over by it. they decided to amalgamate and form a new firm M/s. (e) Partners’ capital accounts should be transferred to the new firm’s account.39 Advanced Accounting Unit – 2 : Amalgamation.

Pass the journal entries in the books of BST & Co.000 Cr. assuming that excess/deficit capital (taking T’s Capital as base) with reference to share in profits are to be transferred to current accounts. ` 40. .333 Cr. 36. Other Creditors Reserves Capitals B S T S & Co.000 Furniture 50.000 15. (c) Provision for doubtful debts has to be carried forward at ` 4. Assets S & Co.000 20. ` 50.25.000 80.000 ` 5.000 and that of T & Co.000 in respect of debtors of S & Co.000 80.000 − 80. was worth ` 60. Adjustment for raising & writing off of goodwill: Raised in old profit sharing ratio S & Co.000 50.08.000 Due from X & Co.000 Cash at bank 58.20. (b) Building. You are required to: (i) (ii) Compute the adjustments necessary for goodwill.000 and ` 1. and ` 5.000 25.667 Cr. 48.000.25.000 Dr.000 60.00.000 3.000 in respect of debtors of T & Co.000.666 Dr.000 25. 3.000 ` − Cash in hand 50. machinery and vehicles were taken over at ` 50. Goodwill account was not to be opened in the books of the new firm. 11.00.000 Due from T & Co.000 1. Due to S & Co. 50. ` 55. ` 10.000 10. ` 90.000 − − 75.000 − 60.000 respectively.000 3.000 The amalgamated firm took over the business on the following terms : (a) Goodwill of S & Co. T & Co.08. Total Written off in new ratio Difference Solution (i) ` B S 45.000 1.40 T & Co. T & Co.000 70.000 Dr.Advanced Issues in Partnership Accounts Their balance sheets on that date were as under: Liabilities Due to X & Co.00.000 3.000 15.000 ` 33.000 ` 10. the adjustments being recorded through capital accounts of the partners. Other Debtors − Stock 1.000 − 30.000 Vehicles Machinery Building 3.333 ` 45.000 − 3.

00.750 95.000 5.) Dr.41 T Advanced Accounting − 60. 1.000 10. taken over at the values stated as per agreement dated.10. Stock Account Dr. Bank Account Dr.10.65.000 60.334 Dr. ` 5. To Provision for Doubtful debts To X & Co. Books of BST & Co.000 80..000 58. T & Co..000 40.000 1.000 50.667 .. To Provision for Doubtful Debts To S & Co.000 3.000 90. Furniture Account Dr..000 60.43.3.333 71. Sundry Debtors A/c Dr.000 15.667 Dr.000 20. ` 10...000 1. 1. Sundry Debtors Dr.000 50.000 1.000 30. Machinery Account Dr.) Cash Account Dr.000 18. Stock Account Dr. 31 Cash Account Dr. Furniture Account Dr.667 Cr. Building Account Dr.000 50.000 1.000 16. taken over at the values stated as per agreement dated. Dr. Bank Account Dr. Vehicles Account Dr.667 50.000 1.000 4. To Sundry Creditors To S’s Capital Account To T’s Capital Account (Sundry assets and liabilities of M/s T & Co. To Sundry Creditors To B’s Capital Account To S’s capital Account (Sundry assets and liabilities of M/s S & Co.00. Journal Entries 2011 Oct.250 Cr. Account Dr. X & Co.000 70.000 16.

cancelled on taking over of the two firms) B’s Current Account Dr.667 5. To S’s Current Account (Excess amount in S’s Capital Account transferred to S’s current account to reduce the balance in capital accounts in accordance with the profit sharing ratio) Working Notes : (i) Balance of Capital Accounts on transfer of business to M/s BST & Co.250 54.000 16.000 (4.000 1.667 20.10.250 1..000 71.000 6.Advanced Issues in Partnership Accounts B’s Capital Account Dr.65. (a) S & Co. for ` 50.S.20.750 ` 80. To S’s Capital Account (Adjustment in capital accounts consequent on raising goodwill of S & Co. T & Co. T’s Capital Account Dr.000.000 33.000 1.333 . B’s Capital 10.T as per agreement) S & Co.250 1.000 95.000 and writing off the same in the new ratio between B.000 1. ` 1.333 ` 50.10.000) 10.43.250 T’s Capital 40. and T & Co.667 3.000 (5. (Mutual indebtedness of S & Co.250 S’s Capital ` As per Balance Sheet Credit for Reserve Profit on Revaluation Less : Provision for doubtful debts (b) T & Co. To T Co.250 9. for ` 60.000 18.00.000 50.667 50.42 11. To B’s Capital Account (Amount credited to B’s Capital to bring capital in profit-sharing ratio) S’s Capital Account Dr.000) 27.000 54.750 S’s Capital ` As per Balance Sheet Credit for Reserve Profit on Revaluation Less : Provision for doubtful debts ` 1.

667 70.000 Stock 46.000 Stock 12.10.000 Furniture 3. On 31st March 2012.000 1.333 2.50.583 +11.750 1.250 (Cr.250 (Dr. 2012 in the book value of the assets and liabilities not taken over. 2012 and Balance Sheet at that date.55. The total therefore is ` 4.750 ` 95.000.667 2.43 (ii) Advanced Accounting Capital in the new firm B S T ` Balance as taken over 1.) 1.000 20.000 80.000 Adjustment for Goodwill Total capital.000 5. From the following balance sheet and trial balance prepare Business Purchase Account.) — *T’s Capital is ` 70. The same set of books has been continued after the acquisition and no entries of the acquisition have been passed except for the payment of ` 80. Balance Sheet as at December.000 . 2012 and 31st March.20.667 71.000 Insurance Policy 18.000 made by Sri Raman.000 There was no change between 1st January.000 Furniture Investments 50.10.38.000 40.65.3.000 Debtors 80.20.000 and it is 1/6 of total. ` 4.000 1.000 the business of M/s Gupta and Singh taking over at book value the following assets and liabilities : ` Debtors 35.250 1.65. Profit and Loss Account for the year ended 31st December.000 2. Sri Raman acquires on payment of ` 80.40.667 –1. 2011 Liabilities Capital Accounts Sri Gupta Sri Singh Bank Loan Creditors ` Assets 30.750 –10.250 ` 71.000 Creditors 10.43.000 70.000* in the new ratio of 3:2:1.000 30.000 ` 3.000 54. taking T’s Capital as the basis Transfer to Current Account Illustration 2 2.

000 3.000 30. 31 To Balance b/d To Investments To Insurance Policy 80.000 Closing Stock ` 50.13.000 5.000 2.000 30.Advanced Issues in Partnership Accounts On 31st December 2012 the trial balance is: 3.00.000 .13. 2012) 87. profit upto 31st March.000 By Gupta’s Capital A/c By Singh’s Capital A/c By Goodwill By Profit & Loss A/c (Balancing figure.000 20.000 40.000 Solution Business Purchase Account 2012 Dec.000 5.000 ` 2012 ` 18.000 2.000 By Bank Loan 3.000 ` 18.000 80.000 6.000 13.000 5.000 30.000 87.000 12.000 20.20.000 15.44 ` Stock Furniture Investment Insurance Policy Business Purchase Account Bank Loan Capital : Gupta Singh Raman Bank Debtors Creditors Purchases Expenses Sales 5.000 3.000 4.000 48.

000 3.000 4.000 By Sales 3.000 35.000 6.000 50.000 65.000 Balance Sheet of Raman as on 31st December.000 4.000) 74.000 Working Notes : (1) Goodwill ` Value of Assets taken over Stock Debtors Furniture Less : Creditors Net assets Goodwill (Balancing figure) Purchase Consideration 46.00.000 ` Assets Goodwill Furniture Stock in trade Sundry Debtors Cash at Bank 1.3.000 ` 4.20.000 65.000 By Closing Stock 12.000 15.45 Advanced Accounting Profit & Loss Account of Raman for the year ended 31st December.50.000 ` 6.000 3.000 .10.000 (10.10.000 48.000 13.000 95.50.000 3.000 80. 2012 Liabilities Raman’s Capital A/c Add : Profit Sundry Creditors 30. 2012 ` To Opening Stock To Purchases To Expenses To Business Purchase (Profit upto 31st March) To Net Profit Raman’s Capital A/c 40.000 50.000 1.000 84.

000 2.000 74. ` 30.000 40. (ii) .46 as on 31st March ` Debtors Stock Furniture Less : Creditors Profit.000 60.000 ----2.000 50. was valued at ` 75.000.00.000 84.50.000 3.000) 61.000 55.000 – 74.000) 74.Advanced Issues in Partnership Accounts (2) Increase in net assets upto 31st March 2012 : as on 1st January 3.000 1.000 46.000 Firm X & Co. ` 1.000 3. was valued at ` 40.000 (10.00. Machinery and Vehicles are to be taken over at ` 2.20.000 40.000 X & Co. Balance Sheet as at 31.3.000 13. B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.000 73.000 (i) --75.000 and ` 74.20.000 90.000 --50. 2012 it was decided to amalgamate both the firms and form a new firm XY & Co. equal to net increase Illustration 3 30.000 (12. ` 40.000 1.000 respectively. Building. consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.20.000 20. ` Y & Co. The firm Y & Co.000 The following were the terms of amalgamation: Goodwill of X & Co.000 4. Goodwill of Y & Co. Goodwill account not to be opened in the books of the new firm but adjusted through the Capital accounts of the partners.000 80.000 4.000 1. wherein A.2012 Liabilities Capital: A B C Reserve Creditors 1.50. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2..000 50.000. On 31st March.20.00.20.000 --1.20.000 ` 35.000 Y & Co. ` Cash in hand/bank Debtors Stock Vehicles Machinery Building Assets X & Co.000..

Profit and loss sharing ratio 3:2 B’s Capital ` 6.3.000 Assets ` 1.500 Dr. as at 31. 2.000 in respect of Y & Co. The excess or deficiency to be kept in the respective Partners’ Current accounts.00.3. Y & Co.000 18.000 Cr.45.15.000 2. how the Goodwill value is adjusted amongst the partners.2012 Liabilities Capital Accounts: A B C Current Accounts: A C Creditors .000 2.500 Cr.000 Cr.2012 by keeping partners capital in their profit sharing ratio by taking capital of ‘B’ as the basis.000 1.000 1.000 Machinery Building Stock Debtors Cash & Bank Total Written off in new ratio Difference Solution (i) A B C (ii) ` 45.000 Working Notes: 1.000 ` Vehicle 1.000 --15.000 Cr.000 Dr. 11. Adjustment for raising and writing off of goodwill Raised in old profit sharing ratio X & Co. 57.000 40.31. 3:2 5:3 ` ` 45.75.72.3. 3. Nil ` 74.45.15.000 75.500 Dr.15. 1.00.(New firm) as on 31. You are required to: (i) (ii) Show.000 ` 46.000 --30.500 Dr.000 6.000 70. 1. and ` 4. 55.000 in respect of X & Co.000 70.47 Advanced Accounting (iii) Provision for doubtful debts at ` 5.000 1.000 Dr. 15. are to be provided.000 25.000 43. Prepare the Balance Sheet of XY & Co.000 Balance Sheet of X Y & Co.000 22. Balance of Capital Accounts at the time of amalgamation of firms A’s Capital ` X & Co.

000 (B’s capital∗ i.000) (1.500 (2.500 Balance of Capital Accounts in the balance sheet of the new firm as on 31.e.95. ` 75.000 20.000 B’s Capital Y & Co.000 18.000 87. Profit and loss sharing ratio 5:3 Balance as per Balance sheet Add: Reserves Less: Revaluation (vehicle) Provision for doubtful debts 2.000) 1.000 -57.2 Conversion of Partnership Firm into a Company At times partnerships also are reconstructed like joint stock companies. Transfer to Current Account 1.50.000 30.500 3.2012 A ` Balance b/d: X & Co.500 61.48 1.000) (3. Adjustment for goodwill Total capital ` 4.500) 2. with the help of creditors if they are satisfied that if by taking of further risk or forgoing a part of the debt.000 B ` 1.000 x 2) to be contributed in 4:5:1 ratio.Advanced Issues in Partnership Accounts Balance as per Balance Sheet Add: Reserves Revaluation profit (Building) Less: Revaluation loss (Machinery) Provision for doubtful debt 1.15.500 57.21.72.15.3.500) 3.95.30. ` 2. If a creditor ∗ B’s Capital `.15.000 15.000 (1.30.30.95.000 C’s Capital ` 50.500 being one-half of the total capital of the firm.000 (8.000 22.500 2.500 57.000 (10.000 2.000 25. It usually entails preparation of Reconstruction Account for determining the past losses which belong to old partners and writing them off to the debit of their capital accounts.000) 1.500) 87.000 (6.000) 1.000 2. the chances of recovery of their loan and capital would improve.94. .000 --- 43.000) (2.17.000 20.000 C ` 1.000 30.000 (12.000) (2. Y & Co.00.000 -1.

000 20. A.3.000 It was agreed that Mr.000. For the further development of the business.000 6% Debentures in X Ltd. A will not get any salary after the admission of Mr.m. . Cash 1.000 30.000 and the loss of the year ended 31st March 2008 was on account of loss by strike to the extent of ` 20.000 The above profits and losses are after charging the salary of Mr. usually some fresh capital/loan is required.000 Investment 20. C. The particulars of the profits are as under : ` Year ended Year ended Year ended Year ended Year ended 31-3-07 31-3-08 31-3-09 31-3-10 31-3-11 Profit Loss Profit Profit Profit 20. (iv) (a) The goodwill of the firm shall be determined on the basis of 2 years’ purchase of the average profits from business of the last 5 years.000 Stock 10.000 10.000 1.000 30. Mr. from the very inception of the firm in 1998 in addition to share of profit. C is to be admitted for a fifth share in the future profits from 1st April 2011. The profit of the year ended 31st March 2007 included an extraneous profit of ` 30. Illustration 4 The following is the Balance Sheet of Messers A and B as on 31st March 2011 : Liabilities A’s Capital B’s Capital A’s Loan General Reserve Liabilities 40.30.000 20.000 10.000 20. A was receiving a salary of ` 500 p.30.000 ` Assets Land and Buildings 90. The following further information is furnished : (i) (ii) The partners A and B shared the profits in the ratio 3:2. (iii) The future profit ratio between A. He is required to contribute cash towards goodwill and ` 10.000 50.000 towards capital. The amount of loan is placed to the credit of the party contributing the same on such terms and conditions as may have been agreed upon.49 Advanced Accounting agrees to join as a partner the whole or only a part of the account standing to the credit of his loan account is transferred to his capital account. Mr.000 25.000 Debtors 10. B and C will be 3:1:1.000 ` 50.

50 (b) It was agreed that the value of the goodwill of the firm shall appear in the books of the firm. Building To Interest on A’s loan To Net Profit to : A’s Capital A/c B’s Capital A/c C’s Capital A/c 3.000 Nil 20.600 . B and C Profit & Loss A/c for the year ending on 31st March.000 40. (v) The trading profit for the year ended 31st March.59. Prepare the Profit and Loss Account for the year ended 31st March. (ix) They applied for conversion of the firm into a Private Limited Company.120 Goodwill ` 39.560 7. (vi) The partners had drawn each ` 1.000 p.m. 2012 ` To Dep.200 By Trading Profit By Interest on Debentures ` 40.520 7.200 Balance Sheet of the Company as on 1-4-2012 Liabilities Share capital ` Assets 1. partners have to subscribe to fresh capital or withdraw.200 41. If necessary. Solution Messers A. Certificate received on 1-4-2012.000 600 22. 2012 and the Balance Sheet of the company. (vii) The value of the other assets and liabilities as on 31st March.Advanced Issues in Partnership Accounts 3.000 before ` Building (before depreciation) Stock Debtors Investment Liabilities 60. as drawings. 2012 was ` depreciation. They decided to convert Capital A/cs of the partners into share capital in the ratio of 3 : 1 :1 on the basis of total Capital as on 31-3-2012.520 41.000 1. 2012 were as under : 40.000 Nil (viii) Provide depreciation at 5% on land and buildings on the closing balance and interest at 6% on A’s loan.

520 ` — — — 17.000 13.000) 20.200) 29.000 4.800 ` 30.000 (1.000 6.000 — 25.000 20.920 Partners’ Capital Accounts B C A B C ` To Drawings To Balance c/d 12.04.920 7.000 (1.69.000 19.000) 6.000 31.600 Land & Building Investments Stock in Trade Cash 57.800 ` 20.000 6.360 25. A 20.000 (1.000) (1.200) 34.800 ` 25.800 1.200) 99.000 80.440 .000 — 30.360 ` 12.69.000 — 20.200) 24.000 (30.440 By Balance b/d By General Reserve By Goodwill By Bank By Profit & Loss A/c ` 40.200 (5.000 65.720 Working Notes: 1.3.000 40.720 Loan from A 1.200) 14.200) ` (10.000 16.560 92.000 6.320 ` 12.200) (5.440 77.760 — 22.000) (10.000 13.800 39.320 ` 50.000 26.51 Advanced Accounting 10.120 1. 31 2010 2011 ` Book Profits Adjustment for extraneous profit 2007 and abnormal loss 2008 Add Back: Remuneration of A Less : Debenture Interest being non-operating income* Total Profit from 2008 to 2011 Less : Loss for 2007 Average Profit Goodwill equal to 2 years’ purchase Contribution from C.840 — 7.360 25.000 10.000 (1. equal to 1/5 2.000 23.000 36. Calculation of goodwill: 2007 2008 2009 Year ended March.000 (4.600 7.520 92.000 15.000 6.320 77.000 6.

000 (3. Liabilities A’s Capital B’s Capital C’s Capital A’s Loan Add : Int.824 31.59.152 ` 95.52 ` ` Assets 80. Investments Stock-in-trade Cash (Balancing figure) ` 60.000 40.824 – ` 13.200 20.472 31.360 – ` 31.824.120 95.200 .824) subscribing to shares worth ` 31. 2012 3. ** Also the closing cash balance can be derived as shown below : ` Trading profit (assume realised) Add: Debenture Interest Add: Decrease in Debtors Balance Less: Increase in stock Less: Decrease in Liabilities Cash Profit 10.536 (` 65.600* 57.69.384 ` 31.000 ` 40.360 13.Advanced Issues in Partnership Accounts 3.360 13.000) 31.200 (30. Conversion into Company Balance Sheet as on 31st March.000) ` 39.120** 1.440 1.000 20.824 A should subscribe shares of ` 15. * It is shown in the books of the firm only to determine the closing capital of partners inclusive of goodwill before conversion.000 61.000 1.320) and C should subscribe shares of ` 18.69.720 ` Capital : A B C Share Capital Distribution of share : A (3/5) B (1/5) C (1/5) 80.000 13.320 65.000 600 10.440) B withdraws ` 33.600 1.440 Goodwill Land & Building Less : Dep.472 – ` 80. due 10.720 4.320 65.000 20.

000 1.000 1.65.50.6.30.a. .00. stock was valued at ` 75.70.000 6.000.000 1.920 59.2012.000 and bank overdraft by ` 15.12.6.65.2011. The firm’s Balance Sheet as at 31.000 3.6.6. sundry creditors were reduced by ` 10.6. In the half year.12. (c) Partners’ Capital Accounts showing the final settlement between them.2012. You are required to prepare: (a) Balance Sheet of the firm as at 30.40.000.2011 was: Liabilities Sundry Creditors Bank overdraft Capital A/cs: A B ` Assets 60. on machinery and after writing off 5% on leasehold premises.2012.000 ` 60. the firm sold the business to a Limited Company.000 16.000 (46. The partners withdrew in equal amounts half the amount of profits made during the period of six months after charging depreciation at 10% p.000 Stock 35. On 30. (b) The Realisation Account.000 9. The value of goodwill was fixed at ` 1.000) 13.000 Leasehold Premises Profit & Loss A/c Drawings Accounts: A B 3.2012.2012 and other items remained the same as at 31.000 The business was carried on till 30.000 Machinery Debtors Joint Life Policy 2.000 26.000 70.000 and Debtors at ` 60.120 Illustration 5 A and B were carrying on business sharing profits and losses equally.000 34.2012.000 10.000 before 30.6. The company paid the purchase consideration in Equity Shares of ` 10 each.000 and the rest of the assets were valued on the basis of the Balance Sheet as at 30. the Joint Life Policy had been surrendered for ` 9.000 10.000 17. On 30.53 Advanced Accounting Add: Opening cash balance Add: Cash brought in by C Less: Drawings Less: Additions to Building 36.3.120 10.

N.09.000 3.1.800 Less: Drawings for 6 months (5.000 4.a.500 By 32.800 Particulars Sundry Creditors A/c Bank Overdraft A/c Limited (W.000 A/c 3.800 3.Advanced Issues in Partnership Accounts Solution (a) Balance Sheet as on 30.000 50.2) Company 4.09.2012 1.42.800 1.800 (b) To To To To To To Particulars Machinery A/c Leasehold Premises A/c Stock A/c Sundry Debtors A/c A’s Capital A/c B’s Capital A/c Realisation Account ` 1.22.000 Bank overdraft 20.500 34.900) 1.000 Add: Profit for 6 months 11.54 ` (7.700) 32.09.6.500) 1.000 Less: Drawings for 6 months (5.300 By 75.42.000 11.2012 ` Assets Machinery Less: Depreciation @ 10% p.1.800 .17.800 Add: Profit for 6 months 1.000 20.000 60.09.28.22.800 By 3.300 75.000 (1.39.50.16.11.000 Liabilities ` Capital Accounts: A’s balance as on 1.900) 1.000 60.2012 1.900 Sundry Debtors B’s balance as on 1.900 Sundry Creditors 50.000 50.800 ` 50. Leasehold premises Less: Written-off @ 5% Stock ` 1.

000) 11.72.800 50.000 1.000) Profit before adjustment of drawings Add: Combined drawings during the 6 months (equal to profit) Profit for 6 months (2) Ascertainment of purchase consideration: Closing net assets (as above) ` 2.12 By Balance b/d A/c To Drawings A/c 10.000) B – ` (1.000 1.900 30.000 60.11.17.800 Working Notes: (1) Ascertainment of profit for the 6 months ended 30th June.600 .000 (2.800 1.300 3.72.000 70.55 (c) Date 1.000 1.12 To Balance c/d 1.000 1.40.6.6.000 6.66.800 1.000 1.40.12 To Drawings A/c 5.30.000 1.000 20.000 Date Particulars A B ` ` 1.800.72.800 Limited Appropriation Company A/c A/c By Realisation 50.800 1.12 Advanced Accounting Partners’ Capital Accounts Particulars A B ` ` 13.12 By Balance b/d 1.000 – 10.000 50.09.900 1.42.000 To Shares in 1.000 29.6.900 30.30.000 1.39.78.11.000 2.900 5.6.000 13.30.17.11.12 By Profit & Loss 11.39.17.3.39.28.78.800 23.000 – 6.000 To Profit & Loss 1.000 30.800 11.000 1.1.000 – 13.000 – 13.000 A/c 1.800 1.40. 2012 Closing Assets: Stock Sundry Debtors Machinery less depreciation Leasehold premises less written off Less: Closing liabilities: Sundry Creditors Bank overdraft Closing Net Assets Less: Opening combined capital: A – ` (1.40.800 11.500 32.1.800 + Goodwill ` 1.30.000 = ` 3.000 1.00. ` ` 75.

B. The Joint Assurance Policy shown in the books at ` 20.000 6.a.000 matured on 1. C.000.2011 By Balance b/d By B’s Current goodwill By C’s Current goodwill A ` 29.2011 and on that date. payments of ` 20.2011 and 31.` 8.12. B and C continued trading on the same terms as previously and the net profit for the year to 31.000.). Interest @ 5% p.2011. and C.000 each were made to A’s Executors on 1. There was no provision in the agreement for interest on capitals or drawings. the partnership was dissolved and an offer to purchase the business as a going concern for ` 1. The balance due to A’s estate. B and C received the sums due to them.56 A.Advanced Issues in Partnership Accounts Illustration 6 3. were valued at ` 36.2011 To Balance b/d To A’s Current A/c – goodwill To A’s Current A/c – Revaluation Profit A ` --B ` ---20.000 Current Account: A – ` 29.000.6. including interest.2012.000 (Dr.000 was accepted on that day.2011 (before charging the interest due to A’s estate) amounted to ` 32.000 C ` 5.000.000 -C ` --- A/c A/c – – .1. the partners drawings were: B.2012 and on that day.` 15.2012.2011.2012. On 1.1. the partners’ balance were as under: Capital Account : A – ` 60. the first such instalment falling due immediately after death and the subsequent instalments at half-yearly intervals. 30.12. was to be credited half-yearly.000 B ` 20.40.6.000 in excess of the book values. was paid on 30. During that period. goodwill (not recorded in the books) was to be valued at ` 60.12.2011. You are required to write-up the Partners’ Capital and Current Accounts from 1.000.2011 to 30. B and C were in partnership sharing profits and losses 3:2:1.` 40. realising ` 26. By the partnership agreement. In ascertaining his share.000 12.000.1. A cheque for that sum was received on 30.1. the sum due to A’s estate was required to be paid within a period of 3 years.000 Particulars 1.` 20. No Goodwill Account was raised and no alteration was made to the book values of fixed assets. Show also the account of the executors of A. Solution Partners’ Current Account Particulars 1. excluding the Joint Endowment Policy (mentioned below). and minimum instalment of ` 20.1.000 20.000.000 and the assets.6.000 10. A died on 31. C – ` 5.000.1.6.000 10. B – ` 20.000 each were to be paid.

000 80.000 B ` 40.2012 By Realisation A/c -profit By C’s Capital A/c transfer 25.1.000 25.000 20.1.1.6.000 17.000 Partners’ Capital Accounts Particulars 1.2011 To Balance c/d 30.6.000 32.573 A ` 1.000 1.192 C ` 20.000 21.2011 To By By By Particulars A’s Capital A/c Balance b/d Interest A/c Balance b/d ` 1.20.000 By A’s Current A/c 20.000 32.000 10.000 20.000 31.2011 1.000 8.20.000 1.192 B ` ---40.000 40.1.808 19.40.1.1.2012 To C’s Current A/c – transfer To Bank A/c 5.190 45.2012 By B’s Current A/c – transfer 20.573 C Particulars ` 1.000) Balance c/d 1.000 40.2011 30.7.000 .000 --1.40.000 21.000 -40.6.000 1.2011 1.12.000 2.2012 12.000 80.000 --45.40.000 1.40.2011 1.192 --19.905 19.000 1.000 A ` 60.000 A’s Executors Account Date 1.57 To Advanced Accounting A’s Capital A/c – transfer 80.000 6.000 8.2011 To Balance b/d 31.3.190 30.2011 1.000 1.23.2011 --.000 20.000 30.190 12.000 By Balance b/d 20.6.000 20.000 28.2011 To Drawings A/c 1.By Balance b/d 20.000 40.2011 To A’s Executors A/c To Balance c/d 31.2011 To To To To To Particulars Bank A/c Balance c/d Bank A/c Balance c/d Bank A/c ` Date 20.000 28.000 10.000 20.287 12.2011 31.000 1.03.383 5.23.192 - C’s Current A/c – Revaluation profit Joint Life Policy A/c (` 26.000 3.000 40.1.000 20.000 3.2011 20.000 19.000 15.000 6.905 By Balance b/d 7.1.000 40.383 1.000 -20.2011 30.000 – ` 20.1.000 By By By By 80.40.573 --12.6.12.095 30.6.190 45.000 1.000 1.000 1.12.000 40.000 12.03.2012 To Balance b/d To B’s Capital A/c – transfer 7.12.1.190 --20.000 20.000 1.40.617 7.2011 By Profit & Loss Appropriation A/c By Balance c/d B’s Current A/c Revaluation profit – 12.

000 2.000 24. B 12.2011 to 31.05.000 20.575 Assets Sundry Assets (balancing figure) Partners’ Current A/cs –B Partners’ Current A/cs. C 6.715 1.000 20.000 (18.000 6.7.192 1.45.000 20.575 3.2011 to 30.575 31.6.715 Working Notes: (1) Adjustment in regard to Goodwill Partners Share of goodwill before death Share of goodwill after death Gain (+)/Sacrifice (-) (` ) (` ) (` ) A 30.19.000 Dr.1.425 C 10.2011 1.2012 87.2011 .58 2.715 By By By Interest A/c Balance b/d Interest A/c 3.000 Dr.575 85.6.000) Cr.Advanced Issues in Partnership Accounts 31.000 (2) Adjustment in regard to revaluation of assets Partners Share of profit on revaluation (` ) credited to all the partners Debited to the continuing partners (` ) (` ) (3) Ascertainment of Profit for the year ended 31.000 7.000 85.6.000 40.575) 26.575 2.000 Dr.12.2012 30. B 20. ` Profit before charging interest on balance due to A’s executors Less: Interest payable to A’s executors: from 1.2011 From 1.000 Dr.2011 30.383 19.12.575 (5.575 87.000) Cr. A 18.575 1.12.000 12.12.45.140 87.C ` 1.2012 To To Balance c/d Bank A/c 85.05.2011 Liabilities Capital Account – B Capital Account – C A’s Executors A/c ` 40.2011 Balance of profit to be shared by B and C (4) Ascertainment of Profit for the year ended 31.1.000 12. ` 32.000 (30.000 10.12.575 1.

Summary • Amalgamation of partnership firms includes Closing the old books of Amalgamating Company Opening the new books of Amalgamated Company • When one firm is merged with another existing firm. 2011 were: A ` 50. The other firm will record the transaction as that of a business purchase. They will then share the company’s profit in the ratio of 3 : 2 : 1 after allowing preference dividend.000 2.1 Apportionment of shares amongst the partners: Sometime an examination problem may require the students to suggest equitable basis for division of shares between the vendors.000. 2012 the business was converted into a limited company and was valued at ` 1.000 and the value placed on the business being ` 1. to maintain the same profit-sharing ratio and to preserve the priority in regard to repayment of capital. B and C in the ratio of 3 : 2 : 1.30. 40.000 excess. Creditors play an important role in conversion of partnership firm into company.20. The capital will now be: A ` 65.000 2.2.a.000.30. so as to preserve the rights as previously existed between them.19.573 6. Suppose A. A’s capital should be ` 60.000.000. when they are partners.000.00. B ` 10. that is.287 1.000.3.59 (5) Advanced Accounting Realisation Account To To To To Sundry Assets A/c Interest A/c – A’s Executors Partners’ Capital A/cs – B Partners’ Capital A/cs – C ` 1.140 12. Both A and C have ` 5. B ` 40. Since interest on capital is meant to compensate those whose capital is in excess of proportionate limits and since in the case of partners it is an appropriation of profit. • . B ` 30. i.e.40.40.000 and C ` 25.40.000. entries will be in the pattern of winding up in the books of the firm which has ceased to exist.000 and C ` 5.000 each and the remaining amount of ` 1. B and C share profits and losses in the ratio 3 : 2 : 1 after allowing interest on capital @ 9% p. Taking B’s capital as the basis.000 and C ` 20. A scheme of capitalisation.000 there is goodwill of ` 30.000.000 can be in the form of equity shares to be divided among A.000 1. On 1st January. Their capitals on 31st December.000 × 3/2 and C’s capital should be ` 20.000.000 By Bank A/c (purchase consideration) ` 1.000 to be shared by the partners in the ratio of 3:2:1 or A ` 15. whereby the mutual interest of partners may remain intact as far as possible is suggested below: The total capital being ` 1. it will be proper to give 9% preference shares to A & C for ` 5.

Vesting: It is the process by which the employee is given the right to apply for shares of the company against the option granted to him in purchase of employee in pursuance of employee stock option scheme (ESOS).4 Company Accounts Unit – I: ESOP and Buy-back of Shares Learning Objectives After studying this unit. you will be able to • • • • • • Learn the provisions of the Companies Act regarding employees’ stock option. 2008 and then in September. which gives such directors. 1992. officers or employees the benefit or right to purchase or subscribe at a future date. 2009 Important terms to be remembered 1. 1. Learn the provisions of the Companies Act regarding buyback of securities Understand equity shares with differential rights. 2. . Grant: Grant of the option means giving an option to the employees to subscribe to the shares of the company. Learn the accounting treatment of employees’ stock options. officers or employees of a company. Securities and Exchange Board of India (SEBI) issued Employees Stock Option Scheme and Employee Stock Purchase Scheme Guidelines in 1999 under section 11 of the Securities and Exchange Board of India Act. which states that "employee stock option" means the option given to the whole-time directors. Understand the accounting policies of employees’ stock option plan. Learn the provisions of Guidance Note on Employee Share-Based Payments. the securities offered by the company at a pre-determined price. 1956.1. Employees Stock Option Plan The Companies (Amendment) Act 2000 has inserted a new clause (15A) in section 2 of the Companies Act. SEBI amended the said Guidelines by in August.

Advanced Accounting Vesting Period: It is the time period during which the vesting of the option granted to the employee on pursuance of ESOS takes place. the Black-Scholes or a binomial model) that takes into account as of the grant date the exercise price and expected life of the option. 4. Option: Option means a right but not an obligation granted to an employee in pursuance of ESOS to apply for shares of the company at a pre-determined price. the risk-free interest rate used shall be the interest rate applicable for a maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities. 5. dividends on the stock.4. the current price in the market of the underlying stock and its expected volatility. Fair value : Fair value of an option means the fair value calculated in accordance with Schedule III as follows: (i) (ii) The fair value of a stock option is the price that shall be calculated for that option in an arm’s length transaction between a willing buyer and a willing seller. . (iii) The fair value of an option estimated at the grant date shall not be subsequently adjusted for changes in the price of the underlying stock or its volatility. expected dividends on the stock. the experience of an appropriately comparable peer group may be taken into consideration.2 3. (c) The expected life of ESOSs should not be less than half of the exercise period of the ESOSs issued until and unless the same is supported by historical evidences with respect to ESOSs issued by the company earlier. (iv) Where the exercise price is fixed in Indian Rupees. or the risk-free interest rate. The fair value shall be estimated using an option-pricing model (for example. (viii) Justification shall be given for significant assumptions. If the company does not have a sufficiently long history of stock option grants. If at the time of further issue of ESOS/ESPS there are any changes in the assumptions. (vi) If the company does not have a sufficiently long history of traded stock prices to estimate the expected volatility of its stock. the life of the option. (vii) The estimated dividends of the company over the estimated life of the option may be estimated taking into account the company’s past dividend policy as well as the mean dividend yield of an appropriately comparable peer group. (v) The expected life of an award of stock options shall take into account the following factors: (a) The expected life must at least include the vesting period. reasons for the same shall be given. it may use an estimate based on the estimated volatility of stocks of an appropriately comparable peer group. (b) The average lengths of time similar grants have remained outstanding in the past. and the risk-free interest rate for the expected term of the option.

multiple option and the amount of employee compensation cost shall be accounted for and amortised accordingly on a straight-line basis over the vesting period.1 Accounting Policies of ESOS Schedule I of the Employees Stock Option Scheme and Employee Stock Purchase Scheme Guidelines.”] (d) When an unvested option lapses by virtue of the employee not confirming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation. Where the accounting value is accounted for as employee compensation in accordance with clause (b). in substance.Company Accounts 4. When a vested option lapses on expiry of the exercise period. as if the option was. 1999 issued by SEBI specifies that (a) In respect of options granted during any accounting period the accounting value of the options shall be treated as another form of employee compensation in the financial statements of the company. this accounting treatment shall be reversed by a credit to employee compensation expense equal to the amortized portion of accounting value of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion. if the company so chooses. of the vested portion of the option at that date. over the vesting period of the last separately vesting portion of the option): Provided that the amount of employee compensation cost recognized at any date at least equals the fair value or the intrinsic value. the amount shall be amortised as under : (i) (ii) Where the scheme does not provide for graded vesting.1. Where the scheme provides for graded vesting (1) the vesting period shall be determined separately for each separate vesting portion of the option. after the fair value of the option has already been accounted for as employee compensation.3 1. (b) (c) (e) . this accounting treatment shall be reversed by a credit to employee compensation expense. the fair value of the option. the amount shall be amortised on a straight-line basis over the vesting period. or (2) the amount of employee compensation cost shall be accounted for and amortised on a straight-line basis over the aggregate vesting period of the entire option (that is. The accounting value of options shall be equal to the aggregate. over all employee stock options granted during the accounting period. of the intrinsic value of the option or. as the case may be.

the maximum exercise period is one year.400 8. The accounting value of the option being: 500 × (160 –40) = 500 × 120 = 60.000 45.600 8.4 (f) Advanced Accounting The accounting treatment specified above can be illustrated by the following numerical example :– Suppose a company grants 500 options on 1/4/1999 at ` 40 when the market price is ` 160.000 36.000 24. Also suppose that 150 unvested options lapse on 1/5/2001.000 24.000 14.000 18.400 3.400 12.000 3. the vesting period is two and a half years.000 . 300 options are exercised on 30/6/2002 and 50 vested options lapse at the end of the exercise period.4.000 The accounting entries would be as follows: 1/4/1999 Deferred Employee Compensation To Employee Stock Options Outstanding (Grant of 500 options at a discount of ` 120 each) 31/3/2000 Employee Compensation Expense To Deferred Employee Compensation Expense (Amortisation of the deferred compensation over two and a half years on straight-line basis) 1/5/2001 Employee Stock Options Outstanding To Employee Compensation Expense To Deferred Employee Compensation Expense (Reversal of compensation accounting on lapse of 150 unvested options) 31/3/2002 Employee Compensation Expense To Deferred Employee Compensation Expense (Amortisation of the deferred compensation pover two and a half years on straight-line basis) 30/6/2002 Cash Employee Stock Options Outstanding To Paid-up Equity Capital To Secretion Premium Account (Exercise of 300 options at an exercise price of ` 40 each and an accounting value of ` 120 each) 60.000 60.

Company Accounts 1/10/2002 Employee Stock Options Outstanding To Employee Compensation Expense (Reversal of compensation accounting on lapse of 50 vested options at the end of exercise period) 6.000 3.000 Deferred Employee Compensation Expense Account Date Particulars Amoun t Date Particulars Amount ` 31/3/2000 31/3/2001 1/5/2001 31/3/2002 60.000 4.000 1/10/2002 60.000 Employee Compensation Employee Compensation ESOS Outstanding Employee Compensation 60.000 6.000 ` 1/4/1999 ESOS Outstanding 60.5 6.000 The T-Accounts for Employee Stock Options Outstanding and Deferred Employee Compensation Expense would be as follows: Employee Stock Options Outstanding Account Date 1/5/2001 Particulars Employee Compensation/ Deferred Compensation Paid Capital/Share Premium Employee Compensation Amount Date 1/4/1999 Particulars Deferred Compensation Amount ` 60.600 8.000 30/6/2002 Up 36.000 24.000 .000 ` 18.400 24.000 60.

(i) (ii) senior managerial personnel. during any one year. inter alia. (iii) Identined employees who were granted option. the following details of the ESOP : (a) options granted.6 Advanced Accounting Employee Stock Options Outstanding will appear in the Balance Sheet as part of Net Worth or Shareholders’ Equity. shall be disclosed. (n) A description of the method and significant assumptions used during the year to estimate the fair values of options. . (c) options vested. employee wise details of options granted to. 1. (l) Where the company has calculated the employee compensation cost using the intrinsic value of the stock options. equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant.2 Disclosure in the Directors' Report The Board or Directors. Deferred Employee Compensation will appear in the Balance Sheet as a negative item as part of Net Worth or Shareholders’ Equity.4. The impact of this difference on profits and on EPS of the company shall also be disclosed. (d) options exercised. (f) options lapsed. (g) variation of terms of options. (i) (j) total number of options in force. the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options. including the following weighted-average information: (i) risk-free interest rate. (e) the total number of shares arising as a result of exercise of option. (h) money realised by exercise of options. (b) the pricing formula.1. disclose either in the Directors Report or in the annexure to the Director's Report. shall. (m) Weighted-average exercise prices and weighted-average fair values of options shall be disclosed separately for options whose exercise price either equals or exceeds or is less than the market price of the stock. (k) diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of option calculated in accordance with Accounting Standard 20 “Earnings Per Share’. any other employee who receives a grant in any one year of option amounting to 5% or more of option granted during that year.

. (iv) expected dividends. the Accounting Standards Board of the Institute is developing an Accounting Standard covering various types of share-based payments including employee share-based payments. and (v) the price of the underlying share in market at the time of option grant. as the formulation of the Standard is likely to take some time. the employees receive shares. this Guidance Note will automatically stand withdrawn. employee stock purchase plans and stock appreciation rights. Once the Accounting Standard dealing with Share-based Payments comes into force. For accounting purposes. viz. either the enterprise or the employee has a choice of whether the enterprise settles the payment in cash or by issue of shares. employee share-based payment plans are classified into the following categories: Equity-settled: Under these plans.3 Provisions of Guidance Note on Employee Share-Based Payments Recognizing the need for establishing uniform sound accounting principles and practices for all types of share-based payments. 4. 1. Cash-settled: Under these plans. However. securities premium account and/or general reserve as recommended in this Guidance . Employee share-based payment plans with cash alternatives: Under these plans. say.] Until all options granted in the three years prior to the IPO have been exercised or have lapsed. the Institute has decided to bring out this Guidance Note. the term 'employee' includes a director of the enterprise. the employees receive cash based on the price (or value) of the enterprise's shares. This account is transitional in nature as it gets ultimately transferred to another equity account such as share capital.7 (iii) expected volatility. An enterprise should recognize as an expense (except where service received qualifies to be included as a part of the cost of an asset) the services received in an equity-settled employee share-based payment plan when it receives the services. with a corresponding credit to an appropriate equity account. 'Stock Options Outstanding Account'.1. For the purposes of this Guidance Note. Until all options granted in the three years prior to the IPO have been exercised or have lapsed. whether whole time or not.Company Accounts (ii) expected life. This Guidance Note establishes financial accounting and reporting principles for employee share-based payment plans. employee stock option plans. disclosures shall be made either in the Directors’ Report or in an Annexure thereto of the information specified above in respect of such options also. disclosure shall be made either in the Directors’ Report or in an Annexure thereto of the impact on the profits and on the EPS of the company if the company had followed the accounting policies specified therein in respect of such options.

such as a target share price upon which vesting (or right to exercise) is conditioned. on a time proportion basis.g. willing market participants would consider in setting the price. the enterprise issues shares on receipt of the exercise price. Market conditions. other than market conditions. or a performance condition is not satisfied. on the grant date. during the vesting period.g. On exercise of the right to obtain shares or stock options. The valuation technique should be consistent with generally accepted valuation methodologies for pricing financial instruments (e..e. In the absence of evidence to the contrary. if subsequent information indicates that the number of shares or stock options expected to vest differs from previous estimates. On vesting date. taking into account the terms and conditions upon which those shares or stock options were granted (subject to the requirements of paragraphs 9 to 11).4. An enterprise should measure the fair value of shares or stock options granted at the grant date. the enterprise should recognize services received in full with a corresponding credit to the equity account. should not be taken into account when estimating the fair value of the shares or stock options at the grant date. If market prices are not available. should be taken into account when estimating the fair value of the shares or stock options granted. if necessary. the enterprise should revise the estimate to equal the number of shares or stock options that ultimately vest. If the shares or stock options granted vest immediately. on a cumulative basis. Hence. To apply the requirements of the Guidance Note. e. Vesting conditions. the employee fails to complete a specified service period. The enterprise should account for those services as they are rendered by the employee during the vesting period.. the enterprise should presume that the services to be rendered by the employee as consideration for those instruments will be received in the future.. the amount recognized for employee services received as consideration for the shares or stock options granted is based on the number of shares or stock options that eventually vest. Instead.8 Advanced Accounting Note. use of an option pricing model for valuing stock options) and should incorporate all factors and assumptions that knowledgeable. willing parties. the enterprise should recognize an amount for the employee services received during the vesting period based on the best available estimate of the number of shares or stock options expected to vest and should revise that estimate. the enterprise should estimate the fair value of the instruments granted using a valuation technique to estimate what the price of those instruments would have been on the grant date in an arm's length transaction between knowledgeable. In this case. If the shares or stock options granted do not vest until the employee completes a specified period of service. these are forfeited). the enterprise should presume that services rendered by the employee as consideration for the instruments have been received. with a corresponding credit to the equity account. The shares so issued should be considered to have been issued at the consideration comprising the exercise price and the corresponding . the employee is not required to complete a specified period of service before becoming unconditionally entitled to those instruments. no amount is recognized for employee services received if the shares or stock options granted do not vest because of failure to satisfy a vesting condition (i. vesting conditions should be taken into account by adjusting the number of shares or stock options included in the measurement of the transaction amount so that. based on market prices if available. ultimately.

the remaining options lapsed.9 amount standing to the credit of the relevant equity account (e. Stock Options Outstanding Account). the enterprise is required to re-measure the fair value of the liability at each reporting date and at the date of settlement. . graded vesting. Until the liability is settled.500 shares only. Illustration 1 A Company has its share capital divided into shares of ` 10 each. For employee share-based payment plans in which the terms of the arrangement provide either the enterprise or the employee with a choice of whether the enterprise settles the transaction in cash or by issuing shares. For cash-settled employee share-based payment plans. the enterprise should measure the services received and the liability incurred at the fair value of the liability. Apart from the above. In the case of a non-listed company. mutatis mutandis.g. On 1st April. value of its shares is determined on the basis of a valuation report from an independent valuer. or the components of that transaction. or as an equity-settled share-based payment plan if. Show Journal Entries.000 employees’ stock options at ` 40. no such liability has been incurred. The employees exercised their options for 9. The Guidance Note also recommends detailed disclosure requirements. 2011. reload feature. modifications to the terms and conditions of the grant of shares or stock options. the intrinsic value may be used. Accounting for employee share-based payment plans is based on the fair value method. and to the extent that. etc. earnings-per-share implications. the Guidance Note also deals with various other significant aspects of the employee share-based payment plans including those related to performance conditions. when the market price was ` 130. For accounting for employee share-based payment plans. The company closes its books on 31st March every year. accounting for employee sharebased payments administered through a trust. as a cash-settled share-based payment plan if. In a situation where the right to obtain shares or stock option expires unexercised. is the amount by which the quoted market price of the underlying share exceeds the exercise price of an option. Intrinsic value. in place of the fair value as described in paragraphs 5 to 14. since the shares are not quoted on a stock exchange.Company Accounts 4. 2011 and 15th March. and to the extent that.. The options were to be exercised between 16th December. There is another method known as the 'Intrinsic Value Method' for valuation of employee sharebased payment plans. the enterprise has incurred a liability to settle in cash (or other assets). with any changes in value recognized in profit or loss for the period. the enterprise is required to account for that transaction. 2010 it granted 10. in the case of a listed company. the balance standing to the credit of the relevant equity account should be transferred to general reserve.

10 Advanced Accounting Solution Journal Entries Particulars 2010 April 1 Dr.000 employees stock options on 1. 300 unvested options lapse on 1.55.000 8. Cr.000 8. 100 vested options lapse at the end of the exercise period. Illustration 2 ABC Ltd.000 stock options to employees at ` 40 when market price is ` 130) Bank Dr. ` Employee Compensation Expense Dr. 600 options are exercised on 30. when the market price is ` 160. grants 1.5.000 11.55.2009. To Employee Stock Options Outstanding (Being grant of 10.2007 at ` 40. To Employee compensation expense (Being transfer of employee compensation expense to profit and loss account) 9. To Employee compensation expense (Being entry for lapse of stock options for 500 shares) Profit and Loss A/c Dr. 2010 to 15th Mar. Pass Journal Entries giving suitable narrations.4. Employee stock options outstanding Dr.000 ` 9.6.00. To Equity share capital To Securities premium (Being allotment to employees of 9.4.2011 3.000 March 31 8.500 equity shares of ` 10 each at a premium of ` 120 per share in exercise of stock options by employees) Employee stock options outstanding Dr.55.000 16th Dec.80. Note: The above solution is given on the basis of a Guidance Note on Employee Share Based Payments issued by the ICAI.000 95. .000 45.2010.000 Employee Stock Options Outstanding will appear in the Balance Sheet as part of Net Worth or Shareholders' Equity.00.000 March 16 45. The vesting period is 2½ years and the maximum exercise period is one year.40.

12.000 48.3.N.000 options granted to employees at a discount of ` 120 each.000 72. 48. Dr.N.e. amortised on straight line basis over 1 2 years . 24. amortised on straight line basis over 1 2 years . Journal Entries Date 31.000 stock options x ` 48) 2 Profit and loss account To Employees compensation expenses account (Being expenses transferred to profit and loss account at year end) Employee stock option outstanding account (W.2009 Dr.e.000 48. (` ) 48.1) To General Reserve account (W.000 31. 48. (` ) Cr.2008 Particulars Employees compensation expenses account To Employee stock option outstanding account (Being compensation expenses recognized in respect of the employee stock option i.000 Dr.000 48.11 Dr.Company Accounts Solution In the books of ABC Ltd.3.000 options granted to employees at a discount of ` 120 each.000 12.000 Dr.2010 Dr.6.000 . 4.000 31.000 48. 1. 48.000 30.3.1. 1.1.000 stock options x ` 48) 2 Profit and loss account To Employees compensation expenses account (Being expenses transferred to profit and loss account at year end) Employees compensation expenses account To Employee stock option outstanding account (Being compensation expense recognized in respect of the employee stock option i.2010 Dr.1) (Being excess of employees compensation expenses transferred to general reserve account) Bank A/c (600 × ` 40) Employee stock option outstanding account (600 × ` 120) Dr.

4. or lastly it will vest at the end of the third year if the average earning of 3 years will be 10%.2009.000 90. 5.e. the expense to be recognized during the year is in negative i. or it will vest at the end of the year 2 if the average earning of two years is 13%. is 16%.000 ` 12.12 Advanced Accounting 6.000 At 31.3. depending upon the employees at the time of vesting of options.000 + 48. : Year ended on 31.000 To Equity share capital account (600 × ` 10) To Securities premium account (600X` 150) (Being 600 employee stock option exercised at an exercise price of ` 40 each) 01.2010. Following is the earning of Choice Ltd.2010 Employee stock option outstanding account Dr.000) Excess expenses transferred to general reserve ` 84.000 Note: The above solution is given on the basis of a Guidance Note on Employee Share Based Payments issued by the ICAI.3.000 unvested options lapsed on 31.2008 for ` 20. 4. . if any to reflect expenses for the number of options that actually vested. No.2011 Earning (in %) 14% 10% 7% 850 employees exercised their vested options within a year and remaining options were unexercised at the end of the contractual life. Illustration 3 Choice Ltd.2010 and finally 3.000 ` 96.5 years vesting period.3.3.10. Considering that 700 stock options have completed 2.3. grants 100 stock options to each of its 1.000 employees on 1.3. of options actually vested (700 x 120) Less: Expenses recognized ` (48. The market price of the share is ` 50. To General reserve account (Being ESOS outstanding A/c on lapse of 100 options at the end of exercise of option period transferred to General Reserve A/c) Working Note: 12.4.500 unvested options lapsed on 31. will examine its actual forfeitures and make necessary adjustments. These options will vest at the end of year 1 if the earning of Choice Ltd.2011.000 unvested options lapsed on 31.000 12. Pass Journal entries for the above.3. ABC Ltd.2010 31.2009 31.

100 options each granted to 1.2009 4.50.3.N.2011) 3rd year 87.000 X ` 20) ESOS outstanding A/c [(26.000 ` 14.2010) 2nd year 95. 75.000 Dr.000 Dr.3.500) x 85.Refer W.000 Year 3 (31.500 options at the end of exercise of option period transferred to General Reserve A/c) Working Note: Statement showing compensation expenses to be recognized Particulars Length of the expected vesting period (at the end of the year) Number of options expected to vest Year 1 (31.3.05.000 3.N. 3.000 x 10) To Securities premium A/c (85.000 Dr.N.Refer W.13 ` Dr.2010 Employees compensation expenses A/c To ESOS outstanding A/c (Being compensation expense recognized in respect of the ESOP.000 Dr.000 25. 8.) 30.000 75.) 31.25.25.00.000 options Date 31.) 30.Refer W.25.2011 Bank A/c (85.05.95. Dr.2009) Year 2 (31. 14.000 options 3rd year 91.000 34.3.e.000] To Equity share capital (85.Company Accounts Solution Particulars Employees compensation expenses A/c To ESOS outstanding A/c (Being compensation expense recognized in respect of the ESOP i.500 options .2011 Employees compensation Expenses A/c To ESOS outstanding A/c (Being compensation expense recognized in respect of the ESOP. amortised on straight line basis over vesting years.3.000 employees at a discount of ` 30 each.3. 17.95.00.000 8.000/87.3.000 options exercised at an exercise price of ` 50 each) ESOS outstanding A/c To General Reserve A/c (Being ESOS outstanding A/c on lapse of 2.000 X ` 40) (Being 85.000 8.50.

95.20.30.30. 1.05.25. 1999 has introduced Section 77A in the Companies Act. 1956.000 27.000 Nil ` 14. – Buy back of shares can be made out of: (i) (ii) its free reserves.2 Buy Back of Securities The Companies (Amendment) Act.000 ` 3.14 Advanced Accounting ` 28. or the securities premium account.000 ` 26. or (iii) the proceeds of any shares or other specified securities. (b) a special resolution has been passed in general meeting of the company authorising the buy-back. Note: No buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.000 ` 26. . The other important provisions relating to the buyback are : (1) No company shall purchase its own shares or other specified securities unless— (a) the buy-back is authorised by its articles.000 ` 14.50.000 ` 27.000 ` 8.000 ` 18.000 x 2/3 = ` 18.25.000 Total compensation expense accrued (50-20) Compensation expense of the year Compensation expense recognized previously Compensation expenses to be recognized for the year Note: The above solution is given on the basis of a Guidance Note on Employee Share Based Payments issued by the ICAI.—For the purposes of this clause.4.25.25.000 28.000 x 1/2 = ` 14.25. (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back: Note: Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies. permitting companies to buyback their own shares and other securities. the expression “debt” includes all amounts of unsecured and secured debts.20. (c) the buy-back is or less than twenty-five per cent of the total paid-up capital and free reserves of the company: Note: the buy-back of equity shares in any financial year shall not exceed twentyfive per cent of its total paid-up equity capital in that financial year. Explanation.50.

(6) Where a company completes a buy-back of its shares or other specified securities under this section. as may be specified by the stock exchange. whose shares are listed on a recognised stock exchange. (g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be prescribed.Company Accounts (e) all the shares or other specified securities for buy-back are fully paid-up. it shall. . (4) Where a company has passed a special resolution under clause (b) of Sub-section (2) to buy-back its own shares or other securities under this section. it shall not make further issue of same kind of shares (including allotment of further shares under clause (a) of Sub-section (1) of Section (81) or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants. if any : Note: No declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange. (5) Where a company buys-back its own securities. (f) 4. one of whom shall be the managing director. is smaller than such marketable lot. before making such buy-back. and signed by at least two directors of the company. or (b) from the open market. where the lot of securities of a public company. or (c) from odd lots. (3) The buy-back may be— (a) from the existing security holders on a proportionate basis. (2) Every buy-back shall be completed within twelve months from the date of passing the special resolution. it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back. sweat equity or conversion of preference shares or debentures into equity shares. that is to say. file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board. stock option scheme. or (d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.15 the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.

(2) No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with provisions of Sections 159. by the company. Illustration 4 Perrotte Ltd. (b) “free reserves” As per Section 372A.16 Advanced Accounting (7) If a company makes default in complying with the provisions of this section or any rules made thereunder or any regulations. as per latest audited balance-sheet of the company. has the following Capital Structure as on 31. redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institutions or bank. 1. where a company purchases its own shares out of free reserves.] Note: According to Section 77AA. 207 and 211.000 or with both. is subsisting.1 Provisions of Section 77b of The Companies Act As per Section 77B : (1) No company shall directly or indirectly purchase its own shares or other specified securities— (a) through any subsidiary company including its own subsidiary companies. or (b) through any investment company or group of investment companies.03. in repayment of deposit or interest payable thereon. then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the proviso to sub-section (1) of Section 80 and details of such transfer shall be disclosed in the balance sheet. the company or any officer of the company who is in default shall be punishable with imprisonment for upto 2 years or with fine upto ` 50. those reserves which.2011: (1) (2) Particulars Equity Share Capital (Shares of ` 10 each fully paid) Reserves and Surplus General Reserve Securities Premium Account (` in crores) 330 240 90 - .2. Some Important Terms (a) “specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time. or (c) if a default. are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.4.

You are also informed that the Infrastructure Reserve is created to satisfy Income-tax Act requirements. show the accounting entries in the company’s books in each situation.500 crores.Company Accounts Profit & Loss Account Infrastructure Development Reserve Loan Funds 90 180 4.N.1) Resources Test (W.25 6. Debit 150 Credit 150 Situation 1: When loan funds are ` 1.25 6..17 600 1.800 crores.25 Nil Nil Journal Entries for the Buy Back (applicable only for situation 2) ` in crores (a) Equity share buy back account To Bank account (Being buy back of five crores equity shares of ` 10 each @ ` 30 per share) Dr.N.2011 a proposal to buy back the maximum permissible number of Equity shares considering the large surplus funds available at the disposal of the company.3) Maximum number of shares that can be bought back [least of the above] Situation 1 8. When loan funds are ` 1. You are required to compute the maximum number of shares that can be bought back in the light of the above information and also under a situation where the loan funds of the company were either ` 1. Situation 2: When loan funds are ` 1. on the recommendation of their Board of Directors.25 Nil Nil Situation 2 8. Solution Statement determining the maximum number of shares to be bought back Number of shares Particulars∗ Shares Outstanding Test (W.00 Situation 3 8.09.2) Debt Equity Ratio Test (W. Situation 3. The prevailing market value of the company’s shares is ` 25 per share and in order to induce the existing shareholders to offer their shares for buy back.25 5.2011.00 5.12. Assuming that the entire buy back is completed by 09.25 6.N. ∗ . have approved on 12.500 crores.200 crores. it was decided to offer a price of 20% over market.200 crores or ` 1.800 (3) The Shareholders of Perrotte Ltd.

25 900 750 600 750 750 750 (c) .800 Situation 2 1. Dr. Resources Test Particulars Paid up capital (` in crores) Free reserves (` in crores) Shareholders’ funds (` in crores) 25% of Shareholders fund (` in crores) Buy back price per share Number of shares that can be bought back (shares in crores) 3.) To Equity share buy back account (Being cancellation of shares bought back) General reserve account To Capital redemption reserve account (Being transfer of free reserves to capital redemption reserve to the extent of nominal value of capital redeemed through free reserves) Dr.25 (Shares in crores) 33 8.500 330 420 750 187. Dr. Debt Equity Ratio Test Particulars (a) (b) Loan funds (` in crores) Minimum equity to be maintained after buy back in the ratio of 2:1 (` in crores) Present equity shareholders fund (` in crores) Situation 1 1.200 Situation 3 1. Shares Outstanding Test Particulars Number of shares outstanding 25% of the shares outstanding 2.18 (b) Advanced Accounting Equity share capital account Securities premium account General reserve account (Balancing figure. 1956. 50 90 10 150 Dr.4. 50 50 (c) Note : Under Situations 1 & 3 the company does not qualify for buy back of shares as per the provisions of Section 77A of the Companies Act.5 ` 30 6. Working Notes: 1.

19 Nil 150 Nil Nil 5 Nil Illustration 5 Anu Ltd. 100 (100) Nil 100 15 25 260 300 400 75 25 100 100 .) Current assets Less: Current liabilities (Trade Payables) 340 40 300 400 The company redeemed preference shares on 1st April. The payments for the above were made out of the huge bank balances.Company Accounts (d) (e) Maximum permitted buy back of Equity (` in crores) [(b) – (c)] Maximum number of shares that can be bought back @ ` 30 per share (shares in crores) 4. 2012. furnishes you with the following summarized balance sheet as at 31st March.4. It also bought back 50 lakhs equity shares of ` 10 each at ` 50 per share. 2012: (` in crores) Sources of Funds Share Capital: Authorised Issued: 12% redeemable preference shares of ` 100 each fully paid Equity shares of ` 10 each fully paid Reserves and surplus: Capital reserve Securities Premium Revenue reserves Application of Funds Fixed assets: cost Less: Provision for depreciation Non-current investments at cost (Market value ` 400 Cr. Prepare balance sheet as at 1. You are asked to: (i) (ii) Pass journal entries to record the above.2012. which appeared as a part of current assets.

Dr.4.4. Debit 75 Credit 75 Dr. 2012 Particulars 12% Preference share capital A/c To Preference shareholders A/c (Being preference share capital account transferred to shareholders account) Preference shareholders A/c To Bank A/c (Being payment made to shareholders) Shares buy back A/c To Bank A/c (Being 50 lakhs equity shares bought back @ ` 50 per share) Equity share capital A/c (50 lakhs х ` 10) Securities premium A/c (50 lakhs х ` 40) To Shares buy back A/c (Being cancellation of shares bought back) Revenue reserve A/c To Capital Redemption Reserve A/c (Being creation of capital redemption reserve to the extent of the face value of preference shares redeemed and equity shares bought back) Dr. 5 20 25 Dr. Assets (1) Non-current assets (a) Fixed assets 3 40 340 1 2 20 280 . ` in crores 1st April. 75 75 Dr.2012 Note No ` in crores I. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Current Liabilities (a) Trade payables Total II. 25 25 Dr.20 Advanced Accounting Solution Journal entries in the books of Anu Ltd. 80 80 (ii) Particulars Balance Sheet of Anu Ltd as at 1.

Company Accounts 4. Share Capital Authorised. Current assets Current assets as on 31. 2012: Liabilities Equity shares of ` 10 each fully paid 9% Redeemable preference shares of ` 100 each fully paid Capital reserves Revenue reserves Securities premium 10% Debentures Current liabilities Amount 100 Assets Fixed assets depreciation Investments at cost 20 Current assets 8 50 60 4 70 312 (` in lakhs) Amount 50 120 142 less 312 .2012 Less: Bank payment for redemption and buy back Illustration 6 340 (100) 100 (100) 15 80 5 180 4 100 240 340 ` in crores 20 280 - 240 Extra Ltd. Issued and Subscribed 200 lakhs Equity shares of ` .21 (b) Non-current investments -Investment at cost (Market value ` 400 crores) (2) Current assets Total Notes to Accounts 1.10 each 2. Fixed Assets Cost Less : Provision for Depreciation 4. furnishes you with the following summarized Balance Sheet as on 31st March.3. Reserves and Surplus Capital Reserve Capital Redemption Reserve Securities Premium (20-5) Revenue Reserve (260-80) 3.

(This was included under current liabilities).000 equity stock options outstanding on the above mentioned date.00 60. 10 each Dr. 2012. On 1.00 2. Solution Date 01. (iii) Included in its investment were “investments in own debentures” costing ` 2 lakhs (face value ` 2.00 90.00 90. 20. to the employees at ` 20 when the market price was ` 30.04. 22.00 Dr. Dr. These debentures were cancelled on 1st April.00 Dr.04.00 22. (v) Pass the journal entries to record the above. (vi) Prepare Balance Sheet as at 01.00 Equity share capital A/c Securities premium A/c To Equity Shares buy back A/c (Being cancellation of shares bought back) 30. 90.04.04. which appeared as a part of the current assets. .2012 ∗ (` in lakhs) Debit Credit Dr.00 ∗ The buy back of equity shares exceeds 25% of total equity shares as per section 77A of the Companies Act. is subject to penalty under sub-section 11 of Section 77A of the Companies Act. the company Extra Ltd.2012 Preference shareholders A/c To Bank A/c (Being payment made to shareholders) 01.2012.00 22.04.2012 employees exercised their options for 50.22 (i) (ii) Advanced Accounting The company redeemed the preference shares at a premium of 10% on 1st April.2012 Equity shares buy back A/c To Bank A/c (Being 3 lakhs equity shares of ` bought back @ ` 30 per share) 01. (iv) The company had 1.04. Therefore.00.000 shares. 2012. The payment for the above were made out of huge bank balances.4.2012 Particulars 9% Redeemable preference share capital A/c Premium on redemption of preference shares A/c To Preference shareholders A/c (Being preference share capital transferred to shareholders account) 01. It also bought back 3 lakhs equity shares of ` 10 each at ` 30 per share. Dr.20 lakhs).

04.04.2012 10% Debentures A/c To Investment (own debentures) A/c To Profit on cancellation of own debentures A/c (Being cancellation of own debentures costing ` 2 lakhs. Therefore.23 01.04.00 5.20 1. of 50.2012 Revenue reserve A/c (20 + 30) To Capital redemption reserve A/c (Being creation of capital redemption reserve account to the extent of the face value of preference shares redeemed and equity shares bought back as per the law) Dr.00 10.2012 Bank A/c Employees stock option outstanding (Current liabilities) A/c To Equity share capital A/c To Securities premium A/c (Being the allotment to employees. Dr.e.20 2.2012 Profit on cancellation of debentures A/c To Capital reserve A/c (Being profit on cancellation of debentures transferred to capital reserve account) Dr.00 5.00 50.00 01.04. . face value being ` 2. the company is subject to penalty under sub-section 11 of Section 77A.00 01.2012 Securities premium A/c To Premium on redemption of preference (Being premium on redemption of preference shares adjusted through securities premium) Dr. 2.20 lakhs and the balance being profit on cancellation of debentures) Dr. not to issue same category /class of shares within 6 months of buy-back).00 ∗ Allotment of equity shares against ESOP may also result in the violation of section 77A of the Companies Act (i. 10. 50.000 shares∗ of ` 10 each at a premium of 20 per share in exercise of stock options by employees) Dr.20 01. 0.00 2.04.00 0.20 0.Company Accounts 4. 2.

20 75.24 Advanced Accounting Balance Sheet of Extra Ltd.00 50.00) 1.04.00 66. Equity share capital Opening balance Less : Cancellation of bought back shares 100.00 .00 (30.00 208.20 1. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-current Liabilities (a) Long term borrowings (3) Current Liabilities Total II.20 50. Assets (1) Non-current assets (a) Fixed assets (b) Non-current investments at cost (2) Current assets Total Notes to Accounts Note No (` in lakhs) 1 2 3 75.4.00 118.00 208. as on 01.00 ` in lakhs 1 Share Capital Equity Shares of ` 10 each 2 Reserves and Surplus Capital Reserve Capital Redemption Reserve Securities Premium 3 Long term borrowings Secured 10% Debentures Working Notes: (` in lakhs) 1.00 8.80 8.80 65.2012 Particulars I.00 40.00 66.

00) 10. 4.00 (2.20) 1.00 8.25 5.00 3.00 75.00 (22.00 142.00) 0 60.80 70.20 8.00 40.00) 10. 2012: .Company Accounts Add : Shares issued against ESOP 2.20 50.00 4.00 (5. Illustration 7 Dee Limited furnishes the following summarized Balance Sheet as at 31st March.00 (2.00 0. 7.00) 65.00) (2. 5.00 (60. 8. Capital Reserve Opening balance Add: Profit on cancellation of debentures Revenue reserves Opening balance Less: Creation of Capital Redemption Reserve Securities Premium Opening balance Less : Adjustment for cancellation of equity shares Less: Adjustment for premium on redemption of preference shares Add: Shares issued against ESOP at premium 10% Debentures Opening balance Less: Cancellation of own debentures Current liabilities Opening balance Less: Adjustment for ESOP outstanding Investments at cost Opening balance Less: Investment in own debentures Current assets Opening balance Less : Payment to preference shareholders Less : Payment to equity shareholders Add : Share price received against ESOP 4.00 120.00 8.00) 118.00 (50.00) (90. 6.

For this purpose. You are required to pass necessary journal entries and prepare the Balance Sheet.00 Dr.000.00 The company passed a resolution to buy back 20% of its equity capital @ ` 50 per share.00 15.26 Advanced Accounting ` ’000 Liabilities Share capital: Authorised capital Issued and subscribed capital: 2.00 Cr.000 Equity shares of ` 10 each fully paid up 2.00 2. Solution In the books of Dee Limited Journal Entries Particulars (i) Bank Account Profit and Loss Account To Investment Account (Being the investments sold at loss for the purpose of buy back) Dr.00 35.00 30.38. 10% Preference shares of ` 100 each (Issued two months back for the purpose of buy back) Reserves and surplus: Capital reserve Revenue reserve Securities premium Profit and loss account Current liabilities and provisions: Assets Fixed assets Investments Current assets. 8.00 14.00 22.000.38. Dr.4. it sold all of its investment for ` 22.00 93.00 30.00. 22.00 27.50.00 97.00 30.00 1.00 1.00 25.00 ` ’000 30. (` in ’000) . loans and advances (including cash and bank balance) 10.

‘Securities Premium’ account may also be used for transfer to ‘Capital Redemption Reserve Account.00 3. 3.00 Dr. 20.500 ∗ Alternatively. 25.00 25. 5.00 Dr.27 Dr. Assets (1) Non-current assets (a) Fixed assets (2) Current assets Total 1 2 Dr.00 4.00 14.500 93.00 69.00 10. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Current Liabilities Total II.00 Dr.00 (` in 000) 22. 20.00 12.00 20.00 10.00 25. 2012 (After buy back of shares) Particulars Note No I.Company Accounts (ii) Equity Share Capital Account Premium payable on buy back Account To Equity shares buy back Account (Being the amount due on buy back) (iii) Securities Premium Account To Premium payable on buy back Account (Being the premium payable on buy back adjusted against securities premium account) (iv) Revenue Reserve Account∗ To Capital Redemption Reserve Account (Being the amount equal to nominal value of equity shares bought back out of free reserves transferred to capital redemption reserve account) (v) Equity shares buy-back Account To Bank Account (Being the payment made on buy back) Balance Sheet of Dee Limited as on 1st April.’ .

or with differential rights as to dividend. Summary • ESOP is an option given to whole-time directors.28 Advanced Accounting Notes to Accounts ` in 000 1 Share Capital Authorised capital: Issued and subscribed capital: 2.00 69.00 22.4.00. 2000 has allowed companies to issue equity shares with disproportionate rights.000 Equity shares of ` 10 each fully paid up 2.00 1.00 29.00 20. Preference share capital.00 3. or (iii) the proceeds of any shares or other specified securities. namely :– (a) Equity share capital (i) (ii) (b) with voting rights.3 Equity Shares with Differential Rights The Companies Amendment Act. • No company shall purchase its own shares or other specified securities unless— • .00 – 8. voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed. at a predetermined price. Buy back of shares can be made out of: (i) its free reserves.00 2. or (ii) the securities premium account. Section 86 of Companies Act : New issues of share capital to be only of two kinds – the share capital of a company limited by shares shall be only two kinds only.00) 10.00 30. officers or employees of a company to purchase or subscribe the securities offered by the company at a future date.000 10% Preference shares of ` 100 each fully paid up 2 Reserves and Surplus Capital reserve Capital redemption reserve Revenue reserve Profit and loss A/c (35.00 27.

2000. . the expression “debt” includes all amounts of unsecured and secured debts.29 the buy-back is or less than twenty-five per cent of the total paid-up capital and free reserves of the company: the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year.—For the purposes of this clause.Company Accounts • • • 4. companies can issue equity shares with differential rights. • As per the Companies Amendment Act. the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back: Explanation.

partnership or company. 2. No commission can be paid in respect of shares or debentures which have not been offered to the general public for subscription.4. It provides an assurance to the company that it would be able to raise the stipulated amount of capital by the issue of shares or debentures and.2 Underwriting Commission The function of an underwriter has great economic significance. In consideration of such a service. you will be able to ♦ ♦ ♦ Learn the provisions of the Companies Act regarding underwriting of shares Determine the liability of underwriters whether shares are fully underwritten or partially underwritten Account for firm underwriting of shares. . it can proceed to draw up its investment programme. It provides that commission only at a rate authorized by the Articles.1 Introduction Underwriting an issue of shares or debentures involves entering into a contract with a person known as underwriter. he shall take up the balance. not exceeding 2½% of the issue price of debentures and 5% of issue price of shares. undertaking that in the event of the shares or debentures not being subscribed by the public or only a part of them being subscribed. Industrial Credit and Investment Corporation of India and Life Insurance Corporation of India. the company takes the risk of the capital being not subscribed by the public. made by the companies. on the basis of such an assurance. The prominent institutions that render this service are: Industrial Finance Corporation. One of the forms in which such a help is rendered is by underwriting the issues of shares and debentures. The Central Government has recently set up a number of financial institutions for helping companies to raise capital. the underwriter is paid a commission.30 Advanced Accounting Unit – 2 : Underwriting of Shares and Debentures Learning Objectives After studying this unit. 2. issues of shares or debentures are rarely underwritten by one person. can be paid. in respect of rest. They are either underwritten by two or more persons jointly or only a part of the issue is underwritten and. who may be an individual. Section 76 of the Companies Act places certain restrictions on the rate of commission and the conditions under which it can be paid. In view of the magnitude of such an obligation.

there are marked applications for only 5. X would not be liable to subscribe for any shares.According to clause (6) of the Form prescribed for such a report. the unmarked applications are treated as marked so far as the company is concerned. In the case in which only part of an issue has been underwritten. if any contract has not been carried out fully. the extent to which it has not been carried out and reasons therefore should be stated. marked applications exceed 6. In such a case. In such a case.4.1. In addition. Manager.3 Provisions in the Companies Act Affecting Underwriting Disclosure in the Prospectus . a company has issued 10. a certain amount of difficulty may arise in determining the liability of each of the underwriters.2 Determination of liability where only part of the issue has been underwritten: In such a case the company is treated as having underwritten the balance of shares which have not been underwritten. 2. however.1.000 shares provided on his doing so the total number of shares allotted (including those to X) does not exceed 10.000. a brief description of each underwritten contract should be given and.e. Underwriting Contract There are two types of underwriting contract (i) (ii) Normal Underwriting Firm Underwriting 2. or their associates should be disclosed.1 Determination of liability in Respect of a Normal Underwriting Contract 2. If.1 Determination of liability where whole of the issue has been underwritten by one person: If the whole of the issue has been underwritten by one person. the applications which have directly flowed to the company should be allocated among the different underwriters. If it does.According the Companies Act.4. the number of shares which X must subscribe will be reduced to that extent. the names of the underwriters and the opinion of the directors that the resources of the underwriters are sufficient to discharge their obligations should be stated.Company Accounts 4. he is responsible to subscribe for all the shares or debentures that have not been subscribed by the public. In this assumption.000 shares of which only 6. or where there are a number of underwriters. 2.4. .000 have been underwritten by X. it is necessary that when any issue of shares or debentures is underwritten.000 shares X would have to subscribe for 1.31 2. it is not necessary to know the number of applications which had originated through the underwriter and those which had flowed directly to the company.000. Disclosure in the Statutory Report . i. particulars of any commission paid or payable to any Director. Suppose. such a difficulty may arise in deciding the basis on which the unmarked applications.4.

450 1.000 shares which did not bear any stamp.000 shares were received.000 (250) 250 — If however.750 2.000 (2. applications for 2.500 (750) 1. issued 10.000 1. .000 shares in the ratio of 40:35:25 Marked applications Balance Credit to A and B for C’s surplus (ratio 40:35) Actual liability A 4. alternatively these are allocated in proportion to the gross amount of capital underwritten as reduced by the marked applications.000 800 (133) 667 B 3.32 Advanced Accounting This can be done in two ways: according to one method. There were thus applications for 3. by following one or the other method.200) 2.the position will be as follows : Gross liability Less: Unmarked applications Less: Unmarked applications (Shares in ratio of 20:25:5) Net liability A 4. the underwriting contract should specify the method to be followed (in the examination the position should be clarified by way of a note). B and C in proportion to their gross liability.000 shares that of B.000) 2.000 C 2. the other view is taken that unmarked applications should be credited to different underwriters in the ratio of liability after credit for marked applications has been given . those for 1. the liability of the underwriter or writers is ascertained is explained below : Elahi Buksh & Co. and those for 2.4.000 shares that of C.500 (1.500 (2. Since the liability of each underwriter may vary widely if one or the other method is followed.000) 2.000 in the above case) in the proportion of the balance of the liability after credit for marked forms has been given. applications for 8.500 (1. the liability of each of the underwriters will be as shown below: Gross liability Less: Unmarked applications 3.000 (1. These were underwritten as follows: A 40% B 35% C 25% In all.450 (117) 1. Ltd.050) 2.200) ___ 800 B 3. how.000) 500 (300) ___ 200 The liability in this case could also be determined by simply apportioning the total number of shares yet to be subscribed (2. the unmarked applications are allotted in the proportion of gross amount of capital underwritten.800 2.500 (1.000 equity shares.333 C 2.500) _____ 1. If credit for unmarked applications is given to A.000 (1.000 shares have the stamp of A.

000 2. X would be liable to subscribe 60% of 2. The whole issue was fully underwritten by Adams.33 Assumption to be considered: In case the information as regards the number of applications that are marked and those that are unmarked is not available (for instance.150 15.000 .000 6.000 (2) + (3) (4) 8.000 equity shares of ` 10 each. if according to the facts given above.000 (6) 8.281 4. For example.000 shares 2.000 shares it should be assumed that 60% (the proportion of the total number of shares underwritten) are through X.719 3.000 16. of which marked applications were as follows: You are required to find out the liabilities of individual underwriters. (1) Adams Benzamin Clayton 10.150 4.000 shares 8.000 shares.150 shares Applications were received for 16.000 (2) 8. In that case. 2011 issued a prospectus inviting applications for 20.000 (7) 1.500 3.000 shares 6.719 – 4. Benzamin and Clayton as follows: Adams Benzamin Clayton Adams Benzamin Clayton Solution Statement of Net Liability of Underwriters Gross liability Marked applications Number of Unmarked applications in the ratio of gross liability (3) 500 300 200 1.850 4.6) 10.281 2.850 shares 4.000 4. total applications received are for 8. in an examination) it should be assumed that out of the total number of applications received a number proportionate to the value of the issue underwritten has been received through the underwriters. Illustration 1 Newton Limited incorporated on 1st January.000 shares 4.000 20.Company Accounts 4.000 shares—the total number of shares not subscribed by public. The surplus shown by the particular underwriters is to be credited to the other underwriters in same proportion as for unmarked applications.350 16.000 Shares Total Surplus of Clayton in the ratio of 10:6 (5) 219 131 -350 – Total (4)+(5) Net liability (1).

then continue to Step 4. 2. Let us say. 1. and The number of shares he is obliged to take up on the basis of the underwriting agreement.000 shares out of which 15.2.800 shares he will have to take 2.000 shares and besides applies for 1. i. or (ii) The benefit of firm underwriting is given to individual underwriter. Step 2 Subtract marked applications (excluding firm underwriting) from gross liability of respective underwriters. After this step.2 Firm Underwriting It signifies a definite commitment to take up a specified number of shares irrespective of the number of shares subscribed for by the public.200 shares in total. In such a case. If some of the resultant figures are negative. If the resultant figures of Step 3 are all positive or zero. Hence unmarked applications are for 1.4.000 are marked. . Step 3 Determine the number of unmarked applications as follows: Total subscriptions (excluding firm underwriting) Less: Marked applications (excluding firm underwriting) Unmarked applications by public Add: Applications under firm underwriting Total unmarked applications ****** ****** ****** ****** ****** Divide the above calculated unmarked applications in the ratio of gross liability. go to Step 5 (skip Step 4).000 shares for which he applied ‘firm’ and 1.34 Advanced Accounting Note: The applications are for 16. ‘firm’. A underwrites 60% of an issue of 10. the underwriting contract has provided that abatement would be allowed in respect of shares taken up ‘firm’ the liability of A in the above-mentioned case would only be for 1. 2. (i) The benefit of firm underwriting is not given to individual Underwriter: For determining the liability of individual underwriter. on the other hand. If some of the resultant figures are found negative.000 shares. the underwriter is obliged to take up : (i) (ii) The number of shares he has applied for ‘firm’. the underwriter’s liability is determined without taking into account the number of shares taken up ‘firm’ by him that is to say.4. unless it has been otherwise agreed.200 shares.e. the following steps are followed: Step 1 Compute gross liability in the usual manner (if it has not been given).000 shares. then add all negative figures and divide the resultant in the ratio of gross liability. If. In case there are marked applications for 4.1 When the Issue is Fully Underwritten [with Firm Underwriting] There are two alternative ways: (i) The benefit of firm underwriting is not given to individual underwriter.4. then it represents net liability as per agreement.200 shares to meet his liability of underwriting contract.

to Step 5. Step 6 Add firm underwriting with the net liability as per agreement. After this step. Here. Step 2 Subtract marked applications (excluding firm underwriting) from gross liability of respective underwriters. Step 4 Subtract “firm underwriting” of individual underwriter from the respective figures of Step 3. the following steps are followed: Step 1 Compute gross liability in the usual manner (if it has not been given). go to Step 6. Step 5 Add firm underwriting with the net liability as per agreement. The resultant figures represent total liability.35 Step 4 Add all the negative figures and divide the resultant between the underwriters having positive figures in the ratio of gross liability. Step 5 Add all negative figures and divide it between the underwriters having positive figures in the ratio of gross liability. (2) The liability of underwriter consists of: (a) (b) Net liability as per agreement. Repeat Step 5 unless all figures are non-negative. After this step. Here.Company Accounts 4. If some of the resultant figures are negative. The resultant figures represent total liability. then add all negative figures and divide their sum in the ratio of gross liability. (1) Firm underwriting is treated as unmarked applications and divided in the ratio of gross liability. then continue to Step 5. (ii) The benefit of firm underwriting is given to individual underwriter For determining the liability of individual underwriter. (2) Firm underwriting is not treated as unmarked applications. Repeat Step 4 unless all figures are nonnegative. After this step. If some of the resultant figures are found negative. Now these figures represent the net liability as per agreement. . then that represents net liability as per agreement. Step 3 Determine the number of unmarked applications as follows: Total subscriptions (excluding firm underwriting) Less: Marked applications (excluding firm underwriting) Unmarked applications by public ****** ****** ****** Divide the above calculated unmarked application in the ratio of gross liability. and Firm underwriting. Now these figures represent the net liability as per agreement. (3) Firm underwriting is credited to individual underwriters separately. If the resultant figures of Step 4 are all positive or zero. go to Step 6 (skip Step 5).

As a result of the issue the following applications were received: Bearing rubber stamp of -Do-Do-Do-DoNot bearing any stamp A B C D E 1. Further.000 shares 3. The underwriters were informed of the amounts due to or from them. with the aid of necessary workings. Under the underwriting terms.00. during the tenure of public issue. Dr. Show. ` 2 payable on application. who was to be given credit for the number of applications received bearing his rubber stamp.000 shares 95.000 .000 shares 32.02. such surplus was to be distributed amongst the remaining underwriters in the ratio of their respective underwriting commitments. ` 57. Dr. The entire issue was underwritten by five underwriters as follows: A: 25%.00. D: 10% and E: 15%. Applications received were to be analyzed on the basis of rubber stamp of the underwriter. made a public issue of 4. C: 25%.000 500 Cr. Applications received which did not bear any rubber stamp were considered as “direct applications” to be credited to all the underwriters in the ratio of their respective underwriting commitment. ` Bank A/c Underwriting Commission A/c Brokerage on Shares A/c To Equity Shares Applications A/c To Bank A/c Dr.500 80. If. as compared to his commitment. the entries to record the amount so received or paid. B: 25%. Solution Journal Entry Dr.000 shares 60.000 38. for any number of shares in which case he was entitled to a brokerage equal to 1/2% of the par value of shares so applied for. Illustration 2 Rosy Ltd. the amounts were duly received or paid.000 equity shares of ` 10 each.000 shares.50.000 shares Included in the number of applications mentioned against D in the above table was an application made by D himself for 10. 1.000 shares 51.000 shares 10. any such credit being given a “surplus” was to result in respect of any underwriter. and Firm underwriting.36 Advanced Accounting (4) The liability of Underwriter consists of: (a) (b) Net liability as per agreement. the underwriter was at liberty to apply. a commission of 2% was payable on the amount underwritten.4.

37 12 20.000 36.50.000 8.600 53.000 51. (11) Due from underwriters.equally with firm underwriting of 50.000 3 2.00.Company Accounts Working Notes: (for description of the columns see below) Name A. Illustration 3 Libra Ltd. came up with an issue of 20.400 3.000 2 1.000 equity shares of ` 10 each at par.00 respectively.000 3.000 12.000 1.50.00.000 60.500 1. E.000 shares each.000 4 1.000 5 –4.500 1.000 99. The agreed commission was 5%.00. C. 1 1.000 52.00. The amounts payable on application and allotment were ` 2. of direct applications (4) Total (2) + (3) (5) Allocation of surplus (6) Total (4)+(5) (7) Final Deficit (1)—(6) (8) Amount Receivable due @ ` 2 per share.300 1.40.97.000 40.000 Column No.000 20.000 9 20.800 13.500 2. D.000 95.500 62.000 shares including the marked forms which were : Anand Vijay Ashok 4. (9) Underwriting Commission due @ 2 % nominal value.000 — — — 38.000 12.500 600 900 — 6 1.000 6. .00. (1) Commitment—No.000 60.500 4. (12) Due to underwriters.000 33.500 97. of Shares (2) Marked Applications (3) Additional proportionate no. B.200 1.00.000 18.000 1.000 64.500 33.000 shares The underwriters had applied for the number of shares covered by firm underwriting. (10) Brokerage due @ 1/2%.400 6.000 4.50 and ` 2.000 shares 4.000 8 — 2.000 7 — 1.50.02. Vijay and Ashok .000 shares were issued to the promoters and the balance offered to the public was underwritten by three underwriters Anand.600 50.500 3.500 2. Subscriptions totalled 12.000 72.000 20.500 1.000 80.500 10.00.000 4.000 1. 5.000 32.200 57.000 10 — — — 500 — 500 11 — — 52.25.04.50.00.000 shares 3.

000 to Ashok.000 to Vijay and 1.38.) 1.000 2.000 9. Vijay Dr. ` 3. Note: Unmarked applications are to be credited to underwriters equally.50.00. Journal Dr.38 Advanced Accounting Pass summary journal entries for — (a) The allotment of shares to the underwriters.000 to Anand. To Ashok (Amount received from Ashok on shares allotted less underwriting commission) Anand Dr. Vijay and Ashok @ 5% on the amount of shares underwritten.50.75.50.000 1.000 2. To Share Application A/c (Application money received on firm applications for 50.) Bank A/c Dr.50. Ashok Dr.75.4.50.500 7.000 Bank A/c Dr.000 .000 3.000 3. (b) The commission due to each of them.75.00. Solution Libra Ltd. ` 3.500 3.000 88. and (c) The net cash paid and or received. 50. application and allotment money credited to share capital) Underwriting Commission A/c Dr.50 per share from Anand. To Anand To Vijay To Ashok (Amount of underwriting commission payable to Anand.500 88.00. Share Application A/c Dr.000 1. Vijay & Ashok) Anand Dr. Vijay Dr. To Share Capital A/c (Allotment of shares to underwriters 50.13.000 2.500 1.000 Cr.03.000 each @ ` 2.50. To Bank A/c (Amount paid to Anand & Vijay in final settlement of underwriting commission due less amount payable on shares allotted payable to him.

excluding firm underwriting Firm underwriting Gross liability 5.000 equity shares of ` 100 each.25.000 64.000) 4.000 — 88.000 (3. 6.25.000 50.00.000 — (1.50 per share Less : Amount paid on Firm Applications of 50.00.50.000 36. of shares) Amount payable @ ` 4.000 ` 2.000 1.000 4. 25% and 20% respectively.500 50. The entire issue was underwritten by four parties: A.000 (4.000 (2) Calculation of Amounts Payable by Underwriters Liability (No.000 — (1.000 (4.38.000 shares respectively.63. Nil and 15.000 50.000 2.03. of shares) Less : Firm Underwriting Less : Marked Applications Less : Unmarked Applications (equally)* Less : Adjustment of Anand’s surplus Net liability.50.000) 25.000.50.25.50 Balance payable Underwriting Commission Receivable Amount Paid Amount received by the Co.500 * Benefit of unmarked applications has not been given to Vijay because his surplus would have ultimately been credited to Anand & Ashok.000) 4.000) — 50. and D also agreed on ‘firm’. underwriting of 4.000 each @ ` 2.25. a commission of 2% was payable on the amounts underwritten.000) 11.000 1.00.000 (11.25.00.000) 3.50.00.000 2.00. B. B. Under the terms agreed upon.000 (50.000 ` 4.50. A.50.000.03.000) — — — — — 50.50.000 1.000 (50.000 (36.000) 1. and D in the proportion of 30% and 25%.000 (50. C. Illustration 4 A company made a public issue of 1.Company Accounts Working Notes : (1) Calculation of Liability of Underwriters Anand Gross Liability (No. ` 50 payable on application.39 Ashok 5.000 (11.000 Vijay 5.000) 4.25.000 ` 2. C. (1. .000 50.000) 53.50.50.50.500 2.000) 1.25.000 50.000 1.000) 1.

250 (2.250 (24. Marked applications received were as under : A 24.000 C +12.000 Shares subscribed excluding firm underwriting Total applications Less : Marked applications Unmarked (iii) Gross liability (30:25:25:20) Less : Marked applications Statement showing Liability of underwriters A B C 37.000 25.000 90.000 10.000 shares 80.000 = 80.000 15.000 (10.500) 10.750 (6.000) 10.000 D 25.000 (2.000 shares 10.000 (25.000 Statement of underwriters’ liability Firm 4.500 11.4.000) 1.000 (24.000) 13.250 31.000 15.250 (3.000 D +24.000 B 20.000 (15.000 (80.40 Advanced Accounting The total subscriptions.500 8.750 Less : Unmarked (in Gross Ratio) Less : Firm underwriting Less : Surplus of ‘D’allotted to A B&C 30:25:25 Surplus of ‘B’ allotted Net liability (iv) (6.000) (2.000) 45.000 – 10.000 (ii) B +20.750 (12.000 – – – – – 10.000) 19.000 Ascertain the liability of the individual underwriters and also show the journal entries that you would make in the books of the company.000) (20.000 – 10.000) –2.000) 35.25.000 35.000) 2.000 Total 1.000) 500 500 – (5.000 (5. Solution: If the benefit of firm underwriting is given to individual underwriters.000 C 12. excluding firm underwriting.750 – 16.500) 16.000 shares.250 – – 6.000 D 24. including marked applications were for 90.000 Others – 4.000 – 10.000) –16. All workings should form part of your answer.000) 11.750 10.750 1.500 (4.000) –1.000 .500 31.000 – 6.000) 6. (i) Total marked applications: A 24.

000 5.50.unmarked applications (b) Public through underwriters .000 3.00.000 2. 1.15.50.00.50.5 per share.000 2.00.000 ` ‘Firm’ underwriting but including Marked applications ‘Firm’ underwriting Total subscription Less: Marked Applications Balance being unmarked (vi) Check: (a) Taken by public .500 4. 2.000 35.00.000 80.000 1.000 and 1.37.000+20.41 Total 35. invited applications from public for 1.000 equity shares of ` .000) 35.10 each at a premium of ` .Company Accounts (v) Amounts due from underwriters A Shares to be subscribed as per (iv) above Amount due @ ` 50 per share 4.000+24.marked (c) By underwriters .000.000 15.000 7.00.000 = 80.000 10.under agreement Journal Entry Bank A/c Underwriting Commission A/c Equity share Application A/c Illustration 5 Dr Dr 62. 30%. 20% and 20% respectively with the provision of firm underwriting of 3.25.50.500) (50.000 15.000 1.000.000+12. The entire issue was underwritten by the underwriters P.000 25.000 Outset Ltd.000) (62.000 2.50.000) (2.500 7.000 6.000 Less : Commission due of shares underwritten (75.000 shares shares shares shares shares shares shares shares shares ` 60.000 shares respectively.000 10.00.37.000) 1.500) (62. Q.000 If the benefit of firm underwriting is not given to individual underwriter: (i) (ii) Total marked applications = 24.25.00. . R and S to the extent of 30%.000 17.000 (80.000 Shares subscribed excluding 90. The underwriters were entitled to the maximum commission permitted by law.000 B C D 4.

000) 20.000 shares were marked in favour of P. Underwriting commission payable to P and Q = 5% of (` 15 × 30.000 and 8.000 7.000) (375) 19. Underwriting commission payable to R and S = 5% of (` 15 x 20.000 shares) = ` 22.000 shares) 19.000 (19.000) (21.000) 12. Working Note: Application received from public Add: Shares underwritten firm Total application Less: Marked applications Unmarked application including firm underwriting 70.800) 3. Calculate the liability of each underwriter.000 42. 21.000 1.000.000 1.700) 13.000 shares 7.925 (1.000 20.000 shares (58.800) 7. underwriting commission is payable @ 5% of the issue price of shares.000) 42.000 6.000 (250) 11.000 8.000 (1.425) 3.000 (8.000 23.000 (19.000 (3.625 (5.000.800 1.625 (5.000 Gross Liability Less: Marked applications (excluding firm underwriting) Balance Less: Surplus of R allocated to P.425) 12.000 shares 77.000 30.000.000 shares)= ` 15.000 14.000 shares (excluding firm underwriting) from public out of which applications for 19.000 (375) 10.700) 4.500 Q 30.000 shares .750 (3.00.000) 11.500 3. R and S respectively.500.000) 23. Solution Calculation of liability of each underwriter assuming that the benefit of firm underwriting is not given to individual underwriters P 30.42 Advanced Accounting The company received applications for 70. Q and S in the ratio of 3:3:2 Add: Firm underwriting Total Liability (10.000 1.000 (Number of shares) R S Total 20.000 (58.950 (950) 7.925 (1. Q and S in the ratio of 3:3:2 Balance Less: Unmarked applications including firm underwriting Net Liability Less: Surplus of R allocated to P.000 Calculation of underwriting commission: As per law in force.500 1.4. 10. Q.800) (3. Also ascertain the underwriting commission payable to different underwriters.500 2.

you will be able to ♦ Apply sinking fund method for the redemption of debentures. Redeemable debentures may be redeemed after a fixed number of years or . but a company may also issue irredeemable debentures. his certificate registering the charge is printed on the bond. Since the charge is not valid unless registered with the Registrar. the nature of the charge • • the assets charged are described therein. It is also customary to create a trusteeship in favor of one or more persons in the case of mortgage debentures. ♦ Deal with purchase of own debentures in the open market ♦ Account for interest on own debentures ♦ Solve problems based on conversion of debentures 3. A debenture is a bond issued by a company under its seal. 3. Basic provisions of Debentures • If a charge has been created on any or the entire asset of the company. The trustees of debenture holders have all powers of a mortgage of a property and can act in whatever way they think necessary to safeguard the interest of debenture holders.2 Redemption of Debentures Debentures are usually redeemable. acknowledging a debt and containing provisions as regards repayment of the principal and interest. Issue of debentures has been discussed in detail at Common Proficiency Test level. or mortgage debentures carrying either a fixed or a floating charge on some or all of the assets of the company. Students are advised to refer the CPT study material for their understanding.1 Introduction The most common method of supplementing the capital available to a company is to issue debentures which may either be simple or naked carrying no charge on assets.43 Unit – 3 : Redemption of Debentures Learning Objectives After studying this unit.Company Accounts 4.

On the other hand. it may be profitable for the company to purchase and cancel them or. That shows the intention of the company to set aside regular sums of money to build up a fund for redeeming debentures. It is sometimes thought that . when it is desired. the company should also purchase outside investments. its profit to credit of Debenture Redemption Reserve Fund. on giving a specified notice. the amount is transferred to the Capital Reserve. If no Debenture Redemption Reserve is created a provision for the premium payable for the same should be made out of profit over the period of debentures. Immediately. the balance to the credit of Debenture Redemption Fund. When the company decides to establish the Debenture Redemption Reserve at the end of the first year. Debentures sometimes are redeemable at a premium. after adjusting therein the amount of appreciation and depreciation of investments on their sale. The balance in the account. the appropriation to the Redemption Reserve Fund should be sufficient to pay both the amount of debentures and the premium on redemption. Investing the amount thereof either • • in the purchase of securities which are readily saleable or taking out a policy that shall mature at the time the debentures will fall due for payment. is either more or less as compared to the amount of debentures which are proposed to be redeemed. or by annual drawing A company may also purchase its debentures. Conditions of the issue: The company is required to create a sinking fund described as Debenture Redemption Reserve Fund Appropriate annually a certain percentage of. on the assumption that it is a capital profit received on the appreciation in the value of investments or settlement of liability for a lesser amount that what was usually payable. Such an arrangement would ensure that the company will have sufficient liquid funds for the redemption of debentures at the time they shall fall due for payment. the deficit is made up by the transfer from Profit and Loss Account. or a fixed sum out of. If it is in excess.4. In such a case.44 Advanced Accounting any time after a certain number of years has elapsed since their issue. equal to the amount of debentures redeemed is subsequently transferred to General Reserve. to keep the debentures alive with a view of issuing them again at a later date. Usually. the amount indicated by the Debenture Redemption Reserves tables is credited to the Debenture Redemption Reserve account and debited to profit and loss account in the appropriation section. The entry for the purpose naturally will be to debit Debenture Redemption Reserve investments and credit bank. as and when convenient in the open market and when debentures are quoted at a discount on the Stock Exchange. if it is short.

Company Accounts 4. In that case. if securities are purchased from the market. In the subsequent years. Debenture Investments are treated like other investments. it is possible generally to invest any sum of money that may be desired. when interest is received on investments. This will be transferred to the general reserve. the interest saved on such debentures should be debited to the debenture interest account and credited to the interest on Debenture Redemption Reserve account directly. the interest on debentures held as an investment made out of the fund is credited to the Debenture . is equal to the Debenture Account. also the profit or loss on the sale of investments should be transferred to the Debenture Redemption Reserve investment. Note: Investments may be realised from time to time and debentures may be purchased either for immediate cancellation or as investment as the company pleases. adjustment of interest payable on them. Where a Debenture Redemption Reserve is kept the amount of premium or discount is adjusted therein on cancellation so that at the date of redemption. interest received on Debenture Redemption Reserve investments will not be credited to Debenture Redemption Reserve nor it will be invested. The balance in the latter account will be transferred to the Debenture Redemption Reserve account.] Note: It may be stated that the Debenture Redemption Reserve is to be sometimes noncumulative. Thus. a notional entry of transfer of interest (and also profit or loss on realisation of Debenture Redemption Reserve investments) to the profit and loss account and then again to Debenture Redemption Reserve will meet strict requirement of law and AS 13 as well. adjustment of the premium or discount. the amount available by sale of investments will be utilised to pay off the debentures. the Debenture Redemption Reserve will go on accumulating each year. the balance of the Debenture Investments Account. it will be transferred to the Debenture Redemption Reserve account. In that case. the amount will be debited to the bank account and credited to the Debenture Redemption Reserve investments account. the purchase of debentures involves two problems first. If there is any loss or profit. if any paid on their purchase and second. In the last year. The investments every year will be of an amount equal to the annual instalment plus the interest which may have been received in the year concerned. the Debenture Redemption Reserve investments will be realised. But. From the accounting point of view. As regards interest. The Debenture Redemption Reserve account will still show a big credit balance almost equal to the amount of the debentures. with the corresponding entry in the Debenture Redemption Reserve investment account. where there is a Debenture Redemption Reserve. [Note : Infact. Thus. the amount of the interest will be credited to the profit and loss account. This may be true in the case of a new issue otherwise. the annual instalment will be debited to the profit and loss appropriation account and credited to the Debenture Redemption Reserve account.45 since Government securities or individual debentures are available in multiples of ` 100 the investments should be made to the nearest of ` 100. if there is none. the bank account will be debited and interest on Debenture Redemption Reserve investments account will be credited. debentures account will be debited and the bank account credited.

often it is not made. However. if there is none. If this entry is passed. This should be so since in the balance sheet it will be a liability of ` 10.333 as interest for 4 months.000 1. on their purchase or cancellation an amount equal to the nominal value of debentures is transferred to General Reserve from the Profit & Loss Account on the consideration that to such an extent the profits will not be available for distribution. will the question of profit or loss could arise. the Debenture Investment Account or Own Debenture Account is debited.3 Purchase of Debentures in Open Market Debentures sometimes are purchased in open market. Therefore.333 49. interest being payable on 31st March and 30th September. it has saved interest for two months. However. it will be noted that the debenture interest account will be debited by the full amount of ` 40.000 will be entered. Entry Own Debentures Interest Account To Bank Dr. only on sale. On purchase of anything. 8% on ` 9.e. .000 as interest to outsiders. equal to the interest for the period the debentures were held by the company.00. profit does not arise. Dr. ` 48. This means that the company will have to pay ` 48. and in this case on cancellation of debentures. But since the company is keeping the debentures alive.000 debentures have been purchased for ` 48. in result. the company will have to pay ` 38. as a general investment. is debited to the Interest Account against which the interest for the whole period will be credited. Suppose a company has issued 8% debentures for ` 10. In order to adjust the effect thereof the amount of interest accrued till the date of purchase.000 as principal plus ` 1.4. it means.00. where there is a Debenture Redemption Reserve out of the reserve and. in the amount column only ` 48. since the adjustment of interest on debentures held as investments would merely involve crediting and debiting the Profit and Loss Account by the same amount. ` 667 should be debited to Debentures Interest Account and credited to the Profit and Loss Account. the price would be inclusive of interest provided these are purchased “cum interest”. 3. Thus.46 Advanced Accounting Redemption Reserve in exactly the same way as the debentures are outside investments.000 there is no profit. But where there is no Debenture Redemption Reserve.50. but if purchased “ex Interest” the interest to the date of purchase would be payable to the seller in addition. i. The company purchases ` 50. ` 50.333 ` It should be noted that even though ` 50.000 which is interest for six months on ` 10 lakhs. a balance in the Account would be left.000 debentures at ` 96 on 1st August 2010. if paid.000 for six months.000. On 30th September. If the debentures are purchased within the interest period.000.000 own debentures will be shown on the assets side of the Balance Sheet.

000 is cancelled on 31st March.Company Accounts 4. The journal entries to be passed will be the following : ` 1st March.400 1. 20. 2011 (1) Bank To Own Debentures A/c To Interest A/c (Sale of ` 30. ignoring income-tax. 15 Dr.000 Debenture @ ` 98 cum interest for 5 months credited to Interest A/c the balance being the sale price proper) (2) Profit and Loss A/c To Own Debentures A/c (The loss on ` 30.000 Own Debentures whose purchase price was ` 28.000 at ` 100.000 19.00 (cum interest) ` 10. had outstanding in its books 500 Debentures of ` 100 each interest at 6% per annum. Rama Ltd. Show ledger accounts of Debentures. In accordance with the powers in the deed. credited to the capital reserve.000 at ` 98. Illustration 1 On January 1. .50 (ex-interest) Debenture interest is payable half-yearly.25 (cum interest) ` 2. 2011 8% Debentures A/c To Own Debentures A/c To Capital Reserve A/c (Cancellation of ` 20..000 ` ` 5. 29.800 at 96) 31st March. the directors acquired in the open market Debentures for immediate cancellation as follows : March 1 Aug. 1 Dec. 400 400 Dr. Debenture interest and profit or loss on cancellation. therefore.400 28. 2011 and the remaining ` 20. on 30th June and 31st Dec.000 is sold at ` 98 cum interest on 1st March.200 800 Dr.000 Debentures) It should be noted that the profit on cancellation or redemption of debentures should be treated as a capital profit and.47 Suppose out of those debentures ` 30.500 at ` 98. 2011.

1 By Debenture Account Debenture Interest Account ` 150 ` Mar.000 Profit & Loss on Cancellation of Debentures June 30 To Capital (transfer) Reserve ` 150 Mar.000 50.000 @ 6% upto 30th June) ` 1. 1 To Bank-Debenture Purchased ` July 1 9.350 2nd Half Year 6% Debentures Account ` Aug.000 Debentures 50 ` June 30 By Profit & Loss A/c 1.350 1. 1 To Bank-Interest for 2 months on ` 5. 1 To Bank-Debentures Purchased To Profit & Loss on cancellation of debenture A/c June 30 To Balance c/d 150 4.350 June 30 By Debenture interest Account (Interest on ` 45. 1 By Balance b/d ` 50.000 50.4.000 .000 45.400 June 30 To Debenture-holders (Interest) A/c 1.400 Debenture-holders (Interest) A/c 1.48 Advanced Accounting Solution 6% Debentures Account 1st Half Year ` Mar.975 By Balance b/d ` 45.400 ` June 30 To Cash 1.850 ` Jan.000 5.

15 To To P & L A/c on Cancellation Bank-Deb.Company Accounts To Dec.462.093. 31 To Capital Reserve — Transfer 62. the account will be credited and Debenture Account debited: the difference between the nominal value of the debentures .093. 31 To To To Bank . By P & L Account ` 1.500 45.000 Bank Debenture holders 50.00 37.500 @ 6% for 6 months) Tutorial Notes : (i) ` 975.75 1.00 Profit or loss on redemption of debenture arises only on sale or cancellation.50 Debenture Interest Account Aug. 15 Dec.00 1. 1 Dec.Interest for one month on ` 10.50 ` Aug.50 25 4.50 2.50 62. if debentures are purchased but not cancelled the total amount paid (minus the interest to the date of purchase) should be debited to Own Debentures Account and shown as investment in the Balance Sheet.093.00 68.75 Debenture-holders (Interest) Account Dec. 1 Dec. 15 By By Debenture A/c Debenture A/c ` 25. On cancellation.50 62.000 Profit & Loss on Cancellation of Debentures A/c 2.00 Dec. Purchased Profit & Loss on Cancellation of Debentures Dec.000 ` Dec.500 32. 31 By Debenture Interest (on ` 32.49 45. 31 To Bank 975.75 975. 31 To Balance c/d 37.75 ` Dec.

70. 2010. A/c ` 10.000 By 10.4. 2010: 6% Mortgage 10. Solution 2011 Feb.000 To 2011 Feb.42.R. the profit or loss on redemption of debentures will be ascertained by comparing (i) the nominal value of debentures cancelled. 4% Government Loan purchased at par and ` 5. Illustration 2 The following balances appeared in the books of a company as on December 31. Write up the ledger accounts concerned.000 debentures of ` 100 each. 1 To ` 10.000 2011 Feb. (iii) In case the transaction is ex-interest.07. Loan @ ` 90 Bank ` 5.000 Feb.70. (Loss) ` 4.600 10.000 .28.75. On February 28.200 1.R. (ii) If debentures are straightway cancelled on purchase. 28 By D.R.00.00. and (ii) the price paid less interest to the date of purchase (if the transaction is cum-interest). The Debenture Redemption Reserve is non cumulative. By Balance b/d holders A/c 1 Premium on Redemption of Debentures Account Debentureholders A/c ` 10. the investments were sold at ` 90 and ` 87 respectively and the debentures were paid off at 101.000 Govt. together with accrued interest.000 Govt.50 Advanced Accounting cancelled and the amount standing to the debit on Own Debentures Account will be profit or loss on redemption of debentures. 42.000. The Interest on debentures had been paid up to December 31. 28 2011 Jan.R.28. 28 6% Mortgage Debentures Account ` 2011 Debenture10.000.60. Debenture Redemption Reserve (for redemption of debentures) ` 10. 3-1/2% Government paper purchased for ` 5. the interest to the date of transaction will be paid in addition to the settled price and hence profit on redemption will be nominal value minus the settled price.000 Debentures Redemption Reserve Investment Account ` 2011 To Balance b/d 10.60.000. 28 By By Bank ` 5.000. Paper @ ` 87 D.200 4.70.000 Jan. 2011.87. Investment ` 5.

28 By By 9.50.17.000 nominal value purchased for ` 24.10. The following purchases were made during the year ended 31st December. To To D. and (iii) Debenture Interest Account. 28 4.17.600 ` 2011 Jan.Company Accounts Debenture Interest Account 2011 Feb.000 Cash Account 2011 Feb.000 10. 1st September ` 20. Interest A/c Balance c/d ` 10. 1 By By Balance b/d Profit & Loss (Appropriation) A/c ` 10.07. Ignore taxation and make calculations to the nearest rupee. 2010 and the cancellation were made on the following 31st March : 1st March ` 25.00.125 cum-interest.42.000 nominal value purchased for ` 20.R.R.600 11. Investment Account (Loss) Premium Redemption on 10.000 11.62. You are required to draw up the following accounts up to the date of cancellation : (i) (ii) Debentures Account.000 Feb.000 75. 28 By Profit & Loss A/c ` 10. The company has power to purchase debentures in the open market for cancellation thereof.400 By Debentureholders Deb.725 ex-interest.000 10. ` 2011 To To Balance b/d Debentures Redemption Reserve investment A/c ? Feb.000 5% Debentures on which interest is payable half yearly on 31st March and 30th September.600 1.000 ? Debenture Redemption Reserve Account 2011 Feb. .600 of Debentures A/c To General Reserve Illustration 3 Sencom Limited issued ` 1.51 ` 2011 To Cash 10. Own Debenture Investment Account.

433 — 1.000 1. By Accrued Interest (on ` 1.50. 1 Sep.000 563 — — 44. 31 To P & L A/c — 45.52 Advanced Accounting Solution Sencom Limited Debenture Account 2010 Dec.433 Mar.708 1.25.875 .000 1.000 1.725 417 19.4.125 45. 31 ` 2010 To Bank (on 3.125 — — 625 — Cost ` 2010 To Balance c/d 1.375 Dec.000 — 562 567 — 45.000 ` 25.000 2011 Jan.125 45.000 ` ` ` ` ` 521 24.000 for 6 months) Jan.313 44.125 ` 1.000 Apl.000 45.50.000 20. 31 To To Own Debenture A/c Balance c/d 1.05.313 44. 1 To Balance b/d 45. 1 By Balance b/d Own Debenture Investment Account Nominal Interest Cost 2010 Mar.000 Mar. 1 By Balance b/d By Balance b/d ` 1.50.000 1. 31 2011 Mar. 31 By Debenture Interest A/c By Balance c/d 45.000 1.50.000 2. 1 2011 45.000 Jan.50.05.433 2.000 Debenture Interest Account 2010 Mar.50. 31 By Debenture Interest A/c By 5% Deb. 30 By Debenture Interest A/c Dec. 31 To Capital Reserve (Profit on cancellation) To P & L A/c — — 45.433 2011 563 44.125 — — 45.000 Jan.000 1. A/c — 45.000 @ 5% for 3 months) ` 1.000 1. 1 To Bank To Bank Cost Nominal Interest Cost 2010 Mar. 31 By Debenture Interest A/c Sep.

000.312 1. if available below par.125 Interest accrued (on ` 1.375 Bank (on ` 1.312 months) Interest on own debentures (on ` 45. (c) 1st September.500 9.625 Interest on own Debentures 1.000 was invested in 6% State Loan.830. issued 50. 31 To To 3. 31 By P & L A/c 4. This cash balance which includes the annual appropriation of ` 50. The following information is given : (a) The annual appropriation is ` 50.31. The Loan bond.Company Accounts To Sep.375 2011 Jan. The company had the right to call upon the Trustee to apply the Debenture Redemption Reserve monies in purchasing own debentures. 2010 sold the State Loan of the face value ` 40. 31 By By Interest Accrued P & L A/c 1.000) and Debenture Redemption Reserve cash ` 56. 31 To To Interest on own Debentures 625 Bank (on ` 1.625 months) Interest on own debentures 563 (on ` 45.000 for 6 2. 6% Debentures of 100 each on 1st January.000.942 represented by 6% State Loan at cost of ` 74.05.05.. 1 Mar. 2010 was ` 1.188 Illustration 4 Hindustan Ltd. . purchased cum interest. 2010 ` 38. (b) Debenture Redemption Reserve Balance as on 1st January.53 7.000 @ 5% for 3 months) 2.000.188 Dec. 30 To To Dec.05.000 for 3 1.000 out of loan held on 1st January. 2007.262 (face value ` 80.000 (ex-interest) and the proceeds were applied in purchasing own debentures (face value ` 45.000 for 3 563 months) 9.876 2011 Mar.000 ex-interest).000 for 3 months) 3. had a face value of ` 60. The debentures are redeemable by the creation of a Debenture Redemption Reserve.

000 93. (g) Debentures outstanding as on 1st January.97.31. FIFO basis) 2011 Jan. Cash A/c Sep.97.R.000 1.000 1.450 By 1. 31 To General Reserve-transfer Balance c/d ` 2010 45. Cash A/c Balance c/d 1.761 Sep.52. 1 profit on sale (assumed.942 869 6.911 1.52. Solution Debenture Redemption Reserve Account 2010 Dec.262 Sep.67. R.40.000 1.R. (e) Interest on State Loan is received on 31st March and 30th September.1 To Balance b/d To D. (f) Interest on debentures is paid on 30th June and 31st December.000 1.911 1.000.R.R. R.R.500 50. 2010 were ` 4.R.000 1. 1 Face Value ` 80. Investment A/c Profit & Loss A/c Balance b/d Face Value ` 40.R.911 . A/c. 1 Dec.00.000 Jan.R.1 To Balance b/d D.761 2011 Jan.911 Debenture Redemption Reserve Investment Account 6% State Loan 2010 Jan.000 60.761 1.31.000 93.4.1 By 56.761 Cost ` 38.31. To D.40.00.780 Dec. 31 ` By ” By Balance b/d D.54 Advanced Accounting (d) The debentures purchased are cancelled on 31st December. 31 869 By By 8. Make ledger entries in the books of the company to give effect to the above. 1 1.000 Cost 2010 ` 74. Investment A/c-profit on sale Own Debenturesprofit on cancellation Interest on D. 31 To Dec.

55 ` 45.000 for 6 months) Dec.) Account 2010 Sep. Cash (Interest on ` 45.000 Interest on D.000 Debentures for 2 months) Bank ` 2010 14.600 3. Cash (on ` 60. 31 6.000 900 1.000 for 3 months) To D.R.R. 1 1. Cash D.000 45.660 Dec. 1 To To D.R. 1 To Balance b/d 1. transfer 8.R.R. Cash (Interest on ` 40.000 for 5 months) ` 4.R.R.500 Debenture Interest Account 2010 June 30 Sep.Company Accounts Own Debenture (D.500 10. A/c.200 Jan.550 Dec.000 By Debentures A/c cancellation 45.000 for 4 months) Dec. 1 To To Bank D. Investment Account 2010 Jan. ` 28. 31 To D. 1 900 By D.010 Dec.000 for 6 1.R.R.R. 31 By P & L transfer A/c.00. 30 By D.R.000 45.000 Dec.00. 31 By Debenture Interest (on ` 45.R.450 45. R. A/c.600 2011 Jan.500 Sep. profit ` 45.000 ` 2010 38.000 for 3 months) ` 2010 Cash (on Mar.R. R.R.200 months) Sep. 1 To Balance b/d (Interest on ` 80.R.000 45. Cash (Interest on ` 1.020 450 12.000 for 3 months) 10. 31 By D. 31 By Balance c/d (on ` 1. ` 1.R.000 ` 4. 31 To .R.R.40.

R.200 Sep.680 Jan. 1 To 56.200 By Interest D.R.000 By By D. Investments D.03.000 4.03. D.R. (D.R. Investment A/c 6% State Loan Debenture Interest A/c Own Deb.56 Advanced Accounting To Interest on.R.000 for 4 months) 900 28. Investment A/c (on ` 60.830 450 38.R.31 By 1.000 Sep.R.R. 1 To To Mar. Investment 6% State Loan To Interest on D.000 for 3 months) By 38.) A/c Balance c/d of ` 900 Sep. 1 1. Investments ` 2010 7. Investment (Interest on own debentures for ` 45.R.R.500 7.R.R.880 Dec. 1 To Balance b/d 7.R. Investments on 3.R.R.4. 31 To Balance b/d Bank-transfer Interest on D. 30 To Interest D.880 2011 Jan.R.200 . 1 50.020 2010 Jan.000 1.020 Debenture Redemption Reserve Cash Account 28.

000) Own Debentures A/c (Face value ` 20.000 4. 6% State Loan has been purchased. Interest till date on this loan is ` 900. Show the entries in the following ledger accounts of MM Ltd. 1.67.00. Half yearly interest is due on the debentures on the 30th June and 31st December in the case of both the companies.000 (1) The amount to be invested on Jan.00.000 debentures at ` 99 ex-interest. 1.550 is debited to Own Debentures (D. 2010 was the date for redemption of the 2000 debentures. ` 60.000.67.R. (3) ` 39. the debentures in XX Ltd.R.000 plus ` 1. ` 38. debited to the D. (D.22. 1 4.000 By Balance b/d ` 4.000 45.000 debentures at ` 98 cum-interest.57 ` 2010 45. the company started buying own debentures and made the following purchases in the open market : 1-2-2010 2. 31 To Notes : Own Deb. A/c (Face Value ` 20.) A/c Balance c/d 4.000 As 31st December.680.000 18. 2010 is ` 39. the interest till date is ` 450 — debited to Debenture Interest Account.000 Jan.R.50. ` 56.R. On 31st December.000 State loan on Sept.50.) Account. Illustration 5 MM Ltd. 2010 : ` 11% Debentures A/c (2000 issue) Debenture Redemption Reserve A/c 13.5% Debentures in XX Ltd. had the following among their ledger opening balances on January 1.R.00. 2010 is ` 57..000). (2) The total amount realised by sale of ` 40. during 2010 : (a) Debenture Redemption Reserve A/c .e. 2010.780.000 i. this has been debited to the interest on D. the outstanding debentures of MM Ltd. 31 To Dec.R. ` 38. investments Account and the balance. were redeemed by payment and by cancellation.000) 50.000 (interest for 5 months on ` 40.R.000 4.00. were sold for ` 95 each ex-interest.000 own debentures.Company Accounts 6% Debentures Account 2010 Dec. Investments Account.000 is utilised for purchase of ` 45.67.000 19. On that date.R. 1-6-2010 2.

000 Debenture Redemption Reserve Account ` 2010 Jan.18.00. Redemp Reserve 24.000 1. 31 To Capital Res.000 2.833 2.000 1.000 50.00.00.57. in XX Ltd.) Solution (a) 2010 Dec.32.58 Advanced Accounting (b) Own Debentures A/c The face value of a debenture was ` 100 (Round off calculations to the nearest rupee. on own Deb. ` ` By Balance b/d 50. 1 26.00.000 Own Debentures Account Int.000 .000 June 30 1. ` 2010 By Debenture Int. A/c (Int.23.00.23.000 Jan.50.32.5% Deb.94.167 1.000 Nominal ` Int.000 2. 31 June 1 To Bank Dec.000 2.000 Amt.5% Deb.00.000 2. 31 To To (b) Nominal 2010 Jan.98.) ` 45. ` Amt. in XX Ltd.73.000 2.000 2.00. 1 Feb.000 50. By Own Deb.000 24.000 ` 2010 Own Debentures A/c Bank 24. A/c By Debenture Int. (profit on cancellation) To.64. A/c By 11% Deb 1.00.53. Deb.000 Dec.70. ` .00.000 24.00. 31 By 13.000 49.167 9.00.000 24. cancellation 24.833 1.000 24. 31 To 13.64. 1 By Balance b/d Dec.00.4.000 Account.00.000 50. (Loss on sale of investment) To General Reserve (transfer) 50.000 11% Debentures Account 2010 Dec.53.000 50.00. 1 To Balance b/d To Bank ` 20.00.

5% Debentures in XX Ltd. 2X10. These are cancelled on April 1. On October 1.000 ` Amount ` 2010 June 30 By 19.000 12% Debentures of ` 100 each on 1-1-2XX8.47.000 50.59 Amount ` 19.000 2X10 Jan.500 debentures from the market at ` 98 per debenture.000 4.000 1.000 2X10 1.000 1. has issued 10.70.000) To Profit & Loss A/c By By Debenture Int.000 Interest ` 1. (iv) On October 1.000 19.04.00.47. Reserve 2. Reserve (Loss sale) 2.47. 1 To Balance b/d To Bank To Profit & Loss A/c By By By Debenture Int.000 Apl. 2X10 it buys 1. A/c Balance c/d 1. (ii) (iii) On January 1. Interest 2010 Jan.000 1.35. 1 Interest Amount ` ` 2XX9 13. These are sold away on June 30. These debentures along with other debentures are redeemed on 31st December.000 Dec.000 Amount ` To Bank (` 1. 1 Apl. Workings should form part of your answer.50. 2X10 at ` 105 per debenture.000 3.000) Dec. Solution 12% Own Debentures Account 2XX9 Oct. 1 1. Prepare the relevant Ledger Accounts showing the above transactions. Interest is payable annually.50.000 1.50.70.000 debentures at ` 106 per debenture from the open market. A/c 12% Deb.000 Interest ` 18.000 Illustration 6 (i) Swati Associates Ltd. 31 4. A/c Profit & Loss A/c .000 19.000 on 2. 1 Jan. 2X10 it buys 2.35.70. 2XX9.000 18. 2X10. 1 To Balance b/d (20. it buys 1.000 4.000 Dec.Company Accounts Working Note : 13.50.47.00.000 3. 31 To Debenture Redemp.47.00.000 debentures at ` 104 per debenture from the open market. 31 By By By Bank Bank Bank Debenture Redemp. These debentures are redeemable after 3 years at a premium of ` 5 per debenture.500 1.500 18.

31 To To To Int.000 24.000 10.000 1.20. 31 6. Finance costs Interest on debenture Profit & Loss A/c (Extracts) for the year 2XX9 Particulars Other Income Total Revenue Notes xx xx Amount 120.000 2.11.000 36.60 June 30 Oct.500 …… .4.000 Bank A/c Int. 1 Dec.000 1.11.000 1.000 2. A/c 12% Deb.000 Amount 4.000 To Bank A/c ` 2XX8 1. A/c (cancelled) Profit & Loss A/c 9.000 1.500 Bank Deb. A/c Bank A/c (on ` 7. 31 To To 2X10 Apl. 31 2XX9 1.000 2X10 3.000 1. on Own Deb.000 4.000 4.500 Note : It has been assumed that all transactions are ex-interest.000 Dec. Int. A/c 18. on Own Deb.02.000 Dec. The amount of such interest has been calculated from the previous 1st January to the date of transaction since the interest is payable annually.20.12.000) To Profit & Loss A/c 9.00. 31 By Profit & Loss A/c 1.20. 31 By Profit & Loss A/c By Profit & Loss A/c ` 1.000 By By By By 36. Debenture Interest Account 2XX8 Dec.000) 84.000 Profit & Loss A/c (Extracts) Profit & Loss A/c (Extracts) for the year 2XX8 Particulars Notes Expenses Finance costs Total expenses Notes to accounts xx. A/c Int. on Own Deb.000 Dec.000 …… 120.57.1 Dec.000 12.00.000 1.00.31 Advanced Accounting To Profit & Loss A/c To Bank (` 2.20.11.73.500 24.20.73. 31 2XX9 Dec.000 Dec.500 June 30 18.

13.Company Accounts Expenses Finance costs Total expenses Notes to accounts xx.000 35.61 xx 120.000 Notes xx Amount 28.000 10.000 .000 .00. Finance costs Interest on debenture Particulars Other Income Total Revenue Expenses Finance costs Total expenses Notes to accounts xx.500 1.000) Profit on cancellation of debentures Total xx. 31 2008 Dec.18.000 51. 31 2009 Dec. 1 2010 By By Bank Balance b/d ` 10.000 Jan.000 10.00.000 .000 10. Finance costs Loss on cancellation of debentures (4.500) xx. Other Income Int. 1 2009 Jan.000 + 12.000) Premium on redemption of debentures (` 7.500 …… Profit & Loss A/c (Extracts) for the year 2X10 35. 31 By Profit & Loss A/c 16.000 @ 5%) Total 2008 Dec.000 …… 4.000 …… 4.000 Dec. A/c (18.00. 31 2010 To Premium on Redemption of Debentures A/c 2008 Bank 35. on Own Deb.500 28.000 18.20.00. A/c (36.000 12% Debentures Account ` 2008 To To Balance c/d Balance c/d 10. Other Income Int.500 xx 51.00. on Own Deb.

000 28.00.00.000 .000 2010 Oct.45.000 ` 21.000 4.000 2. Shares of ` 10 each 40.000 1.62 Advanced Accounting To ” ” Own Deb.500 18.000 3.000 7. 2012 was : (iii) Profit/Loss on cancellation/sales is difference between cost or nominal value and sales price.00.000 2010 April 1 3 months ` 1.000 3.00. 1 Dec. 1 ` 1.000 10.00.00.00.000 1.00.000 6% Redeemable ‘A’ Pref.00. 1 ` 2.00.000 2. A/c Bank 1.000 9.000 18.000 24.50.000 Apl. at March 31. 31 12 months ` 2. ` Issued and Fully Paid Share Capital : 50. Shares of ` 10 each (less calls in arrear on 5.50.000 7% Redeemable ‘B’ Pref.000 1.000 shares) 50.000 Equity shares of ` 10 each Securities Premium Account Capital Reserve Account Profit and Loss Account General Reserve Account 5% Debentures Trade Payables Sundry Assets Own Debentures (Nominal ` 1.000 28.000 2010 Dec.00.000 5.80.40.000 4.00.00.000 2.000 Working Notes : (i) Interest paid on purchase of own debentures: Date Nominal Amount 2009 Oct.000 2010 June 30 6 months ` 1.000 Jan.000) Cash at Bank 5.000 Period 9 months 9 months Rate 12% 12% 12% 12% 12% 12% Interest 13. 31 10.55.4.05.00.20.000 (ii) Interest credited to Interest on Own Debenture A/c 2009 Dec. 1 By Balance b/d 10.95.00.000 Illustration 7 The Summary Balance Sheet of Chanjit Ltd.00.000 5.50.40. 31 12 months ` 1. A/c Own Deb.

000 . 2012 following were due for redemption : (1) The ` 4.000 earned in the seven months to Oct. A/c To Balance b/d ` 1. 30 By New Own Deb. 2012.000 7% ‘B’ Preference Shares at a premium of 5 per cent.Company Accounts On September 30. The whole transaction was completed on September 30. and a transfer was made to General Reserve of a sum equivalent to the cash applied on redemption. (b) to offer to the debenture holders new 6% debentures 2012 or repayment in cash.05.000 5% Debentures at a premium of 10 per cent.00. 2012.05. The offer of new debentures in exchange for the original holding was accepted by 50 per cent of the debenture holders including those held by Chanjit Ltd. 30 By Balance c/d ` 1. Solution : 5% Debentures Account 2012 Sep. (3) The ` 4. 1 By Balance b/d ` 4.000 Own Debentures Account 2012 Apl.00.05. (2) The ` 5. 2012.00. A/c ` 1. 31.000 Apl.00. (d) to repay in cash both ‘A’ and ‘B’ Preference shares. (c) to make an issue of 60.000 ` 2012 2. 31. This was done on August 31.00.000 (New) Own Debentures Account 2012 Sep.000 2012 Sep.50 per share. 1 To Balance b/d ` 1.63 (a) Out of the trading profits of ` 2. and this was carried through on September 30. You are required to (1) show the ledger accounts recording the above transaction in the company books and (2) give the company’s Balance Sheet at Oct.000 1.00. It was decided : 4.000 2012 Sep. 2012.000 4. 30 To 6% Debentures A/c To 5% Debenture holders Account 2. Ignore expenses and taxation.00. 2012.00.05.05. to pay the debenture interest and preference dividends for the half year to September 30.000 1. 2012 and all moneys were received on that date. 30 To (Old) Own Deb.000 Equity Shares of ` 10 each at a premium of ` 2.00.000 6% ‘A’ Preference Shares at a premium of Re. 1 per share.05.000 4.

30 2012 Oct.000 …… 161.00.000 4.000) 61.000) (300. 1 Sep.000 ` 2. 31 To Balance c/d ` 4.000-39.00.000 5% Debenture holders Account ` To Bank A/c 2. 31 To Balance c/d 2012 Sep. 30 By 5% Debentures 2.000 (200.00.00.000 Note : It has been assumed that cash balance has increased by the sum of profit earned. 30 Nov.20. 1 By Balance b/d 2.000 2.000 29. 30 By 5% Debentures A/c ” Premium on Redemp.000 Nov.000 4.00.00.00.00.000 2012 Sep.000) Balance from previous year Less: Transfer to General Reserve Transfer to Capital Redemption Reserve Profit (Loss) carried forward to Balance Sheet Notes to accounts Finance costs Interest on 5% Debenture Preference Dividend 10. .20.000 400.000 Profit and Loss Account (Extract) for the year 2012 Expenses: Finance Costs Total expenses Profit/ (Loss) for the period (200.000 A/c 2. 1 By Balance b/d ” Profit & Loss A/c By Balance b/d ` 2.000 Xx 39.000 2.00.000 General Reserve Account 20.000 Sep.4.000 2012 Oct. of Debentures A/c 2.000 4.000 2012 Apl.00.64 Advanced Accounting 6% Debentures Account 2012 ` ` 2.00.20.

000 ` 5. 1 By Balance b/d 4.000 Shareholders A/c By 5% Debentureholders Account By Pref.60.000 1. 30 By 7% ‘A’ Preference Shares Capital A/c (35.65 2012 Oct.000 7. Dividend A/c By Interest on 5% Deb.1 To Balance b/d 2012 Sep. 31 To Balance b/d To Equity Share Capital A/c To Securities Premium A/c To Profit & Loss A/c ` 2012 5.500 ` 3. A/c Oct.000 shares) Premium on Redemp.500 Nov. 1 By Balance b/d Preference Shares A/c 70.000 2. of Debentures A/c 20.67.56.00.000 Nov.500 Sep. 30 By Bank A/c ”Premium on Redemp.000 Sep.000 29.00.000 Shareholders A/c 1. 1 Cash at Bank By Balance b/d 2. 30 Securities Premium Account ` 2012 To Premium on Redemp.30.500 2.000 3.50.000 Aug.000 7% ‘B’ Preference 2.000 11.50.500 3. 31 By Balance c/d 15.00.000 Apl. 1 By Balance b/d Aug.50.67. 31 Oct.000 3.56.00.000 17.000 2012 Sep.00.000 3. 30 By 6% ‘A’ Preference 6. 31 ” Bank A/c 11.50. 31 To Balance c/d ` 5.67.30.60.50.000 2012 Apl.80.Company Accounts Equity Share Capital Account ` 2012 11. of Pref.000 11.00. 30 6% ‘B’ Preference Shareholders Account 2012 ` To Bank A/c 3. Shares A/c 3.00.000 ”Balance c/d 1.20.000 ` 1. of Apl.00. 1 Aug.67.000 Nov.000 6.500 15.50.000 1.500 .00.

00. 1 By Balance b/d Premium on Redemption of Debentures Account 201 2 Sep.50. as on 31st Oct.500 70.00. 30 By 6% ‘A’ Preference Share Capital A/c Premium on Redemp. 30 To 6% ‘A’ Pref. 30 Nov. of Pref.000 50.000 70.000 Oct.000 Premium on Redemption of Preference Shares Account 2012 Sep.500 2.000 2.00.000 20.000 3.000 5. 30 Capital Redemption Reserve Account 2012 Oct. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital 1 11.000 Sep.000 5. Shareholders Account ”7% ‘B’ Shareholders Account ” Balance c/d Pref..50. 31 To Balance c/d ` 2012 3.000 Sep. 1 Particulars I.45.000 ` Balance Sheet of Chanjit Ltd. 2012 . 30 To Bank A/c ` 5.000 2012 Sep.000 By Profit & Loss A/c By Balance b/d Note No ` 3.500 ` 20.66 Advanced Accounting 6% ‘A’ Preference Shareholders Account 2012 Sep.30 By Securities Premium A/c ` 70.50.000 2012 Sep. 30 To 5% Debentureholders ` 2012 By Securities Premium A/c ` 50.4. 17.00. Shares A/c ` 5.

Issued and Subscribed 1.500 .000 10.500 1.000 Equity Shares of ` 10 each fully paid up 7% Redeemable ‘B’ Pref.000 B Preference Shares 5 Non-current investments Own Debenture (Nominal Value 1.00.56.55.500 3 2.000 50.00.00.05.000 3.00.000 64.16.000 4. Assets (1) Non-current assets (a) Fixed assets (b) Non-current investments (2) Current assets Total Notes to Accounts 1 Share Capital Authorised.56.05.000 1.000 5 6 21.000) 45.20.000) 6 Current assets (a) Cash and cash equivalents 3.45.24.000 3.500 2 10.67 4 2.00.10.60.Company Accounts (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings (3) Current Liabilities (a) Trade payables (b) Short-term provisions Total II.24.000 1.000 1.000 4.500 26.00.000 2.000 11. Shares (pending redemption) Less : Calls in arrear 2 Reserve and Surplus Capital Reserve Capital Redemption Reserve A/c Securities Premium General Reserve Profit & Loss Account 3 Long-term borrowings Secured Loans : 6% Debentures 4 Short-term provisions Premium payable on redemption of 5.000 (5.500 26.16.000 2.000 2.

(d) To repay the debentures at a premium of 3 per cent.000 30.20.35.15. (c) To issue one bonus share for every four shares held. LTD. ` Proposed Dividend A/c To Bank A/c (Proposed Dividend paid to existing shareholders) Bank A/c To Equity Shareholders A/c (Application money received on 5.000 Cr. Solution Journal of BEE Co. on 31st March.75. 20.000 5. Ltd.000 Equity Shares of ` 10 each Issued and Subscribed: 20. Give the necessary journal entries and the company’s Balance Sheet after these transactions are completed.000 (b) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every four shares (held prior to the bonus distribution). this option being taken up by all shareholders.000 5. 75.000 20.000 1.000 1.000 Freehold property Stock Debtors Cash Balance at Bank ` 1.4.000 shares @ ` 15 per share to be issued as rights shares in the ratio of 1:4) Dr. Dr.68 Advanced Accounting Illustration 8 The Summary Balance Sheet of BEE CO. 3.00.000 2.000 Equity Shares of ` 10 each fully paid Profit and Loss Account 12% Debentures Creditors Proposed Dividends 2.000 75.75.000 At the Annual General Meeting it was resolved : (a) To pay the proposed dividend of 10 per cent in cash. ` .000 1.000 75.000 1. 2012 read as under : ` Share Capital : Authorised: 30.15.000 Dr.20.00.20.000 20.

23.23. To Bonus to Shareholders A/c (Amount transferred for issue of bonus shares to existing shareholders in the ratio of 1:4 vide General Body’s resolution dated. To Equity Share Capital A/c To Securities Premium A/c (Share application money on 5.400 .000 50.000 50.600 3.. Premium Payable on Redemption A/c Dr...000 50.000 3..) 12% Debentures A/c Dr..23.600 1..000 4.000 1. To Equity Share Capital A/c (Issue of bonus shares in the ratio of 1 for 4 vide Board’s resolution dated.000 25.) Bonus to Shareholders A/c Dr. and ` 5 per share to Securities Premium Account vide Board’s Resolution dated…..000 91.000 25.15.Company Accounts Equity Shareholders A/c Dr.600 1.. as on. To Debenture holders A/c (Amount payable to debentures holders) Profit & Loss A/c Dr.000 5.00.400 1.600 3.000 25. Equity and liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Current Liabilities (a) Trade payables Total Note No ` 1 2 3. Ltd. To Bank A/c (Amount paid to debenture holders on redemption) 75...600 Balance Sheet of BEE Co.) Securities Premium A/c Dr. (after completion of transactions) Particulars I.000 shares @ ` 10 per share transferred to Share Capital Account.600 1. Profit & Loss A/c Dr.06.20. To Premium Payable on Redemption A/c (Premium payable on redemption charged to Profit & Loss A/c) Debenture holders A/c Dr.69 50.

000 Debentures of ` 100 each Other loans Current Liabilities and Provisions ` 50.e.000 91.50..400 5.5% Convertible Debentures.00.35.51.81. as on 30th June. fully paid issued as bonus shares out of securities premium and P&L Account) 2.00.4.000 equity shares of ` 10 each fully paid General Reserve Debenture Redemption Reserve 13. stood as follows: Liabilities Share Capital : 5. Reserve and Surplus Profit & Loss Account 3.000 50.000 shares of ` 10 each.00.00.000 75.000 50.00.15. Share Capital 30.400 30.00.81. 20.00.00.70 Advanced Accounting II.000 . Fixed Assets (i) Tangible assets Property 4.000 1.15.25.000 4.000 shares of ` 10 each fully paid (5. 1. Assets (1) Non-current assets (a) Fixed assets (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents Total Notes to Accounts 1.000 1. 2012.000 shares after rights issue).000 shares (and not 25. Illustration 9 The summarised Balance Sheet of Convertible Limited.000 1.400 ` 4 3.00. Cash and cash equivalents Cash at Bank Cash in Hand 3 1.00.000 1.000 1.000 1.06.400 1.000 75.00.400 Note : The number of bonus shares issued has been calculated on the basis of issued capital before rights issued i.

Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings . without any lag.00.Company Accounts Assets : 4.000 .000 The debentures are due for redemption on 1st July.000 1.64.000 2.000 4.75 per share and the payment in cash.25. 2012. and Fixed Assets (at cost less depreciation) Debenture Redemption Reserve Investments Cash and bank Balances Other Current Assets (iii) all the transactions are put through.00.Unsecured Loans (3) Current Liabilities (a) Short-term provisions Total II. 2012 after giving effect to the redemption.000 50.000 3. Redraft the balance sheet of the company as on 1st July.60.000 40. on 1st July. The terms of issue of debentures provided that they were redeemable at a premium 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares at a predetermined price of ` 15. Solution Convertible Limited Balance Sheet as on July 1. Assuming that : (i) (ii) except for 100 debenture holders holding totally 25. 2012 Figures as at the end of current reporting period Particulars Note No ` I. the rest of them exercised the option for maximum conversion.00.75.00.000 debentures.50. the investments realise ` 44 lakhs on sale.29.000 50.71 1.00.00.00.000 1. 2012.00. Assets (1) Non-current assets (a) Fixed assets 1 2 60.00.75.

000 Redemption value of 15.000 1.00.000 (iii) .00.000 (15.000 60.00.000 75.60.000 debentures Number of Equity Shares to be allotted : 15.000 25.00.000 4.000 15.000 debentures (85.00. 15.000 ` 89.75.000 85.75 Calculation of cash to be paid : Number of debentures Less : number of debentures to be converted into equity shares Redemption value of 85.00.000) 4.000 50.000) ` 15.72 Advanced Accounting 1.24.000 (89.000 44.000 × ` 105) Cash and Bank Balance : Balance before redemption Add : Proceeds of investments sold Less : Cash paid to debenture holders (iv) Calculation of General Reserve : Opening Balance 1.75.00.000 Equity Shares of ` 10 each 2 Reserve and Surplus General Reserve Securities Premium Account Working Notes : (i) Calculation of number of shares to be allotted : Total number of debentures Less : Number of debentures not opting for conversion 20% of 75.000 2.75.64.000 3.75.75.25.00.000 = = 1.29.000 75.00.000 (ii) ` 1.000 1.000 (i) Tangible assets (2) Current assets (a) Cash and cash equivalents (b) Other current assets Total Notes to Accounts ` 1 Share Capital 6.000 5.00.25.00.000 shares of ` 10 each.75.000 94.00.00.75.4.

(4) Where a company fails to redeem the debentures on the date of maturity.000 Less : Premium on redemption of debentures (5. the Company Law Board may.00. by order.000 Note : The premium on redemption of debentures may also be adjusted against Securities Premium Account.00.000 1.00.000) 1. 3. direct. the company to redeem the debentures forthwith by the payment of principal and interest due thereon.00.00. The Section states as follows: (1) Where a company issues debentures after the commencement of this Act. on the application of any or all the holders of debentures shall.24. after hearing the parties concerned.000 1. (3) The company referred to in sub-section (1) shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue. (2) The amounts credited to the debenture redemption reserve shall not be utitlised by the company except for the purpose aforesaid.73 50. depends upon the condition of issue.4 Liability of the Company to Create Security and Debenture Redemption Reserve New Section 117C has been inserted by the Companies Amendment Act in the Companies Act. For redemption of Debentures a company shall maintain Debenture Redemption Reserve .25. (5) If default is made in complying with the order of the Company Law Board under sub-section (4).29.000 Profit on sale of investments 4. Summary • • • Debenture creates a charge against some or all the assets of the company. Charge may be fixed or floating. • • every officer of the company who is in default. to which adequate amounts shall be credited. from out of its profits every year until such debentures are redeemed.00.Company Accounts Add : Debenture Redemption Reserve transfer 4. Debentures may be redeemed after a fixed number of years or after a certain period has elapsed. shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of not less than five hundred rupees for every day during which such default continues. it shall create a debenture redemption reserve for the redemption of such debentures.

Debentureholders having charge on plant and machinery would accept plant and machinery in full settlement of their dues. .000 (Market value ` 55.000) 12.00.000 Cash and bank balance Profit and Loss A/c 45. we will deal with some advanced problems for advanced knowledge on the topic.000 2. Prepare Capital Reduction account and Balance Sheet of the company after internal reconstruction.000 68.000 14.00. The company would issue 11% Debentures for ` 3. Stock equal to ` 5.00.000 10.00.4.1 Advanced Problems You must have studied the concepts of amalgamation and reconstruction of companies in Chapters 5 and 6 in Paper 1 Accounting of IPCC – Group I.000 8% Preference shares of ` 100 each 9% Debentures Bank overdraft Sundry creditors ` Assets Plant and machinery Furniture and fixtures 20. In this unit. 2012: Liabilities Share capital: 2.42.000 Sundry debtors 5.05.39.000 The following scheme of reconstruction was finalised: (i) (ii) (iii) (iv) (v) Preference shareholders would give up 30% of their capital in exchange for allotment of 11% Debentures to them.000 Stock 1. you will be able to solve the advanced problems on amalgamation and reconstruction of companies 4.74 Advanced Accounting Unit – 4 : Amalgamation and Reconstruction Learning Objectives ♦ After studying this unit.000 ` 9.00. Internal Reconstruction of a Company Illustration 1 Following is the Summary Balance Sheet of ABC Ltd.000 Patents and copyrights Investments (at cost) 6.000 4.000 14.000 Equity shares of ` 10 each fully paid up 6.00.000 70. Pass necessary Journal Entries in the books of the company.50.50. as at 31st March. Investment value to be reduced to market price.42.92.000 and augment its working capital requirement after settlement of bank overdraft.000 in book value will be taken over by sundry creditors in full settlement of their dues.000 45.00.00.

Journal Entries Particulars 8% Preference share capital A/c To Preference shareholders A/c To Capital reduction A/c [Being 30% reduction in liability of preference share capital] Preference shareholders A/c To 11% Debentures A/c [Being the issue of debentures to preference shareholders] 9% Debentures A/c To Debenture holders A/c [Being transfer of 9% debentures to debenture holders A/c] Debenture holders A/c To Plant & machinery A/c To Capital reduction A/c [Settlement of debenture holders by allotment of plant & machinery] Sundry creditors A/c To Stock A/c To Capital reduction A/c [Being settlement of creditors by giving stocks] Bank A/c To 11% Debentures A/c [Being fresh issue of debentures] Bank overdraft A/c To Bank A/c [Being settlement of bank overdraft] Capital reduction A/c To Investment A/c To Profit and loss A/c To Capital reserve A/c [Being decrease in investment and profit and loss account (Dr.50.000 Dr.54.00.20. 12. 4.00.75 ` Dr.00.).000 12.00.00.000 Dr.000 1. 3.00.000 9.000 Dr.000 1.000 92.000 ` 4.000 1.80.000 Dr. 5.000 4.72.92. bal.000 .000 3.50. 6.000 Dr. 12.00. and balance of capital reduction account transferred to capital reserve] 4.000 4.05. 1. 5.000 Dr.000 3.00.20.000 13.00.20.Company Accounts Solution In the Books of ABC Ltd.000 5.000 Dr.

00.000 70.000 3.72.000 92. Assets (1) Non-current assets (a) Fixed assets Tangible assets Intangible assets (b) Non-current investments (2) Current assets (a) Current investments (b) Inventories (` .60.74.00.000) (c) Trade receivables (d) Cash and cash equivalents Cash at Bank (W.) Total 1.000 1 2 20.5.00.000 28.000 Balance Sheet of ABC Ltd.000 1. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings Total II.80.000 1.00.000 28.50.74.000 3 7.05.000 14.000 5 4 2.000 Particulars ` I.54.76 Advanced Accounting Capital Reduction Account ` To To To Investments A/c Profit and loss A/c Capital reserve A/c 13.00. (And Reduced) As on 31st March 2012 Note No By By By Preference share capital A/c 9% Debenture holders A/c Sundry creditors A/c ` 1.000 4.000 5.4.72.20.14. N.000 9.000 .000 5.000 – ` .000 55.39.54.

000 + ` 3. Reserve and Surplus Capital Reserve 3.000) 4.000) Furniture & fixtures (ii) Intangible assets Patents & copyrights 5.246 10.000 5% Cum.000 8% Debentures 80.000 Trade Creditors 96. finds itself in financial balance sheet on 31st December 2012: Liabilities ` Share capital 20.20. Construction Co.760 .77 ` 1.20.20.20.00.000 2. The following is the summarized Assets Land Building (net) Equipment Goodwill Investments (Quoted) in shares Stock Sundry Debtors Profit & Loss Account 55.54.800 5.000 ` 1.000) Working Note: Cash at bank = Opening balance + 11% Debentures issued – Bank overdraft paid = ` 10.713 Interest Payable on Debentures 12.000 27.000 – ` 1.000 = ` 1.00.247 Bank Overdrafts 36.000 3.00.760 difficulty.000 Loan from Directors 16. Share Capital 2.P.00.000 1.000 Equity Shares of ` 10 each fully paid 2. Non Current Investments Investments (` 68.60.00.50.00.11.000 – 9. Shares of ` 10 each fully paid 70.754 60.000 1.00. Long Term Borrowings 11% Debentures (` 4.56. Fixed Assets (i) Tangible assets Plant & machinery (9.247 70.692 39. Pref.000 Equity shares of ` 10 each fully paid-up 2.000 70.000 Illustration 2 S.000 + ` 3.000 27.000 – ` 13.50.000 7.000 20.11.821 5.Company Accounts Notes to Accounts 4.

The investment in shares is to be sold at current market value of ` 60.000 is to be paid to trade creditors now and balance at quarterly intervals.000 p. . ` 46. You are required to show the necessary journal entries to affect the reconstruction scheme.000 Equity Shares of ` 2. Further ` 9.000 50.4.500 8% Cumulative Preference Shares of ` 10 each and 14.000 5% Cum.50 each. (5) (6) (7) (8) (9) (10) (11) ` 6. The balance is to be settled by issue of 1.50 each. The bank overdraft is to be repaid.50 per share.000.000 10. The remaining assets were professionally valued and should be included in the books of account as follows : ` Land Building Equipment Stock (12) 90.000 of directors’ loan is to be credited.000 Preference Shares are to be exchanged for a new issue of 3.a. The existing 7.50 each. Due to losses brought forward it is unlikely that any tax liability will arise until 2014.000 Equity Shares of ` 2. Goodwill and the profit and loss account balance are to be written off. after depreciation but before interest and tax.50 each in lieu of interest payable.000 of this 9½% Debentures are to be issued and taken up by the existing holders at ` 90 for ` 100. The equity shareholders are to subscribe for a new share on the basis of 1 for 1 at a price of ` 3 per share. During a meeting of shareholders and directors. prepare the balance sheet of the company immediately after the reconstruction. And each equity share is to be redesignated as a share of ` 2. The interest rate is to be increased to 9 ½%.000 It is expected that due to changed condition and new management operating profit will be earned at the rate of ` 50.78 Advanced Accounting The authorised capital of the company is 20. it was decided to carry out a scheme of internal reconstruction. Preference Shares of ` 10 each.000 Equity Shares of ` 10 each and 10. 10% of the debtors are to be written off. The Debenture holders are to accept 2.000 Equity Shares of ` 2.000 80. The following scheme has been agreed : (1) (2) (3) (4) The equity shareholders are to accept reduction of ` 7.

000 10.000 Equity shares of ` 2.50) A/c (Equity shareholders rights of ` 10 shares reduced to a share of ` 2... Dr.000 70. Construction Co.500 8% preference shares of ` 10 each and 14..50 per share vide Board’s Resolution dated.79 Equity Share Capital (` 10) A/c To Capital Reduction A/c To Equity Share Capital (` 2. the amount of sacrifice credited to Capital Reduction Account) Dr.. To 9 ½% Debentures A/c (` 9. ` 1..Company Accounts Solution S. ` 2.000 7.) 8% Debentures A/c To 9 ½% Debentures A/c (8% Debentures converted into 9 ½% Debentures vide Board’s Resolution dated.000 Cr.000 Equity shares of ` 2... 60.000 35.50 vide Board’s Resolution dated. To 8% Pref.000 50..800 5.800 Dr. balance credited to Capital Reduction Account vide Board’s Resolution dated.50 each issued in full and final settlement of interest payable.) Interest Payable on Debentures A/c To Equity Share Capital A/c To Capital Reduction A/c (2.000 4.000 Bank A/c Dr..100 900 9. Bank A/c Dr..00.000 35. Capital Reduction A/c Dr... 0. To Equity Share Capital A/c To Securities Premium A/c (20.. 80..P.50..000 Debentures issued at a discount of 10% for cash vide Board’s Resolution dated.) 5% Preference share capital A/c Dr..50 each vide Board’s Resolution dated.000 Equity shares issued for cash at premium of Re.. Ltd.) 8.000 ..000 50. Share Capital A/c To Equity Share Capital A/c (5% Preference share capital converted into 3.000 12.) Dr.000 80..

000 27.4. 36. 2.713 Dr.069 .821 66.713 and ` 46. 1. 52.754 52..247 7.713 46..000 82..000...000 Equity Shares of ` 2. profit on sale credited to capital reduction A/c) Bank Overdraft (loan) A/c Sundry Creditors A/c To Bank A/c (Payment of Bank overdraft ` 36.) Bank A/c To Investment A/c To Capital Reduction A/c (Investment sold for ` 60.) Capital Reduction A/c To Goodwill To Profit & Loss A/c To Land To Equipment To Stock To Sundry Debtors (Amounts written off on various assets A/c and the amount of goodwill and debit balance of profit and loss account written off under scheme of reconstruction dated. ` 7.754 Dr.000 6.000 39.80 Advanced Accounting Dr.500 Loan from Directors A/c To Capital Reduction A/c To Equity Share Capital A/c To Share Premium A/c (` 6.500 credited to share premium A/c vide Board’s Resolution dated.000 2.891 60.500 7. Dr.43..000 of directors’ loan credited to Capital Reduction A/c..50 each issued in settlement of the balance due.000 754 70. 60..000 paid to sundry creditors) Building A/c To Capital Reduction A/c (Appreciation in the value of the building under the scheme of reconstruction dated.000 33. 16.) Dr.000 Dr.

554 ` Balance Sheet of S. Construction Co.387 3.500 22. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings (3) Current Liabilities (a) Trade payables Total II.000 7.754 2.000 754 70.80.000 50.010 .000 50..49.49.. Ltd.800 6.000 52..39.Company Accounts Working Note : Capital Reduction Account To ” ” ” ” ” ” ” Goodwill Profit & Loss A/c Sundry Debtors Land Equipment Stock Debentures (Discount) Capital Reserve ` 60. Assets (1) Non-current assets (a) Fixed assets (b) Non-current investments (2) Current assets (a) Inventories (b) Trade receivables (` 7069 written off) (c) Cash and cash equivalents Total 6 4 5 3 1 2 1.39.000 39.821 7.77.247 900 4. Particulars Note No I.247 3.50.263 89.623 45.000 63.010 1.000 33.P..554 By ” ” ” ” Equity Share Capital A/c Debenture Interest Loan from Directors A/c Investment A/c Building 4. (And reduced) as on .763 2.81 ` 1.069 66..

000) 1.000 (66. Fixed Assets (i) Tangible assets Land Less: written off under the scheme of reconstruction Building Add: Appreciation under the scheme of reconstruction Equipment Less: written off under the scheme of reconstruction (ii) Intangible assets Goodwill Less: written off under the scheme of reconstruction 5.77. Reserve and Surplus Securities Premium Capital Reserve 3. Non-current investments Investments Less: Sold during the year 6.000 Equity shares of ` 2.82 Advanced Accounting Notes to Accounts ` 1.56. Cash and cash equivalents Cash at Bank 45.000 shares issued on conversion and settlement claims against the company) Preference Share Capital 8% Cumulative Preference share capital 2.000 1.263 35.000 90.500 4. Share Capital Equity Share Capital 57.500 . Long-term borrowings Secured Loans 9½% Debentures 4.754 10.000) 60.000 (60.754 (754) 10.000) 27.50 each fully paid (17.80.763 22.000 17.500 1.000 (27.000 89.42.246 52.000 1.4.000 80.387 27.

` 5.000 shares of ` 10 each shall be converted into 12% preference shares of ` 10 each. (f) Balance of profit and loss account to be written off.00. 2012 was as follows : Liabilities ` Assets ` Authorised and subscribed Fixed Assets : capital: 10.000 Cr.20. Accordingly. You are required to show the journal entries giving effect to the above and the resultant Balance Sheet. for the purpose of re-issue to debenture holders and creditors as necessary.000 Equity Share Capital (` 100) A/c To Share Surrender A/c To Equity Share Capital (` 10) A/c (Subdivision of 10. it is to be settled by the issue of equity shares of ` 10 each out of shares surrendered.20.70.00.000 equity shares of ` 100 each into 1.83 The Summarised Balance Sheet of Revise Limited as at 31st March.000 Current liabilities . (e) Creditors claim shall be reduced to 50 per cent. Solution Dr.000 It was decided to reconstruct the company for which necessary resolution was passed and sanctions were obtained from appropriate authorities. In consideration of the reduction.000 12% Debentures 2.000 Current assets : ` 100 each fully paid Unsecured Loans : Stock 3.000 10.000 13.00. each shareholder shall surrender to the company 50% of his holding. (g) The shares surrendered and not re-issued shall be cancelled.20.000 Debtors 2. .Company Accounts Illustration 3 4. (c) Out of shares surrendered.00. 10. (d) The claims of the debenture-holders shall be reduced by 75 per cent.000 Bank 30.00.00.creditors 72. it was decided that : (a) Each share is sub-divided into ten fully paid up equity shares of ` 10 each.000 5.00.000 which are converted out of shares surrendered.000 of such subdivided shares as per capital reduction scheme) Dr.000 Accrued interest 24.000 account 6. (b) After sub-division.000 Equity shares of Machineries 1.000 13. fully paid up.00.000 Profit and loss Provision for income tax 24.00.000 equity shares of ` 10 each and surrender of 50. ` 10. the debenture holders shall receive preference shares of ` 1.

000 7.20.000 4.00..4.00. 50% of which is being clear reduction and equity shares are being issued in consideration of the balance) Share Surrender A/c To 12% Preference Share Capital A/c To Equity Share Capital A/c To Reconstruction A/c (Issued preference and equity shares to discharge the claims of the debenture holders and the creditors respectively as a per scheme and the balance in share surrender account is being transferred to reconstruction account) Reconstruction A/c To Profit and Loss A/c To Capital Reserve A/c (Adjusted debit balance of profit and loss account against the reconstruction account and the balance in the latter is being transferred to capital reserve) Dr.000 1.000 Dr.64.000 72. 5.50.84 Advanced Accounting 12% Debentures A/c Accrued Interest A/c To Reconstruction A/c (Transferred 75% of the claims of the debentureholders to reconstruction account in consideration of which 12% preference shares are being issued out of share surrender account as per capital reduction scheme) Creditors A/c To Reconstruction A/c (Transferred claims of the creditors to reconstruction account.000 1.04.68. Dr.000 Balance Sheet of Revise Limited (and reduced) as on.36.000 . 72.000 4. 6. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital 1 (b) Reserves and Surplus 2 (2) Non-Current Liabilities (a) Long-term borrowings (3) Current Liabilities (a) Other current liabilities (b) Short-term provisions Total 3 4 5 ` 6.000 36.000 24.00.000 50.000 6.000 Dr..000 Dr. 1. Particulars Note No I.000 18.000 6.000 3.

Long-term borrowings Unsecured Loans 12% Debentures 4. 10 each Preference Share Capital Preference Shares (Of the above shares all are allotted as fully paid up pursuant to capital reduction scheme by conversion of equity shares without payment being received in cash) 2.000 1.20.000 6. Short-term provisions Provision for Income-tax 6. Fixed Assets (i) Tangible assets Machineries 1.70.000 3.000 50. Assets (1) Non-current assets (a) Fixed assets (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents Total Notes to Accounts ` 1.000 2.00.00.000 .000 6.85 II. Other current liabilities Accrued interest 5.000 4.20. Reserve and Surplus Capital Reserve 3.Company Accounts 4.000 30.600 Equity Shares of ` .000 24.36.36.000 7.000 1.00.000 5. Share Capital Equity Share Capital Issued Capital :53.

000 14. at a premium of ` 6 per share.000 is to be treated as actual existing liability. are to be of ` 10 each.50.00.3.40.00.00. number of shares to be issued to A Ltd.000 14.. are to be paid by issuing sufficient number of shares of AB Ltd.000 1.50. A Ltd.20.000 80. to take over all the assets and liabilities of the existing companies.86 Advanced Accounting Amalgamation of Companies Illustration 4 Following are the summarised Balance Sheets of A Ltd. and B Ltd. .000 ---3.000 3.00.2012: Particulars Share capital: Equity shares 10 each (fully paid up) Securities premium General reserve Profit and loss account 10% Debentures Secured loan Sundry creditors Land and building Plant and machinery Investment Stock Debtors Cash at bank A Ltd.000 24.000 4.00. and B Ltd.000 The companies agree on a scheme of amalgamation on the following terms: (i) (ii) A new company is to be formed by name AB Ltd.000 ---2. of ` 60. and B Ltd.60.000 2.000 1. the shares of the existing companies are to be valued as under: (iii) Pass journal entries in the books of AB Ltd.000 B Ltd.000 3.000 9. You are required to: (i) (ii) Calculate the purchase consideration (i.000 5. (iv) Prepare the Balance Sheet of AB Ltd.40. and B Ltd.000 40.). Pass journal entries in the books of A Ltd.00.000 30. for the transfer of assets and liabilities. (vi) The face value of shares of AB Ltd.60. AB Ltd.000 5.e.000 ----2. as at 31. (v) The shareholders of A Ltd.70.00.000 5.00.50.80.80.000 24.000 ---3. 10.4. (iii) For the purpose of amalgamation.80. for acquisition of A Ltd.10. = ` 18 per share B Ltd.000 4.80.60. = ` 20 per share (iv) A contingent liability of A Ltd.000 1.000 2. 6.

00.87 Existing shares Value per share Total value No.000 ` 7.000 ` 12.00.000 80.00.000 5.000 60.000 6.00.000 4.Company Accounts Answer (i) Statement showing calculation of purchase consideration (Number of shares) A Ltd.000 18.20. To Realisation A/c (Being transfer of liabilities to Realisation A/c) AB Ltd. Creditors A/c Dr. Dr.000 5.10.50.500 shares 75.00.00.000 60.20.25.00.000 Journal Entries in the books of A Ltd.50.000 4.000 3.000 60.000 ` 9. Ltd.e.00.40.00. ` 16 (10+6) ` Share capital Add: Securities premium Total purchase consideration (ii) 11.000 8.000 18. B.000 1.000 12.000 shares 4.000 5. of shares to be issued at a premium of ` 6 per share i. To Land & building To Plant & machinery To Stock To Sundry debtors To Investment To Bank (Being assets transferred to Realisation A/c) Profit and loss A/c Dr.00.000 30.20. To Realisation A/c (Being the purchase consideration accounted for) 24. ` Realisation A/c Dr.000 18.12.000 ` 18 ` 20 ` 18.000 .75. 1. To Creditors (Being contingent liability treated as real liability) 10% Debentures A/c Dr.

000 80.000 3.20.000 2.00.000 5.80.000 18.00.000 1.000 30.000 1.000 18.000 1.4.00.000 3. Realisation A/c Dr. Goodwill Dr.00.88 Advanced Accounting Share in AB Ltd.00.000 (iii) Journal Entries in the Books of AB Ltd. Debtors Dr.000 ` 5.000 2.20. To 10% Debentures To Sundry creditors To Liquidator of A Ltd. Bank A/c Dr. General Reserve A/c Dr. Plant & machinery A/c Dr.70.60.000 3.000 1.00. A/c Dr.000 1. Profit and Loss A/c Dr.80. Debtors A/c Dr.00.00. Stock A/c Dr. To Shares in AB Ltd.50. ` Land & building A/c Dr.000 4.000 18.20. Bank Dr. accounted for) Land & building A/c Dr. (Being closure of shareholders a/c) 18.000 4.80.90.000 5.000 40.000 18.00. Investment A/c Dr.00. Goodwill A/c Dr. To Secured loan A/c To Sundry creditors 9.000 3. To Shareholders A/c (Being transfer of balances to shareholders’ account) Shareholders A/c Dr. (Being the purchase consideration of A Ltd.00.000 10.000 18. To AB Ltd.50.00.000 3. Stock Dr. Securities premium A/c Dr.000 . Plant & machinery A/c Dr.00.10. (Being purchase consideration received) Share Capital A/c Dr.

000 11.50.) Note No 4.25.000 80. Dr.000 7. (Being purchase consideration of B Ltd.90.000 6.000 4.00.Company Accounts To Liquidator of B Ltd. accounted for) Liquidator of A Ltd.) Liquidator of B Ltd.30.90.70. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings (3) Current Liabilities (a) Trade payables Total II.00.89 12.50.000 11.000 42.000 4.70.000 8.000 70.000 42.75.000 8.70.75. & B Ltd.000 18.000 12.) (iv) Particulars I.000 22.00. To Equity share capital To Securities premium (Being shares issued to Liquidator of A Ltd.90.000 3. To Equity share capital To Securities premium (Being shares issued to Liquidator of B Ltd.00.25.000 6. Assets (1) Non-current assets (a) Fixed assets Tangible assets Intangible assets (b) Non-current investment (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents Total 5 4 3 1 2 Balance Sheet of AB Ltd.000 .000 ` 18. (After amalgamation of A Ltd. A/c Dr.

000 Goodwill Land. for every two shares held – the shares in A Ltd.50.00.000 85. Building and Plant Stock-in-trade Debtors Cash & Bank Balance ` 50. Reserve and Surplus Securities premium 3.000 The Debenture holders agreed to receive such 7% Debentures issued as 96 each as would discharge the debentures in B Ltd.50 in cash per share and 3 shares in A Ltd.00.30.000 84.000 5.000 18. .70.00. Long Term Borrowings Secured 10% Debentures Secured loan 4. being considered as worth ` 12.90.000 3.500 Equity shares of ` .000 8. The shareholders in B Ltd. were to receive ` 2.00. was summarized as follows: Liabilities Share Capital (Fully paid shares of ` 10 each) General Reserve P & L A/c 6% Debentures Creditors 3.000 55.000 3.000 22.000 + 1.000 18. Share Capital 1.000) 5.75.000 28. agreed to acquire the business of B Ltd.20.4.00. On that date Balance Sheet of B Ltd.50 each.000 13. Cash and Cash Equivalents Cash at Bank Illustration 5 A Ltd.000 8.000 5.90 Advanced Accounting Notes to Accounts ` 1.000 5.000 10.25.80. at a premium of 20%.000 11.000 50. as on 31st December.87.00.10 each fully paid up (above shares have been issued for consideration other than cash) 2.80. 2010.000 ` Assets 3.000 70. Fixed Assets (i) Tangible assets Land & Building Plant and Machinery (ii) Intangible assets Goodwill (1.

37.000 transfer General Reserve 85.97. Stock-in-trade Debtors Cash & Bank Balance (1) Shareholders . transfer : Goodwill Land.000 By 90. You are required. etc.000 Plant 3.20.profit By 50.000 7. 2011.500 75. It was agreed that the profit should belong to A Ltd. [for profit (3)] 20.000 Buildings 2.500 Share Capital A/c .000 Realisation A/c 1.37. 2011 Stock was ` 90.000 P & L A/c 55. . There was no addition to or deletion from the fixed assets.500 7.50. Building. The directors of A Ltd. carried on trading which resulted in a profit ` 20. as on July 1.000 Depreciation A Ltd.purchase 6.00. Due to a technical hitch.000 (subject to interest) after providing ` 15.3. Note : It is clear that the costs of liquidation will be payable by A Ltd.000 25.Company Accounts 4. the transaction could be completed only on 1st July. Debtors were ` 25.91 There were fractions equaling 50 shares for which each was paid. Ledger of B Ltd. On 30th June. and give journal entries in the books of A Ltd.500 consideration (2) Provision for 15.37. . Realisation A/c Solution ` To To To To To Sundry Assets..000 as depreciation.000 By 55.50.875 6. Plant.61.000.00. Till date B Ltd.000 The cost of liquidation of B Ltd. to: (i) (ii) prepare Realisation Account and the Shareholders Account in the ledger of B Ltd. considered the various assets to be valued as follows: ` Land 1.500 6.625 5.37.000 By 3.000 6% Debentures 50.500 By By By By ` Sundry Creditors 15.97.000 and Creditors were ` 15.000 Debtors 18.000 A Ltd. 2011.500 Shareholders Account To To Cash Shares in A Ltd. since the amount payable to the shareholders has been specified.000. ultimately was ` 5.37.000.000 By 1.000 Stock 80.

50 — Shares 30. 2011 being credited to P & L Suspense A/c since it is to be adjusted for interest and additional depreciation due to increase in values of assets) Cr.950 @ ` 12.4.000 5. Dr..875 625 6.000 5. 6.5 — Cash for fractions of shares 50 @ ` 12.37.61.37.000 2.000 15. 2011 Add: Profit earned Depreciation provided (no cash payment) Increase in Sundry Creditors Less: Increase in Stock Increase in Debtors (2) 6.50.000 × ` 2. Journal of A Ltd. for the business of B Ltd.000 7.500 Dr.500 60.92 Advanced Accounting ` (1) Cash and Bank Balances as on Jan. Dr.000 55.000 ` 28.000 15.000) 55. (Purchase consideration settled as per agreement dated.50.000 68.. – profit up to June 30.500 . 1.37.000 × 3/2 – 50 = 44.50 Since the transfer of assets is as on 30th June. Dr.000 20. Dr.000 (13.000 75. 2011.) Land A/c Buildings A/c Plant A/c Stock A/c Sundry Debtors A/c Bank A/c To Provision for Depreciation A/c To Profit & Loss Suspense A/c To Sundry Creditors A/c To Business Purchase A/c To Liability for Debentures in B Ltd To Capital Reserve A/c (Various assets and liabilities taken over from B Ltd.500 Purchase Consideration: For Shareholders — Cash 30.00.000 1. Dr.000 86.000 must be standing to the credit of A Ltd.000 15.000 20.000 3. Dr.000 25.500 (3) 2011 July 1 Business Purchase Account To Liquidator of B Ltd. the profit of ` 20.000 6.37. 6. Dr.18. 1.

the respective Balance Sheets of Star and Moon were as follows : Star Moon ` Fixed Assets Current Assets Less: Current Liabilities Representing Capital Additional Information : (a) Revalued figures of Fixed and Current Assets were as follows: Star 3. 2011 still applies.00.500 62.95.17.375 60.000 equity shares of ` 5 each. To Cash A/c To Share Capital A/c To Securities Premium A/c (Discharge of the purchase consideration as per agreement) Liability for Debentures in B Ltd.500.49. Discount on issue of debentures A/c Dr.) Liquidator of B Ltd.000 1.625 4. To Cash A/c (Expenses of Liquidation paid by A Ltd.) Note : (1) 5.000 divided into 40.Company Accounts Capital Reserve A/c Dr.500 75.000 2.81.98. ` 2.37.250 Moon ` Fixed Assets Current Assets 3.55.82. Star and Moon had been carrying on business independently. (2) Illustration 6 It is assumed that the reduction in the value of the stock as on Jan.500 4.49. On 31st December.63.375 (90.500 1.000 × 100 or 96 ` 62.750 ` 1. therefore.000 78.66.500 Debentures are issued at ` 96.000 4.675 owed by Star to Moon.500 ` 1.000 (2.500 1. To 7% Debentures A/c (Discharge of debenture holders of B Ltd.875 (b) The debtors and creditors—include ` 21. debited to the Discount on Issue of Debentures Account.500 83. The purchase consideration is satisfied by issue of the following shares and debentures : .500 is. They agreed to amalgamate and form a new company Neptune Ltd.93 5. Dr.000 6.12.125) 1. Hence the nominal value is 60. 2012. with an authorised share capital of ` 2. A/c Dr.875 2.82. 1.76.500) 1.

to Star and Moon in the proportion to the profitability of their respective business based on the average net profit during the last three years which were as follows : Star 2010 Profit 2011 (Loss)/Profit 2012 Profit (ii) 2.95.24.962 Moon 1.000 1.250) 1.37.000 (c) Amount 13. showing the position immediately after amalgamation.750 1.250 shares of ` 5 each = (iii) Capital Employed (after revaluation of assets) Fixed Assets Current Assets 68.94 (i) Advanced Accounting 30..49.250 30.55.750 Moon : 16.750 5.73.36.000 78.250 + 1.79. You are requested to: (1) Compute the amount of debentures and shares to be issued to Star and Moon.79.875 .500 15% debentures in Neptune Ltd.36. (2) A Balance Sheet of Neptune Ltd.750 81.050 + 1.62.625 (b) Number Star : 13.88.962 3 1.500 (ii) Equity Shares Issued (a) Ratio of distribution Star : Moon 1.950 1. 2012 after revaluation of assets.750 shares of ` 5 each = 16.788 – 1.375 1.250 3..71.875 2.04.950 + 1.71.24.4.000 equity shares of Neptune Ltd. Solution (1) Computation of Amount of Debentures and Shares to be issued: Star Moon ` (i) Average Net Profit 2. at par to provide an income equivalent to 8% return on capital employed in their respective business as on 31st December.500 3 ` = = 1.500 1.88.050 1..788 (1.

250 16.06.95 (2.750 14.125) 1. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings (3) Current Liabilities Balance Sheet of Neptune Ltd.500 × 100 15 Moon : 14.66.000 98. As at 31st December.10.06.00.500) 2.950 ` 1 Share Capital Authorised 40.000 3.50.83.56.000 .700 = = 1.950 (a) Other current liabilities Total II.000 32.000 2.98.08.700 × 100 15 4. Assets (1) Non-current assets (a) Fixed assets (2) Current assets (a) Other current assets Total Notes to Accounts 7.950 5.Company Accounts Less: Current Liabilities (iv) Debentures Issued 8% Return on capital employed 15% Debentures to be issued to provide equivalent income : Star : 16.950 7.50.000 (2) Particulars I. 2012 Note No ` 1 2 3 1.000 2.500 (90.56.000 Equity Shares of ` 5 each 2.

58.000 1.175 5.55.08.950 7.95.79.50.000 ` 6.125) 1.14.56.50.66.500 .(d)] 68.21.075 1.96 Advanced Accounting Issued and Subscribed 30.49.08.3.000 (2) (a) 3.000 2.000 .000 57.62.06.79.(a)] Capital Reserve [Final Figure(c) .(b)] Goodwill [(b) .250 98.78.750 (2.000 1.21.78.90.200 (90.58.675 ** 2.825**) 2.250 ` 1.000 3. 875 .750 5.98.950 (3.2012: Liabilities Capital P Q Assets Plant & P Q ` 7.750 ` 81.10.000 32.76.175 1.000 Total ` (1) Purchase Consideration Equity Shares Issued 15% Debentures Issued Capital Reserve Net Assets taken over Fixed Assets Current Assets Less : Current Liabilities (b) (c) (d) (e) Purchase Consideration Capital Reserve [(a) .750 49.250 17.675 Illustration 7 P and Q have been carrying on same business independently.04.000 32.52.000 2.4.000 ` 4. Following is the Balance Sheet of P and Q as at 31.000 3.55.75.000 * 78.000 2.85.000 Equity Shares of ` 5 each (all the above shares are allotted as fully paid-up pursuant to a contract without payments being received in cash) 2 Reserve and Surplus Capital Reserve 3 Long-term borrowings Secured Loans 15% Debentures Working Notes : Star Moon 1.200* 2.750 1.925 1. Due to competition in the market.50.27.000 1.000 ` 8.950) 3. they decided to amalgamate and form a new company called PQ Ltd.

immediately after amalgamation.58.200 4.000 equity shares of ` 25 each.98.Company Accounts machinery Building Current assets 4. (iv) The assets of P and Q are to be revalued as under: P Q ` Plant and machinery Building (v) The purchase consideration is to be discharged as under: 5. 2012.12.800 2.000 ` 2.3.000 1.600 7.12.000.000 divided into 1.2012 after revaluation of assets of P and Q respectively.600 Following are the additional information: (i) (ii) The authorised capital of the new company will be ` 25.75.40.600 14.12.000 due to Q for the purchases made.63.500 6.57. (b) Profits for the preceding 2 years are given below: P Q ` 1st IInd year year Total 2.000 (a) Issue 24.75.00. . You are required to: (i) (ii) Compute the amount of equity and preference shares issued to P and Q.50.000 6.48.25. Q made a profit of 20% on sale to P. Prepare the Balance Sheet of P & Q Ltd.49.000 7.125 2.75.000 1.600 14.500 13.97 Current liabilities 6.75.500 5. Liabilities of P includes ` 50.62.875 5.23.000 (c) Issue 12% preference shares of ` 10 each fully paid up at par to provide income equivalent to 8% return on capital employed in the business as on 31. This is included in the Current asset of P as at 31st March.000 ` 6.500 13.98.000 equity shares of ` 25 each fully paid up in the proportion of their profitability in the preceding 2 years.00.25. (iii) P has goods purchased from Q. cost to him ` 10.

125 II year 2.400 equity shares 24.12.16.100 .98 Answer (i) Advanced Accounting Calculation of amount of equity shares issued to P and Q Profits of P Q ` ` I year 2.200 ` 5.000 Balance Sheet of PQ Ltd.000 P Q ` Equity Shares 12% Preference shares Total (ii) Particulars I.49.000 67.000 x 475/1.000 11.000 x 525/1.200 × 12 ⎥ ⎣ ⎦ 100 ⎤ ⎡ ⎢73.600 equity shares Calculation of amount of 12% Preference shares issued to P and Q P Q ` Capital employed (Refer working note 1) 8% return on capital employed 8.07.000 6.24.920 100 ⎤ ⎡ 12% Preference shares to be issued ⎢67.62. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (2) Current Liabilities (c) Other current liabilities (W.000 73.25.N.000 equity shares in the proportion of the preceding 2 years’ profitability 24.000 12.60.31.000 ` 9.000 9.15.31.45.200 2.4.000 8.000 No.000 5.76.000 ` 3. 3) Total 1 2.100 29.40.85.000 11.16.875 Total 4.000 5.60.75.920 × 12 ⎥ ⎣ ⎦ Total Purchase Consideration ` 6. of shares to be issued = 24.800 2. ` 17.75. (after amalgamation) Note No.

99 26.000 1.000 14.00.000 7.000 26.07.000 17.23.00.N.100 29.23.17.1) Working Notes: 1. 2) Total Notes to Accounts 2 4.70.000 14.100 ` 1 Share Capital Equity Share Capital Authorised share capital: 1. Goodwill P Q 14.48.N.500 ` 6.000 1.000 25.58.000 11.00.23.76.75.Company Accounts II.75.000 6.000 Equity Shares of ` .63.25 each Preference Share Capital 1.600 .000 2.000 ` Plant and machinery Building Current assets 5.25.25 each Issued and subscribed share capital: 24.76.000 6.000 12.000 Equity Share of ` .00. Assets (1) Non-current assets (a) Fixed assets Tangible assets Intangible assets (2) Current assets (a) Other current assets ( W.600 12% Preference shares of ` .10 each (All of the equity and preference shares have been issued for consideration other than cash) 2 Fixed Assets (i) Tangible assets Plant and Machinery Building (ii) Intangible assets Goodwill (W.

600 (5..57.000 Total purchased goodwill Add: Unrealised profit of ` 10. 2012 are as follows: Liabilities Share Capital: Equity share of ` 10 each 10% Preference shares of ` 100 each Revaluation Reserve X Ltd.000) Goodwill 5.000 14. Current Assets ` Balances before amalgamation Less: Liabilities of P due to Q Less: Unrealised Profit on stock i.58.100 Advanced Accounting 14.500 ` 1. Assets X Ltd.000 (9. were amalgamated on and from 1st April.600 5.31.08.23.600 (50.000) 5.100 X Ltd.500 (50.600) 9. and Y Ltd.500 (2. and Y Ltd.000) 7.100 Q ` Balances before amalgamation Less: Liabilities of P due to Q Total Grand Total Illustration 8 6.73.000) 1. Land and Buildings 38 25 45 Plant and Machinery 24 17 14 Investments 10 6 6 Stock 22 15 .000 @ 20% = ` 2.81.000 is adjusted from current assets and from goodwill (since P & L A/c is not given) Total Goodwill 2. Y Ltd.500 Less: Current liabilities (6.500 ` 5.000 2. 50 20 10 (` in Crores) Y Ltd.000 P Q 14.600 2.000 Less: Purchase consideration (8.e.61. 2007 and formed a new company Z Ltd.4.23.` 10.500) Net assets taken (capital employed) 8.45.600 11. Current Liabilities P 1.000 x 20% Total Grand Total 3. to takeover the business of X Ltd.57.000) 1.57.63.24.31. as on 31st March.63. and Y Ltd.70.40.000 12. The summarized Balance Sheets of X Ltd.

Company Accounts General Reserve Investment Allowance Reserve Profit & Loss Account 15% Debentures of ` 100 each (Secured) Sundry Creditors Bills Payable Additional Information: 12 5 8 4 19 12 140 8 Sundry Debtors 4 Bills Receivable Cash at Bank 6 5 7 5 100 25 5 16 4. Assets (1) Non-current assets (a) Fixed assets (b) Non-current investments 6 104.00 249. 2012 (` in crores) Particulars I.101 20 4 13 140 100 (1) Z Ltd. are discharged by Z Ltd. will issue 6 equity shares for 10 equity shares of X Ltd. Prepare the Balance Sheet of Z Ltd. after amalgamation. at a price of ` 120 per share (face value ` 100). as at 1st April. The amalgamation took place in the nature of purchase. and Y Ltd.00 116. and 2 equity shares for 5 equity shares of B Ltd. issuing such number of its 18% Debentures of ` 100 each so as to maintain the same amount of interest. (4) Investment allowance reserve is to be maintained for 4 more years. (2) Preference shareholders of two companies are issued equivalent number of 15% preference shares of Z Ltd.50 17.00 16.50 7. The shares are issued @ ` 30 each having a face value of ` 10 per share.00 . Solution Balance Sheet of Z Ltd.00 Note No ` (Cr) 1 2 3 4 5 82. (3) 15% Debentureholders of X Ltd. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (a) Long-term borrowings (3) Current Liabilities (a) Trade payables (b) Other current liabilities Total II.00 26.

70 9.50 17.00 34.000 Equity shares of ` 10 each Preference Share Capital 34.00 82.00 29.00 249.00 4 5 6 63.102 Advanced Accounting 9 9.00 26.00 45.4.00 102.50 17.Stock (c) Trade receivables (d) Cash and cash equivalents Total Notes to Accounts 1 Share Capital Equity Share Capital 4.00 41.00 (c) Other non-current assets (2) Current assets (a) Current investments (b) Inventories .00 26.00 9.100 each) Trade payables Bills Payable Other current liabilities Sundry Creditors Fixed assets Tangible assets Land and Buildings Plant and Machinery Trade receivables Sundry Debtors Bills Receivable Cash and cash equivalents Cash At Bank Other non-current assets Amalgamation Adjustment Account 7 8 48.8) Capital Reserve Investment Allowance Reserve Long Term Borrowings Secured Loans 18% of Debentures (` .00 104.00.80 4.00 116.00 9.00.00 54.00 29.00 7.00 7 54.00 37.000 15% Preference Shares of ` 100 each (all the above shares are allotted as fully paid up pursuant to contracts without payment being received in cash) 2 Reserve and Surplus Security Premium (60 + 36 + 4 + 2.50 3 7.00 8 9 .80.

33 lakhs or ` 3. (` In crores) Y Ltd.33 19.00 16.00 12.17 7.33 crores Y Ltd.17 83. it is carried forward by a corresponding debit to Amalgamation Adjustment Account in accordance with AS-14.67 lakhs or ` 4.00 5. Working Notes: 1. Existing Debenture interest @ 15% (i) – (ii) 2. Calculation of Net assets taken over Particulars Assets taken over: Land and Buildings Plant and Machinery Investments Stock Sundry Debtors Bills Receivable Cash at Bank (i) Liabilities taken over: Debentures Sundry Creditors Bills Payable (ii) Net assets taken over X Ltd. ` 400 lakhs x = ` 60 lakhs 15/100 Debentures to be issued in Z Ltd.33 105. of Debentures to be issued in Z Ltd.67 4.17 crores = 3.103 Note: Since Investment Allowance Reserve is to be maintained for 4 years. @ 18% to maintain the same amount of interest = ` 75 x 100/18 = ` 416.83 38 24 10 22 25 5 16 140 25 17 6 15 20 4 13 100 X Ltd. @ 18% to maintain the same amount of interest = ` 60 lakhs x 100/18 = ` 333. . Existing Debenture interest @15% = ` 500 lakhs x = ` 75 lakhs 15/100 Debentures to be issued in Z Ltd.Company Accounts 4.00 34. Calculation of No.

Illustration 9 The summarized Balance Sheet of A Limited and B Limited as at 31st March. 105.00. on the basis of intrinsic value of the shares.70 crores is to be shown in the Balance Sheet of Z Ltd as capital reserve.80) ---13.00. 30. and only balance of ` 4.80.03 4. to B Ltd. . the market value of which is now ` 4.00. 83..00. if entries are made at intrinsic value.67 (114.80.33 --70. The purchase consideration is to be discharged in fully paid-up equity shares. 18.000 3.000 goods supplied by B Ltd.000 30.8 (` in crores) Y Ltd.000 is owed by A Ltd. Also prepare Balance Sheet of A Ltd.000 B Ltd.00.00.000 4.000 30.000.83 (70.000 18.00) 8. is ` 1.4.00. includes long term investment of ` 4.00.000 18.000 2.00. 90 54 2. at cost plus 20%. A sum of ` 1. 12. Y Ltd.000 6.00. 2012 are as follows: Liabilities Equity share of ` 10 each General reserve Creditors A Ltd.20.00.8 114 X Ltd. absorbed B Ltd.00.000 Assets Sundry assets A Ltd. after absorption.000 B Ltd.104 3. Note: Goodwill arising from amalgamation shall be adjusted against capital Reserve arising from amalgamation. 20. 24 16.20. also included in the stock of A Ltd. Give Journal entries in the books of both the companies.000 Sundry assets of B Ltd.000. 1. Advanced Accounting Computation of Purchase Consideration: Equity Shareholders ` 50crores 6 × × ` 30 10 ` 10 ` 45crores 2 × × ` 30 5 ` 10 Preference Shareholders ` 20crores × ` 120 ` 100 ` 14 crores × ` 120 ` 100 Total Purchase consideration Calculation of Goodwill/Capital Reserve Particulars Net Assets takeover Less: Purchase Consideration Goodwill Capital Reserve (` In crores) X Ltd. A Ltd.

00. To Realisation A/c (Being purchase consideration due – W.000 4.00. (` ) 15. 3. To A Ltd. 15.80.20.000 Cr.00.000 (vi) Dr.) Dr.000 15.00. 80. (` ) 18.000 (vii) Dr.00. (i) Business purchase A/c To Liquidators of B Ltd.80. 12.000 15.000 3.80. 2) Sundry assets A/c To Creditors A/c Dr.00.Company Accounts Answer In the Books of B Ltd.000 14.25.00. (Being purchase consideration received by A Ltd. 18.000 (iv) (v) Dr.000 (iii) Dr.000 15. Dr.) Equity share capital A/c General reserve A/c To Equity shareholders A/c (Being transfer of share capital and general reserve to shareholders account) A Ltd. A/c (Being amount payable to B Ltd. Dr. – W. (` ) 18.000 Dr. 15.000 (ii) . 2) Equity shares in A Ltd.000 2.00.000 15.N.000 shares for ` 12 each distributed to equity shareholders of B Ltd. Journal Entries (i) Realisation A/c To Sundry assets A/c (Being assets transferred to realization account on sale of business to A Ltd.00.105 Cr.000 80. Dr.) Creditors A/c To Realisation A/c (Being creditors transferred to realization account on sale of business to A Ltd. Dr. (` ) 15.20.00.000 3. A/c (Being 1.00.N.000 (ii) Dr.) Realisation A/c To Equity shareholders A/c (Being profit on realization transferred to shareholders account) Equity shareholders A/c To Equity shares in A Ltd.80.000 Journal Entries In the Books of A Ltd.

as at 31st March.000 42.000 (v) Dr.106 Advanced Accounting To Business purchase A/c (Being assets & liabilities taken over and purchase consideration due) Liquidators of B Ltd.000 .80.) Balance Sheet of A Ltd.00.000 47.000 (iii) Dr.000 12.50. bought from B Ltd. Assets (1) Non-current assets Non-current investment (2) Current assets Total Note No ` 1 2 32.000 2.00.000 × 20/120 = ` 20.80.000 (iv) Dr.60.00.30.000 47. 1.50.000* 20. 15.000 3 8.) A/c (Being cancellation of mutual liability of debtors & creditors of ` 1.000 6. 20. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities (3) Current Liabilities (a) Trade payables Total II.000.20.4.000 *Unrealized profit = ` 1.000 1. A/c To Equity share capital A/c To Securities premium A/c (Being shares allotted in full payment of purchase consideration) Creditors A/c To Debtors (of B Ltd.000 4 4. 2012 15.50. Particulars I.00.00.60.000) General reserve A/c To Stock A/c (Being elimination of unrealized profit on unsold stock of ` 1.80.000.20.

50.80.000 shares × ` 10) Securities premium (1.00.25. @` 12 per share (` 15. Calculation of Intrinsic Value of shares of ‘A’ Ltd.000 2.80.000 Equity shares of ` 10 each (of the above.25.000 18.000 – 1. (other than investment) Add: Investments at market value Less: Creditors Net assets Total number of equity shares to be issued by A Ltd.000 ` 12.000 shares ` 12 per share Calculation of Purchase Consideration Sundry assets of B Ltd.000 Shares 1.00.50. ` 24.50.00.80.000 3.000 / ` 12) Equity share capital (1.00.00. Less: Creditors Net assets Number of equity shares Intrinsic value per equity share = 2.107 32.000 shares 30.25.000 ` Sundry assets of A Ltd.80.80.000 2.000) 24. 1.00.000) Working Notes: 1.00.000 + 14.00.000 (6.000 (3.000 42.80.000 2.000.00.000 4.000 equity shares of ` 10 each are issued for consideration other than cash) 2 Reserve and Surplus Securities premium General reserve 3 Trade payables Creditors (6.000 .1.80.00.00.00.000) 4 Current assets Sundry assets (30.000 6.25.00.00.000 8.30.25.Company Accounts Notes to Accounts 1 Share Capital 3.000 shares × ` 2) Purchase consideration ` 14. 4.000 + 3.50.000) 15.000 – 20.00.000 2.000 15.

the liquidators are required to place before the final meeting of shareholders and creditors a consolidated account of the amounts received and paid out by him in Form 156 of the Rules. The amount expected to be realised would be compared with the amount due to the creditor concerned. secretary or other chief of the company. The broad lines on which the Statement of Affairs is prepared are the following — (1) Include assets on which there is no fixed charge at the value they are expected to realise. They must lay before the meeting an account of their acts and dealing together with a statement in the prescribed form and containing prescribed particulars with respect to proceedings in and the position of the liquidation. and containing particulars stated under section 454(1) has to be submitted to the Official Liquidator. A deficit (the amount owed to the creditor exceeding the amount realisable from the asset) is to be added to unsecured creditors. a Statement of Affairs is required to be submitted.1 Statement of Affairs In the case of a winding up by Court • • a Statement of Affairs of the company in the prescribed form verified by an affidavit. you will be able to ♦ ♦ ♦ ♦ ♦ Prepare Statement of Affairs as per the format prescribed by the Act. 5. Set an order of payment of all obligations. The statement should be submitted by directors and one or more persons who are the manager. . 1959 prescribe that the Statement of Affairs should be prepared in Form 57 contained in the Rules. Distinguish between preferential payments and over-riding preferential payments. The Companies (Court) Rules. According to the provisions contained under sections 496 and 508. Draw Deficiency account and will be able to point out the reasons for deficiency. Students should note to include calls in arrear but not uncalled capital. The liquidators also are required to submit annual reports under sections 496 and 508. Liquidator in both the types of winding up are required to hold a general meeting at the end of the first year and at the end of each succeeding year.108 Advanced Accounting Unit – 5 : Liquidation of Companies Learning Objectives After studying this unit. Prepare Liquidator’s Final Statement of account. Any surplus is to be extended to the other column. Such reports are to be presented in Form 153 of the Rules. (2) Include assets on which there is a fixed charge. In the case of a voluntary winding up either by member or creditors.4. At the close of the winding up of proceedings in a voluntary liquidation.

The second part starts with the surplus on the given date and includes all profits. 2. (5) The amount of total paid-up capital (giving details of each class of shares) should be added and the figure emerging will be deficiency (or surplus) as regards members. and (4) (iii) Unsecured creditors. dividends etc. List G List of equity shareholders. . Note: Statement of affairs should accompany eight lists : List A Full particulars of every description of property not specifically pledged and included in any other list are to be set forth in this list. taxes. that is. there would be a deficiency to the extent of the difference. From the total assets available. If a minus balance emerges. there would be deficiency as regards creditors. salaries. the following should be deducted one by one :(i) (ii) Preferential creditors. The first part starts with the deficit (on the given date) and contains every item that increases deficiency (or reduces surplus such as losses.Company Accounts (3) 4.109 The total of assets in point (1) and any surplus from assets mentioned in point (2) is available for all the creditors (except secured creditors already covered by specifically mortgaged assets). On that date either assets would exceed capital plus liabilities.2 Deficiency Account The official liquidator will specify a date for period (minimum three years) beginning with the date on which information is supplied for preparation of an account to explain the deficiency or surplus. The Deficiency account is divided into two parts: 1. List C Preferential creditors for rates. 5. List F List of preference shareholders. and if the total of the second part exceeds that of the first. List D List of debenture holders secured by a floating charge. List B Assets specifically pledged and creditors fully or partly secured. otherwise there would be a surplus. If the total of the first exceeds that of the second. there would be a reserve or there would be a deficit or debit balance in the Profit and Loss Account. wages and otherwise. List E Unsecured creditors. there would be a surplus. List H Deficiency or surplus account.). Debentures having a floating charge.

[Vide Notification G.S. the winding up order. 1923 in respect of death or disablement of any workman of the company. a gratuity fund or any other fund for the welfare of the workmen maintained by the company. (iv) all sums due to any workman from a provident fund. to the extent such debts rank under section 529(1)(c). (ii) (iii) all amounts due in respect of any compensation or liability for compensation under Workmen’s Compensation Act. the sum payable to any one claimant in relation to wages and salaries shall not exceed ` 20. 5.∗ As per the Companies (Amendment) Act.4. becoming due and payable by the company to the government or to the local authority within 12 months next before the commencement of the winding up. cesses and rates. unless the assets are insufficient to meet them. 1996. These are the following : (a) All revenues. 80(E) dated 17-2-1997. in relation to a company. taxes. The workmen’s dues and debts to secured creditors shall be paid in full. or by the effect of. It may be noted here that workmen’s dues. shall be paid in priority to all other debts. Section 529A states that in the event of winding up a company workmen’s dues and debts due to secured creditors.3 Overriding Preferential Payments The Companies (Amendment) Act.110 Advanced Accounting 5. a pension fund. in which case they shall be compensated in equal proportions. on the termination of his employment before.000.000. 1947. all accrued holiday remuneration becoming payable to any workman or in the case of his death to any other person in his right. 1985 has introduced section 529A which states that certain dues are to be settled even before the payments to preferential creditors under section 530 in the case of winding up of company. means the aggregate of the following sums: (i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act.4 Preferential Creditors Section 530 specifies the creditors that have to be paid in priority subject to the provisions of section 529A to unsecured creditors or creditor having a floating charge. Such creditors are known as Preferential Creditors.] ∗ .R. (b) All wages or salaries (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee due for the period not exceeding 4 months within the twelve months next before commencement of winding up provided the amount payable to one claimant will not exceed ` 20. the words “exceed such sum as may be notified by the Central Government in the official Gazette” shall be substituted for the words “exceed one thousand rupees” in section 530(2).

Note: Person who advance money for the purpose of making preferential payments under (b) and (c) above will be treated as preferential creditors.000. (g) The expenses of any investigation held under section 235 or 237 in so far as they are payable by the company. 1948.00.000 36.000 Assets Goodwill Building Plant Fixtures Stock Debtors Cash P & L A/c Total ` 1.000 The amounts estimated to be realised are : Goodwill ` 1.000 1.000 3. was ordered to be wound up on March 31st.000 and Directors Fees ` 500. Creditors included ` 6.50.000 25.000 500 1. 1923.00. (f) All sums due to any employee from a provident fund. for the welfare of the employees maintained by the company.Company Accounts 4.111 (c) All accrued holiday remuneration becoming payable to any employee on account of winding up.60. Fixtures ` 10. Illustration 1 X Ltd.000.000 on account of wages of 15 men at ` 100 per month for 4 months immediately before the date of winding up : ` 9.00.25.000. (e) All sums due as compensation to employees under the Workmen’s Compensation Act. 2011 on which date its balance sheet was as follows: Liabilities Subscribed Capital : 10.000 38.000.925 and since that date the accounts of the company have shown the following figures: .000 being the salaries of 5 employees at ` 300 per month for the previous 6 months.000 Interest Accrued 4.500 12. gratuity fund or any other fund.000 23.50.38. Income-tax deducted out of salaries of employees ` 1.000 12. Rent for godown for the last six months amounting to ` 3.64. the debit balance in the Profit and Loss Account was ` 77.000. all contributions payable during the 12 months next under the Employees State Insurance Act.000 25.25. or any other law for the time being in force.000.000 shares of ` 100 each 5% Debentures 1. Three years ago. Building ` 3.25. Debtors ` 20.000 (Secured by floating charge on all assets) Bank Overdraft (Secured by hypothecation of stock) Sundry Creditors Total ` 10.000. provided the money is actually so used.000 5. Stock ` 31. pension fund. Plant ` 5. (d) Unless the company is being wound up voluntarily for the purpose of reconstruction.

000 6.000 5.600 1.000 7.000 40. 6. 1959.4.500 . on 31 March.265 66.540 6.245 ` 40.980 63.700 1.000 3.000 7.112 Advanced Accounting Year 31-3-2009 Year 31-3-2010 Year 31-3-2011 ` Gross Profit Wages and Salaries Electricity and Water Tax Debentures interest Bad Debts Depreciation Directors’ Fees Miscellaneous Expenses Total 65.400 5. Prepare the Statement of Affairs and the Deficiency account in Form 57 of Companies (Court) Rules.500 80.000 10.000 10.750 8.000 500 20.260 8.25. Solution: Statement of Affairs (In liquidation) of X Ltd.340 In addition it is estimated that the company would have to pay ` 5.380 8.00.000 25.56.000 8.000 6.000 as compensation to an employee for injuries suffered by him which was contingent liability not accepted by the company.000 7.000 — 6.000 36.000 Estimated surplus from assets specifically pledged Estimated total assets available for preferential creditors.990 ` 45.500 5. 2011 Estimated Realisable value ` Assets not specifically pledged (as per list A) Cash Debtors Building Plant Fixtures Goodwill Assets specifically pledged (as per list B) (a) (b) (c) (d) Estimated Due to Deficiency Surplus carried to the Realisable secured ranking as last column Value creditors unsecured ` ` ` ` Stock 31.000 1.700 1.000 8.000 34.

113 8.500 1.000 Outstanding Expenses 2.000 3.00.42. difference between Gross Assets (D) and Gross Liabilities as per column (E) Issued and called up capital : 1000 Equity Shares of ` 100 each fully called up as per list (G) Estimated deficiency as regards contributories *Note: This must be read subject to the following : ` ` 18.000 6.62.000 Secured creditors (as per list B) to the extent which claims are estimated to be covered by assets specifically pledged 18.80.500 Nil 16.87.57.56.000 6. (2) The estimates are subject to cost of the winding up and to any surplus or deficiency on trading pending realisation of assets.925 .000 8.500 6.000 Other Assets 8.34.000 Estimated surplus as regards creditors.Company Accounts Debenture holders secured by a floating charge and unsecured creditors (carried forward) Summary of Gross Assets : Gross realised value of assets specifically pledged 31.000 Preferential creditors (as per list ‘C’ Estimated balance of assets available for Debenture holders secured by a floating charge and unsecured creditors) 1.500 10.000 Debenture holders secured by floating charge (as per list D) Estimated surplus as regards debenture holders* Unsecured creditors (as per list E) Estimated unsecured balance of claims of creditors partly secured on specific assets brought forward (c) Creditors on Trade Account 27.500 ` 25.44.64.500 Liabilities Gross Liabilities 4.500 (1) There is no unpaid capital to the called-up.500 Total 8. List H Deficiency Account Items contributing to deficiency: (1) Excess of capital and liabilities over assets three years ago as shown by the balance sheet 77.64.500 23.

114 Advanced Accounting (2) Net dividends or bonuses declared during the period Nil (3) Net Trading Losses (after charging items shown in 60.4. ` 9.000) Workmen’s Compensation Unsecured 500 — 3.575 Preferential 1.000 — 3.500 Items reducing deficiency: Nil Deficiency as shown by the Statement of affairs 3.000 5.000 6.000 18.42.000 3.500 Notes as to net trading profits and losses : Provision for depreciation on fixed assets Charged of Income-tax Interest on Debentures Payment to directors made by the company and required by law to be disclosed in the accounts Balance (being other trading losses) Particulars of Creditors for expenses Directors Fees Income tax on salaries Rent (not distrained by landlord) Wages (15 men for 4 months at ` 100 each) Salaries (5 men for 4 months at ` 300 each.04.000 — 6.000 2.000 6.000 Loss on Goodwill 99.000 Buildings 50.000 .875 60.000 (6) Other items contributing to deficiency: 3.000 Stock 7.000 Plant 25.500 6.000 Workmen’s Compensation 5.000 Fixtures 13.000 26.575 Note below) for the same period (4) Losses other than trading losses written off or for Nil which provision has been made in the books during the same period (5) Estimated losses now written off for which provision has been made for the purpose of preparing the statement: Bad Debts (Debtors) 5.42.700 Nil 24.

` 80 paid-up 6% 1. 2010) Mortgage on Land & Buildings Trade Creditors Owing for wages Secretary’s salary (@ ` 500 p. which went into liquidation on December 31.000 1.m.000 1.000 preference shares of ` 100 each fully paid-up Less : Calls in arrear 5% Debentures having a floating charge on the assets (interest paid upto June 30.000 1.000 4.m. .000 On 31st December. The cost of winding up is expected to be ` 15.) owing Managing Director’s salary (@ ` 1.000 Book Debts 1.000 and declared a dividend of 10% on equity shares.000 besides loss of stock due to fire of ` 40.500 20.00.00. prepare a Statement of Affairs and the Deficiency Account for submission to the official liquidator of the Equipment Ltd. ` 36.000 60. The company suffered a total loss of ` 1.000 80.30.000 for workmen’s compensation).20.Company Accounts 4. excluding ` 5.000 in the Profit & Loss Account.e. In 2006 the company made a profit of ` 40.40.09..80.000 (5.000 87.000 2.000 74.000 1. 2008 and 2009.000 50.000 during 2007.000 1.000 3.000 6.000) 95..000 accompanied by a debit balance of ` 25.00. Illustration 2 From the following particulars.000.500 (i.000 equity shares of 100 each.000 2.000 Estimated to produce Book value ` Land & Building Plant Tools Patents Stock Investments in the hands of a Bank for an overdraft of ` 1.) owing Assets ` 2. 2010: ` 3.000 ` 1.000 90.65.000 less the total of creditors mentioned above.70.500 p.30. 2005 the balance sheet of the company showed a general reserve of ` 40. For 2010 accounts were not made.115 Creditors on trade account are ` 16.000 20.90.000 30.

(in winding up) Statement of Affairs on 31 December.000 1. bank overdraft and unsecured creditors brought forward 50.000 4.000 others assets 3.000 1.000 6.70.000 Deficiency Surplus carried Ranking as to the last Unsecured column Creditors ` ` 20.03.000 ` 1.000 80.53.000 20.00. debenture holders. debenture holders and unsecured creditors Summary of Gross Assets: Gross realisable value of assets specifically charged 3.30.000 3. 2010. 1956 & In the matter of Equipment Ltd.03.03.000 Investments Land & Building ` 1.000 30.00.70.30.116 Advanced Accounting Solution In the matter of the Companies Act.000 50.000 .000 Estimated total assets available for preferential creditors. the date of winding up Estimated realisable value Assets Assets not specifically pledged (as per list A) Trade debtors Stock in trade Plant Tools Patents Unpaid calls Assets specifically pledged (as per list B) Estimated Due to Secured Realisation Creditors ` 60.000 74.000 3.000 3.53.000 3.4.90.000 Estimated surplus from assets specifically pledged Estimated total assets available for preferential creditors.000 5.000 2.

40.000 Issued & Called up Capital: 3.000 *Note:.00.40.000 3.117 ` 2. The Secretary of a Company. (ii) There are 3.31.000 preference shares of ` 100 each fully called Estimated Deficiency as regards members as per list H ` 22.02. being an officer.000 and to any surplus in deficiency on trading realisation of assets.000 2.28.02.000 2.000 Secured creditors (as per List B) to the extent to which claims are estimated to be covered by assets specifically pledge 22. Note: (i) The above is subject to cost to winding up estimated at ` 15.500 Outstanding expenses Estimated deficiency as regards creditors being the difference between gross liabilities and gross assets 6.000 3.000 Preferential creditors as per list C Estimated balance of assets available for Debenture holders.500 64. ` 80 paid 6% 1.000 Equity shares or ` 100 each.000 1. section 530(8)(bb) clearly states that the expression ‘employee’ does not include a workman.04. Also section 2(26) read with the explanation to section 269 concludes that a managing director is not an ordinary employee and hence he should not be considered as an employee for the purpose of section 530. is to be included within the definition of ‘employee’ for the purpose of section 530. .000 2. Bank & unsecured creditors 1. In fact.50.65.67.500 7.500 20. the term “employee” shall include officers and other administrative staff members but it shall not include workmen and managing director.Company Accounts Gross Liabilities Liabilities 4.000 1.000 shares unpaid @ ` 20 per share liable to be called up. 1956.For the purpose of section 530(1)(b) of the Companies Act.000 4.92.92.500 2.500 Debenture holders secured by a floating charge as per list D Surplus as regards debenture holders Unsecured creditors as per list E Estimated unsecured balance of claim of creditors partly secured on specific assets Trade creditors 2.

5. Losses other than trading losses written off or for which provision has been made in the books during the same period .4.69. Net trading profit during the period 1st Jan.000 ` . 2006 8. Net trading losses after charging depreciation. taxation.59.000 50. 2008 3.000 Stock 13. Excess of assets over capital and liabilities on 1st Jan. Estimated losses now written off or for which provision has been made for the purpose of preparing the statement : ` Plant 70. during the same period (` 1.Profit expected on Land & Building.000 Tools 16.700 2.000 Patents 20.000 40.Deficiency Account A. Profit & Incomes other than trading profit during the same period 10. Deficiency as shown by the statement of Affairs (A) .(B) ` Nil 29. Other items Deficiency . 2006 9.000 Debtors 30.000 Investments 10. Cr.000 87.000 20.300 40.000 4.000 6.31. 2006 to 31st Dec.000 + ` 1. 10. interest on debentures. ` Land & Building Plant Tools Patents Stock 1.118 Advanced Accounting List H . Other reducing items contributing to deficiency Items reducing Deficiency 7.69.000 1.000 65.-Dec.20.000 Working Notes : (1) Trial Balance to ascertain the amount of loss for 2010 Dr.300) 4. Excess of capital & liabilities over assets on 1-1-2008 2.09.40.000 15. Item contributing to Deficiency: 1.000 4.04.00.stock loss. Net dividend & bonuses during the period Jan.000 B.000 NIL 4. etc.000 2.

65.000 4.000 1.700 1.000 Investments .000 Machinery Leasehold properties ` 90.00.000 1. 31 By Balance c/d By Profit for the year By Balance b/d 1. went into voluntary liquidation on 1st April.000 3.500 80. 31 2007 Dec.300 10.000 10.03. Ltd.50.90.700 X Co.700 ` 25.40.000 Equity Shares of ` each Debentures (Secured by Floating charge) Bank overdraft 10 2.000 40.000 2.000 10.700 1. 31 2006 2007 To Profit & Loss A/c (Transfer) To Dividend Equity Preference To Profit & Loss A/c (Loss) To Loss of Stock Illustration 3 24.000 1.000 95.000 Debtors 54.000 6.119 2.000 2.70.20.40.000 40.31.000 3.000 Stock 1.80.000 2. 2011.000 ` 40.02.50.09.Company Accounts Investments Debtors Equity Capital 6% Preference share capital 5% Debentures Interest Outstanding Mortgage on Land & Building Trade Creditors Owing for Wages Secretary’s Salary Managing Director’s Salary Bank Overdraft Profit & Loss Account on 1-1-2008 Loss for the year (balancing figure) Reserve & Surplus Account 2005 Dec.000 1.700 8.23.700 2.000 90.03.000 1.000 1.02. The following balances are extracted from its books on that date : ` Capital 24.000 2005 Dec.02.000 18.23. 31 2006 Dec.000 5.500 20.

000 3.64.000.04. Solution Statement of Affairs of X Co.000 1.80.000 Cash in hand Profit and loss account 5.4.18. 2011 Assets not specifically pledged : Estimated realisable values 3.54.000 3.000 Cash in Hand Investments Debtors Stock Machinery Estimated surplus from assets specifically pledged .000 1.000 1.18.000 which were not included in creditors ` 60.40.000 2. Ltd.000 (c) Deficiency ranking as unsecured ` — (d) Surplus carried to last column ` 1.000 12.04.000 5.000 1.000 6.64. on the 1st day of April. Prepare a statement of affairs to be submitted to the meeting of members/creditors.41.000 1.000 Creditors The following assets are valued as under : ` Machinery Leasehold properties Investments Stock Debtors 1.000 The bank overdraft is secured by deposit of title deeds of leasehold properties.80.000 (b) Due to Secured Creditors ` 1.000 6.40. There were preferential creditors amounting ` 3.000 12.000 Assets specifically pledged : (a) Estimated Realisable Value ` Lease hold property 2.20.120 Advanced Accounting 60.

000 10.000 4. Their summarised Balance Sheet as at 30th September.000 ` 5.000 Debentures Estimated surplus as regard debenture holders Creditors Illustration 4 Insol Ltd. and unsecured creditors Summary of Gross assets Gross realisable value of assets specifically pledged Other assets Gross Assets ` ` 2. 2010 appears as under: Liabilities: 2.92.05.000 60.50.02. debentures holders secured by floating charge. is to be liquidated.000 5.000 3.000 equity shares of ` 10 each Secured debentures (on land and buildings) Unsecured loans Trade creditors ` 25.000 3.50.00.50.00.00.000 1.000 2.000 60.000 ` 3.00.000 1.000 Gross Liabilities (to be deducted from surplus or added to deficiency as the case may be) Secured creditors to the extent to which claims are estimated to be covered by assets 54.000 Estimated surplus as regards creditors [being difference between gross assets (d) and gross liabilities (e)] Issued and called up capital : 24.67.52.00.000 Specifically pledged Preferential creditors Estimated balance of assets available for debenture holders secured by a floating charge and unsecured creditors 3.41.121 5.40.000 20.000 52.000 equity shares of ` 10 each Estimated surplus as regard members 2.Company Accounts Estimated total assets available for preferential creditors.59.000 .000 2.18.000 35.000 90.

00.000 53.4.000 Estimated total assets available to unsecured creditors Summary of Gross Assets Gross realisable value of assets specifically 11.00. Solution Statement of Affairs of Insol Ltd.000 35.50. 2010 Estimated Realisable Value (` ) Assets not specifically pledged: (As per list A) Other fixed assets Current assets Assets specifically pledged (As per List B) Estimated realisable Due to value secured creditors Deficiency Surplus 18.00.000 20.000 11.000 90.00.00.00.00.000 ` Land Buildings & 11.00.00.000 For excise duty demands 1.00.00.00.000 ` 10.000 54.00.000 Gross Assets 64.000 . it is found that the contingent liabilities are certain to devolve and that the assets are likely to be realised as follows:— ` Land & Buildings Other fixed assets Current assets Taking the above into account.00.00. prepare the statement of affairs.000 1.000 20.00.000 pledged Other assets 53.000 Contingent liabilities are : For bills discounted 1.000 35.00.00.000 45.000 18. (in Liquidation) as on 30th September.000 On investigation.000 ` ` 1.00.00.122 Advanced Accounting Assets: Land and Building Other fixed assets Current assets Profit and Loss A/c 5.

50.00. the statement is known as “Official Liquidator’s Final Account”. .50.000) 2. profits being added and losses being deducted.000 35.000 25.50.000 1.5 Liquidator’s Final Statement of Account In case of voluntary winding up. (iv) Payments made to redeem securities and cost of execution.e.50.Company Accounts Gross liabilities Liabilities Secured Creditors (as per list B) to the extent to which claims are estimated to be covered by assets Specifically pledged Preferential creditors (as per list C) Unsecured creditors(as per list E) Unsecured Loans Trade creditors Contingent Liability on Bills Discounted Estimated deficiency as regards creditors (67.00.50.000 5.50.00.50. (d) Debenture holders (including interest up to the date of winding up if the company is insolvent and to the date of payment if it is solvent).50. the statement prepared by the Liquidator showing receipts and payment of cash is called “Liquidator’s Statement of Account”. is recognised as “Surplus from Securities”.000 35.000 3. (b) Liquidator’s Remuneration. only the surplus from it.000 67.123 ` 10.00.00.000 20. (v) Payments are made as shown in the following order : (a) Legal Charges.00. (c) Liquidation Expenses. cost of collecting debts. the following points should be noted : (i) (ii) Assets are included in the prescribed order of liquidity. In case of assets specifically charged in favour of creditors.000 20.000 1.00. While Preparing the Statement of Account.000 Equity Shares of ` 10 each : (as per list G) Estimated deficiency as regards members 4.000 28. are deducted from the total receipts.00. (iii) Net result of trading entered on the receipts side.000—64.000 1. if any. In case of compulsory winding up.000 1.00. i.000 52.

it should be seen whether any amount is to be called up on such shares. Firstly. Ltd. The loss per shares have nominal value of ` 100. and (g) Equity shareholders.000 . Preferential (in actual practice.000 75. resolved on 31st December 2010 that the company be wound up voluntarily.000 74. the loss of ` 1. Suitable adjustment will have to be made in cash in such a case.000) Stock in trade Sundry Debtors Sundry Creditors Bank balance • Against D’s liability of ` 2.000 1.000 24. Illustration 5 M. The following was the trial balance extracted from its books as on that date: ` Equity shares of ` 10 each 9% Preference shares of ` 10 each Plant (less depreciation w/o ` 85.000 30. (viii) The loss suffered by each class of shareholders.250. the equity shareholders should be called up to pay the necessary amount (not exceeding the amount of uncalled capital) if creditors’ claims of preference shareholders cannot be satisfied with the amount.450 will have to be suffered by these creditors. Preference shareholders would be called upon to contribute (not exceeding the amount as yet uncalled on the shares) for paying off creditors.15.50.000 2.e. should be proportionate to the nominal value of the share.000 55.00. i. preferential creditors are paid before debenture holders having a floating charge). the latter set must contribute ` 20 first or the first set must be paid ` 20 first. (f) Preference shareholders. (vii) In case of partly paid shares. 2010) Trading loss for the year 2010 ` 2. the amount that cannot be repaid. (vi) Arrears of dividends on cumulative preference shares should be paid up to the date of winding up.000 6. shareholders for dividends declared but not yet paid. Preliminary Expenses Profit & Loss A/c (balance on 1st January. Unsecured creditors.000 2. and one set of shareholders has paid ` 80 per share and other set has paid ` 60 per share.00.124 Advanced Accounting (e) Creditors.4. he can be called upon to pay ` 800.

000 and liquidator’s remuneration of 3% on disbursements to members were paid on 30th June.000 4.05.e.00. The sale was completed in January. . 2011 when : (a) The preference shareholders were paid out in cash. (in liquidation) Liquidator’s Statement of Account from 1st January.05.000. Ltd.32. Prepare the Liquidator’s Statement of Account showing the distribution.04.700 (i. 2010.800 2.000. 2011 along with interest from 31st July.00.Company Accounts Preference dividend for the year 2010 Outstanding Expenses (including mortgage interest) 4% Mortgage loan Total 6. Ltd.200 in cash and as to the balance in 6% Debentures of the purchasing company issued to the liquidator at a premium of 2%.000 75. ` 5. and (b) The debentures on M. 2011 to 30th June.000 2.000 and stock in trade for ` 2.40. Creditors were discharged subject to 2% and outstanding expenses excluding mortgage interest were settled for ` 2.000 less payments made to all creditors) It is assumed that loan is secured by a floating charge. 398) Liquidation Expenses Loan on mortgage with Accrued interest∗∗ Creditors including Outstanding ` 7302∗ 3. 2011 Balance at Bank Realisation from : Sundry Debtors M.30.000 On 1st January. Ltd.200 4. 2011 and the consideration satisfied as to ` 2.62.000 52. and the balance of cash were distributed ratably among the equity shareholders.30.42. ` 1.43.000 6% Debentures Cash ∗ ` 74. (3) On 30th June 2009 six month’s interest on debentures was received from M. Ltd.000 6. Ltd. Solution M.000 1. Plant for ` 2. (4) Liquidation expenses amounting to ` 3.125 6.000 2.500 ∗∗ 3/103 × 2.62.000. The remaining steps in the liquidation were as follows: (1) The liquidator realised ` 52.000 25.50. (2) The loan mortgage was discharged on 31st January.000 Liquidator’s remuneration (3% on ` 2.000 out of the book debts and the cost of collection amounted to ` 2. 2011 the liquidator sold to M.

000 1.500 3.000.250 17.81. ` 60 paid 15% Debentures secured by a floating charge Interest outstanding on Debentures Creditors Assets Land and Building Machinery and Plant Patents Stock Sundry Debtors Cash at Bank Profit and Loss A/c ` 5.00.) (2. Machinery and Plant ` 5.500 equity shares of ` 100 each.126 Advanced Accounting Expenses Return contributors : 6% Preference share4.00.000.00. . 2010 when their Balance Sheet read as follows:— Liabilities Issued and subscribed capital : 5.000 2.500 equity shares of ` 100 each.87.750 2.000 1.000 1. fully paid 2.200 per share Total 6 months’ interest on debentures Equity shareholders Less: Cost of Collection of Debts Total Illustration 6 1.00.50.50.000) 5. The assets realised as follows : Land and Building ` 3.000 1. approx. Sundry debtors ` 2.200 Prakash Processors Ltd.000 75. Stock ` 1.200 6% Debentures Cash (03 P.33.42.35.00. Patents ` 75.50.000.750 Preference dividends were in arrears for 2 years and the creditors included Preferential creditors of ` 38.00.4.43.800 598 1.500 4.000 6.33.000 10% cumulative preference shares of ` 100 each.750 17.000 37.500 2.75.18.000.37.43.000.000 2. went into voluntary liquidation on 31st December.200 holders ` 10 per share 5.000.25.50. ` 75 paid 7.398 5.43.

Solution Prakash Processors Limited Liquidator’s Statement of Account Payments ` By 75.127 The expenses of liquidation amounted to ` 27.750 2.250 12.000 6.500 × ` 2.000 2.06.000 2.00.00.Company Accounts 4.000 ” 13.50. The liquidator is entitled to a commission of 3% on assets realised except cash.875 30.19.750 .25. Patents Stock Sundry Debtors ` 27.250 36.000 37. 2011 show the liquidator’s Statement of Account.000 Liquidation expenses Liquidator’s Remuneration Debenture holders: Debentures Interest accrued Interest 1-1-11/30-6-11 Preferential creditors Unsecured creditors Preferential shareholders : Preference capital Arrear of Dividend Equity shareholders ` 12.65) (1) ” 5. Machinery etc.500 18.000 75.875 Working Notes: (1) Liquidator’s remuneration 12.50.000 1.000 1.000 12.00.35 on 2.00.00.000 × 3/100 =` 36.875 13.750 To Call on equity shareholders (7.000 ” ” 3.250.80.750 3. Assuming the final payments including those on debentures is made on 30th June.25.500 shares To Receipts Assets realised Bank Other assets: Land etc.00.000 19.19.875 ” ” 38.000 5.89.

000 ` 1.50.000) ` (11.000 5.000 5.000.000 Profit and Loss Account Debenture Issue 1.50 per share paid up 13% Debentures Mortgage Loan Bank Overdraft Creditors for Trade Income-tax arrears : (assessment concluded in July 2010) Assessment year 2008-2009 Assessment year 2009-2010 ` Asset Land and Buildings Sundry Current Assets 1. interest on the debentures will have to be paid for the period 1-1-2011 to 30-6-2011 15 1 × = ` 18.. The Bank Overdraft was secured by a personal guarantee of two of the Directors of the Company and on the Bank raising a demand.55.000 equity shares of ` 10 each.500 2. Costs incurred by the Receiver were ` 2.35 2.500 Loss per share ` 62.500 Mortgage loan was secured against land and buildings.128 Advanced Accounting (2) As the company is solvent.000 equity shares 6.500 1.20.000 38.37.000 — 12.000 21.40.000 and by .50.00.000 3.paid up ` 6.000 × Illustration 7 The following is the Balance Sheet of Confidence Builders Ltd. Liabilities Share Capital Issued : 11% Pref.26.4.000 equity shares of ` 10 each.95.89.000 expenses not written off 37.500 Less : Balance available after payment to unsecured and preference shares (13.50.000 and realised ` 2. the Directors paid off the due from their personal resources.000 30.00. Shares of ` 10 each 10.000) Loss to be born by 10.000 32.55.65 Hence.00.000 80. fully paid up 5.750 100 2 (3) Total equity capital .000 26.65 Refund to share on ` 75 paid ` 12. 2010. The company was unable to meet the payments and therefore the debenture holders appointed a Receiver for the Debenture holders brought the land and buildings to auction and realised ` 1. as at 30th Sept.000. ` 7. He also took charge of Sundry assets of value of ` 2. amount of call on ` 60 paid share ` 2.500 5.00. Debentures were secured by a floating charge on all the other assets.

129 the Liquidator ` 2.000 .50.750 1.000 30.17 per share 10. Rest of the assets were realised at ` 1.70.000 and building Less: Applied to discharge of mortgage loan (80.59.000 at the rate of ` 2.000 62.70.50.000 26.750 82.000 Debentures holders 1.00.000.850 82.000 to ` 2.800 3.000 Interest for half year Surplus transferred to the Liquidator 2.800.000 Cost of Liquidation Remuneration Liquidator Unsecured Creditors : Trade Directors for Bank O/D cleared Preferential Shareholders: Principal Arrears of 1.000 ` Surplus received from Receiver Assets Realised Calls on Contributories : On holder of 5.000 9.00. Preference shareholders had not been paid dividend for period after 30th September 2008 and interest for the last half year was due to the debenture holders.00.000 Costs of the Receiver Preferential payments Creditors paid Taxes raised months Principal 70.250 2.250 1.00.000 Liquidator’s Final Statement of Account within 12 - ` 2.Company Accounts 4.000) 2. Prepare the accounts to be submitted by the Receiver and Liquidator.000 32. The Receiver was not entitled to any remuneration but the liquidator was to receive 3% fee on the value of assets realised by him. Solution Receiver’s Receipts and Payments Account ` Sundry Assets realised Surplus received from mortgage Sale Proceeds of land 1.

300 1.100 22.000 1. Shareholders Number of shares transferred at the date of X A 1.93. provided that the existing shareholders have also failed to pay the amount due on the shares.22.800) National call on 5. prior to the date of winding up may be called upon to pay an amount (not exceeding the amount not called up when the shares were transferred) to pay off such creditors as existed on the date of transfer of shares and cannot be paid out of the funds otherwise available with the liquidator. which took place in 2010 and 2011.000 = = 33p ` 2. Illustration 8 In a liquidation which commenced on April 2.950 (b) 15.17 Calls on party paid share (2.89.82. 2011 certain creditors could not receive payments out of the realisation of assets and out of the contributions from “A” list contributories.950 15.000 6.000 Date of ceasing to be member ceasing to be member 1st March 2010 1st May 2010 4.250 — 1.000 shares at 33 paise each 1.000 Creditors remaining unpaid and outstanding .000 = (a) 7.000 Working Note : Call from party paid shares Deficit before call from Equity Shares (1.550 12.6 B List Contributories The shareholders who transferred partly paid shares (otherwise than by operation of law or by death) within one year.130 Advanced Accounting Dividends Equity shareholder : Return of money to contributors to holders of 10. of shares deemed fully paid Refund on fully paid shares 4.4.100 3. The following are the details of certain transfers.33) 5.000 shares @ ` 2.93.50 — 0.500 4.50 each Net balance after national call No.500 1.

Similarly.000 4. ` 6 paid up ignoring expenses of and remuneration to liquidators.000 B 1. 2010 1st Feb.500 4.050 on 2. in the ratio of 10:15:3:2. C & D in the ratio of number of shares held by them.000 1.500 500 50* 8. ` 1. The increase between 1st Nov.000 9.000: B ` 3.500 for which A is not liable will be contributed by B. and 1st Feb. C will have to contribute ` 255 and D will contribute ` 150. C and D in the ratio of 15:3:2 B will have to contribute ` 1.500 1. B.500 Total (a) (b) maximum liability shares held (c) Amount paid (a) or (b) whichever is lower A 1. i. etc.250 1. 2011 7.125 4. C ` 600 and D ` 400.000 (2) 1.e.125 1. 2010 and 1st July 2010. will be shared by C and D who will be liable for ` 300 and ` 200 respectively.000 Shares ` 2.500 to ` 8.200 800 Amount to be paid to the Creditors ` 6.000 C D 300 200 Shares Shares ` ` 600 400 225 150 300 200 1. show the amount to be realised from the various persons listed above.000 outstanding on 1st May 2010 will have to be contributed by A.125. Solution X will not be liable since he transferred his shares prior to one year preceding the date of winding up.125 6.Company Accounts B C D 1.500 8. thus A will have to contribute ` 2.000. The following statement makes the position clear: Statement of Liabilities of B list contributors Creditors Outstanding on the date of ceasing to be member (1) 6. The amount of ` 6.125 2.000 1.. ` 500 occurring between 1st July and 1st Nov. The further increase from ` 7. the further debts incurred between 1st May.500 300 200 1st July 2010 1st Nov..000 4.125 800 .000.000 2.500 (3) 500 (4) 1. is solely the responsibility of D. viz.500 Shares ` 3.131 All the shares were ` 10 each. viz.

. The shareholders who transferred partly paid shares within one year. In case of voluntary winding up. Deficiency Account is the result of capital plus liabilities exceeding the assets or deficit or debit balance in the profit and loss account. Overriding preferential payments are the payments to be made for the workman’s dues and debts secured to secured creditors to the extent they rank under section 529(1)(c). prior to the date of winding up may be called upon to pay an amount (not exceeding the amount not called up when the shares were transferred) to pay off such creditors as existed on the date of transfer of shares.132 Advanced Accounting Summary • • • • • • In case of winding up of the company. the statement prepared by the Liquidator showing receipts and payment of cash is called “Liquidator’s Statement of Account”. Preferential creditors have to be paid in priority to unsecured creditors or creditor having a floating charge. a statement called Statement of affairs is prepared.4.

Premium: The payment made by the insured to the Insurance Company in consideration of the contract of Insurance. ♦ ♦ ♦ 1. In some . Provisions 11 of the Insurance Act. you will be able to: ♦ ♦ Understand the basic concepts of Insurance Learn the meaning of some important terms used in insurance business. This is called Policy Amount. Here one party the Insurance Company called “Insurer” undertakes to indemnify specified losses suffered by the other party called “Insured” for a special consideration called “Premium”. 2. The premium is generally paid annually. 1938 requiring preparation of financial statements for the insurance business and Section 14 of the Act requiring maintenance of register or record of policies. claims. marine and miscellaneous policies. The term of the Insurance contract is called “Insurance Policy”.5 Financial Statements of Insurance Companies Unit-1 : Introduction to Insurance Business Learning Objectives After studying this unit. Insurance Policy: It is the document issued by the insurance company containing terms of the insurance contract. surrender value. Some Important terms used in Insurance Business:1. re-insurance and agents’ balances Learn two main types of insurance business i.e. namely premium. considerations for annuities granted.1 Introduction Insurance is a contract. bonus. It specifies the losses that are covered by the Policies and also the maximum amount that can be paid out in the event of a loss/death. life insurance and general insurance and will be able to distinguish between them Understand the meaning and various types of fire. paidup policy.

the claim arises only when the loss occurs.000 (25.000) Less Re-insurance claim Claims to be shown in revenue account ` 1. 2011: Claim intimated in the year 2010 2011 2009 2009 2011 2011 Solution Total claim paid in 2011 : ` (1.02. The adjustment entry required for this will be as follows: Claims account Dr.2 Advanced Accounting cases it may be paid at shorter intervals.000+ ` 12.000 Claim admitted in the year 2010 2011 2010 2010 2012 2011 Claim paid in the year 2011 2012 2010 2011 2012 2011 ` 15. In case of General Insurance. such amount should be transferred to the insurance fund account and not to the claims account. i. intimated in 2010 or earlier whether accepted in 2010 accepted in 2011(` 15.000) 95.000.000 + 15.000 18. the claim intimated as well as the claim intimated and accepted both are considered.000 (27.000) Less Outstanding in the beginning.000) Add Outstanding at the end. you are required to calculate the loss on account of claim to be shown in the revenue account for the year ending 31st December. However. i.000 8. before the commencement of the insurance cover/policy.e... while calculating the claim outstanding at the end.02.000 5.5. if company rejects any claim. they may not influence the claims account of next year.000 + 8. Claims: A claim occurs when a policy fall due for payment.02.20. A point to be noted is the premium amount has to be paid “front end” i. so that when these claims intimated are paid.29. . intimated in 2011 whether accepted in 2011 or in 2012 ` (10. Illustration 1 From the following.000 1.000 12. To Claims intimated and accepted but not paid account To Claims intimated but not accepted and paid account At the commencement of the next period a reverse entry is passed.000) 1.000 Claim on account of Re-insurance was ` 25.000 10. In Life Insurance it arises on death or on maturity of policy.e. 3.000 + 12.000 1.e.

The amount of Reversionary Bonus is included in claims. Insurance Companies get business through agents. In such a case. 8. Interim Bonus: It is a bonus paid to a policyholder for a period for which valuation is not complete and. where the former agrees to cede (give) and the later agrees to accept certain specified share of risk in return for a share of the premium. Ceding Company: An insurance company that shifts part or all of a risk it has assumed to another insurance company. he surrenders his right under the policy and is paid an amount calculated by a fixed formula. it is described as Reversionary Bonus. 9. on a claim arising. but on a “with profits” policy he is entitled to receive in addition. or on maturity of the policy. This commission paid by the . When company gets re-insurance business it has to pay commission to the Ceding company also. Commission on re-insurance ceded /accepted: Insurance companies get business through its agents. Commission: Generally. In such a case the insurer is said to have ceded a part of its business to other insurer . the claim will be shared between the two companies in the proportion they had agreed to underwrite the risk. the risk of the insurance is being underwritten by another Insurance Company. Surrender Value: When the policy holder wishes to realise the amount of policy before the expiry of the full period of the policy. the amount standing to the credit of Life Fund which is in excess over net liability.Financial Statements of Insurance Companies 5. Commission paid to Agents is shown as a debit (expense) in the Revenue Accounts. The share of the policyholders is paid to them as bonus. Such a bonus is also included in claims. in Re Insurance business transaction is defined as an agreement between the Ceding Company and the Reinsurer. 7. Reinsurance: If Insurance Company does not wish to bear the whole of risk of a policy. with the second insurance company called the Reinsurer.e. is distributed among the shareholders and the policyholders. then it will reinsure a part of risk with some other insurer. as determined by the actuary. On each valuation. either in cash on declaration or by reduction of future premiums. The Ceding company shares the premium amount it has received to cover the risk. In other words. the amount of bonuses declared on each valuation. The holder of a “without profits” policy is entitled to receive on maturity only the amount specified in the policy. the exact profit or bonus has not been determined. it does not figure in the Revenue Account and is not payable in cash immediately but is to be payable at the time of the claim. In return the Reinsurer company pays commission to the Ceding company for getting the business.3 4. Such agents receive commission on the basis of the amount of business they generate for the company.i. therefore. Bonus (applicable only to Life Insurance): A life insurance policy may be “with profit” or “without profits”. 5. “Surrender Value” applies only to Life Insurance policies and comes into play only after two annual premiums have been paid. Until the bonus is paid. these agents receive commission on the basis of the amount of premium they generate for the Insurance Company.

The person receiving the payment is called an annuitant.e. when it passes on a part of the business to the reinsurance company then the Ceding company gets its commission from the re insurance company. The insured amount in that case will be reduced to a figure ascertained according to the following formula: Paid-up value = No. Other Terms Used in Insurance Business 1. This reduction is called bonus in reduction of premium. For example. or annually. of premium paid × Sum assured Total No. Catastrophic Loss: A loss (or related losses) which is unbearable i. he may discontinue the payment and convert the policy into a “Paid-up” policy. Whether the policy is renewed with the same company. semi-annually. 4. the General Insurance Companies in India allow the following rates of reduction for a motor cycle: 1st year 15%. Annuity payments are usually made monthly but can be quarterly. Annuity: It is a contract that provides an income for a specific period of time to say for a number of years or for life. will remain unchanged. In fact this transaction should be divided into two parts-first.400 . or insurer. it causes severe consequences such as bankruptcy to a family.600 Bonus in reduction of premium is ` 1. Thus- • • If net premium received is ` 12. It appears on the credit side of revenue account. the total premium (without any reduction) should be assumed to be received and then reduction granted should be assumed to be paid separately. or a fresh policy is taken with some other company. of premium payable Other conditions of the policy.4 Advanced Accounting reinsurance company is called ‘commission on re-insurance accepted’ and is shown as an expense in the revenue account of the re insurance company. organization. 3rd year 30%. 2. This commission is called ‘commission on re-insurance ceded’. For the ceding company. Paid Up Policy (Applicable only to Life Insurance): If an insured is unable to continue to paying premiums on his life policy. 3. total premium (without reduction) should be treated as income and bonus which is subtracted should be treated as an expense. Thus. It is a gain to the company surrendering the business. This rate of reduction increases every year for usually three years if the insured does not make any claim continuously year after year.5. 2nd year 25%. it is a standing practice that the company usually grants a reduction in premium at the prescribed rate if the insured has not made any claim. Bonus in Reduction of Premium: In all the cases of general insurance the policy is always taken for one year and it is to be renewed after the expiry of the policy. however.

In case of death.1 Principles of Insurance There are several principles governing insurance business. The journal entry is : To Premium account Bonus in reduction of premium account Dr. In a contract of insurance. A has insurable interest i.1 Life insurance policy It covers the “life-risk” of the insured person. 1.400) as income and on the debit side ` 1. (b) Insurable interest: All and sundry cannot enter into contracts of insurance. In life insurance the amount is payable on the happening of . This is because the assessment of the risk and the determination of the premium by the insurer depend on the full and frank disclosure of all material facts in the proposal form. contracts of utmost good faith. In the absence of such interest the contract will amount to a wagering contract.2. One cannot make profit by insuring his risks. There is only the negative obligation to tell nothing but the truth.. But if B.600 + ` 1.5 • • The revenue account on the credit side will show ` 14. Insurance Life Insurance General Insurance 1.2 Various Types of Insurance Basically insurance is divided into two broad types viz. however there is an implied condition that each party must disclose every material fact known to him. happens to be his wife or his debtor or business manager.400 as an expense. the nominee will get the Insurance Policy amount. (c) Principle of uberrimae fidei: Under ordinary law of contract there is no positive duty to tell the whole truth in relation to the subject-matter of the contract.000 (` 12. only those who suffer loss are compensated to the extent of actual loss suffered by them. The insurer is called indemnifier and the insured is the indemnified.e vested interest and therefore he can insure the life of B. For every type of policy insurable interest is insisted upon. A cannot insure the life of B who is a total stranger. 1.e. This is because all contracts of insurance are contracts of uberrima fidei.1. the important of which are discussed below.Financial Statements of Insurance Companies 5. i. In a contract of indemnity. For example. (a) Principle of indemnity: Insurance is a contract of indemnity.

flood. marine or miscellaneous insurance business whether carried on singly or in combination with one or more of them. Term Assurance: Here the policy amount is paid in “lump-sum” on maturity of the term of the Life Insurance Policy (say 20 years). policy amount is paid only on the death of Insured.6 Advanced Accounting an event which is bound to occur i. etc. instead of a one shot “lump-sum” payment the policy amount is disbursed in instalments. Fire Insurance Marine Insurance Miscellaneous Insurance . motor vehicle insurance. 3. 1. cash in transit insurance.5. generally monthly. while "Assurance" is the provision of cover for an event that is certain to happen like death and so Life insurance is actually Life Assurance Life Insurance can be further classified into 3 types: Life Insurance Whole Life Assurance Term Assurance Annuity Whole Life Assurance: In whole life assurance. credit insurance. the life insurance policy also provides for payment of the policy value at maturity or by instalments and an agreed bonus.2 General insurance: It means insurance other than life insurance Section 2(6B) of the Insurance Act defines ‘General Insurance Business’ as fire.e. burglary insurance. “Insurance" refers to providing cover for an event that might happen (fire. theft. Annuity: On maturity of the policy. 1.3 Various types of General Insurance General Insurance is broadly classified into three major categories: 1. professional liability insurance. So this form of Insurance is also described as “Assurance”.). This payment may either be in lumpsum on maturity of the policy or may be paid in instalments called annuity.2. However. workmen’s compensation insurance. death. The uses of the terms "insurance" and "assurance" are sometimes confused. 2. etc. fidelity insurance. Some common types of miscellaneous insurance in India are: exchange risk insurance.

7 In general insurance.Financial Statements of Insurance Companies 5. the policy is taken for one year at a time and can be renewed yearly or a fresh policy can be taken with some other insurance company. General Insurance Fire Insurance Valued Policy Specific Policy Marine Insurance Time Policy Miscellaneous Motor Vehicle Insurance Voyage Policy Average Policy Mixed Policy Floating Policy Floating Policy Excess Policy Blanket Policy Blanket Policy Comprehensive Policy Consequential loss policy Port Policy Re-instatement policy Composite Policy Open declaration policy Valued Policy Fleet Insurance Policy Open Policy Fidelity Insurance Credit Insurance Burglary Insurance Loss of Profit Insurance Workmen’s Compensation Professional Liability Insurance .

under one policy. Specific policy .A policy in which the value of the property is ascertained and/or agreed upon which the insurer undertakes to pay in the event of destruction of goods/property by fire is known as valued policy. Such policies are normally taken where the value of stocks etc. In case of any loss under this policy. the insurer pays whole loss provided it is not more than the sum specified in the policy. the insurer will bear only that proportion of the actual loss which the sum assured bears to the actual value of the property at the time of loss.It is a policy whereby the insured makes a deposit with the insurer and declares the value of the subject matter in respect of which risk is covered.A blanket policy is that which covers all assets . Fire insurance thus covers the risk of loss of property by accidental and non-intentional fire. The former type of policy is known as the First Loss Policy and the latter as the Excess Policy. fluctuates considerably. (iv) Floating policy . (ii) (iii) Average policy . undertakes to indemnify the other party upto an agreed amount against financial loss of goods or property which the latter may suffer because of fire. (viii) Consequential loss policy . i.fixed as well as current . insured for a sum smaller than the value of the property.The objective of this policy is to indemnify the insured against the loss or profit caused by any interruption of business due to fire. (v) Excess policy . This type of policy is not very common these days.5. (vi) Blanket policy . burglary etc. flood. The premium normally charged under this policy is the average of the premia that would have been paid if each lot of the goods had been insured under specific policies for specific sums.Where the stocks of the insured fluctuate he may take out a policy for the amount below which his stocks normally do not fall and another policy to cover the maximum amount of stocks which may be reached at times.It is a policy which insures a risk for a specific amount. (x) Open declaration policy . strikes.A policy which covers risks such as fire. .8 Advanced Accounting The three types of General Insurance: 1.1 Fire Insurance: A fire insurance contract may be defined as an agreement whereby one party.It is a policy under which the insurer pays the amount which is sufficient to re-instate assets or property destroyed. Thus. riots. the value of the goods/property is not considered for this purpose. upto a certain specified amount is known as the comprehensive policy. (vii) Comprehensive policy .3. Types of Fire Policies (i) Valued policy .An average policy contains the ‘average clause’ which lays down that if the property is under-insured. (ix) Re-instatement policy .e. for a consideration.It is the policy which covers several types of goods lying at different locations under one amount and for one premium. It is also known as Loss of Profit Policy.

hull or freight are known as underwriters because they write their name and sign at the foot of the policy. the Association adopted a definite policy known as the “Lloyd’s policy” which is in use even now. is totally lost.Marine losses may be broadly of two types – (i) (ii) (i) Total loss. Later associations were formed for this purpose. it is known as a ‘total loss’...The common types of marine insurance are as follows : (i) (ii) Cargo insurance . Types of Marine Losses . The persons who insure cargo. (ii) Partial Loss : When only a part of the subject matter is lost. An example of this type of loss is when the ship has run .. barratry. the pioneer being the Lloyd’s Association which was formed in 1774. (iii) Freight insurance . cargo. the owner of the ship may effect ‘hull’ insurance to cover such perils.3.e.The ship is also exposed to the perils described in (i) above. Total loss is also of two types : (a) Actual Total Loss . i. Jettison. and Partial loss which are discussed below: Total Loss : When the subject matter of insurance. freight etc. Therefore. stranding of the ship.When the subject matter is not actually totally lost but is lost for all practical purposes e. In the year 1779. i.Where the owner of goods promises or undertakes to pay the freight when the cargo is safely delivered at the port of destination and the cargo is destroyed on the way.Such a loss is caused by extraordinary voluntary sacrifice made or expenditure incurred with the objective of protecting the interests of all owners in a voyage.2 Marine Insurance: Marine insurance is perhaps the oldest type of insurance. The cargo on the ship is exposed to risks arising from an act of God. The shipping company can cover this risk by taking out a freight insurance policy. i.e. Under a contract of marine insurance. it is known as partial loss. it is known as constructive total loss. only individuals used to underwrite the policies in their own names. enemies.This type of marine insurance covers risks to the cargo on the ship.Financial Statements of Insurance Companies 5. Types of Marine Insurance . wrongful act of the captain of the ship in destroying or stealing the vessel or cargo causing loss to owners. (b) Constructive Total Loss . fire etc.9 1.e. it is known as actual total loss. This loss may also be of two types as discussed below : (a) General Average Loss .When the subject-matter of insurance is absolutely destroyed or totally lost to the insured. ship. where the ship or cargo is reasonably abandoned and taken as lost or expenses to be incurred for saving the cargo or the ship are expected to be more than the value thereof. Originally.g. the shipping company would lose the freight. collision of ship.. the insurance company or the underwriter agrees to indemnify the owner of a ship or cargo against risks which are incidental to marine adventure such as sinking or burning of the ship and its contents. Hull insurance . throwing overboard the cargo into the sea to save the ship from sinking or some other imminent danger.

This policy covers the ship when it is docked/stationed at a port. the premium in respect of which is paid for the entire policy at the beginning itself and is adjusted at the end of the specified period for the value of risks covered during this period. (iv) Floating policy . The liability of each underwriter is however distinct and separate. the goods net insured irrespective of whether they are already lost or not lost before the policy is taken . However. The insurance cover is subject to the limit of the sum assured. the insured is not aware of the value of the subject matter to be insured. which is ascertained and declared to the insurer later. (viii) Port policy . (b) Particular Average Loss . (v) Blanket policy .10 Advanced Accounting aground and part of the cargo is to be jettisoned to lighten the ship to save it as well as the cargo from total loss. (iii) Mixed policy .This policy insures the whole fleet of ships. differing needs of the insured have led to the evolution of a variety of marine insurance policies. At the time the cargo is shipped.It is a policy underwritten by more than one underwriter. Some of the important clauses are discussed below: (i) Lost or Not Lost Clause .Generally a standard form for all policies is used for all marine insurance policies to cover various types of risks. the insured declares the value of the shipment and the total value of the policy is reduced by that amount.This type of policy is taken out without specifying the value where at the time of insurance. Clauses in a Marine Policy: A marine policy may cover or exclude various types of risks. the main among which are: (i) (ii) Time policy .When this clause is inserted in the policy.It is a partial loss of the subject matter of insurance caused by a peril against which it is insured but which is not a general average loss. (vi) Fleet insurance policy .5. (vii) Open policy . (ix) Composite policy . In view of this some special clauses may be inserted in the policy. Types of Marine Insurance Policies .This policy is taken for a specified amount. It is generally used for hull insurance though it can be taken out also for cargo. (x) Valued policy .Under this policy.This is a policy whereby the subject matter in transit is insured from one place to another.This policy is taken out by cargo owners who make regular shipments of cargo to insure the shipments expected to be shipped for a certain time by one policy.It is that policy which covers the risk of the subject matter for a specified period of time. the value of the subject matter is agreed between the underwriters and the insured at the time of taking the policy and is specified therein. It is generally carried out for cargo which is exposed to marine risks in transit. Voyage policy .This is also known as time and voyage policy as under this the subject matter on a particular voyage is insured for a specified period of time.

(iv) Running Down Clause (RDC) . throwing overboard goods to reduce the weight of the ship and prevent capture by the enemy. i. (xi) Barratry . the losses caused by the negligence of master. (vii) Excepted Perils Clause . (iii) Permission to Touch and Stay Clause . i. among others. Any deviation from the route specified is permitted in an emergency to save the ship and the lives of the passengers.Financial Statements of Insurance Companies 5. (viii) Free of Particular Average (FPA) and Free of All Averages (FAA) Clauses . In case nothing is specified. the ship is permitted to touch and stay at the ports mentioned in the policy in the order specified therein. the ship must touch and stay at ports which are normally touched in the particular trade.This clause is included in the policy to clarify that the underwriters will not be liable for any loss caused by ship being captured or seized in a war or warlike situation. maintaining and preserving the cargo or the hull will be considered as a “waiver”.e. crew etc. both general and particular average liabilities (discussed hereinafter). In other words. Labour and Travel clause after the notice of abandonment is given by him to the insurer but is not accepted by the insurer.When this clause is included in a marine policy no act of the insurer or the insured in saving. i. it cannot be taken to mean as an acceptance of the notice of abandonment.11 out. (v) Free of Capture and Seizure Clause (FCS) .This clause may be included in a time policy whereby the ship will be covered until the end of the voyage or for not more than 30 days thereafter where the ship is still at sea at the time of expiry of the policy. (ii) Waiver Clause .This clause covers.e. it will not amount that the notice of abandonment is waived.As the names suggest... (x) Jettison Clause . (vi) Continuation Clause . it covers loss of goods occurring between shipment of goods and the issuance of policy. or by explosives or by other defects in machinery of the ship. .This clause specifies the risks not covered by the insurance policy.This clause enables the insured to claim the loss caused by collision with another ship. A monthly pro rata premium is required to be deposited for this purpose. if the insurer takes any such steps.This clause covers the loss caused by jettisoning of goods.This clause covers all losses caused by wilful misconduct or defaults of the master and crew of the ship. in case the insured takes steps under Sue.As per this clause. (ix) Insurance Clause . Thus.. the FPA clause exempts the underwriter from particular average and all averages.e.

The owner of a vehicle is compulsorily required to get third party insurance under the Indian Motor Vehicles Act whereas the other types of insurance are voluntary.3 Miscellaneous Insurance Policies: In addition to the types of general insurance business discussed above. such employees are required to handle cash. the removal of movable goods by theft or burglary.Professional liability insurance protects the professionals. This may also include legal expenses incurred in defending law suits.Burglary insurance policy is issued whereby the insurer undertakes to indemnify the insured against losses from burglary. commonly known as Third Party Insurance. on the part of his employees where.. Important points to be remembered Only in general insurance policy the insured gets compensation only in case of loss sustained by him due to reasons specified in the policy. The scope of miscellaneous insurance business is very wide and encompasses almost all commercial activity.3.This type of insurance covers the risk of liability arising on account of payment of compensation where a worker suffers injury or dies in an accident in the course of his employment. Professional Liability Insurance . such as doctors. as part of their employment obligations. goods or other valuables of the employer. Loss of Profit Insurance . including fixed costs which are continued to be incurred till the business starts functioning at its normal level. i.12 Advanced Accounting 1.This type of insurance protects an employer against the frauds. Burglary Insurance . there are a number of insurance policies which cover various other types of risks. the important ones of which are discussed hereinafter. In India life insurance business can be conducted only by the Insurance Corporation of India. general insurance business is also taken over by the Government and four general insurance companies are now in operation with General Insurance Corporation of India as the holding company.Credit insurance is taken out to protect the insured against the losses caused by bad debts due to insolvency of the debtors or otherwise. and (ii) risk of liability arising from an injury or death of any person in an accident caused by a vehicle.Loss of profits insurance is often accompanied by fire insurance and it covers the risk of loss of profits caused by fire. Fidelity Insurance . Workmen’s Compensation Insurance ..Motor Vehicle insurance policies are normally taken out to cover two types of risk—(i) the risk of damage by an accident or loss by theft. Credit Insurance . lawyers and accountants. defalcations etc.5. set up under an Act of Parliament. against the risk of liabilities arising towards clients of third parties in connection with their work. . Motor Vehicle Insurance .e.

4 Distinction between Life Insurance and Other Forms of Insurance 1. Actuaries periodically estimate the liability under existing policies. On that basis a valuation balance sheet is prepared to determine the profit 5. it was felt that there still existed some scope for improvement. 1. The GIC as the holding company is entrusted with the task of superintending. Life insurance is known also Other policies by another term ‘assurance’ insurance. Determination of Liability A portion of the premium is carried forward as a provision for unexpired liability and the balance net of claims and expenses is taken as profit or loss. In view of this. 1938 The general insurance business in India is governed by the Insurance Act. 1938 which is based on the British Insurance Act. 2. -These are long term contracts running over the number of years. on May 13. These are only for one year though renewable after year. However. The Act was amended in 1969 for ‘social control’ to govern the general insurance business on healthy lines. 1971 the government nationalised the general insurance industry by an ordinance which became the General Insurance (Nationalisation) Act. Timing Payment Claim of of Life Insurance Insurable amount is payable either on the happening of the event (death) or at the maturity Other Insurance Reimbursement of loss or liability incurred will be paid at the happening of the uncertain event only.Financial Statements of Insurance Companies 5. notwithstanding the amount of policy. are known as 3. At that time there were 63 domestic insurance companies and 44 foreign insurance companies operating in India. since the insured gets an assured sum. The sum payable under it is limited to the amount of loss actually suffered or the liability incurred. The managements of all the 107 companies were taken over by the Government and accordingly the General Insurance Corporation (GIC) was formed as a government company in November 1972. 1972. controlling and carrying on the general insurance business in the . Duration Contract Assurance of 4. Value of Policy Insurance can be done for any value depending upon the premiums the insured is willing to pay.5 Some Relevant Provisions of the Insurance Act.13 1.

1938 prescribes the limitation on expenses of management in general insurance business.5. 40C of the Insurance Act. The Insurance Act. assignment or nomination of which the insurer has notice. Its subsidiaries in all the four zones of the country viz. the names and addresses of policyholders. (6) Payment of commission to authorized agents (Section 40): The Act prohibits payment of commission to any person other than authorized agent for soliciting or procuring business. Ltd. A certificate signed by the chairman and two directors must state that all expenses of management have been fully debited to the revenue account. (4) Register of claims: The insurer must also maintain a register of claims. the name and address of the claimant and the date on which the claim was discharged. the Oriental Fire & General Insurance Company (now known as the Oriental Insurance Co. If the claim was rejected. the date of rejection and the reasons there for. 1999 and these have been separately listed. (7) Limit on expenditure [Section 40A(3)]: Expenditure by way of commission which normally ranges within the limits of 5 to 15% subject to the review by GIC.` Sec.. the National Insurance Company Ltd. (5) Approved investments (Section 27B): A company carrying on general insurance business must invest its funds only in approved securities listed in this section. namely life and annuity business. Every insurer should prepare the balance sheet in accordance with the regulations contained in Part I of the First Schedule and in form set forth in Part II of that Schedule.. (3) Register of policies (Section 14): Every insurer must maintain a register of record of policies showing in respect of every policy. giving the details of claim made such as date of the claim. other classes of business and total. and the United India Insurances Company do all classes of direct business of general insurance except aviation which is done by the GIC. Some provisions have been amended by IRDA Act. the date when the policy was effected and record of any transfer. Revenue accounts are to be prepared in accordance with the forms given in the Third Schedule in respect of each class of insurance business. . Apart from these there are other statutory records to be maintained and they are listed in a separate section. 1938 provides for the computation of the limit on expenses of management. Profit and loss account and the appropriation account are to be prepared in form B and C respectively given in Part II of the same schedule. 1938 and the rules framed there under have an important bearing on the preparation of accounts of insurance companies. subject to a maximum of 15% of the premium. the New India Assurance Company Ltd. 1956.).14 Advanced Accounting country. (1) Forms for final accounts [Section 11(1)]. Rule 17E of the Insurance Rules. These forms are given in relevant sections. Some of the provisions have become irrelevant after the nationalization of general insurance. (2) Audit: The Act provides that the company carrying on general insurance business be audited as per the requirements of the Companies act. The balance sheet provides three columns.

1972 shall have the meanings respectively assigned to them in those Acts. 1938 or the Life Insurance Corporation Act. to regulate. • Premium in advance is also a Current Liability Expected claims + Expenses.15 (8) Section 64VA of the Insurance Act. 1999 (Some Relevant Amendments In Insurance Act. 1938 requires every insurer to maintain an excess of the value of its assets over the amount of its liabilities at all times. it used actuarial valuation. Words and expressions used and not defined in this Act but defined in the Insurance Act. are more than expected premium for contracts more that 4 years. 1999 and extends to the whole of India. Claims for losses incurred + Settlement cost + Claims incurred but not Reported (IBNR) + Claims incurred but not Premium is recognised When due Premium deficiency recognised if: is Expected claims + Expenses etc. are more than expected premium. promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act. The Act was published in the Gazette of India on 29th Dec. 1972 to end the monopoly of the Life Insurance Corporation of India (for the insurance business) and General Insurance Corporation and its subsidiaries (for general insurance business)..Financial Statements of Insurance Companies 5. 1938 the Life Insurance Corporation Act. The excess is known as solvency margin. Applicable to Schedule A Life Insurance Business Schedule B General Insurance Business • Over contract priod or period of risk • Unearned premium is a Current Liability and Reserve have to be created for it. 1. Expenses in the year in which they are incurred. Acquisition Cost = Expenses Expenses in the year in which acquiring or renewal policy they are incurred Claims Policy Benefit Amount + Claim settlement cosrt . 1938) The Insurance Regulatory and Development Authority Act. 1956 or the General Insurance Business (Nationalisation) Act. 1956 and the General Insurance Business (Nationalisation) Act.6 Insurance Regulatory and Development Authority Act. etc. 1999 is an act to provide for the establishment of an Authority to protect the interests of holders of insurance policies.

• The actual profits/loss on the sale of investment and enough reported (IBNER) treated in Outstanding claims. Necessary provision for unexpired risk may be made. Actuarial valuation is required for contracts more than 4 years. transfer to Revaluation Reserve.5. • Revaluation Reserve is not available for Shareholder but it is available for Policyholder to certain extent as bonus. Assumption is noted to account. • Valued at historical cost (-) Depreciation (-) impairment loss • • Impairment loss is transferred to Profit and Loss Account. Securities and Preference Share Capital c) Equity Security and derivative Instruments traded activity (Unit sold/purchased more 10. • Valued at historical cost • Revaluation in 3 years.000 units per annum) If for LIP business in force certificate for liability is in pursuant to annual inviting of LIB. • Impairment loss is transferred to Profit and Loss Account • Impairment losses on revalued asset is transferred to revaluation Account Considered as held to maturity and measured at historical cost subject to amortisation.16 Advanced Accounting Actuarial Valuation Investment a) Real Estate Investment Properties b) Debt Security including Govt. The actual Profit or Loss on the sale of investment and FVC account is transferred to Profit and . • Profit on investment = Revaluation Reserve + Profit above carrying amount. No Revaluation is required • • • • Measured at FMV FMV = Least of closing prices on stock exchange Unrealised gains/loss due to change in FMV is taken to Fair Value Change Account. • Measured at Fair Market Value (FMV) • FMV = Least of closing prices on the stock exchange • Unrealised gain / losses due to changes in FMV is taken to Fair Value Change A/c.

Interest falling due and unpaid for 6 months. Catastrophe Reserve At historical cost subject to impairment provision.• actively traded equity • shares and derivatives Instruments. Interest unpaid over 6 months. Important amendments made to the earlier Act by the IRDA Act.Financial Statements of Insurance Companies 5. a profit and loss account. Till then FVC Account is not available for dividend For declaring the dividend. 1999 (1) It is mandatory for every Insurer on or after the commencement of this Act. a separate receipts and payments account. 2. At historical cost subject to • impairment provision. It has to be created in accordance of norms and used for meeting unexpected losses which are not specified and known in advance. does not exceed 10. d) Unlisted and other non. Provision for impairment = Loan for which: remaining 1. Kept at Historical cost Provision for diminution is made if decrease in value. A separate set for each segregated fund means investment for policyholders who bear investment risk. Interest unpaid over 6 months. Till then FVC A/c is not available to • Shareholders for dividend and only specific available for bonus for policyholders. to prepare a balance sheet. The accounting year has already been changed to financial year when . a revenue account in respect of insurance business transacted by him and in respect of his shareholders funds.000 units of that securties) Loans • • Kept at historical cost • Provision for diminution it • can be reversed in case of increase but the carrying amount cannot be more than historical cost. the company can use free Reserve Debts of FVC account.17 Fair value change account is transferred to Revenue/ • Profit and Loss. Loss Account. Linked Business Valuation of interest on principle above. 2. Provision for impairment = • Loan for which: remaining 1. The carrying amount cannot exceed historical cost. (Non-active if trading Vol. Interest falling due and unpaid for 6 months. The accounts are to be prepared for every financial year instead of the calendar year.

(8) Every insurer carrying on general insurance business is required to create a ‘Catastrophe Reserve’ to meet the future potential liability against the insurance policies in. and Insurance Regulatory and Development Authority Act. So far the Authority has not issued any regulation in this regard. 1972. (7) Every insurer must submit to the Authority a prescribed return certified by an actuary in the case of life business and certified by an auditor in the case of general insurance business to show that the required solvency margin has been maintained.5. If an insurer does not maintain such a margin. Summary • Claims: it refers to the amount payable by insurer to the insured when policy becomes due or the mishappening occurs. manner and other conditions of investment with a view to protect the interests of policyholders.18 Advanced Accounting insurance companies prepared the accounts for 15 months ending with the financial year 1988-89. Insurance Regulatory and Development Authority Regulations. The amendment raises commission on fire and marine policies from the previous 10% to 15%. . (3) Insurers are prohibited from investing either directly or indirectly their funds outside India. • Premium: it refers to the consideration received by the insurance company to undertake the risk of the loss. Creation of this reserve should be in accordance with the regulations issued by the Authority. The directive might have become necessary because of the change in the previous year effected by Income Tax Act. force. The Act was amended requiring previous year to be the financial year. 1938. he has to submit a financial plan indicating a plan to correct the deficiency. Claim = Claim intimated + Survey fees + Medical expenses – Claims received on insurance. 2002 . Life Insurance Corporation Act. Insurance Act. the insurer may be deemed to be insolvent and the company may be wound up by the court. 1956. (4) The Regulatory Authority has the power to direct the insurers to invest funds in infra structure and social sectors subject to certain conditions. References: Study on Audit of companies carrying on General Insurance Business published by the Institute of Chartered Accountants of India. (2) Every insurer must keep separate accounts relating to funds of shareholders and policyholders. (6) There is a necessity for insurers to keep a required solvency margin. General Insurance (Nationalisation) Act. It is always net of premium paid on reinsurance. If these requirements are not met to the satisfaction of the Authority. The margin refers to the excess of assets over liabilities. The authority in general has the power to direct the time. in response to Government directive. This reserve is not created for any specific or known purpose. 1999.

it reinsure itself. This is in consideration of lumpsum money paid by him in the beginning of the policy. . This bonus is added in the amount of claims. Some risk retains with some other insurer. Such a bonus is included in claims. Interim Bonus: it refers to bonus paid on the maturity of policy in the year for which the profit has not yet been determined.Financial Statements of Insurance Companies 5. The policy holders get 95% of the profit of LIC by way of bonus. Bonus: the profit of LIC is distributed among the shareholders and policy holders. The bonus may be of following types: Cash Bonus: paid on declaration of bonus in cash.19 • • Annuity (LIC): it is fixed annual payment received regularly till insured lives. Revisionary Bonus: it is paid with the policy maturity instead of cash amount now. • Reinsurance : if an insurer is not willing to bear the whole of the risk. Bonus in reduction of Premium: Bonus is not paid in cash but adjusted against the future premiums.

♦ Familiarize with the format of claim statement and try to understand how to compile the claim provisions. and miscellaneous insurance business. outstanding premium and commission.5. you will be able to: ♦ Understand the issues involved in the general insurance and learn the books of accounts/records which should be maintained at the divisional office of a general insurance company. the four subsidiaries of the General Insurance Corporation operate through their Head Offices. Transactions related to operations at the branches are communicated for accounting thereof at the divisions. marine. The branches of the divisions submit adequate information and evidence of . Regional/Area Offices. separate bank accounts are maintained for premium collections and for disbursement of expenditure. ♦ Understand the concept of re-insurance 2.20 Advanced Accounting Unit . ♦ Learn the technique of creating unexpired risks reserve in case of fire. co-insurance. The most important part of the business operations comprises the issuance of policies for risks assumed and to indemnify the insured for losses to the extent covered by such policies. In financial terms these operations get translated into— (a) the receipt/recording of premium income.1 Functional Divisions and Books of Accounts Maintained Therein Considering the nature and spread of the general insurance business. Insurance companies debit all management expenses to a control account in the general ledger. The accounting for these operations in these offices involve recording of premium income and provisions and payments in respect of claims under policies. and (b) the recording and settlement of claims for losses. ♦ Be familiar with the details of loans and investments of an insurance business and the books and records normally maintained in the investment department of an insurance company. The business operations stated above are essentially confined to the divisional offices and the branches attached to these divisions. collections are transmitted to the relevant controlling office and the concerned account is not normally operated upon for expenditure etc. Learn the technique of accounting of the management expenses and analysis thereof. Divisions and Branches attached thereto. Generally. Normally.2 : Accounting Technique of General Insurance Business Learning Objectives After studying this unit. ♦ Understand the meaning of claims paid.

claims provisions and payments and operation of bank accounts. Cash Receipts. Claims Disbursement Book. reinsurance and other administrative matters which are dealt with at the Head Office. 2. Bank Transfer Journal. Sub-Ledgers. Policy Stamp Register. Salvage Register.Financial Statements of Insurance Companies 5. Journal. Cash Disbursement Vouchers and Journal Vouchers. Dishonoured Cheque Register. The returns from the branches will include all transactions by way of documents relating to premium received. (xxiii) Co-insurers Register. (xxii) Excess/Shortage Register. Other major areas of accounting involve accounting for investments.2 Claims Provision at Divisional Offices The outstanding liability at the year-end is determined at the divisions/branches where the liability originates for outstanding claims. Daily Cash Balance Book. Cash Disbursement Book. based on the total consolidated figure for . (xviii) Stationary Register. General Ledger.21 transactions relating to their operations. State Cheque Register. Premium Register. Register for Analysis of Management Expenses. (xvii) Claims Recovery Register. Thereafter. (xix) (xx) (xxi) Trunk Call Register. The following books of account/records are normally maintained at a divisional office: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) Cash Receipt Book. Remittances Received Register. Summary Books for incorporation of Branch Returns (Cash Receipt Statements. Cash Disbursement Statements and Premium Register after these are duly checked). Assets Register.

Relevant evidence in respect of each claim is retained in each claim file and the liability is discharged after obtaining sanction of the relevant authority on the basis of amounts involved. total of outstanding claims comprises the estimated liability recorded at the Divisions/Branches and the further provision made on this account at head office. Sometimes a year-end statement is also prepared showing month-wise figures so communicated. which will result in future cash/asset outgo for settling liabilities against those claims. where communication is made after a considerable time lag or after the cut-off date for preparation of final accounts) the company at its head office makes an additional provision over and above that made by Divisions/Branches on the Divisional Auditors’ Reports. engineering.5. A liability for outstanding claims shall be brought to accounts in respect of both direct business and inward reinsurance business. Every division prepares a claims statement in the format given on the next page.3 Claims Paid For each class of business. The divisional offices are expected to submit to the Head Office. which are dealt with at head office. if any is provided as IBNR/IBNER. Marine and Miscellaneous business (excluding motor. in the relevant revenue accounts. statements at regular intervals as to claims paid or provided for. and the shortfall.5% in respect of Fire. claims paid separately. for re-insurance adjustments. the insurance companies have to disclose. the Head Office considers a further provision in respect of outstanding claims. Such liability is presently being cushioned to the extent of 5. To cover the possibility of errors in judgement in estimation or in cases of under-estimation of liability (where full details are not available) as also for the possibility of liability not being considered for claims incurred but not reported due to the nature of risks being such (e.22 Advanced Accounting all the divisions/branches. This provision is subject to the amount to be adjusted for re-insurances. The divisional offices first ascertain the genuineness of the claim and ensure completion of the necessary formalities to enable the settlement to be made. At the end of each financial year. hull and credit guarantee) and 10. In view of the above. aviation.5% for motor and engineering business. Change in estimated liability represents the difference between the estimated liability for outstanding claims at the beginning and at the end of the financial period..g. . The liability shall include: (a) Future payments in relation to unpaid reported claims. 2. as required by IRDA the actuarial valuation of the claims liability of an insurer is made by the appointed actuary. (b) Claims Incurred But Not Reported (IBNR) including inadequate reserves [sometimes referred to as Claims Incurred But Not Enough Reported (IBNER)].

23 2. The leading insurer issues the documents. In case the statement is not received. Statements of Account are rendered by the leading insurer to the other co-insurers. Reference to the relevant communications should be made from the concerned companies to ensure that premium collected by them and attributable to the company is recorded. collects premium and settles claims. Incoming Co-insurance (i) Premium . 2. 1938. There may however be cases of premium otherwise receivable and due but which remains uncollected at the year-end. The share of other co-insurers is credited or debited. advices received from the leading insurer.Premium in respect of risk accepted under Bank Guarantee and Cash Deposit received either directly or through agents is accounted for with reference to the limits available. Accounting for premium. Normally. claims etc. (iii) Claims Paid .Normally.5 Outstanding Premium This should normally comprise amounts due for uncollected premium where the company is allowed relaxation to the provisions of Section 64VB of the Insurance Act. to their personal accounts and not routed through revenue accounts. (a) Bank guarantee limits available . It is a practice to treat all claims paid advices relating to the accounting year received upto 31st January of the subsequent year from leading insurer as claims paid. share of premium relatable to further extension/endorsements on policies by the leading insurer are also accounted for on the basis of subsequent advices. monthly statements are prepared and submitted to every party and the balances of outstanding premium are recovered before .2.Financial Statements of Insurance Companies 5.The co-insurer books the premium based on the statement received from the leading insurer usually by issuing dummy documents. as the case may be. Outgoing Co-insurance The share of the insurer only for both premium and claims has to be accounted under respective accounts. Entries are made in the Premium Register from which the Premium Account is credited and the Leading Insurer Company’s Account debited. (ii) Claims Provisions – Refer para 2. on the basis of claims paid. The outstanding balances are expected to be temporarily outstanding and should be recovered within the stipulated period after the year-end.4 Co-Insurance In cases of large risks the business is shared between more than one insurer under coinsurance arrangements at agreed percentages. under co-insurance is done in the same manner as that of the direct business except in respect of the following peculiar features. All such advices are entered into the Claims Paid Register. the premium is accounted for on the basis of advices to ensure that all premium in respect of risk assumed in any year is booked in the same year. the Claims Paid Account is debited with a credit to the co-insurer.

2. under the provisions of General Insurance Nominalisation Act. Outstanding premium in excess of bank guarantee available should be reported. On security of municipal and other public rates.I.24 Advanced Accounting the close of the following month. 1938..The balance of this account is always credit except in cases where the premium due exceeds the cash deposits resulting in debit balance recoverable from the party. Provision for outstanding expenses is made at the divisional office level. the G. marine and miscellaneous revenue accounts apportioned as recommended by the Guidelines framed by the General Insurance Corporation for this purpose. On personal security. Loans on Reversions and Life Interests. Loans to Subsidiary Reversionary Companies.6 Commission Section 40A(3) of the Insurance Act. However. On Insurer’s policies within their surrender value. 1938.C. . It may be noted that all expenses of management are debited to a control account in the general ledger under “Expenses of Management” with a supporting subsidiary ledger viz.7 Loans Part II of the First Schedule to the Insurance Act. Management Expenses Accounts Classification Schedule is normally annexed to the Trial Balance and forms a part thereof. “Analysis of Management Expenses” wherein expenses for each classified category are posted and reconciled with the control account. Such expenses are shown separately under fire. requires the following items to be disclosed in the balance sheet: Loans: On mortgages of property within India. Debentures and Debenture stocks of Subsidiary Reversionary Companies. 2. To Subsidiary Companies (other than Reversionary). deals with and prescribes the basis and rates of commission payable to agents.5. Reversions and Life Interests purchased. On stocks and shares. (b) Cash Deposit . and as to the basis of such apportionment. Debit balance in the cash deposit account is shown separately since they are classified separately with the debit balance under outstanding premium on the assets side of the balance sheet. is empowered to regulate the commission structure. Ordinary stocks and share of Subsidiary Reversionary Companies. On mortgages of property outside India. a note is appended to the accounts.

Stocks and other securities whereon Interest is guaranteed by the Indian Government or State Government Bonds. Debentures. Term loans may often be preceded by bridge loans to such undertakings pending completion of all formalities. 15. 3. 14. Stocks and other Securities whereon Interest is guaranteed by the British or any Colonial Government Bonds. 8. Except for housing and other loans to staff which may be recorded at the Divisions/Regional level other loans are usually dealt with at Head Office. 18. 2. 9. 7. 11. 13. 2. The various types of investments normally included in the Balance Sheet are given below: 1. Debentures. 16. 10. 6.8 Investments Investments in general insurance companies are governed by the provisions of Section 27B of the Insurance Act. 17. 4. 1938 as well as by the guidelines issued from time to time by the Ministry of Finance through General Insurance Corporation of India. 5. Stocks and other Securities whereon Interest is guaranteed by any Foreign Government Debentures of any Railway in India Debentures of any Railway out of India Preference or guaranteed Shares of any Railway in India Preference or guaranteed Shares of any Railway out of India Railway Ordinary Stocks (i) in India (ii) out of India Other Debentures and Debenture Stock of Companies incorporated (i) in India (ii) out of India Other Guaranteed and Preference Stocks and Shares of Companies incorporated (i) in India (ii) out of India Other Ordinary Stocks and Shares of Companies incorporated (i) in India (ii) out of India Holdings in Subsidiary Companies. Debentures.25 Besides the above items the present practice is also to disclose loans to industrial undertakings in India on consortium basis with the GIC and the four subsidiary companies and/or other financial institutions. British Colonial and British Dominion Government Securities Foreign Government Securities Indian Municipal Securities British and Colonial Securities/Foreign Securities Bonds. Deposit with the Reserve Bank of India (Securities to be specified) Indian Government Securities/State Government Securities British.Financial Statements of Insurance Companies 5. . 12.

. The estimates are reviewed and revised periodically if necessary. the investments are made accordingly in each category.5.26 Advanced Accounting As per the Guidelines presently applicable. the investible funds have to be invested on the following pattern : (i) (ii) (iii) Central Government Securities State Government Securities Housing Loans (a) To HUDCO (b) State Governments for housing (iv) Market investment — — — 15% of annual accretion 20% of annual accretion 30% of annual accretion — — 25 % of annual accretion 10% of annual accretion On the basis of estimates made at the beginning of the year. classified as to nature of investments. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) Contracts (Bought/Sold Notes) Copies of the Delivery Instructions Purchase Registers Application Money Registers Allotment and Call Money Registers Rights Issue/Bonus Issue Registers Sales Redemption Registers Term Loans Registers Fixed Deposits/Participation Certificates/Bills Register Underwriting Registers Dividend Reconciliation Register Interest Reconciliation Register Safe-custody Receipts issued by banks Cash Book/Bank Book Investments sub-ledgers General Ledgers Investment Schedules. The following books and records are normally maintained in the Investment Department of the Head Office of a company carrying on general insurance business.

In view of this the reserves are created at the rates allowed under the Income-tax Act. This reserve is based on the Net Premium income earned by the insurance company during the year. It may be mentioned that the insurance companies are governed by the provisions of Section 44 of the Income-tax Act. the insurance companies are allowed a deduction of 50 per cent of net premium income in respect of Fire and Miscellaneous Business and 10 per cent of the net premium income relating to Marine Insurance business. a provision for unexpired risks is made. Marine Cargo and Miscellaneous business except for Marine Hull which has to be 100 per cent. furnishes you with the following information : (i) On 31.2010 it had reserve for unexpired risk to the tune of ` 40 crores. It is the practice of Indian Insurance Co. Many policies extend into the following accounting year during which the risk continues. In this regard.Financial Statements of Insurance Companies 5. Therefore on the closing date there is an unexpired liability under various policies which may occur during the remaining term of the policy beyond the year and therefore. According to this Rule. Such additional reserve for unexpired risk will also be debited to the revenue account. the following business was conducted : . The effort involved in calculating unexpired portion of premium under each policy is very time consuming. Therefore. According to the requirements of the Insurance Act. It comprised of ` 15 crores in respect of marine insurance business : ` 20 crores in respect of fire insurance business and ` 5 crores in respect of miscellaneous insurance business.9 Unexpired Risks Reserve Insurance Company. close their accounts on 31st March but not all risks under different policies expire on that date. The balance will be shown in the balance sheet as in the case of normal reserve for unexpired risk. Additional reserve for unexpired risk • In a particular year the management may feel that the percentage of premium recommended by the General Insurance Council is not sufficient to meet the unexpired risks. • Illustration 1 Indian Insurance Co. Rule 5 of the First Schedule to the Income-tax Rules — computation of Profit & Loss of General Insurance Business — provides for creation of a reserve for unexpired risks as prescribed under Rule 6E of the said Rules. to create reserves at 100% of net premium income in respect of marine insurance policies and at 50% of net premium income in respect of fire and miscellaneous income policies. 1061.27 2. and will be transferred to the credit of next year’s revenue account. In such a situation they may provide additional reserve. Ltd. (ii) (iii) During 2011. Ltd. a simple formula to derive a percentage of premium income to be allocated to reserve for unexpired risks is adopted. it is sufficient if the provision is made for unexpired risks at 50 per cent for Fire.12.

Ltd.85 crores [(43 + 5 – 4.5 crores [(12 + 4 – 7)/2] credited to miscellaneous revenue account).28 Advanced Accounting Marine Premia collected from : (a) Insureds in respect of policies issued (b) Other insurance companies in respect of risks undertaken Premia paid/payable to other insurance companies on business ceded Fire Miscellaneous (` in crores) 18 7 6.5. 2011 Dec.30 3. 3. 0. Cr. 1. Solution (a) Journal of Indian Insurance Co. Dr.7) and opening provision Dr.50 0. 31 Marine Revenue A/c To Unexpired Risks Reserve A/c (Being the difference between closing provision of ` 18.3 12 4 7 Indian Insurance Co.30 crores (18 + 7 – 6.7 43 5 4.30 of ` 15 crores charged to marine revenue account) Fire Revenue A/c To Unexpired Risks Reserve A/c (Being the difference between closing provision of ` 21. Ltd. asks you to : (a) Pass journal entries relating to “Unexpired risks reserve”. (b) Show in columnar form “Unexpired risks reserve” a/c for 2011.85 of ` 20 crores charged to fire revenue account) Unexpired Risks Reserve A/c To Miscellaneous Revenue A/c (Being the excess of opening balance of ` 5 crores over the required closing balance of ` 4.50 . (` in crores) Dr.3)/2] and opening provision Dr.85 1.

This is called as reinsurance. The accounting entries pertaining to re-insurance business ceded to and by an insurance company may be explained with the help of an example: (X insurance company cedes re-insurance business to Y insurance company and Z insurance company cedes re-insurance business to X insurance company.00 ` 5.29 (` in crores) Fire Miscellaneous Marine Fire Miscellaneous ` To Revenue A/c To Balance c/d – ` ` 2011 0.85 21. retaining only that much risks which it can absorb. A ‘ceding company’ is the original insurance company which has accepted the risk and has agreed to ‘cede’ or pass on that risk to another insurance company or a reinsurance company.30 18. one insurance company cannot afford to cover. the insured’s claim for full amount is against the original insurer. therefore.85 21. it reinsures itself. A reinsurance transaction may thus be defined as an agreement between a ‘ceding company’ and a ‘re-insurer’ whereby the former agrees to ‘cede’ and the latter agrees to accept a certain specified share of risk or liability upon terms as set out in the agreement.00 3.30 18. aviation insurance.00 ` 20. It may however be emphasized that the original insured does not acquire any right under a reinsurance contact. 31 Unexpired Risks Reserve A/c 5.85 – 5. Both re-insurer and original insurer share the premium and risk in the same proportion and decided by them earlier. Generally.5 Jan 1 Dec.00 Note : Alternatively. an insurance company insures the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies. the opening balances of unexpired risk reserves may be reversed in the beginning of year by transfer to Revenue account and fresh reserve of full required amount may be created at the end of the year which will be carried forward as closing balances.30 1.. because of their magnitude or nature. Some risk retains with some other insurer. if an insurer is not willing to bear the whole of the risk.50 5.85 4.10 Re-Insurance In general insurance there are risks which. 31 By Balance b/d By Revenue A/c ` 15.g.) Accounting entries pertaining to re-insurance business ceded to and by X insurance company in the above example may be given as follows: .Financial Statements of Insurance Companies (b) Marine 2011 Dec.30 21. e. In the event of loss.00 18. 2. In other words. in such cases.

000 1.000 towards reinsurance accepted and paid ` 70.000 7. Y Insurance Co A/c To Claims (on reinsurance ceded) Z Insurance company cedes reinsurance business to X:1.000 towards reinsurance ceded.000) 7.000 90. Dr.000 . Y Insurance Co A/c To Commission (on Reinsurance ceded) 3.90.30.000 as premium on new policies and ` 1.5. Ltd. xxxx xxxx Dr. xxxx xxxx To Re-Insurance premium (on reinsurance accepted) (Being premium on business ceded by Z insurance company recorded) 2.10.000 as renewal premium. xxxx xxxx Dr. for part of insurance business ceded) (Being commission due on re-insurance business ceded to Z company debited) (Being claims on re-insurance business accepted from Z company recorded) Premium received in respect of new policies Add: Renewal premium Add: Re-insurance premium accepted Less: Re-insurance ceded Premium amount to be credited to Revenue A/c ` 5. xxxx xxxx (Being premium on reinsurance business ceded to Y Insurance Co recorded) (Being commission due on re-insurance business ceded to Y Insurance Co recorded) (Being claims receivable from Y Co. The company received ` 90. received ` 5.20. Commission (on Reinsurance ceded) To Z Insurance Co 3.000 8. How much will be credited to Revenue Account towards premium? Dr. Z Insurance Co A/c Dr. Re--Insurance Premium (on reinsurance ceded) A/c To Y Insurance Co 2.00.000 (70. xxxx xxxx xxxx xxxx Dr.30 Advanced Accounting In the books of X Insurance Company X Insurance company cedes reinsurance business to Y:1.90.20. Claims (on reinsurance accepted) A/c To Z Insurance Co Computation of Premium Income Illustration 1 Janani Assurance Co.

all the companies jointly bear the risk. Commission on Reinsurance ceded: Reinsurance generally gets commission for giving the business under reinsurance contract. Direct Re-insurance business Accepted Insurance Company Re-insurance business ceded Summary • • • Commission on Reinsurance Accepted: The reinsurer generally allows commission to reinsured on apart of business ceded.e.. These limits can be monetary. Coinsurance: when a large risk is offered to an insurance company. THERE ARE TWO TYPES OF REINSURANCE CONTRACTS: 5.Financial Statements of Insurance Companies BROADLY SPEAKING. proportional treaties and non-proportional treaties. It appears as an income in revenue account. then that insurance company retains certain percentage of sum insured and contracts other insurance company to underwriter the balance of risk. Treaties can also be divided into two categories. section of business. i. In this way. etc. for the ceding company to offer and the reinsurer to accept. Reserve for unexpired Risk: • For Marine Business For others = = 100% of net premium income 50% of net premium income . Each transaction under Facultative Reinsurance has to be negotiated individually and each party to the transaction has a free choice. geographical. This is treated as expense of the company. Facultative Reinsurance : It is that type of reinsurance whereby the contract relates to one particular risk and is expressed in a reinsurance policy.31 1. viz. The main drawback of this type of insurance is the volume of work involved and time taken to cover the risk. Under this contract it is obligatory for the re-insurer to accept all risks within the scope of this Treaty and it is obligatory for the ceding company to cede risks in accordance with the terms of the Treaty. Treaty Insurance: Under this type of reinsurance a Treaty agreement is entered into between ceding company and the re-insurer(s) whereby the reinsurances are within the limits of the Treaty. 2. One is called as the leader who issues the policy and acts on behalf of others.

As per the IRDA Guidelines. Part IV: Contents of Management Report Part V: Preparation of financial statements. after consultation with the Insurance Advisory Committee. you will be able to: ♦ Prepare financial statements of insurance companies carrying on life insurance business. ♦ Prepare financial statements of insurance companies carrying on general insurance ♦ Understand the requirements of IRDA Regulations. an insurer carrying on general insurance business shall comply with the requirements given in Schedule B and the report of the auditors shall be in conformity with the requirements of Schedule C. Recently that Guidelines are revised and a new set of guidelines have been issued vide notification dated 30th March. 1938 (4 of 1938) published the Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations 2000 in the official Gazettee on 14th August.irdaindia. 3. 3. 2002. 2000.5. in exercise of the powers conferred by section 114A of the Insurance Act. an insurer carrying on life insurance business shall comply with the requirements given in Schedule A.org].1 Introduction Insurance Regulatory and Development Authority.32 Advanced Accounting Unit – 3 : Financial Statements of Insurance Companies Learning Objectives After studying this unit. 2002 [www. Form B-RA: Revenue Account Form B-PL: Profit and Loss Account Form B-BS: Balance Sheet and 15 Schedules forming part of financial statements Part I: Accounting Principles for preparation of financial statement Part II: Disclosures forming part of Financial Statements Part III: General Instructions for preparation of financial statements Part IV: Contents of Management Report Part V: Preparation of Financial statements Form A-RA: Revenue Account Form A-PL: Profit and Loss Account Form A-BS: Balance sheet and 15 Schedules forming part of financial statements .2 Structure of Schedules A and B: The following table depicts the structure of schedules A and B given under IRDA regulations: Schedule A for Life Insurance Business Schedule B for General Insurance Business Part I: Accounting Principles for preparation of financial statements Part II: Disclosures forming part of Financial Statement Part III: General Instructions for preparation of financial statements.

3. and .4 IRDA Regulations.RA. These forms have been given in the IRDA Regulations. Revenue account [Policy holders’ account] Form A. after the commencement of these Regulations. Profit and loss account Form A-PL. given at the end of this Chapter. (3) The report of the auditors on the financial statements of every insurer and reinsurer shall be in conformity with the requirements of Schedule C. to reinsurers until separate regulations are made for them. shall comply with the requirements of Schedule B: Provided that this sub-regulation shall apply. General Insurance Business The insurance company carrying on general insurance business is required to prepare Balance Sheet Form B – BS.Financial Statements of Insurance Companies 5. 2002. These forms have been given in the IRDA Regulations. after the commencement of these Regulations. whether the profit and loss account gives a true and fair view of the profit or loss for the financial year/period. SCHEDULE C (See Regulation 3): AUDITOR’S REPORT The auditors shall express their opinion on • • • whether the balance sheet gives a true and fair view of the insurer’s affairs as at the end of the financial year/period.RA. Revenue account [Policy holders’ account] Form B. Profit and loss account Form B-PL.33 3. whether the revenue account gives a true and fair view of the surplus or the deficit for the financial year/period. Preparation of financial statements. management report and auditor’s report (1) An insurer carrying on life insurance business. No form has been specified for cash flow statement. or as near thereto as the circumstances permit. shall comply with the requirements of Schedule A. Note: For details regarding Schedule A and Schedule B refer Annexure I and Annexure II respectively.3 Financial Statements Life Insurance Business The insurance company carrying life insurance business is required to prepare Balance sheet Form A – BS. 2002 Some of the contents of the IRDA Regulations. mutatis mutandis. 2002. No form has been specified for cash flow statement. 2002 have been given below: 1. (2) An insurer carrying on general insurance business.

10.000 38. 2002.90.00.50.000 63.10.25.800 5.40.20.000 2.300 4. prepare Profit and Loss Account and Balance Sheet.000 2.750 2. Illustration 1 From the following balance as at 31st March.000 22.000 81.500 2.500 1.750 . 2011 Annuities paid (in India 72. Profit and Loss Account.. 3.00.000) Bank Loan ` ‘000 18. Ltd.000 20.000 2.000 14. 2012 in the books on the National Life Assurance Co. ` ‘000 Life Assurance Fund on April.20.500) General Reserve Deposit with the Reserve Bank —Government Securities Indian Government Securities Foreign Government Securities Loan on Company’s Policies Leasehold Buildings Securities on which interest is guaranteed by the Government Stocks of Shares of companies incorporated in India Share Capital (20.90.500 40.000 14.000) —By Maturity (in India 1.500 47.30.000 47.000 2. The auditor should also comply with other provisions stated in the IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations.000 12. Balance Sheet and its Schedules as prescribed in Part V of Schedule A for Life Insurance business given in Annexure I for better understanding of the llustration given here under.000 70.000 shares @ ` 100 each) Mortgages in India Cash with Bankers on 1st 34. Students are required to go through the formats of Revenue Account.000 50.00.5 Preparation of Financial Statements After studying IRDA Regulations.34 Advanced Accounting • whether the receipts and payments account gives a true and fair view of the receipts and payments for the financial year/period.50.500 Agents’ Balances Advances to ceding companies Due from Re-insurers Due to Re-insurers Sundry Creditors Premiums : First year Renewal Reinsurance accepted Reinsurance ceded Interim Bonus to Policy-holders Commission – Direct : First year Renewal Reinsurance accepted Reinsurance ceded Claims —By Death (in India 1.000 1.32.000 10.5.000 21.000 75. let us work out few illustrations which will help you in understanding the procedure for preparation of financial statements of insurance companies.000 4.

000 Travelling Expenses 1.000 Proposed divided @ 10% Transfer the surplus amount if any to Life Fund for the year ended 31st March.06.000 Law Charges 3. Ltd.600 7.400 Auditors’ Fees 5.950 66.000 9.000) 50.400 7.000 2 50.Financial Statements of Insurance Companies Current Account Cash with Bankers on Deposit (short-term) Account Cash in hand State Government Securities Furniture and Fixtures Outstanding Premiums 5. 2012 5% dividend is also proposed.90. 2012 Policyholders’ Account (Technical Account) Particulars Schedule Current Year (` ’000) Previous Year (` ’000) Premiums earned – net (a) Premium (b) Reinsurance ceded (c) Reinsurance accepted 1 7.000 Interest and Rents Received (Gross) 1. Dividends & Rent – Gross (b) Profit on sale redemption of investments (c) (Loss on sale/redemption of investments) (d) Transfer/Gain on revaluation change in fair value* Other Income (to be specified) Total (A) 2. Solution In the books of National Assurance Co.10.95.25.000 6.000 20.000 Other Expenses of Management 750 39.000 (70.35 40.000 Income from Investments (a) Interest. Revenue Account for the year ended 31st March.000 Rent paid 3.500 Salaries 30.16.500 Commission .

500 Benefits Paid (Net) Interim Bonuses Paid Change in valuation of liability against life policies in force (a) Gross** (b) (Amount ceded in Reinsurance) (c) Amount accepted in Reinsurance Total (C) Surplus [(A) – (B) – (C)] Appropriations 5.85.01.750 Transfer to Shareholders’ Account Transfer to Other Reserves (to be specified) Transfer to Funds for Future Appropriations Total (D) Form A-PL Profit & Loss Account for the year ended 31st March.24.750 1.750 Previous Year (` ’000) Balance brought forward from/transferred to the Policyholders Account (Technical Account) Income From Investments (a) Interest.000 4 5.750 22. 2012 Shareholders’ Account (Non-technical Account) Particulars Schedule Current Year (` ’000) 1.36 Advanced Accounting Operating Expenses related to Insurance Business Other Expenses (to be specified) Provisions (other than taxation) (a) For diminution in the value of investments (Net) (b) Others (to be specified) Total (B) 3 45. Dividends & Rent – Gross (b) Profit on sale/redemption of investments 2.5.500 — 96.85.750 .85.85.250 2.

000 whichever is higher. (d) Claims incurred shall comprise claims paid. settlement costs wherever applicable and change in the outstanding provision for claims at the year-end.Financial Statements of Insurance Companies 5.000 (a) In case of premiums. shall be shown as a separate line item.. (b) Premium income received from business concluded in and outside India shall be separately disclosed. before deducting commissions) under the head reinsurance premiums.750 1.85.37 (c) (Loss on sale/redemption on investments) Other Income (To be specified) Total (A) Expense other than those directly related to the insurance business Provisions (Other than taxation) (a) For diminution in the value of investments (Net) (b) Other (to be specified) Total (B) Profit/(Loss) before tax Provision for Taxation Profit/(Loss) after tax Appropriations (a) Brought forward Reserve Surplus from the Balance Sheet (b) Interim dividends paid during the year (c) Proposed final dividend (d) Dividend distribution on tax (e) Transfer to reserves/other accounts (to be specified) Profit carried forward to the Balance Sheet Notes : 85. .00. less reinsurance in respect of any segment of insurance business of total Premium earned.750 1. the same shall be disclosed separately. (e) Items of expenses and income in excess of one percent of the total premiums (less reinsurance) or ` 5. (c) Reinsurance premiums whether on business ceded or accepted are to be brought into account gross (i. (f) Fees and expenses connected with claims shall be included in claims.00.e.

dividends and rentals receivable in connection with the investment should be stated as gross amount.38 Advanced Accounting (g) Under the sub-head “Others” shall be included items like foreign exchange gains or losses and other items.10.42.00. (h) Interest.5.” (i) Income from rent shall include only the realised rent.00.500 1. 2012 Shareholders’ Account (Non-technical Account) Schedule Current Year (` ’000) Previous Year (` ’000) st Sources of Funds Shareholders’ Funds Share Capital Reserves and Surplus 5 6 20.000 Investments Shareholders’ Policyholders’ Assets held to cover linked liabilities Loans Fixed Assets 9 10 16. the amount of income tax deducted at source being included under advance taxes paid and taxes deducted at source.300 .80.750 Credit/[Debit] Fair value change account Sub-Total Borrowings Policyholders’ Funds Credit/[Debit] Fair value change account Policy Liabilities Insurance reserves Provision for linked liabilities Sub-Total 7 69.000 8 40.250 Funds for future appropriations Total Application of Funds 58.000 38. It shall not include any notional rent.02. Balance Sheet as at 31 March.

8.10.800 1. under the head of reinsurance premiums.35.01.000 1. 3.000 1.39 Current Assets Cash and Bank Balances Advances and Other Assets Sub-Total (A) 11 12 13 14 67.90. .Financial Statements of Insurance Companies 5.000 1.800 1.9.000 1.20.69.500 2. 2. before deducting commission. 2.10 & (C)] SCHEDULE–1: PREMIUM Particulars 58.37.000 7.200 — Current Liabilities Provisions Sub-Total (B) Net Current Assets (C) = (A – B) Miscellaneous expenditure (to the extent not written off or adjusted) Debit Balance in profit & Loss Account (Shareholders’ Account) Total [Sch.00.000 SCHEDULES FORMING PART OF FINANCIAL STATEMENTS Current Year (` ’000) Previous Year (` ’000) 1. First year premiums Renewal premiums Single premiums Total premiums Premiums Income from business written : 5. In India Outside India Total premiums (Net) Notes : Reinsurance premiums whether on business ceded or accepted are to be brought into account.80.500 1.

400 5.000 (4.500 Net Commission Notes : The profit/commission. 3.600 3. SCHEDULE–3: OPERATING EXPENSES RELATED TO INSURANCE BUSINESS Particulars Current Year (` ’000) Previous Year (` ’000) 1.40 Advanced Accounting SCHEDULE–2: COMMISSION EXPENSES Particulars Current Year (` ’000) Previous Year (` ’000) Commission paid Direct – First year premium – Renewal premiums – Single premiums Add : Commission on Re-insurance Accepted Less : Commission on Re-insurance Ceded 40. in respect of (i) Taxation matters (ii) Insurance matters (iii) Managements services. and 30. 8. conveyance and vehicle running expenses Rents.5. 4. 7. 9.000 12.000) 50.950 3. if any. 2.400 . rates & taxes Repairs Printing & stationery Communication expenses Legal & professional charges Medical fees Auditors’ fees. are to be combined with the Re-insurance accepted or Reinsurance ceded figures. 5. expenses etc.500 2.400 1. (a) as auditor (b) as adviser or in any other capacity. Employees’ remuneration & welfare benefits Travel. 6.

specify 2. shall be shown as a separate line item. 12. ‘Operating Expenses (Insurance Business)’ Shall include items like foreign exchange gains or losses and other items.00. (d) Other benefits. Advertisement and publicity Interest & Bank Charges Others (to be specified) Depreciation Total Notes : 750 45. Amount accepted in reinsurance : (a) Claims by Death.750 2. (c) Annuities/Pensions in payment. (b) Under the sub-head “Others”.000 2. . SCHEDULE–4: BENEFITS PAID [NET] Particulars Current Year (` ’000) Previous Year (` ’000) 1. (c) Annuities/Pensions in payment.500 (a) Items of expenses in excess of one percent of the net premium or ` 5. Insurance Claims (a) Claims by Death. (Amount ceded in reinsurance) : (a) Claims by Death. (b) Claims by Maturity. (c) Annuities/Pensions in payment.41 (c) in any other capacity 10.20. 13.000 81. 11.000 whichever is higher. specify 3. (b) Claims by Maturity.Financial Statements of Insurance Companies 5. (b) Claims by Maturity. (d) Other benefits.00.

the same should be separately disclosed..59..750 3.500 1..00.42... 2... each Issued Capital Equity Shares of ` . specify Total Benefits paid to claimants : 5.. .000 Notes : (a) Particulars of the different classes of capital should be separated stated. 3..750 1..00. each Called-up Capital Equity Shares of ` . 2. (c) In case any part of the capital is held by a holding company. wherever applicable. each Less : Calls unpaid Add : Share forfeited (Amount Originally paid up) Less : Par value of Equity Shares bought back Less : Preliminary Expenses Expenses including commission or brokerage on Underwriting or subscription of shares Total 20..000 20..... (b) The legal and other fees and expenses shall also form part of the claims cost..250 5.01. 4. Authorised Capital Equity Shares of ` ...42 Advanced Accounting (d) Other benefits. (b) The amount capitalised on account of issue of bonus shares should be disclosed. In India Outside India Total Benefits paid (Net) Notes : (a) Claims include claims settlement costs..5.01. wherever applicable SCHEDULE–5: SHARE CAPITAL Particulars Current Year (` ’000) Previous Year (` ’000) 1. each Subscribed Capital Equity Shares of ` . 5..

000 35.000 36. if any Less Amount utilized for Buy-back Catastrophe Reserve Other Reserves (to be specified) Life Fund Balance of profit in Profit and Loss Account Total 2. 3.85. SCHEDULE–7: BORROWINGS Particulars Current Year (` ’000) Previous Year (` ’000) 1. 6.000 Notes : Additions to and deductions from the reserves should be disclosed under each of the specified heads.25. 5. 2. Debentures/Bonds Fixed Deposits Banks 21. Capital Reserve Capital Redemption Reserve Share Premium Revaluation Reserve General Reserves Less : Debit balance in Profit and Loss Account.10. 3. 4.750 .Financial Statements of Insurance Companies SCHEDULE–5A: PATTERN OF SHAREHOLDING [As certified by the Management] Particulars Current Year Number of Shares Previous Year Number of Shares 5. 8.750 38.00.25.750 34.25.000 2. 7. 2.43 % of Holding % of Holding Promoters • • Indian Foreign Others Total SCHEDULE–6: RESERVES AND SURPLUS Particulars Current Year (` ’000) Previous Year (` ’000) 1.

50.500 .000 75.050 Notes : (a) The extent to which the borrowings are secured shall be separately disclosed stating the nature of the security under each sub-head.32. (c) Others (to be specified) Unsecured 14.000 10.000 7.500 1. Bonds. of formation of shareholders’ and policyholders’ investments. Security-wise classification Secured (a) On mortgage of property (aa) In India (bb) Outside India (b) On shares. 5.800 71.25. (b) Amounts due within 12 months from the date of Balance. investments are shown as follows (included as total figure in the Balance Sheet) SCHEDULE–8: INVESTMENTS Particulars Current Year (` ’000) 2. Therefore.000 14.5.44 Advanced Accounting 4. etc. Financial Institutions Other entities carrying on insurance business Others (Sundry Creditors) Total 47. Sheet should be shown separately. Securities.10. 6.00.000 40.90.000 4. Govt.50. The classification of investments as desired by schedule 8 and 8A of the format can’t be done due to non-availability.000 Current Year (` ’000) Previous Year (` ’000) Deposit with the RBI Indian Government Securities State Government Securities Foreign Government Securities Securities guaranteed by the Government Stock and shares of companies incorporated in India SCHEDULE–9: LOANS Particulars Previous Year (` ’000) 1.

3. Secured loans for the purposes of his schedule.500 Notes : (a) Short-term loans shall include those.10. 4. (b) Provisions against non-performing loans shall be shown separately. Long term loans shall be the loans other than short-term loans.45 2. . means loans secured wholly or partly against on asset of the company. (c) The nature of the security in case of all long term secured loans shall be specified in each case. (d) Loans considered doubtful and the amount of provision created against such loans shall be disclosed.Financial Statements of Insurance Companies 5.000 16.42. which are repayable within 12 months from the date of balance sheet. (a) Loans against policies (b) Others (to be specified) Total Borrower-wise classification (a) Central and State Governments (b) Banks and Financial Institutions (c) Subsidiaries (d) Companies (e) Loans against policies (f) Others (to be specified) Total Performance-wise classification (a) Loans classified as standard (aa) In India (bb) Outside India Non-standard loans less provisions (aa) In India (bb) Outside India Total Maturity-wise classification (a) Short Term (b) Long Term Total 2.

000 Previous Year (` ’000) 1. property and building above exclude Investment Properties as defined in note (e) to Schedule 8.300 39.300 Notes :Assets included in land.500 67.02.000 1. 4. Cash (including cheques.5.500 . 2.000 40. drafts and stamps) Bank Balances (a) Deposit Accounts (aa) Short-term (due within 12 months of the date of Balance Sheet) (bb) Others (b) Current Accounts (c) Others (to be specified) Money at Call and Short Notice (a) With Banks (b) With other Institutions Others (to be specified) Total Balances with non-scheduled banks included in 2 and 3 above 20. 3. SCHEDULE–11: CASH AND BANK BALANCES Particulars Current Year (` ’000) 7.46 Advanced Accounting SCHEDULE–10: FIXED ASSETS (` ’000) Particulars Cost/Gross Block Depreciation Net Block Goodwill Intangibles (specify) Land-Freehold Leasehold Property Buildings Furniture & Fittings Information Technology Equipment Vehicles Office Equipment Others (Specify nature) Total 63.

Illustration 2 Prepare Revenue Account in proper form for the year ended 31st March.40.00.000 ---18.000 36.000 2.000 18.Financial Statements of Insurance Companies 5. for the year 2011 – 2012: Related to Direct business (` ) Premiums: Related to Reinsurance business (` ) Amount received Receivable at the beginning Receivable at the end Amount paid Payable at the beginning Payable at the end Claims: 30.000 30.80.800 14.000 18.000 12. 2012.47 Students are required to go through the formats of Revenue Account.80.000 -- 2.000 1.000 12.000 _ _ _ 72.000 60.40.20.000 1.000 42.00.000 3.000 24. from the following particulars related to Goma General Insurance Co. Profit and Loss Account.20.000 1.000 1.400 Amount paid Payable at the beginning Payable at the end Amount recovered Receivable at the beginning Receivable at the end Commission: Amount paid Amount received . Balance Sheet and its Schedules as prescribed in Part V of Schedule B for General Insurance business given in Annexure II for better understanding of the llustrations 2 to 4 given here under.000 10.60.

00.95. the income-tax actually paid during the year ` 1.3.000 related to legal expenses regarding claims 30.000 21. dividend and rent received Income-tax in respect of above Management expenses including ` 12. 3.000 on which reserve for unexpired risk @ 50% and additional reserve @ 7 ½ % was created.000 68.000.000 1.20.000 and the provision necessary at the year end ` 2.32.000 27. Revenue Account for the year ended 31. and date of registration with IRDA : ……………….5. The net premium income of the company during the year 2006 – 2007 was ` 24. 2. Claims incurred (Net) Commission Operating expenses related to insurance business Total (B) Operating profit/Loss from insurance business (C) = (A-B) 2 3 4 19.33.03.00.400 1.44.400 6. This year.2012 Particulars Premium earned (Net) Schedule 1 Amount (` ) 27. Solution FORM B – RA Name of the Insurer : Goma General Insurance Company Registration no. dividend & rent (Gross) Total (A) - 30. 2.000 Provision for income tax existing at the beginning of the year was ` 1.000 1.48 Advanced Accounting Additional information: (i) (ii) Interest. 3.000 6.07.68. Profit/Loss on sales/Redemption of investment Other Interest. 4.000.32.600 .000 1. the balance to be carried forward is 50% of net premium on reserve for unexpired risk and 5% on additional reserve..

72.12.52.000 + 36.80.000) Total claim incurred Schedule –3 Commission Particulars Commission paid Direct 72.44.60.000 – 30.000 .14.000 + 18.000 2.000 (72.000 – 24.000 + 12.37.49 Appropriation: Transfer to Shareholders account Transfer to Catastrophe Reserve Transfer to other reserves Total (D) Schedule – 1 Premium Earned (Net) - Particulars Premium received from direct business (W.000) ` 30.000) Add: Claims outstanding at the end (1.2) Total premium earned (Net) Schedule – 2 Claims Incurred (Net) Particulars Claims paid (Direct) Add: Add: Legal expenses regarding claims Reinsurance Accepted 18.000 + 12.000 19.20.000 33.000) 18.000 3.Financial Statements of Insurance Companies 5.12.38.N.000 18.N.20.000 29.60.000) Less: Claims outstanding at the beginning (60.03.000 1.92.000) Net Premium Adjustment for change in reserve for unexpired risk (W.000 + 42.1) Add: Premium on reinsurance accepted (2.000 ` Less: Premium on reinsurance ceded (3.78.40.000 12.000 ` Less: Reinsurance ceded (1.000 27.00.000 1.40.000 –18.000) 19.000 2.000 (1.

000 Premium outstanding at the end Premium outstanding at the beginning Computation of change in reserve for unexpired risk ` Reserve for unexpired risk for the year 2007-08(29.000) (1.80.000) 30.40.000 x 50%) Add: Additional reserve for unexpired risk for the year 2007-08 (29.000 16.47.000 ` Premium on direct business Add: Less: 2.400 ` Less: Re-insurance ceded Net commission Schedule – 4 Operating Expenses related to Insurance Business Particulars Expenses of management (1.000 – 12.000 .00.00.800 (14.70.000 (12.00.32.000 1.40. 30.800 82.5.000) 2.00.000 1.80.20.000 (1.000 x 5%) Less: Reserve for unexpired risk for the year 2006-07 (24.000) Working Notes: 1. Calculation of premium received from direct business 1.000 32.60.40.000 x 7.40.20.5%) 14.37.50 Advanced Accounting Add: Re-insurance accepted 10.000 x 50%) Additional reserve for unexpired risk for the year (24.400) 68.17.000 2.

00 10.80 58.50 22.00 22.00 1020.00 25.00 37.00 975.50 72.50 34.Financial Statements of Insurance Companies Illustration 3 The following are the Balances of Hercules Insurance Co.00 .4.51 (` in ’000) 320.2010 Fire Insurance Marine Insurance Miscellaneous Insurance Unclaimed Dividends Amount Due to Other Insurance Companies Sundry Creditors Deposit and Suspense Account (Cr.00 30.00 160.) Agents Balances (Dr.00 1.) Due from other Insurance Companies Cash in Hand Balance in Current Account with Bank Furniture and Fixtures WDV (cost 100.40 135. 2011 : Capital Balances of Funds as on 1.65 8.80 80.00 510.50 64.40 280.) Sundry Debtors Government Securities Deposited with RBI Government Securities (1020.00 11.00 800.00) Stationery Stock Expenses of Management Fire Insurance Marine Insurance Miscellaneous Insurance Others Foreign Taxes—Marine Outstanding premium Donation Paid (No 80G Benefit) Transfer Fees Reserve for Bad Debts Income Tax Paid Mortgage Loan (Dr.00 1.) Interest accrued but not due (Dr.00 82.00) 5. Ltd.70 120.00 40.00 8.00 950.) Profit and Loss Account (Cr. as on 31st March.50 3.50 74.00 218.

You are required to prepare the revenue and profit and loss account for the year ended 31.3.90 68. Provision for the unexpired risks is to be made as follows: (a) On Marine Policies (b) On Other Policies 100% Premium less reinsurance.00 450. 50% Premium less reinsurance.50 1022.00 10.25 4680 11.50 262.25 3047.50 225.00 1762. Proposed dividends @20%.00 32.00 350. .3.00 Provision for tax @ 50%.50 10.5.00 80.2011 of the company.52 Advanced Accounting 465.00 358.90 Debentures Equity Shares of Joint Stock Companies Claims Less Re-insurance Fire Marine Miscellaneous Premium Less Re-insurance Fire Marine Miscellaneous Interest and Dividends Received on Investments (NET) Tax Deducted at Source Commission Fire Marine Miscellaneous You are required to make the following provisions : Depreciation on Furniture—10% of Original Cost Depreciation on investments of Joint Stock Companies Shares Transfer to General Reserve Outstanding claims as on 31.00 50.00 876.2011 Fire Marine Miscellaneous 200.00 930.70 500.

27 1 1681.50 129.00 408.00 — — 220. Current Year ` ‘000 262.Financial Statements of Insurance Companies Solution Form B – RA (Prescribed by IRDA) Hercules Insurance Co. Current Year 5. Revenue Account for the year ended 31st March.77 — — — 349.00 Misc.50 (-) 72.00 — — 1430.53 ` ‘000 Premiums earned (net) Interest.00 500. 2011 Fire and Marine and Misc Insurance Businesses Schedul e Fire Current Year Marine Current Year Misc.25 87.00 926.00 160.50 80.25 2 3 4 650.10 ` ‘000 349.77 100.25 Schedules forming part of Revenue Account Marine Current Year ` ‘000.00 40.25 — — — 1681.00 — — — 950. Dividends and Rent – Gross Double Income Tax refund Profit on sale of motor car Total (A) Claims incurred (net) Commission Operating expenses related to Insurance business Bad debts Indian and Foreign taxes Total (B) Profit from Marine business ( A−B) Schedule –1 Premiums earned (net) Fire Current Year ` ‘000 1762.00 280.90 23.50 950.52 349.00 Insurance 251.90 350.50 (-)81. 25 ` ‘000 950. Ltd. 1022.77 Premiums Less reinsurance (net) Change in provision for unexpired risk Premiums earned (net) .00 — 8.25 1681.

00 403.90 350.00 100. Profit and Loss Account for the year 31st March.5.00 463.00 160.00 40.00 500.50 80. 2011 Particulars Schedule Current Year Previous Year ` ’ (000) Operating Profit/(Loss) ` ’ (000) (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Income From Investments 251.00 408.54 Advanced Accounting Schedule – 2 Claims incurred (net) Schedule – 3 Commission paid Schedule – 4 Operating expenses related to insurance business Expenses of Management 650.00 10.00 30.12 206.00 Form B-PL Hercules Insurance Co. Dividend & Rent–Gross Other Income Transfer Fees Total (A) Provisions (Other than taxation) Depreciation of Furniture Depreciation of Investments Other Expenses – Expenses of Management Donation Total (B) Profit Before Tax (A-B) Provision for Taxation Profit After Tax . Ltd.27 58.50 1.56 (a) Interest.25 23.00 10.00 280.56 196.10 129.12 10.00 60.

4.) balance as on 1.00 Income tax deducted at 3.4.40 202.00 Expenses of Management 5.00 1.2012 (net) Investment in shares as on 20.25 dividends (gross) Rent received from properties 5.2011 10.00 Income from investment and 10.12 ` Illustration 4 The following figures have been extracted from the books of New India Insurance Company Ltd.4.00 12.00 Profit and Loss Account: (Cr.00 Reinsurance premium 5.00 1.00 receipts Investment in government securities 100.2011 31.00 Other expenses 1.00 Direct claims paid (gross) 25.00 .00 — 10. 2.00 Commission paid on Direct 5.12 10.2011 Claims outstanding as on 1.256 80. in respect of their Marine Business for 2011-2012: (` in lakhs) Direct Business Income received 50.96 1. Provision for Taxation Net Profit before tax Add : Donation Taxable Profit Tax 50% 403.00 Business Reserve for unexpired risks as on 60.00 413.00 (net) source Bad Debts 10. Reserve for unexpired risk 50% of net premium for fire and miscellaneous and 100% of net premium for marine.2011 20.2011 Reinsurance claims paid 4.00 as on 1.Financial Statements of Insurance Companies 5.4.4.55 Profit (a) Interim dividends paid during the year (b) Proposed final dividend (c) Dividend distribution tax (d) Transfer to General Reserves or Other Accounts (to be specified) Balance of profit/loss brought forward from last year Balance carried forward to Balance Sheet Working Notes : — 64.3.00 Outstanding claims as on 30.

00 4. 2. 2012 Particulars Schedule Current Year (` in Lakhs) Premium earned (net) 1 60.RA Name of the Insurer: New India Insurance Company Ltd. Solution Form B .00 Total (B) Operating Profit/(Loss) from Marine Business (C) = (A-B) Appropriations Transfer to Shareholder’s Account Transfer to Catastrophe Reserve Transfer to other Reserves (to be specified) Total (C) 21. Claim a Commission of 25% on reinsurance ceded.5.00 1. Adjust separately for each of these two categories of investments. Total (A) 75. Interest.25 54. (e) Provide 65% for Income tax. Commission 3 3.00 .. Registration No. Claims Incurred (Net) 2 34. Provide 25% Commission on reinsurance accepted Market value of investments as on 31st march.00 1. 4 Operating expenses related to insurance business 16.00 Previous Year (` in Lakhs) – – – 21. Revenue Account for the year ended 31st March. Dividend & Rent-Gross (10+5) 15.00 2. (ii) Shares ` 18 lakhs. Profit/Loss on sale/redemption of investments Others 3. and date of registration with the IRDA: …………….56 Advanced Accounting Prepare a Revenue Account and Profit and Loss Account for the year after taking into account the following further information: (a) (b) (c) (d) All direct risks are reinsured for 20% of the risk.75 3. 2012 is as follows: (i) Government Securities ` 105 lakhs.

Registration No.e. (3.00) (3.00 (13.00 5. securities (5.00 2. 2012 Particulars Schedule Current Year (` In Lakhs) 1.00) 24.00 20.00 .Financial Statements of Insurance Companies Form B – PL 5.00) Other expenses Total (B) Profit before tax A-B [i.35 Total Appropriations Balance of profit/loss bought forward from last year Balance carried forward to Balance Sheet Schedule 1 Premium Earned (Net) Particulars Current Year (` in Lakhs) Previous Year (` in Lakhs) Premium from direct business Add: Premium on re-insurance accepted 50. Profit & Loss Account for the year ended 31st March. 3. Income from investments Other Income Total (A) Provision (other than taxation) Diminution in the value of investment in shares 2. and date of registration with the IRDA: ……………. 4.65) 10.35 Nil 10. 21 – (-3)] Less: Provision for taxation Previous Year (` In Lakhs) 21. Operating Profit from marine insurance 21.00 Less: increment in the value of investment in govt.00 5..57 Name of the Insurer: New India Insurance Company Ltd.

00 54.25 6.00 29.5.00 60.00 30.75 Net Commission .00 1.50) 3.25 (2.00 (20.00 Less: Premium on re-insurance ceded (10.00 4.00 (5.00 Net Premium Adjustment for change in reserve for unexpired risk [(opening) 60 – (Closing) 45] Schedule 2 Claims incurred (Net) Particulars Current Year (` in Lakhs) Previous Year (` in Lakhs) Claims paid Direct Add: Reinsurance accepted Less: Reinsurance ceded Net Claims paid Add: Claims outstanding at the end of the year Less: Claims outstanding at the beginning of the year Total claims incurred Schedule 3 Commission Particulars 25.00) 34.58 Advanced Accounting 55.00) 24.00 15.00) 45.00 Current Year (` in Lakhs) Previous Year (` in Lakhs) Commission paid Direct Add: Re-insurance accepted Less: Commission on reinsurance ceded 5.

25 Provision for income tax: Income (excluding revaluation) Add: Tax deducted at source ` in lakhs 18.00 10.00 21.00) 10.25 16.59 Schedule 4 Operating Expenses Particulars Current Year (` in Lakhs) Previous Year (` in Lakhs) Expenses of Management Bad Debts Other expenses Working Note: 5.65 Provision @ 65% of ` 21.00 3.00 13.Financial Statements of Insurance Companies 5.00 1.00 lakhs Less: Tax deducted at source .65 (3.

Actuarial Valuation – Liability for Life Policies – The estimation of liability against life policies shall be determined by the appointed actuary of the insurer pursuant to his annual investigation of the life insurance business. Receipts and Payments Account [Cash Flow statement] and Profit and Loss Account [Shareholders’ Account] of an insurer shall be in conformity with the Accounting Standards (AS) issued by the ICAI. the insurer can meet all future claims (including bonus entitlements to policyholders) and expenses. Premium – Premium shall be recognised as income when due. 5. if any. – An insurer shall determine the values of investments in the following manner:- (a) Real Estate – Investment Property – The value of investment property shall be determined at historical cost. wherever applicable. The most essential test is the obligatory relationship between costs and the execution of insurance contracts (i. Claims Cost –The ultimate cost of claims shall comprise the policy benefit amount and specific claims settlement costs.60 Advanced Accounting ANNEXURE I SCHEDULE A for Life Insurance Business PART I: Accounting principles for preparation of financial statements 1. For linked business the due date for payment may be taken as the date when the associated units are created. Acquisition costs are those costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts.5. Revenue Account [Policyholders’ Account].. The insurer shall assess at each balance sheet date whether any impairment of the investment property has occurred.Segment Reporting – shall apply to all insurers irrespective of the requirements regarding listing and turnover mentioned therein. 4. 2. . Procedure to determine value of investments. Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow Statement shall be prepared only under the Direct Method. shall be expensed in the period in which they are incurred. Accounting Standard 17 (AS 17) . Actuarial assumptions are to be disclosed by way of notes to the account. Acquisition Costs – Acquisition costs. subject to revaluation at least once in every three years. The liability shall be so calculated that together with future premium payments and investment income. to the extent applicable to insurers carrying on life insurance business. The change in the carrying amount of the investment property shall be taken to Revaluation Reserve. Applicability of Accounting Standards---Every Balance Sheet. 3. 2.e. 6. except that: 1. commencement of risk).

For the removal of doubt. as the case may be. as the case may be. it is clarified that except for the amount that is released to policyholders as per the Authority’s direction. The Authority may issue directions specifying the amount to be released from the Fair Value Change Account for declaring bonus to the policyholders. The bases for revaluation shall be disclosed in the notes to accounts. availability of willing buyers and willing sellers is normal and the prices are publicly available. For the removal of doubt. shall include accumulated changes in the carrying amount previously recognised in equity under the heading ‘Revaluation Reserve’ in respect of a particular property and being recycled to the relevant Revenue Account or Profit and Loss Account on sale of that property. Equity Securities and Derivative Instruments that are traded in active markets – Listed equity securities and derivative instruments that are traded in active markets shall be measured at fair value on the balance sheet date. shall include accumulated changes in the fair value previously recognised in equity under the heading ‘Fair Value Change Account’ in respect of a particular security and being recycled to the relevant Revenue Account or Profit and Loss Account on actual sale of that listed security. An active market shall mean a market. For the purpose of calculation of fair value. Any impairment loss of a re-valued asset shall be treated as a revaluation decrease of that asset and if the impairment loss exceeds the corresponding revaluation reserve. shall be considered as “held to maturity” securities and shall be measured at historical cost subject to amortisation. it is clarified that except for the amount that is released to policyholders as per . (b) Debt Securities – Debt securities. the lowest of the last quoted closing price at the stock exchanges where the securities are listed shall be taken.Financial Statements of Insurance Companies 5. The ‘Profit on sale of investments’ or ‘Loss on sale of investments’. (c) The insurer shall assess on each balance sheet date whether any impairment of listed equity security(ies)/ derivative(s) instruments has occurred. no other amount shall be distributed to shareholders out of Revaluation Reserve Account. An impairment loss shall be recognised as an expense in the Revenue/Profit and Loss Account immediately. Unrealised gains/ losses arising due to changes in the fair value of listed equity shares and derivative instruments shall be taken to equity under the head ‘Fair Value Change Account”.61 Gains/ losses arising due to changes in the carrying amount of real estate shall be taken to equity under ‘Revaluation Reserve’. The ‘Profit on sale of investments’ or ‘Loss on sale of investments’. The Authority may issue directions specifying the amount to be released from the revaluation reserve for declaring bonus to the policyholders. where the securities traded are homogenous. such excess shall be recognised as an expense in the Revenue/Profit and Loss Account. including government securities and redeemable preference shares. unless the asset is carried at re-valued amount.

Also. Segregated funds represent funds maintained in accounts to meet specific investment objectives of policyholders who bear the investment risk. whether any impairment has occurred. has not been determined by the end of the financial year. The insurer shall assess. Any reversal of impairment loss. shall be annexed. (d) Unlisted and other than actively traded Equity Securities and Derivative Instruments – Unlisted equity securities and derivative instruments and listed equity securities and derivative instruments that are not regularly traded in active markets shall be measured at historical cost. Provision shall be made for diminution in value of such investments. The insurer shall assess the quality of its loan assets and shall provide for impairment. Funds for Future Appropriation – The funds for future appropriation shall be presented separately. An impairment loss shall be recognised as an expense in Revenue/Profit and Loss Account to the extent of the difference between the re-measured fair value of the security/investment and its acquisition cost as reduced by any previous impairment loss recognised as expense in Revenue/Profit and Loss Account. any debit balance in Fair Value Change Account shall be reduced from profit/free reserves while declaring dividends. Loans – Loans shall be measured at historical cost subject to impairment provisions. earlier recognised in Revenue/Profit and Loss Account shall be recognised in Revenue/Profit and Loss Account. The provision so made shall be reversed in subsequent periods if estimates based on external evidence show an increase in the value of the investment over its carrying amount. either to the policyholders or to the shareholders. For the purposes of this regulation. for each segregated fund of the linked businesses. The increased carrying amount of the investment due to the reversal of the provision shall not exceed the historical cost. Investment income/ gains and losses generally accrue directly to the policyholders. A separate set of financial statements. . no other amount shall be distributed to shareholders out of Fair Value Change Account. the allocation of which. such a security is classified as “thinly traded”. 9. The impairment provision shall not be lower than the amounts derived on the basis of guidelines prescribed from time to time by the Reserve Bank of India that apply to companies and financial institutions. 8. The funds for future appropriation represent all funds. 7. on each balance sheet date.5. Linked Business – The accounting principles used for valuation of investments are to be consistent with principles enumerated above.62 Advanced Accounting the Authority’s prescription. a security shall be considered as being not actively traded. if as per guidelines governing mutual funds laid down from time to time by SEBI. The assets of each account are segregated and are not subject to claims that arise out of any other business of the insurer.

10. Basis of amortisation of debt securities. 3. other than those under policies. 5. Operating expenses relating to insurance business: basis of allocation of expenditure to various segments of business. Investments and Fixed Assets. Contingent Liabilities: (a) Partly-paid up investments (b) Underwriting commitments outstanding (c) Claims. and significant principles and policies given in Part I of Accounting Principles. All significant accounting policies in terms of the accounting standards issued by the ICAI. B. for: (a) Purchases where deliveries are pending.63 1. . Commitments made and outstanding for Loans. 9. not acknowledged as debts (d) Guarantees given by or on behalf of the company (e) Statutory demands/liabilities in dispute. 7. Historical costs of those investments valued on fair value basis. 4. followed by the insurer. The following shall be disclosed by way of notes to the Balance Sheet: 5. 2. Encumbrances to assets of the company in and outside India. Any other accounting policies. (b) Sales where payments are overdue. not provided for (f) Reinsurance Obligations to the extent no provided for in accounts (g) Others (to be specified). The following accounting policies shall form an integral part of the financial statements: 1. 8. Claims settled and remaining unpaid for a period of more than six months as on the balance sheet date. 2. 11. Computation of managerial remuneration. Basis of revaluation of investment property. Actuarial assumptions for valuation of liabilities for life policies in force. Any departure from the accounting policies shall be separately disclosed with reasons for such departure. Value of contracts in relation to investments. 6. shall be stated in the manner required under Accounting Standard AS 1 issued by the ICAI.Financial Statements of Insurance Companies PART II: Disclosures forming part of Financial Statements A.

Segregation into performing/ non performing investments for purpose of income recognition as per the directions. PART III: General instructions for preparation of Financial Statements The corresponding amounts for the immediately preceding financial year for all items shown in the Balance Sheet. Percentage of business sector-wise. subject to as aforesaid. include any amount written off or retained by way of providing for depreciation. 2. Revenue Account. Advanced Accounting The following information shall also be disclosed: 1. 3. Interest. or retained by way of providing for any known liability or loss of which the amount cannot be determined with substantial accuracy. if any. The figures in the financial statements may be rounded off to the nearest thousands. (c) the expression ‘capital reserve’ shall not include any amount regarded as free for distribution through the profit and loss account. 1. 3. Investments made in accordance with any statutory requirement should be disclosed separately together with its amount. renewals or diminution in value of assets. Accounting Ratios as may be prescribed by the Authority. (d) The expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities. (b) the expression ‘reserve’ shall not. 1. in the manner as may be prescribed by the Authority. and the expression ‘revenue reserve’ shall mean any reserve other than a capital reserve. dividends and rentals receivable in connection with an investment should be stated at gross amount. Profit and Loss Account and Receipts and Payments Account shall be given. the amount of income tax deducted at source should be included under 'advance taxes paid' and taxes deducted at source. Assets to the extent required to be deposited under local laws or otherwise encumbered in or outside India.64 C.5. 5. subject to (II) below mean any amount written off or retained by way of providing for depreciation. 6. Bases of allocation of investments and income thereon between Policyholders’ Account and Shareholders’ Account. . issued by the Authority. 7. A summary of financial statements for the last five years. nature. 2. (I) For the purposes of financial statements. 4. unless the context otherwise requires (a) the expression ‘provision’ shall. renewals or diminution in value of assets or retained by way of providing for any known liability or loss. security and any special rights in and outside India.

2000] (ii) Non-Linked business separately for Ordinary Life. pensions and Health Insurance. Form APL and Form A-BS. 6. Profit and Loss Account [Shareholders’ Account] and the Balance Sheet in Form A-RA. The company shall make provisions for damages under lawsuits where the management is of the opinion that the award may go against the insurer. or (b) any amount retained by way of providing for any known liability or loss. Provided that an insurer shall prepare Revenue Account and Balance Sheet for the under mentioned businesses separately and to that extent the application of AS 17 shall stand modified:(a) Participating policies and Non-participating policies. 2. shall be shown separately. Extent of risk retained and re-insured shall be separately disclosed. General Annuity. or as near thereto as the circumstances permit.65 (II) Where: (a) any amount written off or retained by way of providing for depreciation. 5. 7. Any debit balance of the Profit and Loss Account shall be shown as deduction from uncommitted reserves and the balance. if any. PART V: Preparation of Financial Statements 1. the excess shall be treated as a reserve and not provision.Financial Statements of Insurance Companies 5. a management report duly authenticated by the management. An insurer shall prepare separate Receipts and Payments Account in accordance with the Direct Method prescribed in AS 3 – “Cash Flow Statement” issued by the ICAI. . as prescribed in this Part. Business within India and business outside India. An insurer shall prepare the Revenue Account [Policyholders’ Account]. PART IV: Contents of Management Report There shall be attached to the financial statements. renewals or diminution in value of assets. is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose. (b) (i) Linked business [As defined in regulation 2 (i) of the IRDA (Registration of Indian Insurance Companies ) Regulations .

Dividends & Rent – Gross Profit on sale/redemption of investments (Loss on sale/ redemption of investments) Transfer/Gain on revaluation/change in fair value* TOTAL (A) 1 (`’000).5. Income from Investments Other Income (to be specified) Commission Operating Expenses related to Insurance Business Provision for doubtful debts Bad debts written off Provision for Tax Provisions (other than taxation) (a) (b) For diminution in the value of investments (Net) Others (to be specified) TOTAL (B) 4 2 3 Benefits Paid (Net) Interim Bonuses Paid . and Date of Registration with the IRDA REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH.66 Advanced Accounting FORM A-RA Name of the Insurer: Registration No. 20___. Policyholders’ Account (Technical Account) Particulars Schedule Current Year Previous Year (`’000) Premiums earned – net (a) (b) (c) (a) (b) (c) (d) Premium Reinsurance ceded Reinsurance acceptedInterest.

Previous Year (`’000). 20___.67 Change in valuation of liability in respect of life policies (a) (b) (c) Gross** Amount ceded in Reinsurance Amount accepted in Reinsurance TOTAL (C) SURPLUS/ (DEFICIT) (D) =(A)-(B)-(C) APPROPRIATIONS Transfer to Shareholders’ Account Transfer to Other Reserves (to be specified) Balance being Funds for Future Appropriations TOTAL (D) Notes: * ** Represents the deemed realised gain as per norms specified by the Authority. and Date of Registration with the IRDA PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH. represents Mathematical Reserves after allocation of bonus The total surplus shall be disclosed separately with the following details: (a) (b) (c) (d) Interim Bonuses Paid: Allocation of Bonus to policyholders: Surplus shown in the Revenue Account: Total Surplus: [(a)+(b)+(c)]. Shareholders’ Account (Non-technical Account) Particulars Schedule Current Year (`’000). FORM A-PL See Notes appended at the end of Form A-PL Name of the Insurer: Registration No. Amounts transferred from/to the Policyholders Account (Technical Account) Income From Investments .Financial Statements of Insurance Companies 5.

.68 Advanced Accounting (a) (b) (c) Interest. specific claims settlement costs wherever applicable and change in the outstanding provision for claims at the year-end. Dividends & Rent – Gross Profit on sale/redemption of investments (Loss on sale/ redemption of investments) TOTAL (A) Other Income (To be specified) Expense other than those directly related to the insurance business Bad debts written off Provisions (Other than taxation) (a) For diminution in the value of investments (Net) (b) (c) Provision for doubtful debts Others (to be specified) TOTAL (B) Profit/ (Loss) before tax Provision for Taxation Profit / (Loss) after tax APPROPRIATIONS (a) Balance at the beginning of the year.5. (b) Reinsurance premiums whether on business ceded or accepted are to be brought into account gross (i. before deducting commissions) under the head reinsurance premiums.. (b) Interim dividends paid during the year (c) Proposed final dividend (d) Dividend distribution on tax (e) Transfer to reserves/ other accounts (to be specified) Profit carried ------------to the Balance Sheet Notes to Form A-RA and A-PL. (c) Claims incurred shall comprise claims paid. (a) Premium income received from business concluded in and outside India shall be separately disclosed.e.

00. dividends and rentals receivable in connection with an investment should be stated as gross amount. Sources of Funds Shareholders’ Funds: Previous Year (`’000). (g) Interest. shall be shown as a separate line item. 20____.000 whichever is higher.Financial Statements of Insurance Companies 5. FORM A-BS Name of the Insurer: Registration No. (f) Under the sub-head "Others” shall be included items like foreign exchange gains or losses and other items. (e) Fees and expenses connected with claims shall be included in claims. Schedule Current Year (`’000). the amount of income tax deducted at source being included under 'advance taxes paid and taxes deducted at source”. It shall not include any notional rent. and Date of Registration with the IRDA BALANCE SHEET AS AT 31ST MARCH. (h) Income from rent shall include only the realised rent.69 (d) Items of expenses and income in excess of one percent of the total premiums (less reinsurance) or `5. Share Capital Reserves and Surplus Credit/[Debit] Fair Value Change Account Sub-Total 5 6 Borrowings Policyholders’ Funds: 7 Credit/[Debit] Fair Value Change Account Policy Liabilities Insurance Reserves Provision for Linked Liabilities Sub-Total Funds for Future Appropriations Total Application of Funds Investments .

2. 6. not provided for Reinsurance obligations to the extent not provided for in accounts Others (to be specified) Total . 4. 3.70 Advanced Accounting 8 8A 8B 9 10 11 12 13 14 Shareholders’ Policyholders’ Assets held to cover Linked Liabilities Loans Fixed Assets Current Assets Cash and Bank Balances Advances and Other Assets Sub-Total (A) Current Liabilities Provisions Sub-Total (B) Net Current Assets (C) = (A – B) Miscellaneous Expenditure (To the extent not written off or adjusted) Debit Balance in Profit & Loss Account (Shareholders’ Account) Total CONTINGENT LIABILITIES Particulars Current Year (`’000). 15 1.5. not acknowledged as debts by the company Underwriting commitments outstanding (in respect of shares and securities) Guarantees given by or on behalf of the Company Statutory demands/ liabilities in dispute. Partly paid-up investments Claims. 7. Previous Year (`’000). 5. other than against policies.

conveyance and vehicle running expenses Training expenses Rents.Financial Statements of Insurance Companies SCHEDULES FORMING PART OF FINANCIAL STATEMENTS SCHEDULE – 1 PREMIUM Particulars Current Year (`’000) Previous Year (`’000) 5. if any.Single premiums Add: Commission on Re-insurance Accepted Less: Commission on Re-insurance Ceded Net Commission Note: The profit/ commission. are to be combined with the Re-insurance accepted or Re-insurance ceded figures. 2 3 4 5 6 7 8 Employees’ remuneration & welfare benefits Travel.Renewal premiums .2 COMMISSION EXPENSES Particulars Current Year (`’000) Previous Year (`’000) Commission paid Direct – First year premiums . SCHEDULE – 3 OPERATING EXPENSES RELATED TO INSURANCE BUSINESS Particulars Current Year (`’000) Previous Year (`’000) 1.71 1 2 3 First year premiums Renewal Premiums Single Premiums TOTAL PREMIUM SCHEDULE. rates & taxes Repairs Printing & stationery Communication expenses Legal & professional charges .

wherever applicable.000 whichever is higher.00. specify Amount accepted in reinsurance: (a) Claims by Death. specify (Amount ceded in reinsurance): (a) Claims by Death. SCHEDULE – 4 BENEFITS PAID [NET] Particulars Current Year (`’000) Previous Year (`’000) 1. (b) Claims by Maturity. (b) Claims by Maturity. (d) Other benefits. shall be shown as a separate line item.5. (c) Annuities/Pension payment. Claims by Maturity. Insurance Claims Claims by Death. . (b) Legal and other fees and expenses shall also form part of the claims cost. (d) Other benefits. Annuities/Pension payment.72 Advanced Accounting 9 10 11 12 13 14 Medical fees Auditors' fees. 2. specify TOTAL Notes: (a) Claims include specific claims settlement costs. Other benefits. 3. (c) Annuities/Pension payment. expenses etc a) as auditor b) as adviser or in any other capacity. and (iii) c) in any other capacity Advertisement and publicity Interest & Bank Charges Others (to be specified) Depreciation TOTAL Note : Items of expenses and income in excess of one percent of the total premiums (less reinsurance) or `5. wherever applicable. in respect of Taxation matters (i) Insurance matters (ii) Management services.

. (b) The amount capitalised on account of issue of bonus shares should be disclosed... Authorised Capital Equity Shares of `..Financial Statements of Insurance Companies SCHEDULE – 5 SHARE CAPITAL Particulars Current Year (`’000) 5... the same should be separately disclosed.. 4.. 2.each Called-up Capital Equity Shares of ` .. (c) In case any part of the capital is held by a holding company...73 Previous Year (`’000) 1. SCHEDULE – 5A PATTERN OF SHAREHOLDING [As certified by the Management] Shareholder Current Year Number of Shares % of Holding Previous Year Number of Shares % of Holding Promoters • • Indian Foreign Others TOTAL ...each Less : Calls unpaid Add : Shares forfeited (Amount originally paid up) Less : Par value of Equity Shares bought back Less : Preliminary Expenses Expenses including commission or brokerage on Underwriting or subscription of shares TOTAL Notes: (a) Particulars of the different classes of capital should be separately stated..each Subscribed Capital Equity Shares of `. each Issued Capital Equity Shares of ` .. 3..

3. 3 4. 2. Debentures/ Bonds Banks Financial Institutions Others (to be specified) TOTAL Notes: (a) The extent to which the borrowings are secured shall be separately disclosed stating the nature of the security under each sub-head. 2. if any Less: Amount utilized for Buy-back 6. SCHEDULE . Catastrophe Reserve Other Reserves (to be specified) Balance of profit in Profit and Loss Account TOTAL Note: Additions to and deductions from the reserves shall be disclosed under each of the specified heads. 8.5. Capital Reserve Capital Redemption Reserve Share Premium Revaluation Reserve General Reserves Less: Debit balance in Profit and Loss Account. (b) Amounts due within 12 months from the date of Balance Sheet should be shown separately .74 Advanced Accounting SCHEDULE – 6 RESERVES AND SURPLUS Particulars Current Year (`’000) Previous Year (`’000) 1.7 BORROWINGS Particulars Current Year (`’000) Previous Year (`’000) 1. 7. 4. 5.

1. 4. 5.Financial Statements of Insurance Companies SCHEDULE – 8 INVESTMENTS-SHAREHOLDERS Particulars Current Year (`’000) 5. 4.75 Previous Year (`’000) 1. 2. 2. 3.8B . LONG TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities Other Investments (a) Shares Equity (aa) Preference (bb) (b) Mutual Funds (c) Derivative Instruments (d) Debentures/ Bonds (e) Other Securities (to be specified) (f) Subsidiaries Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments SHORT TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities Other Investments (a) Shares Equity (aa) Preference (bb) (b) Mutual Funds (c) Derivative Instruments (d) Debentures/ Bonds (e) Other Securities (to be specified) Subsidiaries (f) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments TOTAL Note: See Notes appended at the end of Schedule. 5. 3.

8B . 4. 2.8A INVESTMENTS-POLICYHOLDERS Particulars Current Year (`’000) Previous Year (`’000) 1. 3. LONG TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities (a) Shares (aa) Equity Preference (bb) (b) Mutual Funds (c) Derivative Instruments (d) Debentures/ Bonds (e) Other Securities (to be specified) (f) Subsidiaries (g) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments SHORT TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities (a) Shares Equity (aa) (bb) Preference (b) Mutual Funds Derivative Instruments (a) (b) Debentures/ Bonds (c) Other Securities (to be specified) Subsidiaries (d) (g) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments TOTAL Note: See Notes appended at the end of Schedule. 2. 4. 5.76 Advanced Accounting SCHEDULE. 1.5. 3. 5.

4. 4.77 Previous Year (`’000) 1.Financial Statements of Insurance Companies SCHEDULE.8B ASSETS HELD TO COVER LINKED LIABILITIES Particulars Current Year (`’000) 5. 2. 5. LONG TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities (a) Shares (aa) Equity (bb) Preference (b) Mutual Funds (c) Derivative Instruments (d) Debentures/ Bonds (e) Other Securities (to be specified) (f) Subsidiaries (g) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments SHORT TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities (a) Shares (aa) Equity (bb) Preference (b) Mutual Funds (c ) Derivative Instruments (d) Debentures/ Bonds (e) Other Securities (to be specified) (f) Subsidiaries (g) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments TOTAL Notes (applicable to Schedules 8 and 8A & 8B): . 1. 3. 5. 3. 2.

A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. (i) (ii) Holding company and subsidiary shall be construed as defined in the Companies Act. Significant influence may be exercised in several ways. (c) Investment made out of Catastrophe reserve should be shown separately. 1956: Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity. (f) Investments maturing within twelve months from balance sheet date and investments made with the specific intention to dispose of within twelve months from balance sheet date shall be classified as short-term investments . (iv) Associate . if the investor holds. rather than for use in services or for administrative purposes. unless it can be clearly demonstrated that this is not the case. unless such influence is clearly demonstrated. Significant influence may be gained by share ownership. by representation on the board of directors.5. joint ventures and associates shall be separately disclosed. material intercompany transactions. it is presumed that the investor does not have significant influence. (b) Aggregate amount of company's investments other than listed equity securities and derivative instruments and also the market value thereof shall be disclosed. if an investor holds.is an enterprise in which the company has significant influence and which is neither a subsidiary nor a joint venture of the company. Conversely.78 Advanced Accounting (a) Investments in subsidiary/holding companies. which is subject to joint control. interchange of managerial personnel or dependence on technical information. (v) Significant influence (for the purpose of this schedule) -means participation in the financial and operating policy decisions of a company. directly or indirectly through subsidiaries. but not control of those policies. it is presumed that the investor does have significant influence. at cost. (d) Debt securities will be considered as “held to maturity” securities and will be measured at historical costs subject to amortisation (e) Investment Property means a property [land or building or part of a building or both] held to earn rental income or for capital appreciation or for both. participation in the policymaking process. directly or indirectly through subsidiaries. statute or agreement. As regards share ownership. less than 20 percent of the voting power of the investee. (iii) Joint control . 20 percent or more of the voting power of the investee.is the contractually agreed sharing of power to govern the financial and operating policies of an economic activity to obtain benefits from it. for example.

3. Securities.9 LOANS Particulars Current Year (`’000) 5. which are repayable within 12 months from the date of balance sheet. 4. Govt. . 2. (c) Loans against policies (d) Others (to be specified) Unsecured TOTAL BORROWER-WISE CLASSIFICATION (a) Central and State Governments (b) Banks and Financial Institutions (c) Subsidiaries (d) Companies (e) Loans against policies (f) Others (to be specified) TOTAL PERFORMANCE-WISE CLASSIFICATION (a) Loans classified as standard (aa) In India Outside India (bb) Non-standard loans less provisions (b) (aa) In India Outside India (bb) TOTAL MATURITY-WISE CLASSIFICATION (a) Short Term (b) Long Term TOTAL Notes: (a) Short-term loans shall include those. Long term loans shall be the loans other than short-term loans. Bonds.79 Previous Year (`’000) 1.Financial Statements of Insurance Companies SCHEDULE . etc. SECURITY-WISE CLASSIFICATION Secured (a) On mortgage of property In India (aa) (bb) Outside India (b) On Shares.

5. SCHEDULE . (d) Loans considered doubtful and the amount of provision created against such loans shall be disclosed.80 Advanced Accounting (b) Provisions against non-performing loans shall be shown separately. property and building above exclude Investment Properties as defined in note (e) to Schedule 8. Secured loans for the purposes of this schedule. (c) The nature of the security in case of all long term secured loans shall be specified in each case.10 FIXED ASSETS (`’000) Particulars Opening Cost/ Gross Block Additions Deductions Depreciation Closing Up to Last Year For The Year On Sales/ Adjust ments Net Block To As at Previou Date year s Year end Goodwill Intangibles (specify) LandFreehold Leasehold Property Buildings Furniture & Fittings Information Technology Equipment Vehicles Office Equipment Others (Specify nature) TOTAL Work in progress Grand Total PREVIOUS YEAR Note: Assets included in land. . means loans secured wholly or partly against an asset of the company.

the nature and amount shall be separately stated. 4. SCHEDULE – 12 ADVANCES AND OTHER ASSETS Particulars ADVANCES Current Year (`’000) Previous Year (`’000) 1. 2. 2.11 CASH AND BANK BALANCES Particulars Current Year (`’000) 5. 3. If so. drafts and stamps) Bank Balances (a) Deposit Accounts (aa) Short-term (due within 12 months of the date of Balance Sheet) (bb) Others (b) Current Accounts (c) Others (to be specified) Money at Call and Short Notice (a) With Banks (b) With other Institutions Others (to be specified) TOTAL Balances with non-scheduled banks included in 2 and 3 above CASH & BANK BALANCES In India Outside India TOTAL Note: Bank balance may include remittances in transit.81 Previous Year (`’000) 1. 4. 1 2 Cash (including cheques.Financial Statements of Insurance Companies SCHEDULE. 3. 5. Reserve deposits with ceding companies Application money for investments Prepayments Advances to Directors/Officers Advance tax paid and taxes deducted at .

5 6. Income accrued on investments Outstanding Premiums Agents’ Balances Foreign Agencies Balances Due from other entities carrying on insurance business (including reinsures) Due from subsidiaries/ holding company Deposit with Reserve Bank of India [Pursuant to section 7 of Insurance Act. 4. 2. 2. 7. (c) Sundry debtors will be shown under item 8 (Others) SCHEDULE – 13 CURRENT LIABILITIES Particulars Current Year (`’000) Previous Year (`’000) 1. Agents’ Balances Balances due to other insurance companies Deposits held on re-insurance ceded Premiums received in advance Unallocated premium Sundry creditors . The amount of provision against each head should be shown separately. 3. 1938] Others (to be specified) TOTAL (B) TOTAL (A+B) 8. 3. Others (to be specified) TOTAL (A) OTHER ASSETS 1.82 Advanced Accounting source (Net of provision for taxation) 6. Notes: (a) The items under the above heads shall not be shown net of provisions for doubtful amounts. (b) The term ‘officer’ should conform to the definition of that term as given under the Companies Act. 6. 1956.5. 4. 5.

Financial Statements of Insurance Companies 5. 3. and the amount of such benefit is reasonably determinable. 8. Due to subsidiaries/ holding company Claims Outstanding Annuities Due Due to Officers/ Directors Others (to be specified) TOTAL SCHEDULE – 14 PROVISIONS Particulars Current Year (`’000) Previous Year (`’000) 1. Notes: Discount Allowed in issue of shares/ debentures Others (to be specified) TOTAL (a) No item shall be included under the head “Miscellaneous Expenditure” and carried forward unless: 1 2 some benefit from the expenditure can reasonably be expected to be received in future. 9. (b) The amount to be carried forward in respect of any item included under the head “Miscellaneous Expenditure” shall not exceed the expected future revenue/other benefits related to the expenditure. For taxation (less payments and taxes deducted at source) For proposed dividends For dividend distribution tax Others (to be specified) TOTAL MISCELLANEOUS EXPENDITURE (To the extent not written off or adjusted) Particulars Current Year (`’000) Previous Year (`’000) SCHEDULE – 15 1. . 2. 10. 11.83 7. 4. 2.

The most essential test is the obligatory relationship between costs and the execution of insurance contracts (i. which represents premium income not relating to the current accounting period. Acquisition Costs---Acquisition costs. which represents premium received prior to the commencement of the risk. Premium--Premium shall be recognised as income over the contract period or the period of risk. to the extent applicable to the insurers carrying on general insurance business. shall be expensed in the period in which they are incurred. shall not be applicable. commencement of risk). A reserve for unexpired risks shall be created as the amount representing that part of the premium written which is attributable to. shall be disclosed separately in the financial statements. if any. Accounting Standard 13 (AS 13) – Accounting for Investments. except that: 1.Segment Reporting – shall apply to all insurers irrespective of the requirements regarding listing and turnover mentioned therein. shall be shown separately under the head ‘Current Liabilities’ in the financial statements. Accounting Standard 17 (AS 17) . the acquisition of new and renewal insurance contracts. 3. Claims--The components of the ultimate cost of claims to an insurer comprise the claims under policies and specific claims settlement costs. Applicability of Accounting Standards---Every Balance Sheet.84 Advanced Accounting ANNEXURE II SCHEDULE B for General Insurance Business PART I: Accounting principles for preparation of financial statements 1. 4. and to be allocated to the succeeding accounting periods and shall not be less than as required under section 64 V(1) (ii) (b) of the Act. and are primarily related to. 5. . Premium Received in Advance.5. Accounting Standard 3 (AS 3) – Cash Flow Statements – Cash Flow Statement shall be prepared only under the Direct Method. related expenses and maintenance costs exceeds related reserve for unexpired risks. and those estimated or anticipated under the policies following a loss occurrence. Acquisition costs are those costs that vary with. Premium Deficiency--Premium deficiency shall be recognised if the sum of expected claim costs. 2. Claims under policies comprise the claims made for losses incurred.e. whichever is appropriate. 3. 2. Receipts and Payments Account [Cash Flow statement] and Profit and Loss Account [Shareholders’ Account] of the insurer shall be in conformity with the Accounting Standards (AS) issued by the ICAI. Premium received in advance.

residual value being considered zero and no revaluation being permissible. An impairment loss shall be recognised as an expense in the Revenue/Profit and Loss Account immediately. (b) Claims Incurred But Not Reported (IBNR) including inadequate reserves [sometimes referred to as Claims Incurred But Not Enough Reported (IBNER)]. which will result in future cash/asset outgo for settling liabilities against those claims. certificate from a recognised actuary as to the fairness of liability assessment must be obtained. The liability shall include: (a) Future payments in relation to unpaid reported claims.Financial Statements of Insurance Companies 5. Actuarial Valuation of claim liability – in some cases Claims made in respect of contracts where the claims payment period exceeds four years shall be recognised on an actuarial basis. In such cases. 6. Change in estimated liability represents the difference between the estimated liability for outstanding claims at the beginning and at the end of the financial period. The accounting estimate shall also include claims cost adjusted for estimated salvage value if there is sufficient degree of certainty of its realisation. (c) Equity Securities and Derivative Instruments that are traded in active markets--Listed equity securities and derivative instruments that are traded in active markets shall be measured at fair value as at the balance sheet date. (b) Debt Securities--Debt securities including government securities and redeemable preference shares shall be considered as “held to maturity” securities and shall be measured at historical cost subject to amortisation. The Insurer shall assess at each balance sheet date whether any impairment of the investment property has occurred. subject to regulations that may be prescribed by the Authority. the lowest of the last quoted closing price of the stock exchanges where the securities are listed shall be taken. Actuarial assumptions shall be suitably disclosed by way of notes to the account.85 A liability for outstanding claims shall be brought to account in respect of both direct business and inward reinsurance business. . The insurer shall assess on each balance sheet date whether any impairment of listed equity security(ies)/ derivative(s) instruments has occurred.---An insurer shall determine the values of investments in the following manner:(a) Real Estate – Investment Property-.Investment Property shall be measured at historical cost less accumulated depreciation and impairment loss. For the purpose of calculation of fair value. Procedure to determine the value of investments. Fair value as at the balance sheet date and the basis of its determination shall be disclosed in the financial statements as additional information.

Loans--Loans shall be measured at historical cost subject to impairment provisions. if as per guidelines governing mutual funds laid down from time to time by SEBI.86 Advanced Accounting An active market shall mean a market. Catastrophe Reserve -. earlier recognised in Revenue/Profit and Loss Account shall be recognised in Revenue/Profit and Loss Account. where the securities traded are homogenous. The provision so made shall be reversed in subsequent periods if estimates based on external evidence show an increase in the value of the investment over its carrying amount.5. shall include accumulated changes in the fair value previously recognised in equity under the heading Fair Value Change Account in respect of a particular security and being recycled to Profit and Loss Account on actual sale of that listed security. (d) Unlisted and other than actively traded Equity Securities and Derivative Instruments--Unlisted equity securities and derivative instruments and listed equity securities and derivative instruments that are not regularly traded in active market will be measured at historical costs. The impairment provision shall not be lower than the amounts derived on the basis of guidelines prescribed from time to time by the Reserve Bank of India. that apply to companies and financial institutions. any debit balance in the said Fair Value Change Account shall be reduced from the profits/free reserves while declaring dividends. For the removal of doubt. The increased carrying amount of the investment due to the reversal of the provision shall not exceed the historical cost. a security shall be considered as being not actively traded. For the purposes of this regulation. at each balance sheet date. The ‘Profit on sale of investments’ or ‘Loss on sale of investments’. whether any impairment has occurred. The insurer shall assess. Also. Unrealised gains/losses arising due to changes in the fair value of listed equity shares and derivative instruments shall be taken to equity under the head ‘Fair Value Change Account’. if any. as the case may be. prescribed by the Authority. An impairment loss shall be recognised as an expense in Revenue/Profit and Loss Account to the extent of the difference between the remeasured fair value of the security/ investment and its acquisition cost as reduced by any previous impairment loss recognised as expense in Revenue/Profit and Loss Account. Provision shall be made for diminution in value of such investments. The insurer shall assess the quality of its loan assets and shall provide for impairment. 8.Catastrophe reserve shall be created in accordance with norms. Investment of funds out of catastrophe reserve shall be made in accordance with prescription of the Authority. it is clarified that balance or any part thereof shall not be available for distribution as dividends. availability of willing buyers and willing sellers is normal and the prices are publicly available. such a security is classified as “thinly traded”. 7. Any reversal of impairment loss. .

The following shall be disclosed by way of notes to the Balance Sheet: 5. Premiums. Value of contracts in relation to investments. 14. not provided for Reinsurance obligations to the extent not provided for in accounts (d) Guarantees given by or on behalf of the company (g) Others (to be specified) 2. not acknowledged as debts Statutory demands/liabilities in dispute. for: (a) Purchases where deliveries are pending. Claims.87 1. Actuarial assumptions for determination of claim liabilities in the case of claims where the claims payment period exceed four years. . Encumbrances to assets of the company in and outside India. 8. Historical costs of those investments valued on fair value basis. 6. 10. Computation of managerial remuneration. 11. 4. 7. (b) Sales where payments are overdue. Investments and Fixed Assets. written from business in/outside India. 9. Extent of premium income recognised. less reinsurance. 5. 12. category wise. Operating expenses relating to insurance business: basis of allocation of expenditure to various classes of business.Financial Statements of Insurance Companies PART II: Disclosures forming part of Financial Statements A. paid to claimants in/outside India. other than those under policies. Contingent Liabilities: (a) Partly-paid up investments (b) Underwriting commitments outstanding (c) (e) (f) Claims. Commitments made and outstanding for Loans. including whether reliance has been placed on external evidence. based on varying risk pattern. Basis of amortisation of debt securities. (a) Unrealised gain/losses arising due to changes in the fair value of listed equity shares and derivative instruments are to be taken to equity under the head ‘Fair Value Change Account’ and on realisation reported in profit and loss Account. Ageing of claims – distinguishing between claims outstanding for more than six months and other claims. with basis and justification therefor. less reinsurance. 3. 13.

Investments made in accordance with any statutory requirement should be disclosed separately together with its amount. dividends and rentals receivable in connection with an investment should be stated as gross value. Interest. . 6. and significant principles and policies given in Part I of Accounting Principles. A summary of financial statements for the last five years. 16. Accounting Ratios as may be prescribed by the Authority. 4. 5. 4. 3. if any. The corresponding amounts for the immediately preceding financial year for all items shown in the Balance Sheet.88 Advanced Accounting (b) Pending realisation. C. in the manner as may be prescribed by the Authority. The figures in the financial statements may be rounded off to the nearest thousands. B. 2. All significant accounting policies in terms of the accounting standards issued by the ICAI. Income from rent shall not include any notional rent. the amount of income tax deducted at source being included under 'advance taxes paid'. The following accounting policies shall form an integral part of the financial statements: 1. 2. Percentage of business sector-wise. Any departure from the accounting policies as aforesaid shall be separately disclosed with reasons for such departure. Claims settled and remaining unpaid for a period of more than six months as on the balance sheet date. the credit balance in the ‘Fair Value Change Account’ is not available for distribution. PART III: GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL STATEMENTS 1. security and any special rights in and outside India.5. nature. Segregation into performing/ non performing investments for purpose of income recognition as per the directions. Basis of allocation of Interest. issued by the Authority. 3. Revenue Account and Profit and Loss Account should be given. 15. Any other accounting policies followed by the insurer shall be stated in the manner required under Accounting Standard AS 1 issued by the ICAI. Dividends and Rent between Revenue Account and Profit and Loss Account. 2. The following information shall also be disclosed: 1. Fair value of investment property and the basis therefor.

renewals or diminution in value of assets. The company should make provisions for damages under lawsuits where the management is of the opinion that the award may go against the insurer.Financial Statements of Insurance Companies 5. Provided that an insurer shall prepare Revenue Accounts separately for fire. include any amount written off or retained by way of providing for depreciation. Extent of risk retained and reinsured shall be separately disclosed. unless the context otherwise requires (a) the expression ‘provision’ shall. Form B-PL. or as near thereto as the circumstances permit. renewals or diminution in value of assets or retained by way of providing for any known liability. 1. (I) For the purposes of financial statements. a management report duly authenticated by the management. PART V: Preparation of Financial Statements (1) An insurer shall prepare the Revenue Account. 2. and the expression "revenue reserve" shall mean any reserve other than a capital reserve. Profit and Loss Account [Shareholders’ Account] and the Balance Sheet in Form B-RA. PART IV: CONTENTS OF MANAGEMENT REPORT There shall be attached to the financial statements. (II) Where: (a) any amount written off or retained by way of providing for depreciation. the excess shall be treated for the purposes of these accounts as a reserve and not as a provision. 3. and miscellaneous insurance business and separate schedules shall be prepared for Marine . and Form B-BS. (c) the expression capital reserve shall not include any amount regarded as free for distribution through the profit and loss account. Any debit balance of Profit and Loss Account shall be shown as deduction from uncommitted reserves and the balance if any. (b) the expression "reserve" shall not. or (b) any amount retained by way of providing for any known liability is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose.89 5. renewals or diminution in value of assets. shall be shown separately. (d) The expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities. subject to note II below mean any amount written off or retained by way of providing for depreciation. or retained by way of providing for any known liability or loss of which the amount cannot be determined with substantial accuracy. marine. subject to as aforesaid.

Premiums earned (Net) Profit/ Loss on sale/redemption of Investments Others (to be specified) Interest. 1.5. 20___. Dividend & Rent – Gross TOTAL (A) Claims Incurred (Net) Commission Operating Expenses related to Insurance Business TOTAL (B) Operating Profit/(Loss) from Fire/Marine/Miscellaneous Business C= (A . and Date of Registration with the IRDA REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH.shall stand modified. 3. 2. Public/Product Liability 5. Workmen’s Compensation/Employers’ Liability 4. Marine – Other than Marine Cargo and the following classes of miscellaneous insurance business under miscellaneous insurance and accordingly application of AS 17 – Segment Reporting . Personal Accident 8. Motor 3.B) APPROPRIATIONS Transfer to Shareholders’ Account Transfer to Catastrophe Reserve Transfer to Other Reserves (to be specified) TOTAL (C) 1 2 3 4 . 1. Aviation 7. Others (2) An insurer shall prepare separate Receipts and Payments Account in accordance with the Direct Method prescribed in AS 3 – “Cash Flow Statement” issued by the ICAI. Health Insurance 2.90 Advanced Accounting Cargo. 4. 2. 3. Engineering 6. Particulars Schedule Current Year (`’000) Previous Year (`’000) 1. FORM B-RA Name of the Insurer: Registration No.

Dividend & Rent – Gross (b) Profit on sale of investments Less: Loss on sale of investments OTHER INCOME (To be specified) TOTAL (A) PROVISIONS (Other than taxation) (a) For diminution in the value of investments (b) For doubtful debts (c) Others (to be specified) OTHER EXPENSES (a) Expenses other than those related to Insurance Business (b) Bad debts written off (c) Others (To be specified) TOTAL (B) Profit Before Tax Provision for Taxation APPROPRIATIONS (a) Interim dividends paid during the year (b) Proposed final dividend (c) Dividend distribution tax (d) Transfer to any Reserves or Other Accounts (to be specified) Balance of profit/ loss brought forward from last year Balance carried forward to Balance Sheet . 20___. 4. Particulars Schedule Current Year (`’000) 5.91 Previous Year (`’000) 1. 2.Financial Statements of Insurance Companies FORM B-PL Name of the Insurer: Registration No. 5. 3. and Date of Registration with the IRDA PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH. OPERATING PROFIT/(LOSS) (a) Fire Insurance (b) Marine Insurance (c ) Miscellaneous Insurance INCOME FROM INVESTMENTS (a) Interest.

Schedule Current Year (`’000) Previous Year (`’000) Sources of Funds Share Capital Reserves and Surplus Fair Value Change Account Borrowings Total Application of Funds Investments Loans Fixed Assets Current Assets Cash and Bank Balances Advances and Other Assets Sub-Total (A) 5 6 7 8 9 10 11 12 . (d) Items of expenses and income in excess of one percent of the total premiums (less reinsurance) or `5.PL (a) Premium income received from business concluded in and outside India shall be separately disclosed. (h) Income from rent shall include only the realised rent. shall be shown as a separate line item.92 Advanced Accounting Notes: to Form B-RA and B.000 whichever is higher. (c) Claims incurred shall comprise claims paid. (e) Fees and expenses connected with claims shall be included in claims.. (b) Reinsurance premiums whether on business ceded or accepted are to be brought into account gross (i. (g) Interest. It shall not include any notional rent.e. the amount of income tax deducted at source being included under 'advance taxes paid and taxes deducted at source”. specific claims settlement costs wherever applicable and change in the outstanding provision for claims at the year-end. (f) Under the sub-head "Others” shall be included items like foreign exchange gains or losses and other items.5. before deducting commissions) under the head reinsurance premiums..00. and Date of Registration with the IRDA BALANCE SHEET AS AT 31ST MARCH. 20___. dividends and rentals receivable in connection with an investment should be stated as gross amount. FORM B-BS Name of the Insurer: Registration No.

6.93 Current Liabilities Provisions Sub-Total (B) Net Current Assets (C) = (A . Partly paid-up investments Claims. not acknowledged as debts by the company Underwriting commitments outstanding (in respect of shares and securities) Guarantees given by or on behalf of the Company Statutory demands/ liabilities in dispute. . under the head of reinsurance premiums. 1. not provided for Reinsurance obligations to the extent not provided for in accounts Others (to be specified) TOTAL SCHEDULES FORMING PART OF FINANCIAL STATEMENTS SCHEDULE – 1 PREMIUM EARNED [NET] Particulars Current Year (`’000) Previous Year (`’000) Premium from direct business written Add: Premium on reinsurance accepted Less : Premium on reinsurance ceded Net Premium Adjustment for change in reserve for unexpired risks Total Premium Earned (Net) Note: Reinsurance premiums whether on business ceded or accepted are to be brought into account. 2. before deducting commission. 7. other than against policies.Financial Statements of Insurance Companies 5.B) Miscellaneous Expenditure (To the extent not written off or adjusted) Debit Balance in Profit And Loss Account Total Particulars 13 14 15 CONTINGENT LIABILITIES Current Year (`’000). 5. Previous Year (`’000). 3. 4.

3 COMMISSION Particulars Current Year (`’000) Previous Year (`’000) Commission paid Direct Add: Re-insurance Accepted Less: Commission on Re-insurance Ceded Net Commission Note: The profit/ commission.94 Advanced Accounting SCHEDULE – 2 CLAIMS INCURRED [NET] Particulars Current Year (`’000) Previous Year (`’000) Claims paid Direct Add :Re-insurance accepted Less :Re-insurance Ceded Net Claims paid Add Claims Outstanding at the end of the year Less Claims Outstanding at the beginning Total Claims Incurred Notes: (a) Incurred But Not Reported (IBNR). . Incurred but not enough reported [IBNER] claims should be included in the amount for outstanding claims. legal and other expenses shall also form part of claims cost.5. SCHEDULE. (d) Claims cost should be adjusted for estimated salvage value if there is a sufficient certainty of its realisation. (b) Claims includes specific claims settlement cost but not expenses of management (c) The surveyor fees. are to be combined with the Re-insurance accepted or Re-insurance ceded figures. if any.

7. 5. and (c) in any other capacity 10. in respect of (i) Taxation matters (ii) Insurance matters (iii) Management services. conveyance and vehicle running expenses Training expenses Rents.. 8. each . Employees’ remuneration & welfare benefits Travel. expenses etc (a) as auditor (b) as adviser or in any other capacity. 3.Financial Statements of Insurance Companies SCHEDULE – 4 OPERATING EXPENSES RELATED TO INSURANCE BUSINESS Particulars Current Year (`’000) 5. 2. 12. SCHEDULE – 5 SHARE CAPITAL Particulars Current Year Previous Year (`’000) (`’000) 1.95 Previous Year (`’000) 1. 4. Authorised Capital Equity Shares of `. 13. rates & taxes Repairs Printing & stationery Communication Legal & professional charges Auditors' fees.000 whichever is higher.. 6. Advertisement and publicity Interest & Bank Charges Others (to be specified) Depreciation TOTAL Note: Items of expenses and income in excess of one percent of the total premiums (less reinsurance) or `5. shall be shown as a separate line item.00. 11.. 9.

5... Issued Capital Equity Shares of ` .. (c) In case any part of the capital is held by a holding company. SCHEDULE – 5A SHARE CAPITAL PATTERN OF SHAREHOLDING [As certified by the Management] Shareholder Current Year Number of Shares % of Holding Previous Year Number of Shares % of Holding Promoters • Indian Foreign • Others TOTAL .96 Advanced Accounting 2..each Subscribed Capital Equity Shares of `. (b) The amount capitalised on account of issue of bonus shares should be disclosed. 4.......each Called-up Capital Equity Shares of ` .each Less : Calls unpaid Add : Equity Shares forfeited (Amount originally paid up) Less : Par Value of Equity Shares bought back Less : Preliminary Expenses Expenses including commission or brokerage on Underwriting or subscription of shares TOTAL Notes: (a) Particulars of the different classes of capital should be separately stated.... 3. the same should be separately disclosed.

2.97 Previous Year (`’000) 1. (b) Amounts due within 12 months from the date of Balance Sheet should be shown separately . 4. 3 4 Capital Reserve Capital Redemption Reserve Share Premium General Reserves Less: Debit balance in Profit and Loss Account Less: Amount utilized for Buy-back 5 6 7 Catastrophe Reserve Other Reserves (to be specified) Balance of Profit in Profit & Loss Account TOTAL Note: Additions to and deductions from the reserves should be disclosed under each of the specified heads. 3.Financial Statements of Insurance Companies SCHEDULE – 6 RESERVES AND SURPLUS Particulars Current Year (`’000) 5. 2.7 BORROWINGS Particulars Current Year (`’000) Previous Year (`’000) 1. SCHEDULE . Notes: Debentures/ Bonds Banks Financial Institutions Others (to be specified) TOTAL (a) The extent to which the borrowings are secured shall be separately disclosed stating the nature of the security under each sub-head.

3. 4. 1.98 Advanced Accounting SCHEDULE –8 INVESTMENTS Particulars Current Year (`’000) Previous Year (`’000) 1. 5. 5. 2. 2. LONG TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities Other Investments ( a) Shares (aa) Equity (bb) Preference ( b) Mutual Funds Derivative Instruments (c) (d) Debentures/ Bonds (e) Other Securities (to be specified) Subsidiaries (f) (g) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments SHORT TERM INVESTMENTS Government securities and Government guaranteed bonds including Treasury Bills Other Approved Securities Other Investments (a) Shares (aa) Equity (bb) Preference (b) Mutual Funds (a) Derivative Instruments (b) Debentures/ Bonds (c) Other Securities (to be specified) (d) Subsidiaries (e) Investment Properties-Real Estate Investments in Infrastructure and Social Sector Other than Approved Investments TOTAL . 3.5. 4.

(d) Debt securities will be considered as “held to maturity” securities and will be measured at historical cost subject to amortisation. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.Financial Statements of Insurance Companies Notes: 5. interchange of managerial personnel or dependence on technical information. by representation on the board of directors. unless such influence is clearly demonstrated. statute or agreement. As regards share ownership. (e) Investment Property means a property [land or building or part of a building or both] held to earn rental income or for capital appreciation or for both. Significant influence may be gained by share ownership. (f) Investments maturing within twelve months from balance sheet date and investments made with the specific intention to dispose of within twelve months from balance sheet date shall be classified as short-term investments . if the investor holds. at cost. 1956: Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity. rather than for use in services or for administrative purposes. it is presumed that the investor does have significant influence. which is subject to joint control. participation in the policymaking process. directly or indirectly through subsidiaries.is an enterprise in which the company has significant influence and which is neither a subsidiary nor a joint venture of the company. (b) Aggregate amount of company's investments other than listed equity securities and derivative instruments and also the market value thereof shall be disclosed. directly or indirectly through subsidiaries. (c) Investments made out of Catastrophe reserve should be shown separately. Significant influence (for the purpose of this schedule) .means participation in the financial and operating policy decisions of a company. Conversely. Significant influence may be exercised in several ways. joint ventures and associates shall be separately disclosed. if an investor holds. material inter-company transactions.99 (a) Investments in subsidiary/holding companies. Joint control . less than 20 percent of the voting power of the investee. 20 percent or more of the voting power of the investee. but not control of those policies. it is presumed that the investor does not have significant influence. for example. Associate . unless it can be clearly demonstrated that this is not the case.is the contractually agreed sharing of power to govern the financial and operating policies of an economic activity to obtain benefits from it. (i) (ii) (iii) (iv) (v) Holding company and subsidiary shall be construed as defined in the Companies Act.

Govt. Bonds. which are repayable within 12 months from the date of balance sheet. MATURITY-WISE CLASSIFICATION (a) Short Term (b) Long Term TOTAL Notes: (a) Short-term loans shall include those. Secured loans for the purposes of this schedule.5. PERFORMANCE-WISE CLASSIFICATION (a) Loans classified as standard In India (aa) Outside India (bb) (b) Non-performing loans less provisions (aa) In India (bb) Outside India TOTAL 4.100 Advanced Accounting SCHEDULE . (c) The nature of the security in case of all long term secured loans shall be specified in each case. . Long term loans shall be the loans other than short-term loans. Securities (c) Others (to be specified) Unsecured TOTAL 2. (b) Provisions against non-performing loans shall be shown separately. means loans secured wholly or partly against an asset of the company. BORROWER-WISE CLASSIFICATION (a) Central and State Governments (b) Banks and Financial Institutions (c) Subsidiaries (d) Industrial Undertakings (e) Others (to be specified) TOTAL 3.9 LOANS Particulars Current Year (`’000) Previous Year (`’000) 1. (d) Loans considered doubtful and the amount of provision created against such loans shall be disclosed. SECURITY-WISE CLASSIFICATION Secured (a) On mortgage of property (aa) In India Outside India (bb) (b) On Shares.

.101 (`’000) Particulars Cost/ Gross Block Opening Additions Deductions Closing Depreciation Upto For On Sales/ Last The Adjustmen Year Year ts Net Block To Date As at Previous year Year end Goodwill Intangibles (specify) LandFreehold Leasehold Property Buildings Furniture & Fittings Information Technology Equipment Vehicles Office Equipment Others (Specify nature) TOTAL Work in progress Grand Total PREVIOUS YEAR Note: Assets included in land. building and property above exclude Investment Properties as defined in note (e) to Schedule 8.Financial Statements of Insurance Companies SCHEDULE – 10 FIXED ASSETS 5.

Note : Bank balance may include remittances in transit.11 CASH AND BANK BALANCES Particulars Current Year Previous Year (`’000) (`’000) 1.5.102 Advanced Accounting SCHEDULE. drafts and stamps) Bank Balances (a) Deposit Accounts (aa) Short-term (due within 12 months) (bb) Others (b) Current Accounts (c) Others (to be specified) Money at Call and Short Notice (a) With Banks (b) With other Institutions Others (to be specified) TOTAL Balances with non-scheduled banks included in 2 and 3 above 3. the nature and amount should be separately stated. 4. 4. 5. Reserve deposits with ceding companies Application money for investments Prepayments Advances to Directors/Officers Advance tax paid and taxes deducted at source (Net of provision for taxation) Others (to be specified) TOTAL (A) . 2. SCHEDULE – 12 ADVANCES AND OTHER ASSETS Particulars Current Year Previous Year (`’000) ADVANCES (`’000) 1. 6. Cash (including cheques. 2. 3. If so.

1956. 4. 8. 3. 4. 9. 3. 2. 10. 6. (c) Sundry Debtors will be shown under item 9(others) SCHEDULE – 13 CURRENT LIABILITIES Particulars Current Year (`’000) Previous Year (`’000) 1. (b) The term ‘officer’ should conform to the definition of that term as given under the Companies Act. The amount of provision against each head should be shown separately. 7. 5. 1938] Others (to be specified) TOTAL (B) TOTAL (A+B) Notes: (a) The items under the above heads shall not be shown net of provisions for doubtful amounts. 8.Financial Statements of Insurance Companies OTHER ASSETS 5. 2. 5. Income accrued on investments Outstanding Premiums Agents’ Balances Foreign Agencies Balances Due from other entities carrying on insurance business (including reinsures) Due from subsidiaries/ holding Deposit with Reserve Bank of India [Pursuant to section 7 of Insurance Act. Agents’ Balances Balances due to other insurance companies Deposits held on re-insurance ceded Premiums received in advance Unallocated Premium Sundry creditors Due to subsidiaries/ holding company Claims Outstanding Due to Officers/ Directors Others (to be specified) TOTAL . 6.103 1. 7.

5. . 2. 2. (b) The amount to be carried forward in respect of any item included under the head “Miscellaneous Expenditure” shall not exceed the expected future revenue/other benefits related to the expenditure. some benefit from the expenditure can reasonably be expected to be received in future.104 Advanced Accounting SCHEDULE – 14 PROVISIONS Particulars Current Year Previous Year (`’000) (`’000) 1 2 3 4 5 Reserve for Unexpired Risk For taxation (less advance tax paid and taxes deducted at source) For proposed dividends For dividend distribution tax Others (to be specified) TOTAL MISCELLANEOUS EXPENDITURE (To the extent not written off or adjusted) Particulars Current Year SCHEDULE – 15 Previous Year (`’000) 1. Discount Allowed in issue of shares/ debentures Others (to be specified) (`’000) TOTAL Notes: (a) No item shall be included under the head “Miscellaneous Expenditure” and carried forward unless: 1. and the amount of such benefit is reasonably determinable.

dividend payment and disposal of non-banking assets. Accepting deposits of money from public for the purpose of lending These deposits are repayable on demand and can be withdrawn by cheque. However merely accepting public deposits by a company for financing its own business shall not make it a bank.1 Meaning of Banking Banks are vital to business and may be likened to the heart in a human being. ♦ 1. 1949. Learn the provisions relating to capital. the composition of management team of a bank and types of banks operating in India. you will be able to: ♦ ♦ ♦ Understand the legal definition of banking. 1949 Learning Objectives After studying this unit. liquidity norm (Capital Reserve Ratio & Statutory Liquidity Ratio). Try to relate such provisions with the financial information obtained from any banking companies.6 FINANCIAL STATEMENTS OF BANKING COMPANIES Unit-1: Some Relevant Provisions of the Banking Regulations Act. Learn the conditions to be fulfilled for obtaining a license for banking activities in India. 1949 is not applicable to a primary agricultural society. a co-operative land mortgage bank and any other co-operative society. circulating money through the economy. draft or otherwise Banking Company: Any bank which transacts this business as stated in section 5 (b) of the act in India is called a banking company. reserve. reserve fund. Banks in India and their activities are regulated by the Banking Regulation Act. . It may be mentioned that the Banking Regulation Act. Banking : Under Section 5(b) of the said Act “Banking” means.

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Advanced Accounting

1.1.1

Types of banks

There are two main categories of Commercial Bank in India namely:1. Scheduled Commercial Bank 2. Scheduled Co-operative Bank Scheduled Commercial Banks are again divided into five types and the Scheduled Cooperative Banks into two as given in the following chart.

Types of Banks

Scheduled Commercial Banks

Scheduled Co-operative Banks

Nationalised Bank IOB, SBI *

eg.

Scheduled State Cooperative Bank

Development Bank eg. NABARD, EXIM

Scheduled Urban Cooperative Bank

Regional Rural Bank (Gramin Bank)**

Foreign Banks eg. CITI Bank, BNP Paribas

Private Sector Bank eg. ICICI, Axis

Financial Statements of Banking Companies * There are so far 26 Nationalised bank including SBI and its subsidiaries.

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** There are 82 Regional Rural Banks (RRBs) as on 01.01.2012. RRB’s are conceived as low cost institutions having a rural ethos, local feel and pro-poor focus. Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. After May 1997 there are no non-scheduled commercial banks existing in India. However there are small to tiny non-scheduled Urban Co-operative Banks also known as Nidhi’s in some parts of the country. The banks included in this schedule list should fulfill following two conditions: 1. The paid up capital and reserves in aggregate should not be less than ` 5 lakhs. (Presently for a new bank to be set up in India the initial minimum paid up capital should be Rs 200 crores) Any activity of the bank will not adversely affect the interests of depositors.

2.

The Reserve Bank includes a bank in this schedule if it fulfils certain other conditions too. RBI as the Central Bank is the ‘Bank of Last Resort’ i.e. when other commercial banks are in trouble RBI helps them out. The services provided by RBI to scheduled commercial banks includes the following: (a) (b) (c) (d) (e) (f) The purchase, sale, and re-discounting of certain bills of exchange, or promissory notes. Purchase and sale of foreign exchange. Purchase, sale and re-discounting of foreign bills of exchange. Making of loans and advances to scheduled banks. Maintenance of accounts of the scheduled bank in its banking department and issue department. Remittance of money between different branches of scheduled banks through the offices, branches or agencies of Reserve Bank free of cost or at nominal rates.

1.1.2 Banking Company Business
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking company may engage. These are: Main Business:(i) (ii) (iii) borrowing, raising or taking up of money, lending or advancing of money; handling in all manners Bills of exchange/hundies/promissory notes acting as agents for any government or local authority or any other person, Managing issues of shares, stocks, debentures etc. including underwriting, guaranteeing.

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Advanced Accounting

Other Business:(v) (vi) (vii) carrying on and transacting every kind of guarantee and indemnity business. managing, selling and realising property which may come into the possession of the banking company in satisfaction of its claims. acquiring and holding and generally dealing with any property or any right, title or interest in such property which may form the security for any loans and advances. establishing and supporting or aiding in the establishment and support of institutions, funds, trusts etc. acquisition, construction, maintenance and alteration of any building and works necessary for the purpose of the banking company. selling, improving, managing, developing, or otherwise dealing with property and rights of the company. acquiring and undertaking whole or any part of the business of any person or company.

(viii) underwriting and executing trusts. (ix) (x) (xi) (xii)

(xiii) doing all such other things as are incidental or conductive to the promotion or advancement of the business of the banking company. (xiv) any other business which the Central Government may specify. No banking company shall engage in any form of business other than those referred to above. To summarise all the above, the functions of Commercial Bank are:

Functions of a Commercial Bank
Some of the main functions of modern commercial banks are: (a) Receiving of money on deposit and providing facilities to constituents for payments by cheque. (b) Dealing in securities on its own account and on account of customers. (c) Lending of money by (i) making loans and advances, (ii) purchasing or discounting of bills. (d) Transferring money from place to place by (i) the issue of demand drafts, telegraphic transfers, traveller’s cheques, etc., (ii) collection of bills. (e) Issuing letters of credit. (f) Safe custody of securities and valuables. (g) Issuing guarantees. (h) Acting as executors and trustees sometimes through subsidiary companies formed for that purpose.

Financial Statements of Banking Companies (i) (j)

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Buying, selling and dealing in foreign exchange. Acting as managers for issue of capital by companies and performing functions incidental thereto.

1.2 Prohibition of Trading (Section 8)
A banking company cannot directly or indirectly deal in the buying or selling of goods. However, it may buy, sell or barter in connection with the bills of exchange received for collection or negotiation or can undertake the administration of estates as executors, trustees or otherwise.

1.3 Disposal of Non-Banking Assets (Section 9)
A banking co in the course of its business may have to take possession of certain asset charged in its favour on account of the failure of a debtor to repay the loan. A banking company can only acquire immovable property for its own use. However, other immovable properties acquired must be disposed off within seven years from the date of acquisition. The Reserve Bank of India at its discretion can extend this. Income/loss from such an asset has to be shown separately in the profit and loss account of the banking company. It must be noted that the banking company can retain immovable property if it is meant for the banks own use. For Example-XYZ bank acquired car from one customer on 1st January, 2006 who defaulted in payment of dues as it was held as security. Such assets are non banking assets and bank needs to dispose of them within seven years i.e by the end of 31st December 2013.

1.4 Management (Section 10)
Management of a Bank comes under its Board of Directors. Under section 10(a), not less than 51% of the total number of members of the board of directors of a banking company shall consist of persons having special knowledge or practical experience in one or more of the following fields: 1. Accountancy. 2. Agriculture and rural economy. 3. Banking. 4. Co-operation. 5. Economics. 6. Finance. 7. Law. 8. Small scale industry. It is also required not less than two directors should have special knowledge or practical experience in respect of agriculture and rural economy and co-operation or small-scale industry. Under section 10(b)(1), every banking company shall have one of its directors as Chairman of its board of directors. The Chairman is entrusted with the management of the whole of the affairs of the banking company. Such Chairman is the whole-time employee of the banking company and

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Advanced Accounting

can hold office for a period not exceeding five years. Other directors who are whole-time directors can hold office continuously for a period not exceeding eight years.

1.5 Capital and Reserve
Requirement as to minimum paid-up capital and reserve (Section 11): • In the case of a banking company incorporated outside India and having a place or places of business in the city of Bombay or Calcutta or both, the aggregate value of its paid-up capital and reserve shall not be less than ` 20 lacs. Any other banking company incorporated outside India shall have aggregate value of paid-up capital and reserves amounting to ` 15 lacs or more. In case of any banking company incorporated in India having places of business in more than one State including any such place or places of business situated in the city of Bombay or Calcutta or both, the aggregate value of its paid-up capital and reserves shall not be less than ` 10 lacs. In case of a banking company incorporated in India and having all its places of business in one State and none of which is situated in the city of Bombay or Calcutta, the aggregate value of its paid-up capital and reserves shall be ` 1 lakh in respect of all its principal places of business plus ` 10,000 in respect of each of its other places of business situated in the same district in which it has its principal place of business plus ` 25,000 in respect of each place of business situated elsewhere in the State (however, such banking company does not need to maintain the aggregate value of paid-up capital and reserve more than ` 5 lacs). Any banking company incorporated outside India is required to deposit with the Reserve Bank either in cash or in the form of unencumbered approved securities or partly in cash and partly in securities, the minimum amount of paid-up capital and reserves which it has to maintain under section 11(2).

• •

Regulation relating to authorized capital, subscribed capital and paid-up capital (Section 12): The subscribed capital of a banking company shall not be less than one-half of the authorised capital and the paid-up capital shall not be less than one-half of the subscribed capital. The capital of the banking company consists of ordinary shares or equity shares and such preference shares which have been issued prior to the first day of July, 1944. The voting right of any single shareholder cannot exceed 1% of the total voting rights. Under section 13 of the Banking Regulation Act a banking company cannot pay out directly or indirectly commission, brokerage, discount, or remuneration in respect of any shares issued by it, an amount exceeding two and one-half per cent of the paid-up value of such shares.

1.6 Reserve Funds (Section 17)
Every banking company incorporated in India is required to transfer atleast 25% of its profit to the reserve fund. The profit of the year as per the profit and loss account prepared under Section 29 is to be taken as base for the purpose of such transfer and transfer to reserve fund

Financial Statements of Banking Companies should be made before declaration of any dividend.

6.7

If any banking company makes any appropriation from the reserve fund or share premium account, it has to report to the Reserve Bank of India the reasons for such appropriation within 21 days. Note: Students shall ensure that 25% of the profit earned during current year is transferred as Statutory Reserve even if the question is silent on the issue in the examination question.

1.7 Restriction as to Payment of Dividend
Before paying any dividend, a banking company has to write off completely all its capitalised expenses including preliminary expenses, organisation expenses, share-selling commission, brokerage, and amounts of losses incurred by tangible assets. However, a banking company may pay dividend on its shares without writing off 1. 2. the depreciation in the value of its investment in approved securities in any case where such depreciation has not actually been capitalised or accounted for as a loss. the depreciation in the value of its investment in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor of the banking company. the bad debts in any case where adequate provision for such debts had been made to the satisfaction of the auditor of the banking company.

3.

1.8 Cash Reserve (Section 18)
For smoothly meeting cash payment requirement, banks have to maintain certain minimum ready cash balances at all times. This is called as Cash Reserve Ratio (CRR) Cash reserve can be maintained by way of balance in a current account with the Reserve Bank of India or by way of net balance in current accounts. Every Scheduled Commercial Bank has to maintain cash reserve (i.e. CRR) as per direction of the RBI issued under Section 42(IA) of the Reserve Bank of India Act, 1934. The Reserve Bank vide notification DBOD.No.Ret.BC.74 /12.01.001/2011-12 January 24, 2012 reduced the Cash Reserve Ratio (CRR) of Scheduled Commercial Banks by 50 basis points from 6.00 per cent to 5.50* per cent of their Net Demand and Time Liabilities (NDTL) with effect from January 28, 2012. However, the RBI had further reduced the Cash Reserve Ratio (CRR) of Scheduled Primary (Urban) Co-operative Banks by 75 basis points from 5.50 per cent to 4.75 per cent of their Net Demand and Time Liabilities (NDTL) vide Cir.No.3/12.03.000/ 2011-12 dated March 9, 2012, on reviewing the current and evolving liquidity conditions Therefore, Cash Reserve Ratio (CRR) will be 4.75∗ per cent of their Net Demand and Time Liabilities (NDTL) with effect from March 10, 2012.

RBI revises this rate time to time.

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Advanced Accounting

1.9 Licensing of Banking Companies (Section 22)
A banking company can function in India only if it holds a licence issued by the Reserve Bank of India and included in the Second Schedule of the RBI Act. Before granting any licence, the Reserve Bank of India has to be satisfy the following conditions: Financial Requirement: The initial minimum paid-up capital for a new bank shall be Rs.200 crore. The initial capital will be raised to Rs.300 crore within three years of commencement of business. The overall capital structure of the proposed bank including the authorised capital shall be approved by the RBI. Other Requirement: In addition to the financial requirement the Reserve Bank of India would need to satisfy about the other additional requirements: (a) That the company is or will be in a position to pay its present or future depositors in full as their claims accrue. (b) That the affairs of the company are not being conducted or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors. (c) That the general character of the proposed management of the company will not be prejudicial to the public interest of its present or future depositors. (d) That the company has adequate capital structure and earning prospects. (e) That the public interest will be served by the grant of a licence to the company to carry on banking business in India. (f) That having regard to the banking facilities available in the proposed principal area of banks already in existence in the area and other relevant factors, the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth.

Similarly, prior permission of the Reserve Bank of India is necessary to open a new branch of bank in India or to change the existing place of business situated in India. Also, no banking company incorporated in India can open a branch outside India or change the existing place of business without prior permission of the Reserve Bank of India.

1.10 Liquidity Norms (Section 24)
Banking companies have to maintain sufficient liquid assets in the normal course of business called as Statutory Liquidity Ratio (SLR). This In order tosafeguards the interest of depositors and prevent banks from over-extending their resources, liquidity norms have been settled and given statutory recognition. Every banking company has to maintain the SLR in: 1. 2. cash gold

Financial Statements of Banking Companies 3. unencumbered approved securities.

6.9

At present SLR should not be less than 24%• of its demand and time liabilities in India. However, this percentage is changed by the Reserve Bank of India from time to time considering the general economic conditions. This is in addition to the Cash Reserve Ratio balance which a scheduled bank is required to maintain under Section 42 of the Reserve Bank of India Act.

1.11 Restriction on Acquisition of Shares in Other Company
A banking company cannot form any subsidiary except for one or more of the following purposes: 1. 2. 3. The undertaking of any business permissible for banking company to undertake. Carrying on business of banking, exclusively outside India with previous permission in writing, of the Reserve Bank. The undertaking of such other business which the Reserve Bank of India may permit with prior approval of the Central Government.

Other than formation of such subsidiary companies as mentioned above, a banking company cannot hold shares in any company either as pledge, mortgage, or absolute owner of an amount not exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less.

1.12 Restriction on Loans and Advances
Under Section 20 of the Banking Regulations Act, a banking company shall not grant any loans or advances on the security of its own shares. It cannot enter into any commitment for granting any loan or advance to or on behalf of (i) (ii) any of its directors. any firm in which any of its directors is interested as partner, manager, employee or guarantor.

(iii) any company other than the subsidiary of the banking company, or a company registered under section 25 of the Companies Act or a Government company of which any of the directors of the banking company is a director, manager, employee or guarantor or in which he holds substantial interest. (iv) any individual in respect of whom any of its directors is a partner or a guarantor.

1.13 Prohibition of Charge on Unpaid Capital and Floating Charge on Assets
Under Section 14 of the Banking Regulation Act, a banking company cannot create any charge upon any unpaid capital of the company. A banking company also cannot create a

RBI revises this rate time to time.

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Advanced Accounting

floating charge on the undertaking or any property of the company or any part thereof unless the creation of such floating charge is certified in writing by the Reserve Bank as not being detrimental to the interest of the depositors of such company (Section 14A).

1.14 Unclaimed Deposits
Under Section 26 of the Banking Regulations Act, every banking company is required to submit a return in the prescribed form and manner, to the Reserve Bank of India at the end of each calendar year of all accounts in India which could not be operated for 10 years. This report is to be submitted within 30 days after the close of each calendar year. In case of fixed deposit, such 10 years are to be reckoned from the date of expiry of the fixed period.

1.15 Accounts and Audit
Sections 29 to 34A of the Banking Regulation Act deal with accounts and audit. At the end of each financial year every banking company incorporated in India in respect of business transacted by it shall prepare with reference to that year or period, a Balance Sheet (Form A) and Profit and Loss Account (Form B) as on the last working day of that year or the period in the forms set out in the Third Schedule of Banking Regulation Act. Similarly, every banking company incorporated outside India is required to prepare Balance Sheet and Profit and Loss Account in respect of all business transacted through its branches in India.. The statement of accounts must be signed by the manager or principal officer and by at least three directors or all directors if there are not more than three directors in case of a banking company incorporated in India. In case of a banking company incorporated outside India, the statement of accounts must be signed by the manager or agent of the principal office of the company in India. Under Section 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account prepared in accordance with Section 29 shall be audited by a person duly qualified under any law for the time being in force to be an auditor of companies. Every banking company is required to take previous approval of the Reserve Bank of India before appointing, re-appointing or removing any auditor or auditors. In addition, the Reserve Bank can order special audit of the banking companies accounts if it thinks fit in the public interest of the banking company or its depositors.

Financial Statements of Banking Companies

6.11

Unit – 2 : Books of Accounts, Returns and Forms of Financial Statements
Learning Objectives
After studying this unit, you will be able to: ♦ Learn the main characteristics of a bank’s system of book keeping. ♦ Understand the methods in which all detailed accounts in subsidiary books and principal books are maintained by a bank and their purposes. ♦ Make a list of various other registers, departmental journals and memorandum books generally maintained by a bank. ♦ Familiarize with the monthly, quarterly and annual returns filed by a bank to the RBI. ♦ Appreciate the formats of Banks Financial Statements in Form A for Balance Sheet and Form B for Profit and Loss Statement of the Banking Regulation Act.

2.1 Main Characteristics of a Bank’s Book-Keeping System
The book-keeping system of a banking company is substantially different from that of a trading or manufacturing enterprise. A bank maintains a large number of accounts of various types for its customers. As a safeguard against any payment being made in the account of a customer in excess of the amount standing to his credit or a cheque of a customer being dishonoured due to a mistake in the balance in his account, it is necessary that customers’ accounts should be kept up-to-date and checked regularly. In many other mercantile enterprises, books of primary entry (i.e., day books) are generally kept up-to- date while their ledgers including the general ledger and subsidiary ledgers for debtors, creditors etc. are written afterwards. However a bank cannot afford to ignore its ledgers, particularly those concerning the accounts of its customers and has to enter into the ledgers every transactions as soon as it takes place. In bank accounting, relatively less emphasis is placed on day books. These are merely treated as a means to an end-the end being to keep up-to-date detailed ledgers and to balance the trial balance everyday and to keep all control accounts in agreement with the detailed ledgers. Presently most if not all of the Banks' accounting is done on Core Banking Solutions (CBS) wherein all accounts are maintained on huge servers with posting being effected instantly through vouchers, debit cards, internet banking etc. The main characteristics of a bank’s system of book-keeping are as follows: (a) Voucher posting – Vouchers are nothing but loose leaves of journals or cash books on which transactions are recorded as they occur. Entries in the personal ledger are made directly from vouchers instead of being posted from the books of prime entry. (b) Voucher summary sheets - The vouchers entered into different personal ledgers each day are summarised on summary sheets, totals of which are posted to the control accounts in the general ledger.

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Advanced Accounting

(c) Daily trial balance - The general ledger trial balance is extracted and agreed every- day. (d) Continuous checks - All entries in the detailed personal ledgers and summary sheets are checked by persons other than those who have made the entries. A considerable force of such check is employed, with the general result that most clerical mistakes are detected before another day begins. (e) Control Accounts - A trial balance of the detailed personal ledgers is prepared periodically, usually every two weeks, agreed with general ledger control accounts. (f) Double voucher system - Two vouchers are prepared for every transaction not involving cash - one debit voucher and another credit voucher.

2.1.1 Slip (or Voucher) System of Ledger Posting The bank has to ensure that customers (depositors) ledger accounts are up-to-date so that when a cheque is presented to the bank for payment, the bank can immediately decide whether to honour or dishonour the cheque. Thus transactions in the bank are immediately recorded. For this purpose slip system of ledger posting is adopted. Under this system entries are made in the (personal) accounts of customers in the ledger directly from various slips rather than from subsidiary books or journals and then a Day Book is written up. Subsequently, entries in the accounts of the customers are tallied with the Day Book. In this way the posting in the ledger accounts and writing of the day-book can be carried out simultaneously without any loss of time. A slip is also called voucher. In general, the types of slips used in bank book-keeping are: pay-in-slips, cheques or withdrawal forms. As these slips are filled by the customers there is much saving of time and labour of the employees of the bank. (a) Pay-in-slip : When a customer deposits money with a bank, he has to fill-up a printed pay-in-slip form and submit it to the ‘receiving cashier’ of the bank along with cash. The form of pay-in-slip has two parts. The left-hand side portion of the pay-in-slip is called ‘counterfoil’. It is returned by the receiving cashier after he receives and counts the cash. The counterfoil bears signature of the receiving cashier and it is duly stamped with the rubber stamp of the bank. Pay-in-slip serves as an acknowledgement of the deposit by the customer with the bank. The remaining portion of pay-in-slip that is, its right-handside part remains with the bank for making entry in the cash book, after which it is given to the ‘personal accounts ledger keeper’ for crediting the ledger account of the customer. (b) Withdrawal slip or cheque : When a customer withdraws money from the bank, he has to fill-up or write a cheque or withdrawal form and submit it to the paying cashier who makes payment, after checking the signature of the customer and adequacy of amount in his ledger account. The paying cashier credits the cash account and the ledger-keeper

Financial Statements of Banking Companies

6.13

debits the customer’s account. These days the cashier may himself debit the customer’s account in the computer based ledger immediately before making the payment. (c) Dockets : Sometimes the bank staff also prepares slips for making entries in the ledger accounts for which there are no original vouchers. For example, the loan department of a bank prepares vouchers when the interest is due. This slip or voucher is known as docket. 2.1.2 Need of the Slip System The need for slip system arises due to following reasons : (i) Updated Accurate Accounts: The bank must keep its customers’ accounts accurate and up-to-date because a customer may present a cheque or withdrawal slip anytime during business hours of the bank.

(ii) Division of Work: As the number of transactions in bank is very large, the slip system permits the distribution of work of posting simultaneously among many persons of the bank staff. (iii) Smooth Flow of Work: The accounting work moves smoothly without any interruption.

2.2 Principal Books of Accounts
a) The General ledger contains accounts of all personal ledgers, the profit and loss account and different asset accounts. The accounts in the general ledger are arranged in such an order that a balance sheet can be readily prepared therefrom. There are certain additional accounts known as contra accounts which are a feature of bank accounting. These are kept with a view to keep control over transactions which have no direct effect on the bank’s position e.g., letters of credit opened, bills received or sent for collection, guarantees given, etc. Profit and loss ledger - Some banks keep one account for profit and loss in the General Ledger and maintain separate books for the detailed accounts. These are columnar books having separate columns for each revenue or expense head. Other banks maintain separate books for debits and credits. These books are posted from vouchers. The total of debits and credits posted are entered into the Profit and Loss Account in the General Ledger. In some banks, the revenue accounts are also maintained in the General Ledger itself, while in some others broad revenue heads are kept in the General Ledger and their details are kept in subsidiary ledgers.

b)

For management purposes the account heads in the Profit and Loss ledgers are more detailed than those shown in the published Profit and Loss Account of the bank. For example, there will be separate accounts for basic salary, dearness allowance and various other allowances, which are grouped together in the final accounts. Similarly, various accounts concerning general charges, interest paid, interest received, etc., are maintained separately in the Profit and Loss ledgers.

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Advanced Accounting

2.3 Subsidiary Books
(a) Personal Ledgers - Separate ledgers are maintained by a bank for different types of accounts. For example, there are separate ledgers for Current Accounts, Fixed Deposits (often further classified by length of period of deposit), Cash Certificates, Loans, Overdrafts, etc. As has been mentioned earlier, these ledgers are posted directly from vouchers, and all the vouchers entered in each ledger in a day are summarised into voucher summary sheets. The voucher summary sheets are prepared in the department which originates the transaction, by persons other than those who write the ledgers. They are subsequently checked with the vouchers by different persons generally unconnected with the writing up of ledgers on the Voucher Summary Sheets. (b) Bill Registers - Details of different types of bills are kept in separate registers which have suitable columns. For example, bills purchased, inward bills for collection, outward bills for collection etc. are entered serially on day-to-day basis in separate registers. In case of bills purchased or discounted, party-wise details are also kept in normal ledger form. This is done to ensure that the sanctioned limits of parties are not exceeded. Entries in these registers are made by reference to the original documents. A voucher for the total amount of the transaction of each day is prepared in respect of each register. This voucher is entered in the Day Book. When a bill is realised or returned, its original entry in the register is marked off. A daily summary of such realisations or returns is prepared in separate registers whose totals are taken to vouchers which are posted in the Day Book. In respect of bills for collection, contra vouchers reflecting both sides of the transaction are prepared at the time of the original entry, and this is reversed on realisation. Outstanding entries are summarised frequently, usually twice a month, and their total is agreed with the balance of the respective control accounts in the General Ledger.

2.4 Other Subsidiary Registers
There are different registers for various types of transactions. Their number, volume and details will differ according to the individual needs of each bank. For example, there will be registers for :(a) Demand Drafts, Telegraphic Transfers and Mail Transfers issued on Branches and Agencies. (b) Demand drafts, Telegraphic Transfers and Mail Transfers received from Branches and Agencies. (c) Letters of Credit. (d) Letters of Guarantee. Entries into these registers are made from original documents which are also summarized on vouchers everyday. These vouchers are posted into Day Book.

Financial Statements of Banking Companies

6.15

Outstanding entries are summarised frequently and their total agreed with the control heads in the General ledger.

2.5 Departmental Journals
Each department of the Bank maintains a journal to note the transfer entries passed by it. These journals are memoranda books only, as all the entries made there are also made in the Day Book through Voucher Summary Sheets. Their purpose is to maintain a record of all the transfer entries originated by each department. For example, the Loans and Overdraft Section will pass transfer entries for interest charged on various accounts every month, and as all these entries will be posted in the journal of that department, the office concerned can easily find out the accounts in respect of which the interest entry has been passed. Since all vouchers passed during the day are entered into the Day Book only in a summary form, it may not be possible to get this information from the Day Book without looking into the individual vouchers. Moreover, as the number of departments in banks is quite large, the Day Book may not be accessible at all times to all departments. As has been mentioned earlier, two vouchers are generally made for each transaction by transfer entry, one for debit and the other for credit. The vouchers are generally made by and entered into the journal of the department which is affording credit to the other department. For example, if any amount is to be transferred from Current Account of a customer to his Saving Bank Account, the voucher will be prepared by the Current Accounts Department and entered in the journal of that department.

2.6 Other Memorandum Books
Besides the books mentioned above, various departments of the bank have to maintain a number of memoranda books to facilitate their work. Some of the important books are described below :a) Cash Department (a) Receiving Cashiers’ cash book (b) Paying Cashiers’ cash book (c) Main cash book (d) Cash Balance book The main Cash Book is maintained by persons other than the cashiers. Each cashier keeps a separate cash book. When cash is received, it is accompanied by pay-in-slip or other similar document. The cashier makes the entry in his book which is checked by the chief cashier. The pay-in-slip then goes to the Main Cash Book writer who makes an entry in his books. The cash book checker checks the entry with the slip and then the counter-foil of the slip is returned back to the customer and the foil is sent to the appropriate department for entering into the ledger. The foil is used as a voucher. Cash is paid against a cheque or other document (e.g.

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Advanced Accounting

traveller’s cheque, demand draft, pay order, etc.) after it has been duly passed and entered in the appropriate account in the ledger. Cheques, demand drafts, pay orders, etc. are themselves used as vouchers. b) Quick Payment System - Banks introduce different systems so that their customers may receive payment of cash etc. quickly. The most prevalent system is the teller system. Under this system tellers keep cash as well as ledger cards and the specimen signature cards of each customer in respect of Current and Saving Bank Accounts. A teller is authorised to make payment upto a particular amount, say, ` 10,000. On receipt of the cheque, he verifies it, passes it for payment, then enters it in the ledger card and makes the payment to customer. The teller also receives cash deposited in these accounts. c) Outward Clearing: (i) A Clearing Cheque Received Book for entering cheques received from customers for clearing. (ii) Bankwise list of the above cheques, one copy of which is sent to the Clearing House together with the cheques. A person checks the vouchers (foil of pay-in slips) and lists with the Clearing Cheque Received Book. The vouchers are then sent to appropriate departments, where customers’ accounts are immediately credited. If any cheque is received back unpaid the entry is reversed. Normally, no drawings are allowed against clearing cheques deposited on the same day but exceptions are often made by the manager in the case of established customers. d) Inward Clearing - Cheques received are verified with the accompanying lists. They are then distributed to different departments and the number of cheques given to each department is noted in a Memo Book. When the cheques are passed and posted into ledgers, their number is independently agreed with the Memo Book. If any cheques are found unpayable, they are returned back to the Clearing House. The cheques themselves serve as vouchers. e) Loans & Overdraft Departments (a) Registers for shares and other securities held on behalf of each customer. (b) Summary Books of Securities giving details of Government securities, shares of individual companies etc. (c) Godown registers maintained by the godown-keeper of the bank. (d) Price register giving the wholesale price of the commodities pledged with the bank. (e) Overdraft Sanction register. (f) Drawing Power book. (g) Delivery Order books. (h) Storage books. f) Deposits Department (a) Account Opening & Closing registers.

(b) Private Telegraphic Code and Cyphers. (c) Stationery registers. managing agent or guarantor. etc. The above is not an exhaustive list of accounting records kept by a bank.8 Returns to be Filed by Banking Companies Apart from the weekly return to be filed by scheduled banks. 26) (e) Monthly return of assets and liabilities at the close of business on the last Friday of every month. (d) Old records register. For example. 24 and time and demand liabilities at the close of business on every Friday. (S.Financial Statements of Banking Companies (b) For Fixed Deposits. such as attendance register. 2.. etc. (S. 20) (b) Monthly return of assets maintained in accordance with S. h) General (a) Signature book of bank’s officers. (iv) Number of cheques. all banking companies have to file the following returns with the Reserve Bank : (a) Monthly return of unsecured loans and advances granted to companies in which any of the banking company’s directors is interested as director. leave register. e. 25) (d) Annual return of unclaimed accounts which have not been operated upon for 10 years or more.7 Statistical Books Statistical records kept by different banks are in accordance with their individual needs. (S.. (ii) Deposits received and amount paid out each month in the various departments. bills and other items collected. (S. vehicles. 2. motor cars. overtime register. 24) (c) Quarterly return of assets and liabilities at the close of business on the last Friday of every quarter. (c) Due Date Diary. g) Establishment department 6. there may be books for recording (i) average balance in loans and advances etc. Rate register giving analysis of deposits according to rates. (S.17 (a) Salary and allied registers. (d) Specimen signature book. (S. 27) (f) Annual return of remuneration paid to directors and the first ten highest paid officers (Rule 5) (g) Quarterly return of officers in India.g. furnitures and fixtures. (Rule 13) (h) Any other statement or information as may be required by the Reserve Bank. (b) Register of fixed assets. (iii) Number of cheques paid. 27) .

3. New Revised Formats The Third Schedule (See Section 29) Form ‘A’ Form of Balance Sheet Balance Sheet of ______________________ Balance Sheet as on 31st March (Year) Schedule Capital & Liabilities Capital Reserve & Surplus Deposits Borrowings Other liabilities and provisions Total Assets Cash and balances with Reserve Bank of India Balance with banks and Money at call and short notice Investments 7 8 6 1 2 3 4 5 As on 31...6.9 Forms of Balance Sheet and Profit and Loss Account The Committee under the Chairmanship of Shri A. (Current year) (here enter name of the Banking company) (000’s omitted) As on 31.. (Previous year) . Ghosh. after due deliberation suggested suitable changes/amendments in the forms of balance sheet and profit and loss account of banks.18 Advanced Accounting 2. 2. RBI.3... Form B of Profit and Loss Account and eighteen other schedules of which the last two relates to Notes and Accounting Policies. having regard to : 1.3. need for better disclosure expansion of banking operations both area-wise and sector-wise over the period need for improving the presentation of accounts etc... The formats are given below as specified in Banking Regulation Act in Form A of Balance Sheet. Deputy Governor..

. Profit/Loss Net profit/loss (—) for the year Profit/Loss (—) brought forward Total IV...3. Income Interest earned Other income Total 13 14 II.19 9 10 11 Total Contingent liabilities Bills for collection Refer Annexure I for detailed break up of the Balance Sheet schedules at the end of the chapter Form ‘B’ Form of Profit & Loss Account for the year ended 31st March Schedule Year ended As on 31..3. Appropriations Transfer to statutory reserves Transfer to other reserves Transfer to Government/Proposed dividends Balance carried over to balance sheet Total . Expenditure Interest expended Operating expenses Provisions and contingencies Total 15 16 III. (Previous year) 12 I.. (Current year) (’000 omitted) Year ended As on 31.Financial Statements of Banking Companies Advances Fixed Assets Other Assets 6..

Tier I capital should be taken as the numerator while the denomionator should be arrived at by converting the minimum capital charge for open exchange position stipulated by the Exchange Control Department of the RBI into ‘notional risk assets’ by multiplying it by 25 (the reciprocal of the minimum capital to risk-weighted assets ratio of 4%) and then adding the resulting figure to the weighted assets. 1949 prescribes Schedules 1 to 16 only.6. is only for better understanding of their financial statements. the aggregate of provisions for depreciation separately on investments in India and outside India and the net value of investments in India and . 2. Note: The Banking Regulations Act. Accordingly. compiled for credit risk purposes. Any other schedule prepared by a Banking company besides what is specified in the Third schedule of the Banking Regulations Act. banks in addition to the above 16 schedules. Capital adequacy ratio Capital adequacy ratio – Tier I Capital Capital adequacy ratio-Tier II Capital Amount of subordinated debt raised as Tier II capital Percentage of shareholding of the Government of India in the nationalized banks Gross value of investments in India and outside India. 1949.5 (the reciprocal of the minimum capital to risk-weighted assets ratio of 8%) and then adding the resulting figure to the weighted assets.10 Notes on Accounts The sum of Tier I and Tier II capital should be taken as the numerator while the denomionator should be arrived at by converting the minimum capital charge for open exchange position stipulated by the Exchange Control Department of the ‘notional risk assets’ by multiplying it by 12. compiled for credit risk purposes. Also detail guidelines of RBI for compilation of Financial Statements has been given in Annexure III. This item should be shown by way of explanatory notes/remarks in the balance sheet as well as in Schedule 5 relating to ‘Other Liabilities and Provisions’.20 Advanced Accounting Refer Annexure II for detailed break up of the Profit and Loss Account schedules at the end of the chapter. may prepare Schedule 17 for Notes on Accounts and Schedule 18 for Disclosure of Accounting Policies.

Financial Statements of Banking Companies outside India Percentage of net NPAs to net advances 6. and such other sectors to be defined as ‘sensitive’ by the RBI from time to time. Banks should disclose lending to sectors which are sensitive to asset price fluctuations. The disclosures should include the opening balances of Gross NPAs (after deducting provisions held. estate. toward depreciation in the value of investments and the provisions towards tax during the year Maturity pattern of investment securities Maturity pattern of loans and Banks may follow the maturity buckets prescribed in the guidelines on Assets-Liability Management System for advances disclosure of maturity pattern. Banks may follow the maturity buckets prescribed in the guidelines on Asset-Liability Management System for disclosure of maturity pattern. These provisions along with other provisions and contingencies should tally with the aggregate of the amount held under ‘Provisions and income-contingencies’ in the profit and loss account. ECGC claims received and part payments received and kept in suspense account) at the beginning of the year. reductions/additions to the NPAs during the year and the balances at the end of the year. interest suspense account.21 Net NPAs mean gross NPAs minus (balance in Interest Suspense Account plus ECGC claims received and held pending adjustment plus part payment received and kept in Suspense Account plus provisions held for loan losses). Movements in NPAs The amount of provisions made towards NPA. Working funds mean total assets as on the date of balance sheet (excluding accumulated losses. Maturity pattern of borrowings Lending to sensitive sectors Interest income as a percentage to working funds . Banks may follow the maturity buckets prescribed in the guidelines on Asset-Liability Management System for disclosure of maturity pattern. if any). These should include advances to sectors such as capital market. Foreign currency assets and liabilities Maturity pattern of deposits In respect of this item. Banks may follow the maturity buckets prescribed in the guidelines on Assets-Liability Management System for disclosure of maturity pattern. etc. the maturity profile of the bank’s foreign currency liabilities should be given.

d. they may make more disclosures than the minimum prescribed. Profit per employee Depreciation Investments on As per RBI Circular. Total amount of loan assets subjected to restructuring under CDR. the following information in respect of corporate debt restructuring undertaken during the year. under “Notes on Accounts”. This means fortnightly average of deposits (excluding inter-bank deposits) and advances divided by number of employees as on the date of balance sheet. The amount of sub-standard assets subjected to CDR.22 Advanced Accounting Non-interest income as a percentage to working funds Operating profit as a percentage to (interest working funds Return on assets Business (deposits advances) per employee plus Operating profit means total income minus expenses plus operating expenses etc. a. 01) …………………… Add: Provisions made during the year: ………………. Less: Write-off/back of excess provisions during the year ……. .) Return on assets means net profit divided by average of total assets as at the beginning and end of the year. The amount of doubtful assets subjected to CDR. Opening Balance (as on April. While banks should ensure that they comply with the minimum disclosures prescribed. [(a) = (b)+(c) +(d)] b.6. bank should make disclosure on the provision for depreciation on investments in the following formats. Disclosures in the Notes on Account to the Balance Sheet pertaining to restructured / rescheduled accounts apply to all accounts restructured/rescheduled during the year. c. Closing balance (as on March 31) ……………… Corporate Debut Restructured Accounts Banks should disclose in their published annual Balance Sheets. The amount of standard assets subjected to CDR.

5. c. *Total under column 3 should tally with the total of investments included under the following categories in Schedule 8 to the balance sheet: a. 2.6 and 7 above may not be mutually exclusive. 6.23 Banks should make the following disclosures in the ‘Notes on Accounts’ of the balance sheet in respect of their non SLR investment portfolio. 7. 2.Financial Statements of Banking Companies Non SLR Investment 6. Issuer Composition of Non SLR Investments Amount Extent of Extent of Extent of Extent of private ‘below ‘unrated ‘unlisted placement investment Securities securities grade’ securities (3) (4) (5) (6) (7) No. Shares Debentures & Bonds Subsidiaries/Joint Ventures Others Amounts reported under columns 4. 3. d. Issuer (1) 1. 4. (2) PSUs FIs Banks Private corporate Subsidiaries/Joint Ventures Others Provision held towards depreciation Total XXX XXX XXX XXX Note: 1. 5. b. Non performing non-SLR investments Particulars Opening balance Additions during the year since 1* April Reductions during the above period Amount (` Crore) .

the banks should disclose the accounting policies regarding key areas of operation at one place along with notes on accounting in their financial statements. the banks in these statements will include banking companies. The Hindi version of the balance sheet will be part of the annual report. Associate Banks and all other institutions including co-operatives carrying on the business of banking whether or not incorporated or operating in India. State Bank of India. Figures should be rounded off to the nearest thousand rupees. (iii) Movement of NPAs. Sector-wise NPAs.6. Advanced.24 Advanced Accounting Closing balance Total provisions held The bank should make appropriate disclosures in the “Notes on Account” to the annual financial statements in respect of the exposures where the bank had exceeded the prudential exposure limits during the year. 2. from the year ending March. 2. 2010: (i) (ii) Concentration of Deposits. it may be omitted from the formats. Formats of Balance Sheet and Profit and Loss Account cover all items likely to appear in the statements. (v) Off-balance sheet SPVs sponsored by banks. 3. Unless otherwise indicated. RBI has prescribed the following additional disclosures in the ‘Notes to accounts’ in the banks’ balance sheets. Corresponding comparative figures for the previous year are to be disclosed as indicated in the format. The words “current year” and “previous year” used in the format are only to indicate the order of presentation and may appear in the accounts. .11 Disclosure of Accounting Policies In order to bring the true financial position of banks to pointed focus and enable the users of financial statements to study and have a meaningful comparison of their positions. Exposures and NPAs. Notes and Instructions for Compilation General instructions 1. (iv) Overseas assets. NPAs and revenue. 4. 5. In case a bank does not have any particular item to report. nationalised banks. The RBI has taken several steps from time to time to enhance the transparency in the operations of banks by stipulating comprehensive disclosures in tune with international best practices.

Tier II capital on the other hand consists of certain reserves and certain types of subordinated debt.25 Unit – 3 : Capital Adequacy Norms Learning Objectives After studying this unit. . At present capital adequacy ratio is 9%. When returns of the investors of the capital issues are counter guaranteed by the bank. all Indian scheduled commercial banks (excluding regional rural banks) as well as foreign banks operating in India are required to maintain capital adequacy ratio (or capital to Risk Weighted Assets Ratio) which is specified by RBI from time to time. you will be able to understand ♦ ♦ definitions of capital funds (Tier I & Tier II)and minimum capital requirement.Financial Statements of Banking Companies 6.1 Capital Framework of Banks Functioning in India Capital Adequacy Ratio (CAR) Every bank should maintain a minimum capital adequacy ratio based on capital funds and risk assets. The capital adequacy ratio is worked out as below : Capital fund ** X 100 Risk weighted assets + off balance sheet items ** Capital Fund consists of Tier I & Tier II Capital The CAR measures financial solvency of Indian and foreign banks. Tier I capital consists mainly of share capital and disclosed reserves and it is a bank’s highest quality capital because it is fully available to cover losses. As per the prudential norms. The loss absorption capacity of Tier II capital is lower than that of Tier I capital. such investments will not be considered as Tier I/II regulatory capital for the purpose of capital adequacy. Under existing Basel norms. 3.2 Capital Funds Capital is divided into two tiers according to the characteristics/qualities of each qualifying instrument. technique of computing weightage for the purpose of capital adequacy norms 3. The main objectives of Basel committee-were (i) (ii) to stop reckless lending by bank to strengthen the soundness and stability of the banking system and (iii) to have a comparative footing of the banks of different countries. Banks can lend only about 22 times of their core Capital. This is in line with international standards based on Basel Committee.

17/21. and other disclosed free reserves. Cumulative perpetual preference shares should be fully paid-up and should not contain clauses which permit redemption by the holder.26 Advanced Accounting 3. and (iv) Capital reserves representing surplus arising out of sale proceeds of assets. (iii) Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital.3.3 Tier-I and Tier-II Capital for Indian Banks Tier I capital (also known are core capital) provides the most permanent and readily available support to a bank against unexpected losses. statutory reserves.No. which is an intangible asset.6. Therefore. current and brought forward losses.2 Tier II capital comprises elements that are less permanent in nature or are less readily available than those comprising Tier I capital.These elements have the capacity to absorb unexpected losses and can be included in the capital.01.BC. 3. The elements comprising Tier II capital are as follows : (a) Undisclosed reserves (b) Revaluation reserves (c) General provisions and loss reserves (d) Hybrid debt capital instruments (e) Subordinated debt (f) Investment Reserve Account (a) Undisclosed reserves and cumulative perpetual preference assets .1 Tier I capital comprises: The elements of Tier I capital include (i) (ii) Paid-up capital (ordinary shares).subject to laws in force from time to time. including share premium if any. (As per DBOD.) As reduced by : intangible assets. . 3. Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier I capital . if they represent accumulations of post-tax profits and not encumbered by any known liability and should not be routinely used for absorbing normal loan or operating losses. should be deducted from Tier I capital. DTA.3. Deferred Tax Asset (DTA) Creation of DTA results in an increase in Tier I capital of a bank without any tangible asset being added to the banks’ balance sheet. 2011.BP.002/2011-12 dated July 1.

Subordinated debt instrument will be limited to 50% of Tier-I capital. They often carry a fixed maturity and as they approach maturity. it would be prudent to consider revaluation reserves at a discount of 55% while determining their value for inclusion in Tier-II capital.27 (b) Revaluation reserves . tax consequences of revaluation etc. may be treated as a part of Tier II capital within the overall ceiling of 1. ii. Revaluation reserves arise from revaluation of assets that are under-valued on the bank’s books. The extent to which the revaluation reserve can be relied upon as cushion for unexpected loss depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets. unsecured. (c) General provisions and loss reserves .To be eligible for inclusion in the Tier-II capital the instrument should be fully paid up.25 per cent of weighted risk assets. may be included in Tier II capital. . which is general in nature and not made against any identified assets. in particular when they are able to support losses on an ongoing basis without triggering liquidation. Adequate care must be taken to see that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering general provisions and loss reserves to be part of Tier-II capital. 'Floating Provisions' held by the banks. and Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS) as part of Upper Tier II Capital. subordinated to the claims of other creditors.Those instruments which have close similarities to equity. Such reserves will have to be reflected on the face of the balance sheet as revaluation reserves. (d) Hybrid Debt Capital instruments . Debt capital instruments eligible for inclusion as Upper Tier II capital . Excess provisions which arise on sale of NPAs would be eligible Tier II capital subject to the overall ceiling of 1. Therefore. they can be included in Tier-II capital. free of restrictive clauses and should not be redeemable at the initiative of the holder or without the consent of the banks’ supervisory authorities. Instrument with an initial maturity of less than five years or with a remaining maturity of one year should not be included as part of Tier-II capital. At present the following instruments have been recognized and placed under this category: i. the subsequent proportion in values under difficult market conditions or in a forced sale.If these are not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses. However. general provisions and loss reserves (including general provision on standard assets) may be taken only up to a maximum of 1. (e) Subordinated Debt .25% of total Risk Weighted Assets. they should be subjected to progressive discount for inclusion in Tier-II capital.25 percent of total risk weighted assets.These reserves often serve as a cushion against unexpected losses but they are less permanent in nature and cannot be considered as core capital.Financial Statements of Banking Companies 6. potential for actual liquidation at those values.

The deduction shall be made at 50% from Tier I and 50% from Tier II capital. (g) Banks are allowed to include the ‘General Provisions on Standard Assets’ and ‘provisions held for country exposures’ in Tier II capital. from Tier I and Tier II capital of the parent bank.3 a) Deductions from Tier I and Tier II Capital Equity/non equity investments in subsidiaries The investments of a bank in the equity as well as non-equity capital instruments issued by a subsidiary. 3. . while assessing the capital adequacy of the bank on 'solo' basis. the provisions on ‘standard assets’ together with other ‘general provisions/ loss reserves’ and ‘provisions held for country exposures’ will be admitted as Tier II capital up to a maximum of 1. the bank is acting as a third party service provider. b) Credit Enhancements pertaining to Securitization of Standard Assets i) Treatment of First Loss Facility: The first loss credit enhancement provided by the originator shall be reduced from capital funds and the deduction shall be capped at the amount of capital that the bank would have been required to hold for the full value of the assets. shall be deducted 50% from Tier I capital and 50% from Tier II capital. iv) Underwriting by an originator Securities issued by the SPVs and devolved / held by the banks in excess of 10 per cent of the original amount of issue. should be deducted at 50 per cent each.6. However.28 Advanced Accounting (f) Investment Reserve Account .3. the excess should be credited to the Profit & Loss account and an equivalent amount (net of taxes. The deduction shall be made 50% from Tier I and 50% from Tier II capital. the first loss credit enhancement provided by it shall be reduced from capital to the full extent as indicated at para (i) above. including secondary market purchases. ii) iii) Treatment of credit enhancements provided by third party: In case. if any and net of transfer to Statutory Reserves as applicable to such excess provision) should be appropriated to an Investment Reserve Account in Schedule 2 –“Reserves & Surplus” under the head “Revenue and other Reserves” in the Balance Sheet and would be eligible for inclusion under Tier II capital within the overall ceiling of 1. had they not been securitised.In the event of provisions created on account of depreciation in the ‘Available for Sale’ or ‘Held for Trading’ categories being found to be in excess of the required amount in any year.25 per cent of total risk weighted assets prescribed for General Provisions/ Loss Reserves. under the Basel I Framework.25 per cent of the total riskweighted assets. Treatment of Second Loss Facility: The second loss credit enhancement provided by the originator shall be reduced from capital funds to the full extent. which are reckoned towards its regulatory capital as per norms prescribed by the respective regulator.

in such a case. 3. (iii) Statutory reserves kept in Indian books. cash balances are not susceptible to any risks whereas advances are susceptible to credit risks. For example. Even within advances. Similarly. the risk involved in guarantees given against counter-guarantees of other banks is much less compared to other guarantees. 3. guarantees related to particular transactions are less . capital funds of foreign banks operating in India would also comprise of Tier I capital and Tier II capital. Tier II Capital : The elements of Tier II capital include the following elements. however. (iv) Remitable surplus retained in Indian books which is not repatriable so long as the bank functions in India. Similarly.6 Risk-adjusted Assets For CAR purposes the entire assets side of the Banks Balance Sheet is recalculated assigning risk weights.29 Underwriting by third party service providers: If the bank has underwritten securities issued by SPVs devolved and held by banks which are below investment grade the same will be deducted from capital at 50% from Tier I and 50% from Tier II. the excess will be ignored for the purpose of computing the capital adequacy ratio.Financial Statements of Banking Companies v) 6.4 Ratio of Tier II Capital to Tier I Capital The quantum of Tier II capital is limited to a maximum of 100% of Tier I Capital. 3. a) Elements of Tier II capital as applicable to Indian banks. b) Head Office (HO) borrowings raised in foreign currency (for inclusion in Upper Tier II Capital) subject to certain terms and conditions. the risk of loss arising from failure of the customer to settle his obligation fully is less in the case of loans guaranteed by DICGC/ECGC as compared to unguaranteed loans. Tier I capital of Foreign bank would comprise the following elements: (i) (ii) Interest free funds from Head Office kept in a separate account in Indian books specifically for the purpose of meeting the capital adequacy norms. This follows the principle of conservatism. This seeks to ensure that the capital funds of a bank predominantly comprise of core capital rather than items of a less permanent nature. It may be clarified that the Tier II capital of a bank can exceed its Tier I capital. different off-balance sheet items also involve varying degree of risk. For example. Innovative Instruments eligible for inclusion as Tier I capital.5 Tier I and Tier II Capital for Foreign Banks As in case of Indian banks.

Illustration 1 A commercial bank has the following capital funds and assets. So even though the Bank has extended a loan of Rs 100 crores. Other Investments 5. For example. Cash. LG’s. cash. balances with RBI 2. Bills 9. Segregate the capital funds into Tier I and Tier II capitals. for CAR purposes it will be recokened as only Rs 50 Crores. the Reserve Bank has assigned different risk weights to different categories of assets. after Risk –Adjusted Assets.Balance Sheet Items like LC’s.6.7 Reporting for Capital Adequacy Norms Banks should furnish an annual return. The risk adjusted to category of assets is determined by multiplying the nominal value of the category as per the balance sheet with the risk weight assigned thereto. the risk-adjusted value of these advances would be ` 50 crores (loans guaranteed by DICGC/ECGC have been assigned a risk weight of 50). Find out the risk-adjusted asset and risk weighted assets ratio - . Bank Premises. accepted Non funded exposure to Real estate For detailed Risk Weights as per RBI guidelines for the purpose of CAR are given in Annexure IV 3. The format for the returns is specified by the RBI under Capital Adequacy Norms. 8. if a bank has DICGC/ECGC guaranteed advances of ` 100 crores outstanding on the balance sheet date. balances with Reserve Bank of India is assigned a risk weight zero (i. No Item of asset Risk Weight % 0 20 0 100 0 100 100 100 150 1. Recognising the above. The returns should be signed by two officials who are authorised to sign the statutory returns now being submitted to the Reserve Bank. All Off.e. In brief the important weights for the purpose of Ascertainment of CAR are as follows:Sr. Other Loans & Advances 7. Furniture & Fittings etc. the asset will not be considered to be at risk at all). Loans & Advances guaranteed by Government 6. Investments in Government Securities 4. Balances in current account with other banks 3. loan and advances have generally been assigned a risk weight of 100 per cent.30 Advanced Accounting risky compared to general guarantees of indebtedness. For example.

02.00 280.80. endorsements and letters of credit Solution 6.50 182.30 Capital Funds .80.31 (Figures in ` Lakhs) 4.10 4.30 769.50 (i) Capital Funds .Financial Statements of Banking Companies Capital Funds: Equity Share Capital Statutory Reserve Capital Reserve (of which ` 280 lakhs were due to revaluation of assets and the balance due to sale) Assets: Cash Balance with RBI Balances with other Bank Claims on Banks Other Investments Loans and Advances: (i) (ii) Guaranteed by government Guaranteed by public sector undertakings of Government of India (iii) Others Premises.10 52.50 28.00 201.50 128.20 37.26 770.00 9.Tier I : Equity Share Capital Statutory Reserve Capital Reserve (arising out of sale of assets) ` in lakhs ` in lakhs 480.00 12.56 .02.Tier II : Capital Reserve (arising out of revaluation of assets) Less : Discount to the extent of 55% 280 (154) 1. furniture and fixtures Other Assets Off-Balance Sheet Items: Acceptances.20 702.80 12.00 2.50 782.

56 × 100 = 7.00 2.50 100 37.50 128.65% 100.80 12.50 — — 52.76.40+37.20 702.02.50 782.90 Capital Funds (Tier I & Tier II) × 100 Risk Adjusted Assets + off Balance sheet items = 769.20 — 2.40 Other Investments Loans and Advances: (i) (ii) guaranteed by government guaranteed by public sector undertakings of Central Govt.82.30+1.00 2.82.70 782.10 52.50 5.50 1.02.01.78.02. Endorsements and Letters of credit Risk Weighted Assets Ratio: 37. So the bank has to improve the ratio by introducing further Tier I capital.02.01.6.02.90 Expected ratio is 9%. furniture and fixtures Other Assets Off-Balance Sheet Item ` in Lakhs Acceptances.20 63.50 100. (iii) Others Premises.76.32 Advanced Accounting (ii) Risk Adjusted Assets Funded Risk Assets Cash Balance with RBI Balances with other Banks Claims on banks ` in Percentage weight 0 20 20 100 0 0 100 100 100 Credit Conversion Factor Amount ` in lakhs lakhs 4.50 Capital Adequacy Ratio = 770.26 63.50 28. .50 1.78.

♦ Make provision for depreciation on their current investments. Reserve Bank (RBI) has issued guidelines stating the rates to be followed for making such provision. Learn how to classify investments into permanent and current and also follow the technique suggested by the Reserve Bank for computation of depreciation provision.33 Unit – 4 : Income Recognition. Income recognition for interest earned is a function of classification of the Bank loans & advances (i. Discount and commission earned handling Bills of Exchange and Non-Funded advances like Letter of Credit (LC). its Assets into Performing & Non-Performing Assets (NPA’s)). Basically an NPA is a bad and doubtful debt. 2. by . For Performing assets income is recognised as it is earned i. For Non Performing assets interest income is not considered on accrual basis and it is recognised only when it is actually received. An asset becomes non-performing when the bank does not receive income from it for a certain period. you will be able to: ♦ Determine the profit/loss of a bank which is determined by the income recognition policy. standard assets. doubtful and loss assets. Try to understand the definitions of various categories and also follow Illustration given in the chapter to learn. The Accounting Standard 9 (AS 9) on ` Revenue Recognition' issued by the Institute of Chartered Accountants of India (ICAI) requires that the revenue that arises from the use. any credit facility (assets) becomes non-performing “when it ceases to generate income for a bank. Classification of Assets and Provisions Learning Objectives In this unit. In concept. ♦ Classify advances of a Bank according to the riskiness i.” Note: Bank should classify an account as NPA if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.e. accrued.e. It is an essential condition for accrual of income that it should not be unreasonable to expect its ultimate collection.Financial Statements of Banking Companies 6. Letter of Guarantee (LG) etc.e. In this unit Income recognition from Loans & Advances will be dealt with and in the next unit Income from Bills/LCs’/LGs’ will be taken up. Income from non-performing assets can only be accounted for as and when it is actually received. 4. substandard assets. Interest earned on Loans & Advances extended to its customers. Learn the technique of income recognition followed by a bank. doubtful assets. ♦ Create adequate provision against sub-standard.1 Income Recognition Bulk of a banks’ income is from two sources:1. and loss assets. This helps to find out the bank profit in a conservative manner.

but interest on NPA should be recognised on cash basis. but interest on NPA should be recognised on cash basis.34 Advanced Accounting others.057 KC Bank Statement of interest on advances in respect of Performing assets and Non Performing Assets are as follows:( in lakhs) Performing assets Non Performing Assets Interest earned Cash credits and overdrafts Term Loan Bills purchased and discounted Solution 1800 480 700 Interest received 1060 320 550 Interest earned 450 300 350 Interest received 70 40 36 Find out the income to be recognized for the year ended 31st March. Interest on performing assets should be recognised on accrual basis. of enterprise resources yielding interest should be recognized only when there is no significant uncertainty as to its measurability or collectability. 2012. Illustration 1 Given below interest on advances of a commercial bank (` in lakhs) Performing assets Interest earned Term Loans Cash credits and overdrafts Bills purchased and discounted Solution 120 750 150 Interest received 80 620 150 Interest earned 75 150 100 NPA Interest received 5 12 20 Find out the income to be recognized for the year ended 31st March. .6. Interest on performing assets should be recognised on accrual basis. 2012. Interest on Term Loan : Interest on cash credits and overdraft : Income from bills purchased and discounted : Illustration 2 ` in lakhs (120 + 5) = 125 (750 + 12) = 762 (150 + 20) = 170 1.

2012: (` in lakhs) Performing Interest accrued Term loans Cash credits andoverdrafts 240 1.Financial Statements of Banking Companies 6. 3.500 24 1. Term Loan: become NPA if their amount (interest or principal) remain overdue wholly or partly for a period exceeding 90 days.774 240 10 250 lacs) Identification of NPA The Reserve Bank of India has issued detailed guidelines to banks regarding the classification of advances between performing and non-performing assets which are revised from time to time.Performing Assets Cash credit and overdraft Interest accrued on Performing Assets Interest received on Non .870 (480+40) = 520 (700+36) = 736 3.3.35 Interest on cash credits and overdraft : Interest on Term Loan Income from bills purchased and discounted : Illustration 3 ` in lakhs (1800+70) = 1.126 Find out the income to be recognised in the case of SS Bank for the year ended 31st March. 2.Performing Assets Total interest to be recognised 1.500 Assets Interest received 160 1.240 Non-performing Interest accrued 150 300 Assets Interest received 10 24 Answer Calculation of interest income of SS Bank to be recognised for the year ended 31.2012 (` in Term Loan Interest accrued on Performing Assets Interest received on Non . A cash credit overdraft account is treated as NPA if it remains out of order for a period of more than 90 days.524 1. The latest guidelines for identifying an NPA’s are: 1. Bills purchased and discounted become NPA if they remain overdue for a period exceeding 90 days. An account is treated as 'out of order' if any of the following .

2006 Total interest debited Total credits `60. Securitisation transactions: Such transactions become NPA when the amount of liquidity facility remains overdue for more than 90 days.00. Government guaranteed advances: The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. With effect from the year ending 31 March 2006 State Government guaranteed advances and .000 `1. or credits during the aforesaid period are not enough to cover the interest debited during the same period. Derivative transactions: Such transactions become NPA when the overdue receivables representing positive mark to market value of a derivative contract remain unpaid for a period of 90 days from the specified due date for payment.2006 to 31.03. upto the period of harvesting the crops raised will be termed as ‘long duration” crops and other crops will be treated as “short duration” crops. 7. Crops having crop season of more than one year i.25. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income.01.42. c) Further any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank Example of OUT OF ORDER Sanctioned limit Drawing power Amount outstanding continuously from 1.000 Since the credit in the account is not sufficient to cover the interest debited during the period account will be said as NPA. 6.000 `55.000 ` 47.00. 4.6. 5. if the instalment of principal or interest thereon remains overdue for one crop season.36 Advanced Accounting conditions is satisified: (a) The outstanding balance remains continuously in excess of the sanctioned limit/drawing power – (b) Though the outstanding balance is less than the sanctioned limit/drawing power – (i) (ii) there are no credits continuously for more than 90 days as on the date of balance sheet.e. Agricultural Advances: Advances granted for agriculture purposes becomes NPA if interest and/or instalment of principal remains overdue for two crop seasons in case of short duration crops and a loan granted for long duration crops will be treated as NPA. The requirement of invocation of guarantee has been delinked for deciding the asset classification and provisioning requirements in respect of State Government guaranteed exposures.000 `3.00.

the account will be treated as not serviced in the books of the other member banks and therefore. to ensure proper asset classification in their respective books. the institution/bank financing the infrastructure projects ('the lending institution') has an arrangement with a financial institution ('the taking-over instituion') for transferring to the latter the outstanding in respect of such financing on a pre-determined basis. Thus. 12. be treated as NPA. the borrower should also recognise the arrangement by way of inter-creditor arrangement. in this variant of take-over arrangements. the lending bank should apply the prudential norms in the usual manner so long as the account remains on its banks ∗ Take-out finance is a product emerging in the context of the funding of long-term infrastructure projects. Indira Vikas Patras. Kisan Vikas Patras and life insurance policies have been exempted from the above guidelines. 8. the advance may not be treated as NPA. the overdue status (in respect of payment of interest) should be reckoned from the date when there is default in payment of interest or repayment of instalment of principal on due date of payment. In the latter case. For a take-out finance arrangement to take effect. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks. Under this arrangement.37 investments in State Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days. national savings certificates (NSCs) eligible for surrender. however. Advances Secured Against Certain Instruments: Advances secured against term deposits. Thus. The balance should. Advances Guaranteed by EXIM Bank: In the case of advances covered under the guarantee-cum-refinance programme of EXIM Bank. to the extent payment has been received by the bank from the EXIM Bank. therefore. but basically. they are either in the nature of unconditional take-out finance or conditional take-out finance. the taking-over institution stipulates certain conditions to be satisfied by the borrower before it is taken over from the lending institution. arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery. Take-out Finance: In the case of take-out finance arrangement. Consortium Advances: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. 11. in respect of housing loans or similar advances granted to staff members where interest is payable after recovery of principal. 9. there is an inherent element of uncertainty over the ultimate transfer of the outstanding amount to the taking-over institution. interest on such advances may be taken to income account on due dates provided adequate . be treated as NPA. The banks participating in the consortium should. (if the conditions for treating it as NPA are satisfied). There are several variants of take-out finance. 10.Financial Statements of Banking Companies 6. Advances to Staff: As in the case of project finance.

considering the difficulties of large borrowers. The outstanding in the account based on drawing power calculated from stock statements older than three months. delay beyond six months is not considered desirable as a general discipline. Hence. however. stock statements relied upon by the banks for determining drawing power should not be older than three months. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement. (ii) Net Worth of Borrower/Guarantor or Availability of Security: Since income recognition is based on recoveries from an advance account. A working capital borrower account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory.6. non-submission of stock statements and non-renewal of the limits on the due date. If an account has been regularised before the balance sheet date by payment of overdue amount through genuine sources (and not by sanction of additional facilities or transfer of funds between accounts). In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: a) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets. the account need not be treated as NPA. a solitary credit entry made in the account on or before the balance sheet date which extinguished the overdue amount of interest or instalment of principal is not reckoned as the sole criterion for determining the status of the account as non-performing or otherwise.1 A Regularisation of Account by year-end The identification of NPA is to be done on the basis of the position as on the balance sheet date. Advances against gold ornaments. would be deemed as irregular. balance outstanding exceeding the limit temporarily. an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.1. Certain other important RBI guidelines with reference to NPA’s are given below:(i) Temporary Deficiencies: The classification of an asset as NPA should be based on the record of recovery. 4. The bank should. the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. Drawing power is required to be arrived based on the stock statement which is current. since current assets are first appropriated in times of distress. b) Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers.38 Advanced Accounting margin is available in the respective accounts. However. ensure that the account remains in order subsequently. etc. In any case. net worth of borrower/guarantor . Also. government securities and all other securities are not covered by this exemption.

banks may continue to record such accrued interest in a Memorandum account in their books.39 should not be taken into account for the purpose of treating an advance as NPA or otherwise. Likewise. At a later date when the loan is repaid by the customer and obviously interest realised. all the facilities granted to the borrower will have to be treated as NPA without any regard to performing status of other facilities. it should be ensured that the credits towards interest in the relevant accounts are not out of fresh/additional credits facilities sanctioned to borrowers concerned.1. subject to certain exceptions). the debt becomes doubtful and the interest accrued on doubtful debts at the end of the accounting year should not be credited to Interest Account because it remains unrealised and would artificially inflate the profit of the bank company.Financial Statements of Banking Companies 6. Interest on doubtful debts should be then credited to Interest Suspense Account and debited to Customer’s Loan Account as shown below: Debit : Customer’s Loan Account Credit : Interest Suspense Account In the balance sheet Interest Suspense Account will be shown in Liabilities side of to be included in Schedule 5: Other Liabilities and Provisions. Customer’s Loan account with interest included would be shown in the Assets side. banks should reverse the interest already charged and not collected by debiting Profit and Loss account. interest recorded in the Memorandum account should not be taken into account. the availability of security is not relevant for determining whether an account is NPA or not (this is. 4. In the account books of the bank. (iv) Partial Recoveries in NPAs: Interest partly realised in NPAs can be taken to income.2 Interest Application: On an account turning NPA. the entry would be: Debit : Credit : Interest Suspense Account Interest Account . This procedure is followed when the financial position of the customer is good and he will be in a position to return the money on maturity date. a customer’s loan account is debited with the amount lent to him and the interest accrued thereon is also entered in the debit side of his account. However. (iii) Determination of NPAs : Borrower-wise. the journal entry is : Debit : Credit : Customer’s Loan Account Interest Account But if there is any doubt regarding customer’s ability to pay. However. and stop further application of interest. however. For the purpose of computing Gross Advances. Not Facility-wise: If any of the credit facilities granted to a borrower becomes non-performing.

00.000 Dr. provisioning as per the norms. Show how the transactions would be recorded in the books of the Sona bank.000 16.000 1.000 and is yet to be recorded.000) Interest Suspense Account To Interest Account (Amount received against the suspense account) Interest Suspense Account Bad Debts Account To Pankaj Loan Account (Unrecovered portion of the interest reversed and the balance transferred to bad debts account) Dr. should be made on the balances after such deduction.000 7. During 2012-13. Dr. the unrealised amount of interest should be transferred to Customer’s Loan Account with the help of following entry: Interest Suspense Account To Customer’s Loan Account For Example: On 31 March 2012.000 Treatment of interest suspense account: Amounts held in Interest Suspense Account should not be reckoned as part of provisions for NPA. Pankaj Loan Account To Interest Suspense Account (Interest due on doubtful debt credited to interest suspense account) Bank Account To Pankaj Loan Account (Recovery of 80% of the total loan amount and interest accrued i.6.000 1. 7. (8. Interest on the said loan has accrued ` 80. Solution Journal Entries Date 2012 31 March 2012-13 Particulars Debit ` 80.000 Dr.000 64.60.000 Credit ` Dr.00.000 to Shri Pankaj in the loan ledger of a Sona Bank. 80.e.76.000+80. It is found on enquiry that the financial position of the borrower is bad and doubtful. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter NPA. . 64. the bank is able to realise only 80% of the outstanding amount on account of customer’s bankruptcy.40 Advanced Accounting Finally. Dr.04.04. there is an unsecured loan of ` 8.

2. such an asset will have well-defined credit weaknesses . the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the bank in full. In such cases. Performing Assets Non Performing Assets Performing assets are also called as Standard Assets. Non Performing Assets (NPA): An Advance is classified as an NPA when interest due and charged is not repaid within 90 days.2 Classification of Bank Advances on the Basis of Asset Performance for Determining Loss Provisions The Banks have to classify their advances into two broad groups: 1. (i) Sub-standard Assets . The Non Performing Assets is again classified into three groups and they are (i) sub standard Assets (ii) doubtful assets & (iii) Loss Assets.Sub-standard asset is one which has been classified as an NPA for a period not exceeding 12 months.Financial Statements of Banking Companies 6.Standard asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business.41 4. In other words. Classification of Bank Advances Performing Assets (Standard Assets) Non Performing Assets Sub Standard Assets Doubtful Assets Loss Assets Performing Assets: (i) Standard Assets .

a credit facility would be classified first as sub-standard for a period not exceeding 12 months and then as doubtful. (iii) Loss Assets .42 Advanced Accounting that jeopardise the repayment of the debt and are characterised by thepossibility that the bank would sustain some loss. It may be noted that the above classification is meant for the purpose of computing the amount of provision to be made in respect of advances and not for the purpose of presentation of advances in the balance sheet.A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off. 2. that in respect of accounts where there are potential threats to recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers. however. questionable. In such a case. wholly or partly. if deficiencies are not corrected. suppose. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub standard. Security having Significant Realisable Value: It has been clarified that where the realisable value of security is significant. 1949. the credit facility should not be treated as loss assets. If. Banks have been advised to classify such accounts straightway as doubtful or loss assets. upon becoming NPA. which requires classification of advances altogether differently.An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. Threats to Recovery: As per the guidelines. as on March 31. 2012. . The balance sheet presentation of advances is governed by the Third Schedule to the Banking Regulation Act. on the other hand. such an asset is considered uncollectible and of such little value that its continuance as a bank asset is not warranted although there may be some salvage or recovery value.e) the realisable value of security is significant then the bank can treat the credit facility only as doubtful and not as a loss asset. (ii) Doubtful Assets . the bank or the internal/external auditor or the RBI inspectors identifies a particular credit facility as a loss asset where the amount outstanding is ` 100 lakh and the salvage value of the security is ` 10 lakh. As per RBI guideline. as appropriate irrespective of the period for which the account has remained NPA. the facility should be treated as a loss asset and provision should be made for ` 100 lakh (and not ` 90. the realisable value of the security is ` 80 lakh (i. it will not be prudent for banks to clarify them first as sub-standard and thereafter as doubtful. It has been clarified. with the added characteristic that the weaknesses make collection or liquidation in full. Important Points for Provisions: 1. loan upon becoming an NPA would first be classified as sub standard for a period not exceeding 12 months and beyond that it would have to be classified as DOUBTFUL.00 lakh). In other words. To illustrate.6.

In other words.25 1. RBI has directed that bank should make provision against all assets (i.e) Loans & advances as follows: Rates of Provisioning for Non-Performing Assets Category of Advances Revised Rate (%) Standard Advances (a) direct advances to agricultural and SME (b) advances to Commercial Real Estate (CRE) Sector (c) all other loans and advances not included in (a) and (b) above Sub. the classification of a credit facility should not be upgraded merely as a result of rescheduling or renegotiation. it should similarly. and the other participating institutions/banks may follow the same.Financial Statements of Banking Companies 6. If such a facility was earlier classified as doubtful. the bottleneck in achieving regular commercial production is of a temporary nature and not indicative of any long-term impairment of the unit’s economic viability and it is likely to achieve cash break-even if some time is allowed. In such cases.3 Provisions Taking into account the time lag between an asset becoming substandard/doubtful turning into loss asset. 4. if in the opinion of the bank.43 3.standard Advances • • 0. the borrowal unit may have commenced production but the level and volume of production reached immediately after the date of completion of the project may not be adequate to generate the required cash flow to service the loan.40 Secured Exposures Unsecured Exposures 15 25 . In some cases. In respect of credit facilities sanctioned under consortium arrangements. continue to be classified in that category. Some lead time may be needed to achieve regular commercial production.00 0. the bank may reschedule the loan and treat the asset as standard. the lead time should normally not exceed one year from the schedule of commencement of commercial production as indicated in the terms of sanction. the decision as to whether the borrowal unit has achieved regular commercial production and whether there is a need for rescheduling may be taken by the lead institution/lead bank. Renegotiation or Reschedulement after Commencement of Commercial Production: A credit facility where the terms of the loan agreement regarding interest and principal have been renegotiated or scheduled after commencement of commercial production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled term (subject to the exception discussed in paragraph below. While the Board of Directors of each bank may lay down broad parameters for rescheduling in such cases.

Solution Provisioning requirement: As on… Asset Classification Provisions on secured portion Provisions on unsecured portion Total (`) % 31 March. The provisions on standard assets should not be reckoned for arriving at net NPAs.5 years. 2012: 2.000 4. The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.000 Period for which the advance has remained in ‘doubtful’ category as on 31st March.44 • Advanced Accounting Unsecured Exposures in respect of Infrastructure loan accounts where certain safeguards such as escrow accounts are available. 20 Doubtful Advances – Unsecured Portion Doubtful Advances – Secured Portion • • • 100 25 40 100 100 For Doubtful upto 1 year For Doubtful > 1 year and upto 3 years For Doubtful > 3 years Loss Advances Note: 1.04.000 % 100 100 Amount 2.000 I .000 Realisable value of security: ` 8.400 8. 2012 31 March. 2013 Doubtful 1 to 3 years Doubtful more than 3 years 40 100 Amount 2. 2012: `10.000 2. As per RBI DBOD Circular No. 2.048/2011-12 dated 18/05/2011 Illustration 1 The outstanding amount (funded as well as unfunded) as on 31st March.6. BP.BC 94/21.400 10.

find out the amount of provisions to be shown in the Profit and Loss Account of AG bank.45 llustration 2 From the following information.4 15 25 40 100 100 * All the marked sub-standard and doubtful assets are assumed as fully secured.00 6.000 1.00 % of provision Provision ` in lakhs 20 600 200 240 200 1.000 2.Financial Statements of Banking Companies 6. compute the provisions to be made in the Profit and Loss account: ` in lakhs Assets Standard Substandard Doubtful For one year (secured) For two years and three years (secured) For more than three years (secured .00 8.00 10. of plant and machinery Rs.260 Standard Substandard* Doubtful for one year* Doubtful for three years* Doubtful for more than three years Loss Total Provision required 0.00 2.600 lakhs) Loss Assets 20. Illustration 3 From the following information of AY Limited.00 40.000 16. ` in lakhs Assets Standard 5000 Sub-standard 4000 Doubtful : for one year 800 : for three years 600 : for more than three years 200 Loss Assets 1000 Solution Computation of provisions for AG Bank Assets Amount ` in lakhs 50.000 2.000 4.500 by mortgage .000 6.

400 4. (It may be noted that these illustrations are merely intended to facilitate understanding of the RBI guidelines.3.500 25 40 100 100 100 1. The manner of determining the amount of provision in respect of ECGC/DICGC guaranteed advances in accordance with the above guidelines is illustrated below.000 4. such banks may continue to do so.600 1. The Reserve Bank of India has also clarified that if the banks are following more stringent method of provisioning in respect of advances guaranteed by ECGC/DICGC.080 20.500 9.6.1 Provisioning for advances covered by ECGC/DICGC guarantee: In the case of advances guaranteed by Export Credit Guarantee Corporation (ECGC).50 lakhs . 2012) ` 1. Deposit Insurance 7 Credit Guarantee Corporation (DICGC) provision is required to be made only for the balance in excess of the amount guaranteed by the corporations.400 600 1. In case the bank also holds a security in respect of an advance guaranteed by ECGC/DICGC. they have not been issued by the RBI.000 16. the realisable value of the security should be deducted from the outstanding balance before the ECGC/DICGC guarantee is off-set.400 600 1. ` 4 lakhs 50% More than 3 years remained doubtful (as on March 31.000 0.000 1.500 1.40 15 % age of provision Amount of provision % (` in lakhs) 80 2.) Illustration 4 Outstanding Balance ECGC Cover Period for which the advance has remained doubtful Value of security held You are required to calculate provisions.46 Answer Advanced Accounting Calculation of amount of provision to be made in the Profit and Loss Account Classification of Assets Amount of Advances (` in lakhs) Standard assets Sub-standard assets Doubtful assets: For one year (secured) For two to three years (secured) For more than three years (unsecured) (secured) Non-recoverable assets (Loss assets) Total provision required 6.

50 lakhs You are required to calculate provisions as per applicable rates.40 lakhs (@ 100% of unsecured portion) `1.40 lakhs `1.Financial Statements of Banking Companies Solution Provision required to be made as on 31.00 lakhs (`1.50 lakhs) `2.25 lakhs) `1.03.25 lakhs (@ 100% of unsecured portion) `1.2012 6.47 Outstanding balance Less: Value of security held(Secured Portion) Unrealised balance Less: ECGC Cover (50% of unrealizable balance) Net unsecured balance Provision for unsecured portion of advance Provision for secured portion of advance Total provision to be made Illustration 5 Outstanding Balance ECGC Cover Period for which the advance has remained doubtful Value of security held (realizable value only 80%) Solution Provision required to be made as on 31.2012 `4.20 lakhs (@ 100% of the secured portion) `2.60 lakhs Unrealised balance Less: ECGC Cover (50% of unrealizable balance) Net unsecured balance Provision for unsecured portion of advance Provision for secured portion of advance Total provision to be made . Outstanding balance Less: Value of security held (80% of 1.20 lakhs) `2.5 lacs) `4.75 lakhs ` 4 lakhs 50% More than 3 years remained doubtful (as on March 31.50 lakhs (@ 100% of the secured portion) `2.80 lakhs (`1.03.40 lakhs) `1. 2012) ` 1.25 lakhs `1.50 lakhs (`1.00 lakhs (`1.

2012 is ` 1.000 × 50% = ` 50. The loan guaranteed by DICGC is assigned a risk weight of 50%.000 4. (HTM) : Securities acquired by banks with the intention to hold them upto maturity should be classified as ‘held-to-maturity’. What is the value of Risk-adjusted asset? Solution (` in lakhs) 1. The value of security (including DICGC 100% cover of ` 100 lakhs) is ascertained at ` 500 lakhs.000 (400) 600 (100) 500 500 lakhs 400 lakhs 900 lakhs Loan outstanding Guaranteed by DICGC – Risk weight Value of risk adjusted asset Rs.50.SLR securities) should be classified under three categories : Held-to-Maturity.00.3.48 Advanced Accounting Illustration 6 In KR Bank. the doubtful assets (more than 3 years) as on 31.00.000 50% ` 25.00. Investments under ‘held-to-maturity’ 1 To maintain SLR .00. The entire investment portfolio of a bank (including SLR securities and non.6. How much provision must be made in the books of the Bank towards doubtful assets? Solution Doubtful Assets (more than 3 years) Less: Value of security (excluding DICGC cover) Less: DICGC cover Unsecured portion Provision: for unsecured portion @100% for secured portion @ 100% Total provision to be made in the books of KR Bank Illustration 7 A loan outstanding of ` 50.000 has DICGC cover.4 Classification of Investments A unique feature of investments of a bank is that a large proportion of the investments is made in pursuance of the requirement to maintain a certain minimum level of liquid assets1. The directions issued by RBI from time to time affect the methods of classification of investments.000 lakhs.

Certain securities specified in this behalf are not to be reckoned while applying the ceiling of 25 per cent in respect of ‘held-to-maturity’ securities. Held-for-Trading. These securiites are to be sold within 90 days. 25% 75% of the total Investments . trading strategies. tax planning. manpower skills or capital position. though a HFT .Securities acquired by banks with the intention to trade by taking advantage of short-term price/interest rate movements should be classified as ‘held-fortrading’ AFS Securities which do not fall within the above two categories should be classified as ‘available-forsale’ bank can at its discretion hold less than the aforesaid percentage under this category. Profit or loss on sale of investments in both the categories will be taken to the Profit and Loss Account. risk management capabilities. The banks will have the freedom to decide on the extent of holdings under HFT and AFS. Max limit 25% of the total investments. Available-for-Sale (AFS) : Securities which do not fall within the above two categories should be classified as ‘available-for-sale’. This will be decided by them after considering various aspects such as basis of intent. (HFT) : Securities acquired by banks with the intention to trade by taking advantage of short-term price/interest rate movements should be classified as ‘held-fortrading’.49 category should not exceed 25 per cent of the total investments of the bank though a bank can at its discretion hold less than the aforesaid percentage under this category.Financial Statements of Banking Companies 6. Types of Investments HTM Securities acquired by banks with the intention to hold them upto maturity should be classified as ‘held-to-maturity’. The investment classified under HFT would be those from which the bank expects to make again by the movement in the interest rates/market rates.

50 Advanced Accounting 4. After transfer. iv) Transfer of scrips from AFS / HFT category to HTM category should be made at the lower of book value or market value. may be provided. if any. However. After transfer. the provision against depreciation held against this security (including the additional provision. if any. Such shifting will normally be allowed at the beginning of the accounting year. ii) Banks may shift investments from AFS to HFT with the approval of their Board of Directors/ ALCO/ Investment Committee. Such transfer is permitted only with the approval of the Board of Directors/ ALCO/ Investment Committee. or extreme volatility. In the case of transfer of securities from HTM to AFS / HFT category. may be provided.5Shifting among Categories of Investments i) Banks may shift investments to/from HTM with the approval of the Board of Directors once a year. No further shifting to/from HTM will be allowed during the remaining part of that accounting year. the appreciation should be ignored and the security should be transferred at the book value. these securities should be immediately re-valued and resultant depreciation. In the case of transfer of securities from AFS to HFT category or vice-versa. but should be ratified by the Board of Directors/ ALCO. in cases where the market value is higher than the book value at the time of transfer. In cases where the market value is less than the book value. if any. such shifting may be done with the approval of the Chief Executive of the bank/Head of the ALCO.6. it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions. . the securities need not be re-valued on the date of transfer and the provisions for the accumulated depreciation. such securities would continue to be held at the acquisition cost till maturity). (It may be noted that as per existing instructions banks are not allowed to accrue the discount on the securities held under HTM category and. held may be transferred to the provisions for depreciation against the HFT securities and vice-versa. iii) Shifting of investments from HFT to AFS is generally not allowed. it may be transferred to the AFS / HFT category at the amortised cost. it may be transferred to AFS / HFT category at the acquisition price / book value. (b) If the security was originally placed in the HTM category at a premium. (a) If the security was originally placed under the HTM category at a discount. therefore. if any. In case of exigencies. required based on valuation done on the date of transfer) should be adjusted to reduce the book value to the market value and the security should be transferred at the market value. these securities should be immediately re-valued and resultant depreciation. or market becoming unidirectional. In other words.

do not permit offsetting of gains and losses across different categories. The guidelines however. provision for diminution shall be made to recognise a decline other than temporary. the book value of the individual securities in this category would also not undergo any change after marking to market. the net appreciation under any of the aforesaid categories above should be ignored. (iii) As per AS 13. (ii) The bank should reflect the amortised amount in Schedule 13: Interest Earned – Item II ‘Income on Investments’ as a deduction.Financial Statements of Banking Companies 6. in which case the premium should be amortised over the period remaining to maturity. The book value of the individual securities would not have undergone any change after the marking to market . While the net depreciation under each of the categories (required by third schedule to Banking Regulation Act. Thus. In terms of AS 13. They should be carried at acquisition cost unless it is more than the face value. .6 Valuation of Investments The Banks are required to classify investments into three categories : (a) Held-to-Maturity. the deuction need not be disclosed separately. However. The book value of the securities should continue to be reduced to the extent of the amount amortised during the relevant accounting period. Consequently. such reduction being determined and made for each investment individually. In other words. Banks are required to follow AS 13 ‘Accounting for Investments’ issued by the ICAI relating to long-term investments for valuation of investments in subsidiaries. (c) Held-for-trading: The individual scrips in the ‘held-for-trading’ category should be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the ‘Available for sale’ category. banks can offset gains in respect of some investments marked-to-market within a category against losses in respect of other investments marked-to-market in that category. However. in the value of the investments. 1949 – refer Unit 1) should be recognised and fully provided for. long term investments should be arrived in the financial statements at carrying cost. (i) Investments classified under held-to-maturity category need not be marked to market.51 4. Such diminution should be determined and provided for each investment individually (b) Available-for-sale The individual scrips in the available-for-sale category should be marked to market quarterly or at more frequent intervals. the depreciation or appreciation in value of individual scrips in accordance with the above methodology would not be credited to individual scrip accounts but would be held collectively in a separate account.only permanent diminution in the value of such investments under held-to-maturity category should be provided for.

. and (b) In respect of securities included in the AFS category. banks are advised to maintain capital charge for market risk in a phased manner over a two year period. the excess should be credited to the Profit & Loss account and an equivalent amount (net of taxes. provisions created on account of depreciation in the ‘AFS’ or ‘HFT’ categories are found to be in excess of the required amount in any year. and net of consequent reduction in the transfer to Statutory Reserve).6. (vi) Banks may utilise IRA as follows : The provisions required to be created on account of depreciation in the AFS and HFT categories should be debited to the P&L Account and an equivalent amount (net of tax benefit. Banks satisfying the above were allowed to transfer the amount in excess of the said 5 per cent in the IFR to Statutory Reserve. banks which have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT (items as indicated at (a) above) and AFS category may treat the balance in excess of 5 per cent of securities included under HFT and AFS categories. if any. may be transferred from the IRA to the P&L Account. trading positions in derivatives and derivatives entered into for hedging trading book . banks were advised to build up Investment Fluctuation Reserve (IFR) of a minimum 5 per cent of the investment portfolio within a period of 5 years. General Reserve or balance of Profit & Loss Account.52 Advanced Accounting 4. (ii) To ensure smooth transition to Basel II norms. Investment Reserve Account (IRA) (v) In the event. For this purpose. open gold position limit. as Tier I capital.7 Investment Fluctuation Reserve (i) With a view to building up of adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments. in the IFR. open foreign exchange position limit. (iii) With a view to encourage banks for early compliance with the guidelines for maintenance of capital charge for market risks. banks may transfer the balance in the Investment Fluctuation Reserve ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve. as under: (a) In respect of securities included in the HFT category. if any and net of transfer to Statutory Reserves as applicable to such excess provision) should be appropriated to an IRA Account in Schedule 2 – “Reserves & Surplus” under the head “Revenue and other Reserves”. (iv) Banks maintaining capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT (items as indicated at (a) above) and AFS category would be permitted to treat the entire balance in the IFR as Tier I capital.25 per cent of total Risk Weighted Assets prescribed for General Provisions/ Loss Reserves. and would be eligible for inclusion under Tier-II within the overall ceiling of 1.

50 from the IRA. (viii) In terms of our guidelines on payment of dividend by banks. The amount drawn down from the IRA will. Provision towards any erosion in the value of an asset is an item of charge on the profit and loss account. (vii) The amounts debited to the P&L Account for provision should be debited under the head ‘Expenditure . dividends should be payable only out of current year's profit. However. and net of transfer to Statutory Reserves as applicable to such excess provision). General Reserve or balance of Profit & Loss Account would be eligible to be reckoned as Tier I capital. if any. . a bank which pays a tax of 30% and should appropriate 25% of the net profits to Statutory Reserves. not be available to a bank for payment of dividend among the shareholders. In other words.Provisions & Contingencies’. the balance in the IRA transferred ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve.Financial Statements of Banking Companies 6. can draw down `52. if the provision made for depreciation in investments included in the AFS and HFT categories is `100.53 Illustratively. after determining the profit for the year. The amount transferred from the IRA to the P&L Account. banks may draw down from the IRA to the extent of provision made during the year towards depreciation in investment in AFS and HFT categories (net of taxes. should be shown as ‘below the line’ item in the Profit and Loss Appropriation Account. and hence should appear in that account before arriving at the profit for the accounting period. therefore.

In this case after reducing discount charges.1.6.e. the balance amount is credited to the account of the customer. Rebate on Bills Discounted: When a bank discounts a bill of exchange. Try to understand the technique of computing such rebate.000 June 5 . 5. Discounting 2. But all bills discounted may not mature for payment by the close of the year (i. ♦ Understand the technique for considering acceptance and endorsement as assets as well as liability.000 Rebate on bills discounted not due on March 31st. these are the following functions: 1.05. you will be able to understand ♦ Learn the concept of a rebate on bills discounted. Collection of bills 3.708 Rate of Discount (%) 14 ` (i) 1. Discounting: A bank may straight away purchase a Bill (Discounting). This account is an Asset. Collection & Acceptance of Bills With reference to Bills.1.54 Advanced Accounting Unit – 5 : Some Special Transactions of Banks Learning Objective After studying this chapter. Illustration 1 The following is an extract from Trial Balance of overseas Bank as at 31st March. Immediately on commencement of next financial year the Rebate A/c is closed by transfer to the credit of Discount A/c.40. 31st March). So the unexpired portion (unearned portion) of such discount account is carried forward by debiting the Discount A/c and crediting Rebates on Bills Discounted A/c. The Rebate A/c is shown on the liability side of the Balance Sheet as income received which has not accrued before the close of the year. 2011 ` Bills discounted 12. The total of both is debited to ‘Bills purchased and discounted account’. Acceptances on behalf of customers 5.160 1. 2010 Discount received An analysis of the bills discounted is as follows: Amount Due Date 2011 22. the full amount of the discount earned is credited FRONT END to the discount account.1 Discounting.64.

05.317) 85.160 .263.82. (ii) Number of days in the unexpired portion of the bill is 73: discount on ` 4.55 (ii) 4.Financial Statements of Banking Companies 6.06. will be ` 17.160 ` 22.000 for 97 days @ 16 % p.40. (iii) Number of days in the unexpired portion of the period of the bill is 86: discount on ` 2.06.2011 (see above) The journal entries will be as follows : (42.551 Dr. Solution In order to determine the amount to be credited to the Profit and Loss A/c it is necessary to first ascertain the amount attributable to the unexpired portion of the period of the respective bills.160 1. hence the number of days after March 31st.36.3.82.302.000 for 66 days @ 14% per annum will be 14/100 × 66/365 × ` 1.000 June 12 14 (iii) 2.000 June 25 14 (iv) 4. 22.000 = ` 3.a. (iv) Number of days in the unexpired portion of the period of the bill is 97: discount on ` 4.000 for 86 days @ 14% per annum will be ` 9.544. is 66.000 for 73 days @ 14% per annum will be ` 12.36.40. Cr.208.868 the year ended 31-3-2011 Less: Rebate on bills discounted as on 31.000 July 6 16 Calculate Rebate on Bills Discounted as on 31-3-2011 and show necessary journal entries. The discount on ` 1.27. The amount of discount to be credited to the Profit and Loss Account will be: ` Transfer from Rebate on bills discount as on 31-3-2010 Add: Discount received during 22. The workings are as given below : (i) The bill is due on 5th June.708 1. ` Rebate on Bills Discounted A/c To Discount on Bills A/c (Being the transfer of Rebate on Bills Discounted on 31-32010 to Discount on Bills Account) Dr.

2011 being 36. 42. Uncertain Bank discounted bills of exchange of ` 4.56 Advanced Accounting Discount on Bills A/c To Rebate on Bills Discounted A/c (Being the transfer of rebate on bills discounted required on 31-3-2010 from discount on Bills Account) Discount on Bills A/c To Profit and Loss A/c (Being the amount of discount on Bills transferred to Profit and Loss Account) Dr.317 Dr.00 Dr. Illustration 2 On 31st March.00 ` 9.317 42. 2011. bills of exchange of ` 600 crores were due for realisation from the acceptors/customers after 31st March.000 crores charging interest at 18% per annum the average period of discount being for 73 days. Of these. 2010. the discount on bills will not appear as a separate item but will be included in the heading Interest/Discount on advances/bills as per Form B of the new format. 4000. the average period outstanding after 31st March.00 .00 144. Cr. During the year ended 31st March. Uncertain Bank Journal Entries (Rupees in crores) Dr.551 85. Uncertain Bank had a balance of ` 9 crores in “rebate on bills discounted” account. 85.6. Uncertain Bank asks you to pass journal entries and show the ledger accounts pertaining to: (i) (ii) discounting of bills of exchange and rebate on bills discounted. 9. 2011.5 days.551 Note: In the Profit and Loss Account. Solution ` Rebate on bills discounted A/c To Discount on bills A/c (Being the transfer of opening balance in rebate on bills discounted account to discount on bills account) Bills purchased and discounted A/c To Discount on bills A/c Dr.

Financial Statements of Banking Companies 18 73 ⎤ ⎡ ⎢ ` 4.650 .80 Illustration 3 The following information is available in the books of X Bank Limited as on 31st March.00 By Rebate on bills discounted A/c By Bills purchased and discounted A/c ` 9.00 April 1 2011 10.80 10.20 ` 2010 April 1 10.00 (ii) 2010 April 1 2011 March 31 Rebate on bills discounted A/c ` 2010 To Discount on bills A/c To Balance c/d 9.00 144.856.20 201011 153.80 Dr.600 10.21.80 19.80 142.00 10.00 Dr. 2012: ` Bills discounted Rebate on Bills discounted (as on 1.05.57 To Clients A/c (Being the discounting of bills of exchange during the year) Discount on bills A/c To Rebate on bills discounted A/c (Being the unexpired portion of discount in respect of the discounted bills of exchange carried forward) Discount on bills A/c To Profit and loss A/c (Being the amount of income for the year from discounting of bills of exchange transferred to Profit and Loss A/c) (i) 2011 March 31 To Rebate on bills discounted A/c To Profit and loss A/c Ledger Accounts Discount on bills A/c 3.37. 10.20 142.00 153.000crores × 100 × 365 ⎥ ⎣ ⎦ 6.000 2.80 March 31 19.56.4.80 By Balance b/d By Discount on bills A/c ` 9. 142.2011) Discount received Details of bills discounted are as follows: 1.

05.72.2012 and give necessary journal entries.000 28.000 50.254 = ` 8.000 Due Date 5. Journal Entries (i) Rebate on bills discounted Account To Discount on bills Account [Being opening balance of rebate on bills discounted account transferred to discount on bills account] Dr.6. 2012] Dr.2012 25.00.000 Due date 5.21.60.58 Advanced Accounting Value of bill (`) 18.3.600 (ii) Discount on bills Account To Rebate on bills discounted Account [Being provision made on 31st March.21.021 1.2012 Rate of Discount 12% 12% 14% 16% Calculate the rebate on bills discounted as on 31.56.25.2012 Days after 31.52.2012 In the books of X Bank Ltd.600 2.254 4.6.2012 6. 4.6.20.633 4.996 [Being transfer of discount on bills.000 40.25.3.6.20.000 1.20.650 + 2.6. of the year.254 Rebate on bills discounted on 31.996 8. Solution Statement showing rebate on bills discounted Value 18.000 28.996 .000 50.000 93.00.6. 2.254 (iii) Discount on bills Account To Profit and loss Account Dr.2012 12.60. to profit and loss account) Credit to Profit and Loss A/c will be as follows: 10.25.52.7.25.6.000 40.25.25.2012 25.37.600 1.7.2012 6.21.52.600 – 4.2012 12.2012 (30+ 31+5) = 66 (30+31+12) = 73 (30+31+25) = 86 (30+ 31+ 30+ 6) = 97 Rate of discount 12% 12% 14% 16% Discount Amount 39.3. 8.

include among others the following balances: Rebate on bills discounted (01. the books of the Pankaj Bank.Financial Statements of Banking Companies 6.11 10.000 3. 2011 from the following data and show journal entries: (i) (ii) (iii) (iv) Solution (a) ` Calculation of Rebate on Bills Discounted Due Date Days after 31 December 2011 31 + 28 + 18 = 77 3 1 + 28 + 13 = 72 3 1 + 28 + 28 = 87 3 1 + 28 + 23 = 82 Total Journal Entry Date Particulars Debit ` 1569.91 207.000 12.000 20.000 46. 4%.000 30.000 15.57 1569.000 15.29 Credit ` Discount Rate ` Date of Bill 15.11.59 Illustration 4 Calculate Rebate on Bills discounted as on 31 December.11 20.15.000 18-03-2012 13-03-2012 28-03-2012 23-03-2012 8% 7% 7% 9% 421.000 30.47.11.10.29 Illustration 5 As on 31 December 2011.12.69 606.000 5 months 4 months 4 months 3 months Rate of Discount 8% 7% 7% 9% 25.000 20.00. To Rebate on Bills Discounted (Being the provision for unexpired discount required at the end of the year) 1569.00. 31 Interest and Discount Account Dr.12 333.01.20.11 25.11 ` Period 25.2011) Discount received Bills discounted and purchased Bills for collection 3.000 Throughout 2011 the Bank’s rate for discounting has been 18% and the rate of commission on bills for collection. .29 Dec.

20. Show also the journal entries to adjust above mentioned accounts. 42.000 49.000 (Being the amount of provision for unexpired discount brought forward from the previous year credited to interest and discount account) 2.084) 42. Bills sent for collection have to be shown by way of Note as per Third Schedule.19. 92.20.1. the bank can collect a bill for a customer.20.916 (Being transfer of balance of interest and discount account to Profit and Loss Account) 5. Two Accounts have to be opened. Solution The amount of unexpired discount on the Bills Discounted and purchased.20.916 Rebate on Bills Discounted Account To Interest and Discount Account Dr.19. They are mirror images of each other.2 Collection of Bills: On the other hand.19. the average due date for the bills discounted and purchased in calculated is 15 February.12.000 3.2011 Journal Entries Date 2011 1.6.000 (7. 2012 and that for bills for collection is 15 January. Interest and Discount Account To Profit and Loss Account Dr.916 42.60 Advanced Accounting On investigation and analysis. Interest and Discount Account To Rebate on Bills Discounted Account Dr.760 92. taking into account the average due date on 15 February 2012 (i. They are: . 45 days) is calculated as under: Opening balance in the Discount Received Account Add: Opening balance in Rebate Account Less: Rebate on Bills on 31. Particulars Debit ` Credit ` ` 46.00. 3. 2012. The particulars will be recorded in a separate book called Bills for Collection Register.000 3.760 (Being provision for unexpired discount required at the end current year) 3.e. Show the calculation of the discount earned for the year 2012.00.

Solution Bills for Collection (Assets) A/c ` in lacs ` in lacs To Balance b/d To Bills for collection Total 7 By Bills for collection 64. As against this liability. Such Acceptance (Liabilities) which are outstanding at the close of the year and the corresponding asset (security) is disclosed as Contingent liability.5 By Bills dishonoured By Balance c/d 71.5 71. the bank reimburses itself by disposing of the security deposited by the customer.61 (i) (ii) Bills for Collection (Asset) Bills for Collection (Liability) Illustration 7 On 01.3 Acceptance and Endorsement: A bank has more acceptable credit as compared to that of its customer.5 Bills for Collection (Liabilities) A/c ` in lacs ` in lacs By Bills for collection By Bills dishonoured By Balance c/d Total 47 To Balane b/d 5.5 19 71. The bank has to honour this acceptance on behalf of its client only in the event of a client failing to honour the bill on the due date. .5 lacs. either as an acceptor or as an endorser.04. If the bill. usually the bank requires the customer to deposit a security equivalent to the amount of the bill accepted on his behalf. Bills collected were 47 lacs. Bills dishonoured was 5.5 5.5 Total 47 5.5 Total 7 64. As a safeguard against the customer not being able to meet the demand of the bank in this respect.5 To Bills for collection 19 71. During 2011-12 bills received for collection amounted to 64.2011 bills for collection was 7 lacs.5 lacs. has to be retired by the bank and the amount cannot be collected from the customer on demand. at the end of its term. Prepare Bills for collection (Assets) and Bills for Collection (Liabilities) Accounts. the bank has a corresponding claim against the customer on whose behalf it has undertaken to be a party to the bill.Financial Statements of Banking Companies 6. because of this more often than not the bank is called to accept or endorse a bill on behalf of its customers.1.

the equivalent value thereof in home currency in collected from them at the rate of exchange prevailing on the date of issue of the traveller’s cheque and the bank either purchases immediately the amount of foreign exchange equal to the value of the travellers’ cheque issued.000 12. when any amount is collected for a customer as dividend or interest.3. In the case of customers desiring travellers’ cheques in a foreign currency.2 Letters of Credit and Travellers’ Cheques: These are issued as a facility to travellers within the country or abroad. do not involve any complicated accounting.2011 Acceptances not yet satisfied stood at ` 22. A similar procedure is adopted in case of telegraphic transfer made on account of customers. Illustration 8 From the following details prepare “Acceptances.00.1. His account is also debited with the remittances..30. In either case. the same procedure is followed.00.000 5. the person desiring such instruments of credit.00.g. Similarly. A scrutiny of the Acceptance Register (for transactions during the year) revealed the following : ClientAcceptances/GuaranteesRemarks ` A B C D 10. collection of dividend and interest. wherever any payment is made on account of a customer. Usually a separate charge is made for such a service. Endorsements and other Obligation A/c” as would appear in the General Ledger. In the case of letters of credit in foreign currency.6. as the case may be. his account is debited and cash is credited. 2011 Party failed to pay and bank had to honour on 30. The corresponding debit is raised in the account of the customer. his account is credited and cash is debited. to be issued in his favour or some other party is made to deposit the full value of the letter of credit or travellers’ cheques issued in his favour.62 Advanced Accounting 5. When the bills of Exchanges drawn against the Letters of credit are received for payment. making periodical payments etc. The transactions entered into for rendering other services e. it credits the account of the bank or that of the branch with amount of the draft. Out of which ` 20 lacs were subsequently paid off by clients and bank had to honour the rest. On 1.000 8. or transfers out of its balances of foreign currency an amount equivalent to the value of travellers’ cheques to the Travellers’ Cheques Account. 5. the amount is debited to the Letter of Credit Account.3.2012 .11.000.4.00. Correspondingly.000 Bank honoured on 10.1.2011 Not satisfied upto 31.3. the travellers’ cheques. Basically.2011 Party paid off on 30. The amount deposited by the customer is placed to the credit of Letters of Credit Account or Travellers’ Cheques Account.9.1 Drafts and telegraphic Remittances: When a bank issues a bank draft on another bank or on its branch. when presented are debited to the Travellers’ Cheque Account.6.

4.00 5.6. (Paid off by party) 12.00 2.000 -do-do- 6.00.Financial Statements of Banking Companies E F Total Solution Acceptances.000 2.11 By Balance b/d 22.30 B C D E F 10. (Paid off by clients) To Constituent’s liabilities for acceptances/guarante es etc.30 20.00 30.11.00 2011-12 By Constituents’ liabilities for A 10. 30.2011 To Constituents’ liabilities for acceptances/guarante es etc. (Honoured by bank) 10.63 ` ’000 2011-12 To Constituents’ liabilities for acceptances/guarante es etc.70 42.70.00 5.70.00 To Constituent’s liabilities for acceptances/guarante es etc.201 1 .30 lakhs less ` 20 lakhs) ` ’000 1.2011 To Constituents’ liabilities for acceptances/guarante es etc. (Honoured by bank ` 22.000 42.00 12. Endorsements and other Obligation Account (in general ledger) 5.70 2.9.00 8.

2012 To Balance c/d (Acceptances not yet satisfied) 15. 2012: (a) On 1-4-2011 Bills for collection were ` 7.000 and client paid off ` 10. During 2011-2012 bills received for collection amounted to ` 64. The security for the loan was 10.00. either towards principal or towards interest.64 Advanced Accounting (Honoured by bank on party’s failure to pay) 31. not yet satisfied amounted to ` 14. Prepare Bills for Collection (Assets) A/c and bills for Collection (Liability) A/c. the price as per Stock Exchange rate was ` 82 per share..50.00 ` Interest and Discounts Rebate for bills discounted Bills discounted and purchased 4. 2012.000 ` 98.000 It is ascertained that the proportionate discounts not yet earned for bills to mature in 20112012 amount to ` 14.00. bills collected were ` 47..000 20.000 was advanced on 30-9-2011 @ 10 per cent p.00 65. amounted to ` 44. Cr. the price fell to ` 40 per share in January.00. Endorsement.000. Bank honoured acceptances to the extent of ` 25. Acceptances.50.000. 5.500.00 Illustration 9 Following facts have been taken out from the records of Adarsha Bank in respect of the year ending March 31.000. Endorsements and other ObligationsA/c” as it would appear in the General ledger.a.50. etc.000 against the guaranteed liability.000 and bills dishonoured and returned were ` 5.3. (b) On 1-4-2011. interest payable half yearly.000 fully paid shares of ` 100 each (the market value was ` 98 as per the Stock Exchange information as on 30th Sept. that a loan of ` 6. During the year under question. (c) It is found from the books. Acceptance.00.000.Solution . State how you would classify the loan as secured/unsecured in the Balance Sheet of the Company. 2011).00.000 which the Bank had to pay.00.70 65. On 31-32012.00. Guarantees etc. Prepare Ledger Accounts.000. But due to fluctuations.00. (d) The following balances are extracted from the Trial Balance as on 31-3-2012: Dr. but the loan was outstanding as on 31-3-2012 without any payment recorded in the meantime.6. Endorsements. Prepare the “Acceptances.00. Clients failed to pay ` 1.

50. etc.Financial Statements of Banking Companies (a) 2011 Bills for Collection (Assets) A/c 6. Endorsements.00.000 Bills for Collection (Liabilities) A/c ` By Bills for Collection (Liabilities) A/c By Bills for collection (Liabilities) A/c By Balance c/d 5.000 2011-12 By constituents. 31 To Balance c/d 22.99. Endorsement etc.50.000 2012 Mar.99.500 71.50.50. 31 To Balance c/d ` 2011 47.000 71.000 1. 1 ` By Balance b/d 14.000 58.000 2011 Apr.00.00.500 18.50. 31 71. 1 5. Endorsement.000 18. To Constituents’ Liability for Acceptances.50.50.000 . 44.50.50.00.000 Apr.50.000 58.000 47. Liabilities for Acceptances.000 10.000 (b) 2011-12 Acceptances. Endorsement & other Obligation A/c ` To constituents’ Liability for Acceptanc.000 Mar. Endorsements.00. To Constituents’ Liability for Acceptances.000 Apr.00.50.50.65 ` 2011-12 To Balance b/d To Bills for Collection (liabilities) A/c 64.500 71.00.000 64. (amount paid on failure of clients) 25.000 2011-12 To Bills for collection (Assets) A/c To Bills for Collection (Assets) A/c 2012 Mar. etc. 1 2011-12 7. etc.500 2011-12 ` By Balance b/d By Bills for collection (Assets) A/c 7.00.

000 6. 1 201112 98.000 20.000 Interest & Discount Account 2012 Mar.000 20. Hence it is to be treated as good and fully secured.20.000 ` 2011 To Profit & Loss A/c 98. (d) Rebate on Bills Discounted A/c ` 2011-12 2012 Mar.000 Apr. 31 To Interest Discount A/c To Balance c/d and 6.6.00.66 Advanced Accounting (c) For classifying loans as fully secured or otherwise.000 .06.000 covering the loan and the interest due comfortably. the value of the security as on the last date of the year is considered. The value of the security is ` 8.06. 31 ` By Balance b/d 20.06.000 2011 Apr.000 By Balance b/d By Rebate on Bills discounted A/c ` 98. 1 14.000 98.

00 150. Illustration 1 From the following information. 2012 giving the relevant schedules and also specify at least four important Principal Accounting Polices : ` in lakhs Dr. you will be able to: ♦ Learn how to prepare profit and loss account of a bank.12 0. income recognition on NPA.00 198.00 517.00 412. Share Capital 19. provisions on non-performing assets. Cr.00 450..Financial Statements of Banking Companies 6. depreciation on current investments.87 812. ♦ Learn how to prepare Balance-sheet.80.88 155. 6.00 231.10 28.67 Unit – 6 : Preparation of Financial Statements of Banks Learning Objectives After studying this unit.15 37. In this unit we shall straightaway go to the problems relating to preparation of final accounts of banks.1 Introduction Forms for the preparation and presentation of financial statements of banking companies have been given in Annexure I & II along with compliance guidelines of RBI given in Annexure III after the chapter.000 Shares of ` 10 each Statutory Reserve Net Profit before Appropriation Profit and Loss Account Fixed Deposit Account Savings Deposit Account Current Accounts Bills Payable Cash credits Borrowings from other Banks Cash in Hand Cash with RBI Cash with other Banks 160. ♦ Compute tax provision. transfer to statutory reserve. prepare a Balance Sheet of ADT International Bank as on 31st March.00 .10 110.00 520.

04.10.11 Share Capital Reserves and Surplus Deposits Borrowings Other liabilities and provisions Assets 1 2 3 4 5 1.12 As on 31.68 Advanced Accounting Money at Call Gold Government Securities Premises Furniture Term Loan Additional Information: 210. 10% of cash credit is unsecured.10.82 .59. 2012 50% of the Term Loans are secured by Government guarantees.00 0.588.25.00 14.3.17 155.22 2.88 2.3.98.26 1.10 25.70 70.93.22 Cash and balances with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets 6 7 8 9 10 2.65.76 3.10.40 16.000 55.12 55.88.000 14.12 792.000 1.12. (` in lacs) Capital and Liabilities Schedule As on 31.23 110.32.000 Bills for collection Acceptances and endorsements Claims against the Bank not acknowledged as debt Depreciation charges—Premises Furniture Solution Balance Sheet of ADT International Bank As on 31st March.588.000 78.6.12 1.00 7.22 18.98 2.87.

50 (2) Balance in Profit & Loss Account (W.67 18.17.10 1.50 7.00 5.22 14.10 Authorised Capital Issued.69 Other Assets Contingent liabilities Bills for collection 11 12 Schedule 1— Capital – 25.00 (1) Statutory ReserveOpening balance Additions during the year 2.98.00 14.15 (i) (ii) Cash in hand Balances with RBI .10.80.31.50.93.00 37.Financial Statements of Banking Companies 6.00 Other liabilities and provisions Schedule 6— Cash and balances with RBI 0.N.88. Subscribed and Paid up Capital 19.000 Shares of ` 10 each Schedule 2— Reserves and Surplus – 1.20.00 (i) (ii) (iii) Demand deposits from others Saving bank deposits Fixed Deposits Schedule 4— Borrowings 5.60. 1) Schedule 3— Deposits 524.12 4.50 268.87.12 Borrowing in IndiaOther banks Schedule 5— Other Liabilities and Provisions 1.

76 1.61 2.49.90 0. 2) Schedule 7—Balances with banks and money at call and short notice 44.88 16.N. Premises At cost on 31st March.44 84.12 3. Other Fixed Assets Furniture at cost on 31st March.82 .10 7.53 3.32.80 1.78 70. 2011 Depreciation to date Total (1 + 2) 70.40 Schedule 9— Advances (ii) Others—Gold A.70 2.98 11.96.98 B (i) (ii) (iii) 1.12 2.6.04.N.25.92.23 1.70 Advanced Accounting In current account (W.32.17 55. In India (i) Balances with banks (a) in current accounts (W.01 16.40.59. 3) 1.26 Schedule 8— Investments (ii) Money at call and short notice (1) Investment in India in (i) Government securities 1. 2011 Depreciation to date 156. (i) (ii) Cash credits.14 2.65.10 155.52.10. overdrafts Term Loans Secured by tangible assets Secured by bank/government guarantees Unsecured Schedule 10— Fixed Assets 8.10.

000) 1.00 (37.88 6.55.50.49.73 1.91. endorsements 0.50.46.00 5.45.87 2.87 .60.12 55. Non-monetary assets have been carried in the books at the historical cost.54 2. After the transfer.40 (2) Transfer from Cash with other banks to Cash with RBI Cash reserve required Cash with RBI Transfer needed to maintain cash reserve (3) Liquid Assets : Cash on hand Cash with other Banks Money at call and short notice Gold Government securities Excess liquidity (6.10.71 (i) (ii) Claims against bank not acknowledged as debts Acceptances.73) = `(in lacs) 1.15 1.17 6.00 4.14 Principal Accounting Policies: (a) Foreign Exchange Transactions (i) Monetary assets and liabilities have been translated at the exchange rate prevailing at the close of year.14) The excess liquidity enables the transfer as per (2) above.50 44.12 14.62.61 37.67 Working Note : (1) Balance in Profit & Loss Account : Net Profit before appropriation Add : Profit for the year Less : Transfer to statutory reserve (25% of 1.Financial Statements of Banking Companies Schedule 11— Other Assets Nil Schedule 12— Contingent Liabilities 6. .91.55 14.10.23 1.50) 524. cash with other Banks = ` (in lacs) (1.12.55.54 – 4.6.

45 1. Tax relief available when the advance is written off will be accounted for in the year of write-off. suit filed and decreed accounts have been considered good on the basis of– Available estimate value of existing and prospective primary and collateral securities including personal worth of the borrowers and guarantors. (iii) The claim lodged/to be lodged under various credit guarantee schemes.55 7.27 1. Depreciation in respect of assets of foreign branches has been provided as per the local laws. (iv) Pending settlement of claims by Govt.6. 1962. (b) Investment: Permanent category investments are valued at cost. Exchange and Brokerage Profit on sale of investments Interest on Deposits Item ’000 ` 2011-12 20. (d) Fixed Assets: The premises and other fixed assets except for foreign branches are accounted for at their historical cost.22 12 6. (iii) Profit or Loss on foreign currency position including pending forward exchange contracts have been accounted for at the exchange rates prevailing at the close of the year. (c) Advances: Advances due from sick nationalised units under nursing programmes and in respect of various sticky. While valuation of government securities held as current investments have been made on yield to maturity basis.72 Advanced Accounting (ii) Income and Expenditure items in respect of Indian branches have been translated at the exchange rates on the date of transactions and in respect of foreign branches at the exchange rates prevailing at the close of the year.12 1. (ii) The claim lodged/to be lodged under various credit guarantee schemes. the investments in shares of companies are valued on the basis of book value.14 1. Illustration 2 From the following information. Depreciation has been provided on written down value method at the rates specified in the Income Tax Rules.12 1. Provisions to the satisfaction of auditors have been made and deducted from advances.22 (i) . Valuation of investment in current category depends on the nature of securities.12 Interest and Discount Income from investment Interest on Balances with RBI Commission.22 8.77 7. prepare Profit and Loss A/c of Dimple Bank as on 31-3-2012 : ’000 ` 2010-11 14.

30 . telegrams and telephones Insurance Repair & maintenance 6.27 1.47 8.73 1.12 98 98 2.27 7.79 2. Income Year ended 31-3-2012 Year Ended 31-3-2011 1.55 1.86 8.34 24.Financial Statements of Banking Companies 1.58 1.10 1.08 16. Other Information: (i) The following items are already adjusted with Interest and Discount (Cr.): Tax Provision (’000 `) Provision for Doubtful Debts (’000 `) Loss on sale of investments (’000 `) Rebate on Bills discounted (’000 `) (ii) Appropriations : 25% of profit is transferred to Statutory Reserves 5% of profit is transferred to Revenue Reserve.48 92 12 55 Interest Earned Other Income Total 13 14 25. Solution Dimple Bank Profit and Loss Account for the year ended 31-3-2008 (` 000’s ) Schedule No.22 34. taxes and lighting Printing and stationery Advertisement and publicity Depreciation Director’s fees Auditor’s fees Law charges Postage.12 98 1.10 50 48 42 57 Interest to RBI Payment to and provision for employees Rent.96 7.48 1.52 62 52 66 Also give necessary Schedules.47 1.12 1. I.

97 1.86 14.69 20.6.77 25.96 2.40 33.05 1.14 1. Appropriations Transfer to Statutory Reserve Transfer to Other Reserve. Year Ended 31-3-2011 Interest/Discount Income on Investments Interest on Balances with RBI and other inter-bank fund Others Total Schedule 14 .10 97.55 − 16.12 7.96 (` 000’s) Year ended 31-3-2012 I. Advanced Accounting Expenditure Interest Expended Operating Expenses Provisions and Contingencies Total III. IV.97 24.22 12 . Exchange and Brokerage Profit on Sale of Investments 1.36 (6) (6) Net Profit/Loss (—) for the year Profit/Loss (—) brought forward Total IV.03 (6) 97 25.15 66.Other Income 22. Profit/Loss 15 16 9.27 1.00 7.Interest Earned (` 000’s) Year ended 31-3-2012 I. Year Ended 31-3-2011 Commission.39 16. II.12 1.75 5.22 7. II. Proposed Dividend Balance carried over to Balance Sheet Total Schedule 13 .74 II. III.

22 7.Financial Statements of Banking Companies Less: Loss on sale of Investments 6. II.Interest Expended (` 000’s) Year ended 31-3-2012 I.69 6.47 9. Year Ended 31-3-2011 Interest on Deposits Interest on RBI/inter-bank borrowings Total Schedule 16 .12 98 98 2.Operating Expenses 8.12 1.27 7. VI.34 Total Schedule 15 . . telephones etc. prepare Profit and Loss A/c of KC Bank for the year ended 31st March. IV.75 (12) 1.48 1. allowances and expenses Auditor’s fees and expenses (including branch auditors) Law charges Postage. II.55 1. 2012. Repairs and maintenance Insurance Other Expenditure Total 8.97 Illustration 3 From the following information.10 1.27 1.39 (` 000’s) Year ended 31-3-2012 I. III.52 62 66 52 20.58 1. X. Year Ended 31-3-2011 Payments to and provision for employees Rent.47 1. VIII.12 1.22 1. taxes and lighting Printing and stationery Advertisement and Publicity Depreciation on the Bank’s Property Director’s fees. XI. XII. VII. IX.10 8.10 50 48 57 42 − 16. V.12 98 1.79 2.96 7. telegrams.

telegrams.20 7.00 1.00 50 2.50 15.76 Advanced Accounting 000 ` 18.20 2.20 450 750 Collected (` ’000) 40.00 2.20 1.6.50 30. allowances and bonus to employees Payment to Provident Fund Printing and stationery Repairs and maintenance Postage.20 2.40 1.00 . telephones Other Information: (i) Interest on NPA is as follows Cash credit Overdraft Term Loans (ii) Classification of advances (’000 `) Standard Sub-standard Doubtful assets not covered by security Doubtful assets covered by security for one year Loss Assets Earned (` ’000) 8.40 8.00 11.80 1.50 75 1.18 82 27 52 27.50 1.40 2.80 12.40 50 80 Items Interest on cash credit Interest on overdraft Interest on term loans Income on investments Interest on balance with RBI Commission on remittances and transfer Commission on letters of credit Commission on government business Profit on sale of land and building Loss on exchange transactions Interest paid on deposit Auditors’ fees and allowances Directors’ fees and allowances Advertisements Salaries.

40 8.30 II III Income on investments Interest on Balance with RBI Interest on NPA is recognised on cash basis.50 38.40 680.00 57.40 (16.Interest Earned Year Ended 31-3-2012 III IV Profit/Loss Appropriations I Interest/discount on advances/bills Interest on cash credit (1820-420) Interest on overdraft (750-350) Interest on term loans (1540-500) 14.77 27.20 23.30 2.80 II Expenditure Interest expended Operating expenses Provisions and Contingencies 15 16 27.50 40.50 Bank should not keep more than 25% of its investment as ‘held-for-maturity’ investment.000 as on 31-3-2012. . Solution KC Bank Profit and Loss Account For the year ended 31st March.Financial Statements of Banking Companies (iii) Investments 6.75.40 1.00 10.00 4. 2012 Particulars Schedule (` ’000’) Year Ended 31-3-2012 I Income Interest earned Other income 13 14 38.60) Nil Schedule 13 .40 28. The market value of its rest 75% investment is ` 19.

80 2. Repairs and maintenance Working Note: Provisions and contingencies (` ’000) Provision for NPA : Standard 3000 × 0.40 2. allowances and bonus Provident Fund Contribution 12.20 80 50 23.50 1.Operating Expenses 27.40 1. Exchange and Brokerage Commission on remittances and transfer Commission on letter of credit Commission on Government business 75 1. telephones etc.78 Advanced Accounting Schedule 14 .20 1.Interest Expended Year Ended 31-3-2012 IV V Profit on sale of Land and Building Loss on Exchange Transactions I Interest on Deposits Schedule 16 .40% 12 .6.40 III IV VI VII IX X Printing and Stationery Advertisement and publicity Directors’ fees. telegrams. allowances and expenses Auditors’ fees and expenses Postage.80 15.Other Income Year Ended 31-3-2012 I Commission.18 82 2.75 27 (52) 2.50 Schedule 15 .20 Year Ended 31-3-2012 I Payment and provision for employees Salaries.

65.00 9.00 7.50 4.43.50 Less : Market value Illustration 4 2062.00.68 2.00 The following are the ledger balances (in Rupees thousands) extracted from the books of Vaishnavi Bank as on March 31.30 5.50 5. 2012 : Dr.30 It is assumed that sub-standard asset is fully secured. 19.70 1.50.00 2.Financial Statements of Banking Companies 6.70.00 6.00 2.00 12. .5 2.5 Cost 75% of 27.00 50.5 680.00) 87.50.56.00 2.00 5.00 1.00 592.60.00 74.51.53.20 9.30 20.72.79 Sub-standard Doubtful not covered by security Doubtful covered by security for one year Loss Assets Depreciation on current investments 1120 × 15%∗ 200 × 100% 50 × 25% (200 × 100%) 1.50 (1975.30.65. Share Capital Current accounts control Employee security deposits Investments in Govt.63. of India Bonds Gold Bullion Silver Constituent liabilities for acceptances and endorsements Borrowings from banks Building Furniture Money at call and short notice Commission & brokerage Saving accounts Fixed deposits Balances with other banks Other investments ∗ Cr.

80 Advanced Accounting 2. 2012 are required to be prepared in appropriate form.46. rates and taxes Cash in hand and with Reserve Bank Miscellaneous income Depreciation reserve (building) Directors fees Postage Loss on sale of investments Branch adjustments Other Information: The bank’s Profit and Loss Account for the year ended and Balance Sheet as on 31st March.00 2.10.00 79. .00.00 8.6.00.00 40.00 39.50 4.10.25.20.00.00 2.00 6.00 65.00 6.00 10.00 79.20.00.35.20.12.35. Further information (in Rupees thousands) available is as follows — (a) Rebate on bills discounted to be provided (b) Depreciation for the year Building Furniture 50.50 2.00 4.00 18.00 12.00 79.00 50.00 7.20 14.00 1.00 2.00 (c) Included in the current accounts ledger are accounts overdrawn to the extent of 25.00 5.00 1.10.50.00 Interest accrued on investments Reserve Fund P & L A/c Bills for collection Interest Loans Bills discounted Interest Discounts Rents Audit fees Depreciation reserve (furniture) Salaries Rent.00 4.

86.14.00 Vaishnavi Bank Profit and Loss Account for the year ended 31-3-2012 I.75.71. 2012 6.00 6 7.46.20 61.00 98.50.30 1.00 20.00 4.00 4.00 .86.81 (‘000 `) Capital and Liabilities Schedule As on 31-3-2012 19.50 16.00.24.60.50 7.30 19.00 As on 31-3-2011 Capital Reserves & Surplus Deposits Borrowings Other liabilities and provisions Total 1 2 3 4 5 (‘000 `) Assets Schedule As on 31-3-2012 As on 31-3-2011 Cash and balance with Reserve Bank of India Balances with bank and Money at call and short notice Investments Advances Fixed Assets Other Assets Total Contingent liabilities Bills for collection 12 7 8 9 10 11 7.00 5.65.35.Financial Statements of Banking Companies Solution Balance Sheet of Vaishnavi Bank as on 31st March.35.00.72.00 6.20 61. Income Interest & Discount Other income 13 14 10.00 13.98.23.00 10.

24..25 6.39.50 4...00.00 65. For Other Banks Authorised Capital Shares of ` .39. each Called up capital Shares of ` .00 As on 31-32012 I.Capital 1. each Issued Capital Shares of ` .00 Net profit for the year Profit b/f IV.00 Transfer to Statutory Reserve Balance carried over to Balance Sheet Schedule 1 . Profits/Loss 15 16 79. Appropriations 5..75 4...84.00 19. Advanced Accounting Expenditure Interest Expended Operating Expenses Provisions and Contingencies III.59.24.6..00.Reserves & Surplus − − − 19.00 6.00.75 . Statutory Reserves Opening Balance Additions during the year 14.50 5.82 II.00 (` ’000) As on 31-3-2012 III.00 1.59..39. each Subscribed Capital Shares of ` . each Schedule 2 .

Deposits 4.00 1.20 As on 31-3-2012 3.14.25 20. Cash in hand (including foreign currency notes) Balances with Reserve Bank of India: (i) In Current Account (ii) In Other Account Total 3.39. I.20. Balance in Profit and Loss Account Total Schedule 3 .00 74.00 2.24. Demand Deposits Saving Bank Deposits Term Deposits Schedule 4 .00 7.30 7. III.72.50.83 15. Other liabilities including provisions: Rebate on bills discounted Employees Security Deposit Total Schedule 6 .30.00 (` ’000) As on 31-32012 A.50. II.Financial Statements of Banking Companies 6.84.50 As on 31-32012 I.72.50.Borrowings 9.Other liabilities and provisions As on 31-3-2012 7.00 (Details are not based on figures given in the question) . II.20 1.50 13.00 80.95.75 V. Borrowings in India (ii) Other banks Total Schedule 5 .00 I.Cash and Balances with Reserve Bank of India 40.30 IV.75.

71.60.Advances 9.00 16. (i) (ii) Bills purchased and discounted Cash credits.00 19.30.50 2.50 Schedule 8 .25.60.00 (‘000 `) As on 31-3-2012 I.00 B.30 20.30 1.70 5.84 Advanced Accounting Schedule 7 .00 8. overdrafts and loans repayable on demand Secured by tangible assets Secured by Bank/Govt. (i) 18.00 5. Investments in India in (i) Government securities (ii) Shares (assumed) (vi) Gold Silver Total Schedule 9 .00.00.30 A.00.35.00 19.51. (i) (ii) (iii) I. In India Balances with banks in Current accounts in Other accounts Money at call and short notice with banks with other institutions Total 2.6.00 30.23. Securities Unsecured Advances in India Priority sector As on 31-3-2012 1.00 2.60. .56.00 12.00.63.43.00 C.Balances with Banks & Money at Calls & Short Notice As on 31-3-2012 I.00 7.Investments (i) (a) (b) (ii) (a) (b) 2.

00 6. Other fixed articles (including Furniture and Fixture) At cost as on 31st March.00 20. 2011 Depreciation to date 6.00.00 5.Fixed Assets 1.00 .00 50.00 II. endorsements and other obligations Total 5.00.00 19.92.00 I. II.42.00 5.00 43.20 Schedule 12 .00 2.35. Acceptances.40.46.00 10. 2011 Depreciation to date Total (I & II) Schedule 11 .65.00 (Details are assumed) As on 31-3-2012 I. Inter-office adjustments (net) Interest accrued 2.Contingent Liabilities Year ended 31-3-2012 V.Financial Statements of Banking Companies 6.00 5.65.85 (ii) (iii) (iv) Public sector Banks Others Total Schedule 10 . Premises At cost as on 31st March.60.20 4.46.Other Assets As on 31-3-2012 48.

00 50. IV. III.00 12.00 I.00) 53.00) Total Schedule 14 : Other Income Year ended 31-3-2012 10.00 98.00. bills (6.59. Interest/discount on advances. V. Payments to and provisions for employees Rent.20. III.20.00 10.50 . Exchange and Brokerage Profit on sale of investments Less : Loss on sale on investments 2.6. II.00 10.00 55. allowances and expenses Auditor’s fees and expenses Postage.86 Advanced Accounting Schedule 13 : Interest Earned Year ended 31-3-2012 I.53.00 –40. Telegrams.00 (2.00 1.00. Interest on Deposits Total Schedule 16 : Operating Expenses 79. II. Commission.50 4.00 + 4.00 45. Total 2.20.00 Miscellaneous Income Rent and Other Receipts Total Schedule 15 : Interest Expended Year ended 31-3-2012 I. Telephones etc. VI.12.50 Year ended 31-3-2012 I.00.50 79. Taxes and Lighting Depreciation on Bank’s property Director’s fees.

..... For Nationalised Banks As on 31.3.87 As on 31. (Previous year) Opening Balance .3. For other Banks Authorised Capital ( ___Shares of ` ____ each) Issued Capital ( ___Shares of ` ____each) Subscribed Capital ( ____Shares of ` ___ each) Called-up Capital ( ____Shares of ` ___ each) Less : Calls unpaid Add : Forfeited shares Total Schedule 2 .. (Current year) I..Capital 6.. 1949 Total III.Reserves and Surplus As on 31. (Previous year) Capital (Fully owned by Central Government) II..3.Financial Statements of Banking Companies Annexure I Schedules forming part of Balance Sheet Schedule 1 . Statutory Reserves As on 31. For Banks Incorporated outside India Capital (i) (The amount brought in by banks by way of start-up capital as prescribed by RBI should be shown under this head) (ii) Amount of deposit kept with the RBI under Section 11(2) of the Banking Regulation Act. (Current year) I..3.

IV and V) Schedule 3 . III.88 Advanced Accounting Additions during the year Deductions during the year II... Capital Reserves Opening Balance Additions during the year Deductions during the year III. As on 31.3. Share Premium Opening Balance Additions during the year Deductions during the year IV. Revenue and other Reserves Opening Balance Additions during the year Deductions during the year V..Deposits As on 31. III. From banks (ii) From others Savings Bank Deposits Term Deposits (i) From Banks (ii) From others Total :(I. II.3.6. II and III) B. (Previous year) (i) (ii) Deposits of branches in India Deposits of branches outside India Total . I. Demand Deposits (i) II.. (Current year) A. Balance in Profit and loss Account Total : (I.

II.Financial Statements of Banking Companies Schedule 4 . (Current year) I..3...Cash and Balances with Reserve Bank of India As on 31... II.Other Liabilities and Provisions As on 31. As on 31.` Schedule 5 ... (Previous year) (i) Reserve Bank of India (ii) Other banks (iii) Other institutions and agencies II.3..3.3..3... (Current year) I.89 As on 31..... (Current year) I. (Previous year) (i) In Current Account (ii) In Other Accounts Total : (I & II) ...Borrowings 6. (Previous year) Bills payable Inter-office adjustments (net) III. Borrowings in India As on 31. Interest accrued IV. Cash in hand (including foreign currency notes) Balances with Reserve Bank of India As on 31.. Others (including provisions) Total Schedule 6 . Borrowings outside India Total : (I and II) Secured borrowings included in I & II above .3.

Investments in India in As on 31.... Investments outside India in (i) Government securities (Including local authorities) (ii) Subsidiaries and/or joint ventures abroad . (Previous year) (i) Balances with banks (a) in Current Accounts (b) in Other Deposit Accounts (ii) Money at call and short notice (a) with banks (b) with other institutions Total : (i & ii) II.90 Advanced Accounting Schedule 7 . (Previous year) (i) Government securities (ii) Other approved securities (iii) Shares (iv) Debentures and Bonds (v) Subsidiaries and/or joint ventures (vi) Others (to be specified) Total II.3..6.3... (Current year) I.. (Current year) I. In India As on 31.Investments As on 31..3..Balances with Banks & Money at Call & Short Notice As on 31..3. Outside India (i) In Current Accounts (ii) in other Deposits Accounts (iii) Money at call and short notice Total Grand Total (I & II) : Schedule 8 ...

.3.Financial Statements of Banking Companies 6. Advances outside India (i) Due from banks (a) Bills purchased and discounted (b) Syndicated loans (c) Others (ii) Due from others Total Grand Total :(C. (i) (ii) Secured by tangible assets Covered by Bank/Government Guarantees (iii) Unsecured Total C. I.Advances As on 31.91 (iii) Other investments (to be specified) Total Grand Total :(I & II) Schedule 9 . As on 31... overdrafts and loans repayable on demand (iii) Term loans Total B. (Current year) A. (Previous year) (i) (ii) Bills purchased and discounted Cash credits. I & II) ..3. Advances in India (i) (ii) Priority Sectors Public Sector (iii) Banks (iv) Others Total II...

Other Fixed Assets (including Furniture and Fixtures) At cost as on 31st March of the preceding year Additions during the year Deductions during the year Depreciation to date Total : (I & II) Schedule 11 . As on 31.3. V... (Current year) I.. (Current year) I. Others* *In case there is any unadjusted balance of loss the same may be shown under this item with appropriate foot-note.3.. Premises As on 31. Stationery and stamps VI. II.3. II.. Schedule 12 .. (Previous year) Inter-office adjustments (net) Interest accrued Tax paid in advance/tax deducted at source Non-banking assets acquired in satisfaction of claims Total IV.3. As on 31... (Previous year) At cost as on 31st March of the preceding year Additions during the year Deductions during the year Depreciation to date II... III......Other Assets As on 31.. (Current year) I.3.Fixed Assets As on 31.Contingent Liabilities As on 31.92 Advanced Accounting Schedule 10 .3.6.. (Previous year) Claims against the bank not acknowledged as debts Liability for partially paid investments ..

. III.Other Income IV.Interest Earned Year ended 31. 6. (Previous year) Commission... (Current year) I. Year ended 31. (Current year) I. Others Year ended 31.. (Previous year) Interest/discount on advances/bills Income on investments Interest on balances with Reserve Bank of India and other inter-bank funds Total Schedule 14 .3. II..3...Financial Statements of Banking Companies III.3.. Acceptances..93 Liability on account of outstanding forward exchange contracts (a) In India (b) Outside India IV. Year ended 31. exchange and brokerage Profit on sale of investments Less : Loss on sale of investments Profit on revaluation of investments Less : Loss on revaluation of investments . Guarantees given on behalf of constituents V..3. II... III. Other items for which the bank is contingently liable Total Annexure II Schedules forming part of Profit and Loss Account Schedule 13 . endorsements and other obligations VI.

. (Current year) I. II. (Previous year) Payments to and provisions for employees Rent.. III. from subsidiaries/companies and/or joint ventures abroad/in India VII. Director’s fees... taxes and lighting Printing and stationery Depreciation on Bank’s property IV.. Law Charges . Advertisement and publicity VI. allowances and expenses VII..3. Schedule 15 . III.. Year ended 31. building and other assets Less : Loss on sale of land. Auditor’s fees and expenses (including branch auditor’s fees and expenses) VIII.. building and other assets V.3. V.3. Profit on sale of land. II. (Previous year) Interest on deposits Interest on Reserve Bank of India/inter-bank borrowings Others Total Schedule 16 .3. Year ended 31..Operating Expenses Year ended 31.94 Advanced Accounting IV. (Current year) I. Miscellaneous Income Total Note : Under items II to V loss figures may be shown in brackets.6.Interest Expended Year ended 31. Profit on exchange transactions Less : Loss on exchange transactions VI. Income earned by way of dividends etc....

if any. Where necessary. Balance Sheet Item Capital Schedule 1 Coverage Nationalised Banks Notes and instructions for compilation The capital owned by Central Government as (Fully Owned by Central on the date of the Balance Sheet including contribution from Government... Subscribed......... 6. may be explained in the notes.each) subscribed Capital ( .Shares of `.....Shares of `. Postages. . Telephones. 1949 should also be shown.....Financial Statements of Banking Companies IX.... Telegrams. (ii) The amount of deposits kept with RBI... fresh contribution made by Government. items which can be combined should be shown under one head for instance ‘Issued and Subscribed Capital’. X....General The changes in the above items. Calls-inarrears will be deducted from Called up capital while the paid-up value of forfeited shares should be added thus arriving at the paid-up capital.each) Called up Capital (. etc.. etc... Called-up Capital should be given separately... Insurance XII.. fresh issue of capital. if any.95 Repair and maintenance XI.. say.... Less : Calls unpaid. for Government) participating in World Bank Projects should be shown.Add: Forfeited shares. during the year..Paid up to capital... Issued.... capitalisation of reserves.. Authorised.... Other Banks (Indian) Authorised Capital (. Other expenditure Total In ‘Notes on Accounts’. Banking companies (i) The amount brought in by banks by way of incorporated outside start-up capital as prescribed by RBI should be shown under this head. under sub-section 2 of section 11 of the Banking Regulation Act..Shares of `. Notes ....each.. the following disclosures should be made: Annexure III Guidelines of Reserve Bank of India for Compliance of Financial Statements Given below are the compliance notes of the Reserve Bank of India for balance sheet and profit and loss account as per the revised formats.Shares or ` each) Issued Capital (.

(V) Balance of Profit Includes balance of profit after appropriations. Surplus on revaluation should be treated as Capital Reserves. The amount held in ‘Investment Fluctuation Reserve Account’ could be utilized to meet the depreciation requirement on investment in securities in future. Reserves 2 and Surplus (II) Capital Reserves (III) Share Premium (IV) Revenue and other The expression ‘Revenue Reserve’ shall Reserves mean any reserve other than capital reserve. an equivalent amount may be transferred from the ‘Investment Fluctuation Reserve Account’ to the Profit and Loss Account as a ‘below the line’ item after determining the profit for the year. renewals or diminution in value of assets or retained by way of providing for any known liability. . Excess provision towards depreciation on investments should be transferred to ‘Investment Fluctuations Reserve Account’ which should be shown as a separate item under the head ‘Revenue and Other Reserves’. The expression ‘capital reserves’ shall not include any amount regarded as free for distribution through the profit and loss account.96 Advanced Accounting (I) Statutory Reserves Reserves created in terms of Section 17 or any other section of Banking Regulation Act must be separately disclosed. The expression Reserve shall not include any amount retained by way of providing renewals or diminution in value of assets or retained by way of providing for depreciation. Premium on issue of share capital may be shown separately under this head. Extra provision needed in the event of depreciation in the value of the investment should be debited to the Profit and Loss Account and if required. This item created will include all reserves other than those separately classified. Surplus on translation of the financial statements of foreign branches (which includes fixed assets also) is not a revaluation reserve.6. Such reserves will have to be reflected on the face of the balance sheet as revaluation reserves.

etc.Financial Statements of Banking Companies 6. deposits mobilised under various schemes. foreign currency non-resident deposits accounts. certificates of deposits. etc. ordinary staff deposits. should be treated as demand deposits. (b) Matured time deposits and cash certifica-tes. Includes all demand deposits of the non-bank sectors. Notes – General Movements in various categories of Reserves should be shown as indicated in the schedule Deposits 3 A. are to be included under this category. cash credit accounts. (II) B. Fixed deposits. cash certificates. Saving Bank Deposits (III) Term Deposits (i) from banks Includes all types of bank deposits repayable after a specified term. (ii) from others Includes all types of deposits of the non-bank sector repayable after a specified term. certificates of deposits. annuity deposits. inoperative current accounts. Credit balances in over-drafts. deposits payable at call. overdue deposits. are to be included under this category. (ii) Deposits of branches outside India Notes – General (a) Interest payable on deposits which is accrued but not due should not be included but shown under other liabilities. (c) Deposits under special schemes should be included under term deposits if they are . etc. cumulative and recurring deposits.97 In case of loss the balance may be shown as a deduction. matured time deposits and cash certificates. (I) Demand Deposits (i) from banks (ii) from others Includes all bank deposits repayable on demand. (i) Deposits of branches The total of these two items will agree with the in India total deposits.

as ‘deposits’ ‘borrowings’. When each deposits have matured for payments they should be shown under demand deposits.98 Advanced Accounting not payable on demand. pay slips. Bills payable Includes drafts. telegraphic transfers. should be classified depending upon documentation. (ii) Inter-office transactions should not be shown as borrowings. Notes – General (i)The total of I & II will agree with the total borrowings shown in the balance sheet. National Bank for Agriculture and Rural Development and other institutions. agencies (including liability against participation certificates. bankers cheques and other miscellaneous items.6. bonds. Other banks Includes borrowings/refinance obtained from commercial banks (including cooperative banks). (iii) Other institutions Includes borrowings/refinance obtained from and agencies Industrial Development Bank of India. Includes secured borrowings/refinance in India and outside India. (iii) Funds raised by foreign branches by way of certificates of deposits. etc. etc. Export-Import Bank of India. . co-operative banks. notes. Secured included above borrowings This item will be shown separately. (d) Deposits from banks will include deposits from the banking system in India. (iv) Refinance obtained by banks from Reserve Bank of India and various institutions are being brought under the head ‘Borrowings’. Borrowings 4 (I) Borrowings in India (i) (ii) Reserve Bank of Includes borrowings/refinance obtained from India Reserve Bank of India. advances will be shown at the gross amount on the assets side Other liabilities and provisions 5 I. if any) (II) Borrowings India outside Includes borrowings of India branches abroad as well as borrowings of foreign branches. Hence. foreign banks which may or may not have a presence in India. travellers’ cheques. mail transfers payable.

margin deposits. should be shown under this head. credit entries outstanding for more than five years in interbranch accounts should be segregated and transferred to a separate Blocked Account. (ii) Provisions towards standard assets should be shown separately as ‘Contingent Provisions against Standard Assets’ under this ahead. where the repayment is not free. inland as well as foreign. While arriving at the net amount of interbranch transactions for inclusion under Schedule 5 or 11 as the case may be. other liabilities which are not disclosed under any of the major heads such as unclaimed dividend.99 Inter-office adjustment The inter-office adjustments balance. conveyance etc. III. 6. if in (net) credit.). etc. contingency funds which are not disclosed as a reserve but are actually in the nature of reserves. surplus in aggregate in provisions for bad debts provision account. The Blocked Account arising from transfer of credit . Others (including (i) Includes the net provision for income tax provisions) and other taxes like interest tax (less advance payment tax deducted at source etc. provisions and fund kept for specific purposes. Only net position of inter-office accounts. outstanding charges like rent. proposed dividend/ transfer to Government. Certain types of deposits like staff security deposits. Interest accrued Includes interest accrued but not due on deposits and borrowings. surplus in aggregate in provisions for depreciation in securities.Financial Statements of Banking Companies II. should also be included under this head. In working out the net position. unexpired discount. the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries. (iii) Amount of subordinated debt raised as Tier II capital should be shown in Schedule 5 as well as by way of explanatory notes/remarks in the balance sheet. should be shown here. IV.

100 Advanced Accounting entries in inter-branch accounts outstanding for more than five years should be shown under this head. Any adjustment from the Blocked Account should be permitted only with the authorization of two officials one of whom should be from outside the branch concerned. representing mostly items in transit and unadjusted items. (iv) The amount of subordinated debt raised against Tier II capital should be indicated. (ii)The interest accruing on all deposits. Cash in hand Includes cash in hand including foreign (including foreign currency notes and also of foreign branches in currency notes) case of banks having such branches. which are not netted off against the relative assets. should be treated as a liability. Balances in Balances with banks current accounts and deposit accounts should (a) in current be shown separately. Balances with Reserve Bank of India (i) (ii) in Current Account in other Accounts Cash and 6 Balances with the Reserve Bank of India I. etc. (i) Includes all balances with banks in India (including co-operative banks).6. contingency funds. Notes – General (i) For arriving at the net balance of interoffice adjustments all connected inter-office accounts should be aggregated and the net balance only will be shown. II. (iii)It is proposed to show only pure deposits under this head ‘deposits’ and hence all surplus provisions for bad and doubtful debts. Balances 7 with banks and money at call and short notices I. secret reserves. should be brought under the head ‘Others (including provisions)’. accounts (b) in other Deposit accounts In India (ii) Money at call and Includes deposits repayable within 15 days or . whether the payment is due or not. preferably from the Controlling/Head Office if the amount exceeds Rupees one lakh.

(iv) Debentures and Investments in debentures and bonds of and Bonds corporations not included in item (ii) should be included here. securities which according to the Banking Regulation Act. These securities should be shown at the book value. like gold. (ii) Deposits Balances held with foreign branches by other accounts branches of the bank should not be shown under this head but should be included in inter-branch accounts. Outside India Includes Central and State Government securities and Government treasury bills.Financial Statements of Banking Companies short notice (a) (b) II. (v) Investments in Investments in subsidiaries/joint ventures subsidiaries/joint (including RRBs) should be included here. ventures (vi) Others Includes residual investments. However. (ii) Other approved Securities other than Government securities. the difference between the book value and market value should be given in the notes to the balance sheet. The amounts held in ‘current accounts’ and ‘deposit accounts’ should be shown separately. (iii) Shares Investments in debentures and bonds of companies and corporations not included in item (ii) should be included here. Includes balances held by foreign branches (i) Current accounts and balances held by Indian branches of the banks outside India. (i) (ii) . (iii) Money at call Includes deposits usually classified in foreign and short notice countries as money at call and short notice. Investments outside India Government securities All foreign Government securities including (including local securities issued by local authorities may be authorities) Subsidiary and/ or joint All investments made in the share capital of Investments in India (i) Government securities Investments 8 I. should be included here.101 less than 15 days notice lent in the inter-bank call money market. commercial paper and other instruments in the nature of shares/ debentures/ bonds. with banks with other institutions 6. 1949 are treated as approved securities. if any. II.

All advances not classified under (i) and (ii) will be included here. The item will include advances in India debts) Covered by Bank/ Advances in India and outside India to the Government Guarantee extent they are covered by guarantees of Indian and foreign governments and Indian and foreign banks and DICGC & ECGC are to be included. Bills purchased and In classification under section ‘A’. (i) Secured by tangible All advances or part of advances which are assets (includes secured by tangible assets may be shown advances against book here. the total of which will be carried to balance sheet. and the net value of investments in India and outside India. Advances should be broadly classified into sectors ‘Advances in India. the aggregate of provisions for depreciation separately on investments in India and outside India. Notes-General Indicate the gross value of investments in India and outside India.102 Advanced Accounting ventures abroad subsidiaries floated outside India and/or joint ventures abroad should be classified under this head. (ii) (iii) Unsecured C. The break-up of net value of investments in India and outside India (gross value of investments less provision) under each of the specified category need only be shown. Total of ‘A’ should tally with the total of ‘B’. All other investments outside India may be shown under this head. I.6. All out discounted standings in India as well as outside less (ii) Cash credits. Advances in India (i) (ii) Priority Public . demand (iii) Term loans Including overdue installments. The gross value of investments and provisions need not. (iii) Others Advances 9 A. however. be shown against each of the categories specified in the Schedule.provisions made. will be classified under three drafts and loans heads as indicated and both secured and repayable on unsecured advances will be included under these heads. and ‘Advances outside sector India’. over. (i) B.

(ii) Term loans will be loans not repayable on demand. Advances on II. All the remaining advances will be included under the head ‘Others’ and typically this category will include non-priority advances to the private. (a) Bills purchased and Advances to Central and State Governments discounted and other Government undertaking including Government companies and corporations (b) Syndicate loans which are.Financial Statements of Banking Companies (iii) Banks (iv) Others 6. All advances to the banking sector including co-operative banks will come under the head ‘Banks’. Other Assets(including Fixed Motor vehicles and other fixed assets other furniture than premises but including furniture and . year (iv) Depreciation to date II.103 Advances in India will be further classified on the sectoral basis as indicated. (ii) Due from others Such advances should be excluded from item (ii) i. (i) Premises At cost as on 31st Premises wholly or partly owned by the March of the preceding banking company for the purpose of business year after the first balance sheet subsequent to the (ii) Additions during the year reduction or revaluation should show the revised figures for a period of five years with (iii) Deductions during the the date and amount of the revision made. Advances outside sectors which for the time being are classified as priority sectors according to the India instructions of the Reserve Bank are to be (i) Due from banks classified under the head ‘Priority sector’. Notes – General (i) The gross amount of advances including refinance but excluding rediscounts provisions made to the satisfaction of auditors should be shown as advances. Fixed Assets 10 I. according to the statutes. joint and co-operative sectors. advances to public sector. to be (c) Others treated as public sector companies are to be included in the category “Public Sector”. (iii) Consortium advances would be shown net of share from other participating banks/ institutions..e.

all connected interoffice accounts should be aggregated and the net balance.6. Only such interest as can be realised on the ordinary course should be shown under this head. In working out the net position. if in debit. While arriving at the net amount of interbranch transactions for inclusion under Schedule 5 or 11. if in ments (net) debit. should be shown here. to the extent that these items are not set off against relative tax provisions should be shown against this item. Tax paid in advance/tax The amount of tax deducted at source on deducted at source securities. III. credit entries outstanding for more than five years in interbranch accounts should be segregated and transferred to a separate Blocked Account. usually there may not be any amount of interest due on advances. II. Inter-office adjust. as the case may be. should be shown under this head. Interest accrued Interest accrued but not due on investments and advances and interest due but not collected on investments will be the main components of this item.The inter-office adjustments balance. advance tax paid etc. (i) At cost on 31st March of the preceding year (ii) Additions during the year (iii) Deductions during the year (iv) Depreciation to date I. only should be shown representing mostly items in transit and unadjusted items. Other Assets 11 . the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries.104 Advanced Accounting and fixtures) fixtures should be shown under this head. As banks normally debit the borrowers’ accounts with interest due on the balance sheet date. For arriving at the net balances of inter-office adjustment accounts. Only net position of inter-office accounts. inland as well as foreign.

. loose leaf or other ledgers. Non-banking assets Immovable properties/tangible assets acquired in satisfaction acquired in satisfaction of claims are to be of claims. commitments under undercontingently liable writing contracts. Other items for which Arrears of cumulative dividends. 6. debentures.Financial Statements of Banking Companies IV. Others This will include items like claims which have not been met. exchange contracts Guarantees given on Guarantees given for constituents in India and behalf of constituents outside India may be shown separately. Liability on account of Outstanding forward exchange contracts may outstanding forward be included here. VI. are to be included here. etc. VI. which are shown as quasi-asset to be written off over a period of time should be shown here. estimated amounts of contracts remaining to be executed on capital account and not provided for. etc. bills the Bank is rediscounted. clearing items. provision netted against this item so that only realisable value is shown under this head. (i) (ii) V. will be included under this head. Accrued income other than interest may also be included here. shown under this head. Claims against bank acknowledged debts the not as II. investments etc.105 Stationery and stamps Only exceptional items of expenditure on stationery like bulk purchase of securities paper. as these items are for internal use. III. In India Outside India Acceptances endorsements other obligations This item will include letters of credit and bills and accepted by the bank on behalf of customers. Outstanding in credit card operations should be shown as part of “advances” ( Schedule instead of clubbing these under “Other Assets” Contingent Liabilities 12 I. V. for instance. Liability for partly paid Liability on partly paid shares. IV. The value should be on a realistic basis and cost escalation should not be taken into account.

money and other Interbank market placements. It does not include foreign exchange income. Profit on sale of Includes investments Less Loss securities. and brokerage commission/exchange on remittances and transfers. if any. gold. Commission. term loans. If the net position is a loss. export loans. on securities. Interest/discount advances/bills on Includes interest and discount on all types of loans and advances like cash credit. commission on letter of credit and guarantees. broke-rage. motor of vehicle. the amount should be shown as deduction. overdue. call loans. etc. profit/loss on sale of II. on revaluation of investments . furniture land and buildings. II. etc. silver etc. Only the on sale of investments net position should be shown. interest and also interest subsidy. Bills for Collection Profit and Loss Account Interest earned 13 I. domestic and foreign bills purchased and discounted (including those rediscounted). funds IV. demand loans. Other Income 14 I. commission on Government business commission on other permitted agency business including consultancy and other services. exchange Includes all remuneration on services such as commission on collections. relating to such advances/bills. Profit on revaluation of The net profit/loss on revaluation of assets investments Less: Loss may also be shown under this item.106 Advanced Accounting Bills and other items in the course of collection and not adjusted will be shown against this item in the summary version only. III. No separate schedule is proposed. overdraft. Others Includes any other interest/discount income not included in above heads. Income on Investments Includes all income derived from the investment portfolio by way of interest and dividend III. Interest on balances with Includes interest on balances with Reserve Reserve Bank of India Bank and other banks.6..

allowances. If the net position is a loss. Others Includes discount / interest on all borrowings/refinance from financial institutions. medical allowance to staff etc. II. insurance etc. III.Financial Statements of Banking Companies IV. Only the net position should subsidiaries. Provisions for employees bonus. building and other assets Less : Loss on sale of land. Miscellaneous income Includes recoveries from constituents for the godown rents. V. Operating expenses 16 I. pension. House rent allowance and other similar payments to staff should appear . from under interest. II. Profit on exchange transactions Less : Loss on exchange transactions Interest Expended 15 I. transactions VI. Interest on Reserve Bank Includes discount/interest on all borrowings of India/inter-bank and refinance from Reserve Bank of India borrowings and other banks. it is to be shown as a deduction. In case any item under this head exceeds one percentage of the total income. particulars may be given in the notes. income from bank’s properties. staff welfare. Income earned by way of excluding interest which will be shown dividends etc. companies be shown. gratuity liveries to staff. may also be included here. Rent. and any other miscellaneous income. leave fare concessions. lighting taxes and Includes rent paid by the banks on building and other municipal and other taxes paid (excluding income tax and interest tax) electricity and other similar charges and levies. and/or joint ventures abroad/in India VII. Payments to and Includes staff salaries / wages. All otherpayments like interest on participation certificates. penal interest paid. buildings and other assets 6. Profit on sale of land. Interest on deposits Includes interest paid on all types of deposits including deposits from banks and others institutions. security charges.107 Includes profit/loss on dealing in foreign exchange all income earned by way of foreign exchange commission and charges on foreign exchange. etc. other staff benefits like provident fund.

furniture. telephones. Depreciation on Bank’s Includes depreciation on bank’s own property: motor cars and other vehicles. Law charges All legal expenses and reimbursement of expenses incurred in connection with legal services are to be included here. If external auditors have been appointed by banks themselves for internal inspections and audits and other services the expenses incurred in that context including fees may not be included under this head but shown under ‘other expenditure’. III. etc.. VI. maintenance . VII. leasehold properties.6. non banking assets. telephones. etc. etc. conveyance charges. tele-gram. Auditors’ fees and expenses (including branch auditors’ fees and expenses) Includes fees paid to the statutory auditors and branch auditors for professional services rendered and all expenses for performing their duties. Advertisement publicity V. etc. which though in the nature of reimbursement of expenses incurred may be included under this head. property electric fittings. Includes all postal charges like stamps. and Includes expenditure incurred by the bank for advertisement and publicity purposes including printing charges of publicity matter.108 Advanced Accounting under the head ‘Payments provisions for employees’. Includes sitting fees and all other items of and expenditure incurred on behalf of directors. to and Printing and Stationery Includes books and forms and stationery used by the bank and other printing charges which are not incurred by way of publicity expenditure. Repairs and Includes repairs to banks’ property. even though they may be in the nature of reimbursement of expenses. hotel charges. Directors’ allowances expenses fees. etc. VIII. their maintenance charges. Similar expenses of local Committee members may also be included under this head. telegrams. teleprinter. lifts. Postage. vaults. IX. The daily allowances. IV. X.

Other expenditure Provisions and contingencies Treatment of accumulated losses Includes insurance charges on bank’s property. travel expenses. Investments in Government Securities. Balances in current account with other banks ii. periodicals. subscriptions to papers. Investments in other approved securities guaranteed by Central! . While preparing the Balance Sheet and Profit and Loss Account accumulated losses should be brought forward under Item III or Form “B” before appropriation of the balance profit made. donations. insurance premium paid to Deposit Insurance & Credit Guarantee Corporation. Insurance 6. Claims on Bank Investments (Applicable to securities held in HTM) 1. All expenses other than those not included in any of the other heads like. provisions for diminution in the value of investments. Includes all provisions made for bad and doubtful debts. may be included under this head. to the extent they are not recovered from the concerned parties. Domestic Operations A. etc. licence fees. 2. etc.Financial Statements of Banking Companies XI. No. transfers to contingencies and other similar items. Funded Risk Assets Sr. provisions for taxation. Cash.109 XII. II Item of asset or liability Risk Weight % 0 20 20 0 0 i. In case any particular item under this head exceeds one percentage of the total income particulars may be given in the notes. entertainment expenses. Annexure IV The following table shows the weights to be assigned to the value of different assets and offbalance sheet items: Risk Weights for Calculation of Capital charge for Credit Risk I. balances with RBI 2. I Balances 1.

110 Advanced Accounting State Government. However the banks need to assign 100% risk weight only on those State Government guaranteed securities issued by the defaulting entities and not on all the securities issued or guaranteed by that State Government. would amount to a claim on the parent foreign bank and the risk weight of such exposure would depend upon the rating (assigned by the international rating agencies) of the overseas parent of the Indian branch. 0 Investments in other securities where payment of interest and repayment of principal are guaranteed by State Governments.) 4. guaranteed/ counter-guaranteed by overseas Head Offices or the bank's branch in other country. for a period of more than 90 days banks should assign 100% risk weight. (This will include investments in Indira/Kisan Vikas Patra (IVP/KVP) and investments in Bonds and Debentures where payment of interest and principal is guaranteed by Central Govt. 4 and 6 has remained in default. 6. 20 8. 5. 0 20 20 7. Investments in Government guaranteed securities of Government Undertakings which do not form part of the approved market borrowing programme. Note: The exposure of Indian branches of foreign banks. 3. Claims on commercial banks. Investments in other securities where payment of interest and repayment of principal are guaranteed by Central Govt. 9. Investments in bonds issued by other banks Investments in securities which are guaranteed by banks as to 20 20 .6. Note: If the repayment of principal I interest in respect of State Government Guaranteed securities included in item 2. Investments in other approved securities where payment of interest and repayment of principal are not guaranteed by Central/State Govt.

111 payment of interest and repayment of principal. Deposits placed with SIDBI/NABARD in lieu of shortfall in lending to priority sector. Investment in Mortgage Backed Securities (MBS) of residential assets of Housing Finance Companies (HFCs) which are recognised and supervised by National Housing Bank 13 Investment in Mortgage Backed Securities (MBS) which are backed by housing loan qualifying for 50% risk weight.Financial Statements of Banking Companies 6. convertible bonds. debentures and units of equity oriented mutual funds 18 19 20 Investment in Mortgaged Backed Securities and other securitised exposures to Commercial Real Estate Investments in Venture Capital Funds Investments in Securities issued by SPVs (in respect of securitisation of standard assets) underwritten and devolved on originator banks during the stipulated period of three months 21 Investments in Securities issued by SPVs in respect of securitisation of standard asset underwritten and devolved on bank as third party service provider during the stipulated period of three months 22 23 NPA Investment purchased from other banks Investments in instruments issued by NBFC-ND-SI 125 150 150 100 100 100 100 . 10. Note: Equity investments in subsidiaries. 12. Investments in subordinated debt instruments and bonds issued by other banks or Public Financial Institutions for their Tier II capital. 14. intangible assets and losses deducted from Tier I capital should be assigned zero weight 100 100 50 50 50 100 100 17 Direct investment in equity shares. Investment in securitised paper pertaining to an infrastructure facility. All other investments including investments in securities issued by PFls. 11 . 15 Investments in debentures/ bonds/ security receipts/ Pass Through Certificates issued by Securitisation Company / SPVs/ Reconstruction Company and held by banks as investment 16.

Loans guaranteed by Govt. Note: If the loans guaranteed by State Govts. (ii) Bills negotiated under LCs ‘under reserve’. 7. (i) Govt. bills purchased/discounted 5.112 III Advanced Accounting Loans & Advances including bills purchased and discounted and other credit facilities 1. In other words. 2. of India 4.6. the amount outstanding in the accounts covered by the Debt Relief Scheme shall be treated as a claim on the borrowers and risk weighted as per the extant norms. Loans granted to public sector undertakings of Govt. bills purchased/discounted/negotiated without LCs. 8. Accordingly. (i) For the purpose of credit exposure. 0 100 100 20 20 100 100 100 50 . /negotiated under LC (where payment to the beneficiary is not under reserve) is treated as an exposure on the LC issuing bank and assigned risk weight as is normally applicable to inter-bank exposures. Others including PFls Leased Assets Advances covered by DICGC/ECGC Note: The risk weight of 50% should be limited to the amount guaranteed and not the entire outstanding balance in the accounts. the exposure will attract a risk weight appropriate to the borrower. of India Note: 0 The amount outstanding in the account styled as "Amount receivable from Government of India under Agricultural debt Waiver Scheme 2008" shall be treated as a claim on the Government of India and would attract zero risk weight for the purpose of capital adequacy norms. However. will carry 100% risk weight. Loans granted to public sector undertakings of State Govt. have remained in default for a period of more than 90 days a risk weight of 100 percent should be assigned. will be reckoned as exposure on the borrower constituent. the outstandings in excess of the amount guaranteed. (ii) Banks (iii) Others 6. Loans guaranteed by State Govts. 3.

0 The balance outstanding in excess of the guaranteed portion would attract a risk-weight as appropriate to the counter. 13. SSI Advances Guaranteed by Credit Guarantee Fund Trust for Small Industries (CGTSI) up to the guaranteed portion. IVPs and KVPs where adequate margin is available. Note: 50 The risk weight of 50% should be limited to the amount guaranteed and not the entire outstanding balance in the accounts. 12.1 lakh against gold and silver ornaments 18 Takeout Finance (i) Unconditional takeover (in the books of lending institution) 20 .Financial Statements of Banking Companies 6. 11 Advances against term deposits.party. will carry 100% risk weight. Note: Banks may assign zero risk weight for the guaranteed portion. the product of New India Assurance Company Ltd. Loans and Advances granted to staff of banks which are fully covered by superannuation benefits and mortgage of flat/house. Life policies. Insurance cover under Business Credit Shield. NSCs. 10.113 9. Housing loans above `30 lakh sanctioned to individuals against the mortgage of residential housing properties having LTV ratio equal to or less than 75% Note: If restructured 14 Housing loans upto `30 lakhs sanctioned to individuals against the mortgage of residential housing properties having LTV ratio equal to or less than 75%. In other words. the outstandings in excess of the amount guaranteed. Note: If restructured 15 Housing loans of ` 75 lakhs and above sanctioned to individuals ( irrespective of LTV ratio) 16 Consumer credit including personal loans and credit cards 125 100 50 100 0 20 75 50 75 125 16A Educational Loans 17 Loans up to Rs.

furniture and fixtures Income tax deducted at source (net of provision) Advance tax paid (net of provision) Interest due on Government securities Accrued interest on CRR balances and claims on RBI on account of Government transactions (net of claims of Government/RBI on banks on account of such transactions) All other assets # 20 21 22 23 24 125 100 100 100 100 100 25 IV 1. Secured and unsecured advances to stock brokers Fund based exposures commercial real estate* Funded liquidity facility for securitisation of standard asset transactions NPA purchased from other banks Loans & Advances NBFC-NO-SI (other than Asset Finance Companies (AFCs)) & All unrated claims on corporate. Repos) outstanding against them. units of equity oriented mutual funds. will be assigned zero exposure value for counterparty credit risk.g.6. long term as well as short term. CBlOs. regardless of the amount of the claim Other Assets Premises.114 Advanced Accounting (a) (b) Where full credit risk is assumed by the taking over institution Where only partial credit risk is assumed by taking over institution i) ii) the amount to be taken over the amount not to be taken over 20 100 100 125 (ii) Conditional take-over (in the books of lending and Taking over institution) 19 Advances against shares to individuals for investment in equity shares (including IPOs/ESOPs). bonds and debentures. etc. 100 0 0 0 0 100 # i) The exposures to CCPs on account of derivatives trading and securities financing transactions (e. as it is presumed that the CCPs' exposures to their . 2.

Short-term self-liquidating trade-related contingencies (such as documentary credits collateralized by the underlying shipments). & As regards claims on AFCs. Certain transaction-related contingent items (e.g.Financial Statements of Banking Companies 6. ii) The deposits / collaterals kept by banks with the CCPs will attract risk weights appropriate to the nature of the CCP. for all the categories to which the exposure is assigned. S No. This will then have to be again multiplied by the weights attributable to the relevant counter-party as specified above. it will be according to the ratings assigned to these entities as per the New Capital Adequacy Framework. h the credit risk remains with the bank. which shall be reduced to a level of 100 per cent. there is no change in the risk weights. Off-Balance Sheet Items The credit risk exposure attached to off-Balance Sheet items has to be first calculated by multiplying the face value of each of the off-Balance Sheet items by 'credit conversion factor' as indicated in the table below. if any. forward deposits and partly paid shares 50 20 100 100 . For the purpose of capital adequacy.g. performance b bid dbonds. as different classifications are driven by different considerations. Direct credit substitutes e. In the case of CCll. Forward asset purchases. general guarantees of indebtedness (including standby LlCs serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptance). In such cases. which would continue to be governed by the credit rating of the AFC. 2. Instrument credit conversion factor 100 1. 5. 3. the exposure would be reckoned for regulatory / prudential exposure limit. * It is possible for an exposure to get classified simultaneously into more than one category. except the claims that attract a risk weight of 150 per cent under the New Capital Adequacy Framework.115 counterparties are fully coliateralised on a daily basis. Sale and repurchase agreement and asset sales with recourse. fixed by RBI or by the bank itself. the risk weight will be 20 per cent and for other CCPs. warranties and standby LlCs related to particular transactions). thereby providing protection for the CCP's credit risk exposures. the largest of the risk weights applicable among all the categories would be applicable for the exposure. 4.

116 Advanced Accounting 6. 9. Aggregate outstanding foreign exchange contracts of original maturity • less than one year • for each additional year or part thereof Take-out Finance in the books of taking-over institution (i) Unconditional take out finance (ii) Conditional take out finance Note: As the counter-party exposure will determine the risk weight. Bills discounted by banks which have been accepted by another bank will be treated as a funded claim on a bank.6. formal standby facilities and credit lines) with an original maturity of over one year. 7. 8. .g. Note issuance facilities and revolving underwriting facilities.. 50 50 0 2 3 10. Similar commitments with an original maturity upto one year. Rediscounting of documentary bills accepted by banks. the following transactions with non-bank counterparties will be treated as claims on banks and carry a risk-weight of 20% • • Guarantees issued by banks against the counter guarantees of other banks. In all the above cases banks should be fully satisfied that the risk exposure is in fact on the other bank. 100 50 it will be 100 percent in respect of all borrowers or zero percent if covered by Government guarantee. and securities. or which can be unconditionally cancelled at any time. 11 12 13 14 Non-Funded exposures to commercial real estate Guarantees issued on behalf of stock brokers and market makers Commitment to provide liquidity facility for secuitisation of standard asset transactions Second loss credit enhancement for securitisation of standard asset transactions provided by third party 15 Non-funded exposure to NBFC-ND-SI 125 150 125 100 100 NOTE: In regard to off-balance sheet items. which represent commitments with certain drawdown. Other commitments (e.

Item Risk weight (%) 100 Foreign exchange open position. Funded Risk Assets Sr. No.0 per cent 1. 1. Risk weights for Forward Rate Agreement (FRA) / lnterest Rate Swap (IRS) For reckoning the minimum capital ratio. the computation of risk weighted assets on account of FRAs fiRS should be done as per the two steps procedure set out below: Step 1 The notional principal amount of each instrument is to be multiplied by the conversion factor given below: Original Maturity Conversion Factor Less than one year One year and less than two years For each additional year Step 2 0. i) ii) iii) iv) Item of asset or liability 20 percent 0 percent 100 percent II. Overseas operations (applicable only to Indian banks having branches abroad) Risk % 0 0 0 20 Cash Balances with Monetary Authority Investments in Government securities Balances in current account with other banks .D. All others A. 100 I.5 per cent 1. Open position in gold Note: The risk weighted position both in respect of foreign exchange and gold open position limits should be added to the other risk weighted assets for calculation of CRAR 2.Financial Statements of Banking Companies 6.0 per cent The adjusted value thus obtained shall be multiplied by the risk weightage allotted to the relevant counter-party as specified below: Counter party Risk weight Banks Central & State Govt. No.117 Risk weights for Open positions Sr.

d) Claims on public sector undertakings of State Governments e) Others 0 0 100 100 100 100 20 100 viii) All other banking and infrastructural assets B. forward deposits and partly paid shares d securities.g. Similar commitments with an original maturity up to one year.such as documentary credits collateralised by the underlying shipments Sale and repurchase agreement and asset sales with recourse. Etc.g. Non-funded risk assets Sr. the credit risk remains with the bank. performance bonds. investments in CDs/FRNs. b) Claims guaranteed by State Governments c) Claims on public sector undertakings of Government of India. No. which represent commitments with certain draw down Note issuance facilities and revolving underwriting facilities Other commitments (e. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances) Certain transaction-related contingent items (e.6. Investment in non-bank sectors Loans and advances. or which can be unconditionally cancelled at any time.118 Advanced Accounting v) vi) vii) All other claims on banks including but not limited to funds loaned in money markets. e. formal standby facilities and credit lines) with an original maturity of over one year. bid bonds. 50 20 100 100 50 50 0 .g. warranties and standby letters of credit related to particular transactions) Short-term self-liquidating trade related contingencies. bills purchased and discounted and other credit facilities a) Claims guaranteed by Government of India. Forward asset purchases. Instruments Credit Conver Factor 100 i) ii) iii) iv) v) vi) vii) viii) Direct credit substitutes. deposit placements.

75 lakh) Risk-weight (b) and (e) Risk-weight on (d) : ` 10.50 lakh .Zero .(b) : ` 1. whichever is less Realisable value of Security a) Balance outstanding : `1.Linked to the counter party .Financial Statements of Banking Companies 6.00 lakh.(b) d) Guaranteed portion (max.00 lakh : ` 10.75 lakh .50 lakh d) Guaranteed portion (75% of (c) : ` 6.25 lakh .00 lakh : ` 18.50 lakh b) Realisable value of security : ` 10.12 lakh Risk-weight on (b) and (e) Linked to the counter party Risk-weight on (d) Zero Example II CGTSI cover : 75% of the amount outstanding or 75% of the unsecured amount or ` 18.38 lakh e) Uncovered portion (8.6.75 lakh whichever is less Realisable value of Security a) Balance outstanding b) Realisable value of security c) Unsecured amount (a) .00 lakh : ` 30.00 lakh c) Unsecured amount (a) .119 SSI Advances Guaranteed by Credit Guarantee Fund Trust for Small Industries (CGTSI) Risk weights and Provisioning norms Risk-weight Example I CGTSI Cover: 75% of the amount outstanding or 75% of the unsecured amount or `18.) e) Uncovered portion (` 30 lakh-18.75 lakh : ` 11. : ` 40.38 lakh) : ` 2.

provisions laying down relationship between licensee and consumer. 1956. 1939. Further amendment was made in 1991 to open generation to private sector and establishment of . 1910 provided basic framework for electric supply industry in India.especially section 59 was amended to make the earning of a minimum return of 3% on fixed assets a statutory requirement (w. 1948 mandated creation of State Electricity Boards (SEBs) and need for the State to step in (through SEBs) to extend electrification (so far limited to cities) across the country.7 Financial Statements of Electricity Companies Unit –1: Relevant Legal and Administrative Provisions Learning Objectives After studying this unit. the Madras Electricity Duty Rules.1. legal framework for lying down of wires and other works. The Electricity (Supply) Act.4. the W.1 Historical Background of Legislative Initiatives The Indian Electricity Act. 1942 etc. 1948. 1. the UP Electricity Duty Rules. provision for licence for supply of electricity in a specified area.f. It made provisions for growth of the sector through licensees. 1. the Electricity (Supply) Act. 1910. 1939. Understand the composition and purposes of various statutory authorities. the UP Electricity Duty Act.1 Introduction Earlier electricity supply undertakings were governed by the Indian Electricity Act. 1949. Electricity (Emergency Powers) Act. Understand how accounting is done in electricity companies 1. the Madras Electricity Duty Act. Some State Legislations were the Punjab Electricity Act. you will be able to: ♦ ♦ ♦ Know the legal framework applicable for electricity companies. Also there were State legislations relating to electricity supply. The Act covered the provisions for licence by State Government. 1939. the Madras Electricity (Validation of Levy Surcharges) Act. 1942.1985). Later on this Act was amended to enable generation in Central sector and to bring in commercial viability in the functioning of SEBs -.B. 1948 and the Indian Electricity Rules.e.

1910. transmission and distribution have been separately identified. 1998. Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto” The Electricity Act 2003 provides electricity market for private investments for increasing generation capacity and efficient network use in India. the Electricity (Supply) Act. no person shall (a) transmit electricity. It replaced the three existing legislations. 2003 Before enactment of the Electricity Act 2003.2 RLDCs and another amendment in 1998 was made to provide for private sector participation in transmission. As per the Act. trading and use of electricity and generally for taking measures conducive to development of electricity industry.2. unless he is authorised to do so by a license issued under section 14.1 Objectives: The objectives of the Act are "to consolidate the laws relating to generation. constitution of Central Electricity Authority. it emphasized on the constitution of SERC optional for States and distancing of Government from tariff determination.Financial Statements of Electricity Companies 7. the Electricity Regulatory Commissions Act. 1.2 a) Features of the Act The Act de-licenses power generation completely (except for hydro power projects over a certain size). Therefore. rationalization of electricity tariff. was enacted in 1998. As per sec 2(29). distribution and transmission were carried out mainly by the State Electricity Board. Indian Electricity Act. 10% of the power supplied by suppliers and distributors to . or (c) undertake trading in electricity. or is exempt under section 13. and also provision relating to Transmission Utilities. "generate" means to produce electricity from a generating station for the purpose of giving supply to any premises or enabling a supply to be so given. ensuring transparent policies regarding subsidies.2. distribution. generation. activities like generation. Now. It encourages captive generation. namely. promoting competition therein. Further.2 Electricity Act. nondiscriminatory open access to transmission and distribution system and de-licensing generation Under the Electricity Act 2003. 1. The Electricity Regulatory Commission Act. transmission. 1948 and the Electricity Regulatory Commissions Act. The Electricity Act 2003 seeks to create liberal framework of development for the power sector by distancing Government from regulation. To reform the electricity sector further by participation of private sector and to bring in competition the Electricity Act was enacted in 2003. for purpose of distancing state government from tariff determination. 1. 1998 lays down the provision for setting up of Central / State Electricity Regulatory Commission with powers to determine tariffs. or (b) distribute electricity. Due to politico economic situation the cross subsidies had reached an unsustainable level. promotion of efficient and environmentally benign policies. protecting interest of consumers and supply of electricity to all areas.

An appellate tribunal was to be set up to hear appeals. b) Till 2003. (Section 14) Generation being de-licensed and captive generation being freely permitted. (Section 65) Trading. 12) Provision for payment of subsidy through budget. if necessary. SERCs to frame regulations within one year regarding phasing of open access. Hydro projects however. (Section 14) Open access in transmission from the outset. to be a Government company – with responsibility for planned and coordinated development of transmission network. 79 & 86) Provision for reorganisation or continuance of SEBs. (Section 55) c) d) e) f) g) h) i) j) k) l) m) n) o) p) . (Sections 131 & 172) Metering of all electricity supplied made mandatory. (Sections 7. 8 & 9) Transmission Utility at the Central as well as State level. would need clearance from the Central Electricity Authority. The act extends to whole of India except state of Jammu and Kashmir The Central Government to prepare a National Electricity Policy in consultation with State Governments. (Section 42) Distribution licensees would be free to undertake generation and generating companies would be free to take up distribution businesses. (Sections 38 & 39) Provision for private licensees in transmission and entry in distribution through an independent network. (Sections 7. (Section 3) Provision for license free generation and distribution in the rural areas. a distinct activity is being recognised with the safeguard of the Regulatory Commissions being authorised to fix ceilings on trading margins. Setting up state electricity regulatory commission (SERC) made mandatory. to overcome these teething problems that the sector faces. Thus.7. the state government was required to unbundle State Electricity boards. 1948. Most of the SEBs were not even able to earn a minimum Rate of Return (RoR) of 3% on their net fixed assets in servicing after providing for depreciation and interest charges in accordance with Section 59 of the Electricity (Supply) Act. State Electricity Boards (SEBs) were responsible for providing electricity to the people.3 Advanced Accounting the consumers has to be generated using renewable and non-conventional sources of energy. However they may continue with them as distribution licensees and state transmission utilities. (Sections 38-40) Open access in distribution to be introduced in phases with surcharge for current level of cross subsidy to be gradually phased out along with cross subsidies and obligation to supply. (Sections 12.

4 Appellate Tribunal to hear appeals against the decision of the CERC and SERCs. collect and record the data concerning the generation. transmission. .Financial Statements of Electricity Companies q) r) s) t) 7. The CEA is responsible for the technical coordination and supervision of programmes and is also entrusted with a following statutory functions: a. promote measures for advancing the skill of persons engaged in the electricity industry. 166) Ombudsman scheme (Section 42) for consumers’ grievance redressal. promote and assist in the timely completion of schemes and projects for improving and augmenting the electricity system. specify the technical standards for construction of electrical plants. distribution and utilisation of electricity. trading.3 Central Electricity Authority Under Section 3 of the Electricity (Supply) Act. the office of the CEA is an "Attached Office" of the Ministry of Power. trading. advise the Central Government on any matter on which its advice is sought or make recommendation to that Government on any matter if. (Sections 57-59. 1948. the recommendation would help in improving the generation. f. formulate short-term and perspective plans for development of the electricity system and coordinate the activities of the planning agencies for the optimal utilisation of resources to subserve the interests of the national economy and to provide reliable and affordable electricity for all consumers. distribution and utilisation of electricity and carry out studies relating to cost. competitiveness and such like matters. b. h. advise the Central Government on the matters relating to the national electricity policy. specify the Grid Standards for operation and maintenance of transmission lines. where similar provisions exists. efficiency. i. specify the safety requirements for construction. (Section 135-150) Provisions safeguarding consumer interests. electric lines and connectivity to the grid. d. operation and maintenance of electrical plants and electric lines. 1. specify the conditions for installation of meters for transmission and supply of electricity. e. Central Electricity Authority (CEA) is a Statutory Body constituted. c. in the opinion of the Authority. g. (Section 111) Provisions relating to theft of electricity made more stringent. hereinafter replaced by the Electricity Act 2003. the Central Government has the power to constitute a body called Central Electricity Authority generally to exercise such functions and perform such duties under the Act in such a manner as the Central Government may describe or direct. transmission.

by the said name. The Members of the Authority shall be appointed from amongst persons of ability. applied research in the field of electricity. finance. transmission. promote research in matters affecting the generation. commerce. Constitution: The Central Commission shall consist of the following Members namely:a) b) a Chairperson and three other Members. dealing with problems relating to engineering. operation and maintenance of generating stations. licensee or the generating company owning or having the control of another electricity system. distribution and trading of electricity. accounting. n. applied economics. sue or be sued. 1. carry out. and o.7. ex officio. licensees or the generating companies on such matters which shall enable them to operate and maintain the electricity system under their ownership or control in an improved manner and where necessary. economics or industrial matters. b. in co-ordination with any other Government. k.5 j. engineering with specialisation in transmission and supply of electricity. discharge such other functions as may be provided under this Act. The Central Government appoints one of the full time members to be the chairman of the Authority. advise any State Government. advise the Appropriate Government and the Appropriate Commission on all technical matters relating to generation. both movable and immovable. commerce or finance. Advanced Accounting make public from time to time information secured under this Act.4 Central Electricity Regulatory Commission The Central Electricity Regulatory Commission shall be a body corporate. integrity and standing who have knowledge of. namely:a. d. l. and provide for the publication of reports and investigations. the Chairperson of the Authority who shall be the Member. transmission and distribution of electricity. construction. and adequate experience and capacity in. and to contract and shall. or cause to be carried out. The Authority shall consist of not more than fourteen Members (including its Chairperson) of whom not more than eight shall be full-time Members to be appointed by the Central Government. engineering with specialisation in design. any investigation for the purposes of generating or transmitting or distributing electricity. m. . hold and dispose of property. and at least one Member shall be appointed from each of the following categories. c. having perpetual succession and a common seal with power to acquire.

namely (i) formulation of National electricity Policy and tariff policy: (ii) promotion of competition. 1. The Central Commission shall ensure transparency while exercising its powers and discharging its functions. e) f) g) h) i) j) k) l) m) The Central Commission shall advise the Central Government on all or any of the following matters. (iii) promotion of investment in electricity industry. hold and dispose of property. if considered. to specify Grid Code having regard to Grid Standards. sue or be sued. to discharge such other functions as may be assigned under this Act. having perpetual succession and a common seal. efficiency and economy in activities of the electricity industry. both movable and immovable. with power to acquire. necessary. (iv) any other matter referred to the Central Commission by that Government. to adjudicate upon disputes involving generating companies or transmission licensee in regard to matters connected with clauses (a) to (d) above and to refer any dispute for arbitration.6 The Chairperson and Members of the Central Commission shall be appointed by the Central Government on the recommendation of the Selection Committee The Central Commission shall discharge the following functions. to levy fees for the purposes of this Act. if such generating companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one State. to fix the trading margin in the inter-State trading of electricity. to determine tariff for inter-State transmission of electricity. to regulate the tariff of generating companies other than those owned or controlled by the Central Government specified in clause (a). . namely:c) d) to regulate the tariff of generating companies owned or controlled by the Central Government. and to contract and shall.5 State Electricity Commission The State Commission shall also be a body corporate by the name aforesaid. continuity and reliability of service by licensees. to regulate the inter-State transmission of electricity .Financial Statements of Electricity Companies 7. to issue licenses to persons to function as transmission licensee and electricity trader with respect to their inter-State operations. to specify and enforce the standards with respect to quality. by the said name.

regulate the operations of intrastate transmission. SERC’s primary function was to determine bulk and retail tariffs to be charged to customers.6. and electricity traders Promote cogeneration and generation of electricity from renewable sources of energy Adjudicate upon the disputes between the licensees and generation companies and to refer any dispute for arbitration Levy fee for the purposes of this Act Specify State Grid Code Specify or enforce standards with respect to quality. The State Commission shall specify an Electricity Supply Code (sec 50) to provide for recovery of electricity charges. intervals for billing of electricity charges disconnection of supply of electricity for non-payment thereof. bulk or retail.1 Generating Company and requirement for setting up of generating station: As per sec 2(29). electric lines or meter. necessary Discharge such other functions as may be assigned to it under this Act Advise the State Government as mandated under Section 86(2) of the Electricity Act.7. transmission and wheeling of electricity. distribution licensees. supply.7 Advanced Accounting To determine the tariff for generation. entry of distribution licensee or any person acting on his behalf for disconnecting supply and removing the meter. distress or damage to electrical plant. 2003 Thus. entry for replacing. CERC and State Electricity Regulatory Commission (SERC) are the two electricity regulators — one operating at the central level and the other at various state levels. 1. continuity and reliability of service by Licensees Fix the trading margin in the intra-State trading of electricity. wholesale. altering or maintaining electric lines or electrical plant or meter. as the case may be within the State To regulate electricity purchase and procurement process of distribution licensees including the price at which electricity shall be procured from the generating companies or licensees or from other sources through agreements for purchase of power for distribution of supply within the State Facilitate intra-State transmission and wheeling of electricity Issue licences to persons seeking to act as transmission licensees. restoration of supply of electricity. tampering. . if considered.6 Generating Companies 1. "generate" means to produce electricity from a generating station for the purpose of giving supply to any premises or enabling a supply to be so given.

Any generating company may establish. tie-lines. supply electricity to any licensee in accordance with this Act and the rules and regulations made thereunder and may. subject to the regulations made under sub-section (2) of section 42. a person may construct. (a) (b) submit technical details regarding its generating stations to the Appropriate Commission and the Authority. 1. supply electricity to any consumer. maintain or operate a captive generating plant and dedicated transmission lines provided that the supply of electricity from the captive generating plant through the grid shall be regulated in the same manner as the generating station of a generating company. co-ordinate with the Central Transmission Utility or the State Transmission Utility. 1. or is exempt under section 13.Financial Statements of Electricity Companies 7. unless he is authorised to do so by a licence issued under section 14. to establish. or (b) distribute electricity. . Notwithstanding anything contained in this Act. or (c) undertake trading in electricity. sub-stations and dedicated transmission lines connected therewith in accordance with the provisions of this Act or the rules or regulations made thereunder.3 Duties of Generating Companies 1. or artificial juridical person. whether incorporated or not.6.2 Captive Generation: Captive generating plant” means a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such cooperative society or association. 1. shall have the right to open access for the purposes of carrying electricity from his captive generating plant to the destination of his use provided that such open access shall be subject to availability of adequate transmission facility and such availability of transmission facility shall be determined by the Central Transmission Utility or the State Transmission Utility. as the case may be.8 Generating company means any company or body corporate or association or body of individuals.7 Licensee and Bulk Licensee No person shall (a) transmit electricity. who has constructed a captive generating plant and maintains and operates such plant.6. as the case may be provided further that any dispute regarding the availability of transmission facility shall be adjudicated upon by the Appropriate Commission. 2. Every person. 2. for transmission of the electricity generated by it. 1. operate and maintain generating stations. which owns or operates or maintains a generating station. 3. operate and maintain a generating station without obtaining a licence under this Act if it complies with the technical standards relating to connectivity with the grid referred to in clause (b) of section 73.

(2) Every licensee shall.7. before obtaining the approval under subsection (1). wheeling and inter-connection arrangements within its territorial jurisdiction for the transmission and supply of electricity by economical and efficient utilisation of the electricity. and. exchange or otherwise without the prior approval of the Appropriate Commission. the utility of any other licensee. give not less than one month’s notice to every other licensee who transmits or distributes electricity in the area of such licensee who applies for such approval. regional and interregional generation and transmission of electricity. make region-wise demarcation of the country. maintained or controlled by CTU. and in particular to facilitate voluntary interconnections and co-ordination of facilities for the inter-State. without prior approval of the Appropriate Commission. or any part thereof. lease. No licensee shall at any time assign his licence or transfer his utility. 1.8 Transmission of Electricity Inter-State transmission Inter-State Transmission System’-includes: i) ii) iii) any system for conveyance of electricity by means of main transmission line from the territory of one State to another State. make such modifications therein as it may consider necessary for the efficient. (a) (b) undertake any transaction to acquire by purchase or takeover or otherwise. the transmission of electricity within a State on a system built. economical and integrated transmission and supply of electricity. or merge his utility with the utility of any other licensee provided that nothing contained in this sub-section shall apply if the utility of the licensee is situate in a State other than the State in which the utility referred to in clause (a) or clause (b) is situate. the prior approval of the Appropriate Commission. operated.9 Advanced Accounting Licensee not to do certain things. Any agreement relating to any transaction specified in subsection (1) or sub-section (3). unless made with. the conveyance of electricity across the territory of an intervening State as well as conveyance within the State which is incidental to such interstate transmission of electricity. (1) No licensee shall. owned .9 Open Access “open access” means the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer . by sale.” The Central Government may. shall be void. The State Commission shall facilitate and promote transmission. (3) (4) 1. from time to time.

(1) The Appropriate Commission shall determine the tariff for: (a) supply of electricity by a generating company to a distribution licenseeprovided in case of shortage of supply of electricity. for a period not exceeding one year to ensure reasonable prices of electricity. transmission of electricity . the generation.10 Tariff The Appropriate Commission shall specify the terms and conditions for the determination of tariff by the following: (a) (b) (c) (d) (e) (f) (g) (h) (i) the principles and methodologies specified by the Central Commission for determination of the tariff applicable to generating companies and transmission licensees. multi year tariff principles.11 Determination of Tariff Determination of tariff by bidding process As per section 62 of the Act. transmission. the National Electricity Policy and tariff policy: 1. economical use of the resources. it fixes the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement. reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission.Financial Statements of Electricity Companies 7. 1.10 or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission. safeguarding of consumers' interest and at the same time. the factors which would encourage competition. distribution and supply of electricity are conducted on commercial principles. the principles rewarding efficiency in performance. good performance and optimum investments. efficiency. the promotion of co-generation and generation of electricity from renewable sources of energy. that the tariff progressively reflects the cost of supply of electricity and also. wheeling of electricity. recovery of the cost of electricity in a reasonable manner. entered into between a generating company and a licensee or between licensees. (b) (c) .

power factor. total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of any area. voltage. for promoting competition among distribution licensees. the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee. (3) No tariff or part of any tariff may ordinarily be amended more frequently than once in any financial year. Provided that in case of distribution of electricity in the same area by two or more distribution licensees. (4) If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section. it may fix only maximum ceiling of tariff for retail sale of electricity. the nature of supply and the purpose for which the supply is required. (2) The Appropriate Commission shall differentiate according to the consumer's load factor.7.11 (d) Advanced Accounting retail sale of electricity. except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified. .

12 Unit 2 : Accounting Terms Learning Objectives After studying this unit.Transactions and events of an Electricity company are considered for 1. For tariff determination two orders has been issued viz 2004 Regulations and 2009 Regulations. which is different from what is prescribed by the Electricity Act. the Distribution Licensee may require from any person. to deposit sufficient security against the estimated payment which may become due to him - .e. 2. Accelerated Power Development and Reforms Program loan and grant and depreciation. 2003. Security deposit As provided in section 47 of the Act. the optimised depreciated replacement cost [ODRC] method ♦ ♦ ♦ It has been observed that many State Electricity Boards use different accounting techniques. who requires a supply of electricity to his premises in pursuance of section 43 of the Act. Accounting and reporting of financial statements in Annual reports as required by the Companies Act. The conclusion arrived at by the Commission was that the methodology for obtaining the Tariff rate base has to be different and independent. in this unit we have limited our discussion on accounting practices followed by Electricty Companies only. 1956. you will be able to: ♦ Understand relevant transaction of an electricity company such as security deposit.Financial Statements of Electricity Companies 7. Accounting and reporting aspect is discussed in this Unit. 2003. Understand Reporting of financial statements of electricity company as per Revised Schedule VI Differentiate between replacement and extension or improvement of assets in the accounts. Tariff determination on basis of audited balance sheet presented practical difficulties as there was time lag between the availability of audited balance sheet and the commencement of the year. Tariff determination as per Electricity Act.1 Relevant Transaction of Electricity Supply Company 1. whereas the tariff is required to be determined before the commencement of a year. 2. Therefore. capital service line contribution. Learn the technique of recording of the transactions relating to replacement/ extension or improvement of plant and machinery of electricity supply companies Understand method of depreciation for replacement of asset i.

Fuel Price and Power Purchase Adjustment (FPPPA) charges. on the security referred to in sub-section (1) and refund such security on the request of the person who gave such security. Different State Commissions prescribe different security deposit norms as per 47 of the Act. payable annually on the consumer's security deposit . as may be specified by the concerned State Commission. No. Norms of Kerala State are given below for reference. Electricity Duty and any other charges as may be levied from time to time). in respect of the provision of such line or plant or meter. 1 2 3 4 Domestic Commercial LT Industrial HT/EHT Industrial: * • • 5 6 7 8 Single shift industries Double shift industries Continuous industries 50% 75% 100% 50% 40% 75% 50% = Load x Load Factor of the category in which the consumer falls x (Billing cycle + 45 days) x Current tariff Load factor 30% 50% 50% Particulars Agriculture / Water Supply Street lights Signals & blinkers Railway Traction Interest on Security Deposit The Licensee shall pay interest to the consumer at the Reserve Bank of India bank rate prevailing on the Is1 of April for the year. or (2) where any electric line or electric plant or electric meter is to be provided for supplying electricity to such person.13 (i) Advanced Accounting in respect of electricity supplied to such person (including Energy Charges.2 Kerala Electricity Supply Code 2011 Determination of Security Deposit amount for a consumer S. (4) A distribution licensee shall not be entitled to require security in pursuance of clause (a) of sub-section (1) if the person requiring the supply is prepared to take the supply through a pre-payment meter.7. Fixed / Demand Charges. (3) The distribution licensee shall pay interest equivalent to the bank rate or more. section 2.

or in other cases. not repayable within a period of 12 months from the reporting date and hence does not satisfy any of the conditions for classifying a liability as ‘current’ Journal Entry Amount to be debited / credited b) Adjustment of accrued Interest on security deposit in the consumer's bill 3. To Interest Accrued on Security Deposit A/c Note: Balance of Interest Accrued on Security Deposit A/c at the end of the accounting period should be disclosed as Non-current liability in the Balance Sheet since the same is. Actual amount received To Security Deposit A/c Note: Balance of Security Deposit A/c at the end of the accounting period should be disclosed as Non-current liability in the Balance Sheet since the same is. The interest accrued during the year shall be adjusted in the consumer's bill for the first quarter of the ensuing financial year. . from the date of notification of this Code. The interest accrued during the year shall be adjusted in the consumer's bill for the first quarter of the ensuing financial year Interest Accrued on Security Deposit A/c To Sales Turnover Dr.3 Accounting and Reporting of Security Deposit Journal Entry When security deposit is received 1. Interest Expense A/c Dr.Financial Statements of Electricity Companies 7. in substance. as may be specified by the concerned State Commission. in substance. not repayable within a period of 12 months from the reporting date and hence does not satisfy any of the conditions for classifying a liability as ‘current’ Amount to be debited / credited Journal Entry (a) Amount to be debited / credited Interest accrued on security deposit at the end of the accounting period 2.14 with effect from date of such deposit in case of new connections energized after the date of this notification. interest on security deposit at bank rate or more. For amount received Bank A/c Dr. 2.

000 16. shall be leviable. 1 2 3 4 5 6 Sanctioned Load (kW) Upto 5 More than 5 upto 10 More than 10 upto 20 More than 20 upto 50 More than 50 upto 100 More than 100 kW (at 11 kV) Amount (`) 3.7. . 2012 Chapter IV paragraph 30 are given below for reference: Service line cum Development (SLD) Charges: ln case the area/colony is electrified by the Licensee. Amount received from consumer towards capital / service line contributions is accounted as capital reserve as the amount is not refundable and subsequently proportionate amount is transferred to income statement during the expected life of the asset to match against depreciation on total cost of such asset.4 Capital Service Line Contributions Different State Commissions prescribes such Service line cum Development (SLD) Charges norms as per section 47 of the Act.000 11. 3. 2. as given in Table-4. the SLD charges shall be payable by all consumers irrespective of whether it is electrified or un-electrified area. 4.000 31. Norms of DELHI ELECTRICITY SUPPLY CODE REGULATIONS. Amount received from consumer towards capital/service line contributions is accounted as liability and subsequently recognized as income over the life of the asset. Service Line cum Development Charge S. 1. Amount received from consumer towards capital / service line contributions is accounted as reserves as the amount is not refundable and reported under the head reserves and surplus without transferring any proportionate amount to the income statement over the life of asset.000 50% of the cost of HT cables/line/switchgear Accounting for this source of funds of Electricity Company requires special attention as the following different accounting and reporting practices are noticed in published Financial Statements of some companies.No. Amount received from consumer towards capital/service line contributions is accounted as reduction in the cost of non-current asset and depreciation may be provided on such reduced cost.000 7.15 Advanced Accounting 2. SLD charges.

overloaded DT/lines etc. The amount transferred matches proportionately against depreciation charged on total cost of such asset in the Statement of Profit and Loss. 2000.5 Implementation of Accelerated Power Development and Reforms Program (APDRP) Government identified need for electricity distribution reforms in light of existing poor distribution network. For amount received Capital / service line contributions A/c To Profit and Loss A/c Note: Balance of capital / service line contributions A/c at the end of the accounting period should be disclosed as Capital Reserve under “Reserves and Surplus” wherein this transfer is shown as deduction. high LT/HT line ratio. huge transmission and distribution losses due to un-metered supply and theft. .Financial Statements of Electricity Companies Accounting entry for the 3rd option is as follows Journal Entry Amount to be debited / credited 7. Journal Entry Amount to be debited / credited When proportionate amount is transferred to income statement during the expected life of the asset from capital / service line contributions A/c 5.16 When amount received from consumers towards capital / service line contributions 4. on the equity base determined in accordance with regulation 12. 2. Equity Base should not include the amount contributed by the consumers towards such capital investment. Actual amount received To Capital / service line contributions A/c Note: Balance of capital / service line contributions A/c at the end of the accounting period should be disclosed under Capital Reserve under “Reserves and Surplus” as in substance it is not redeemable to consumers. Dr. For this Government introduced Accelerated Power Development Program (APDP) in February. Return on equity shall be computed in rupee terms. For amount received Bank A/c Dr. Consumer contribution for such capital investment is not brought out in the ARR .

Assistance for strengthening and upgradation of subtransmission and distribution system. The year 2000-01 is the base year for the calculation of loss reduction.7. Therefore. SEBs and Utilities have to arrange remaining 50% of the fund from Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) or other financial institutions or from their own resources as counter-part funds. Reducing Aggregate Technical and Commercial (AT&C) losses. in subsequent years. Incentive component: . Two years of working experience of APDP showed that it had several limitations. Increasing revenue collection. .1 Objectives of APDRP:. and Distribution system in the country with the following objectives: i.17 Advanced Accounting The main objective of this program was to initiate a financial turnaround in the performance of the state owned power sector. iv. Sikkim. Incentive component – It is a grant for States/Utilities to encourage them to reduce their cash losses on yearly basis. and Improving consumer satisfaction. In respect of other States (Non-special category) Union Government finance 50% of the project cost and the ratio of grant and loan is 1:1.5. Focus is on high density urban areas to achieve quick result as losses in absolute term are very high in such areas. Investment component – Funds are provided through a combination of grant and loan. Uttaranchal. Himachal Pradesh and Jammu & Kashmir) in the ratio of 90% grant and 10% soft loan is financed. It aims at strengthening and up-gradation of the Sub-Transmission. in the Union Budget 2002-03 APDP was re-christened as Accelerated Power Development and Reforms Program (APDRP) with the stipulation that ‘access of the States to the fund will be on the basis of agreed reform programmes’ the center piece of which would be narrowing and ultimate elimination of the gap between unit cost of supply and revenue realization within a specific time frame. State Governments are incentivised upto 50% of the actual cash loss reduction by SEBs/ Utilities as grant. Union Government provide funds under the programme as additional central assistance over and above the normal Central Plan Allocation to those States who commit to a time bound programme of reforms as elaborated in the Memorandum of Understanding (MoU) and Memorandum of Agreement (MoA). The funds under the programme are provided under two components: i Investment component. For this purpose States have been categorized as Special Category States and NonSpecial Category States. Improving quality of supply of power. ii.APDRP has now been given much wider scope than APDP. 2. The losses are calculated net of ii. iii. 100% of the project cost in special category States (all North Eastern States.This component has been introduced to motivate SEBs/Utilities to reduce their cash losses.

25 percent of the APDRP amount after approval of project b. 50 percent of the APDRP amount is released. On utilization of 75 percent of the project cost. The following table will make the funding modalities more clear: S.Financial Statements of Electricity Companies 7. On utilization of 75 percent of the sanctioned project cost. On utilization of 25 percent of the project cost. is treated as capital receipt and accounted as Capital Reserve and subsequently adjusted as income (by transfer to the Statement of Profit and Loss) in the same proportion as the depreciation written off on the assets acquired out of the grant. balance 25 percent of the APDRP amount is released 2.5. Government of India towards capital expenditure.3 Accounting of Grant received under APDRP: Grant received under the Accelerated Power Development and Reforms Programme (APDRP) of the Ministry of Power. Non-special category States: a.No. 50 percent of the APDRP amount is released c.18 subsidy and receivable. On utilization of the 25 percent of sanctioned project cost. c. The depreciation for the year debited to the statement of Profit and Loss on asset acquired out of grant match against portion of grant transferred from Capital Reserve. The . Funds under incentive components are provided as 100% grant to all the States (special category and non-special category) as Additional Plan Assistance. Special Category States: (namely all North-Eastern States. Himachal Pradesh and Jammu & Kashmir): a. Category of States % of Projects / Scheme Cost from APDRP as Grant 1 2 Special Category States Non-special category States 90 25 Loan 10 25 50 % of Projects Scheme Cost from PFC/REC/ Own/ Other Sources 2. balance 25 percent is released ii. Sikkim.5.2 Funding Pattern: Funds under the Accelerated Power Development Reforms Programme (APDRP) are released to the State Government as below: i. Uttaranchal. 25 percent of the APDRP amount – after approval of project under APDRP and on tie up of counterpart funds from financial institutions and release of matching fund by financial institutions (FIs) b.

35th Annual R