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SLM Bcom Corporate Accounting
SLM Bcom Corporate Accounting
B.COM
BA
( III SEMESTER )
POLIICAL SCIENCE
CORPORATE ACCOUNTING
(CORE COURSE : BC3B04) 329B
2017 ADMISSION
ONWARDS
CORPORATE ACCOUNTING
STUDY MATERIAL
THIRD SEMESTER
For
BCOM
(2017 ADMISSION ONWARDS)
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Calicut University P.O, Malappuram, Kerala, India 673635
329B
School of Distance Education
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
STUDY MATERIAL
THIRD SEMESTER
BCOM
(2017 ADMISSION ONWARDS)
CORE COURSE:
Prepared by:
Sri. Rajan.P
Assistant Professor on Contract
School of Distance Education, University of Calicut
MODULE – I 5 – 37
MODULE – II 38 – 122
MODULE – V
176 – 187
Note : The amount paid to the supplier * 2,25,300 is after deducting trade discount K 12,100
(5% of 2,42,000) and cash discount 4,600 (2% of net purchase price, i.e., Rs 2,29,900) To
arrive at purchase cost, only trade discount is deductible. Cash discount should not be
deducted because it is not allowed on purchase (it is allowed for prompt payment).
b) Cost of conversion: Costs of conversion of inventories include direct costs such as direct
labour, and systematic allocation of production overhead incurred in converting materials into
finished goods. Production overhead consists of fixed production overheads and variable
production overheads.
Fixed production overheads: Fixed production overheads are those indirect costs of
production that remain constant irrespective of the volume of production. Examples are
depreciation and maintenance of factory buildings and equipment, cost of factory
management and administration etc.
Fixed production overheads should be allocated on the basis of normal capacity.
Normal capacity is the production expected to be achieved on average over a number of
periods under normal circumstances. The capacity lost due to plant maintenance should be
taken into account. When production is abnormally high, the fixed production overheads
allocated to each unit will be reduced (to avoid over valuation of inventories).
Variable production overhead: variable production overheads are those indirect cost of
production that vary directly with the volume of production. Examples are indirect material
and indirect labour.
Example
Fantacy toys, manufactures toys. It has incurred the following expenses:
Cost of raw materials 600000
Rebate on purchase 30000
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Wages 110000
Depreciation of machinery 20000
Electricity charges(factory) 16500
Factory supervision charges 10500
Calculate cost of purchase and cost of conversion
solution
cost of raw material 600000
less rebate 30000
cost of purchase 570000
wages 110000
depreciation on machinery 20000
factory electricity charges 16500
factory supervision charges 10500
cost of conversion 157000
c) other cost
Other cost to be included in the cost of inventory are those which are incurred in
bringing the inventories to their present location and condition. These costs include inward
transport and storage prior to completion of production and specific design work required for
a special client.
Example
How will you value the inventory per kg. of finished goods which consisted of :
Material cost :100 per kg
Direct labour cost : 20 per kg
Direct variable production oh : 10 per kg
Fixed production charges for the year on normal capacity of 10000 kgs. Rs. 100000.
At the year end, 2000 kg. of finished goods are in stock.
Solution
The allocation of fixed production overheads is based on the normal capacity of the
production facilities. , thus cost per kg. of finished goods may be calculated as follows:
Material cost 100
Direct labor cost 20
Direct variable production oh 10
Fixed production overhead 10 40
140
Thus, the value of 2000 kgs. Of finished goods stock at the year end will be Rs.
280000(2000x140)
Cost which are excluded
a. Abnormal wastage of material, labor and overhead
b. Storage cost, if they are not necessary prior to a further production process.
c. Administrative overhead
d. Selling cost
e. Interest cost when inventories are purchased on deferred payment basis.
Cost of inventories of a service provider
To the extent that service providers have inventories, they measure them at thecosts of their
production. These costs consist primarily of the labour and other costs of personnel directly
engaged in providing the service, including supervisory personnel, and attributable
Corporate Accounting Page 7
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overheads. Labour and other costs relating to sales and 5 general administrative personnel are
not included but are recognised as expenses in the period in which they are incurred. The cost
of inventories of a service provider does not include profit margins or non-attributable
overheads that are often factored into prices charged by service providers.
Example
Example
Example
Example
Measurement at Recognition
An item of Property, Plant & Equipment that qualifies for recognition as an asset shall
be measured at its cost.
Elements of Cost:
a. Purchase price + (Import duties + Non refundable taxes) - (Trade Discounts +
Rebates)
b. Directly attributable costs.
c. Initial estimate of the cost of dismantling and removing the item and restoring the site
in which it is located.
Costs that are not Costs of Property, Plant & Equipment:
a. Costs of opening new facility;
b. Costs of introducing new product or service;
c. Costs of conducting business in new location or with new class of customer;
d. Administration and other general overhead costs;
e. Costs incurred in using or redeploying an item;
f. Amounts related to certain incidental operations
Costs that are not included in the cost of PPE
a. Cost of opening a new facility
b. New costs of introducing a new product or service
c. Cost of conducting business in a new location or with a new class of customer.
d. Administration and general overhead costs
e. Cost incurred after an asset is ready for use, but has not yet been used or is not yet
operating at full capacity
f. Initial operating losses
g. Relocation or reorganization costs
h. In case of self constructed asset, the cost of any abnormal waste related to materials,
labor or other resources
Example
Example
A factory has a carrying value of rs. 20 million. Two years ago the company reduced
the carrying value from Rs. 22 million. This was taken as an expense in profit or loss. In the
current year the factory is now worth Rs. 23 million. Show the accounting treatment for
revaluation in the current year.
Revaluation decrease
1. If an asset’s carrying amount is decreased as result of revaluation, then the decrease
shall be recognized in statement of profit and loss, unless there is a previous
revaluation increase in respect of the same asset.
Example
A factory has a carrying value of Rs. 20 million. It has been revalued at Rs. 19
million. How will you treat the decrease in value?
Solution
The decrease in value Rs. 1 million should be treated as expense in the statement of
profit and loss.
Profit and loss (expense) 1 million
To accumulated depreciation (to be shown in the balancesheet) 1 million.
2. If there is a previous revaluation increase in respect of the same asset, the decrease in
revaluation shall first be adjusted again the revaluation surplus to the extent of
previous revaluation increase in respect of the same asset. The balance if any, shall be
recognized in the statement of profit and loss. The decrease in revaluation reduces the
amount accumulated in equity under the head revaluation surplus.
Example
A factory has a carrying value of Rs. 22 million. Two years ago, it was revalued
upwards to rs. 23 million. The value has now fallen to Rs. 20 million. How will you
account the revaluation decrease?
Solution
The revaluation decrease is Rs. 3 million. Of this, 1million will be charged against the
previous revaluation surplus and the remaining Rs. 2 million will be charges as expenses
in the statement of profit and loss. The entry is:
Revaluation surplus Dr. 1 million
Profit or loss dr. 2 million
To property, plant and equipment 3 million
Disposal of revalued asset
when a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retain earnings. This means that the transfer to retain earnings should not be
made through the statement of profit and loss.
Corporate Accounting Page 16
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Example
Depreciation
Usually fixed assets are expected to be used for more than one year. Therefore, the
depreciable amount of a fixed asset is allocated over its useful life. The amount allocated
to a particular accounting period is called depreciation. Thus, depreciation is the
systematic allocation of the depreciable amount of an asset over its useful life. The
depreciable amount of an asset is the cost of an asset less its residual value.
Example
The policy of Akash Ltd. Is to keep company vehicles for 5 years. It has just bought
new equipment for Rs. 30000. Today’s market price, less selling cost, of a similar
equipment that is 5 years old is Rs. 9000, which is a reasonable estimate of the residual
value of the new equipment. Calculate
a. Depreciable amount
b. Annual depreciation charge
Solution
a. Depreciable amount 30000 minus 9000 = 21000
b. Annual depreciation 21000/5 years = 4200
Depreciation of revalued asset
In case of revaluation, the depreciation is calculated on the total revalued amount over a
period of balance useful lives assessed on the date of revaluation. New cost for the purpose of
depreciation will be gross cost less accumulated depreciation on the date of revaluation.
Along with this, the revaluation reserve is amortised to the income statement based on the
useful life of the asset to which it relates. This is done to ensure that depreciation on the
revalued amounts shouldn’t inflate/ deflate the income statement.
Example
Corporate Accounting Page 17
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Shine ltd purchased an asset for Rs. 60000 at the beginning of 2014. It had a useful life of 5
years. On Ist January 2016, the asset was revalued to Rs 75000. The expected useful life has
remained unchanged. Show how revaluation is accounted. Also state the treatment for
depreciation from 2016 onwards.
example
Accounting treatment
c) Training costs
d) Relocating or reorganizing costs.
Initial measurement
After intangible assets have been first recognized. They are to be measured. They
should be initially measured at cost. But Subsequently, they can be carried at cost or at a
revalued amount.
Measurement of intangible assets acquired as a part of business, combinations
In this case the intangible asset is measured at fair value at the date of acquisition.
Measurement of internal project
In case of internal project, expenditure of creating an intangible asset is treated
differently. The research phase and development phase should be distinguished from one
another. Research expenditure are treated as an expense. Development expenditure qualifying
for recognition measured at cost and is capitalized.
Measurement of intangible assets acquired in exchange for equity instruments
If an intangible asset is acquired in exchange for equity instrument, the cost of the
asset is the fair value of those equity instruments.
Measurement in case of exchange of assets
An intangible asset may be acquired in exchange for a similar asset with a similar fair
value. No gain or loss is recorded on the transaction. Instead, the cost of the new asset is the
carrying amount of the asset given up.
Example
X ltd has a franchise, which ahs carrying value of rs. 10 million. It exchanges it for a
similar franchise with a market value of Rs. 11 million. State whether there is surplus or gain.
Solution
Rs. 1 million may be treated as revaluation surplus, rather than a gain in the income
statement. The journal entry is :
Intangible asset (new) dr 11 million
Revaluation surplus 1 million
Tangible asset (old) 10 milliion
Revaluation model
Under the revaluation method, an intangible asset is carried at a revalued amount.
This is the fair value of the intangible asset at the date of revaluation, less subsequent
accumulated amortization and accumulated impairment.
Revaluation increase (upward revaluation)
When an intangible asset is revalued =upwards to a fair value, the revaluation increase
is credited directly to equity under the head revaluation surplus, unless the asset was
previously revalued downwards. If the asset was previously revalued downwards, the
revaluation increase should be first used to set off the previous revaluation decrease.
Revaluation decrease
When the carrying amount of an intangible asset is revalued downwards, the amount
of the downward revaluation should be charged as an expense in the income statement, unless
the asset was previously revalued upwards. If the asset was previously revalued upwards the
revaluation surplus in respect of that asset.
Example
Amortization
An intangible asset with a finite useful life should be amortised over its expected
useful life. Amortization is a systematic allocation of the cost or realued amount less any
residual value, over the asset’s useful life.
Example
factors that affect the fair value of the entity. However, such differences do not represent the
cost of intangible assets controlled by the entity.
Internally generated intangible asset: it may be difficult to know whether an internally
generated asset qualifies for recognition. This is because of it is often difficult to:
a. Identify whether, and when, there is identifiable asset that will generate future
benefits and
b. Determine the cost of the asset.
To assess whether an internally generated assets meet the criteria for recognition, an
enterprise splits the generation of assets into
Example
Example
Example
83000
Less closing interest 12000
======
71000
Example
agricultural activity (Ind AS-41) or, mineral rights and mineral reserves such as oil, natural
gas and similar non-regenerative resources.
Investment property:
It is a land and/or building, or part of a building, or both, held by the owner or the
lessee under a finance lease to earn rentals and/or for capital appreciation, rather than for: use
in production or supply of goods and services or use in administrative purposes or sale in the
ordinary course of business.
Owner-occupied property:
It is a property held (by the owner or by the lessee under finance lease) for use in the
production or supply of goods or services or for administrative purposes. One of the
distinguishing characteristics of investment property (compared to owner-occupied property)
is that it generates cash flows that are largely independent from other assets held by an entity.
Owner-occupied property is accounted for under Ind AS-16, Property, Plant and Equipment.
Examples of Investment Property:
Land held for long-term capital appreciation rather than for short-term sale;
A building owned by the entity and leased out under one or more operating leases;
A building that is vacant but is held to be leased out under one or more operating
leases;
Property that is being constructed or developed for future use as investment property
Partial own use.
If the owner uses part of the property for its own use, and part to earn rentals or for
capital appreciation, and the portions can be sold or leased out separately, they are accounted
for separately. Therefore the part that is rented out is investment property. If the portions
cannot be sold or leased out separately, the property is investment property only if the owner-
occupied portion is insignificant. [IAS 40.10]
Ancillary services.
If the entity provides ancillary services to the occupants of a property held by the
entity, the appropriateness of classification as investment property is determined by the
significance of the services provided. If those services are a relatively insignificant
component of the arrangement as a whole (for instance, the building owner supplies security
and maintenance services to the lessees), then the entity may treat the property as investment
property. Where the services provided are more significant (such as in the case of an owner-
managed hotel), the property should be classified as owner-occupied. [IAS 40.13]
Recognition
Investment property should be recognised as an asset when it is probable that the
future economic benefits that are associated with the property will flow to the entity, and the
cost of the property can be reliably measured. [IAS 40.16]
Initial measurement
Investment property is initially measured at cost, including transaction costs. Such cost
should not include start-up costs, abnormal waste, or initial operating losses incurred before
the investment property achieves the planned level of occupancy. [IAS 40.20 and 40.23]
Measurement subsequent to initial recognition
IAS 40 permits entities to choose between: [IAS 40.30]
a fair value model, and
a cost model.
One method must be adopted for all of an entity's investment property. Change is permitted
only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely
for a change from a fair value model to a cost model.
Disposals
An investment property is eliminated from the balance sheet on disposal, and when no
future economic benefits are expected from it. The investment property may be disposed off
by sale or by entering into a finance lease. The difference between the net sale proceeds and
the carrying amount of the property represents the gain or loss on disposals.
Example
Scope
An entity shall apply this Standard to all contracts with customers, except the
following:
(a) lease contracts within the scope of Ind AS 17, Leases;
(b) insurance contracts within the scope of Ind AS 104, Insurance Contracts; 591
(c) financial instruments and other contractual rights or obligations within the scope of
Ind AS109, Financial Instruments, Ind AS110, Consolidated Financial Statements,
Ind AS111, Joint Arrangements, Ind AS 27,Separate Financial Statements and Ind AS
28, Investments in Associates and Joint Ventures; and
(d) non-monetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers. For example, this
Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfill demand from their customers in different specified locations
on a timely basis
Definitions
1. contract: a contract is an agreement between two or more parties that creates
enforeale rights and obligations.
2. Revenue; revenue is the income arising in the ordinary course of an entities activities.
3. Income: income is the increase in economic benefits in the form of inflows or
enhancements of assets or decrease of liabilities that result in an increase in equity.
4. Stand along selling price: stand alone selling price is the price at which an entity
would sell a promised good or service separately to a customer.
Revenue recognition and measurement
Under Ind AS 115 (IFRS 15), revenue is recognized and measured using a five step
model.
Step 1: Identify the contract with the customer
The new standard defines a ‘contract’ as an agreement between two or more parties
that creates enforceable rights and obligations and specifies that enforceability is a matter of
law. Contracts can be written, oral or implied by an entity’s customary business practices.
Step 2: Identify the performance obligation
The new standard requires an entity to identify the performance obligations, i.e. the
unit of account for revenue recognition. A promise to deliver a good or provide a service in a
contract with a customer constitutes a performance obligation if the promised good or service
is distinct.
Step 3: Determine the transaction price
Ind AS 115 requires an entity to consider the terms of the contract and its customary
business practices to determine the transaction price. The transaction price is the amount of
consideration to which an entity expects to be entitled in exchange for transferring goods or
services to a customer.
The entity should consider the following when determining transaction price:
Variable consideration and the constraint: If the consideration includes a variable
amount, an entity should estimate the amount of consideration to which it will be
entitled in exchange for transferring the promised goods or services to a customer.
Items such as discounts, credits, price concessions, returns and performance bonuses
may result in variable consideration.
The existence of a significant financing component in the contract: In determining the
transaction price, an entity should adjust the promised amount of consideration for the
time value of money if significant financing components exist.
Non-cash consideration: Non-cash consideration is measured at fair value, if that can
be reasonably estimated. If not, an entity uses the stand-alone selling price of the good
or service that was promised in exchange for non-cash consideration.
Consideration payable to a customer: Entities need to determine whether
consideration payable to a customer represents a reduction of the transaction price, a
payment for a distinct good or service, or a combination of the two.
Corporate Accounting Page 39
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If any entity does not satisfy its performance obligation over time, it satisfies it at a
point in time. this will be the point in time at which the customer obtains control of the
promised asset and the entity satisfies a performance obligation. Revenue will, therefore, be
recognized when control is passed at a certain point in time. for this purpose, an entity has to
consider the following indicators of transfer of control:
Contract costs: Costs that would have been incurred regardless of whether the contract was
obtained are recognized as an expense as incurred. Costs incurred in fulfilling a contract,
unless within the scope of another standard are recognized as an asset if they meet all the
following criteria.
Example
Example
Objectives
•Calculate taxes under Ind AS 12.
•Describe the recognition criteria for deferred tax liabilities and assets.
•Explain the deferred tax effects on business combinations.
•Detail the recognition of deferred tax assets arising from unused tax
•Detail the recognition of deferred tax assets arising from unused tax losses or credits.
•Detail presentation and disclosure requirements of income taxes
Some Definitions
1. Accounting Profit– Profit or loss for a period per the books of account.
2. Taxable Profit– The profit (loss) for a period, determined in accordance with the
rules established by the taxation authorities, upon which income taxes are payable
(recoverable)
3. Tax expense–The aggregate amount included in the determination of profit or loss for
the period in respect of current tax and deferred tax
4. Current tax–The amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period
Recognition of current tax liabilities and Assets
Current tax for current and prior periods shall, to the extent unpaid, be recognised as a
liability. If the amount already paid in respect of current and prior periods exceeds the
amount due for those periods, the excess shall be recognised as an asset. The benefit relating
to a tax loss that can be carried back to recover current tax of a previous period shall be
recognised as an asset. When a tax loss is used to recover current tax of a previous period, an
entity recognises the benefit as an asset in the period in which the tax loss occurs because it is
probable that the benefit will flow to the entity and the benefit can be reliably measured.
a. Taxable temporary differences : these are temporary differences that will result in
taxable amounts in determining taxable profit of future periods when the carrying
Deferred tax
Deferred tax is difference in tax liability calculated for temporary difference between
the taxable profit and accounting profit.
Deferred tax liabilities
Deferred tax liabilities generally arise where tax relief is provided in advance of an
accounting expense/unpaid liabilities, or income is accrued but not taxed until received
Recognition of deferred tax liabilities
The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable
temporary differences. There are three exceptions to the requirement to recognise a deferred
tax liability, as follows:
liabilities arising from initial recognition of goodwill [IAS 12.15(a)]
example
Example
Example
The accounting treatment for a post-employment benefit plan depends on the economic
substance of the plan and results in the plan being classified as either a defined contribution
plan or a defined benefit plan:
Defined contribution plans. Under a defined contribution plan, the entity pays
fixed contributions into a fund but has no legal or constructive obligation to make
further payments if the fund does not have sufficient assets to pay all of the
employees' entitlements to post-employment benefits. The entity's obligation is
therefore effectively limited to the amount it agrees to contribute to the fund and
effectively place actuarial and investment risk on the employee
Defined benefit plans These are post-employment benefit plans other than a
defined contribution plans. These plans create an obligation on the entity to provide
agreed benefits to current and past employees and effectively places actuarial and
investment risk on the entity.
Recognition and measurement of post employment benefits
Defined contribution plans
Rules for recognition measurement of defined contribution plans are given below
a. Contributions to defined contribution plan should be recognized as an expense in the
period they are payable.
b. Any liability or unpaid contribution that are due as at the end of the period should be
recognized as a liability
c. Any excess contribution paid should be recognized as an asset, but only to the extent
that prepayment will lead to a reduction in future payments or cash refund.
Other long-term benefits
the recognition and measurement of a surplus or deficit in an other long-term
employee benefit plan is consistent with the requirements outlined above
service cost, net interest and remeasurements are all recognised in profit or loss
(unless recognised in the cost of an asset under another IFRS), i.e. when compared
to accounting for defined benefit plans, the effects of remeasurements are not
recognised in other comprehensive income.
Recognition and measurement of other long term benefits
Unlike post employee benefits, there is only less uncertainty relating to the
recognition and measurement of other long term benefits.
The net total of the following amounts should be recognized in the statement of profit
and loss:
a. service cost
b. net interest on the net defined benefit liability (or asset)
c. remeasurements of the net defined benefit liability
d. actuarial gains and losses(should be recognized immediately)
e. past service cost.
Termination benefits
when the entity can no longer withdraw the offer of those benefits - additional
guidance is provided on when this date occurs in relation to an employee's decision to
accept an offer of benefits on termination, and as a result of an entity's decision to
terminate an employee's employment
when the entity recognises costs for a restructuring under IAS 37 Provisions,
Contingent Liabilities and Contingent Assets which involves the payment of
termination benefits.
Example
Where time value of money is important, the provision should be discounted. In other words,
the amount of provision should be the present value of the expenditures expected to be
required to settle the obligation. The discount rate should be the pre tax rate that reflects
current market assessment.
2. Reimbursement
Some or all of the expenditure required to settle an obligation is expected to be reimbursed
from a third party. If so, the reimbursement should be recognized only when it is virtually
certain that the reimbursement will be received if the entity settles the obligation.
3. Changes in provisions
Provisions should be reviewed at the end of the reporting period and adjusted to reflect the
current best estimate. If it no longer probable that an outflow of resources will e required to
settle the obligation, the provision shall be reversed.
4. Use of provisions
A provision should be used only for expenditure for which the provision was originally
recognized and not for another purpose.
5. Future operating losses
Provisions should not be recognized for future operating losses. This is because they do not
meet the definition of a liability and the general recognition criteria.
6. Onerous contact
Onerous contract is a contract in which the unavoidable costs of fulfilling the obligations
under the contract exceed the economic benefits from it.
7. Restructuring (provision for restructuring)
Restructuring is defined as a programme that is planned and controlled by management that
materially changes either the scope of business or the manner in which that business is
conducted.
Recognition of restructuring cost
A provision for restructuring costs is recognized only the general recognition criteria
for recognizing a provision are met. Besides, the following criteria should also be met:
a. An entity must have a detailed formal plan for the restructuring
b. It must have raised a valid expectation that it will carry out the restructuring, by
starting to implement that plan or announcing its main features.
A restructuring provision should include only the direct expenditures arising from the
restructuring that are both:
a. Necessitated by the restructuring, and
b. Not associated with the ongoing activities of the enterprise
A government grant is recognised only when there is reasonable assurance that (a) the
entity will comply with any conditions attached to the grant and (b) the grant will be
received. [IAS 20.7]
The grant is recognised as income over the period necessary to match them with the
related costs, for which they are intended to compensate, on a systematic basis. [IAS 20.12]
Non-monetary grants, such as land or other resources, are usually accounted for at fair
value, although recording both the asset and the grant at a nominal amount is also permitted.
[IAS 20.23]
Even if there are no conditions attached to the assistance specifically relating to the
operating activities of the entity (other than the requirement to operate in certain regions or
industry sectors), such grants should not be credited to equity. [SIC-10]
Objective of IAS 20
The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government
grants and other forms of government assistance.
Scope
IAS 20 applies to all government grants and other forms of government assistance.
However, it does not cover government assistance that is provided in the form of benefits in
determining taxable income. It does not cover government grants covered by IAS 41
Agriculture, either The benefit of a government loan at a below-market rate of interest is
treated as a government grant.
Definitions
1. Grants related to assets: these grants are given when tan entity purchases or constructs
long term assets. For example, govt may offer 25% grant for purchase of machinery
with a view to encourage investment in industrial machinery. Grants related to assets
are also called capital gain.
2. Grants related to income: grants related to income are government grantws other than
those related to assets. These are grants that boost income, or reduce costs, these are
also called revenue grants
Government grants (including non monetary grants) should be recognized only when
there is reasonable assurance that:
a. The firm will comply with the condition attached to the grant, and
b. The grant will be received
under a general heading such as ‘Other income’; alternatively, they are deducted in reporting
the related expense.
Repayment of government grants
A government grant that becomes repayable shall be accounted for as a change in accounting
estimate (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).
Repayment of a grant related:
(a) to income shall be applied first against any unamortised deferred credit recognised in
respect of the grant. To the extent that the repayment exceeds any such deferred
However, IAS 17 does not apply as the basis of measurement for the following leased assets:
property held by lessees that is accounted for as investment property for which the
lessee uses the fair value model set out in IAS 40
investment property provided by lessors under operating leases
biological assets held by lessees under finance leases
biological assets provided by lessors under operating leases
Definitions
Lease : a lease is an agreement whereby the lessor conveys to the lessee in return for
rent the right to use an asset for an agreed period of time.
.
Accounting treatment of finance lease in the books of lessee: At commencement date,
lessee should record financial lease as asset and liability in its balance sheet at fair value of
the leased property or the present value of the minimum lease payments at that date,
whichever is less. Lessor and lessee should account for the transaction just like a credit sale.
In the lessee’s books, therefore, the leased asset is capitalized. The journal entry is
Asset a/c dr
To lessor (liability) a/c
The proportion of interest payable (expense) is debited in the statement of profit or loss of the
lessee. The journal entry is
Interest a/c dr
To cash
The proportion of capital cost should be debited to the lessor’s account. This reduces the
outstanding liability. The journal entry is .
Lessor’s a/c
To cash
Example
Depreciation policy
The depreciation policy for assets held under finance lease should be consistent with
that for owned assets. The depreciation recognized shall be calculated in accordance with Ind
AS (IAS) 16 property, plant and equipment and Ind AS (IAS) 38 Intangible assets.
1. the net carrying amount at the reporting date for each class of asset.
2. A reconciliation between the total minimum lease payments at the reporting date, and
Accounting treatment of finance lease in the books of Lessor: If a lessor leases out an
asset under finance lease, the asset cannot be seen in his premises. In other words, the asset
cannot be used in his business again. Hence, the lessor cannot record such an asset as a non
current asset. Interest receivable (portion of lease rental) should be credited in the statement
Cash a/c dr
To interest
The capital cost of lease rental should be credited in the lessee’s account. This reduces the
Cash a/c dr
To lessee’s a/c
Example
Cash a/c dr
To lease
(rental received from lessee)
Lease rental dr
To profit and loss
(income credited to statement of profit or loss)
Disclosure requirements by lessor for operating lease
Lessor should disclose the following for operating leases.
a. The furniture minimum lease payments under non cancellable operating leases in the
aggregate and for each of the following period.
Not later than one year
Later than one year and not later than five years,
Later than five years
b. Total contingent rents recognized as income in the period.
c. A general description of the lessor’s leasing arrangements
Sale and leaseback transactions
In a sale and lease back transactions, an asset is sold by a vendor and then the same
asset is leased back to the same vendor.
The accounting treatment of a sale and leaseback transaction depends upon the type of
lease involved.
SHARE BASED PAYMENT
When a firm purchases goods or services from other parties it usually makes
payments in cash or through bank. Nowadays companies make payments by issuing their
shares.
Objectives
the objective of Ind AS 102 is to specify the financial reporting by an entity when it
undertake a share based payment transaction.
Scope
The concept of share-based payments is broader than employee share options. IFRS 2
encompasses the issuance of shares, or rights to shares, in return for services and goods.
Examples of items included in the scope of IFRS 2 are share appreciation rights, employee
share purchase plans, employee share ownership plans, share option plans and plans where
the issuance of shares (or rights to shares) may depend on market or non-market related
conditions.
IFRS 2 applies to all entities. There is no exemption for private or smaller entities.
Furthermore, subsidiaries using their parent's or fellow subsidiary's equity as consideration
for goods or services are within the scope of the Standard
Definition of share-based payment
A share-based payment is a transaction in which the entity receives goods or services
either as consideration for its equity instruments or by incurring liabilities for amounts based
on the price of the entity's shares or other equity instruments of the entity. The accounting
requirements for the share-based payment depend on how the transaction will be settled, that
is, by the issuance of (a) equity, (b) cash, or (c) equity or cash.
Recognition and measurement
The issuance of shares or rights to shares requires an increase in a component of equity. IFRS
2 requires the offsetting debit entry to be expensed when the payment for goods or services
does not represent an asset. The expense should be recognised as the goods or services are
consumed. For example, the issuance of shares or rights to shares to purchase inventory
would be presented as an increase in inventory and would be expensed only once the
inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is presumed to relate to past service,
requiring the full amount of the grant-date fair value to be expensed immediately. The
issuance of shares to employees with, say, a three-year vesting period is considered to relate
to services over the vesting period. Therefore, the fair value of the share-based payment,
determined at the grant date, should be expensed over the vesting period.
As a general principle, the total expense related to equity-settled share-based payments will
equal the multiple of the total instruments that vest and the grant-date fair value of those
instruments. In short, there is truing up to reflect what happens during the vesting period.
However, if the equity-settled share-based payment has a market related performance
condition, the expense would still be recognised if all other vesting conditions are met.
The various types of transactions may be discussed as follows
1. Equity settled share based payment transactions
For equity-settled share-based payment transactions, the entity shall measure the goods or
services received, and the corresponding increase in equity, directly, at the fair value of the
goods or services received, unless that fair value cannot be estimated reliably. If the entity
cannot estimate reliably the fair value of the goods or services received, the entity shall
measure their value, and the corresponding increase in equity, indirectly, by reference to
the fair value of the equity instruments granted.
2. Transactions in which services are received
If the equity instruments granted vest immediately, the counterparty is not required to
complete a specified period of service before becoming unconditionally entitled to those
equity instruments. In the absence of evidence to the contrary, the entity shall presume that
services rendered by the counterparty as consideration for the equity instruments have been
received. In this case, on grant date the entity shall recognise the services received in full,
with a corresponding increase in equity.
3. Cash settled share based payment transactions
For cash - settled share- based payment transactions, the entity shall measure the goods or
services acquired and the liability incurred at the fair value of the liability. Until the liability
is settled, the entity shall remeasure the fair value of the liability at the end of each reporting
period and at the date of settlement, with any changes in fair value recognised in profit or loss
for the period.
2. If the rate of dividend cannot be maintained, the market value of shares will fall
B. To the company_
1. Market value of shares may fall if the rate of dividend is not maintained. As a result, the
company's reputation may suffer.
2. It encourages undesirable speculation.
Conditions for Issue of Bonus Shares
According to Companies Act, a company can issue bonus shares only if the
following conditions are fulfilled:
1. Issue of bonus shares should be authorized by the Articles.
2. The proposal of the Board of Directors regarding issue of bonus shares should be approved by
the members in the general meeting.
3. The company should have sufficient profits and reserves to permit the issue of bonus shares.
4. The bonus issue should satisfy the guidelines issued by SEBI.
Funds or Sources for Bonus Issue
As per Section 63 (1) of the Companies Act 2013, a company may issue fully paid up bonus
shares to its members, in any manner whatsoever, out of the following reserves:
A. Revenue Reserves/ Profits _____
1. Credit. balance in the profit and loss account.
2. General reserves.
3. Credit balance in the sinking fund account for the redemption of a liability (e.g. debentures)
after the redemption of the liability.
4. Dividend equalisation reserve.
B. Capital Reserves / Profits
1. Profit prior to incorporation.
2. Profit on sale of fixed assets or business.
3. Capital Redemption Reserve A/c created for redemption of preference share.
4. Security premium collected in cash only.
Types of Bonus Issue
1. Fully paid bonus shares : When bonus shares are distributed free of cost in proportion of holding,
it is called fully paid bonus shares.
2. Partly paid bonus shares : When bonus is applied for converting partly paid. The following are
the journal entries in respect of issue of bonus shares. A. When fully paid bonus shares are
issued. 1. When issued at par
Capital Reserve A/c Dr.
Security Premium A/c Dr.
Capital Redemption Reserve A/c Dr.
Debenture redemption reserve A/c Dr.
General Reserve A/c Dr.
' Profit and Loss Dr.
To Bonus to Shareholders A/c (On the declaration of bonus out of reserve and /or profit)
Security Premium A/c and Capital Redemption Reserve Account cannot be utilised to convert .the
partly paid shareg. into fully paid shares. When partly paid shareware converted into fully paid ones
by applying bonus, the shareholders get converted their partly paid shares into fully paid without
paying the final call money Similarly when fully paid bonus they get without aying cash. The impact
of issue of fully paid bonus shares or conversion of partly paid shares into fully paid shares on the
Balance Sheet is that the reserves and profit which are utilised for giving_ bonus, are reduced and the
share capital (and sometimes security premium also) is increased. Thus, reserves are capitalised.
Journal Entry for Cash Bonus
In case of cash bonus the required journal entries are :
1) Profit & Loss . Dr.
To Bonus Payable A/c
2) Bonus Payable A/c Dr.
To Bank A/c
Example -1 (Bonus Shares at Par)
X Ltd. with a paid up capital of ? 5,00,000 divided into shares of f 10 each fully paid had resolved
to capitalise ? 80,000 of the accumulated reserves of f 1,25,000 by issuing bonus shares of f 10 each
fully paid. Pass necessary journal entries.
Solution:
Journal
2. Price quoted in the market is not considered while writing the entries because the company
has issued the shares at face value plus premium.
Example- 3 (Conversion of Partly paid Shares)
XY Ltd. has a fully paid equity capital of ? 5,00,000 divided into shares of ? 10 each and
1,00,000 partly paid shares of ? 10 each, ? 7 paid up. It has an accumulated profit to the credit of its
profit and loss account of ? 2,00,000, free reserve of ? 1,50,000 and security premium of ? 50,000.
It has decided to convert the partly paid equity shares into fully paid by applying bonus out of
accumulated profit and free reserves. The bonus was declared at? 6 per share on the fully paid up
capital. Pass necessary journal entries.
Solution
Journal
Profit and Loss Dr. 2,00,000
Reserve A/c Dr. 1,00,000
To Bonus to Shareholders A/c 3,00,000
(Declaration of bonus out of P&L and free reserves)
Share Final Call A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(Final call made on 1,00,000 shares @?3 per share)
Bonus to Shareholders A/c Dr. 3,00,000
To Share Final Call A/c 3,00,000
(Utilisation of bonus)
Working Note:
1. Amount of bonus = 50,000 fully paid shares x 6 per share = Rs. 3,00,000
2. Amount required to convert 1,00,000 partly paid shares, ? 7 paid up shares = 1,00,000 x 3 =
Rs. 3,00,000
3. The required amount is utilised out of accumulated profit of Rs. 2,00,000 and Rs. 1,00,000
out of free reserves. Security premium cannot be utilised for the purpose.
Example- 4 (Balance Sheet before Bonus Issue)
Following is the B/S of A Ltd as on 31. 3.18:
Liabilities Assets
Share Capital Sundry Assets 10,00,000
5,000 shares of Rs.100
each, Rs. 60 paid 3,00,000
Security Premium 40,000
Reserve 2,70,000
Profit and Loss 1,25,000
Sundry Creditors 2,65,000
-------------- -------------
10,00,000 10,00,000
======= =======
1. A right issue is made to existing share 1. A public Issue is made to the public at
holders large.
3. The price is much less than the 3. The price is generally lower than the
existing market price. expected market price.
PRACTICAL PROBLEMS
Illustration 1
Following are the extracts from the draft B/S of Ram Ltd. as on 31-3-2018: Authorised capital:
Rs.
2,00,000 Equity shares of Rs. 10 each 20,00,000
Issued and subscribed capital:
50,000 Equity shares of Rs. 10 each ' 5,00,000
Reserve fund 1,00,000
P/L Account 80,000
A resolution was passed declaring the issue of bonus shares of 20% on equity shares, to be
provided as to f 60,000 out of P/L Account and 40,000 out of Reserve Fund. The bonus
shares were to be satisfied by issuing fully paid equity shares. Write the journal entries and
show how they would affect the Balance Sheet.
Solution
Journal
2018 Reserve Fund A/c Dr. Rs. Rs.
March Profit or Loss Dr. 40,000 1,00,000
31 To Bonus to Shareholders A/c (Declaration of bonus @ 60,000
20% on equity shares)
Bonus to Shareholders A/c Dr. 1,00,000 1,00,000
To Equity Share Capital A/c (Issue of 1,000 bonus shares)
Balance Sheet (extracts)
Particulars Note No. Rs.
Equity & Liabilities Equity
Share Capital:
60,000 shares of ? 10 each fully paid
Reserve fund (1,00,000 - 40,000) 1 6,00,000
Profit and Loss A/c (80,000 - 60,000) 60,000
20,000
Notes to Accounts
Note No. Particulars Amount Rs.
1 Share Capital
Authorised Capital 20,00,000
2.00,000 Equity shares of Rs.10 each
Issued and Subscribed capital
60,000 Equity Shares of Rs.10 each fully paid 6,00,000
(Of the above shares, 10,000 shares are allotted as
fully paid up by way of bonus shares out of Reserve
Fund and P/L a/c)
Solution
Value of Right is calculated as below:
No. of New or Right Shares x (Market price - Issue price)
Total No. of all Shares (i.e., Fresh + Existing Shares)
Value of right = 3 x (200 - 150) = Rs. 21.43
4+3
or
Value of right = Market Price - Average Price
Market price of existing shares + Issue price of
proportionate right issue
Average price of share =
Total No. of Shares
4 x 200 + 3 x 150 800 + 450 1250 = f 178.57
4+3 7 7
llustration 6
A Ltd. has offered right issue to its existing shareholders. The existing share capital of the
company is Rs. 25,00,000. The market price of its share is Rs. 21. The company offers to its
shareholders the right to buy 2 shares at Rs.5.50 each for every 5 shares held. You are required to
calculate:
i) Theoretical market price after rights issue
ii) The value of right
iii) Percentage increase in share capital
Solution
Average price or theoretical market price after right issue is calculated as below:
2. Define bonus shares. Distinguish between bonus shares and right shares.
Solution
Working Note:
Face value of share to be redeemed (10,000 x 100) = 10,00,000 Proceeds
per new share = Rs. 10
No.of shares to be issued = 10,00,000 = 1,00,000 shares
10
Example -2 (Fresh Issue of Shares at Premium and Redemption at Par)
B Ltd had 3,000, 9% preference shares of f 200 each fully paid up. The company
decided to redeem these preference shares at par, by issue of sufficient number of ordinary shares of f
25 each at a premium of ? 2 per share as fully paid. Write journal entries in the books of the company.
Working Note:
Value of shares to be redeemed (3,000 x 200) = 6,00,000
Proceeds per new share = Rs. 25
.-. No.of shares to be issued = 6,00,000 = 24,000 shares
25
Example - 3 (Fresh Issue of Shares at Discount and Redemption at Par)
C Ltd had 9,000,8% Redeemable Preference Shares of 20 each, fully paid up. The company decided
to redeem these shares by issue of sufficient No. of equity shares of Rs.10 each fully paid at 10%
discount. Pass necessary journal entries in company’s book.
Working Note:
Value of shares to be redeemed (9,000 x 20) = Rs. 1,80,000
When shares are issued at discount, the proceeds must be sufficient to cover the face value of
preference shares to be redeemed, i.e., Rs. 1,80,000.
In case there are two categories of redeemable preference shares (one fully paid \and another
partly paid) and there is no instruction regarding redemption, only fully /paid preference shares may
be redeemed.
Sometimes there are calls in arrears in case of redeemable preference shares. In. such a case, it
is necessary to follow the instructions given in the question. If nothing is mentioned in the question,
there are two options. They are: (a) Preference shares having calls in arrears should not be redeemed,
(b) It is presumed that calls in arrears are collected and all the preference shares are redeemed.
Note: Students are advised to give the assumption on which the problem is solved, by way of a note.
Example - 5 (Partly Paid up Shares)
E Ltd had 8,000,8% redeemable preference shares of X 25 each, f 20 called up. The company decided
to redeem the preference shares at 5% premium by the issue of sufficient number of equity shares of f
10 each fully paid up at a premium of 10%. Pass journal entries relating to redemption
Working Note:
1. Nominal value of shares to be redeemed (8,000 x 25): 2,00,000 Premium on
redemption 5% 10,000
Total amount required for redemption 2,10,000
2. No.of Shares to be issued 2,00,000 = 20, 000 shares
10
3. Security Premium = 10% of 2,00,000 or (20,000 x 1) = 20,000
4. Only face value of shares issued can be used for the redemption but not premium. The
premium can be used for providing redemption premium.
Redemption out of Profits
Redeemable preference shares can be redeemed out of the divisible profits.
Divisible profits for dividend. The examples of divisible or undistributed profits include
general reserve, reserve fund, dividend equalisation reserve, investment fluctuation reserve,
insurance fund, workmen's compensation fund, workmen's accident fund, debenture
redemption reserve, reserve for contingencies, any other revenue reserve, profit and loss
account balance etc.
In the case of shares so redeemed should be transferred from divisible profits to Capital
Redemption Reseive Account.
Reasons for Creating CRR
CRR is created for the following reasons :
1) Capital maintenance: The important purpose of creating CRR is to maintain the capital
intact. By creating CRR, it is possible to protect capital structure and components of
capital as it is. If much variation is taking place in components and volume of capital,
business activities would be reduced. This causes dissatisfaction among shareholders.
2) Safeguard of creditors: The other reason for creating CRR is to protect the interest of
creditors. If CRR is not created, the directors may distribute the entire amount of
profits by way of dividend. This will adversely affect the interest of creditors.
Note: For calculating CRR, the premium on redemption and security premium are totally
ignored.
Accounting Treatment
The following journal entries are required to be passed the books of the company.
1. When Shares are Redeemed at Par
(a) On transfer to Capital Redemption Reserve Alc
Profit and Loss A/c / General Reserve A/c Dr.
To Capital Redemption Reserve A/c
(b)(On the redemption of shares
Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(c) On Payment to Preference Shareholders
Pref erence Shareholders A/c Dr.
To Bank A/c
Note: First see whether the preference shares are fully paid up or partly paid up. If the shares are
partly paid up they must be made fully paid up. The journal entries have already been given.
Note: If nothing is mentioned specially in the question regarding the fund (proceeds) v/ out of which
redeemable preference shares have to be redeemed, students should always assume that the
redemption has to be made out of profits.
Example - 8 (Combination of fresh issue and profit)
X Ltd has a part of its share capital in 1000 Redeemable Preference Shares of Rs. 100 each. The
shares have now become due for redemption. It has been discovered that the company's Reserve Fund
amounts to Rs. 75,000, Rs. 50,000 out of which has been decided to be utilised in connection with the
redemption, the balance being met out of a fresh issue of sufficient number of equity shares of Rs. 20
each fully paid. You are requested to give the journal entries recording the above transactions.
Working Note:
1. Value of preference shares to be redeemed (1,000 x 100) 1,00,000
Redemption out of profit 50,000 .
Redemption out of fresh issue (balance) . 50,000
2. Value per share X 20 each
No.of shares to be issued = 50,000 = 2,500 shares
--------
20
PRACTICAL PROBLEMS
Ltd company has part of its share capital in 1,000 8% Redeemable Preference shares of ? 100 each.
The shares have now become ready for redemption. It is decided that the whole amount will be
redeemed out of fresh issue of equal amount of equity of shares of f 10 each. Show the necessary
journal entries in the company's books.
Illustration- 2
A. Ltd. has a part of its share capital in 1,000 7% redeemable preference shares of ? 100 each.
These are now redeemable out of the accumulated reserve of ? 1,50,000.
Dr.
7% Redeemable Preference Share Capital A/c 1,00,000 1,00,000
and to redeem the existing Preference Shares at X 105 utilising as much profits as would be
required for the purpose.
Show the Journal entries to record these transactions. Prepare also a summarised
Balance Sheet showing the position of the company on completion of the redemption. On 31-
03-18 cash balance amounted to X 1,85,000 and Sundry Creditors stood at X 87,000.
7. Profit available for dividend excludes (a) P/L A/c, (b) general reserve, (c) share
forfeited account (d) dividend equalisation reserve.
Ans: 1 - c, 2 - c, 3 - d, 4 - d, 5 - b, 6 - d, 7 - c
Short Answer Type
1. Define redeemable preference shares
2. What is divisible profit?
3. What js capital redemption reserve account ?
C. C. Short Answer Type
1. What are the conditions to be fulfilled under the Companies Act for the redemption ...
of preference shares ?
2. What is divisible profit? What is not considered as divisible profit ?
3. What is capital redemption reserve account? How is it created and how is it utilised ?
4. What is capital redemption reserve account ? What is the logic of creation of capital
redemption reserve ?
5. Discuss the various methods of redemption of preference share.
6. Explain the accounting procedure on redemption of preference share.
Problems
1. Hindustan Construction Company Ltd, had 5,000 8% Redeemable Preference Shares of f
100 each, fully paid up.
The company decided to redeem these preference shares at par by the issue of sufficient
number of equity shares of ? 10 each fully paid up at par.
You are required to pass necessary journal entries including cash transactions in the
books of the company.
2. The issued and paid-up capital of XY Ltd. included 2,000,8% Preference shares of Rs.100
each. The company decided to redeem the Preference shares at par. You are required to give
journal entries separately in the following cases:
(a) When the shares are redeemed out of profits.
(b) When the shares are redeemed out of proceeds of new issue of Equity Shares
of ? 10 each at par,
3. A B C Ltd. has issued 10,000 equity shares of Rs.100 each fully paid and 6,000 redeemable
preference shares of Rs.100 each fully paid. On 31st Dec. 2018 the Profit and Loss Statement
showed undistributed profit of Rs.50,000 and the General Reserve A/c stood at Rs.2,80,00.
On 1.1.2019, the directors decided to issue 3000, 6% preference shares of Rs.100 each at
20% premium- and to redeem the existing redeemable preference shares at Rs.110 utilising as
less profit as possible for the purpose. Pass necessary journal entries to record the above
transaction. There was a bank balance of Rs. 4,00,000 on that date.
(Amount transferred to C.R.R A/c ? 3,00,000)
4. A Ltd. had issued 50,000 redeemable preference shares of Rs.10 each, Rs.8 paid. In
order to redeem these shares now being redeemable, the company issued for cash 30,000
equity shares of Rs. 10 each at a premium of Rs.2 per share. Out of the cash proceeds, the
redeemable preference shares were paid and the balance was met out of the reserve fund
which stood at Rs. 2,50,000. Show the journal entries in the books of the company.
REDEMPTION OF DEBENTURES
Companies are allowed to issue only redeemable debentures. Redeemable debentures are
redeemed either at the expiry of the period of debentures or before the expiry.
Meaning of Redemption of Debentures
Redemption of debentures simply means repayment of debentures. It is the discharging of the
liability on account of debentures. They may be redeemed at par or at premium.
Methods of Redeeming Debentures
Following are some of the important methods of redeeming debentures:
1. Drawing lots (Lottery) and redeeming by instalment (Redemption by annual
drawings).
2. Redemption by payment in lumpsum after a specified date.
3. By converting debentures into new shares / debentures.
4. By purchase of own debentures in the open market.
Sources of Redemption of Debentures
The various sources out of which the debentures may be redeemed are:
1. Redemption out of fresh issue
2. Redemption out of capital
3. Redemption out of profit
4. Redemption by sinking fund or insurance policy fund
Redemption by Periodical Drawings
Under this method a certain portion of the debentures are redeemed periodically. This means
that the debentures are redeemed in instalments. This method is also called "Lottery Method"
of redeeming debentures (i.e., drawing by lots).
The following journal entries are passed when debentures are redeemed and interest is paid.
(a) Debentures A/c Dr.
To Debenture holders A/c
(Amount due to debenture holders)
Debenture holders A/c Dr.
To Bank A/c (Payment to debentureholders)
(b) Interest on Debentures A/c Dr.
To Bank A/c
(Payment of interest on debentures)
These entries will continue as long as debentures are repaid and the interest is paid regularly
on the balance of debentures.
Redemption in Lumpsum after a Specified Date
Sometimes debentures will not be redeemed in instalments. Instead, they will be redeemed in
one lumpsum after a certain period. They may be redeemed at; par or at premium according
to the terms of issue.
The following journal entries are passed when debentures are redeemed and interest is paid:
(a) When debentures are redeemed at par
Debentures A/c Dr.
To Debenture holders A/c
(Amount due to debentureholders)
Corporate Accounting Page 94
School of Distance Education
Dr. 25,000
To Premium on Redemption A/c (Premium on
redemption provided out of security premium)
Debenture holders A/c Dr. 5,25,000 5,25,000
To Bank A/c
(Payment due to debenture holders).
Note: It is assumed that the premium on redemption has not been provided at the time of
issue.
Redemption out of Capital
If profits are not utilized to redeem debentures, debentures are said to be redeemed . out of
capital. Thus, when, at the time of redemption, adequate profits are not transferred to
Debenture Redemption Reserve A/c, such type of redemption is called redemption out of
capital. Since the profits are not utilized for the redemption of debentures, the assets of the
company are reduced by the amount paid. This would affect the working capital of the
company.
Redemption out of Profit
When sufficient profits are transferred from Statement of Profit and Loss to the Debenture
Redemption Reserve Account at the time of redemption of debentures, such redemption is
said to be out of profits. This Is called redemption out of profit because it reduces the amount
of profit available for dividend. The amount thus saved because of non payment of dividends
is utilized for the redemption of debentures.
Companies Act, 2013, requires every company to create debenture redemption reserve (DRR)
every year with sufficient amount out of its profits, until such debentures are redeemed.
However, the Act does not specify the percentage or amount to be transferred to DRR. As per
the guidelines issued by SEBI, a company which wants to redeem debentures out of profit
should transfer an amount equal to 50% of the amount of debentures issued to 'Debenture
Redemption Reserve7, before the commencement of redemption of debentures (if the
debentures are for a period of more than 18 months). This provision is applicable only in case
of non-convertible debentures or for non-convertible portion of partly convertible debentures.
When an amount equal to 50% of the amount of debentures is transferred to DRR A/c, it
means that 50% of debentures is redeemed out of capital.
Infrastructure companies and company issuing debentures with maturity not more than 18
months are exempted from the guidelines of SEBI. But as per Companies Act, all companies
should create DRR. The following journal entries are required:
(1) On creation of DRR
Profit or Loss Dr.
To Debenture Redemption Reserve A/c
On Debentures becoming due (a) If redeemed at par:
Debentures A/c Dr. (with nominal value)
To Debenture holders A/c
(b) If redeemed at a Premium:
Corporate Accounting Page 96
School of Distance Education
Note: (1) DRR has not been created before the commencement of redemption because
debentures were issued for a period of less than 18 months (as per SEBI guidelines). Here an
amount equal to the nominal value of debentures to be redeemed has been transferred from
Statement of Profit or Loss to DRR. This is done as per Companies ' Act. Since the whole
amounts of debentures are redeemed on maturity, DRR has been created for full amount. (2)
Entries relating to interest on debentures have been ignored.
Example 7
A Ltd has issued 15,000 debentures of f 100 each payable full on application on 1-10-2016.
Applications were received for 12,000 debentures. The terms of redemption provide that one-
third of the debentures are redeemable every six months. Write necessary journal entries.
Date Particulars Debit Credit
Amount? Amount ?
2016 Bank A/c Dr. 12,00,000
Oct.l To 8% Debentures (Issue of 12,000, 8% 12,00,000
debentures of ? 100 each)
2017 Profit or Loss Dr. 4,00,000
Mar.3 To DRR A/c (Transfer of amount equal to 4,00,000
1 debentures to be redeemed to DRR)
8% Debentures A/c Dr. 4,00,000
To Debentureholders A/c 4,00,000
(Amount due to debentureholders)
Debentureholders A/c Dr. 4,00,000
To Bank A/c 4,00,000
(Payment to debentureholders)
jm.7 8% Debentures A/c Dr. 4,00,000
Sep.30 To Debentureholders A/c (Amount due to 4,00,000
debentureholders)
Debentureholders A/c Dr. 4,00,000
To Bank A/c 4,00,000
(Payment to debentureholders)
2018 Profit or Loss Dr. 8,00,000
Mar31 To DRR A/c (DRR created out of profit) 8,00,000
8% Debentures A/c Dr. 4,00,000
To Debentureholders A/c 4,00,000
(Amount due to debentureholders)
(iii) As a part of the profit is set aside for creating a sinking fund, shareholders get a
comparatively low rate of dividend during the currency of debentures.
Accounting Entries
The journal entries which are required to be passed under sinking fund method are
summarised as follows:
I. At the end of the First Year
(1) When annual amount is set aside
Profit or Loss Dr.
To Sinking Fund/Debenture Redemption Fund A/c
(2) When Sinking Fund is invested
Sinking Fund Investment or
Debenture Redemption Fund Investment A/c Dr.
To Bank A/c
IL At the end of Second and Subsequent Year
(3) For receiving interest on investment
Bank A/c Dr.
To Interest on Sinking Fund Investment A/c
(4) For transferring the interest to Sinking Fund
Interest on Sinking Fund Investment A/c Dr.
To Sinking Fund A/c
(5) For setting aside the amount of profit
Profit or Loss
Dr.
To Sinking Fund A/c
(6) When Sinking Fund along with interest is invested
Sinking Fund Investment A/c Dr.
To Bank A/c III. At the end of Last Year ,
(7) For receiving interest on investment
Bank A/c Dr.
To Interest on Sinking Fund Investment A/c
(8) For transferring the interest to Sinking Fund
Interest on Sinking Fund Investment A/c • Dr.
To Sinking Fund A/c
(9) For setting aside the amount of profit
Profit or Loss Dr.
To Sinking Fund A/c
(10) For sale of investment
Bank A/c Dr.
7. Debenture Redemption Fund Investment A/c shall appear under assets in the B/S under
the sub head "Investments" till redemption.
8. The amount to be set aside from the profit is ascertained with reference to "Sinking Fund
Tables"
9. The amount of profit to be set aside is to be calculated as follows:
(a) If the Debentures are to be redeemed at par Nominal Value of Debentures to be
redeemed x Present value of f 1 for given number of years at a given rate of interest
Example 10
The 1,000 9% Debentures of ? 100 each issued at par are to be redeemed after 4 years.
Investments are expected to realise 12% p.a. The table shows that ? 0.2092488 ^invested at
the end of each year at 12% compound interest will amount to ^ 1 at the end of 4 years and ?
1 p.a at 12% interest amounts to T 4.779 in 4 years.
Calculate the amount to be set aside annually from profit: (a) if Debentures are repayable at
par, (b) if Debentures are repayable at 10% premium.
Solution
(a) If Debentures are Redeemable at par :
Amount of profit to set aside 1,00,000 x 0.2092488 = Rs. 20,924.88
or
Rs. 1,00,000 / 4.779 = Rs. 20,924.88
(b) If Debentures are Redeemable at 10% premium
Amount to be set aside = (1,00,000 + 10,000) x 0.2092488 = Rs. 23017.37
or
1,10,000 = 23,017.37
4.779
Example 11
This is an alternative to Sinking Fund method. Under the Sinking Fund method,
annual contribution is invested in outside securities. Under insurance policy method, an
To Bank A/c
(b) For setting aside the amount of profit at the end of the year
Profit and Loss Appropriation A/c Dr. (with the amount of profit set aside)
(e) For making the amount due and for payment usual entries are to be passed.
(f) The balance of Debenture Redemption Fund Ale will be transferred to general
reserve by passing the following entry:
Example 13
A Ltd. had issued 2000,10% debentures of ? 100 each at a discount of 10%. These debentures
were given the option to convert their debentures into equity shares of ? 100 each. The
holders of 400 debentures out of the above exercised the option. Write journal entry for
conversion if: (a) new equity shares are issued at par, (b) new equity shares are issued at 20%
premium, and (c) new equity shares are issued at 10% discount.
Solution
The number of equity shares to be issued in lieu of debentures will be calculated as below:
The number of equity shares to be issued in lieu of debentures will be calculated as below:
The new shares to be Issued = 36,000
---------- = 400
90
1. The purchase is made when the market price of the debenture is the lowest. Hence, less
amount is spent for their redemption (profit on cancellation or on redemption).
2. This reduces the interest burden.
3. This avoids to pay premium on redemption.
Purchase of Debentures for Immediate Cancellation
A company may purchase its debentures for the purpose of immediate cancellation.
This results in reduction of debenture liability to the extent of par value of debentures
cancelled.
Accounting Treatment
Note: When there Is sinking fund, the Loss on Redemption of Debentures A/c should be debited
to Sinking Fund A/c.
It should be noted that when own debentures are purchased for immediate
cancellation, debentures account should be debited with nominal or face value (and
debentures will be cancelled). \
When, there is no sinking fund, an amount equal to the nominal value of the
debentures cancelled .(redeemed) should be transferred to Debenture Redemption
Reserve A/c. The entry is:
Generally interest on debentures is paid on fixed dates, I.e., half yearly or yearly. However,
the company can buy its own debentures from the open market at any time during the year. If
a company purchases its own debentures on the date of payment of interest, there will be no
Cum-interest Quotation
If the purchase price includes interest for the period from previous date of interest to the date
of purchase, it is called cum interest price(Cnm is a Latin word which means 'with' i.e.,
cumulative or inclusive of interest). It means the price paid by the company for the
debentures includes the interest for the expired period also.
Journal Entries
S At the time of recording the purchase of own debentures, only the price paid towards the
cost of debentures must be debited to the own debentures account. The interest must be
debited to Interest account.
In this case, Own Debentures A/c should be debited with cost of debentures (and not nominal
value of debentures).
Cost of Own Debentures = Price paid - Interest for the expired period,
(c). When own debentures purchased for investment are cancelled in future
Debentures A/c Dr (Nominal value)
To Own Debentures A/c (Cost, i.e., price paid minus Interest) To Profit on Redemption of
Debentures (Balance)
Ex-interest Quotation
If the purchase price excludes the interest for the expired period, it is called Ex-
interest price ('Ex'is also a Latin word which means 'without', i.e., exclusive of interest). This
means that the purchase price of debentures does not include the interest for the expired
period. This further means that the purchaser (company) has to pay, in addition, the interest
for the expired period. Thus,
Solution
Journal
2016
July 1 Bank A/c Dr. 1,00,000 1,00,000
To 6% Debentures A/c (Issue of 1000 debentures of
?100 each at par)
Dec 31 Interest on Debentures A/c Dr. 3,000 3,000
To Bank A/c (Payment of interest on
debentures)
2017 6% Debentures A/c (100 x 100) Dr 10,000
May 31 Interest on Debentures A/c(10,000 x 5/12 x 6/100) To Dr. 250 10,050
Bank A/c (price paid +interest)
To Profit on Redemption of Deb. A/c (100 x2) 200
(Purchase of 100 debentures ex-interest for cancellation)
June 30 Interest on Debentures A/c Dr. 2,700 2,700
To Bank A/c (Payment of interest on 900
debentures)
Dec 31 Interest on debentures A/c Dr. 2,700 2,700
To Bank A/c (Payment of interest on 900
debentures)
Dec 31 Profit on Redemption of Debentures A/c To Dr. 200 200
Capital Reserve A/c
(Profit on redemption transferred to capital reserve)
2018 Interest on Debentures A/c Dr. 2,700
Jun30 To Bank A/c (Payment on interest on 900 2,700
debentures)
On 1st January, 2017 X Ltd. issued 1,000 8% Debentures of f 100 each at a discount of 6%.
(a) That interest shall be payable on 30th June and 31st Dec. every year; and
(b) That on the 31st December every year, one- fifth of the debentures shall be redeemed.
Pass relevant journal entries in the books of the company including cash transactions for the years
2017 and 2018.
Illustration 3
The following balances appeared in the books of X Ltd. on 1-4-2018:
Sinking Fund A/c ? 50,000
Sinking Fund Investment A/c
(10% Govt. Securities, Nominal value X 45,000) 48,000
12% Debentures 1,00,000
The company sold X 30,000 Govt. Securities at 110% and utilised the amount to redeem part
of the Debentures at a premium of 10%. Show Debentures A/c, Sinking Fund A/c and
Sinking Fund Investment A/c.
Am: 1-personal, 2- fietiti0us,3- general reserve, 4- sinRing fund, 5- ass€ft, 6- debenture redemption
reserve, 7- cum, 8-cum interest, 9-debt
Choose the correct answer
1. Interest on debenture is (a) adjustment of profit, (b) appropriation of profit, (c) charge on
profit, (d) none of these
2. After all the debentures are redeemed, the balance in the sinking fund is transferred ■ to
(a) general reserve, (b) capital reserve, (c) profit and loss account, (d) debentures account.
3. When own debentures are cancelled, any profit on cancellation is transferred to (a) general
reserve, (b) capital reserve, (c) profit or loss (d) none of these.
4. When debentures are bought as own for the purpose of investment, the own debenture
account is debited with (a) face value, (b) cum interest price, (c) ex-interest price, (d) face
value with premium.
5. After realizing all the investments, the balance in the sinking fund account is transferred to
(a) profit and loss account, (b) debenture account, (c) capital reserve, (d) sinking fund
account.
6. Which of the following is not a source of redemption of debentures (a) redemption out of
capital, (b) redemption out of borrowings from financial institution (c) redemption out of
profit, (d) redemption by conversion
Ans: 1-c, 2- a, 3-b, 4- c, 5- d, 6-b
B Short Answer Type *
1. What do you mean by drawing by lot ?
2. What is Debenture Redemption Reserve account?
3. What are own debentures ?
4. What do you mean by sinking fund ?
C Short Essay Type
l. What are the different methods of redeeming debentures?
2. Enumerate the various sources of redemption of debentures.
3. What is the significance of Sinking Fund method of redemption of debentures?
4 . Distinguish between Sinking Fund for replacement of an asset and a Sinking Fund the
redemption of a liability.
5 . Distinguish between Sinking Fund method and Insurance Policy method.
6. How would you treat premium on redemption of debentures?
1. A company issued debentures of the face value of ? 1,00,000 at a discount of 6%. The
debentures were repayable by annual drawing of Rs. 20,000. How would you deal with
the discount on debentures? Show the discount account in the company's ledger for the
period of duration of debentures.
(Amount written off in the 1st year Rs. 2000, IInd year Rs. 1600,IIIrd year Rs. 1200, IVth
year Rs.800 and Vth year ? 400)
BUY-BACK OF SHARES
Some years back buy back of shares and securities was not allowed in many developed
countries (including India), Over the years, the situation has changed. Companies in India now can
buy-back their own shares. Section 88, 69 and 70 of the Companies Act, 2013 deal with buy-back
shares,
One of the first companies to offer the buyback of shares in India in. October 2000 was
Philips India Pvt. Ltd, Later many MNCs, opted for this method to restructure capital, or avail other
benefits.
Meaning and Definition of Buy-Back of Shares
Buy-back is the reverse of issue of shares, Buy-back simply means buying of own shares, It is a
process of capital restructuring. It allows a company to buy-back its own shares, which were issued by
it earlier. It is a method of cancellation of a company's share capital It leads to reduction in the share
capital of a company
Objectives of Buy-Back
1. To improve returns on capital
2. To return surplus cash to the investors.
3. To increase the market price of the share.
4. To change the capital structure (i.e., to restructure capital base).
5. To increase the EPS.
6. To prevent hostile takeover bids.
7. To improve the financial health after buy-back
8. To achieve optimum capital structure
9. To service the equity more efficiently.
Reasons and Benefits of Buy-back
1. It helps to increase the EPS.
2. The market price of the share will go up.
3. It help to return surplus the cash to the investors
(a) Through stock exchange: Under this method, a company can buy back its shares at the
prevailing quoted price in a stock exchange. The buy-back is made only on stock
exchange with electronic trading facility. This method does not require Escrow Account.
(b) Through book building process: Under book building process the shareholders offer
their shares at a price at which they are willing to sell their shares within a price band
(i.e., price range) specified by the company The company will receive the offers from the
shareholders. The merchant banker and the company shall determine the buyback price
based on the acceptances received. The final price of buy-back shall be the highest price
accepted and this price shall be /paid to all shareholders whose specified securities have
been accepted for buy / back, litis method, requires the opening of Escrow Account.
3. Buy-back of shares from odd lots : The companies may locate the odd lots of shares (i.e.,
the block of shares that is not held in multiples of 100) and purchase them back from the
odd lot holders,
Accounting Treatment
Accounting treatment of buy-back of shares is more or less similar to redemption of
preference shares. The following points may be noted:
1. Only fully paid up securities can be bought back, If the securities are partly paid, they
must be made fully paid up by making final call
2. Sufficient balance must be standing to the credit of free reserves if buy back is to be
made from free reserves.
3. If the shares are bought back out of free reserves or security premium, an amount equal
to the face value of shares so bought back must be transferred from free reserves or
security premium to Capital Redemption Reserve A/c (CRR).
4. The premium, if any paid on buy-back must be written off to security premium or free
reserves.
5. Discount on payback, if any, must be transferred to Capital Reserve.
6. CRR can be utilized for the purpose of issuing fully paid bonus shares.
It should be noted that for buy-back, security premium can be transferred to CRR.
Note: If the fresh issue of shares (for the purpose of buy back) is less than the amount of
shades to be bought back, capital redemption reserve is to be created for the balance.
Jourrnal Entries
1. If the company issues fresh securities for the purpose of buy back, appropriate
entries are passed.
2. If the company buys back shares from free reserves or security premium, an amount equal
to the nominal value of shares so bought should be transferred to Capital Redemption
Reserve A/c. The entry is:
Journal
To Bank A/c
3,00,000
A Ltd issued 4,00,000 shares of ? 10 each. The balance in the security premium account and
general reserve account were ? 40,00,000 and ? 50,00,000 respectively. The company bought back
1,00,000 shares at a price of ? 30 each and issued cheques for this purpose from its bank account.
Write journal entries.
Liabilities Assets
. 14,50,000 14,50,000
On 1-1-2019, the company bought back 25,000 equity shares @ ? 20 each. The company
issued 2,000 8% preference shares of ? 100 each for the purpose. Give journal entries.
IJ/ Short Answer Type 1./ What is meant by buy-back of shares ? 2 / What
are free reserves ? - 3/ What is escraw account ? 4/.What do you mean by
1. Non-current Assets
Fixed Assets 2,700
Non Trade Investments 300
2. Current Assets
Stock 600
Trade Receavables 360
Cash and Cash Equivalents 160
Total Assets 4,120
1. Equity and Liabilities
1. Equity
Share Capital
(a) Equity Shares off 20 each 800
(b) Other Equity (Reserves and Surplus)
General Reserve 780
a. Authorized by articles: a company may alter the capital clause of its memorandum
only if it is authorized by its articles of association to do so.
b. Ordinary resolution: an ordinary resolution must be passed at a general meeting.
c. Notice: a notice specifying alteration made must be given to the registrar within 30
days of alteration.
Methods of alteration of share capital
1. Increase its share capital by making fresh issue
If a company wants to increase its capital beyond the amount of its authorised capital, it
must increase its authorised capital by the amount of new shares. Entries for the purpose
will be the same as in the case of original issue of shares.
2. Consolidate and divide all or any of its share capital into shares of larger denomina-
tion:
Alteration in the share capital can be done by consolidating the shares of smaller amounts
into shares of larger amounts. This is possible when articles permit to do so.
Journal entry, for this purpose, will be:
(i) Share Capital (say Rs. 10) A/c Dr.
To Share Capital (say, Rs. 100) A/c
3. Subdivide all or any of its share capital into shares of smaller denomination:
Entry will be:
Share Capital (say, Rs. 100) A/c Dr.
To Share Capital (say, Rs. 10) A/c
4. Convert all or any of fully paid-up shares into stock or reconvert stock into fully
paid-up shares of any denomination:
Journal entry
Share capital a/c dr
Stock
Example
1. A ltd having 10000 equity shares o f rs. 10 each decides to convert the share capital into
equity stock. Write the journal entry.
Solution
Equity share capital a/c dr
To equity stock a/c
5. By reconverting stock into shares: tock may be reconverted into shares.
Journal entry
Stock a/c dr
Share capital a/c
Example
A ltd having equity stock of Rs. 10000 decides to convert the equity stock into equity
shares of Rs. 10 each. Write the journal entry
Equity stock a/c dr 100000
Equity share capital a/c 100000
6. By decreasing the share capital
A company can decrease its share capital by cancelling unissued shares. The authorized
share capital gets reduced by the amount of unissued shares now cancelled. This is the
diminution of share capital. This should not be confused with the reduction of share capital.
This means that decrease in the share capital is different from reduction of share capital.
Journal entry
No accounting entry is needed for cancellation of unissued shares. Only reduced
authorized capital is to be shown in the next balance sheet.
Example
A ltd has an authorized share capital of Rs. 10,00,000 and issued capital of Rs.
800000. It decides to alter its authorized share capital to rs. 8,00,000. Show the accounting
treatment.
No journal entry is required for cancellation of unissued shares. The reduced
authorized share capital Rs. 8,00,000 is to be shown in the balance sheet.
Example
Retrospective application
When a change in accounting policy is applied retrospectively, it requires the entity to
adjust the opening balance of each affected components of equity for the earliest prior period
presented and the other comparative amounts disclosed for each prior period presented as if
the new accounting policy had always been applied.
Limitations on retrospective application
When it is impracticable to apply retrospective application, then the entity should
apply the new accounting policy to the carrying amounts of assets and liabilities as at the
beginning of the earliest period for which retrospective application is practicable, which may
be the current period.
Changes in accounting estimates
As a result of the uncertainties inherent in business activities, many items in financial
statements cannot be measured with precision but can only be estimated. Estimation involves
judgement based on the latest available, reliable information. For example, estimates may be
required of:
(a) bad debts;
(b) inventory obsolescence;
(c) the fair value of financial assets or financial liabilities;
(d) the useful lives of, or expected pattern of consumption of the future economic benefits
embodied in, depreciable assets; and
(e) warranty obligations.
Change in measurement basis
A change in the measurement basis applied is a change in an accounting policy, and is
not a change in an accounting estimate. When it is difficult to distinguish a change in an
accounting policy from a change in an accounting estimate, the change is treated as a change
in an accounting estimate.
Difficulty in distinguishing change in policy and changes in estimate
When it is difficult to distinguish a change in an accounting policy from a change in
an accounting estimate, then the change should be treated as a change in an accounting
estimate.
Change in accounting estimate (prospective application)
The effect of change in an accounting estimate should be recognized prospectively by
including it in profit or loss in :
a. the period of the change, if the change effects that period only, for example, bad
debts;
b. the period of the change and future periods, if the change affects both, for example,
estimated useful life depreciable assets.
Errors
Errors discovered during a current period may have arisen on account of mathematical
mistakes, incorrect application of accounting policies, misinterpretation of facts, oversights or
fraud.
Accounting treatment
An entity should correct all prior period errors retrospectively in the first set of
financial statements approved for issue after their discovery. This correction should be done
by:
a. restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
b. if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.
Limitations on retrospective restatement
In case it impracticable for the entity to determine the period specific effects of an error for
one or more prior periods presented, it shall restate the opening balances of assets, liabilities
and equity for the earliest period for which retrospective restatement is practicable.
In case it is impracticable to determine the cumulative effect, at the beginning of the current
period, of an error on all prior periods, the entity shall restate the comparative information to
correct the error prospectively from the earliest date practicable.
Example
Example
Events after the end of reporting period may be classified into two types:
Adjusting Events - Those events that provide further evidence about conditions that
existed at the end of reporting period.
Non-Adjusting Events - Those events that reflect conditions that arose after the end of
reporting period.
Adjusting Events
If any events occur after the end of the reporting period that provide further evidence of
conditions that existed at the end of reporting period (i.e. Adjusting Events), then the
financial statements must be adjusted accordingly.
Example
or cease trading. For example, a fire destroyed inventory in the warehouse after the year end.
This is non adjusting event. The loss of inventory means that the entity can no longer
continue to trade. Then the going concern assumption is no longer valid.
Presentation of Financial Statements
Objective
This Standard prescribes the basis for presentation of general purpose financial statements to
ensure comparability both with the entity’s financial statements of previous periods and with
the financial statements of other entities. It sets out overall requirements for the presentation
of financial statements, guidelines for their structure and minimum requirements for their
content.
Scope
1. An entity shall apply this Standard in preparing and presenting general purpose financial
statements in accordance with Indian Accounting Standards (Ind ASs).
2. Other Ind ASs set out the recognition, measurement and disclosure requirements for
specific transactions and other events.
3. This Standard does not apply to the structure and content of condense d interim financial
statements prepared in accordance with Ind AS 34 Interim Financial Reporting. However,
paragraphs 15–35 apply to such financial statements. This Standard applies equally to all
entities, including those that present consolidated financial statements and those that present
separate financial statements as defined in Ind AS 27 Consolidated and Separate Financial
Statements .
4. This Standard uses terminology that is suitable for profit -oriented entities, including
public sector business enti ties. If entities with not-for-profit activities in the private sector or
the public sector apply this Standard, they may need to amend the descriptions used for
particular line items in the financial statements and for the financial statements themselves.
5. Similarly, entities whose share capital is not equity may need to adapt the financial
statement presentation of members’ interests.
Components of financial statement
A complete set of financial statements comprises the following
1. A balance sheet
2. A statements of profit and loss
3. Statement of changes in equity
4. A statement of cash flows,
5. Notes comprising significant accounting policies and other explanatory information
6. Comparative information in respect of preceding period, and
7. A balance sheet as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement or reclassifies
items in its financial statements.
b. Trade receivables
c. Cash and cash equivalents
d. Bank balances other than (1)
e. Loans
f. Other to be specified
3. Current tax assets
4. Other current assets
Total assets
B. EQUITY AND LIABILITIES
Equity
a. Share capital
b. Retained earnings(reserves and surplus)
Non current liabilities
a. Financial liabilities
i. Borrowings
ii. Trade payables
iii. Other liabilities(to be specified)
b. Provisions
c. Deferred tax liabilities
d. Other non current liabilities
Current liabilities
a. Financial liabilities
i. Borrowings
ii. Trade payable
iii. Other financial liabilities(to be specified)
b. Other current liabilities
c. Provisions
d. Current tax liabilities
Total equity and liabilities
(h) shares reserved for issue under options and contracts/commitments for the
sale of shares/disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date as at which the
Balance Sheet is prepared:
(A) Aggregate number and class of shares allotted as fully paid-up
pursuant to contract(s) without payment being received in cash.
(B) Aggregate number and class of shares allotted as fully paid-up by
way of bonus shares.
(C) Aggregate number and class of shares bought back.
(j) terms of any securities convertible into equity/preference shares issued along
with the earliest date of conversion in descending order starting from the farthest
such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and
officers); (l) forfeited shares (amount originally paid-up).
B. Reserves and Surplus
(i) Reserves and Surplus shall be classified as:
(a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium Reserve;
(d) Debenture Redemption Reserve;
(e) Revaluation Reserve;
(f) Share Options Outstanding Account;
(g) Other Reserves–(specify the nature and purpose of each reserve and the
amount in respect thereof);
(h) Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and
appropriations such as dividend, bonus shares and transfer to/ from reserves, etc.;
(Additions and deductions since last balance sheet to be shown under each of the
specified heads);
(ii) A reserve specifically represented by earmarked investments shall be termed as a
“fund”.
(iii) Debit balance of statement of profit and loss shall be shown as a negative figure under
the head “Surplus”. Similarly, the balance of “Reserves and Surplus”, after adjusting
negative balance of surplus, if any, shall be shown under the head “Reserves and Surplus”
even if the resulting figure is in the negative.
C. Long-Term Borrowings
(i) Long-term borrowings shall be classified as: (a) Bonds/debentures; (b)
Term loans:
(A) from banks.
(a) Land;
(b) Buildings;
(c) Plant and Equipment;
(d) Furniture and Fixtures;
(e) Vehicles;
(f) Office equipment;
(g) Others (specify nature).
(ii) Assets under lease shall be separately specified under each class of asset.
(iii) A reconciliation of the gross and net carrying amounts of each class of assets
at the beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments and the related
depreciation and impairment losses/reversals shall be disclosed separately.
(iv) Where sums have been written-off on a reduction of capital or revaluation of
assets or where sums have been added on revaluation of assets, every balance
sheet subsequent to date of such write-off, or addition shall show the reduced or
increased figures as applicable and shall by way of a note also show the amount
of the reduction or increase as applicable together with the date thereof for the
first five years subsequent to the date of such reduction or increase.
J. Intangible assets
(i) Classification shall be given as:
(a) Goodwill;
(b) Brands /trademarks;
(c) Computer software;
(d) Mastheads and publishing titles;
(e) Mining rights;
(f) Copyrights, and patents and other intellectual property rights, services
and operating rights;
(g) Recipes, formulae, models, designs and prototypes;
(h) Licences and franchise;
(i) Others (specify nature).
(ii) A reconciliation of the gross and net carrying amounts of each class of assets
at the beginning and end of the reporting period showing additions, disposals,
acquisitions through business combinations and other adjustments and the related
amortization and impairment losses/reversals shall be disclosed separately.
(iii) Where sums have been written-off on a reduction of capital or revaluation of
assets or where sums have been added on revaluation of assets, every balance
sheet subsequent to date of such write-off, or addition shall show the reduced or
increased figures as applicable and shall by way of a note also show the amount
of the reduction or increase as applicable together with the date thereof for the
first five years subsequent to the date of such reduction or increase.
K. Non-current investments
(i) Non-current investments shall be classified as trade investments and other
investments and further classified as:
(a) Investment property;
(b) Investments in Equity Instruments;
(c) Investments in preference shares;
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms;
(h) Other non-current investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate indicating
separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv)
controlled special purpose entities in whom investments have been made and the nature and
extent of the investment so made in each such body corporate (showing separately
investments which are partly-paid). In regard to investments in the capital of partnership
firms, the names of the firms (with the names of all their partners, total capital and the shares
of each partner) shall be given.
(ii) Investments carried at other than at cost should be separately stated
specifying the basis for valuation thereof;
(iii) The following shall also be disclosed:
(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate provision for diminution in value of investments.
L. Long-term loans and advances
(i) Long-term loans and advances shall be classified as:
(a) Capital Advances;
(b) Security Deposits;
(c) Loans and advances to related parties (giving details thereof);
(d) Other loans and advances (specify nature).
(ii) The above shall also be separately sub-classified as:
(a) Secured, considered good; (b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed under
the relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company or any
of them either severally or jointly with any other persons or amounts due by firms
or private companies respectively in which any director is a partner or a director
or a member should be separately stated.
M. Other non-current assets
Other non-current assets shall be classified as:
(i) Long-term Trade Receivables (including trade receivables on deferred credit
terms);
(ii) Others (specify nature);
(iii) Long term Trade Receivables, shall be sub-classified as:
(a) (A) Secured, considered good;
(B) Unsecured, considered good;
(C) Doubtful.
(b) Allowance for bad and doubtful debts shall be disclosed under the relevant
heads separately.
(c) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated.
N. Current Investments
(i) Current investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investment in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds; (f) Investments in partnership firms;
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the bodies corporate [indicating
separately whether such bodies are: (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv)
controlled special purpose entities] in whom investments have been made and the nature and
extent of the investment so made in each such body corporate (showing separately
investments which are partly paid). In regard to investments in the capital of partnership
firms, the names of the firms (with the names of all their partners, total capital and the shares
of each partner) shall be given.
(ii) The following shall also be disclosed:
(a) The basis of valuation of individual investments;
(b) Aggregate amount of quoted investments and market value thereof;
(c) Aggregate amount of unquoted investments;
(v) Bank deposits with more than twelve months maturity shall be disclosed
separately.
R. Short-term loans and advances
(i) Short-term loans and advances shall be classified as:
(a) Loans and advances to related parties (giving details thereof);
(b) Others (specify nature).
(ii) The above shall also be sub-classified as:
(a) Secured, considered good; (b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed under
the relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company or any
of them either severally or jointly with any other person or amounts due by firms
or private companies respectively in which any director is a partner or a director
or a member shall be separately stated.
S. Other current assets (specify nature)
This is an all-inclusive heading, which incorporates current assets that do not fit into any
other asset categories.
T. Contingent liabilities and commitments (to the extent not provided for)
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;
(b) Guarantees;
(c) Other money for which the company is contingently liable.
(ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on capital
account and not provided for;
(b) Uncalled liability on shares and other investments partly paid;
(c) Other commitments (specify nature).
U. The amount of dividends proposed to be distributed to equity and preference shareholders
for the period and the related amount per share shall be disclosed separately. Arrears of fixed
cumulative dividends on preference shares shall also be disclosed separately.
V. Where in respect of an issue of securities made for a specific purpose, the whole or part
of the amount has not been used for the specific purpose at the balance sheet date, there shall
be indicated by way of note how such unutilised amounts have been used or invested.
W. If, in the opinion of the Board, any of the assets other than fixed assets and noncurrent
investments do not have a value on realisation in the ordinary course of business at least
equal to the amount at which they are stated, the fact that the Board is of that opinion, shall
be stated.
Circumstances, that would give rise to the separate disclosure of items of income and
expenses include;
a. Write downs of inventories to net realizable value of property, plant and
equipment to recoverable amount, as well as reversals of such write down.
b. Restructuring of the activities of an entity and reversals of any provisions for
the costs of restructuring.
c. Disposals of items of property, plant and equipment
d. Disposals of investments
e. Discontinued operations,
f. Litigations settlements, and
g. Other reversals of provisions
Classification of expense
On the basis of nature of expense
Revenue xxxx
Other income xxxx
Changes in inventories of finished goods and work in progress xxxx
Raw materials and consumables used xxxx
Employee benefits cost xxxx
Depreciation and amortization expense xxx
Other expenses xxxx
Total expenses xxxx
Profit xxxx
Under the direct method, major classes of gross cash receipts and gross payments are
disclosed. In this method, cash receipts from operating revenues and cash payments for
operating expenses are calculated to arrive at cash flows from operating activities. The
differences between the cash receipts and the payments in the net cash flow from operating
activities.
Cash flow from operating activities under direct method may be calculated in the following
manner:
Cash received from debtors xxx
Cash paid to creditors (xxx)
Cash paid to employees (xxx)
Cash operating expenses paid (xxx)
Interest paid (xxx)
Income tax paid (xxx)
Net cash flow from operating activities xxx
Indirect method
Indirect method is also known as net profit method or reconciliation method. This method
starts with net profit or net loss as per the profit and loss account. The net cash flow from
operation is determined by adjusting the net profit or loss for the effect of:
a. Non cash items such as depreciation, provision, deferred taxes, unrealized foreign
exchange gains/losses.
b. Changes during the period in inventories and receivables and payables ie, changes in
current assets and current liabilities.
c. All other items which affect cash included in investing and financing activities such
as loss/gain on sale of fixed assets and investments.
Indirect method is widely used. This method is specially used when amount of sales is not
given in the question.
Cash flow from operating activities under indirect method may be calculated in the following
manner.
Cash flow from operating activities
Net profit before tax xxxx
Add: non cash and non operating items:
Depreciation` xxx
Preliminary expenses written off xxx
Discount on issue of shares and debentures xxx
Goodwill patents etc, written off xxx
Loss on sale of fixed asset xxx
Provision for doubtful debts etc xxx
Dividend paid xxx
Under writing commission written off xxx
Xxx
Less: items to be deducted
Rent received xxx
Interest received xxx
Dividend received xxx
Profit on sale of fixed asset, investment xxx
Operating profit before working capital changes xxx
Add: decrease in current assets(individually) xxx
Increase in current liability xxx
Less: increase in current assets (individually) xxx
Decrease in current liability xxx
Cash generated from operation xxx
Example
From the following summary of Cash Account of X Ltd., prepare Cash Flow Statement for
the year ended 31st March 2007 in accordance with AS-3 using the direct method. The
company does not have any cash equivalents.
(a) During 2006, the business of a sole trader was purchased by issuing shares for
Rs. 2, 00,000. The assets acquired from him were: Goodwill Rs. 20,000, Machinery
Rs. 1, 00,000, Stock Rs. 50,000 and Debtors Rs. 30,000.
(b) Provision for tax charged in 2006 was Rs. 35,000.
(c) The debentures were issued at a premium of 5% which is included in the retained
earnings.
(d) Depreciation charged on machinery was Rs. 30,000.
2. From the following Balance Sheets of Exe Ltd. make-out Cash Flow Statement:
Additional Information:
Example
MODULE-IV
BUSINESS COMBINATIONS AND CONSOLIDATED FINANCIAL STATMENTS
Business combination is a transaction or other event in which an entity obtains control
of one or more businesses. In short, business combination is the bringing together of separate
businesses into one reporting enterprise.
There are two parties in a business combination, acquirer and acquiree.
A business can be acquired in the following ways:
a. Acquisition of an entire entity
b. Acquisition of a group of assets and liabilities (ie, part of an entity) that constitute a
business.
c. Acquisition of controlling interest in an entity (eg. Acquisition of more than 50%
shares of an entity)
IFRS 3 and Ind AS 103 give guidance on accounting for business combinations in the
books of acquirer.
Objectives of IFRS 3 (or Ind AS 103)
The objective of IFRS 3 Business Combinations is to improve the relevance, reliability and
comparability of the information that a reporting entity provides in its financial statements
about a business combination and its effects.
Under IFRS 3, a business combination must be accounted for using a technique called the
“acquisition method”. This views the transaction from the perspective of the acquirer and
involves the following stages:
1. Identify acquirer
2. Determine acquisition date
3. Recognise and measure Assets, liabilities and NCI in acquiree at FV at the acquisition
date
4. Goodwill/Bargain purchase Difference between consideration paid and net assets
acquired
1. Identify the Acquirer
The acquirer is the entity that obtains control of the other entity or business. The concept of
control is dealt with under IFRS 10 Consolidated Financial Statements. In essence, control is
where an investor is exposed, or has rights, to variable returns from its involvement in the
investee and has the ability to effect those returns through its power over the investee.
An investor controls an investee, when all of the following are in place:
Power over an investee
Exposure or rights, to variable returns from its involvement with the investee, and
The ability to use its power over the investee to affect the amount of the investors
returns
Deciding who is the acquirer depends on judgement, and it can be useful to look out for these
indicators when deciding the acquirer:
The entity transferring cash or assets
The entity that issues equity interests
The entity that is usually larger (though not always), and the relative size of the
combining units
Voting rights in the combined entity after the combination (acquirer usually receives
more voting rights)
The board of directors and senior management of the new combined entity (acquirer
usually controls the board)
2. Determine the acquisition date
The next step in the acquisition method is to determine the acquisition date. This is the date
the acquirer, the purchaser, obtains control of the acquiree.
If the acquisition was written down, say in contract form, the acquisition date would normally
be the closing date, when the purchaser takes legal possession of the assets and assumes the
liabilities of the acquiree. Watch out though, as the acquisition date could be earlier than this,
say if the acquirer is allowed to take possession of the acquiree early, by some agreement
between the parties.
The reason we have to ascertain the acquisition date is because it’s used when determining
the fair value of things like consideration paid, assets acquired, liabilities assumed and any
non-controlling interest. The acquisition date is also very important when considering pre and
post-acquisition dividends, as their treatment differs.
3. recognizing and measuring the identifiable assets acquired, the liabilities assumed
and any non controlling interest in the acquire.
The acquirer should identify the assets acquired and liabilities assumed. The assets
and liabilities so identified should be recognized separately from goodwill/gain from bargain
purchase. This is important for two reasons. First, disclosure of assets and liabilities
separately from goodwill adds information value to financial statements. Second, the
goodwill is not amortised but tested for impairment while assets are amortised.
Measurement of non controlling interest
Non-controlling interest (NCI), also known as minority interest, is an ownership
position whereby a shareholder owns less than 50% of outstanding shares and has no control
over decisions. Non-controlling interests are measured at the net asset value of entities and do
not account for potential voting rights.Non controlling interest should be shown as separate
non current liability in the consolidated financial statement.
Example
for the acquire includes any asset or liability resulting from a contingent consideration
arrangement.
b. Deferred consideration
In some situations all of the purchase consideration shall not be paid at the date of
acquisition. Instead, a part of the payment is paid later. The payment which is paid later is
known as dererred consideration. That is, the payment of purchase consideration is deferred.
Deferred consideration shall be discounted, using the parent’s cost of capital.
c. Share exchange
Sometimes, the purchase consideration is ascertained on the basis of the ratio in which the
shares of the acquirer are to be exchanged for the shares of the acquire. The exchange ratio is
generally based on the intrinsic value of each company’s share. This method of calculating
purchase consideration is known as share exchange method or intrinsic value method.
Acquisition related costs
acquisition related costs are costs the acquirer incurs to effect a business combination.
These include:
a. Finders fees
b. Advisory, legal,valuation and other professional or consulting fees,
c. General administrative costs, including the costs of maintaining an internal
acquisition department, and
d. Cost of registering and issuing debt and equity securities.
Example
As per IAS 37, a contingent liability is not recognized but only disclosed. However,
IFRS 3 and Ind AS 103 specifically provide that the acquirer should recognize a contingent
liability of the acquire if it fair value can be measured reliably.
After initial recognition and until the liability is settled, cancelled or expired, the
acquirer shall measure a contingent liability recognized in a business combination at the
higher of:
a. The mount that would be recognized in accordance with Ind AS 37, and
b. The amount initially recognized.
Step 5: recognizing and measuring goodwill (or gain from bargain purchase)
IFRS 3 or Ind AS 103 covers the accounting treatment of goodwill acquired in a
business combination. Suppose a company(acquirer) agrees to pay (consideration) for a 100%
investment in another company (acquiree) more than the tangible assets of the acquiree. Then
this would mean that the acquire must also have intangible assets. The amount paid over and
above the value of the tangible assets is goodwill arising on consideration.
Recognition and measurement of goodwill
Goodwill acquired in a business combination is recognized as an asset and is initially
measured at cost. After initial recognition, it is measured at cost less any accumulated
impairment losses. The method of calculation of goodwill varies according to situations.
Situations 1
When consideration transferred and net assets acquired are given and 100% share are
acquired by the acquirer.
Situation 2
When consideration transferred and net assets acquired are given and the acquirer
acquired less than 100% shares of subsidiary.
Situation 3
When consideration transferred, net assets acquired, assets held for sale and
contingent liabilities.
Gain from bargain purchase (negative goodwill)
in extremely rare circumstances an acquirer will make gain from bargain purchase
(negative goodwill) in a business combination. This happens when the net assets acquired is
greater than the total consideration. Before recording negative goodwill, it is necessary to
review all assets, liabilities and continent liabilities to ensure that they have been properly
accounted for. Also, the acquirer shall determine whether there exists clear evidence of the
underlying reasons for classifying the business combination as a bargain purchase.
In short bargain purchase arises when the fair value of the net assets acquired exceeds
the consideration paid for them.
The objective of this Standard is to lay down principles and procedures for
preparation and presentation of consolidated financial statements. Consolidated financial
statements are presented by a parent (also known as holding enterprise) to provide financial
information about the economic activities of its group. These statements are intended to
present financial information about a parent and its subsidiary(ies) as a single economic
entity to show the economic resources controlled by the group, the obligations of the group
and results the group achieves with its resources.
Summary of consolidation process
In preparing consolidated financial statements, the financial statements of the parent and its
subsidiaries should be combined on a line by line basis by adding together like items of
assets, liabilities, income and expenses. In order that the consolidated financial statements
present financial information about the group as that of a single enterprise, the following
steps should be taken:
(a) the cost to the parent of its investment in each subsidiary and the parent’s portion of
equity of each subsidiary, at the date on which investment in each subsidiary is made, should
be eliminated;
( b ) a ny e x c e s s o f t h e c o s t t o t h e p a r e n t o f i t s i n v e s t m e n t i n a subsidiary
over the parent’s portion of equity of the subsidiary, at the date on which investment in the
subsidiary is made, should be described as goodwill to be recognised as an asset in the
consolidated financial statements;
(c) when the cost to the parent of its investment in a subsidiary is less than the parent’s
portion of equity of the subsidiary, at the date on which investment in the subsidiary is made,
the difference should be treated as a capital reserve in the consolidated financial statements;
(d) minority interests in the net income of consolidated subsidiaries for the reporting period
should be identified and adjusted against the income of the group in order to arrive at the net
income attributable to the owners of the parent; and
(e) minority interests in the net assets of consolidated subsidiaries should be identified and
presented in the consolidated balance sheet separately from liabilities and the equity of the
parent’s shareholders.
Uniform accounting policies
Consolidated financial statements should be prepared using uniform accounting
policies for like transactions and other events in similar circumstances. If it is not practicable
to use uniform accounting policies in preparing the consolidated financial statements, that
fact should be disclosed together with the proportions of the items in the consolidated
financial statements to which the different accounting policies have been applied.
Disclosure of non controlling interest in the consolidated balance sheet
A parent presents non controlling interest in its consolidated balance sheet separately
from the equity of the owners of the parent. Clearly speaking, it is shown under non current
liabilities.
Goodwill and pre acquisition loss
On the acquisition date, the subsidiary company may have pre acquisition loss. The
pre acquisition loss should be taken into consideration while calculating net assets. Pre
acquisition loss should be deducted from equity share capital and the balance is net assets
acquired. This net asset should be compared with the consideration paid. The excess of
consideration paid over the net assets acquired represents goodwill.
Goodwill and pre acquisition profit
While acquiring the controlling shares in the subsidiary, the parent company pays not
only for the paid up value of shares acquired but also for the profits that the subsidiary has
accumulated till the date of acquisition. In such cases the total of share capital of the
subsidiary and the parent company’s share in the pre acquisition profit of the subsidiary must
be compared with the consideration paid or transferred in order to arrive at goodwill.
Post acquisition profit of the subsidiary
So far we have discussed the preparation of consolidated balance sheet immediately
after acquiring majority shareholding in a subsidiary. Hence the reserves and surplus of the
subsidiary were treated as capital profits. Now we turn our attention to the treatment profits
earned by the subsidiary after acquisition. This is called post incorporation profit.
Revaluation of fixed assets of subsidiary
Fixed assets of subsidiary company may be revalued at the time of acquisition by the
parent company. While calculating non controlling interest, the share of the non controlling
share holders in the increase in value of fixed assets should be included in the non controlling
interest. This means that the non controlling shareholders are entitled to their share in the
increase in the value of fixed assets on revaluation. Any decrease in the value of fixed assets
should be deducted along with their share in the losses or expenses not written off.
Intra group trading
There may be transactions between companies within a group. In other words, a
company may trade with another company in a group. This is known as intra group trading
and intra group transaction.
Types of intra group trading
Following are the important types of intra group trading or intra group transactions:
a. Sale and purchase of goods on credit
b. Loans held by one company in the other and interest on such loans.
c. Sale of non current assets
d. Intra group dividends
e. Intra group investment in debentures.
shares cum dividend. It may do so in the current year or any future year. Accordingly parent
company should pass the following entry in its books on receiving dividends.
Cash a/c dr
To investment in subsidiary
Dividend received y parent company out of post acquisition profit of subsidiary
If the subsidiary has already paid dividends out of post acquisition profit, the matter
should be regarded as closed and nothing more needs to be done about this. When the
subsidiary paid dividends, it would have debited the amount to its statement of profit or loss
and credited to cash account.
Interim dividend received from subsidiary
The parent company may receive interim dividend from the subsidiary. Interim
dividend is usually declared and paid in the middle of the year. Interim dividend is to be
apportioned between the pre acquisition period and post acquisition period on the basis of
time ratio on the assumption that interim dividend is earned equally throughout the year.
Proposed dividend out of post acquisition profit
Usually dividends are proposed by the subsidiary out of post acquisition profits. The
basic rule is that if a subsidiary has not yet paid a dividend on the equity capital, this
appropriation shall be ignored in consolidation. The full amount of revenue profit attributable
to parent company’s share in the subsidiary is taken in the consolidated balance sheet as
usual. To eliminate the proposed intra group dividend in the consolidated balance sheet, the
following journal entry is to be passed
Proposed dividend a/c dr
To dividend receivable
Example
unsold stock at the yar end and add this amount back to cost of sales, thereby reducing gross
profit.
Acquisition during the accounting year
If the subsidiary is acquired during the accounting year, it is necessary to apportion its
profit for the year between pre acquisition period and post acquisition period. For this the part
year method may be used. Under this method, the entire statement of profit or loss of the
subsidiary is spelt between pre acquisition and post acquisition proportions. Only the post
acquisition figures are included in the consolidated statement of profit or loss.
Consolidated statement of profit or loss and other comprehensive income
After preparing the consolidated statement of profit or loss, it is easy to prepare
consolidated statement of profit or loss and other comprehensive income. Any item of other
comprehensive income is attributable to either the parent or a subsidiary. If it is attributable to
the subsidiary, part of it is allocated to the non controlling interest.
Fair value in acquisition accounting
Fair values are important in the accounting of acquisition of a subsidiary. To calculate
goodwill arising on consolidation, it necessary to have fair values of assets and liabilities. For
example, the market value of a freehold building may have sharply risen since it was
acquired. But the asset may appear in the balance sheet at historical cost less accumulated
depreciation.
IFRS 3 (Ind AS 103) and IFRS 13 (Ind AS 113)
IFRS 3 (Ind AS 103) business combinations gives general principles for arriving at
the fair values of subsidiary’s assets and liabilities. The acquirer should recognize the
acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date only
if they satisfy the following conditions:
a. In the case of an asset other than an tangible asset, it is probable that any associated
future economic benefits will flow to the acquirer, and its fair value can be measured
reliably.
b. In the case of a liability other than a contingent liability, it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation,
and its fair value can be measured reliably.
c. In the case of an intangible asset or a contingent liability, its fair value can be
measured reliably.
IFRS 13 (Ind AS 113) fair value measurement provides guidance on how the fair value of
asset and liabilities should determined. The following should be considered in determining
fair value.
a. The asset or liability being measured
b. The principal market or where there is no principal market, the most advantageous
market in which an orderly transaction would take place for the asset or liability.
c. The highest and best use of the asset or liability and whether it is used on a stand
alone basis or in conjunction with other assets or liabilities.
d. Assumptions that market participants would use when pricing the asset or liability.
Ind AS 27 separate financial statements
Separate financial statements are those presented by a parent (ie an investor with
control of a subsidiary) or an investor with joint control of, or significant influence over, an
investee, in which the investments are accounted for at cost or in accordance with Ind AS
109, Financial Instruments.
Preparation of separate financial statements
Separate financial statements shall be prepared in accordance with all applicable Ind
AS. When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with IndAS 109. The entity shall apply the same accounting for each
category of investments. Investments accounted for at cost shall be accounted for in
accordance with Ind
AS 105, Non-current Assets Held for Sale and Discontinued Operations, when they are
classified as held for sale (or included in a disposal group that is classified as held for sale).
The measurement of investments accounted for in accordance with Ind AS 109 is not
changed in such circumstances.
Parent ceases to become an investment entity
When a parent ceases to be an investment entity, or becomes an investment entity, it shall
account for the change from the date when the change in status occurred, as follows:
(a)when an entity ceases to be an investment entity, the entity shall, in accordance
with paragraph 10, either:
(i) account for an investment in a subsidiary at cost. The fair value of the
subsidiary at the date of the change of status shall be used as the deemed cost at that
date; or
(ii) continue to account for an investment in a subsidiary in accordance with
Ind AS 109.
(b) when an entity becomes an investment entity, it shall account for an investment in
a subsidiary at fair value through profit or loss in accordance with Ind AS109. The difference
between the previous carrying amount of 930 the subsidiary and its fair value at the date of
the change of status of the investor shall be recognised as a gain or loss in profit or loss. The
cumulative amount of any fair value adjustment previously recognised in other
comprehensive income in respect of those subsidiaries shall be treated as if the investment
entity had disposed of those subsidiaries at the date of change in status.
Ind AS 28 investments in Associates and Joint ventures
Ind AS 28 investment in Associates and joint ventures outlines how to apply, with
certain limited exceptions, the equity method to investments in associates and joint ventures.
Difference between associates and joint ventures
Associates are entities over which the investor has significant influence. Joint
ventures, on the other hand, are entities over which the ventures have joint control.
Significant influence
If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or more
of the voting power of the investee, it is presumed that the entity has significant influence,
unless it
can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly
or
indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the entity does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an entity from having significant influence.
Equity method
Under the equity method, on initial recognition the investment in an associate or a
joint venture is recognised at cost, and the carrying amount is increased or decreased to
recognise the investor’s share of the profit or loss of the investee after the date of acquisition.
The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or
loss. Distributions received from an investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary for changes in the investor’s
proportionate interest in the investee arising from changes in the investee’s other
comprehensive income. Such changes include those arising from the revaluation of property,
plant and equipment and from foreign exchange translation differences.
Goodwill / capital reserve
On acquisition of the investment, an entity recognizes goodwill or a capital reserve. It
is based on the difference between the cost of the investment and an entity’s share of the
identifiable net asset of the investee as on acquisition date. If the cost of investment exceeds
the entity’s share of the identifiable net assets of the investee, and the difference is goodwill.
Investors share of post acquisition profit or loss of investee
The carrying amount of an investment in associate, after the acquisition date, is
adjusted to recognize the investor’s share of post acquisition profit or loss and OCI of
the investee entity. The investor’s share of the profit or loss and OCI of the investee are
recognized in the investor’s profit and loss and OCI respectively.
Investors share of gain or loss in respect of downstream or upstream transactions
In case of any downstream transactions or an upstream transaction, the investor’s
share of gain or losses in such transactions is eliminated.
MODULE-V
Double account system
(Accounts of electricity companies)
Meaning of Double Account System:
The Double Account System is a method of presenting the annual final accounts/annual
financial statements of public utility undertakings, like Railways, Electricity, Gas, Water
Supply, Tramways etc.
Features of Double Account System
1. Generally, a public utility undertaking needs a large amount of capital which is invested in
the acquisition of fixed assets. Therefore, fixed assets, fixed liabilities and current assets,
current liabilities are to be separately dealt with. Fixed Assets and fixed or long-term
liabilities are recorded in Receipts and Expenditure on Capital Account. Similarly, current
assets and current liabilities are recorded in the General Balance Sheet.
2. Revenue Account and Net Revenue Account are prepared instead of Profit and Loss
Account and Profit and Loss Appropriation Account.
3. Normally, no adjustment of asset is made in the Capital Account.
4. Depreciation is not deducted from the asset concerned but the same is shown as a liability
by way of a fund. And, as such, fixed assets are recorded at book value.
5. Any kind of funds and reserve — e.g., Sinking Fund, Depreciation Fund, General Reserve,
Capital Reserve, the Balance of Revenue/Net Revenue Account — are shown in the liabilities
side of the General Balance Sheet.
6. Discount and Premiums are permanently treated as capital items.
7. Loan capital (debentures) Shares and Stocks are treated as capital items.
8. Interest on Loan and Debentures (i.e., all fixed interests) are to be charged against Net
Revenue Account.
Advantages of Double Account System
1. As Depreciation fund is compulsorily created and invested in outside securities, it helps to
replace an asset without affecting the liquid resources, viz., Cash, of the concern.
2. Revenue account represents the operating activities which expresses the operating result of
the undertaking while extraneous items are recorded on Net Revenue Account which
expresses the real operational result.
3. The capital account helps us to understand the source of capital in various forms and the
application of same in the form of various fixed assets. Thus, it can easily be followed by an
ordinary person.
4. Since these concerns enjoy almost monopoly rights given by the Govt., the Govt, may
understand whether the concern supplies the efficient service at reasonable cost or not after
analysing its prescribed format of accounting.
5. The undertakings may compile at ease various statistical returns which reflect the service
given to the public since the accounts are published in a standardized form.
Difference between single account system and double account system.
(a) Under Single Account System, only one Balance Sheet is prepared which contains
assets and liabilities. But, under Double Account System, The Balance Sheet is split
up into two parts (i) Capital Account, and (ii) The General Balance Sheet.
(b) Under Single Account System, the purpose of preparing accounts is to show the
financial position of a firm at a particular date whereas, under Double Account
System, the purpose is to show the amount of capital received and the application of
the same in fixed assets.
(c) Under Single Account System, depreciation is deducted from the respective assets in
the Balance Sheet. Under Double Account System, however, the fixed assets are
always shown at book value, i.e. they are not written-down in the books.
(d) The revenue account is known as Profit and Loss Account and Profit and Loss
Appropriation Account, respectively, under Single Account System. But the same is
known as Revenue Account and Net Revenue Account under Double Account
System.
Final accounts under double account system
The final account under double account system consist of :
1. Revenue account
2. Net revenue account
3. Capital account
4. General balance sheet
Revenue Account
All items of expenditure appear on the debit side whereas all items of income appear
on the credit side of Revenue Account.
Revenue account for the year ended
A.Generation 1. Sale of energy for lighting
1. to fuel 2. Sale of energy for power
2. To oil, wastage , water 3. Sale of energy under special
3. salary of engineers contracts
4. to wages and gratuities 4. Public lighting
5. repairs and maintenance 5. Rental of meters
B. distribution 6. Rent receivable
1. salary of engineers 7. Transfer fees
2. wages and gratuities 8. Other items
3. repairs and maintenance 9. Miscellaneous receipts
c. public lamps 10. Sale of ashes
Capital Account
It is also known as Receipts and Expenditure on Capital Account. The purpose of this account
is to show the sources of total capital and the application of the same in different fixed assets.
It contains expenditure of a capital in the left hand side (or debit side) including additions to
fixed assets. Three columns are generally used for the purpose—the first column shows the
expenditure on each item at the end of last year, the second one shows the additions which
are made for the current year, and the third column represents the total capital expenditure to
date.
On the other hand, the right hand side (or credit side) reveals the receipts on capital account
including amount received from public for shares and debentures including the amount of
fixed loans, if any. Premium received on shares and debentures or any calls paid in advance
are also to be added and Calls-in-arrear is to be deducted. Three columns are also used—the
first column shows the receipts on each item at the end of last year, the second column shows
the receipts for the current year and the third column represents the total capital receipts to
date.
Balance Sheet. The assets are recorded in the right hand side (asset side) and liabilities are
recorded in the left hand side (liabilities side), i.e., it is prepared in its usual form.
Prepare a Revenue Account, Net Revenue Account and the General Balance Sheet under the
Double Account System from the following Trial Balance as on 31.12.1993, of the Rural
Electric Supply Co. Ltd. A Call of Re. 1 per share was payable on 30.6.1993 and arrears are
subject to interest at 10% p.a.
Depreciation to be provided for on opening balance on Buildings 2½%, Machinery 7½%,
Main 5%, Transformer etc. 10%, Meters and Electrical Instruments 15%, Advertising has
been prepaid by Rs. 5,000 and provision of 5% to be made for doubtful debts.
Annexure V of the Indian electricity Rules, 1956 presents the following statements:
Form No contents
6. Contingencies Reserve:
A sum equal to not less than 1/4% and not more than 1/2% of the original cost of fixed assets
must be transferred from the revenue account to Contingencies Reserves until it equals 5% of
the original cost of fixed assets. The amount of the reserve must be kept invested in trust
securities.
7. Development Reserve:An amount equal to income-tax and super tax (calculated at current
rates) which would have been paid but for the development rebate allowed by income-tax
authorities on installation of new plant and machinery, has to be transferred to the
Development Reserve Account.
If, in any accounting year, the clear profit excluding the special appropriation together with
the accumulations, if any, in the Tariff and Dividends Control Reserve less the amount to be
credited to Development Reserve falls short of the reasonable return, the sum to be
appropriated to the Development Reserve in respect of such accounting year may be reduced
by the amount of the shortfall.
The following balances have been extracted from the books of an electricity company at
the end of the accounting year:
In the accounting year, the company earned a profit of Rs. 28, 00,000 after tax. Assuming the
bank rate is 10%, show how you deal with profits of the company.