Professional Documents
Culture Documents
Financial
Reporting
For 3rd SEM M.com, Bangalore University
S.Darshan R. Madhankumar
R. Madhankumar M.com, PGDFM, PGDBL, (CS)
S. Darshan M.com, MFA, PGDBL, (CS)
Corporate Financial
Reporting
(CFR)
Syllabus:
Module 1: Accounting Standards
Accounting Standards, Interpretations and guidance notes on various aspects issued by
the ICAI and their applications. Overview of International Accounting Standards (IAS);
References:
1. IFRS for India, Dr.A.L.Saini, Snow white publications
2. Roadmap to IFRS and Indian Accounting Standards by CA Shibarama Tripathy
3. IFRS explained – A guide to International financial reporting standards by BPP
learning Media
4. IFRS for finance executives by Ghosh T P, taxman allied services private limited
5. IFRS concepts and applications by Kamal Garg, Bharath law house private limited
6. IFRS: A Quick Reference Guide by Robert J. Kirk, Elsevier Ltd.
7. First lesson to International Financial ReportingStandards beginners guide by MP
Vijay Kumar, prime knowledge services.
8. A student’s guide to international financial reporting standards by Clare Finch,
Kalpan Publishing.
Chapter 1
Accounting standards
Syllabus:
Accounting standards, interpretations and guidance notes on various aspects issued
by the ICAI and their applications. Overview of International Accounting standards
(IAS)
Introductions:
The use of the word standard in accounting literature is of a recent origin what is described
as standard today used to be generally known as principles a few years ago. The British
introduced the term standards in place of principles. We know that financial statements are
prepared to summarize the end result of all the business activities by an enterprise during
an accounting period in monetary terms.
To compare the financial statements of various reporting enterprises poses some difficulties
because of the divergence in the method and principles adopt by these enterprises in
preparing their financial statements. In order to make these methods and principles
uniform and comparable to the extent possible standards are evolved and today there exist
different sets of accounting standards which are followed by different countries mean to say
respective countries use their own standards for accounting practice.
In other words The Accounting Standards are a set of guidelines and road map, known as
Generally Accepted Accounting Principles (GAAP), issued by the Accounting body of the
country
Eg. ICAI – Standard Setting Board
Advantages:
It provides the accountancy profession with useful working rules.
It assists in improving quality of work performed by accountant.
It strengthens the accountant‘s resistance against the pressure from directors to use
accounting policy which may be suspect in that situation in which they perform
their work.
It ensures the various users of financial statements to get complete crystal
information on more consistent basis from period to period.
Corporate Financial Reporting Page 7
R. Madhankumar M.com, PGDFM, PGDBL, (CS)
S. Darshan M.com, MFA, PGDBL, (CS)
It helps the users compare the financial statements of two or more organisations
engaged in same type of business operation.
Disadvantages:
Users are likely to think that said statements prepared using accounting standard
are infallible.
They have been derived from social pressures which may reduced freedom.
The working rules may be rigid or bureaucratic to some user of financial statement.
The more standards there are, the more costly the financial statements are to
produce.
An important question with regard to standard setting is deciding whether standard should
be set by government or a private sector body or government backed agency.
2. If private sector body as standard setter: Certain opinions have also been
advanced for giving standard setting task to private body because firstly, It is argued
that government could neither attract enough high quality talent nor devote
sufficient resources to standard setting. Secondly government would be susceptible
to undue political influence from special influence groups. Finally a private sector
body would be more responsive to the needs of diverse interest.
2. Political Bargaining in Standard Setting: Earlier, but not so many years ago,
accounting could be thought of as an essentially non-political subject. But, today, as
the standard setting process reveals, accounting can no longer be thought of as non-
political.
4. Pluralism: The existence of multiple accounting agencies has made the task of
standard setting more difficult. In India, company financial reporting is influenced
by although in different degrees, by Accounting Standards Board of ICAI, Ministry of
Corporate Affairs, Institute of Cost and Works Accountants of India, Securities and
Exchange Board of India (SEBI).
Further, we have self regulatory organization such as the Indian bank association(IBA),
Fixed income money market and derivate association of India (FIMMDA), Association of
merchant bankers of India(AMBI), Association of Mutual funds of India(AMFI), Foreign
exchange Dealers association of India(FEDAI), Primary Dealers association of India (PDAI),
among other which play a critical role in developing codes of conduct and setting and
maintaining standards. Following are the bodies responsible for setting up A.S.
2. Accounting standards and SEBI: Security and Exchange board of India was
established in 1982 and it deals with the formulation of Laws, by laws rules and
amendments for the purpose of giving smooth and strong support to stock market.
SEBI also focuses on protecting to interest of investor.
3. Accounting standard and Income tax act 1961: Section 145 of the income tax
act 1961 deals with the method of accounting to adopted for computing the income
under the head of profit and gains from business and profession. ― The finance act
1995 had amended section 145 w.e.f from 1st April 1999.
AS- 4 – Contingencies* and Events Occurring after the Balance Sheet Date
Corporate Financial Reporting Page 11
R. Madhankumar M.com, PGDFM, PGDBL, (CS)
S. Darshan M.com, MFA, PGDBL, (CS)
Events that occur between the balance sheet date and the date on which the financial
statements are prepared are referred to as events occurring after the balance sheet date.
Such events are classified into two categories: (i) events occurring after balance sheet date
that provide further evidence to the conditions which were prevailing on the balance sheet
date and (ii) events occurring after the balance sheet date that are indicative of the
conditions which occur subsequent to the balance sheet date.
AS-5 – Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
The standard ensures uniform classification and disclosure of certain items so that profit
and loss statement may be prepared on uniform basis and thereby facilitating inter-period
and inter-firm comparisons. The standard recommends that all items of income and
expense which are recognised in a period should be included in the determination of net
profit or loss for the period. While arriving at the net profit, extraordinary items and the
effects of changes in accounting estimates should also be incorporated. The profit and loss
statement should disclose clearly the profit or loss from ordinary activities and
extraordinary activities.
amalgamating companies but also of the shareholders‘ interests and of the business of
these companies.
AS-19 – Leases
The objective of this standard is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures in relation to finance leases and operating leases. A
lease is classified as a finance lease if it transfers substantially all the risks and rewards
incident to ownership, title may or may not eventually be transferred. A lease is classified as
an operating lease if it does not transfer substantially all the risks and rewards incident to
ownership. Leases in the Financial Statement of Lessees
(a) Financial Leases: In this case at the inception of a financial lease, the lessee should
recognise the lease as an asset and a liability.
(b) Operating Leases: Lease payments under an operating lease should be recognised as an
expense in the statement of profit and loss on a straight line basis over the lease term
unless another systematic basis is more representative of the time pattern of the user‘s
benefit. transaction is established at fair value, any profit or loss should be recognised
immediately.
(c) that can be distinguished operationally and for financial reporting purposes.
AS-25 – Interim Financial Reporting
An interim financial report means a financial report containing either a complete set of
financial statements or a set of condensed financial statements for an interim period.
Lesson 9 Accounting Standards 417 An interim financial report should include, at a
minimum, the following components: (i) Condensed balance sheet; (ii) Condensed statement
of profit and loss; (iii) Condensed cash flow statement; and (iv) Selected explanatory notes.
2. Members being accounting bodies from countries other than the nine above which
seek and are granted membership.
The need for an IAS program has been attributed to three factors:
The growth in international investment investors in international capital market are
to make decision based on published accounting which are based on accounting
policies and which again vary from country to country. The intentional accounting
standard will help investors to make more efficient decision.
The increase prominence of multinational enterprises such enterprises render
accounts for the home and host countries in which their shareholders reside and in
local country in which they operate accounting standards will help to avoid
confusion.
The growth in the number of accounting standard setting bodies it is hoped that the
IASC can harmonize these separate rule making efforts.
(ii) To work for the improvement and harmonisation of regulation accounting standards and
procedures relating to the presentation of financial statements.
IAS 2 Inventories
IAS 3 Consolidated Financial Statements Originally issued 1976, effective 1 Jan 1977.
Superseded in 1989 by IAS 27 and IAS 28
IAS 4 Depreciation Accounting Withdrawn in 1999, replaced by IAS 16, 22, and 38, all of
which were issued or revised in 1998
IAS 6 Accounting Responses to Changing Prices Superseded by IAS 15, which was
withdrawn December 2003
IAS 9 Accounting for Research and Development Activities – Superseded by IAS 38 effective
1.7.99
IAS 15 Information Reflecting the Effects of Changing Prices – Withdrawn December 2003
IAS 17 Leases
IAS 18 Revenue
IAS 25 Accounting for Investments – Superseded by IAS 39 and IAS 40 effective 2001
IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions –
Superseded by IFRS 7 effective 2007
IAS 41 Agriculture
Chapter 2
International Financial Reporting Standard(IFRS)
Syllabus:
Interpretations by International Financial Reporting Committee(IFRIC), Significance Vis a vis Indian
accounting standard. US GAAP, Application of IFRS and US GAAP.
Meaning of IFRS:
International financial reporting standards (IFRS) refers to a set of generally accepted
accounting principles (GAAP) used by companies to prepare financial statements, a critical
sources of information published annually at a minimum and useful to various
stakeholders in understanding a company‘s financial performance and management‘s
stewardship of the company‘s resources.
In other words International financial reporting standards (IFRS) are a set of Accounting
standard developed by the international accounting standard board (IASB) which helps in
becoming the global standard for the preparation of public company financial statements.
Features of IFRS
1. Faithfull representation: It is another basic features of IFRS. The financial statement
is prepared under IFRS system is complete and free from Bias.
2. Comparability: The basic features of IFRS are Comparability. It will help to compare
financial statement form one period to the next or for two companies in the same
industry so that we can make a informed decision about the companies.
4. Materiality and Aggregation: Every material class of similar item has to be presented
separately. Items that are dissimilar nature or function shall be presented separately
unless they are immaterial.
5. Verifiability: Verifiability helps the users that the information is faithfully presented
according to the economic phenomenon. It means that different knowledgeable and
independent observers could reach the consensus that a particular depiction provides a
faithful representation.
7. Understandability: Financial reports are prepared for users who have reasonable
knowledge of business and economic activities and who review and analyze the
information diligently. Some phenomenon is complex and cannot be made easy to
understand. Excluding information on those phenomenons might make their
information easier who understand.
Users of IFRS
a) Investors: A financial report helps the investors to take decision about buying and
selling of shares, taking up a rights issue and voting. Investors can also know the level
of dividend and any changes in share price by going through financial reports. A
financial report helps the investors to know about liquidity and solvency position of the
company and also the company‘s future prospects.
b) Employees: Financial reporting helps the employees to know about their security of
employment and future prospects for job in the company and help them with collective
pay bargaining.
c) Lenders (Debenture holders and Creditors): They need information to decide whether
to lend to a company. They will also need to check that the value of any security
remains adequate, that the interest repayments are secured, that the cash is available
to redemption at the appropriate time and that any financial restrictions have not been
breached.
d) Suppliers: Suppliers to need to known whether the company will be a good customer
and pay its debts.
e) Customers: They need to know the weather the company will be able to continue
producing and supplying goods.
b) Increase Comparability: IFRS will give more comparability among sectors, countries
and companies. This will result in more transparent financial reporting of a company‘s
activities which will benefit investors, customers and other key stakeholders in India
and overseas.
c) Access to Global Capital Markets: Convergence with IFRS will enable Indian entities
to have easier access to global capital markets and eliminates barriers to cross-border
listings. It encourages international investing and thereby leads to more foreign capital
flows to the country.
e) IFRS balance sheet will be closer to economic value: Historical cost will be
substituted by fair values for several balance sheet items, which will enable a corporate
to know its true worth.
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S. Darshan M.com, MFA, PGDBL, (CS)
g) Benefits for the Industry: Currently companies need to prepare additional financial
statements based on multiple reporting formats to arise capital in global market.
Convergence with IFRS will eliminate the requirement for dual set of financial
statements and thereby reduces the cost of raising funds by the companies.
Disadvantages of IFRS:
a) Small companies that have no dealings outside the countries have no incentive to adopt
IFRS unless mandated.
b) There is an extremely high price-tag – ―…the SEC estimates the costs for issuers of
transitioning to IFRS would be approximately $32 million per company and relate to the
first three years of filings on Form 10-K under IFRS. Total estimated costs for the
approximately 110 issuers estimated to be eligible for early adoption would be
approximately $3.5 billion‖ (SEC, 2008).
d) Many feel that during this financial crisis that the world is currently experiencing, a
conversion of this magnitude is too much to ask of executives and management
Consultation with SAC about adding the topic to the IASB‘s Agenda
5. Complexity in the financial reporting process Under IFRS, companies would need to
increasingly use fair value measures in the preparation of financial statements.
Companies, auditors, users and regulators would need to get familiar with fair value
measurement techniques.
6. Impact on financial performance Due to the significant differences between Indian
GAAP and IFRS, adoption of IFRS is likely to have a significant impact on the financial
position and financial performance of most Indian companies.
9. Legal and regulatory considerations In some cases, the legal and regulatory
accounting requirements in India differ from the IFRS. In India, Companies Act of 1956,
Banking Regulation Act of 1949, IRDA regulations and SEBI guidelines prescribe
detailed formats for financial statements to be followed by respective enterprises in their
financial reporting. In such cases, strict adherence to IFRS in India would result in
various legal problems.
US GAAP
GAAP refers to accounting policies and procedures that are widely used in practice. Unlike India
where accounting has its basis in law, US GAAP has evolved to be a collection of pronouncements
issued by a particular accounting organization. US GAAP are the accounting rules used to prepare
financial statements for publicly traded companies and many private companies in United States.
Generally accepted accounting principles for local and state governments operates under different set
of assumptions, principles, and constraints, as determined by the Governmental Accounting
Standards Board. (GASB).
In the United States, as well as in other countries practicing under the English common law system,
the government does not set accounting standards, in the belief that the private sector has the better
knowledge and resources. The Securities and Exchange Commission (SEC) has the ultimate authority
to set US accounting and financial reporting standards for public (listed) companies. The SEC has
delegated this responsibility to the private sector led by the Financial Accounting Standards Board
(FASB). Other private sector bodies including the American Institute of Certified Public Accountants
(AICPA) and the FASB‘s Emerging Issues Task Force(EITF) also establish authoritative accounting
Standard Board(FIN) also provide implementation and interpretation guidance. The SEC has the
Statutory authority to establish GAAP for filings made with it. While allowing most of the Standard
settings to be done in the private sector, the SEC is still very active in both its oversight responsibility
as well as establishing guidance and interpretations, as it believes appropriate. US GAAP have the
reputation around the world of being more perspective and detailed than accounting standards in
other countries. In order to organize and make clear what is meant by US GAAP, a GAAP hierarchy
has been established which contains four categories of accounting principles. The sources in the
higher category carry more weight and must be followed when conflicts arise. The table given below
summaries the current GAAP hierarchy for financial statements of non-governmental entities.
BALANCE SHEET
Basis of IFRS USGAAP IGAAP
Difference
Format IFRS does not prescribe any US GAAP also does not IGAAP provides two
format, but stipulates minimum prescribe any format , format of Balance Sheet-
line items like PPE, Investment but Rule S-X of SEC Horizontal and Vertical
property, Intangible assets, stipulates for listed format ( Part I of
Financial assets, Biological companies minimum Schedule III to the
assets, inventory, receivables, line items to be disclosed Companies Act, 2013).
etc. either on face of Balance
sheet or Notes to
Accounts.
Order Under IFRS, line items are Under US GAAP, items In IGAAP, line items are
presented in increasing order of in assets and liabilities presented in increasing
liquidity. are presented in order of liquidity.
decreasing order of
liquidity.
Consolidation Consolidation of Financial Under US GAAP It is not mandatory for
statements of subsidiaries is not consolidation of results companies to prepare
compulsory until it is required of Subsidiaries and CFS under AS 21.
under some other law or Variable interest entity However, listed
regulation (FIN 46R) is compulsory enterprises are
mandatorily required by
listing agreement of
SEBI to prepare and
present CFS.
Current/Non- An organisation has an option to Bifurcation into current No such requirement
Current adopt Current or Non current & non-current items is
classification of assets and cumpulsorily required.
liabilities
Inventories should be valued at the lower of cost and net realisable value. Net realisable value is
selling price less cost to complete the inventory and sell it. Cost includes all costs to bring the
inventories to their present condition and location. If specific cost is not determinable, the benchmark
treatment is to use FIFO or weighted average. An allowed alternative is LIFO, but then there should be
disclosure of the lower of (i) net realisable value and (ii) FIFO, weighted average or current cost. The
cost of inventory is recognised as an expense in the period in which the related revenue is recognised.
If inventory is written down to net realisable value, the writedown is charged to expense. Any reversal
of such a write-down in a later period is credited to income by reducing that period‘s cost of goods
sold.
The cash flow statement is a required basic financial statement. It explains changes in cash and cash
equivalents during a period. Cash equivalents are short-term, highly liquid investments subject to
insignificant risk of changes in value. Cash flow statement should classify changes in cash and cash
equivalents into operating, investing, and financial activities.
Changes in Accounting Estimates and Errors An entity shall select and apply its accounting policies
consistently for similar transactions, other events and conditions, unless a Standard or an
Interpretation specifically requires or permits categorisation of items for which different policies may
be appropriate. An entity shall change an accounting policy only if the change (a) is required by a
Standard or an Interpretation; or (b) results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events or conditions on the entity‘s
financial position, financial performance or cash flows.
An entity shall adjust the amounts recognized in its financial statements to reflect adjusting events
after the balance sheet date. Further an entity shall not adjust the amounts recognized in its financial
statements to reflect non-adjusting events after the balance sheet. If an entity declares dividends to
holders of equity instruments after the balance sheet date, the entity shall not recognize those
dividends as a liability at the balance sheet date. An entity shall not prepare its financial statements
on a going concern basis if management determines after the balance sheet date either that it intends
to liquidate the entity or to cease trading, or it has no realistic alternative but to do so.
It provides, among other things: (i) Accrue deferred tax liability for nearly all taxable temporary
differences. (ii) Accrue deferred tax asset for nearly all deductible temporary differences if it is
probable a tax benefit will be realised. (iii) Accrue unused tax losses and tax credits if it is probable
that they will be realised. (iv) Use tax rates expected at settlement. (v) Current and deferred tax assets
and liabilities are measured using the tax rate applicable to undistributed profits. (vi) Non-deductible
goodwill: no deferred tax. (vii) Unremitted earnings of subsidiaries, associates, and joint ventures: Do
not accrue tax. (viii) Capital gains: Accrue tax at expected rate. (ix) Do not ―gross up‖ government
grants or other assets or liabilities whose initial recognition differs from initial tax base.
Basis of Segment Reporting: (i) Public companies must report information along product and service
lines and along geographical lines. (ii) One basis of segmentation is primary, the other is secondary.
(iii) Segment accounting policies the same as consolidated.
The cost of an item of property, plant and equipment should be recognised as an asset if, and only if,
(a) it is probable that future economic benefits associated with the item will flow to the entity; and (b)
the cost of the item can be measured reliably. An item of property, plant and equipment that qualifies
for recognition, as an asset should shall be measured at its cost. An entity shall choose either the cost
model or the revaluation model as its accounting policy and shall apply that policy to an entire class
of property, plant and equipment. If an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset belongs shall be revalued. If an asset‘s
carrying amount is increased as a result of revaluation, the increase shall be credited directly to
equity under the heading of revaluation surplus. If an asset‘s carrying amount is decreased as a result
of revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be
debited directly to equity under the heading revaluation surplus in respect of that asset.
IAS-17 – Leases
A lease is classified as finance lease if it transfers substantially all risks and rewards incidental to
ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks
and rewards incidental to ownership. At the commencement of the lease term, lessees shall recognize
finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the
leased property or, if lower, the present value of the minimum lease payments, each determined at the
inception of the lease. Any initial direct costs of the lessee are added to the amount recognized as an
asset. Finance lease gives rise to depreciation expense for depreciable assets as well as finance
expense for each accounting period. Lease payments under operating lease shall be recognized as an
expense on a straight-line basis over the lease term unless another systematic basis is more
representative of the time pattern of the user‘s benefit.
IAS-18 – Revenue
Revenue should be measured at fair value of consideration received or receivable. Usually this is the
inflow of cash. Discounting is needed if the inflow of cash is significantly deferred without interest. If
dissimilar goods or services are exchanged (as in barter transactions), revenue is the fair value of the
goods or services received or, if this is not reliably measurable, the fair value of the goods or services
given up. Revenue should be recognised when: (i) significant risks and rewards of ownership are
transferred to the buyer; (ii) managerial involvement and control have passed; (iii) the amount of
revenue can be measured reliably; (iv) it is probable that economic benefits will flow to the enterprise;
and (v) the costs of the transaction (including future costs) can be measured reliably.
Grants should not be credited directly to equity. They should be recognised as income in a way
matched with the related costs. Grants related to assets should be deducted from the cost or treated
as deferred income.
A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by
applying to the foreign currency amount the spot exchange rate between the functional currency and
the foreign currency at the date of the transaction. Reporting at subsequent balance sheet date
should be: (a) foreign currency monetary items shall be translated using the closing rate; (b) non-
monetary items that are measured in terms of historical cost in a foreign currency shall be translated
using the exchange rate at the date of the transaction; and (c) non monetary items that are measured
at fair value in a foreign currency shall be translated using the exchange rates at the date when the
fair value was determined. Exchange differences arising on the settlement of monetary items or on
translating monetary items at rates different from those at which they were translated on initial
recognition during the period or in previous financial statements shall be recognized in profit and loss
in the period in which they arise. When a gain or loss on a non-monetary item is recognized directly in
equity, any exchange component of that gain or loss shall be recognized directly in equity. Conversely,
when a gain or loss on a monetary item is recognized in profit or loss, any exchange component of
that gain or loss shall be recognized in profit or loss.
The benchmark treatment is to treat borrowing costs as expenses. The allowed alternative is to
capitalise those directly attributable to construction. If capitalised and funds are specifically
borrowed, the borrowing costs should be calculated after any investment income on temporary
investment of the borrowings. If funds are borrowed generally, then a capitalisation rate should be
used based on the weighted average of borrowing costs for general borrowings outstanding during the
period. Borrowing costs capitalised should not exceed those actually incurred. Capitalisation begins
when expenditures and borrowing costs are being incurred and construction of the asset is in
progress. Capitalisation suspends if construction is suspended for an extended period, and ends when
substantially all activities are complete.
This standard requires disclosure of related party transactions and outstanding balances in the
separate financial statements of a parent, venturer or investor. A party is related to an entity if: (a)
directly or indirectly through one or more intermediaries, the party: (i) controls, is controlled by, or is
under common control with, the entity which includes parents, subsidiaries and fellow subsidiaries:
(ii) has an interest in the entity that gives it significant influence over the entity; or (iii) has joint
control over the entity; (b) the party is an associate; (c) the party is a joint venture in which the entity
is a venturer; (d) the party is a member of the key management personnel; (e) the party is close
member of the family; (f) the party is controlled, jointly controlled or significantly influenced; (g) the
party is a post –employment benefit plan for the benefit of employees of the entity
The standard applies to accounting and reporting by retirement benefit plans. It establishes separate
standards for reporting by defined benefit plans and by defined contribution plans.
An associate is an entity, including an unincorporated entity such as partnership, over which the
investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
An investment in an associate shall be accounted for using the equity method with specified
exceptions. An investor shall discontinue the use of equity method from the date that it ceases to have
significant influence over an associate. The investor in applying equity method uses the most recent
available financial statements of the associate. When the reporting dates of the investor and the
associate are different, the associates prepares, for the use of the investor, financial statements as of
the same date as the financial statements of the investor. The investor‘s financial statements shall be
prepared using uniform accounting policies for like transactions and events in similar circumstances.
Hyperinflation is indicated if cumulative inflation over three years is 100 per cent or more (among
other factors). In such a circumstance, financial statements should be presented in a measuring unit
that is current at the balance sheet date. Comparative amounts for prior periods are also restated into
the measuring unit at the current balance sheet date. Any gain or loss on the net monetary position
arising from the restatement of amounts into the measuring unit current at the balance sheet date
should be included in net income and separately disclosed.
A joint venture is a contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control. These are of three types: (i) Jointly controlled operations: It
should be recognised by the venturer by including the assets and liabilities that it controls and the
expenses that it incurs and its share of the income that it earns from the sale of goods or services by
the venture. (ii) Jointly controlled assets: It should be recognised as follows: (a) its share of the jointly
controlled assets, classified according to the nature of the assets; (b) any liability that it has incurred;
(c) its share of any liabilities incurred jointly with the other venturers in relation to the joint venture;
(d) any income from the sale or use of its share of output of the joint venture; (e) any expenses that it
incurred in respect of its interest in the joint venture. Lesson 9 Accounting Standards 435 (iii) Jointly
controlled entities: It may maintain its own accounting records and prepares and presents financial
statements in the same way as other entities in conformity with International Financial Reporting
Standard.
It is applicable only to public companies. An entity shall calculate basic earnings per share for profit
or loss attributable to ordinary equity holders. Basic earning per share shall be calculated by dividing
profit or loss attributable to ordinary equity holders by the weighted average number of ordinary
shares. An entity shall calculate diluted earnings per share amounts for profit or loss attributable to
ordinary equity holders of the parent entity and, if presented, profit or loss from continuing operations
attributable to those equity holders. For the purpose of calculating diluted earnings per share, an
entity shall adjust profit or loss attributable to ordinary equity holders of the parent equity, and the
weighted average number of shares outstanding, for the effects of all dilutive potential ordinary
shares. Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to
ordinary shares would decrease earnings per share or increase loss per share from continuing
The standard defines the minimum content of an interim financial report as a condensed balance
sheet, condensed income statement, condensed cash flow statement, condensed statement showing
changes in equity, and selected explanatory notes. Interim financial statements, complete or
condensed, must cover the following periods: (i) a balance sheet at the end of the current interim
period, and comparative as of the end of the most recent full financial year; (ii) income statements for
the current interim period and cumulative for the current financial year to date, with comparative
statements for the comparable interim periods of the immediately preceding financial year; (iii) a
statement of changes in equity cumulatively for the current financial year to date and comparative for
the same year-to-date period of the prior year; and (iv) a cash flow statement cumulatively for the
current financial year to date and comparative for the same year-to-date period of the prior financial
year. Enterprises are required to apply the same accounting policies in their interim financial reports
as in their latest annual financial statements
Impairment of assets, deals mainly with accounting for impairment of goodwill, intangible assets and
property, plant and equipment. The standard includes requirements for identifying an impaired asset,
measuring its recoverable amount, recognising or reversing any resulting impairment loss, and
disclosing information on impairment losses or reversals of impairment losses. An impairment loss
should be recognised whenever the recoverable amount of an asset is less than its carrying amount.
The standard set out three specific applications of these general requirements (a) a provision should
not be recognised for future operating losses; (b) a provision should be recognised for an onerous; (c) a
provision for restructuring costs should be recognised only when an enterprise has a detailed formal
plan for the restructuring and has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main features to those affected by
it.
The standard states that: (i) an intangible asset should be recognised, in the financial statements, if,
and only if: (a) it is probable that the expected future economic benefits that are attributable to the
asset will flow to the enterprise; and (b) the cost of the asset can be measured reliably. (ii) An entity
shall assess the probability of expected future economic benefits using reasonable and supportive
assumptions that represent management‘s best estimate of the set of economic conditions that will
exist over the useful life of the asset. (iii) Internally generated goodwill shall not be recognized as an
asset. (iv) No intangible asset arising from research shall be recognized. (v) An intangible asset arising
from development shall be recognized subject to specified conditions. (vi) Expenditure on an intangible
item that was initially recognized as an expense shall not be recognized as part of the cost of an
intangible asset at a latter date. (vii) The accounting for an intangible asset is based on its useful life.
(viii) An intangible asset shall be derecognised on disposal or when no future economic benefits are
expected from its use or disposal.
Recognition and Measurement Under this standard an entity shall recognize a financial asset or
financial liability on the balance sheet when and only when, the entity becomes a party to the
Investment property shall be recognized as an asset when it is probable that the future economic
benefits that are associated with the investment property will flow to the entity, and the cost of
investment property can be measured reliably. An investment property shall be measured initially at
its cost. Transaction cost shall also be included in the initial measurement. For accounting purpose
an enterprise must choose either: (i) a fair value model: Investment property should be measured at
fair value and changes in fair value should be recognised in the income statement; or (ii) a cost model:
Investment property should be measured at depreciated cost (less any accumulated impairment
losses). An investment property shall be derecognised on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected from its disposal.
IAS-41 – Agriculture
This standard prescribes the accounting treatment, financial statement presentation and disclosures
related to agricultural activity. Biological assets should be measured at their fair value less estimated
point-of-sale costs, except where fair value cannot be measured reliably. Agricultural produce
harvested from an enterprise‘s biological assets should be measured at its fair value less estimated
point-of-sale costs at the point of harvest. If an active market exists for a biological asset or
agricultural produce, the quoted price in that market is the appropriate basis for determining the fair
value of that asset. If an active market does not exist, an enterprise uses market determined prices or
values when available. A gain or loss arising on initial recognition of biological assets and from the
change in fair value less estimated point-of- sale costs of biological assets should be included in net
profit or loss for the period in which it arises. If a government grant related to a biological asset
measured at its fair value less estimated point-of-sale costs is conditional, including where a
government grant requires an enterprise not to engage in specified agricultural activity, an enterprise
should recognise the government grant as income when the conditions attaching to the government
grant are met.
CHAPTER 3
CORPORATE FINANCIAL REPORTING
Issues and problems with special reference to published financial statements; sustainability
reporting; concept of Triple bottom line reporting, global reporting initiative(GRI) and
International federation of Accountants(IFAC)
Annual report is major vehicle through which Indian Companies are publishing their
financial statement. Like Companies of any developed countries. Indian Annual Reports
now include much more than the legal minimum requirements. Regarding elements of
annual reports, the following are most common.
The marked elements are provided voluntarily. Regarding last few items disclosure is
limited to large companies only. Companies are facing lot problems in publishing the
annual reports. While publishing financial statements, companies has to fulfil the
requirements of all stakeholders, (shareholders, creditors, investors, financial
intermediaries, employees, customers, suppliers, community, state and local governments
etc.)in true and fair view. management decision making is depends upon the financial
statements. Therefore one must be very careful in publishing annual reports. Today, Indian
companies are facing many issues and problems in publishing the annual reports which are
as follows:
7. The development of knowledge economy: For the past two hundered years, neo-
classical economics had recognized only two facts of production: labour and capital.
9. Independence: This can be viewed as the key quality of the external audit; however,
auditor have frequently been criticized for their perceived lack of Independence :
How unfair may the financial relevance of the audit can quite rightly be questioned.
In order to help bolster the independence of the external auditor, larger companies
have established audit committees.
10. Fraud: Fraudulent financial statements are of great concern not only to the
corporate world, but also to the accounting profession. Every year the public has
witnessed spectacular business failures reported by the media.
7. Cost savings - TBL reporting often involves the collection, collation and analysis of data
on resource and materials usage, and the assessment of business processes. For
example, this can enable a company to better identify opportunities for cost savings
through more efficient use of resources and materials.
8. Innovation - The development of innovative products and services can be facilitated
through the alignment of R&D activity with the expectations of stakeholders. The
process of publishing TBL reporting provides a medium by which companies can engage
with stakeholders and understand their priorities and concerns.
9. Aligning stakeholder needs with management focus - External reporting of
information focuses management attention on not only the integrity of the data but also
the continuous improvement of the indicator being reported.
10. Creating a sound basis for stakeholder dialogue - Publication of TBL reporting
provides a powerful platform for engaging in dialogue with stakeholders. Understanding
stakeholder requirements and alignment of business performance with such
requirements is fundamental to business success. TBL reporting demonstrates to
stakeholders the company's commitment to managing all of its impacts, and, in doing
so, establishes a sound basis for stakeholder dialogue to take place.
Forms of Reporting
A number of options, ranging from the inclusion of minimal TBL-related information within
statutory reporting through to the publication of a full TBL report, are available to
companies considering TBL reporting.
In choosing an appropriate path forward, companies are likely to take into account a
diversity of factors including: the overall strategic objectives; current capacity to report;
prioritization of stakeholder requirements; and the reporting activities within the industry
sector.
understood form. It is important that companies develop indicators that reflect their own
strategic objectives and the requirements of key stakeholder groups.
Triple Bottom Line Accounting
1. Expanding the traditional reporting framework
2. Take into account environmental and social performance in addition to financial
performance.
3. Company's responsibility to 'stakeholders' rather than shareholders.
Legislation
1. Legislation permitting corporations to adopt a 'Triple Bottom Line' is under
consideration in some jurisdictions.
2. The triple bottom line has been adopted as a part of the State Sustainability Strategy
Currently, there is wide variation in how organizations define their business models and approach to
disclosure. This highlights the need for a clear, universally applicable, international definition of a
business model. The proposed definition and discussion in the paper aim to bridge the varied
interpretations by highlighting common areas and ensuring a consistent application across industries
and sectors.
The background paper found that, in a complex financial climate that has seen investors demand
greater transparency, reporting on business models is currently inconsistent, incomparable, and
incomplete because of a lack of consistent guidance.
―Towards Integrated Reporting – Communicating Value in the 21st Century‖ , where it was identified
as one of two ―central themes for the future direction of reporting‖. The Discussion Paper noted that
although there ―is no single, generally accepted definition of the term ‗business model‘ ... it is often
seen as the process by which an organization seeks to create and sustain value.‖
The process of integrated reporting, in turn, is a powerful tool to help drive an organization‘s
strategic agenda, providing management with key drivers of performance; Integrated reporting
has to be open and transparent by reflecting both improvements in performance as well as
weaknesses; and
Pension fund investors, as well as some other institutional investors, are increasingly looking
for financial implications of ESG factors to understand how an organization‘s strategy and
operations are affecting the numbers and key measures of performance.
Definition on Capitals:
(1) Financial capital. The pool of funds that is:
available to an organization for use in the production of goods or the provision of services
obtained through financing, such as debt, equity or grants, or generated through operations or
investments.
(2) Manufactured capital. Manufactured physical objects (as distinct from natural physical objects)
that are available to an organization for use in the production of goods or the provision of
services, including:
buildings
equipment
infrastructure (such as roads, ports, bridges and waste and water treatment plants).
Manufactured capital is often created by one or more other organizations, but also includes assets
manufactured by the reporting organization when they are retained for its own use.
(3) Human capital. People‘s competencies, capabilities and experience, and their motivations to
innovate, including their:
alignment with and support of an organization‘s governance framework and risk management
approach, and ethical values such as recognition of human rights
ability to understand, develop and implement an organization‘s strategy
loyalties and motivations for improving processes, goods and services, including their ability to lead,
manage and collaborate.
(4) Intellectual capital. Organizational, knowledge-based intangibles, including:
intellectual property, such as patents, copyrights, software, rights and licences
―organizational capital‖ such as tacit knowledge, systems, procedures and protocols
intangibles associated with the brand and reputation that an organization has developed.
(5) Natural capital. All renewable and non-renewable environmental stocks that provide goods and
services that support the current and future prosperity of an orpositively or negatively, on
natural capital. It includes:
air, water, land, forests and minerals
biodiversity and ecosystem health.
(6) Social and relationship capital. The institutions and relationships established within and
between each community, group of stakeholders and other networks (and an ability to share
information) to enhance individual and collective well-being. Social and relationship capital
includes:
shared norms, and common values and behaviours
key relationships, and the trust and willingness to engage that an organization has developed
and strives to build and protect with customers, suppliers, business partners, and other
external stakeholders
an organization‘s social licence to operate
Approaches of Business Model Reporting
In reviewing the global examples of business model reporting, it became apparent that they could be
broadly allocated into five categories. Common approaches to business model reporting based on a
survey of current practices.
Approach Description
Organizational overview What the entity does, how it is structured or where it
operates
Business strategy Key aspects of the organization‘s strategy
Value chain Place in the value chain and dependencies on key
inputs
Financial performance How the business model drives profitability or
revenue generation
Value creation How the organization‘s inputs, activities and
relationships lead to value and desired outcomes
The Framework draws a distinction between outputs and outcomes, but recognizes that both are
important in presenting a complete picture of a business model. Outputs represent the key products
and services that an organization produces. These outputs can then have a range of outcomes, both
internally to the organization and externally among a wider set of stakeholders. For example, in the
case of a car manufacturer, the output is the car; the outcomes to a consumer may be mobility,
safety, reliability, comfort and status. Outcomes that flow beyond the customer include environmental
impacts arising from emissions.
Incorporating the key elements of inputs, activities, outputs and outcomes will facilitate report
preparers to make the connection to the capitals. This, in turn, will encompass the broader concepts
of value creation identified in the Framework, as well as a more complete definition of business model
than is traditionally the case.
Linking strategy and business model disclosures is important, but they should be distinct disclosure
elements. Building upon an assessment of opportunities, risks and the market environment, an
organization‘s strategy will determine the appropriate mix of products and services (outputs) to
achieve the desired outcomes that will generate the greatest benefits to customers and other
stakeholders. The aim of the business model is then to deliver on this strategy, and consequently the
outputs and desired outcomes, both of which may be expressed quantitatively in terms of targeted key
performance indicators. It is also important to avoid describing the business model as merely an
organizational overview and description of the business.
A description of the actual outputs and outcomes achieved is therefore fundamental to a proper
understanding of the effectiveness of an organization‘s business model. Disclosure on the
achievement of outcomes (ideally presented relative to prior periods), market expectations, strategic
goals or other benchmarks can be considered part of the ―Performance‖ Content Element of the
Framework. Performance analysis may identify changes necessary to the business model to better
achieve the current strategy. Alternatively, this analysis may highlight changes to strategic objectives
that affect the current business model.
It is important to establish where the business model sits within the broader narrative. Based on the
literature study and review of current reporting practices, it would be appropriate for the Framework
to make a distinction between business model disclosures and other information such as:
capitals
governance
performance
future outlook.
Chapter 4
Accounting and reporting of financial instruments
Financial Instruments
Applicability: this statement is applicable on enterprises which are Non-SME.
Financial Instruments:
Financial Instrument is a contract that gives rise to a Financial asset for one enterprise and a
Financial Liability or an Equity for another enterprise. The examples are investments, debtors,
deposits etc.
Initial Recognition
An entity should recognized the financial assets or a financial liability on its balance sheet when and
only when the entity becomes a party to the contractual provision of the instruments.
De-recognition
A financial asset is derecognised ie removed from the balance sheet, when and only when either the
contractual rights to the asset‘s cash flows expire, or the asset is transferred and the transfer qualifies
for de recognition.
Financial Assets
A Financial asset is an asset that is
Cash
Equity Instruments of other enterprise, eg.
Investment in ordinary shares.
A contractual right to receive cash, or to exchange financial assets or liabilities with other enterprise
under conditions that are potentially favourable to the enterprise.
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity. The definition is wide and includes cash, deposits in
other entities, trade receivables, loans to other entities
2. Held to maturity( Assets with fixed maturity and the entity has a positive intention
and ability to hold till maturity)
This category is intended for investments in debt instruments that the entity will not sell
before their maturity date irrespective of changes in market prices or the entity‘s financial
position or performance. Investments in shares generally do not have a maturity date, and
thus should not be classified as held-to-maturity investments. IAS 39 requires a positive
intent and ability to hold a financial asset to maturity.
Available-for-sale financial assets are carried at fair value subsequent to initial recognition.
There is a presumption that fair value can be readily determined for most financial assets
either by reference to an active market or by a reasonable estimation process. The only
exemption to this are equity securities that do not have a quoted market price in an active
market and for which a reliable fair value cannot be reliably measured. Such instruments are
measured at cost instead of fair value.
For available-for-sale financial assets, unrealised holding gains and losses are deferred in
reserves until they are realised or impairment occurs. Only interest income and dividend
income, impairment losses, and certain foreign currency gains and losses are recognised in
profit or loss.
Financial Liability:
Financial Liability is a contractual obligation to deliver cash or to exchange financial assets or
financial liabilities with another enterprise under conditions which are potentially unfavourable to the
enterprise.
It also includes contracts which may be settled in the enterprise‘s equity shares. Eg. Convertible
debenture, convertible Preference share.
Note:
Fixed assets, stock, pre-paid expenses are not financial assets. Deferred incomes and
warranty obligation are not financial liabilities.
Solution:
Accountings for financial assets at fair value through profit & loss: (held for trading)
On the day of acquisition the asset is recognized at fair values.
The transaction costs are directly charged to the profit & loss account. (This is also applicable
for interim financial statement.)
On subsequent reporting dates they are measured at fair values. The difference is transferred
to P/L A/c.
On Disposal the assets will be de-recognised and the difference carrying amount & fair value
at the date of sale is transfer to P/c A/c.
No impairment test is required.
Any change in the fair value between trade date & settlement date is recognized through profit
& loss A/c.
Problem 3
Solution:
Journal Entries
Date Particulars Debit (`) Credit (`)
28.03.2015 Investment A/c Dr. 60,000 60,000
To, Liabilities A/c
31.03.2015 Investment A/c Dr. 3,200 3,200
To, P/L A/c
04.04.2015 P/L A/c Dr. 800
To, investment 800
Liabilities A/c Dr. 60,000 60,000
To, Bank A/c
22.04.2015 Bank A/c Dr. 69,000
To, Investment A/c 62,400
To, P/L A/c 6,600
Merchant Banker:
Merchant banker means an entity registered under SEBI(Merchant Bakes) Regulation 1999 Merchant
banker is a person engaged in the business of:
a) Issue Management: Either by making arrangements regarding selling, buying or subscribing
to securities as manager, consultant, adviser or
b) Rendering corporate advisory services in relation to issue management.
2. Infrastructure: Applicant should have necessary infrastructure like adequate office space,
equipments and manpower to effectively discharge its activities
3. Expertise: Atleast 2 person who have experience in to conduct the business of merchant
banker should be in employment with the merchant banker.
4. Bar on Registration: Person directly or indirectly connected with the applicant should not
have been granted registration by SEBI. Such person include associate, subsidiary, group
company of the applicant body corporate.
5. Capital adequacy requirements: Applicant should full fill the capital adequacy
requirements.
6. Litigation: Applicant, its partner, director or principal officer should not be involved in any
litigation connected with the securities market which has an adverse effect on the applicant‘s
business.
7. Economic offence: Applicant, its director, partner or principal officer should not have been
convicted for any offence involving moral turpitude or found guilty of any economic offence
9. Fit and proper: The applicant should be a fit and the proper person
10. Investor’s Interest: Grant of certificate to the applicant is in the best interest of the
investors.
2. Change in information if any: While filing the renewal application for the certificate of
registration as merchant banker, it shall provide a statement highlighting the change that
have taken place in the information that was submitted to SEBI for earlier registration and a
declaration stating that no other changes other than as intentioned in the above statement
has taken place.
3. Half Yearly Reports: Under regulation 28 of SEBI regulation 1992, the merchant banker
shall send half-yearly report in schedule XXVII format relating to their merchant baking
activities. This Report shall be submitted twice a year, as on 31 st march and 30th September
and should reach SEBI within 3 months from the close of the period to which it relates.
5. Issue of penalty points: Penalty points may be imposed on the merchant banker for
violation of any of the provision of operational gridlines under this chapter. The merchant
bankers on whom penalty point of 4 or more has been imposed may be restrained from filing
any offer document or associating or managing any issues for a particular period.
2. Period of Maintenance: merchant bankers are required to preserve the books of account and
other record and documents maintained for a minimum period of five years.
3. Intimation of SEBI: Merchant bankers are required to intimate to the board, the place of
maintenance of books of accounts, records and documents.
1. Required by statute: A member is required to maintain the following books as per Rule 15 of
securities Contract(Regulation) Rules, 1957 and Rule of SEBI(Stock broker and sub Brokers )
Rules 1992:
a) Transactions Register
b) Clients ledger
c) General ledger
d) Journals
e) Cash Book
f) Bank pass Book
g) Margin Deposit Book
h) Register of Accounts of Sub-brokers
i) Written consent of clients in respect of contracts entered into as principals.
3. Other conditions:
1. A member should maintain separate sets of books of accounts under following
circumstances:
a) Where he holds membership of any other recognized stock exchange
b) Where he holder membership in a difference segment of the same stock
exchange
2. A member should intimate to SEBI the place where the books of accounts, records
and documents are maintained.
3. The books of accounts and other records maintained under regulation 17 should be
preserved for a minimum period of five years.
Penal consequences: A stock brokers who fails to comply with the regulations or laws relating to
securities contract or contravenes any of them, shall be liable to
a) suspension of registration or b) cancellation of registration.
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance
NBFC expands to Non-Banking Financial Company is a company registered under the Companies Act,
1956 and regulated by the Central Bank i.e. Reserve Bank of India under RBI Act, 1934. These
entities are not banks, but they are engaged in lending and other activities, akin to that of banks like
providing loans and advances, credit facility, savings and investment products, trading in the money
market, managing portfolios of stocks, transfer of money and so on.
It is indulged in the activities of hire purchasing, leasing, infrastructure finance, venture capital
finance, housing finance, etc. An NBFC accepts deposits, but only term deposits and deposits
repayable on demand are not accepted by it.
In India, these companies emerged in the mid-1980‘s. Kotak Mahindra Finance, SBI Factors,
Sundaram Finance, ICICI Ventures are examples of popular NBFC‘s.
Module 5
Developments in Financial Reporting
Syllabus
Value Added Statement, Economic Value Added, Market Value Added, Shareholders’ Value
added, Human Resource Reporting, and Inflation Accounting
A Financial statement show how much wealth a reporting entity has been able to create for
its shareholders within an accounting period through utilization of its capital
Value Added
Value Added is the wealth created by a Firm, through the combined effort of
Capital
Management and
Employees.
This wealth concept arises due to the input- output exchange between a Firm and
components of its external environment.
Value Added = Sale Value of Outputs - Cost of Bought in goods and services
The Value Added Statement shows the Value Added of a business for a particular period. It
also reveals how it is arrived at and apportioned to the stakeholders like employees,
management, loan providers, Government and also to the business itself.
The Value Added Statements has two parts — the first part showing how the GVA is arrived
at and the second part showing the application / distribution of Value Added to various
beneficiaries.
Employees include Permanent, Temporary Workers, White Collar, Casual Labours etc.
Employee Expenses includes Perquisite, Staff Welfare, and Official Travelling etc. Auditors are
not employees.
Directors include WTD, PTD, MD, Executive Directors, Non-executive directors. Directors
Sitting Fees is an expense.
Government Taxes: Recoverable – Excise Duty, Service Tax, VAT etc. These taxes are not
contribution towards government since they are recoverable. Irrecoverable – Income Tax,
Wealth Tax, House Tax, Cess, Local Tax etc. These taxes are applicable towards government
since they are not recoverable. Provision for Deferred Tax Liability is considered as application
towards entity not for government.
Providers of finance mean long term finance. Debentures are considered as long term
finance.
Shareholders means equity and preference shareholder. All Dividend will be included.
Towards entity include all reserves generated during the year.
Solution:
Value added Statement
Particulars Rs. Rs.
Sales 28,500
Less: Cost of Bought in Material and Services (COBMS):
Operating Cost (25,600 – 10,200) 15,400
Excise Duty 1,700
Interest on Bank Overdraft 100 17,200
Value Added by Manufacturing and Trading Activities 11,300
Add: Other Income 750
Total Value Added/GVA 12,050
Application Statement
Particulars Amount %
To Employees as Salaries, Wages, etc. 10,200 84.65
To Government as Taxes, Duties, etc. 200 1.65
To Financiers as Interest on Borrowings 1,200 9.95
To provide for maintenance and expansion of company 450 3.75
Total Value added 12,050 100
Problem 2
From the following profit and loss account of kalyani ltd. prepare a gross value added
statement. show the reconciliation between gross value statement and profit before tax
Particulars Rs. Rs.
Sales 206.42
Other income 10.20
216.62
Expenditure
Production and operating expenses 1 166.57
administrative expenses 2 6.12
Interest and other charges 3 8.00
Depreciation 5.69 186.28
Profit before tax 30.24
Provision for tax 3.00
27.24
Interest allowance reserve written back 0.46
Balance as per last balance sheet 1.35
29.05
Transferred to:
General reserve 24.30
Proposed dividend 3.00
Surplus carried to balance sheet 1.75
29.05
Notes:
1. Production & Operational Expenses (` Lakhs)
Increase in Stock 112
Consumption of Raw Materials 185
Consumption of Stores 22
Salaries, Wages, Bonus & other benefits 41
Cess and Local Taxes 11
Other Manufacturing Expenses 94
465
2. Administration Expenses include inter-alia Audit Fees of `4.80 Lakhs, Salaries &
Commission to Directors `5 Lakhs and Provision for Doubtful Debts `5.20 Lakhs.
Interest and Other Charges: (` Lakhs)
On Working Capital Loans from Bank 8
On Fixed Loans from IDBI 12
On Debentures 7
27
Notes:
1. Production & Operational Expenses (Lakhs)
Increase in Stock 112
Consumption of Raw Materials 185
Consumption of Stores 22
Salaries, Wages, Bonus & other benefits 41
Cess and Local Taxes 11
Other Manufacturing Expenses 94
465
2. Administration Expenses include inter-alia Audit Fees of Rs. 4.80 Lakhs, Salaries &
Commission to Directors Rs 5 Lakhs and Provision for Doubtful Debts Rs. 5.20 Lakhs.
Interest and Other Charges: (Lakhs)
On Working Capital Loans from Bank 8
On Fixed Loans from IDBI 12
On Debentures 7
27
Cost of Equity Capital = Risk Free Rate + (Beta x Equity Risk Premium)
Where Equity Risk Premium = Market Rate of Return Less Risk Free Rate of Return
Beta:
Beta is a relative measure of volatility that is determined by comparing the return on
a share to the return on the stock market. Thus, Beta is a measure of non-
diversifiable risk.
The greater the volatility, the more risky the Share and hence, the higher the Beta.
A Company having a Beta of 1.2 implies that, if the Stock Market increases by 10%,
the Company‘s Share Price will increase by 12% (i.e. 10% x 1.2). Also, if the Stock
Market decreases by 10% the Company‘s Share Price will decrease by 12%.
It is the basis of explaining the relationship between the Return of a particular
security (e.g. Shares of a particular Company) and the return of the Stock Market as
a whole (i.e. Market Risk Premium). Beta is the responsiveness of Stock Return or
Portfolio Return (of a Company) to Market Return (as a whole).
Beta is a statistical measure of volatility. For Listed Companies, Beta is calculated
as the co-variance of daily return on stock market indices and the return on daily
share prices of a particular Company divided by the Variance of the return on daily
Stock Market indices. Generally, maximum of yearly Beta of the Company should be
taken for calculations.
For Unlisted Companies, Beta of similar firms in the industry may be considered
after transforming it to un-geared beta and then re-gearing it according to the Debt
Equity Ratio of the unlisted Company.
Market Rate of Return: It may be calculated from the movement of share market indices
over a period of an economic cycle based on moving average, to smooth out
abnormalities, if any. Market Rate of Return may be calculated as under —
Stock Exchange Index at the end of the year – Stock Exchange Index at the beginning of the
year
Stock Exchange Index at the beginning of the year
The individual components of Capital i.e. Debt, Preference and Equity. Thus WACC or (Kr)
is equal to -
Kd x Debt + Kp x PSC + Ke * Equity
Total Funds Total Funds Total Funds
Problem 11
The following information is available of a concern: calculate EVA
Debt capital 12% 2,000
Equity capital 500
Reserve and surplus 7,500
Capital employed 10,000
Risk free rate 9%
Beta factor 1.05
Market rate of return 19%
Equity (Market) Risk premium 10%
Net operating profit after tax 2,000
Tax Rate 30%
Problem 12
From the following information of vinod ltd compute the economic value added:
Share capital 2,000
Reserve and surplus 4,000
long term debt 400
Tax rate 30%
Risk free rate 9%
Market rate of return 16%
Interest 40
Beta factor 1.05
Profit before interest and tax 2,000
Problem 13
Compute EVA of Sarin ltd for 3 years from the information given
Particulars Year 1 Year 2 Year 3
Average capital employed 3,000 3,500 4,000
Operating profit before tax 850 1,250 1,600
Corporate income taxes 80 70 120
Average debt + Total capital employed (in%) 40 35 13
Beta variant 1.10 1.20 1.3
Risk free rate (In %) 12.50 12.50 12.5
Equity Risk premium (%) 10 10 10
Cost of Debt (Post tax)(%) 19 19 20
Problem 14
The capital structure of Himesh ltd is as under:
80,00,000 equity share of 10 each = Rs 800 lakhs
1,00,000 12% preference shares of Rs. 250 each = Rs. 250 lakhs
1,00,000 10% Debenture of Rs. 500 each = Rs. 500 lakhs
Term loan from Bank (at 10%) = Rs. 450 lakhs
The company‘s Profit and loss account for the year showed a balance PAT of Rs. 100 Lakhs,
after appropriating equity dividend at 20%. The company is in the 40% tax bracket.
Treasury bonds carry 6.5% interest afid beta factor for the company may be taken at 1.5.
The long run market rate of return may be taken at 16.5% calculate EVA.
Problem 15
From the following information, compute EVA of Auto Ltd. (Assume 35% tax rate)
• Equity Share Capital = Rs.1,000 Lakhs • PE Ratio = 5 times
• 12% Debentures = Rs. 500 Lakhs • Financial Leverage = 1.5 times
Problem 16
Pilot ltd Supplies the following information using which you are required to calculate the
economic value added.
Financial Leverage 1.4 times
Capital
Equity shares of Rs. 1,000 each 34,000(Number)
Accumulated profit Rs. 260 Lakhs
10% Debenture of Rs. 10 each 80 Lakhs (Number)
Dividend Expectation of equity shareholders 17.50%
Prevailing corporate tax rate 30%
Problem 17
Prosperous Bank has a criterion that it will give loans to companies that have an Economic
Value added greater than zero for the past three years on an average. The bank considering
lending money to a small company that has the economic value characteristics shown
below. The data relating to the company is as follow:
Average operating income after tax equals Rs. 25,00,000 per year for the last three
years.
Average total assets over the last three years equals Rs. 75,00,000.
Weighted average cost of capital appropriate for the company is 10% which is
applicable for all three years.
The company‘s average current liabilities over the last three years are Rs. 15,00,000.
Does the company meet the bank‘s criterion for the positive economic value added?
Problem 18
B & Co. has existing assets in which it has capital invested of ` 100 Crores. The After Tax
Operating Income on assets-in-place is ` 15 Crores. The Return on Capital Employed of 15%
is expected to be sustained in perpetuity, and Company has a Cost of Capital of 10%.
Estimate the Present Value of Economic Value Added (EVA) to the Firm from its assets-in-
place.
(ii) Differentiate between VA (Value Added) and Economic Value Added (EVA)
concepts.
Problem 19
The capital structure of A ltd whose shares are quoted on the NSE is as under.
Particulars Rs .(lakhs)
Equity shares of 100 each fully paid 505
9%, preference shares of Rs. 10 each 150
12% debenture of Rs. 10 each 5
Statutory Reserve 50.5
The statutory fund is compulsory required to be invested in government securities. The
ordinary shares are quoted at a premium of 500%. Preference shares @ 30 per shares and
debenture at par value.
Calculate MVA of the Company.
Problem 20
Compute MVA from the following information
Liabilities Rs. Assets Rs.
5000 Equity shares of Rs. 10 each 50,000 Fixed assets 3,00,000
1000 preference shares of Rs. 100 each 1,00,000 Current assets 2,00,000
Reserves and Surplus 50,000
1000 Debentures of Rs. 50 each 50,000
Current Liabilities 2,50,000
5,00,000 5,00,000
All the securities are listed in London stock exchange and there MV are as follows.
Equity shares Rs. 500 per share
Preference shares Rs. 200 per share
Debenture at Par value
Shareholder value added (SVA) is expressed as a company's capital costs from stock and
bond issues subtracted from its net operating profit after tax (NOPAT).
For instance, if a company's NOPAT is 200,000 and its capital costs are 50,000, its SVA
would be 150,000 (200,000 - 50,000 = 150,000)
Problem 21
Compute According to Lev and Schwartz model 1971. The total value of HR of the
employee of the group skilled and unskilled.
Annual average earnings of an employee till the retirement age Rs. 1,00,000
Age of Retirement 65 years.
Discount rate 15%
No of employees in the group 20
Average age 62 years.
Problem 22
From the following details compute according to lev and Schwartz 1971 model. The total
value of Hr of a employee of groups skilled and unskilled.
Particulars Skilled Unskilled
Average annual earnings of employees till the retirement 60,000 40,000
Age of Retirement 65years 62years
Discount rate 15% 15%
No of employee in the group 30 40
Average age 62 60
Problem 23
From the following details compute according to lev and Schwartz 1971 model. The total
value of Hr of a employee of groups skilled and unskilled.
Particulars Skilled Unskilled
Average annual earnings of employees till the retirement 50,000 30,000
Age of Retirement 65years 62years
Discount rate 15% 15%
No of employee in the group 20 25
Average age 62 60
Problem 24
From the following information in respect of L&S Ltd., calculate the Total Value of Human
Capital by following Lev and Schwartz Model. The Company uses 10% Cost of Capital for
discounting purposes. Retirement Age is 55 years. Distribution of Employees is –
Unskilled Semi skilled Skilled
Age No. Average No. Average No. Average
Annual Annual Annual
Earnings Earnings Earnings
30-39 70 6,00,000 50 7,00,000 30 10,00,000
40-49 20 8,00,000 15 10,00,000 15 12,00,000
50-54 10 10,00,000 10 12,00,000 5 14,00,000
Year 5 10 15 20 25
PV @ 10% 3.7908 6.1446 7.6061 8.5136 9.070
Problem 25
From the following information in respect of L&S Ltd., calculate the Total Value of Human
Capital by following Lev and Schwartz Model. The Company uses 10% Cost of Capital for
discounting purposes. Retirement Age is 55 years. Distribution of Employees is –
Unskilled Semi skilled Skilled
Age No. Average No. Average No. Average
Annual Annual Annual
Earnings Earnings Earnings
30-39 40 84,000 60 36,000 100 18,000
40-49 20 1,20,000 30 48,000 50 30,000
50-54 10 1,80,000 20 60,000 30 36,000
Year 5 10 15 20 25
PV @ 10% 3.7908 6.1446 7.6061 8.5136 9.070
Problem 26
From the following information in respect of L&S Ltd., calculate the Total Value of Human
Capital by following Lev and Schwartz Model. The Company uses 15% Cost of Capital for
discounting purposes. Retirement Age is 55 years. Distribution of Employees is –
Unskilled Semi skilled Skilled
Age No. Average No. Average No. Average
Annual Annual Annual
Earnings Earnings Earnings
30-39 70 3,000 50 3500 30 5000
40-49 20 4,000 15 5000 15 6000
50-54 10 5,000 10 6000 5 7000
Year 5 10 15 20 25
PV @ 15% 3.3520 5.0184 5.8468 6.2586 6.4632
Inflation Accounting
Meaning of Inflation Accounting
Inflation Accounting is that form of accounting which attempts to show the financial
statement items at current values in order to understand about the true profitability and
financial position of a concern. It attempts to adjust the stated values of various items in
the financial statements to their true current values.
Monetary Items: - Items whose amounts remain fixed irrespective of the changes in the general price
level are called monetary items.
Non-monetary Items: - Items whose amounts keep changing in accordance with changes in the general
price level are called non-monetary items.
Problem 27
Solution:
Statement showing classification into monetary and non-monetary items
Items Monetary/Non-monetary
Cash in hand Monetary
Cash at bank Monetary
Building Non-monetary
Land Non-monetary
Debtors Monetary
Creditors Monetary
Bank overdraft Monetary
Problem 28
Classify the following items into monetary and non-monetary
Equity Share Capital
Participating Preference Share Capital
Non-participating Preference Share Capital
Bills Payable
Investments
Prepaid Expenses
Outstanding Expenses
Stock
Solution:
Statement showing classification into monetary and non-monetary items
Items Monetary/Non-monetary
Equity Share Capital Non-monetary
Participating Preference Non -Monetary
Share Capital Non-monetary
Non-participating Preference Monetary
Share Capital Monetary
Bills Payable Monetary
Investments Non-monetary
Prepaid Expenses Monetary
Outstanding Expenses Monetary
Stock Non-monetary
Practice Problem
Classify the following items into monetary and non-monetary
Cash
Bank
Stock
Debtors
Creditors
Prepaid Expenses
Prepaid Income
Calculation of Net Monetary gain or Loss:
Xxx
Monetary Liabilities:
Indexed value of Monetary liabilities
Opening value of Monetary liabilities Xxx
indexed[ ]
Add/Less: Additions or reductions during the year at indexed value Xxx
[ ] xxx
xxx Xxx
Less: Historical value of monetary Liability
Net Monetary gain or Loss xxx
Problem 29
Compute the Net monetary results of P ltd. As on 31 st March 2014 from the information given
below:
Particulars 1.4.2013 31.3.2014
Cash 25,000 30,000
Book Debts 51,000 60,000
Creditors 55,000 65,000
Loan 40,000 45,000
Retail Price Index 250 350
Average for the year 300
Solution:
Calculation of Monetary Assets and Monetary Liabilities
Monetary Assets
Particulars 1.4.2013 31.3.2014
Increase during the year
Cash 25,000 30,000
Book Debts 51,000 60,000 (90,000-76,000)
76,000 90,000 14,000
Monetary Liabilities
Particulars 1.4.2013 31.3.2014 Increase during the year
Creditors 55,000 65,000
(1,10,000-95,000)
Loan 40,000 45,000
15,000
95,000 1,10,000
Problem 30
From the following information, calculate the net monetary gain or loss during the year ending 31-03-
2014.
Items 1-4-2013 31-03-2014
Bank 15,000 21,000
Debtors 45,000 54,000
Creditors 75,000 50,000
Stock 75,000 78,000
Fixed Assets 1,50,000 1,35,000
General Price Index 100 125
Average Price Index 120
Problem 31
From the following information, calculate the net monetary gain or loss during the year ending 31-03-
2014.
Items 1-4-2013 31-03-2014
Cash 60,000 88,000
Debtors 80,000 1,00,000
Creditors 90,000 1,00,000
Bills Payable 70,000 80,000
General Price Index 100 125
Average Price Index 120
Problem 32
From the following information, calculate the net monetary gain or loss during the year ending 31-03-
2014.
Items 1-4-2013 31-03-2014
Cash 3,000 6,000
Debtors 2,000 500
Creditors 500 200
General Price Index 100 180
Average Price Index 150
Problem 33
Following information have been disclosed by the balance sheet of a firm.
Monetary Assets Rs. 10,000 ; Monetary Liabilities Rs. 5,500.
Add: Purchases [ ]
Problem 34
From the following details find out; 1) cost of sales 2) closing stock using FIFO Method.
Opening stock on 1st April 2013 Rs. 40,000
Purchase during the year Rs.2,00,000
Closing stock on 31st March 2014 Rs. 30,000
Opening Price level Index 80
Average Level Index 125
Closing index 140
Solution:
Calculation of Indexed Cost of Goods Sold when FIFO method
Particulars Rs.
Opening Stock [ ] 70,000
2,24,000
Add: Purchases[ ]
2,94,000
Less: Closing Stock [[ ]] 35,000
COGS 2,59,000
Alternative Method….
Calculation of Indexed Cost of Goods Sold when FIFO method
Particulars Historical Conversion CPP (Rs.)
Value Factor
Opening Stock 40,000 140/80 70,000
Add: Purchases 2,00,000 140/125 2,24,000
2,40,000 2,94,000
Less: Closing Stock 30,000 140/125 35,000
Cost of Goods Sold 2,59,000
Problem 35
From the following details find out; 1) cost of sales 2) closing stock using FIFO Method.
Opening stock on 1st April 2013 Rs. 80,000
Purchase during the year Rs.4,80,000
Closing stock on 31st March 2014 Rs. 1,20,000
Opening Price level Index 100
Average Level Index 140
Closing index 125
Ans: 4,92,800
Xxx
Add: Purchases [ ]
Xxx
Less: Closing Stock
Out of Opening stock [ ] Xxx
Problem 36
From the following data, compute historical and CPP adjusted cost of goods sold when LIFO Method is in
use.
Opening Stock Rs. 1,20,000
Purchases during the year Rs. 7,20,000
Closing Stock Rs. 1,80,000
Price Index at the beginning of the year 100, at the end of the year 140 and the average 125.
Solution
Calculation of Indexed Cost of Goods Sold when FIFO method
Particulars Rs.
Opening Stock [ ] 1,68,000
8,06,400
Add: Purchases[ ]
9,74,400
Less: Closing Stock
Out of Opening stock [ ] 1,68,000
67,200
Out of purchase[ ]
COGS 7,39,200
Alternative Method…..
Calculation of Indexed Cost of Goods Sold when LIFO method is in use
Particulars Historical Conversion CPP Value (Rs.)
Value Factor
Opening Stock 1,20,000 140/100 1,68,000
Add: Purchases 7,20,000 140/125 8,06,400
8,40,000 9,74,400
Less: Closing Stock
- Out of Opening Stock 1,20,000 140/100 1,68,000
- Out of Purchase I 60,000 140/125 67,200
Cost of Goods Sold 7,39,200
Problem 37
From the following data, compute historical and CPP adjusted cost of goods sold when (a) FIFO Method
is in use and (b) LIFO Method is in use
Opening Stock Rs.50,000 Price Index 100
Purchases Rs. 50,000 Price Index 125 (average)
Closing Stock Rs.70,000 Price Index 200
Format for preparation of Current Purchasing Power adjusted Profit & Loss Account
Stock 70,000
Debtors 40,000
Cash 30,000
1,40,000
Less: Creditors 35,000 1,05,000
4,00,000
The following further information are given:
Closing stock was acquired during last quarter of 2014
Opening stock was acquired during the last quarter 2013
land and building were acquired and capital issued in 2006. The Land and Building
is depreciated under the straight line method. over 40 years.
The Price Indices are
a) 2006 Average 80
b) 2013 Last quarter 120
c) December 31,2013 100
d) 2014 Last quarter average 125
e) 2014 average 140
f) December 31.2014 150
Sales , Purchases and Administration expenses assumed to occur over the year and
hence an average prices.
Solution:
This problem can be solved by following the 7 Steps as follows:
Since the entire problem is given under historical accounting system, there is no necessity of
doing anything in this regard.
Step 2: Classification of Balance sheet items into monetary and Non-Monetary Items
Monetary Items Non- Monetary Items
Creditors Share capital
Debtors Reserve
Cash Land and Building
Stock
Step 3: Calculation of Cash Balance, ignoring Receipts and payments at the end of
the year
It is not possible to ascertain the Net monetary gain or loss because the opening balance at of
the monetary assets and liabilities are not known.
Furniture 1,50,000
Stock 2,00,000
Debtors 3,00,000
Cash 1,00,000
7,50,000 5,50,000
Less: Creditors 2,00,000
10,00,000
The following further information are given:
Closing stock was acquired during January 2014
Opening stock was acquired during February 2013
Plant and machinery and furniture were acquired and capital issued in 2004-05. Plant and
machinery is depreciated under the straight line method.
The Price Indices are
1. 2004-05 Average 80
2. 2012-13 Last quarter 120
3. March 31,2013 100
4. 2013-14 Last quarter average 125
5. 2013-14 average 140
6. March 31.2014 150
Solution:
This problem can be solved by following the 7 Steps as follows:
Since the entire problem is given under historical accounting system, there is no necessity of
doing anything in this regard.
Corporate Financial Reporting Page 76
R. Madhankumar M.com, PGDFM, PGDBL, (CS)
S. Darshan M.com, MFA, PGDBL, (CS)
Step 2: Classification of Balance sheet items into monetary and Non-Monetary Items
Monetary Items Non- Monetary Items
Creditors Share capital
Debtors Reserve
Cash Plant and Machinery
Furniture
Stock
Step 3: Calculation of Cash Balance, ignoring Receipts and payments at the end of
the year
It is not possible to ascertain the Net monetary gain or loss because the opening balance at of
the monetary assets and liabilities are not known.
Note:
Note :
Problem 42
The Current purchasing power accounting method takes care of changes in the value of
Money, but it does not account for changes in the value of individual item. The value of the
items might have increased on the basis of general price index, whereas the actual values of
the items might have decreased. To Remove this drawback, the inflation committee, set up
by the government of U.K under the chairmanship of MR. Francis Sandilands to consider
the problem of price level changes accounting, in its report published in September 1975,
recommended the adoption of current cost accounting method for dealing with the problem
of inflation accounting. This method of inflation accounting is now accepted in the U.K and
U.S.A. The current cost accounting method is also recommended by the Institute of
Chartered Accountants of India.
Features of Current Cost Accounting Method: The Main features of this method are:
1. In this method, Historical values of items are not taken into account. Only the
current values of Individual items are taken as the basis for preparing profit and
loss account and balance sheet.
2. Under this method, Items are not adjusted as a result of the changes in the general
price level as they are adjusted under the current purchasing power method. They
are adjusted at their specific price level. That means, this method takes into account
price changes relevant to the particular firm or industry rather than the economy as
a whole.
4. In addition to adjustments for depreciation and cost of sales, this method deals with
working capital and also loan raised. that means this method deals with operating
profit and capital employed.
6. It also attempts to state the assets and liabilities in the balance sheet at their
current values.
7. Under this method fixed assets are to be shown in the balance sheet at their values
to the business and not at their historical costs reduced by depreciation.
8. To ascertain the profit for the year depreciation is calculated on the current values
of the relevant fixed assets.
9. The fixed assets in the balance sheet should be shown at their value to the
business. The value to the business can be define in three ways: i) Net current
replacement value or replacement cost ii) Net realizable value iii) Economic value.
10. Under current cost accounting method, accounting profit‘s dividend into three parts,
Following are the steps involved in preparing financial statements under CCA
Method
Step 1: Prepare financial statements under historical accounting system.
Step 2: Calculate Cost of sales adjustment (COSA)
Step 3: Calculate MWCA
Step 4: Calculation of Depreciation Adjustment
Step 5: Calculate backlog depreciation
Step 6: Calculation of Revaluation reserve
Step 7: Calculation of gearing adjustment
Step 8: Prepare the income statement under CCA method
Step 6: Prepare current cost balance sheet
Problem 45
Problem
From the historic financial statements given below workout the profit and loss account and
Balance sheet under CCA method.