FINANCIAL STATEMENTS OF COMPANY

STUDENT
MANAGERIAL REMUNERATION NOTES

Applicable to Public companies

1. Company having Adequate Profits

1
toprgnt 12 I
. .

"I D

Managerial Remuneration = 11% of Net Profits to Directors

including
1. Whole Time Director
2. Managing Director
3. Manager
↳Y
To not
=

/ MD
WTD/MD/Manager( Part Time Directors
Apne/Sage) (Sautele/ Paraye)
Company has Manager/MD/ One = 5% of NP 1% of NP = 6% total
WTD
More than one = 10%
of NP to all.
1% of NP = 11% total
->
-

Company doesn’t have - 3 % of NP = 3% total

Manager/ MD/ WTD
-
- 57
.
=
I MD

:
G4T
Calculation of Net Profits :
-
-
PROFIT & LOSS A/C
DR. CR.
Expenses of Revenue Nature Income of Revenue Nature
Expenses on actual basis and not on
Provisional basis.
Subsidy received from Govt. XX
Eg: Bad debt written off and not provision for
bad debts.
ent

Expenses permitted by Company’s Act, 2013 Profit on sale of Fixed Asset ent
Depreciation (123) WDV P&L COST SP
Donation to charity/trust (181) 80 D = 20 100 130
- -
- -

⑰
......
------
Sitting fee paid to directors --
Revenue Nature Capital Nature
->
20 - 20
NET PROFIT 30X
P&L Cr .
-
-
-
-

-
 stary-red- We ->
xY. =
100x1 ...
FINANCIAL STATEMENTS OF COMPANY
0- RIL x III
I
p=ICIORe
-
50008 - A
50b crove -
-
-
- -

↑
11 ove
-

1 Store STUDENT
10
.

e
*
-
-

NOTES

T
2. Company having Inadequate Profits
- -

losses
-

- -
-

· -

Company having inadequate Profits / Losses 3L

-
-
-
-

Effective Capital at)

-
Managerial Remuneration.

stones
5W ·

Negative EC or less than 5 Cr. ,

.

60 lakhs 6X18
-
-
- - -

5-100 Equal to, Greater than 5Cr. But less than 100
-
-

Cr. X
100 croves
84 lakhs -4
↓
100 258
-
Equal to , Greater than 100 Cr. But less than 6x20
-
- -
120 lakhs
250 Cr. -
-

120 lakhs + 0.01%* of EC

7250 Equal to, Greater than 250 Cr. --

exceeding 250 Cr.

- -
-

%x
-

300 12019khs + 0 01
.
50 croves .

- -
- -
-

Calculation of Effective Capital [Aukaat = Owner Funds + Loan Funds]

Effective Capital Important Points

3
1. Paid up Capital
-
-
( Equity + Preference)
❖ X Revaluation Reserve to be excluded
⑱ 2. Reserves & Surplus ❖ P&L A/c Dr. to be deducted
❖ Preliminary expenses to be deducted
Long term payable after 12 months
3. Loan/Deposits Working capital loan/Cash credit / Overdraft are
considered as short term loans

-⑧- RIL
-

-
Exception – Incase of an Investment Company,
Investments will not be deducted for calculating
effective capital .
4. Less: Investments
This is because the purpose of such company is
to earn profits by acquiring and selling its
Investments.
 4.26 ACCOUNTING

Solution
Calculation of effective capital and maximum amount of monthly
remuneration
(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserve excluding Revaluation reserve (150- 10) 140
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
380
Less: Accumulated losses not written off (20)
Investments (180)
Effective capital for the purpose of managerial remuneration 180

Since Kumar Ltd. is incurring losses and no special resolution has been passed by the
company for payment of remuneration, managerial remuneration will be calculated on
the basis of effective capital of the company, therefore maximum remuneration
payable to the Managing Director should be @ ` 60,00,000 per annum.
Note: Revaluation reserve, and application money pending allotment are not
included while computing effective capital of Kumar Ltd.
Illustration 3
Mudra Ltd. gives the following information the year ended 31st March, 20X1:
`
Gross profit -
C 40,25,365
Subsidies received from Govt. - 2,73,925
=

Administrative, Selling and distribution expenses 8,22,542

-
- -

Directors’ fees 1,34,780

-
->

sitting Feel
Interest on debentures
-
~ 31,240
-

Managerial remuneration X 2,85,350

-

Depreciation on Property, plant and equipment (PPE)

-
-> 5,22,543

AlsID exP-822542 GP e 4025365

© The Institute of Chartered Accountants of India I
- ,

sitting fees-134 780

,
Subs - -
273925
1
 ↑
NPBT & MR
11
Int - 31240
BT
man. ran
-
-
-

NPBT
MR
Depr -
575345
--

0
I
-

Tax exp NP 2735383

NPBT - ·

4.27
-

FINANCIAL STATEMENTS OF COMPANIES

-

less
:
Tax exp NPAT
-

NPAT Tr to Res -

Trans
Provision for Taxation X 12,42,500
-

Transfer to General Reserve X 4,00,000

-

Transfer to Investment Revaluation Reserve

= -
X 12,500

- Depreciation on PPE as per Schedule II of the Companies Act, 2013 was

-
-

` 5,75,345. You are required to calculate the maximum limits of the managerial
remuneration as per Companies Act, 2013. 11Y x
-

Maximum => :

an

Solution =
% . X 2735383
.

Calculation of net profit u/s 198 of the Companies Act, 2013

` `
Gross profit 40,25,365
Add: Subsidies received from Government 2,73,925

↳
42,99,290
Less: Administrative, selling and distribution 8,22,542
expenses
Director’s fees 1,34,780
Interest on debentures 31,240
Depreciation on PPE as per Schedule II 5,75,345 (15,63,907)

0
CLEAR Profit u/s 198 27,35,383
-
X oo
I Maximum Managerial remuneration under Companies Act, 2013= 11% of
I

` 27,35,383= ` 3,00,892

1.7 DIVISIBLE PROFIT

One of the important functions of company accounting is to determine the amount
of profits which is available for distribution to the shareholders as dividend. This is
necessary since the amount of profits disclosed by the Profit & Loss Account, in
every case, is not available for distribution. The availability of profits for distribution
depends on a number of factors, e.g., their composition, the amount of provisions
and appropriations that must be made out of them in priority, etc.
Meaning of Dividend
(a) A dividend is a distribution of divisible profit of a company among the
members according to the number of shares held by each of them in the
capital of the company and the rights attaching thereto.

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.33

=
⑧
17,500 9% Preference shares of ` 100 each, fully paid up
-
-
17,50,000
8,00,000 Equity shares of ` 10 each, fully paid up 80,00,000
General
- Reserves as on 1.4.20X1 25,00,000
=

Capital Reserves as on 1.4.20X1 3,00,000

Revaluation Reserves as on 1.4.20X1 3,50,000
-> Net profit for the year ended 31st March, 20X2 3,00,000
-

Average rate of dividend during the last three years has been 12%. ⑦
Solution

Amount that can be drawn from reserves for 10%

dividend
10% dividend on ` 80,00,000 ` 8,00,000
Profits available
Current year profit 3,00,000
Less: Preference dividend (1,57,500) (1,42,500)
Amount which can be utilised from reserves 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:

Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be
declared. 127x8000000 9600x9 % 15 500
?
=
=

Condition II
1500
Maximum amount that can be drawn from the accumulated profits and reserves
should not exceed 10% of paid up capital plus free reserves ie. ` 12,25,000 [10% of
=-
(80,00,000+17,50,000+25,00,000)] 10 % (IUC+FR)
-
--
--
-
-
-
- 1225000
Condition III -

The balance of reserves after drawl ` 18,42,500 (` 25,00,000 - ` 6,57,500) should -3500
not fall below 15 % of its paid up capital ie. ` 14,62,500 (15% of ` 97,50,000]
Since all the three conditions are satisfied, the company can withdraw ` 6,57,500 from
accumulated reserves (as per Declaration and Payment of Dividend Rules, 2014.)
Cuw Bal 2500000 %.
9750 800 x 15
140minbal
·
=

1462500
=

- minbal= / -
,
,

© The Institute of Chartered Accountants of India

max div= -500x
-
ca tejas suchak
 ca tejas suchak
-
Dividend - 1. Divisible Profits when distributed amongst shareholders is called as dividend. ➔ Going Concern
2, Assets realized during liquidation, when distributed amongst creditors and contributories is called dividend. ➔Liquidating Company

Section 123
1. Sources of Dividend
a) Out of Current Year Profits
b) Out of Undistributed Profits of previous financial year or years.
c) Combination of Above 2
d) Money received by central and state Govt. for the purpose of distribution of dividend

Retained Earnings = 1. P&L

2. General Reserve Free Reserves
3. Dividend Equalisation Reserve

Free Reserves - Reserves that can be used by the company for distribution as dividend.
 catejas suchak
When dividend is distributed out of

⑲d Current Year Profits

Provisions relating to
Depreciation X
Losses
1. Provide for current year depreciation
- -
Before distributing dividend, a company should provide for
2. 2. Provide for arrears of depreciation of the previous financial year losses
preceding financial years.
-
-

3. If any asset issold/destroyed/demolished/scrapped

during the current year : the difference between 1 .

Juvent Year : Depn-w/off

nHeatDepenre
WDV of the asset and the selling price

·
:
should be charged to P&L.
WDV = 50 ➔ Sale = 20 P&L = 30
Destroy = 0 P&L = 50 ene
Demolish = 0 P&L = 50
Scrap =5 P&L = 45
 ca tejas suchak
DISTRIBUTION OF DIVIDEND OUT OF RESERVES
Profit =
1700000
7 1

Only Free Reserves can be used for distribution as dividend. Profit =

1000 -

Examples of Reserves that are not Free Reserves – I Avg Rate of 3 years
/ ↓
Iperific
.

1. Capital Reserves 10 % (PUC+FR)

: E Si

ision
2. CRR
=
specific
3 15 (PUL)
% Res-
3. Securities Premium
4. Revaluation Reserve & 10. 91 or
->

London j
5
.

5. DRR
FR :
IOL Education Marriage
0 Fund
200000 300000
Fund
300000
i
While distributing dividend out of Reserves the lowest of the 3 tests is permissible –
1
- -
-

#.
1. Maximum Rate of Dividend - Free Res
-

The Rate of dividend in Current FY cannot exceed the average rate of dividend of past 3 FY.
- - =

100/-
-
- - - -

2. Maximum Amount that can be withdrawn

-- from Reserves –
-

3% 00of
Pit it

↳sold=00
-
-
--
= 10%*(Paid Capital+ Free Reserves) *Note – Paid up Capital = Equity+Preference
- .

- -

3. Minimum Balance after Reserves

- - - -
- -

-
- --
ca
= 15%*(Paid up Capital)
-

4. The amount so withdrawn should be 1 st used to write off current FY losses

 catejas suchak
6% x 1000000
-

Paid up Capital = ↓10,00,000 t -

1 = 60000

Example -
~

Free Reserves = 200,000

-
~
10% (PUCHAR) = 10 % x1200000 = 120000
Capital Reserve = 100,000
n
& - -

Current bal
3
Current FY Losses = 10,000 , 000
200
-
=

157
2 -

main baln
1000000 x
Average Dividend rate for last 3 financial year = 6%
: .

Company wants to declare a dividend of = Ox

-> -

5%
- =

X 4. 40000
=
4%
->
-
I

Sol – 1. Maximum Rate of Dividend = Average dividend rate of last 3 financial year = 6% 60000 =

2. Maximum withdrawal from Reserves = 10%*(Paid up Capital + Free Reserves)

1

= 10%*(12,00,000)
= 120,000
3. Minimum balance required after withdrawal = 15%*Paid up Capital
1.Balance of Free Reserves = 200,000
2.Balance after withdrawal = 150,000 (15%*10,00,000)
Amount that can be withdrawn = 50,000
Hence as per point 2 & 3 the amount that can be withdrawn = 50,000
4. Amount that can be withdrawn = 50,000
(-) CY Losses = (10,000)
Dividend = 40,000 = 4% Dividend
Hence as per combined interpretation maximum rate of dividend = 4%
Hence the company should be restricted to 4% and cannot declare 5% dividend