COMPANY

FINANCIAL
STATEMENTS
Dr. Kavitha Menon
Final Accounts

■ At the Annual General Meeting (AGM) of a company, the BoD

of the company shall lay financial statements before the company
– A balance sheet as at the end of the financial year
– A profit & loss account or income & expenditure a/c
– Cash flow statement for the year
– A statement of changes in equity
– An explanatory note annexed
Meaning
■ Final accounts are the end results of the working of the organization. We
prepare two statements:
■ Profit & Loss Statements
– Gives net profit earned or losses
incurred during the period under
consideration
– Flow Concept – prepared for a
period
– It is prepared for the year ended
31 March 20XX
■ Balance Sheet
– Also called Statement of Affairs
or Position
– Gives details of assets owned &
liabilities owed by the
organization
– Stock concept – prepared at a
particular point of time
– Prepared as on 31 March 20XX
– Vertical format
Schedule III

■ Balance Sheet format given in Part I of Schedule III of the

Companies Act, 2013
■ Statement of Profit & Loss format given in Part II of Schedule
III
Profit & Loss A/c

■ Prepared for a year i.e. April 1 to March 31, next year

■ Shows the financial performance of the business i.e.
profit earned or loss incurred during the
accounting period.
■ Format prescribed in Part II of Schedule III of the
Companies Act, 2013.
 Name of the Company
Statement of Profit and Loss for the year ended 31 March, 20X2
Particulars Note For the year For the year
No. ended ended
31 March, 20X2 31 March, 20X1
      Rs. Rs.
I. Revenue from operations      
II. Other income      
III. Total revenue (I + II)      
IV. Expenses      
  Cost of materials consumed      
  Purchases of stock-in-trade      
  Changes in inventories of finished goods, work-in-      
progress and stock-in-trade
  Employee benefits expense      
  Finance costs      
  Depreciation and amortisation expense      
  Other expenses      
  Total expenses      
V. Profit before exceptional & extraordinary item & tax      
(III-IV)
VI Exceptional items      
VII. Profit before extraordinary item & tax (V- VI)      
VIII. Extraordinary items      
IX. Profit / (Loss) before tax (VII-VIII)      
X Tax expense:      
  (a) Current Tax      
  (b) Deferred Tax      
XI. Profit / (Loss) for the period from continuing      
operations
XII. Profit / (Loss) for the period from discontinuing      
operations
XIII. Tax expense for discontinuing operations      
XIV. Profit / (Loss) for the period from discontinuing      
operations after tax (XII- XIII

XV. Profit (Loss) for the period (XI+XIV)      

XVI. Earnings per share      
  (1) Basic EPS      
  (2) Diluted EPS      
REVENUE FROM OPERATIONS
Revenue earned by the company from its operating activities i.e. activities carried on to
earn profit
(A) In respect of a company other than a finance company revenue from operations shall
disclose separately in the notes revenue from—
(a) Sale of products;
(b) Sale of services;
(c) Grants & Donations received (only Section 8 companies)
(d) Other operating revenues (duty drawback, export subsidy, scrap sale);
Less:
(d) Excise duty. (tax to be paid to government)
(B) In respect of a finance company, revenue from operations shall include revenue from—
(a) Interest; and
(b) Other financial services.
OTHER INCOME (not related to main
activity)
Income earned from other sources (not from business activities)
i.e. non-operating activities
■ Interest income from investments (in case of a company other a
finance company)
■ Dividend income
■ Net gain/(loss) on sale of investments
■ Gain on sale of property, plant/assets scrapped
■ Insurance claims received
■ Royalty received from subsidiaries
■ Rental income
EXPENSES - CPCEFDO
■ Cost of materials consumed
■ Purchase of stock in trade
■ Changes in inventories of finished goods, work-
in-progress and stock-in-trade
■ Employee benefits expense
■ Finance costs
■ Depreciation and amortization expense
■ Other expenses
Cost of materials consumed

■ Cost of raw materials & other materials consumed in

manufacturing the goods.
■ Opening Stock of Raw Materials + Net Purchases –
Closing Stock of Raw Materials
■ Both raw materials & packing materials
Purchases of stock-in-trade

■ Goods purchased for resale.

■ If the company carries out further processing on the goods
purchased, they are not stock in trade but will be part of
Cost of Materials Consumed.
■ E.g.
– A company purchases paper for resale: Purchases of
stock in trade
– Paper is purchased for manufacturing notebooks - Cost
of Materials Consumed
Changes in inventories of finished goods,
work-in-progress and stock-in-trade

This is the difference between opening stock & closing

inventories of finished goods, work-in-progress &
stock-in-trade
■ If opening is greater than closing – difference is positive
■ If opening is lesser than closing – difference is negative
■ In Notes to accounts – each item shown separately.
Employee Benefit Expenses
■ Payments made to and for the benefits of employees
■ Example:
– Salaries
– Wages
– Contribution to provident fund & other funds
– Gratuity
– Leave encashment
– Expense on Employees Stock Option Plan (ESOP) & Employee Stock
Purchase Plan (ESPP)
– Staff welfare expenses
– Bonus
Finance Costs
■ Cost incurred by the company on the borrowings i.e. loans
taken
■ Interest paid on short-term and long-term loans taken by the
company - Overdrafts, Cash Credits, Debentures, Bonds,
Cash Credit, Public Deposits, Term Loans from banks
■ Bills Discounting charges
■ Loan Processing Fee
■ Other borrowing costs
Depreciation and amortization expense
■ Depreciation is fall in the value of tangible assets (assets that
have a physical existence, capable of being touched, felt, seen)
due to its usage or efflux of time or obsolescence
– Charged on property, plant & equipment, loose tools,
furniture
■ Depreciation on right-of-use (RoU) assets ( a lessee's right to
use an asset over the life of a lease)
■ Amortization – used for depreciating intangible assets (lack
physical existence)
– Charged on technical knowhow, goodwill, computer
software, patents, trademarks, copyrights etc.
Other expenses – expenses that do not
find place in the above mentioned heads
(a) Consumption of stores, (g) Rates and taxes (excluding
spares and tools taxes on income)
(b) Power and fuel (h) Auditor’s remuneration
(c) Rent (i) Packing and freight charges
(d) Repairs & maintenance (j) Advertisement and publicity &
(e) Corporate Social Other marketing expenses
Responsibility expenses (l) Bad debts written off
(f) Insurance (m) Discount allowed
 Exceptional Items
■ One-off events occurring normal course of the business that either caused a
great expense or a big bout of revenue
■ They are not expected to be recurring but occur due to company’s normal
course of business activity
■ Amount is material
■ Example:
– Profits or losses on disposal of fixed assets
– Disposal of long term investments
– Amount received in settlement of insurance claims
– Compensation provided for voluntary retirement scheme
– Litigation/legal settlement
Extraordinary items
■ Arise from abnormal or unusual events & not in the ordinary
course of business
■ Not expected to recur frequently or regularly
■ Company has no control on its occurrence.
■ Only on rare occasions
■ Example
– Losses from disasters not commonly insured against (e.g., wars,
riots, and earthquakes)
– Losses in production due to labour strikes.
– Loss by theft
– Significant change in Government policies
Tax Expense
■ Current Tax
– The amount of income tax determined to be payable
(recoverable) in respect of the taxable profit/ (tax loss) for a
period.
■ Deferred Tax
– The tax effect due to timing differences which are temporary
– Timing differences are the differences between taxable income
and accounting income for a period.
– Can be positive or negative
Example of Deferred Tax

■ Under IT, machinery purchased for scientific research related

to business is fully allowed as a deduction in the 1st year for tax
purpose.
■ In the books, for accounting purposes, the depreciation would
be under straight line method and spread over its useful life.
■ Thus, total depreciation charged on the machinery for
accounting purposes and amount allowed as deduction for tax
purposes will be ultimately the same but periods over which
the depreciation is charged & the deduction is allowed will
differ.
 Example of Deferred Tax
■ IT allows full depreciation on an asset for Rs. 10,000 in year 1
itself but company depreciates in 2 equal instalments of Rs.
5000 each year. Tax rate is 10%.
Year 1 Year 2 Rs. 500 paid less
Books IT Books IT in Year 1 is to be
Profit 200,000 200,000 200,000 200,000 paid next year.
Depreciation (5000) (10000) (5000) - Deferred Tax
Profit before 195,000 190,000 195,000 200,000 Liability
tax
Add to P&L – will
Tax 19500 19000 19500 20000 be paid next year
 Example of Deferred Tax
■ Company charges full depreciation on an asset for Rs. 10,000
in year 1 itself but IT allows depreciation in 2 equal
instalments of Rs. 5000 each year. Tax rate is 10%.
Year 1 Year 2 Benefit of Rs. 500
Books IT Books IT paid more in Year 1
(advance Tax) will be
Profit 200,000 200,000 200,000 200,000 adjusted in next year.
Depreciation (10000) (5000) - (5000) Deferred Tax Asset
Profit before 190,000 195,000 200,000 195,000
Subtracted in P&L –
tax as it is paid in
Tax 19000 19500 20000 19500 advance
EPS – Earnings per share

■ Earnings on each share

■ EPS which accrues to the equity shareholders of the company after
paying dividends to preference share holders.
■ Indicates company’s profitability.
Basic EPS

■ Normal EPS
■ This is derived by dividing the net profit (after deducting dividend
on preference shares) of a company by the total number of
ordinary shares outstanding.
■ Basic EPS = NP after tax & preference dividend/no. of equity
shares outstanding
Diluted EPS
■ Calculated by assuming that everyone who has an instrument that
can be converted into an equity share converts it into an equity
share and so the total number of outstanding shares of the
company increase, thereby reducing the EPS.
■ Shows EPS a business could earn, if all the stock options, share
warrants, convertible securities, were taken into account along
with the additional no. of shares at that time.
■ Diluted EPS = NP after tax & preference dividend/ All
convertible securities + common shares
 Name of the Company
Balance Sheet as at 31 March, 20X2
Particulars Note As at 31 As at 31
No. March, 20X2 March, 20X1
      Rs. Rs.
I. EQUITY AND LIABILITIES      
1Shareholders’ funds      
  (a) Share capital      
  (b) Reserves and surplus      
  (c) Money received against share warrants      
2Share application money pending allotment      
3Non-current liabilities      
  (a) Long-term borrowings      
  (b) Deferred tax liabilities (net)      
  (c) Other long-term liabilities      
  (d) Long-term provisions      
4Current liabilities      
  (a) Short-term borrowings      
  (b) Trade payables      
  (c) Other current liabilities      
  (d) Short-term provisions      
  TOTAL      
II. ASSETS      
1 Non-current assets      
  (a) Property, Plant & Equipment and Intangible      
Assets
  (i) Property, Plant & Equipment      
  (ii) Intangible assets      
  (iii) Capital work-in-progress      
  (iv) Intangible assets under development      
  (b) Non-current investments      
  (c) Deferred tax assets (net)      
  (d) Long-term loans and advances      
  (e) Other non-current assets      
2 Current assets      
  (a) Current investments      
  (b) Inventories      
  (c) Trade receivables      
  (d) Cash and cash equivalents      
  (e) Short-term loans and advances      
  (f) Other current assets      
  TOTAL      
DISCLOSURES
SHAREHOLDER’S FUNDS

■ Under the Keyword “Shareholders’ Fund/ Owner’s

Fund” figures appearing under Owner Funds /
Shareholding / Capital Investment / Equity Share /
Equity Interests / Share Ownership / Capital Account
/ Partners’ Capital /Capital Providers / Stockholder /
Venture Capitalists / Own Capital / Endowment
Fund/ Corpus Fund /General Fund etc. inclusive of
Reserve and Surplus is to be mentioned
Share Capital
■ The number and amount of authorized share capital
■ The number of shares issued, subscribed & fully paid, &
subscribed but not fully paid
■ Par value per share
■ A reconciliation of the number of shares outstanding at the
beginning and at the end of the reporting period.
■ The rights, preferences and restrictions attaching to each class
of shares including restrictions on the distribution of dividends
and the repayment of capital.
Share Capital
■ Shares in respect of each class in the company held by its holding
company or its ultimate holding company
■ Shares in the company held by each shareholder holding more
than 5 per cent, shares specifying the number of shares held.
■ Shares reserved for issue under options and
contracts/commitments for the sale of shares/disinvestment,
including the terms and amounts.
Share Capital
■ For the period of five years immediately preceding the date as at
which the Balance Sheet is prepared.
– Aggregate number and class of shares allotted as fully paid-up
without payment being received in cash.
– Aggregate number and class of shares allotted as fully paid-up
by way of bonus shares.
– Aggregate number and class of shares bought back.
Share Capital
■ Terms of any securities convertible into equity/preference shares
issued along with the earliest date of conversion in descending order
starting from the farthest such date.
■ Calls unpaid (showing aggregate value of calls unpaid by directors
and officers).
■ Forfeited shares (amount originally paid-up).
Equity Share Capital
■ To raise money, a company issues a certain number of shares to
the public at face/par/nominal value
■ When the company issues shares, it will decide the face value (
₹1, ₹2, ₹5 or ₹10)
■ Equity Share Capital = Face Value x No. of shares issued
■ Company can sell over and above face value i.e. at a premium.
The amount received is “Securities Premium” shown under
Reserves & Surplus”
Reserves and Surplus
RESERVES - The amount set aside i.e. transferred out of profits
– To meet legal requirements (Capital Reserve, Capital
Redemption Reserve, Debenture Redemption Reserve)
– Amount received by way of Securities Premium
– To meet any liability (e.g. Workmen’s Compensation
Reserve)

SURPLUS – Balance in Statement of Profit & Loss –

accumulated profits not appropriated or distributed as dividend
Reserves and Surplus
a) Capital Reserves; e) Other Comprehensive Income
b) Capital Redemption f) General Reserve
Reserve;
g) Surplus i.e., balance in
c) Securities Premium Statement of Profit and Loss
Reserve;
d) Debenture Redemption
Reserve;

Additions and deductions since last balance sheet and closing

balance to be shown under each of the specified heads
CAPITAL RESERVE
■ A reserve created out of capital ■ A fund requirement maintained
profit
– Gain on ale of property,
plant & equipment
– Gain on sale of investment
– Gain on purchase of an
■ DRR ensures enough funds are
existing business
CAPITAL REDEMPTION
RESERVE
■ A reserve created when a
company purchases its own
shares or during redemption
of preference shares
■ It’s a statutory reserve
DEBENTURE REDEMPTION SECURITIES PREMIUM
RESERVE
■ When a company issues
by the companies that issue securities at a price which is
debentures in India to protect the more than the nominal
investors from the possibility of value, the aggregate amount
the company defaulting on of premiums received is
repayments. transferred to securities
premium a/c
available to meet the obligations
of debenture holders.
OTHER COMPREHENSIVE INCOME (OCI)
■ Gain or loss that has not been realized on investments &
fixed assets
■ Revaluation
RETAINED EARNINGS
■ Profits earned till date
Reserves & Surplus

■ Debit balance of statement of profit and loss (DENOTING

LOSS) shall be shown as a negative figure under the head
“Surplus”.
■ Similarly, the balance of “Reserves and Surplus”, after
adjusting negative balance of surplus, if any, shall be shown
under the head
■ “Reserves and Surplus” even if the resulting figure is in the
negative.
Money received against share warrants
■ Share Warrant is an option issued by the company that gives the
holder a right to subscribe to equity shares at a pre-determined price
(which is lower than the market price) within a certain time period.
Thus share warrants will be converted into equity shares at a later
date at a specified value.
■ They are issued to attract potential investors to invest in the company.
 Sometimes, offered to promoters or employees as incentive. They
are issued with debentures/bonds or preference shares that allows an
investor the option to purchase the shares at a later date. This will
help the issuing company to pay lower rate of interest on debentures
SHARE APPLICATION MONEY
PENDING ALLOTMENT
■ A Company receives certain amount from shareholders on application known
as share application money
■ Inspite of receipt, allotment maybe pending.
■ Share application money to the extent not refundable is included in
Shareholders’ Funds, as it is the amount received by the company against
which allotment will be made.
■ Happens only when application money is received before Balance Sheet date
& allotment is done after Balance Sheet date
■ If share application money is received and no allotment will be made (in case
of over-subscription) it is shown under the head Other Current Liability as
the amount is refundable at some later date.
NON CURRENT LIABILITIES

■ Liabilities which need to be repaid for more than 1 year.

NON CURRENT LIABILITIES

■ Four sub-headings
– Long term borrowings
– Deferred tax liabilities
– Other Long term liabilities
– Long term provisions
Long Term Borrowings

(a) Bonds/debentures;
(b) Term loans:
(A) from banks.
(B) from other parties.
(c) Deferred payment liabilities;
(d) Deposits;
(e) Long term maturities of finance lease obligations;

Borrowings shall further be sub-classified

as secured and unsecured.
Deferred Tax Liabilities

■ Every year accounting income is compared with taxable income

as rules as per IT Act and Financial accounting are different.
■ If difference between the two exists which is temporary in nature,
income tax on the difference is termed as deferred tax.
■ If taxable income is lesser than accounting income, it results in
deferred tax liability. (Paying less)
■ If taxable income is greater than accounting income, it results in
deferred tax asset (advance tax)
Other long term liabilities

(a) Trade payables: Amount due on account of goods purchased

or services received in the normal course of business which are
not current liabilities; i.e. those agreed to be settled after 12
months
(b) Others: Amount payable in respect of statutory obligation
(Investor Education & Protection Fund), purchase of assets
Long term provisions
■ PROVISION – Amount set aside to meet future liability, the
amount of which cannot be determined with accuracy but is
estimated.
■ Provisions against which liability will arise after 12 months of the
date of balance sheet or after the period of operating cycle
■ The amounts shall be classified as:
(a) Provision for employee benefits – retirement benefits,
gratuity,
(b) Those of specific nature – e.g. Provision for warranty claims,
Provision for Earned Leave
CURRENT LIABILITIES
■ Liabilities that are expected to be settled in the company’s
normal operating cycle or due to be settled within 12 months
■ Divided into:
– Short term borrowings
– Trade payables
– Other current liabilities
– Short term provisions
Short-term borrowings
(a) Loans repayable on demand;
(A) from banks.
(B) from other parties.
(b) Bank overdraft
(c) Cash Credit
(d) Loans and advances from related parties;
(e) Deposits
(f) Current Maturities of Long-term debts
Borrowings shall further be sub-classified
as secured and unsecured.
Trade Payables

■ A payable shall be classified as a “trade payable” if it is in

respect of the amount due on account of goods purchased or
services rendered in the normal course of business.
■ Includes sundry creditors & bills payable
 Other current liabilities
(f) ESI Payable
(a) Interest accrued but not due
on borrowings; (g) Outstanding expenses
(b) Interest accrued and due on (h) Provident Fund payable
borrowings;
(c) Unpaid dividends;
(d) Unpaid matured deposits &
interest accrued thereon
(e) Income received in advance;
Short-term provisions

■ Proposed dividend
■ Provision for tax
■ Provision for expenses (say Electricity)
■ Provision for warranty
■ Provision for employee benefits (to be settled within 12
months)
Assets = Shareholder’s Funds + Liabilities
NON-CURRENT ASSETS
■ Those assets which are not current assets.
■ Divided into
– Property, plant & equipment & Intangibles
– Non-current Investments
– Deferred Tax Asset
– Long-term loans & advances
– Other non-current assets
Property, plant & equipment &
Intangibles
■ Held not for the purpose of sale but for the purpose to increase
earnings of the business.
■ Used for along time to earn profit
■ Divided into:
1. Property, plant & equipment
2. Intangible assets
3. Capital Work-in-progress
4. Intangible assets under development
Property, plant & equipment
■ Tangible assets – Having physical existence, assets which can be
physically seen and touched
– Land
– Building
– Plant and Equipment
– Furniture and Fixtures
– Vehicles
– Office Equipment
– Computers
Property, plant & equipment
■ It is necessary to give the following information regarding each
class or kind of fixed tangible asset:
a. Original cost
b. Addition (purchase)
c. Deductions (sale)
d. Total depreciation written off or provided for up to the end of the
year.
Intangible Fixed Assets
Assets which do not have physical evidence & thus cannot be
touched & seen.
 Goodwill
 Brands / Trademark
 Computer software
 Mining rights
 Copyrights and patents
 Recipes, formulae, models and designs
 Licenses and franchise.
Capital Work-in-Progress

■ Items of property, plant and equipment under construction

Intangible assets under development

■ Patents, Intellectual Property Rights under development

Non-current Investment
■ Investments which are held not with the purpose to resell but to
retain them.
(i) Trade Investments: Investments made by the company in shares
or debentures of another company to promote its own trade and
business.
(ii) Other investments: Which are not trade investments.
 Investments in property  In equity shares
 In preference shares  In debentures
 In mutual funds  In partnership firms
 In govt. securities
Deferred Tax Asset

■ A deferred tax asset comes into force when taxable income is

more than accounting income.
Long term Loans & Advances

■ Expected to be received back in cash or in kind (in the form of an

assets) after 12 months from the date of the balance sheet
(i) Capital Advances: Advances given for acquiring fixed assets
(ii) Security Deposits: Deposit for electricity, telephone etc given
for a period beyond 12 months.
(iii)Other loans and advances
 Long term loan to employees
 Long term advance to suppliers etc
Other Non-current Assets
■ Long term Trade Receivables - receivable 12 months from the date
of the balance sheet or after the operating cycle whichever is later
■ Insurance claim receivable
■ Security Deposits – given for a long period (e.g, electricity)
CURRENT ASSET
■ Assets which are:—
(a) expected to be realised in, or is intended for sale or consumption in the
company’s normal operating cycle;
(b) it is held primarily for the purpose of trading;
(c) expected to be realised within twelve months after the reporting date; or
(d) cash or cash equivalent unless it is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting date.
■ All other assets shall be classified as non-current.
Operating Cycle

■ An operating cycle is the time between the acquisition of assets

for processing and their realization in cash or cash equivalents.
■ Where the normal operating cycle cannot be identified, it is
assumed to have a duration of twelve months.
Operating Cycle
Heads under Current Assets

■ Current investments
■ Inventories
■ Trade Receivables
■ Cash & cash equivalents
■ Short-term Loans & Advances
■ Other Current Assets
Current Investments
■ Those investments which are held to be converted into cash within a
short period, i.e. within 12 months from the date of purchase of the
investment.
 Investments in partnership firms
 In equity shares  In preference shares
 In debentures  In mutual funds
 In govt. securities  Short Term Investment
Inventories
■ Refers to stock held for the purpose of trade in the normal course of
the business, i.e. for manufacturing or trading of goods.
(i) Raw Materials
(ii) Work-in-Progress
(iii) Finished Goods
(iv) Stock-in-Trade (for goods acquired for trading)
(v) Stores and Spares
(vi) Loose Tools
Trade Receivable
■ Refers to the amount due on account of goods sold or services
rendered in the normal course of business.
■ Receivable within a period of 12 months
■ It includes:
 Debtors
 Bills Receivable
■ Allowances for bad & doubtful debts are Deducted
Cash and cash equivalents
■ Balances with banks (including bank deposits having a maturity
period of more than 3 months but not exceeding 12 months from
the date of the balance sheet)
 Balances with banks
 Cheques, drafts on hand
 Cash in hand
 Bank deposits with more than 12 months maturity (fixed
deposit)
Short-term loans and advances
■ Expected to be realised within 12 months from the B/S date or
within the operating cycles, if the operating cycle is more than 12
months.
■ Loans and advances to related parties
– Loans to directors or other officers of the company
■ Advances to employees & suppliers
■ Security deposits
Other current assets
 Dividend receivable
 Interest accrued on investments
 Income receivable
 Prepaid expenses
 Advance tax
Contingent Liabilities and Capital
Commitments
(a) Contingent Liabilities –
i. Those liabilities which may or may not arise because they are
dependent on a happening in future.
A claim is filed against the company in a consumer court by a
customer. The court may hold the company at fault & may
impose penalty. It may happen otherwise also. Whether the
company has a liability or not is dependent on court order.
ii. It is not recorded in the books of accounts but is disclosed in the
Notes to Accounts for the information of the users.
Contingent Liabilities and Capital
Commitments
iii. Example of Contingent Liability
a. Claims against the company not acknowledged as debts
b. Bills receivable discounted from bank not yet due for payment
c. Court cases, litigations & claims disputed by the company
d. Bank Guarantees
(b) Capital Commitments – Financial commitments due to activities
agreed by the company to be undertaken by it in future. (Uncalled
Liability)
Contingent Assets
■ Possible economic benefit that is dependent on the occurrence or
non-occurrence of an uncertain future event that is out of the
company’s control.
■ Example:
– A company involved in a legal case with the sheer expectation to
receive the compensation as the outcome of the case is not yet
known and the amount is yet to be determined.
– Company A Ltd. has filed a lawsuit against Company B Ltd. for
infringing a patent case. If there is a good chance that Company
A Ltd. will win the case, it has a contingent asset in this matter.
IMPAIRMENT LOSS
■ Impairment –
– Meaning - Loss of utility in the assets, hence it needs to be written
down as per conservatism concept.
– Events that trigger or indicate impairment – damage, technological
obsolescence, asset is suddenly used for alternative purpose, adverse
legal/administrative decision (Uber London), Cost incurred is much
larger than what was anticipated to acquire or build the asset, future
forecast projecting losses from asset
■ If an asset suffers economic impairment, the depreciated historical cost of
the asset should further be reduced by the amount of impairment loss in
order to improve the soundness of the balance sheet.
What is Impairment
Impairment Loss

Amount

Value in
the
Balance
Sheet

Fair Value Carrying Value