CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

CS EXECUTIVE

COMPANY ACCOUNTS
-Theory Notes For June 2019 Exams

By

CA SHIVAM GUPTA
ACA,M.com
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 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

ACCOUNTING STANDARDS
Objectives of AS 1. To harmonise different accounting policies and used in a country.

2. To reduce the accounting alternatives in the preparation of financial

statements.

3. To ensure comparability of financial statements of different enterprises

4. To call for disclosures beyond that required by the law.

Benefits and Benefits:

Limitation of (i) Standardisation of alternative accounting treatments: Standards reduce
Accounting to a reasonable extent or eliminate altogether confusing variations in the
Standards? accounting treatments used to prepare financial statements.
(ii) Requirement of additional disclosures: There are certain areas where
important information are not statutorily required to be disclosed.
Standards may call for disclosure beyond that required by law.
(iii) Comparability of Financial Statements: The application of accounting
standards would, to a limited extent, facilitate comparison of financial
statements of companies situated in different parts of the world and
also of different companies situated in the same country. However, it
should be noted in this respect that differences in the institutions,
traditions and legal systems from one country to another give rise to
differences in accounting standards adopted in different countries.
However, there are some limitations of setting of accounting standards:
(i) Difficulty in choosing Accounting policy: Alternative solutions to certain
accounting problems may each have arguments to recommend them.
Therefore, the choice between different alternative accounting
treatments may become difficult.
(ii) Lack of Flexibility: There may be a trend towards rigidity and away from
flexibility in applying the accounting standards.
(ii) Scope Restricted: Accounting standards cannot override the statute. The
standards are required to be framed within the ambit of prevailing statutes.

Composition of (i) Nominee of the Central Government representing the Department of

Accounting Company Affairs on the Council of the ICAI
Standard Board
(ii) Nominee of the Central Government representing the Office of the
Comptroller and Auditor General of India on the Council of the ICAI

(iii) Nominee of the Central Government representing the Central Board of

Direct Taxes on the Council of the ICAI

(iv) Representative of the Institute of Cost and Works Accountants of India

(v) Representative of the Institute of Company Secretaries of India

 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
(vi) Representatives of Industry Associations (1 from Associated Preface to
the Statements of Accounting Standards Chambers of Commerce and
Industry (ASSOCHAM), from Confederation of Indian Industry (CII) and
from Federation of Indian Chambers of Commerce and Industry (FICCI)

(vii) Representative of Reserve Bank of India

(viii) Representative of Securities and Exchange Board of India

(ix) Representative of Controller General of Accounts

(x) Representative of Central Board of Excise and Customs

(xi) Representatives of Academic Institutions (1 from Universities and 1

from Indian Institutes of Management)

(xii) Representative of Financial Institutions

Objectives and The following are the objectives of the Accounting Standards Board:
Functions of
Accounting (i) To conceive of and suggest areas in which Accounting Standards need to
Standard Board? be developed.

(ii) To formulate Accounting Standards with a view to assisting the Council

of the ICAI in evolving and establishing Accounting Standards in India.

(iii) To examine how far the relevant International Accounting

Standard/International Financial Reporting Standard can be adapted while
formulating the Accounting Standard and to adapt the same.

(iv) To review, at regular intervals, the Accounting Standards from the point
of view of acceptance or changed conditions, and, if necessary, revise the
same.

(v) To provide, from time to time, interpretations and guidance on

Accounting Standards.

(vi) To carry out such other functions relating to Accounting Standards.

Accounting The standard-setting procedure of ASB can be briefly outlined as

Standard Setting follows:
process?  Identification of broad areas by ASB for formulation of AS.

Constitution of study groups by ASB to consider specific projects
and to prepare preliminary drafts of the proposed accounting
standards. The draft normally includes objective and scope of the
standard, definitions of the terms used in the standard, recognition
and measurement principles wherever applicable and presentation
and disclosure requirements.

Consideration of the preliminary draft prepared by the study group
of ASB and revision, if any, of the draft on the basis of deliberations.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Circulation of draft of accounting standard (after revision by ASB) to
the Council members of the ICAI and specified outside bodies such
as Department of Company Affairs (DCA), Securities and Exchange
Board of India (SEBI), Comptroller and Auditor General of India
(C&AG), Central Board of Direct Taxes (CBDT), Standing Conference
of Public Enterprises (SCOPE), etc. for comments.

Meeting with the representatives of the specified outside bodies to
ascertain their views on the draft of the proposed accounting
standard.

Finalisation of the exposure draft of the proposed accounting
standard and its issuance inviting public comments.

Consideration of comments received on the exposure draft and
finalisation of the draft accounting standard by the ASB for
submission to the Council of the ICAI for its consideration and
approval for issuance.

Consideration of the final draft of the proposed standard and by the
Council of the ICAI, and if found necessary, modification of the draft
in consultation with the ASB is done.

The accounting standard on the relevant subject is then issued by
the ICAI.

What is Accounting Policy are the specific accounting principles and the methods of
accounting policy? applying those principles adopted by an enterprise in the preparation and
List areas where presentation of financial statements.
different
Some of the areas in which specific accounting principles can be followed
accounting
policies are are:
 Depreciation and Amortization (AS 6)
encountered/  Valuation of Inventory (AS 2)
used? When  Valuation of Goodwill (AS 10)
accounting  Valuation of Fixed Asset and Investments (AS 10 & 13)
policies can be  Translation of Foreign currency items (AS 11)
changed as per as  Treatment of expenditure during construction and recognition of
1? profit on long term contracts (AS 7)

An entity shall retain the presentation and classification of items in the

financial statements from one period to the next unless:

(a) it is apparent, following a significant change in the nature of the entity’s

operations or a review of its financial statements, that another presentation
or classification would be more appropriate having regard to the criteria for
the selection and application of accounting policies in Ind AS 8; or

(b) An Ind AS requires a change in presentation.

What are the 1. Going Concern: The enterprise is normally viewed as a Going Concern, i.e
fundamental continuing in operation for the foreseeable future. It is assumed that

enterprise has neither the intention nor the necessity of liquidation or of

 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

accounting curtailing materially the scale of operations.

assumptions? List
all of them? 2. Consistency: The accounting policies are consistent from year to year.

3. Accrual: Revenue and cost are accrued i.e recognized as they are earned
or incurred and recorded in the financial statements of the periods to which
they relate and not when money is received or paid.

As 2 does not AS 2 should be applied in accounting for inventories other than:

apply to which a. Work in progress arising under construction contracts, including
type of directly related service contracts;
inventories? b. Work in progress arising in ordinary course of business of service
providers;
c. Shares, debentures and other financial instruments held as stock in
trade;
d. Producer’s inventory of livestock, agricultural and forest products,
minerals oils, ores and gases to the extent they are measured at net
realisable value in accordance with well established practices in
those industries.

Cost of inventory The cost of inventories shall comprise of:

comprises of?? a. All cost of purchase,
b. Cost of conversion and
c. Other cost incurred in bringing the inventories to their present
location and condition.

The cost of purchase consists of purchase price, duties and taxes (other than
those subsequently recoverable from taxing authority) Freight inwards and
other expenditure directly attributable to the acquisition.

Materials held for use in the production of inventories are not written down below
cost if finished goods in which they will be incorporated are expected to be sold at or
above cost.

However, where there is a decline in the value of material and it is estimated that
cost of finished goods will exceed the NRV of finished goods, the materials are
written down to net realisable value i.e replacement cost of the material.

The cost of conversion of inventories includes cost directly related to units of

production (Direct material, direct labour and direct expenses). They shall
also include a systematic allocation of fixed and variable production
overhead that are incurred in converting materials into finished goods.

I) Variable production overhead vary with the volume of production and

hence can be allocated.

II) The fixed production overhead is to be allocated on the basis of normal

capacity of the production facilities. Normal capacity is the production
expected to be achieved on an average over a number of years taking into
account the loss due to planned maintenance. Unallocated overheads are
treated as expense in the period in which they are incurred.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Which costs are to a. Abnormal cost of wasted material, labour or other production
be excluded from overheads;
the cost of b. Storage costs of inventory;
inventories? c. Administration overheads as they do not contribute to bring the
inventories to their present location and condition;
d. Selling and distribution overheads.
e. Interest and borrowing cost relating to inventories.

Cost For items not ordinarily interchangeable, Specific Identification method

methods/formula should be used.
allowed for For items that are ordinarily interchangeable, FIFO or weighted average
inventory
valuation? method may be used. (LIFO method is not allowed by AS 2)

Standard cost method or retail method is also allowed for convenience if the
results approximate the actual costs. The retail method is often used in
retail trade for measuring inventories of large number of rapidly changing
items that have similar margins and for which it is impracticable to use
other costing methods.

When change in The method of depreciation is applied consistently to provide comparability

method of of the results of the operations of the enterprise from period to period.
depreciation is
allowed?? And A change from one method of providing depreciation to another is made only
how the difference if :
a. the adoption of the new method is required by statute or
is adjusted?
b. for compliance with an accounting standard or
c. if it is considered that the change would result in a more appropriate
preparation or presentation of the financial statements of the
enterprise.

When such a change in the method of depreciation is made, depreciation is

recalculated in accordance with the new method from the date of the asset
coming into use. The deficiency or surplus arising from retrospective
recomputation of depreciation in accordance with the new method is
adjusted in the accounts in the year in which the method of depreciation is
changed.

In case the change in the method results in deficiency in depreciation in

respect of past years, the deficiency is charged in the statement of profit and
loss. In case the change in the method results in surplus, the surplus is
credited to the statement of profit and loss. Such a change is treated as a
change in accounting policy and its effect is quantified and disclosed.

Exclusions from (i) Forest, plantation and similar regenerative natural resources.
applicability of as (Industry Standards)
6? (ii) Wasting Assets including expenditure on the exploration for and
extraction of minerals, oils, natural gas, and similar non-
regenerative resources; (Industry Standards)
(iii) Expenditure on Research and Development; (AS 26)
(iv) Goodwill and other intangible assets; (AS 26)
(v) Live stock; (Industry Standards)
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Types of Construction contracts are of two types:

construction

contracts as per 1. Fixed Price Contract: it is a construction contract in which the contractor
AS 7? agrees to a fixed contract price, or a fixed rate per unit of output, which
in some cases is subject to cost escalation clauses.

2. Cost Plus Contract: it is a construction contract in which contractor is

reimbursed for allowable or otherwise defined costs, plus percentage of
these cost or a fixed fee.

Measurement of (1) Percentage of Completion Method: The recognition of revenue and

contract revenue expenses by reference to the stage of completion of a contract is often
and contract costs referred to as percentage of completion method. Under this method,
as per AS 7? contract revenue is matched with the contract costs incurred in reaching
the stage of completion, resulting in the reporting of revenue, expenses
and profit which can be attributed to the proportion of work competed.
This method provides information on the extent of contract activity and
performance during a period. However, any expected excess of total
contract costs over total contract revenue for the contract is recognised
as an expense immediately.

% Completion = Actual cost to date

Total estimated cost on the contract

(2) Stage of Completion Method: The stage of completion may be determined

in a variety of ways. The enterprise uses the method that measures
reliably the work performed. Depending upon the nature of the contract,
the methods may include:

(i) The proportion that contract cost incurred for work performed
upto the reporting date bear to the estimated total contract costs;
(ii) Surveys of work performed;
(iii) Completion of a physical proportion of the contract work.
Progress payment and advances received from the customers may not
necessarily reflect the work performed.

When the outcome of a construction contract cannot be estimated reliably:

(i) Revenue should be recognised only to the extent of contract costs
incurred by which recovery is probable; and
(ii) Contract cost should be recognised as an expense in the period in
which they are incurred.
An expected loss on the construction contract should be recognised as an
expense immediately.
Revenue Revenue is recognized when the following conditions are satisfied:
recognition as per
as 9: sale of goods a. The seller has transferred to the buyer the property in goods for a
(Dec 2014) consideration.
OR

b. Significant risk and rewards of the ownership has been transferred to the
buyer where the seller retains no effective control over the goods to a degree
usually associated with the ownership;
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

AND
c. No significant uncertainty exists regarding the amount of consideration
that will be delivered from the sale of goods.

Revenue Following conditions must be satisfied:

recognition as per
as 9: rendering of a. The performance may consist of execution of one or more acts. It should be
services measured using either:
i. Completed service contract method;
ii. Proportionate completion method; whichever relates the revenue to the
work accomplished.

b. There is no significant uncertainty regarding the amount of consideration

that will be derived from rendering the service.

c. It is reasonable to expect the ultimate collection at the time of

performance. Otherwise, revenue recognition should be postponed.

Revaluation of When a fixed asset is revalued in financial statements, an entire class of

fixed assets as per assets should be revalued or the selection of assets for revaluation should be
as 10: made on a systematic basis. For example, an enterprise may revalue a whole
class of assets within a unit.

It is not appropriate for the revaluation of a class of assets to result in the

net book value of that class being higher than the recoverable amount of the
asset of that class.

An increase in net book value arising on the revaluation of assets is

normally credited directly to owner’s interest under the heading of
Revaluation Reserves and is regarded as not available for distribution as
dividends. It sometimes happen that an increase to be recorded is a reversal
of a previous decrease arising on revaluation which has been charged to
profit and loss account in which case the increase in to be credited to the
extent that it offsets the previously recorded decrease.

Cost of fixed The cost of an item of fixed asset comprises of its purchase price, including
assets: import duties and other non refundable taxes or levies and any directly
attributable cost of bringing the asset to its working condition for its
intended use; any trade discounts and rebates are deducted in arriving at
the purchase price.

Examples of directly attributable costs are: Site preparation, initial delivery

and handling cost, installation cost, professional fees like engineer fees, etc.

Investment & Investments are assets held by an enterprise for earning income by way of
types of dividend, interest and rentals, and for capital appreciation, or for other
investments as benefits to the investing enterprise. Assets held as “stock in trade” are not
per as 13: investments.
Investments are classified as long term and current investments.

A current investment is an investment that is by its nature readily

realisable and is intended to be held for not more than one year from the
date on which such investment is made.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

A long term investment is an investment other than current investment.

Carrying Amount Current Investments: The carrying amount for current investment is the
of investments as lower of cost and fair value. In respect of investments for which active
per AS13? market exists, market value generally provides the best evidence of fair
value. Valuation of current investments on overall basis is not considered
appropriate. The most prudent and appropriate method is to carry
investments individually at lower of cost and fair value. However, for
convenience, enterprise may value investment category wise like equity
shares, preference shares, etc.

Long term investments: Long term investments are usually carried at cost.
However, where there is a decline, other than temporary, in the value of
long term investment, the carrying value is reduced to recognise the decline.
Indicator of value of an investment are obtained by reference to its market
value, expected cash flows from investments, etc. The carrying amount of
long term investments is determined on an individual investment basis.

Amalgamation In Amalgamation in the nature of merger is an amalgamation which satisfies

nature of Merger all the following conditions.
as per AS 14? (i) All the assets and liabilities of the transferor company become, after
(June 2014) amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already held
therein, immediately before the amalgamation, by the transferee company
or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity

shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.

iv) The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company.

v) No adjustment is intended to be made to the book values of the assets and

liabilities of the transferor company when they are incorporated in the
financial statements of the transferee company except to ensure uniformity
of accounting policies.

Amalgamation in Amalgamation in the nature of purchase is an amalgamation which does not

nature of satisfy any one or more of the conditions specified in sub-paragraph (e)
purchase as per above.
AS 14?
Pooling of interest This method is used for accounting in case of merger in the books of
method (Dec transferee.
2014) (Dec 2013)  In preparing the financial statements of Transferee Company after
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
amalgamation, Line by Line addition is done for respective assets and
liabilities of the Transferor and Transferee Company except for Share
Capital.
The difference between the purchase consideration paid by the
company to the transferor company and the amount of share capital (Equity + preference Capital) of
the
 transferor company should be adjusted with reserves.
Reserves mean the portion of earnings, for example, Profit & Loss
 Account, General Reserves, Capital Reserves.
If purchase consideration is more than the share capital of the transferor
company then the amount should be debited to reserves, if reverse is the
case, the difference is credited to reserves.

Purchase method  If any of the conditions of merger is not satisfied, then the amalgamation
(Dec 2014) (Dec shall be classified as purchase, therefore, the purchase method of
2013) accounting shall be followed in the books of Transferee Company.
As per the purchase method in the books of Transferee Company, assets
and liabilities shall be recorded at the value at which these assets and
liabilities are taken over by the Transferee Company from the
Transferor Company; Certainly assets do not include fictitious assets
and liabilities do not include internal liabilities like Reserve and Surplus
but includes liabilities outside the books of accounts i.e unrecorded
Liabilities.
 If the Purchase consideration exceeds the net assets taken over, the
difference is debited to goodwill account. If the purchase consideration is
less than the net assets taken over, the difference is credited to capital
reserve.

Treatment of Goodwill represents a (excess) payment made in anticipation of future

goodwill arising income and it is appropriate to treat it as an asset to be amortised to income
on amalgamation on a systematic basis over its useful life. Due to the nature of goodwill, it is
as per AS 14? frequently difficult to estimate its useful life with reasonable certainty. Such
estimation is however, made on a prudent basis. Accordingly, it is
considered appropriate to amortise goodwill over a period not exceeding 5
years unless a somewhat longer period can be justified. The requirement of
AS 26 Intangible Asset regarding Amortization shall not apply to such
Goodwill.

Types of Leases & Leases in the Financial Statement of Lessees

their Treatment (a) Financial Leases :
as per AS 19? 1. In this case at the inception of a financial lease, the lessee should
recognise the lease as an asset and a liability. Such recognition should be at
an amount equal to the fair value of the leased asset at the inception of the
lease. However, if the fair value of the leased asset exceeds the present
value of the minimum lease payments from the stand point of the lessee, the
amount recorded as an asset and a liability should be the present value of
the minimum lease payments from the stand point of the lessee.

2. The lease payments should be apportioned between the finance charge

and the reduction of the outstanding liability.

3. The finance charge should be allocated to periods during the lease term so
as to produce a constant periodic rate of interest on the remaining balance of
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
the liability of each period.

4. Also a finance lease gives rise to a depreciation expense for the asset as
well as finance expense for each accounting period. If there is no reasonable
certainty that the lessee will obtain ownership by the end of the lease term,
the asset should be fully depreciated over the lease term or its useful life
whichever is shorter.

(b) Operating Leases:

1. 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.

Leases in the Financial Statement of Lessees

(a) Finance Leases: The lessor should recognise assets given under a finance
lease in its balance sheet as a receivable at an amount equal to the net
investment in the lease. The recognition of finance income should be based
on a pattern reflecting a constant periodic rate of return on the net
investment of the lessor outstanding in respect of the finance lease.

(b) Operating Leases: The lessor should present an asset given under
operating lease in its balance sheet under fixed assets. The lease income
from operating leases should be recognised 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 in which benefit derived
from the use of the leased asset is diminished. The depreciation on leased
assets should be on a basis consistent with the normal depreciation policy of
the lessor company.

Treatment of Events occurring after balance sheet date are those significant events, both
events occurring favorable or unfavorable, that occur between the balance sheet date and the
after balance date on which financial statements are approved by the Board of Directors
sheet date as per in case of a company, and by corresponding approving authority in case of
AS 4? any other entity.

Two types of events can be identified:

(i) Those which provide further evidence of conditions that existed
on balance sheet date; (Adjusting Events)

Examples:
(a) Loss on a trade receivable account which is confirmed by
insolvency of a customer.
(b) Discovery of frauds and errors that show that the financial
statements were incorrect.

(ii) Those which are indicative of conditions that arose subsequent to

the balance sheet date. (Non Adjusting Events)
Examples:
(a) Amalgamation effected after balance sheet date.
(b) Decline in market value of investments.
(c) Destruction of major production plant by fire.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Treatment of Accounting treatment of Contingent Losses:

Contingent Losses

& Contingent The accounting treatment of a contingent loss is determined by the outcome
Gains as per AS of the contingency. If it is likely that a contingency will result in a loss to the
4? enterprise, then it is prudent to provide for that loss in the financial
statements.

The estimates of the outcome and of the financial effect of contingencies are
determined by the judgment of the management of the enterprise. This
judgment is based on consideration of information available up to the date
on which the financial statements are approved and will include a review of
events occurring after the balance sheet date, supplemented by experience
of similar transactions and, in some cases, reports from independent
experts.

If there is conflicting or insufficient evidence for estimating the amount of a

contingent loss, then disclosure is made of the existence and nature of the
contingency.

Accounting treatment of Contingent Gains:

Contingent gains are not recognized in the financial statements since their
recognition may result in the recognition of revenue which may never be
realized. However, when a realization of a gain is virtually certain, then
such a gain is not a contingency and accounting for the gain is appropriate.

Treatment of Extraordinary Items:

Extraordinary
Items, Prior Extraordinary items are income or expenses that arise from events or
Period Items as transaction that are clearly distinct from the ordinary activities of
per AS 5? enterprise and therefore, are not expected to recur frequently or regularly.

Extraordinary items should be disclosed in the statement of profit and loss

as a part of net profit or loss for the period. The nature and the amount of
each extraordinary item should be separately disclosed in the statement of
profit and loss in a manner that its impact on current profit or loss can be
perceived.

Examples of events or transactions that generally give rise to

extraordinary items for most enterprises are:
– attachment of property of the enterprise; or
– an earthquake.

Prior Period Items:

Prior period items are income or expense which arise in the current period
as a result of error or omissions in the preparation of financial statements of
one or more prior periods.

The nature and amount of prior period items should be separately disclosed
in the statement of profit and loss in a manner that their impact on the
current profit or loss can be perceived.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Errors may occur as a result of mathematical mistakes, mistakes in

applying accounting policies, misinterpretation of facts, or oversight.

Examples of prior period items are:

(i) Error in calculation in providing expenditure or income;
(ii) Omission to account for income or expenditure;
(iii) Applying incorrect rate of depreciation;
(iv) Treating operating lease as finance lease.

Accounting for Non Monetary Government Grants:

Government Government grants may take the form of non monetary assets such as land
Grants AS 12? or other resources given at concessional rates. In these circumstances, it is
usual to account for such assets at their acquisition cost. Non monetary
assets given free of cost are recorded at a nominal value.

Presentation of grants relating to specific fixed assets:

Grants relating to specific fixed assets are government grants whose
primary condition is that an enterprise qualifying for them should purchase,
construct or otherwise acquire such asset. Other conditions may be attached
restricting the type or location of such assets or period during which such
asset should be acquired.

Presentation of grants relating to Revenue:

Grants related to revenue are sometimes presented as a credit in the profit

and loss account, either separately or under a general heading such as
Other Income. Alternatively, they are deducted in reporting the related
expense.

Refund of Government Grants:

Government grants sometimes become refundable if certain conditions are

not fulfilled. A government grant that becomes refundable is treated as an
extraordinary item as per AS 5.

The amount refundable in respect of a government grant related to revenue

is applied first against any unamortised deferred credit remaining in respect
of the grant. To the extent that the amount refundable exceeds any such
deferred credit, or where no deferred credit exists, the amount is charged
immediately to profit and loss statement.

The amount refundable in respect of a government grant related to a specific

fixed asset is recorded by increasing the book value of the asset or by
reducing the capital reserve or the deferred income balance, as appropriate,
by the amount refundable. In the first alternative, i.e., where the book value
of the asset is increased, depreciation on the revised book value is provided
prospectively over the residual useful life of the asset.

Borrowing Cost What constitutes Borrowing Costs?

AS 16?
a. Interest and Commitment charges on bank borrowings and other
short term and long term borrowings.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

b. Amortisation of discounts or premiums relating to borrowings.

c. Amortisation of ancillary cost relating to arrangement of funds;
d. Finance charges in respect of assets acquired under finance lease or
under similar arrangements;
e. Exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Recognition:
Borrowing cost that are directly attributable to the acquisition, construction
or production of a qualifying asset should be capitalized as a part of that
asset. Other borrowing costs should be recognised as an expense in the
period in which they are incurred.

Commencement of Capitalization:
The capitalization of borrowing costs as a part of cost of qualifying asset
should commence when all of the following conditions are satisfied:
a. Expenditure for the acquisition, construction or production of a
qualifying asset is being incurred;
b. Borrowing cost are being incurred; and
c. Activities that are necessary to prepare the asset for its intended use
or sale are in progress;

Earnings Per 1. A potential equity share is a financial instrument or other contract that
Share AS 20? entitles, or may entitle, its holder to equity shares.

Examples of potential equity shares are:

(a) debt instruments or preference shares, that are convertible into equity
shares;
(b) share warrants;
(c) options including employee stock option plans under which employees of
an enterprise are entitled to receive equity shares as part of their
remuneration and other similar plans; and
(d) shares which would be issued upon the satisfaction of certain conditions
resulting from contractual arrangements (contingently issuable shares),
such as the acquisition of a business or other assets, or shares issuable
under a loan contract upon default of payment of principal or interest, if the
contract so provides.

2. An enterprise should present basic and diluted earnings per share on the
face of the statement of profit and loss for each class of equity shares that
has a different right to share in the net profit for the period. An enterprise
should present basic and diluted earnings per share with equal prominence
for all periods presented.

3. For the purpose of calculating basic earnings per share, the net profit or
loss for the period attributable to equity shareholders should be the net
profit or loss for the period after deducting preference dividends and any
attributable tax thereto for the period.

4. Dilutive Potential Equity Shares:

Potential equity shares should be treated as dilutive when, and only when,
their conversion to equity shares would decrease net profit per share from
continuing ordinary operations.
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Potential equity shares are anti-dilutive when their conversion to equity

shares would increase earnings per share from continuing ordinary
activities or decrease loss per share from continuing ordinary activities. The
effects of anti-dilutive potential equity shares are ignored in calculating
diluted earnings per share.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
CORPORATE FINANCIAL REPORTING

Explain the Accounting is a process to identify measure and communicate economic

concept of information to permit informed judgments and decisions by the user of
Corporate the information.
Financial Its function is to provide quantitative information, primarily financial in

Reporting (JUNE name, about economic entities, that is intended to be useful in making
economic decisions and related choice among alternative course of action.
2014)
Financial reporting may be defined as communication of published
financial statement and related information from a business enterprise
to all users. It is the reporting of accounting information of an entity to a
user or group of users. It contains booth qualitative and quantitative
information.
The Financial report made to the management is generally known as
internal reporting, while financial reporting made to the shareholder
investors/management is known as external reporting.
The internal reporting is a part of management information system and
the uses MIS reporting for the purpose of analysis and as an aid in
decision making process. The management of a corporate is ultimately
responsible for the generation of accounting information. The
accountability of a company has two distinct aspects – legal and social.
Under legal requirements a company has to supply certain information
to the various users through annual reports and under the social
obligation, a company has to provide additional information to various
user groups.

Objective of The objectives of financial reporting given by Financial Accounting Standard

Corporate Board (FASB) are summarized as follows:
Financial
Reporting 1. Financial reporting should provide information that is useful to investors
and creditors and other users in making rational investment, credit and
similar decisions. The information should be useful to both, the present and
potential investors.

2. Financial reporting should provide information about the economic

resources of an enterprise the claims to those resources (obligations of the
enterprise to transfer resources to other entities and owners equity) and the
effects of transactions event, and circumstances that change resources and
claims to those resources.

3. Financial reporting should provide information about the enterprise’s

financial performance during a period. Investors and creditors often use
information about the past to help in assessing the prospects of an
enterprise.

4. Financial reporting should provide information about how management of

an enterprise obtains and spends cash, its borrowing and repayment of
borrowing, capital transactions including cash dividends and other
distributions of enterprise resources to owners, and other factors that may
affect an enterprise’s liquidity or solvency.

5. Financial reporting should provide information about how management of

an enterprise has discharged its stewardship responsibilities to owners
(shareholders) for the use of enterprise resource entrusted to it.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

6. Financial reporting should provide information that is useful to

management and directors in making decisions in the interest of owners

What is Value A simplified financial statement that shows how much wealth has been
Added Statement? created by a company.
A value added statement calculates total output by adding sales, changes
in stock, and other incomes, then subtracting depreciation, interest,
taxation, dividends, and the amounts paid to suppliers and employees.
Such value added can be taken to represent in monetary terms the net
output of an enterprise. This is the difference between the total value of
its output and the value of the inputs of materials and services obtained
from other enterprises.
The value added is seen to be due to the combined efforts of capital,
management and employees, and the statement shows how the value
added has been distributed to each of these factors.

Advantages of 1. It is an alternative performance measure to profit and therefore helps in

Value Added the comparison of the performance of the company. Value added is superior
Statement ? (DEC performance measure because it pays attention on inputs which are under
2014) the control of the management.

2. By employing various productivity measures like value added per rupee of

capital employed, value added per rupee sales, value added per employee
etc., it helps in judging the productivity of the company.

3. Resource allocation decisions are normally based on the concept of

maximizing profit but value added statement provides a better alternative
by focusing on other factors rather than just profit.

4. It also helps in devising the incentives schemes for the employees of the
company in a better way.

5. It reflects a broader view of the company’s objectives and responsibilities

rather than just focusing only on the small aspects about the company.

Limitations of There is a duality associated with the VAS in that it reports on the
Value Added calculation of value added and its application among the stakeholders in the
Statement company. Many inconsistencies are found in practice in both the calculation
and presentation of value added in the VAS. These inconsistencies make the
statement confusing, non-comparable and unverifiable. The main areas of
inconsistencies include, but are not limited to, the following:
1. The treatment of depreciation resulting in gross and net value added;
2. The treatment of taxes like pay-as-you-earn, fringe benefits and other
benefits in the employees’ share of value added;
3. The timing of recognition of value added - production or sales;
4. The treatment of taxes such as VAT /GST and deferred tax; and
5. The treatment of non-operating items.

What is meant by Economic value added (EVA) is a financial measure of what economists
Economic Value sometimes refer to as economic profit or economic rent. The difference
Added? between economic profit and accounting profit is essentially the cost of
Equity
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

capital – an accountant does not subtract a cost of equity capital in the

computation of profit, so in fact an accountant’s measure of income or profit
is in essence the residual return to that equity capital since all other costs
have been deducted from the revenue stream.

How to Calculate Note that, as in the traditional computation of earnings, interest on debt
EVA? (DEC 2013) capital is subtracted from operating earnings (earnings before interest
and taxes (EBIT)) to obtain net income
Then, an opportunity cost on equity capital is subtracted to obtain EVA.
The opportunity cost on equity capital is computed as the equity or net
worth of the business times a rate of return that reflects the rate
required by investors in the business.
This required rate is in reality an opportunity cost measured by the rate
of return that could be obtained on equity funds if they were invested
elsewhere.
A positive EVA means the firm is generating a return to invested capital
that exceeds the direct (i.e. interest) and opportunity cost of that
invested capital; a negative EVA means that the firm did not generate a
sufficient return to cover the cost of its debt and equity capital.

The under given tables gives a view for how to calculate ‘Economic Value
Added (EVA):

Earnings before Interest and Taxes (EBIT) xxx

Less : Interest xxx
Net Income xxx
Less : Cost of Equity Capital xxx
Economic Value Added (EVA) xxx

Expressed as a formula:
EVA = “Net Operating Profit after Taxes” – (Equity Capital X % Cost of
Equity Capital).
Advantages of 1. In various cases, company pay bonuses to the employees on the basis of
EVA Analysis? EVA generated. Since a higher EVA implies higher bonuses to the
employees, it promotes the employees for working hard for generating
higher revenue.

2. Using EVA , company can evaluate the projects independently and hence
decide on whether to execute the project or not

3. It helps the company in monitoring the problem areas and hence taking
corrective action to resolve those problems.

4. Unlike accounting profit, such as EBIT, Net Income and EPS, EVA is
based on the idea that a business must cover both the operating costs as
well as the capital costs and hence it presents a better and true picture of
the company to the owners, creditors, employees, shareholders and all other
interested parties.

5. It also helps the owners of the company to identify the best person to run
the company effectively and efficiently.

What is Market 1. Market value added is the difference between the Company’s market and
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
Value Added? book value of shares. According to Stern Stewart, if the total market value of a
company is more than the amount of capital invested in it, the company
has managed to create shareholder value. If the market value is less than
capital invested, the company has destroyed shareholder value.

2. Market Value Added = Company’s total Market Value – Capital Invested

3. Book value of equity refers to all equity equivalent items like reserves,
retained earnings and provisions. In other words, in this context, all the
items that are not debt (interest bearing or noninterest bearing) are
classified as equity.

4. Market value added (MVATM) is identical in meaning with the market–

to–book ratio

5. According to Stewart, Market value added tells us how much value the
company has added to, or subtracted from, its shareholders investment.
Successful companies add their MVA and thus increase the value of capital
invested in the company. Unsuccessful companies decrease the value of the
capital originally invested in the company.

What is  Shareholder Value Added (SVA) represents the economic profits

Shareholders generated by a business above and beyond the minimum return required
Value Added? by all providers of capital.
“Value” is added when the overall net economic cash flow of the business
exceeds the economic cost of all the capital employed to produce the
operating profit.
Therefore, SVA integrates financial statements of the business (profit
and loss, balance sheet and cash flow) into one meaningful measure. The
SVA approach is a methodology which recognises that equity holders as
well as debt financiers need to be compensated for the bearing of
investment risk.
The SVA methodology is a highly flexible approach to assist
management in the decision making process. Its applications include
performance monitoring, capital budgeting, output pricing and market
valuation of the entity.

The benefits of moving towards SVA include:

1. Overall, value-based performance measures will result in greater
accountability for the investment of new capital, as well as for the use of
existing investments.

2. Organisation will have the opportunity to apply a meaningful private

sector benchmark to evaluate performance.

3. Managers will be provided with an improved focus on maximizing

shareholder value.

Drawbacks:

1. A limitation in the use of SVA as a performance measure is that, by

nature, it is an aggregate measure. In order to analyse the underlying
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
causes of any changes in calculated value between years, it is necessary to
fully comprehend the value drivers and activities specific to a given firm.

2. There may be certain enterprises which are subject to any degree of price
regulation then it may not be possible for management to adjust output
prices to achieve a commercial return in response to upward movements in
input prices. Such a situation may result in SVA being reduced even though
there may have been no decrease in overall efficiency.

3. Similarly, a reduction in direct Government funding would result in a

decrease in SVA.

4. Combined with the use of traditional accounting measures, a thorough

knowledge of the value drivers of the business will assist in determining the
underlying causes of fluctuations in the value added measure.

5. Again, the use of SVA is not a substitute for detailed analysis of business
drivers, rather it is an additional measurement tool with an economic
foundation
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
UNDERWRITING OF SECURITIES
Types of An underwriting agreement may be of any one of the following types:
underwriting? Complete Underwriting
If the whole of the issue of shares or debentures of a company is
underwritten, it is said to be complete underwriting.

In such a case, the whole of the issue of shares or debentures may be

underwritten by –
(a) one firm or institution, agreeing to take the entire risk;
(b) a number of firms or institutions, each agreeing to take risk only to a
limited extent.

Partial Underwriting
If only a part of the issue of shares or debentures of a company is
underwritten, it is said to be partial underwriting.

The part of the issue of shares or debentures may be underwritten by -

(a) One person or institution;
(b) A number of firms or institutions each agreeing to take risk only to a
limited extent.

In case of partial underwriting, the company is treated as “Underwriter” for

the remaining part of the issue.

Firm Underwriting
It refers to a definite commitment by the underwriter or underwriters to
take up a specified number of shares or debentures of a company
irrespective of the number of shares or debentures subscribed for by the
public. In such a case, the underwriters are committed to take up the agreed
number of shares or debentures in addition to unsubscribed shares or
debentures, if any. Even if the issue is over-subscribed, the underwriters are
liable to take up the agreed number of shares of debentures.

Payment of Section 40 (6) of the Companies Act 2013, provides that a company may pay
underwriting commission to any person in connection with the subscription or
commission under procurement of subscription to its securities, whether absolute or
companies act conditional, subject to the following conditions which are prescribed under
2013 Companies (Prospectus and Allotment of Securities) Rules, 2014:
(a) the payment of such commission shall be authorized in the company’s
articles of association;

(b) the commission may be paid out of proceeds of the issue or the profit of
the company or both;

(c) the rate of commission paid or agreed to be paid shall not exceed, in case
of shares, five percent (5%) of the price at which the shares are issued or a
rate authorised by the articles, whichever is less, and in case of debentures,
shall not exceed two and a half per cent (2.5 %) of the price at which the
debentures are issued, or as specified in the company’s articles, whichever is
less;

(d) the prospectus of the company shall disclose -

– the name of the underwriters;
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
– the rate and amount of the commission payable to the underwriter; and
– the number of securities which is to be underwritten or subscribed by the
underwriter absolutely or conditionally.

(e) there shall not be paid commission to any underwriter on securities

which are not offered to the public for subscription;

(f) a copy of the contract for the payment of commission is delivered to the
Registrar at the time of delivery of the prospectus for registration.

Thus, the Underwriting commission is limited to 5% of issue price in case of

shares and 2.5% in case of debentures. The rates of commission given above
are maximum rates. The company is free to negotiate lower rates with
underwriters.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
ISSUES & REDEMPTION OF SECURITIES

‘What is Issue of The shares of many successful companies which offer attractive rates of
Shares at dividend on their existing capitals fetch a higher price than their face value
Premium and in the market. When shares are issued at a price higher than the face
where securities value,
premium can be they are said to be issued at a premium. Thus, the excess of issue price over
Utilized as per the face value is the amount of premium. For example, if a share of ` 10 is
companies act issued at Rs. 12, Rs. (12 – 10) = Rs. 2 is the premium.
(DEC 2013) The premium on issue of shares must not be treated as revenue profits. On
the contrary, it must be regarded as capital receipt. The Companies Act
requires that when a company issues shares at a premium whether for cash
or otherwise, a sum equal to the aggregate amount of the premium collected
on shares must be credited to a separate account called “Securities Premium
Account”. There are no restrictions in the Companies Act on the issue of
shares at a premium, but there are restrictions on its disposal.

Under Section 52(2) of the Companies Act 2013, the Securities Premium
Account may be applied by the company –
(a) towards the issue of unissued shares of the company to the members of
the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.

Transfer of profits In case of inadequacy or absence of profits in any financial year, any
to reserves for company proposes to declare dividend out of the accumulated profits earned
declaration of by it in previous years and transferred by the company to the reserves, such
dividend? declaration of dividend shall not be made except in accordance with the
Companies (Declaration and Payment of Dividend) Rules, 2014. In the event
of inadequacy or absence of profits in any year, a company may declare
dividend out of free reserves subject to the fulfillment of the following
conditions, namely: –

– The rate of dividend declared shall not exceed the average of the rates at
which dividend was declared by it in the three years immediately preceding
that year: Provided that this sub-rule shall not apply to a company, which
has not declared any dividend in each of the three preceding financial year.

– The total amount to be drawn from such accumulated profits shall not
exceed one-tenth of the sum of its paid-up share capital and free reserves as
appearing in the latest audited financial statement.

– The amount so drawn shall first be utilised to set off the losses incurred in
the financial year in which dividend is declared before any dividend in
respect of equity shares is declared.

– The balance of reserves after such withdrawal shall not fall below fifteen
per cent of its paid up share capital as appearing in the latest audited
financial statement.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

– No company shall declare dividend unless carried over previous losses and
depreciation not provided in previous year are set off against profit of the
company of the current year the loss or depreciation, whichever is less, in
previous years is set off against the profit of the company for the year for
which dividend is declared or paid.

Issue of Bonus (1) A company may issue fully paid-up bonus shares to its members, in any
Shares manner out of –
(Regulations) (i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
However, no issue of bonus shares shall be made by capitalising reserves
created by the revaluation of assets.

(2) No company shall capitalise its profits or reserves for the purpose of
issuing fully paid-up bonus shares under (1) above, unless –
a) it is authorised by its articles;

b) it has, on the recommendation of the Board, been authorised in the

general meeting of the company;

c) it has not defaulted in payment of interest or principal in respect of fixed

deposits or debt securities issued by it;
d) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;

e) the partly paid-up shares, if any outstanding on the date of allotment,

are made fully paid-up;

f) The company which has once announced the decision of its Board
recommending a bonus issue, shall not subsequently withdraw the same.
[Rule 14 of Companies (Share Capital and Debentures) Rules, 2014]

(3) The bonus shares shall not be issued in lieu of dividend.

Buy back of Advantages of Buy Back:

shares (sections It is an alternative mode of reduction in capital without requiring
68, 69 & 70) approval of the Court/CLB(NCLT),
to improve the earnings per share
to improve return on capital, return on net worth and to enhance the
long-term shareholders value;
to provide an additional exit route to shareholders when shares are
undervalued or thinly traded;
to enhance consolidation of stake in the company;
to prevent unwelcome takeover bids;
to return surplus cash to shareholders;
to achieve optimum capital structure;
to support share price during periods of sluggish market condition;
to serve the equity more efficiently.

According to section 68(1) of the Companies Act 2013, a company may

CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
purchase its own shares or other specified securities (referred to as buy-
back) out of—
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities:

However, no buy-back of any kind of shares or other specified securities

shall be made out of the proceeds of an earlier issue of the same kind of
shares or same kind of other specified securities.

Conditions for buy back:

According to section 68(2), following conditions must be satisfied in order to
buy-back the shares.
(a) must be authorized by its articles;

(b) a special resolution has been passed at a general meeting of the company
authorizing the buy-back, but the same is not required when:

i) the buy-back is 10% or less of the total paid-up equity capital and free
reserves of the company; and

ii) such buy-back has been authorized by the Board by means of a resolution
passed at its meeting;

(c) the buy-back is twenty-five per cent or less of the aggregate of paid-up
capital and free reserves of the company. But in case of Equity Shares, the
same shall be taken as 25% of paid up equity capital only.

(d) Debt equity ratio should be 2:1, where: Debt is aggregate of secured and
unsecured debts owed by the after buy-back and Equity: is aggregate of the
paid-up capital and its free reserves:

(e) all the shares or other specified securities for buy-back are fully paid-up;

(f) If shares or securities are listed, buy back will be in accordance with the
regulations made by the Securities and Exchange Board in this behalf; and

(g) the buy-back in respect of unlisted shares or other specified securities is

in accordance with Share Capital and Debentures Rules, 2014.

(h) No offer of buy-back shall be made within a period of one year from the
date of the closure of the preceding offer of buy-back, if any.

Other Conditions for Buy back

– Every buy-back shall be completed within a period of one year from the
date of passing of the special resolution, or as the case may be, the
resolution passed by the Board. Section 68(4)

– The buy-back can be from:

a) from the existing shareholders or security holders on a proportionate
basis;
b) from the open market;
c) by purchasing the securities issued to employees of the company pursuant
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

to a scheme of stock option or sweat equity. Section 68(5)

– Before making such buy-back, file with the Registrar, a declaration of

solvency signed by at least two directors of the company, one of whom shall
be the managing director, if any, Form No. SH.9 may be prescribed and
verified by an affidavit to the effect that the Board of Directors of the
company has made a full inquiry into the affairs of the company as a result
of which they have formed an opinion that it is capable of meeting its
liabilities and will not be rendered insolvent within a period of one year
from the date of declaration adopted by the Board Section 68(6).

– Company shall extinguish and physically destroy the shares or securities

so bought back within seven days of the last date of completion of buy-back
Section 68(7).

– Where a company completes a buy-back of its shares or other specified

securities, it shall not make a further issue of the same kind of shares or
other securities including allotment of new shares or other specified
securities within a period of six months except by way of:
a) a bonus issue or
b) in the discharge of subsisting obligations such as conversion of warrants,
stock option schemes, sweat equity or conversion of preference shares or
debentures into equity shares.

Prohibition of buy No company shall directly or indirectly purchase its own shares or other
back in certain specified securities –
cases (section 70) a) through any subsidiary company including its own subsidiary companies;
b) through any investment company or group of investment companies; or

c) if a default, is made by the company, in the repayment of deposits

accepted either before or after the commencement of this Act, interest
payment thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder, or repayment of any term loan or
interest payable thereon to any financial institution or banking company.

Provided that the buy-back is not prohibited, if the default is remedied and a
period of three years has lapsed after such default ceased to subsist

Managerial A. Limit if Adequate Profit u/s 197 of Companies Act, 2013:

Remuneration Overall managerial remuneration not to exceed 11% of the Net Profit
under Companies of the F.Y, if company wants to pay Managerial remuneration more
Act, 2013 (Dec than 11% of Net Profits then it must pass a resolution in General
Meeting and must take prior approval of Central Government.
2014) (Dec 2013)
MD/WTD:
5% of NP if one.
10% of NP if more than one.

Manger: 5% of NP

Other directors
1% of NP if company has MD/WTD/Manager
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
3% of NP if company has no MD/WTD/Manager
In all the above cases the approval of central government is required if the
company wants to
exceed the above limit.

Net profit for the purpose of calculation of Managerial Remuneration:

Section 198 spells out the method of net profits for the purpose of
managerial remuneration, which is as follows:
INCOME
To be credited u/s 198(2) Not to be credited u/s 198(3)
Gross Profit in usual manner Securities Premium
Other Income (Rent, Dividend, Profit on sale of forfeited shares
Interest)
Subsidy from Government Profit on sale of undertaking (Capital
profits)
Profit on sale of fixed assets

EXPENSES
To be deducted u/s 198(4) To be deducted u/s 198(5)
Usual Working Expenses Income Tax & Surcharge
Actual Bad debts written off Loss on sale of undertaking (Capital
Losses)
Actual Repairs and Maintenance Any Compensation or damages
payable other than breach of contract
Depreciation u/s 123
Loss on sale of assets
Interest on Borrowings
Insurance Premium
Brought Forward Losses if any
Any compensation or damages for
Breach

Limit if Inadequate Profit (PART II OF SCHEDULE V=

Higher of A or B;
A)
Effective Capital Yearly Remuneration
Negative or less than 5 crores 30 Lakhs
5 crores and above but less than 42 Lakhs
100 crores
100 crores and above but less than 60 Lakhs
250 crores
250 crores and above 60 Lakhs + 0.01% of the effective
capital in excess of 250 crores
B) In the case of a managerial person who was not a security holder, holding
securities of the company of nominal value of rupees five lakh or more or an
employee or a director of the company or not related to any director or
promoter at any time during the two years prior to his appointment as a
managerial person, —2.5% of the current relevant profit:

Provided that the above limits shall be doubled if the resolution passed by
the shareholders is a special resolution.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

What are pre- Profit or Loss of a business for the period prior to the date the company
incorporation came into existence is referred to as Pre-incorporation Profits or Losses.
Profits and How
are they treated When a running business is acquired by the company, the profit or loss
in the books of the earned by the company till the date of incorporation has to be shown
company? (Dec separately, since it represents profits of capital in nature. To ascertain the
profits as on date of taking over, either a set of financial statements at the
2014) (DEC 2011) date of takeover is prepared or the financials are prepared at the end of
accounting period and then the profits are bifurcated into pre (capital) and
Post (revenue) Profits. Of the above two options, the latter is preferable and
convenient to practice.
Items Basis of Apportionment
Gross Profit/Loss Sales Ratio
Fixed Expenses (based on time which will be Time Ratio
incurred even if there is no Sale during the
year) Example – Salaries, Rent, Taxes,
Depreciation, Office expenses, etc
Variable Expenses (based on sales which will Sales Ratio
not be incurred if there is no Sale) Example –
Commission, Discount, Advertisement, Sales
promotion, Selling expenses, Sales, Audit Fees,
etc
Expenses related to Pre-incorporation period Pre Incorporation Period
alone – Partners remuneration, etc
Expenses related to Post Incorporation period Post Incorporation
alone – Examples – Director’s Fees, Debenture Period
Interest, Discount of issue of debentures,
Preliminary Expenses, etc

What Are Meaning:

preliminary Before incorporation and commencement of business, company and the
Expenses? Give promoters of the company may incurred so many types of expenses like
some Examples statuary fees and company logo designing, in some cases rent for the office
and how they are premises during the time of incorporation not after incorporation etc... These
presented In are all comes under preliminary expenses .in simple words preliminary
expenses are the expenses that spent by the promoters before the
Balance Sheet? incorporation of company.
(DEC 2014)
Which Expenses are included:
Preliminary expenses refer to those expenses which are incurred in forming
a joint stock company. These comprise the expenses incidental to the
creation and floatation of a company and the following items are usually
included therein:
(i) Stamp duty and fees payable on registration of the company and stamp
papers purchased for preliminary contracts of the company.
(ii) The legal charges for preparing the Prospectus, Memorandum and
Articles of Association and contracts and of the registration of the company.
(iii) Accountants’ and Valuers’ fees for reports, certificates, etc.
(iv) Cost of printing the Memorandum and Articles of Association, printing,
advertising and issuing the prospectus.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
(v) Cost of preparing, printing and stamping letters of allotment and share
certificates.
(vi) Cost of preparing printing and stamping Debenture Trust Deed, if any.
(vii) Cost of company’s seal and books of account, statutory books and
statistical books.

Which expenses are not Included:

But preliminary expenses should not include the following expenses which
are incurred before commencement of business:
(i) Cost of preparation of the feasibility report.
(ii) Cost of preparation of the project report.
(iii) Cost of conducting market survey or any other survey necessary for the
business of the company.
(iv) Consultancy fees payable for engineering services in connection with the
business.

Generally, a limit is prescribed in the Articles or Prospectus or the

Statement in lieu of Prospectus upto which any amount would be spent on
preliminary expenses. But sanction of the shareholders is necessary if the
amount spent on preliminary expenses exceeds the said limit.

Treatment in Books of Accounts:

Strictly speaking preliminary expenses are of capital nature and as such
should be shown on the assets side of the Balance Sheet under the heading
“Miscellaneous Expenditure”.
Although, there is no legal compulsion to write off the amount of
preliminary expenses, it is prudent to write it off as soon as possible since it
is unrepresented by assets. Preliminary expenses being of capital nature,
may be written off against capital profits.
Alternatively, such expenses may be treated as deferred revenue
expenditure and written off gradually over a number of years by transfer to
Profit and Loss Account. For income-tax purposes, such expenses can be
written off over a period of 10 years. Until completely written off,
Preliminary expenses have to be shown on the assets side of the Balance
Sheet under the heading ‘Miscellaneous Expenditure’

Adequacy of the company shall create Debenture Redemption Reserve (DRR) in

Debenture accordance with following conditions:-
Redemption
Reserve ?? (i) No DRR is required for debentures issued by All India Financial
Institutions (AIFIs) regulated by Reserve Bank of India and Banking
Companies for both public as well as privately placed debentures. For other
Financial Institutions (FIs) within the meaning of clause (72) of section 2 of
the Companies Act, 2013, DRR will be as applicable to NBFCs registered
with RBI.

(ii) For NBFCs registered with the RBI under Section 45-IA of the RBI
(Amendment) Act, 1997, ‘the adequacy’ of DRR will be 25% of the value of
debentures issued through public issue as per present SEBI (Issue and
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Listing of Debt Securities) Regulations, 2008, and no DRR is required in the

case of privately placed debentures.

(iii) For other companies including manufacturing and infrastructure

companies, the adequacy of DRR will be 25% of the value of debentures
issued through public issue as per present SEBI (Issue and Listing of Debt
Securities), Regulations 2008 and also 25% DRR is required in the case of
privately placed debentures by listed companies. For unlisted companies
issuing debentures on private placement basis, the DRR will be 25% of the
value of debentures.

Where the (i) in deposits with any scheduled bank, free from any charge or lien;
debenture
redemption (ii) in unencumbered securities of the Central Government or of any State
reserve can be Government;
invested (Modes (iii) in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee)
of Investment) of section 20 of the Indian Trusts Act, 1882;

(iv) in unencumbered bonds issued by any other company which is notified

under sub-clause (f) of section 20 of the Indian Trusts Act, 1882;

(v) the amount invested or deposited as above shall not be used for any
purpose other than for redemption of debentures maturing during the year
referred above:

Purchase of Own Under this method, a company may purchase its own debentures in the
Debentures in open market if it seems to be convenient and profitable to the company.
open market When the market price of the debentures goes down below par or
(JUNE 2011) debentures are quoted at a discount on the stock exchange, the company
usually takes the opportunity to buy the debentures in the open market
and to cancel them.
Own debentures may, also, be purchased by the company for its own
investment when it is desired to keep the debentures alive with a view to
issuing them in future.
The law does not prohibit a company from purchasing its own
debentures unless the terms of issue specify otherwise. In such a case,
the purchase of debentures can be made out of the amount realised on
sale of investments where sinking funds exists.
Where there is no sinking fund, the debentures can be purchased out of
the company’s cash balance.
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
CORPORATE RESTRUCTURING

Why Corporate The various needs for undertaking a Corporate Restructuring exercise are
Restructuring is as follows:
done? (i) to focus on core strengths, operational synergy and efficient allocation of
managerial capabilities and infrastructure.

(ii) consolidation and economies of scale by expansion and diversion to

exploit extended domestic and global markets.

(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick
unit with profits of a healthy company.

(iv) acquiring constant supply of raw materials and access to scientific

research and technological developments.

(v) capital restructuring by appropriate mix of loan and equity funds to

reduce the cost of servicing and improve return on capital employed.

(vi) Improve corporate performance to bring it at par with competitors by

adopting the radical changes brought out by information technology.

What is Corporate 1. Corporate Restructuring is a comprehensive process, by which a company

Restructuring? can consolidate its business operations and strengthen its position for
achieving its short-term and long-term corporate objectives - synergetic,
dynamic and continuing as a competitive and successful entity.

2. The expression ‘Corporate Restructuring’ implies restructuring or

reorganizing a company or its business (or one of its businesses) or its
financial structure, in such a way as to make it operate more effectively.
This is not a legal term and has no precise meaning nor can it be defined
with precision.

3. Corporate Restructuring is concerned with arranging the business

activities of the corporate as a whole so as to achieve certain predetermined
objectives at corporate level. Such objectives include the following:
– orderly redirection of the firm's activities;
– deploying surplus cash from one business to finance profitable growth in
another;
– exploiting inter-dependence among present or prospective businesses
within the corporate portfolio;
– risk reduction; and
– development of core competencies.

Types of Restructuring may be of the following kinds:

Restructuring?
(DEC 2013) 1. Financial restructuring which deals with the restructuring of capital base
and raising finance for new projects. This involves decisions relating to
acquisitions, mergers, joint ventures and strategic alliances.

2. Technological restructuring which involves, inter alia, alliances with

other companies to exploit technological expertise.

3. Market restructuring which involves decisions with respect to the product

CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
market segments, where the company plans to operate based on its core
competencies.

4. Organizational restructuring which involves establishing internal

structures and procedures for improving the capability of the personnel in
the organization to respond to changes. This kind of restructuring is
required in order to facilitate and implement the above three kinds of
restructuring. These changes need to have the cooperation of all levels of
employees to ensure that the restructuring is successful
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
B List On theappointment of Liquidator, director’s position will stand
Contributories automatically vacated and the shareholders will be referred to as
(June 2014) contributories.
Shareholders who have transferred that partly paid shares within one
year earlier to date of winding up will be placed in “B” List. Such
contributories will be referred to as “B” List of contributories.
Liquidator is expected to dispose the assets off to pay off liabilities. In
case the disposal of assets was not sufficient to discharge the liabilities,
then the liquidator can claim from “A” List of contributories towards
their unpaid capital towards the company.
If “A” List of contributories are not meeting the liabilities, then
liquidator can fall upon “B” List of contributories to recover money
towards unpaid portion of the capital.
The liquidator can fall upon only against transfer of partly paid shares
effected during within one year earlier to the date of winding up and
transmission of shares will not come under this purview. If there were to
be more than one such contributories, then the liability will be fixed
against that many contributories in the ratio in which they are expected
to contribute towards the capital. In no case, such fixation of liabilities
can exceed the statutory liability (towards unpaid capital).

Statement of The officers and directors of a company under liquidation must, according to
affairs section 454 read with section 511A, make out and submit, within 21 days of
(Liquidation of the Tribunal order (or within such extended time, not exceeding three
company) months, as the liquidator or the Tribunal may allow), a statement showing
the following
(a) The assets of the company, stating separately the cash balance in hand
and at bank, if any, and the negotiable securities, if any, held by the
company;

(b) Its debts and liabilities;

(c) The names, residences and occupations of its creditors, stating separately
the amount of secured and unsecured debts and in the case of secured debts,
particulars of the securities given, whether by company or its officers, their
value and dates on which they were given;

(d) The debt due to the company and the names, residences and occupations
of the persons from whom the amount likely to be realised on account
thereof;

(e) Such further or other information as may be prescribed, or as the official

liquidator may require.

The statement has to be prepared even in case of voluntary winding up.

What are Under Section 530 of the Companies Act , the following creditors are treated
preferential as preferential creditors:
Creditors?
1. All revenues, taxes, cesses & rates payable to the government or local
authority will be treated as preferential creditors provided that it must
become due within 12 months before the date of winding up.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

2. 4 months salary & wages due to the employees of the company will be
treated as preferential provided that it must become due within 12 months
before the date of winding up. Maximum of ` 20000 will be treated as
preferential creditors.

All accrued holiday remuneration payable to an employee due to

termination of his employment is treated as preferential

The person who advances money for making the payment under (ii) & (iii)
mentioned above will be treated as preferential.

1. Any sum payable by the company under the Employees State Insurance
Act, 1948 will be treated as preferential provided that it must become due
within 12 months before the date of winding up.

2. Compensation payable by the company under Workmen Compensation

Act, 1923 is treated as preferential.

3. Any sum payable by the company to its employees from a Provided Fund,
Pension Fund, Gratuity Fund or any other fund maintained foe the welfare
of the employees.

4. The expenses of investigation held Under Section 235 or 237 will be

treated as preferential.

Order of payment The amount received from the assets not specifically pledged & the amounts
on Liquidation of contributed by the contributories must be distributed by the liquidator in
Companies the following order:
1. Expenses of winding up including the liquidators remuneration
2. Creditors secured by the floating charge on the assets of the company
3. Preferential creditors
4. Unsecured creditors
5. The surplus, if any, amongst the contributories (i.e. preference
shareholders & equity shareholders) according to their respective rights &
interests.

Consequences of The following are the consequences of winding up:

Winding Up
1. An officer called a liquidator is appointed & he takes over the
administration of the company. He may be appointed by High Court,
members or by the creditors as the case may be.

2. The powers of the board of directors will cease & will now vest the
liquidator.

3. Winding up order or resolution of voluntary winding up shall operate as

a notice of discharge to all the members of the company. Members of
company are called ‘Contributories’.

4. Liquidator of the company will prepare a list of contributories who be

made liable to contribute to the assets of the company in case assets are not
sufficient to meet the claims of various claimants. In case there is a surplus
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
in the assets, the liquidator of the company will prepare a list of those
members, who are entitled to share this surplus.

5. Liquidator of the company will collect & realise its assets & distribute
the proceeds among right claimants as per the procedure of the law.

6. Winding up ultimately leads to dissolution of the company. The

company’s life will come to an end & it will be no more an artificial person in
the eyes of law.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
CONSOLIDATION OF ACCOUNTS

What is Cost of In actual practice, it rarely happens that the cost of acquisition of shares
Control in in the subsidiary company agrees exactly with intrinsic value of the
Consolidation of shares (i.e. the net assets of the subsidiary company) on the date of
acquisition.
Accounts? (June If the price paid by the holding company for the shares acquired in the
2014) subsidiary company is more than the intrinsic value of the shares
acquired, the difference should be treated as Cost of Control or Goodwill.
 If on the other hand, the price paid by the holding company for the
shares acquired in the subsidiary company is less than the intrinsic
value of the shares acquired, the difference should be treated as capital
 profits and credited to Capital Reserve.
 It should be noted that while computing the intrinsic value of the shares
as on the date of acquisition of control, all profits and losses upto that
date, have to be taken into account. While preparing the consolidated
balance sheet, such Goodwill or Capital Reserve, whatever may be the
case, must be shown in the Balance Sheet.

What is Minority The claim of outside shareholders in the subsidiary company has to be
Interest assessed and shown as a liability in the consolidate balance sheet.
Minority interest consists only the face value of the shares held by them.
But it may so happen that the subsidiary company may have some
accumulated profits and reserves or accumulated losses. Besides, it may
have some profits or losses on account of revaluation of its assets on the
date of acquisition of shares by the holding company.
While calculating the amount of minority interest, all these items have
to be taken into account and proportionate share of all such profits and
reserves should be added to the amount of minority interest while
proportionate share of all such losses should be deducted from the
minority interest,
thus, Minority Interest = paid-up value of shares held by minority
shareholders + proportionate share of the company’s profits and reserves
+ proportionate shares of profits on revaluation of assets of the company
- proportionate share of company’s losses – proportionate share of loss
on revaluation of assets of the company.
The company’s profit and reserves or loss will include both pre-
acquisition and post-acquisition profits and reserves or losses.
But, if there are some preference shares of the subsidiary company held
by outsiders, the minority interest in respect of the preference share will
consist only of the face value of such shares and the dividend due on
such shares if there are profits.

Treatment of Pre Accumulated losses of the subsidiary company upto the date of
Acquisition acquisition of shares by the holding company are called pre-acquisition
Losses of losses.
Subsidiary Both the holding company and the minority shareholders must share

Company (Dec such losses in proportion to their respective holdings. The minority
shareholders’ share of such losses should be deducted from the amount of
2014)
Minority Interest.
 But the holding company’s share of such losses should be treated as
capital loss and debited to Goodwill account. While preparing the
Consolidated Balance Sheet, this Goodwill Account should be shown as
an asset.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Treatment of Pre Accumulated profits and reserves which appear in the balance sheet of
Acquisition the subsidiary company up to the date of acquisition of its shares by the
holding company are called pre-acquisition profits and reserves.
PROFITS of Both the holding company and the minority shareholders will have
Subsidiary
proportionate share in such profits and reserves.
Company
The share of the minority shareholders in such profit and reserves will
be added to the amount of minority interest. But the holding company’s
proportionate share in such profits and reserve should be treated as
capital profits and credited to Capital Reserve since the holding company
cannot earn any revenue profits from its subsidiary before the shares are
acquired in it.
While preparing the consolidated balance sheet, this Capital Reserve
should be shown on the liabilities side or if there is any Goodwill, it can
be shown as a deduction from the Goodwill in the assets side.

Profit on If there is any profit resulting from the revaluation of assets of the
Revaluation of subsidiary company whether before or after the date of acquisition of
Assets of shares by the holding company, the same must be shared both by the
Subsidiary holding company and the minority shareholders in proportion to their
respective holdings.
Company
The minority shareholders’ share ofsuch profit should be added to the
Minority interest. But the holding company’s share should be treated as
capital profits and dealt with like pre-requisitions profit and reserve.
Further, adjustment for depreciation on the increases or decreases in the
value of assets would be made in the profit and loss account of the
subsidiary.
For appreciation in the value of assets, depreciation charge would be
increased proportionately and the same would be deducted from the
revenue profits of the subsidiary company.
On the other hand, for revaluation loss due to decrease in the value of
assets, excess depreciation provision should be written back.

Loss on If there is any loss resulting from the revaluation of the assets of the
Revaluation of subsidiary company as on the date of acquisition of shares by the holding
Assets of company the same must be shared both by the holding company and the
Subsidiary minority shareholders in proportion to their respective holdings. The
Company minority shareholders’ share of such loss should be deducted from the
amount of Minority interest. But, the holding company’s share of such loss
should be treated as capital loss and dealt with like pre-acquisition losses.
But, if such loss occurs after the date of acquisition of shares by the holding
company the same should be treated as ordinary loss.
 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
VALUATION OF SHARES

Need for The necessity for valuation of shares arises inter alia in the following
Valuation of circumstances:
Shares (June (i) Assessments under the Wealth Tax Act.
2014)
(ii) Purchase of a block of shares which may or may not give the holder
thereof a controlling interest in the company.

(iii) Purchase of shares by employees of the company where the retention of

such shares is limited to the period of their employment.

(iv) Formulation of schemes of amalgamation, absorption, etc.

(v) Acquisition of interest of dissenting shareholders under a scheme of

reconstruction.

(vi) Compensating shareholders on the acquisition of their shares by the

Government under a scheme of rationalization.

(vii) Conversion of shares, say, conversion of preference shares into equity.

(viii) Advancing a loan on the security of shares.

(ix) Resolving a deadlock in the management of a private limited company

on the basis of the controlling block of shares being given to either of the
parties.

Features of Following are the features of intangible assets :

Intangible Assets (i) It is non-physical in nature.
(ii) It gives the specific rights to the holders over several future years.
(iii) It is possible for multiple uses at the same time.
(iv) It creates future value.
(v) It is identifiable as non-monetary asset.
(vi) It has limited ability to protect property rights.
(vii) Investment in intangible assets is basically risky.

Cost of Inherently 1. Internally generated goodwill should not be recognised as an asset.

Generated
Goodwill? & Its 2. No intangible asset arising from research (or from the research phase of
Treatment? (AS an internal project) should be recognised.
26)
3. An intangible asset arising from development (or from the development
phase of an internal project) should be recognised if, and only if, an
enterprise can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will
be available for use or sale;

(b) its intention to complete the intangible asset and use or sell it;

(c) its ability to use or sell the intangible asset;

(d) how the intangible asset will generate probable future economic benefits.
CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA
Among other things, the enterpriseLesson 6 Valuation of Shares and should
demonstrate the existence of a market for the output of the intangible asset
or the intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset;

(e) the availability of adequate technical, financial and other resources to

complete the development and to use or sell the intangible asset; and

(f) its ability to measure the expenditure attributable to the intangible

assets during its development reliably.

COST OF INHERENTLY GENERATED GOODWILL:

The cost of an internally generated intangible asset is the sum of
expenditure incurred from the time when the intangible asset first meets
the recognition criteria. Reinstatement of expenditure recognised as an
expense in previous annual financial statements or interim financial reports
is prohibited. The cost of an internally generated intangible asset comprises
all expenditure that can be directly attributed, or allocated on a reasonable
and consistent basis, to creating, producing and making the asset ready for
its intended use.

The cost includes, if applicable:

(a) expenditure on materials and services used or consumed in generating
the intangible asset;

(b) the salaries, wages and other employment related costs of personnel
directly engaged in generating the asset;

(c) any expenditure that is directly attributable to generating the asset, such
as fees to register a legal right and the amortization of patents and licenses
that are used to generate the asset; and

(d) Overheads that are necessary to generate the asset and that can be
allocated on a reasonable and consistent basis to the asset (for example, an
allocation of the depreciation of fixed assets, insurance premium and rent).
Allocations of overheads are made on bases similar to those used in
allocating
Overheads to inventories. AS 16, Borrowing Costs, establishes criteria for
the recognition of interest as a component of the cost of a qualifying asset.
These criteria are also applied for the recognition of interest as a component
of the cost of an internally generated intangible asset.

The following are not components of the cost of an internally generated

intangible asset:
(a) selling, administrative and other general overhead expenditure unless
this expenditure can be directly attributed to making the asset ready for
use;

(b) clearly identified inefficiencies and initial operating losses incurred

before an asset achieves planned performance; and

(c) expenditure on training the staff to operate the asset.

 CS EXECUTIVE ACCOUNTS NOTES- BY CA SHIVAM GUPTA

Fair Value of  The fair value of a share is the average of the value of shares obtained by
Shares the net assets method and the one obtained by yield method.
 Under net assets method, the value of an equity share is arrived at by
valuing the assets of a company and deducting therefrom all the
liabilities and claims of preference shareholders and dividing the
resultant figure by the total number of equity shares with the same paid
 up value.
 Under yield method, the value of an equity share is arrived at by
comparing the expected rate of return with the normal rate of return. If
the expected rate of return is more than normal rate of return, the
market value of the share is increased proportionately.

The fair value of shares can be calculated by using the following formula:
Fair value of share = (Value by net asset method + Value by yield method)/2

 This method is also known as dual method of share valuation. This

method attempts to minimise the demerits of both the methods. This is
of course, no valuation but a compromised formula for bringing the
parties to an agreement. However, it is recognised in Government circles
for valuing shares of investment companies for wealth tax purposes.