Advanced Accounting

Summary Notes with AS Charts

Sr. No. Chapter Name Page No.

1. Dissolution of Partnership Firm 1

2. Accounting for Employee Stock Option Plans 6

3. Buy Back of Securities 9

4. Amalgamation of Companies 12

5. Internal Reconstruction 20

6. Accounting for Liquidation of Companies 21

7. Financial Statements of Banking Co. 27

8. Non-Banking Financial Company 35

9. Consolidated Financial Statements of companies 42

Charts - Accounting Standards

10. AS 4 - Contingencies and events occurring... 48

11. AS – 5 Net profits or loss for the period............ 49

12. AS 7 - Construction Contracts 50

13. AS 9 - Revenue Recognition 52

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14 AS 17 - Segment Reporting 54

15. AS 18 - Related Party Disclosures 56

16. AS 19 - Leases 59

17. AS 20 - Earnings Per Share 64

18. AS 22 - Accounting For Taxes on Income 66

19. AS 24 - Discontinuing Operations 68

20. AS 26 - Intangible Assets 70

21. AS 29 - Provisions, Contingent Liabilities ...... 72

TeachMe Academy (88887 Dissolution
88889) of Partnership Firm
Dissolution of Partnership Firm

Steps for Dissolution of partnership

1. Open Realisation A/c:- Transfer all assets at book values to realisation A/c except
cash A/c and at Bank A/c
(Asset A/c will be closed by transferring balances to realisation A/c)

Realisation A/c.....Dr. xxx

To Assets A/c (Individually) xxx

Debtors A/c & Provision for Bad debts A/c are separate accounts.
Therefore Debtors A/c shall be credited with gross value.

Cash & Bank A/c to be prepared separately (It will be closed at the end).

2. Transfer of liabilities :- These A/c of outsiders liabilities & provisions to be

closed / debited & credited to realisation A/c.
Liabilities A/c......Dr. xxx
Provisions A/c.......Dr. xxx
To Realisation A/c xxx

3. Reserve & Balance to Profit & Loss Account to be transferred to partners capital
A/c in old ratio.

4. Realisation A/c credited with actual amount realised by sale of asset or asset
taken over by any by partner.
Cash /Bank A/c ........Dr. (Asset sold) xxx
Partners Capital A/c...........Dr. (Asset taken Over) xxx
To Realisation A/c. xxx

5. Exp. of dissolution & Actual payment of liabilities are debited to realisation A/c.

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TeachMe Academy (88887 88889) Dissolution of Partnership Firm

Realisation A/c ........Dr. xxx

To Cash A/c (Expenses or liabilities paid) xxx
To Partners Capital A/c (Liabilities taken over by any partner) xxx

6. Profit or loss in realisation A/c is credited or debited to partners capital A/c in

old ratio.

7. Close partner capital Accounts by making payment or collecting amount.

In case of collection from partner In case of payment to partners

Cash A/c......Dr. Partners Capital A/c......Dr.

To Partners Capital A/c To cash A/c

 Dissolution due to Insolvency of Partner Insolvency of a partner

(First 7 steps are same as given above)

Remaining partners (other than insolvent partner) will contribute in last

agreed capital ratio.

What is last agreed capital ratio?

In case of fixed capital Method In case of fluctuating capital Method

No need of any adjustment in capital Take capital ratio after all adjustment
A/c. but before adjustment of loss on
(Take ratio of capital A/c exclude Realisation.
Current A/c).

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TeachMe Academy (88887 88889) Dissolution of Partnership Firm

Note: - Garner VS. Murray principle is not compulsory in India & PSR or capital
ratio may be applied for sharing deficiency of insolvent partner depending on
partnership agreement or facts given in the problem.

If noting is specified in the problem then generally ratio is applied.

'GARNER VS MURRAY ‘Rule.

Loss on realisation Loss due deficiency on of

insolvency of a partner

- Distributed in PSR to all partners in - Distributed to partners having credit

Profit Sharing Ratio balance in their capital ratio.

- Loss on realisation shall be brought

in by solvent partner in cash Fixed Capital Fluctuation
Method Capital Method

Capital Ratio before Capital ratio after

Adjustment all adjustment
except realisation
loss.

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TeachMe Academy (88887 88889) Dissolution of Partnership Firm

PIECEMEAL PAYMENTS

Assets are sold / Realised step by step (Not at once) therefore payments are
also made in pieces / parts as & when cash is received from sale or realisation
of assets.

METHODS

Maximum Loss Method Highest Relative Capital Method

- Each instalment realised is - Partners who has higher relative

as final payment. & Partners capital, that is, whose capital is
capital A/cs are adjusted on that greater proportion to his PSR is first
basis each time when distribution paid.
is made, following either
Garner Vs. Murray Rule or PSR Step 1 – Capital of all partners are divided
by their profit sharing ratio.

Step 2 – Smallest amount of capital after

division is treated as basic capital.

Step 3 – Calculate capital of other

partner multiplying their PSR to
basic capital.

Step 4 – Deduct capital step 3 from

original capital which is excess
capital.
- By repeating process once or twice, we
can ascertain excess capital of each

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TeachMe Academy (88887 88889) Dissolution of Partnership Firm

partner.

Step 5 – Partners with largest excess

capital will be paid first, 2nd
payment to partner who ranks
next until capital of partners are
reduced to their Profit Sharing
Ratio.

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TeachMe Academy (88887 88889) Accounting for Employee Stock Option Plan
Accounting for Employee Stock Option Plan

It is option for employees to purchase shares of company at the end of specified period.

Company enters into an agreement with employees for ESOP

Matter of An Agreement -
1. Employee will get choice to purchase shares of company if they continue their service
for minimum specified period.
2. It is an option for employee but is an obligation for company to issue shares.
Therefore company shall book ESOP compensation after it enters in an agreement
with employees.

Concept of ESOP - Example with date

Agreement Date – 24th November 2018
Minimum Period to be completed – E.g. 5 years
Vesting Date – 24th Nov. 2023
Exercise Period – E.g. 1 Year.

ESOP

Agreement Date Minimum period to Vesting Date Exercise period Not

E.g. 24th Nov 2018 be completed 24th Nov.2023 E.g. 1 Year Exercised
E.g. 5 years
Grant Date Date on which It is period If not
Vesting Period minimum which starts Taken /
Date of (Minimum period of period of after vesting exercised
Agreement service to be service is date in which then
between employer completed by completed by employee will option
& employee employee to become employee actually will
Eligible for ESOP) purchase shares lapse

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TeachMe Academy (88887 88889) Accounting for Employee Stock Option Plan

Exercise Price – Discounted price compared to market price at which employees are
allowed to purchase shares. Employees may leave their job before completion of minimum
period, then in such case their option will lapse.

Formula = [Applied every year]

Expected shares for option x Discount x Period Completed Expenses already
Minimum Period recognised till last year

Journal Entries at the End of Each Year

1. Employee Compensation Expenses A/c ..........Dr. Prepare working note

To Employee Stock Options Outstanding A/c for calculation
(Being expenses in respect of ESOP recognised
during the year)

2. Profit & Loss A/c ..................................................Dr.

To Employee Compensation Expenses A/c
(Being the transfer of Employees
Compensation Expenses A/c to Profit & Loss A/c))

3. At the time of issue of shares to employees for ESOP (After Completion of Minimum
Period)
Bank A/c .....................................................................Dr. [No. of options x Exercise Price]
Employees Stock Options Outstanding A/c.........Dr. [No. of options x Fair value of option]
To Share Capital A/c [No. of options x Face value]
To Securities Premium A/c [No. of options x (Exercise Price +
Fair value of option - face Value)]
(Being ESOPs exercised during period)

4. If in any year after applying formula amount of expenses to be provided is negative

then, such negative amount is treated as excess provision.

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TeachMe Academy (88887 88889) Accounting for Employee Stock Option Plan

Transfer such amount to General Reserve. This is mainly because all employee who
enter into agreement may not retain for minimum period.

Employee Stock Options Outstanding A/c................Dr. No. of options lapsed x Fair value
To General Reserve A/c of each option

NOTE – Same entry shall be recorded if there is a balance in Employee Stock Option
outstanding Account after completion of exercise period.

5. If employee discontinue is job then he is not eligible for option, such option shall be
Cancelled / forfeited. This cancellation shall NOT be treated as forfeiture.

Important points
1. In the problem if market price & exercise price is given then Discount = Market Price –
Exercise Price
2. In few problems we may find fair value of option then, there is no need to calculate
option price & fair Value of option can be treated as Option Price / Discount.
3. Fair value of shares & fair value of share option is different
a) Fair value of share is given = Market Price / Fair value of shares (-) Exercise
/ Issue Price
b) Fair Value of Shares option = Discount

In case if it is specified in problem that options are exercised in same year than there is
no need to create ESOP Outstanding Account and following entry is sufficient
a) Bank Account ......................................................Dr.
ESOP Compensation Account .........................Dr.
To Equity Share Capital Account
To Securities Premium Account

b) P & L Account .........................Dr.

To ESOS Compensation Expenses Account

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TeachMe Academy (88887 88889) Buy Back of Securities
Buy Back of Securities

Buy Back of Shares Means - Purchase back of shares by Company

Buy back of Equity Shares Redemption of Preference Shares

This Can be Done By

a) Proceeds of fresh issue of shares
b) By using Free Reserves;
(Free reserve are transferred to CRR & then Bonus shares can be issued out of CRR)

To maintain capital after buy back or redemption

Limits of Buy Back

1. 25% of Total Outstanding Equity Shares (In Numbers).

2. 25% of (Paid up Capital + Free Reserves)/Buy Back Price per share. (It includes
Securities premium, P&L A/c, General Reserve but not Statutory Reserve).

3. Post buy back “Debt Equity Ratio” shall not exceed 2:1

Calculation of Number of Shares for Buy Back

1) Shares Outstanding Test
Total Number of Equity Shares x 25% = ( XXX )

2) Resource Test
= 25% (Paid capital + Free Reserve)/ Buy Back Price = No. of shares ( xxx ).

3) Debt Equity Ratio Test

a) Debt/ Loan at Present xxx
b) Minimum shareholders Fund (Post Buy Back) {Step(a)/2} xxx
c) Actual Shareholders Fund at Present xxx
d) Excess shareholders fund over minimum [Step c-Step b] xxx

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TeachMe Academy (88887 88889) Buy Back of Securities

e) No. of shares for buy back xxx

= Excess/Difference (Step d)

Buy Back price + Provision For CRR

Whichever is less from 3 tests.

Journal Entries

Redemption of Preference shares Buy back of Equity shares

(i) Amount Due (i) Amount Due

Preference share Capital A/c ..............Dr. Equity share capital A/c......................Dr.

Premium Payable A/c ............................Dr. Premium Payable on Buy-back A/c...Dr.

To Preference Shareholders A/c To Equity Shareholders A/c

(ii) Amount Paid (iii) Amount Paid

Preference Shareholders A/c ...............Dr. Equity Shareholders A/c ....................Dr.

To Bank A/c To Bank A/c

(iii) Adj. of Premium against Profit /Loss (iii) Adj. of Premium against Profit /Loss

General Reserve/Profit &Loss A/c .......Dr. General Reserve/Profit &Loss A/c.....Dr.

Securities Premium A/c..........................Dr. Securities Premium A/c.......................Dr.

To Premium Payable A/c To Premium Payable on Buy Back A/c

(iv) Transfer to Capital Redemption (iv) Transfer to Capital Redemption

Reserves Reserves

General Reserve A/c.................................Dr. General Reserve .................................Dr.

Profit &Loss A/c ................................Dr. Profit &Loss A/c ...............................Dr.

To Capital Redemption Reserves A/c To Capital Redemption Reserves A/c

(v) Issue of Bonus Shares (v) Issue of Bonus Shares

Securities Premium A/c .........................Dr. Securities Premium A/c .....................Dr.

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TeachMe Academy (88887 88889) Buy Back of Securities

Revenue Reserve A/c .............................Dr. Revenue Reserve A/c ..........................Dr.

General Reserve A/c ...........................Dr. General Reserve A/c ..........................Dr.

P& L A/c ...............................................Dr. P& L A/c ..............................................Dr.

To Bonus Issue to Shareholders A/c To Bonus Issue to Shareholders A/c

(vi) Bonus to shareholders A/c ..........Dr. (vi) Bonus to shareholders A/c.....Dr.

To Equity Share Capital A/c. To Equity Share Capital A/c.

Transfer to Capital Redemption Reserves =

Nominal Value shares Redeemed - Nominal Value of shares issued

Buy back has effect on mainly 3 items of Balance sheet

Share Capital Reserve & Surplus Cash & Cash Equivalent

(-)Buy Back Premium Payable (+) Proceeds of New issue

(+) New Shares Capital Redemption Reserves (-) Payment of Buy Back

(+) Bonus Bonus

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 AMALGAMATION & ABSORPTIONAmalgamation
TeachMe Academy (88887 88889) & RECONSTRUCTION
& Absorption & Reconstruction

Scope of this chapter

Amalgamation Absorption Reconstruction

Virat Ltd. Anushka Ltd. X Ltd. Y Ltd.

Virushka Ltd. External Reconstruction

One existing company will take Internal

over the another company X Ltd. (Losses) Reconstruction
Y ltd.

Further no existence New Co.

(Similar Accounting Treatment)

Amalgamation –
Two companies dissolved & New company formed to take over business of two companies

Absorption -
One existing company took over business of other company.

External Reconstruction -
New Company will be formed to take over the business of existing / old company.

Accounting Treatment

1. One or more company(ies) getting closed / dissolved in all above three types – Prepare
Realisation Account.
2. Another company whether existing or new is taking over business – Pass Journal entries
for business purchase.
3. Therefore, In case of amalgamation, Absorption & Reconstruction there is no change in
accounting treatment.

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

Purchase Consideration

1. Payment made to equity shareholders & Preference shareholders in form of Cash,

Equity shares, Preference shares or debentures are treated as purchase consideration.
2. Therefore, payments to debenture holders in the form of cash / debenture are not
treated as Purchase Consideration.
3. As well as realisation expenses paid by transferee company is not treated as purchase
consideration.
4. Other payments of liability settlement is NOT Purchase consideration.

Methods of calculating Purchase Consideration

Net Asset Method Net Payment Method Lump-sum Method

Assets Acquired xxx 1. Consider payment to equity & preference

(Agreed Price) shareholders Only. Note:- Payment to debenture
(-) Liabilities taken over (xxx) holders in cash or debentures is not considered.
Net Assets xxx 2. Payment of Realisation expenses not considered.
(+) Goodwill xxx 3. Purchase consideration –
Total Purchase Consideration xxx Payment to equity shareholder of transferor
Company in cash / shares / debentures XXX

If payment is not given in problem or (+) Payment to preference shareholders of

share issued is given but number of transferor co. in cash / shares/ debentures XXX

Shares or price of shares is not given Purchase consideration XXX

then follow Net Asset Method (-) Net Assets acquired As per 1st Method
Goodwill / Capital Reserve XXX

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

Intrinsic Value Of Share

It is real value of shares on the basis of Net Asset in business

All Assets (At current Price) xxx
(-) All Liabilities (xx)
Net Asset xxx

Intrinsic Value of shares = Net Assets

No. of equity shares.

ACCOUNTING TREATMENT

Amalgamation in the Amalgamation in the

Nature of Merger Nature of Purchase

Conditions for Merger (5 fere) If any of the condition is not fulfilled /

Satisfied.

1. All assets & liabilities are taken

over (As well as reserves are acquired). Then it is treated as purchase.
2. At Book Value only.
3. Same business will be carried on . Accounting as per purchase method.
4. At least 90% of shareholders of
transferor Company ready to become
shareholder of new company.
5. Consideration paid in shares except
fractional Shares.

Accounting as per pooling of Int. method.

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

Intention – To come together & do business

Consequences Accounting as per purchase method.

1. All reserves are also acquired with assets 1. Reserves are not acquired (If nothing
& Liabilities. is specified then all assets including
cash & bank after adjustment
realisation expenses shall be acquired.
2. Assets & liabilities are shown at Book 2. Assets & liabilities are shown at
Value. agreed price.
3. Excess payment for net asset or 3. Excess / Less payment for realisation
realisation expense of transferor company. of expenses.
a) Extra payment – Deducted from a) Extra Payment treated as goodwill
General reserve / P&L A/c. b) Less Payment treated as Capital
b) Less Payment – Added in GR / P&L A/c. Reserve.
(No effect to Goodwill / Capital Reserve)

If realisation expenses paid by transferee Statutory Reserve – In case of

company of transferor company Purchase, reserves are not acquired.
Deduct from P & L A/c / General Therefore separate treatment is
Reserves. required for statutory reserve.
Transferee company must show
Statutory Reserves statutory Reserve in their Books of
In case of merger all reserves are Accounts / Balance sheet.
acquire at the time of business
purchase. Journal Entry
Hence Statutory Reserves are also acquired Amalgamation Adjustment A/c ...........Dr.
Due to this there is no need to give To Statutory Reserve
separate treatment for statutory reserves. Shown in Reserve & surplus
Shown in Reserve &Surplus as negative
(Previously it was required to be shown
on Asset Side).

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

This separate treatment of A/c is required in the books of Transferee Company.

There is no change in accounting treatment in books of transferor whether it is
purchase or merger.
In the books of transferor co. If preference shareholders are discharged / settled at
premium, then such payment to preference shareholders shall be treated as loss for
equity shareholders And such loss shall be debited to realisation Account / Equity
shareholders Account.

Journal Entries

In the books of transferor company

(No change in following entries whether it is purchase / merger)

1. To close Asset Account - Realisation Account ...........Dr. xxx

To Assets Account (Individually) (At B.V.) xxx

2. To close Liabilities Sundry Liabilities A/c.……..Dr. (Individually) (At B.V.) xxx

Account - To Realization A/c. xxx

(Note: Debtors Account & Provision for doubtful debts A/c both are separate A/c. Hence
Debtors A/c shall be credited with Gross value & provision for doubtful debts Account
shall be debited with its value)

3. To close share capital Equity share capital A/..........Dr. xxx

& reserve Account Reserve A/c .............................Dr. (Individually)xxx
To Equity Shareholders A/c xxx

Preference share Capital A/C.....Dr. xxx

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

To Preference shareholders A/c xxx

4. Purchase consideration Due Transferee Co./ New CO. A/c....Dr. xxx

To Realisation A/c xxx

5. Sale of assets not Cash A/c ............................Dr. xxx

taken over by new co. To Realisation A/c xxx

6. Paid of liabilities not Realisation A/c...................Dr. xxx

taken over by new co. To Cash A/c xxx

7. Purchase Consideration Received Cash/Bank A/c.…………………..Dr. xxx

Shares in New Co. A/c….......Dr. xxx
Debentures in New co. A/c.…Dr. xxx
To New Company A/c xxx

8. Payment to Pref. share holders Preference shareholders A/c...Dr. xxx

To Cash / Bank A/c xxx
(If any excess amount paid, then such amount debited to realisation/ Eq. shareholders A/c).

9. Payment to Equity Shareholders Equity Shareholders A/c ..........Dr. xxx

To cash / bank A/c xxx
To Eq. shares of transferee Co. A/c xxx

10. Liquidation expenses Realization A/c.…………………..Dr. xxx

To Cash/Bank A/c. xxx

Note - If problem states two companies are merged it doesn’t mean it is merger, please
check conditions given.

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

In the books of New Company (Transferee Company)

1. Business Purchase A/c Business Purchase A/c.………………..Dr xxx

To Transferor co. / Vendor co. A/c. xxx(p.c.)

2. Recording of assets and Asset A/c ........................................Dr. xxx

Liabilities. To Liabilities A/c xxx
To Business Purchase A/c xxx
If Extra amount paid then,
Assets A/c.…………………..Dr. xxx In merger no concept of
Goodwill A/c..…………………..Dr. (Bal. Figure) xxx G/W or Capital Reserve
To liabilities A/c. xxx then profits / difference
To Business Purchase A/c. xxx adjusted in General
Reserve / P&L A/c.
If less paid then,
Asset A/c .........................Dr. xxx
To liabilities A/c xxx
To Business Purchases A/c xxx
To Capital Reserve Account (Bal. Figure)xxx

3. Purchase Consideration Paid.

Transferor Co. A/c ............Dr. xxx
To Cash / Bank xxx
To Equity shares xxx
To Debentures xxx

4. Realisation Expenses of transferor company paid by transferee.

Goodwill A/c ........Dr. xxx (In case of purchase)
P&L A/c / General Reserve A/c.......... Dr. xxx (In cases of merger)
To Cash/ Bank A/c xxx

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TeachMe Academy (88887 88889) Amalgamation & Absorption & Reconstruction

If following words are given in problem. What does it mean?

Discharged at Premium Vs. Issued at Premium

Paid at premium

No securities premium A/c is involved Securities premium A/c is involved

Just Extra payment is made for settlement Ex. ₹ 11,00,000 preference shares are
in cash / shares. discharged by issuing preference shares
For Example - 11,00,000 preference shares are of ₹ 100 @ 10 %Premium.
discharged at 10% premium by issuing
Preference shares of transferee company 11,00,000 – liability is constant
11,00,000 + 10 % = 12,10,000 11,00,000/ 100 + 10
12,10,000 are Preference shares issued and Premium = 10,000 shares x ₹ 10
transfer it share capital amount . =1,00,000

Transfer 1,00,000 to securities premium

Account Remaining in Preference share
Capital.

Transferor company sold goods to transferee company at profit before amalgamation.

(vice versa)
Inventory remaining with other company which is taken over back. Then such inventory
contains unrealised profit & such profit shall be reversed.
1st effect – deduct it from inventory & 2nd effect – deduct it from P&L.

Special Adjustment
Debentures of 5,00,000 discharged at premium of 20% @ ₹ 96 i.e. (96%).
Hence 5,00,000 + 20% = ₹ 6,00,000.
No. of Debentures = 6,00,000 / 96 = 6,250 X ₹ 100 (Face value) = 6,25,000.

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TeachMe Academy (88887 88889) INTERNAL RECONSTRUCTION Internal Reconstruction

Objectives of Internal Reconstructions

1. Is to write off losses & fictitious assets.

2. To show actual position of business through new balance sheet.

3. For writing off losses there must be profit which is possible by either reducing capital
liabilities or increasing asset value.

4. Such profit shall be credited to capital reduction/ reconstruction A/c and then losses/
fictitious Assets shall be written off be debiting capital reduction account
5. If there is credit balance in capital reduction account even after writing off losses and
fictitious Assets then such profit/balance shall be transferred to capital reduction/
reconstruction account

Liabilities

Balance in present Balance Sheet Balance is not shown in Balance sheet

Paid less amount than liability Unrecorded liabilities.

Examples

Liabilities A/c .....................Dr. 1. Preference divided payable.

To Bank A/C 2. Unrecorded Creditor.

To Capital Reduction A/c

- Entry for only amount paid -

Capital Reduction A/c ........................Dr.

To Bank A/c

In this case balance was not available in

balance Sheet and it is unrecorded still we

have to make Payment.

Hence it is additional liability. This Will be

debited in CAPITAL Reduction A/c.

Amount which is not paid shall be ignored.

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 Liquidation of Companies
TeachMe Academy (88887 88889) Liquidation of Companies

Required in this Chapter -

Statement of Affairs
Liquidators statement of final Account
(Problem may specify that receiver & liquidator both are appointed)
Deficiency Account (as per list H - Minimum 3 years)
List B Contributories

Statement of Affairs
List to be attached with Statement of Affairs
List A – Assets which are not specifically pledged.
List B – Assets which are specifically pledged (Secured).
List C - Preference share creditors (Government dues, employees).
List D – Floating charge on debenture holder.
List E – Unsecured Creditor.
List F – Preference shareholders.
List G – Equity shareholders
List H – Deficiency Account
Format of statement of Affairs
Particulars Amount
Assets which are not specifically pledged (as per list ‘A’)
Cash/Bank xxx
Debtors xxx
Machinery xxx xxx
Assets which are specifically pledged (as per List B)
Particulars Estimated Amt. due Deficiency Surplus

Of Asset realizable to secured Transfer to carried to

values creditors Unsecured outer

₹ creditors Column ₹

Estimated Amount Available for Payment xxx

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 TeachMe Academy (88887 88889) Liquidation of Companies

Summary of Gross Asset

1. Gross realisable value of assets specifically Pledged xxx
2. Other Assets xxx
Gross Assets xxx
Summary of Gross Liabilities
Gross Liabilities
Liabilities
xxx Secured Creditors (As per list B)to the extent to which claims
are estimated to be covered by assets specifically pledged. -

xxx Preferential creditors (as per list ‘C’) XXX

Estimated balance available for Debenture holders & XXX

unsecured Creditors.
xxx Debenture holders secured by a floating charge (as per list ‘D’) XXX

Estimated balance available for Unsecured creditors.

xxx Unsecured creditors (as per list ‘E’)
Balance/Surplus for Preference / Equity Shareholders. XXX

Preference shareholder (AS Per List E). XXX

Equity Shareholder (AS per List G). XXX

Estimated surplus / deficiency as required to Contributors (list H) XXX

List H Deficiency Account

(Shall be prepared for previous 3 years) - 1 Statement

No. Particulars Amount
A. Items contributing deficiency
1. Excess of Capital & liabilities over Assets (Opening Balance of Loss) xxx
2. Net dividend & Bonus during period (Equity+ Preference) xxx
3. Net Treading Losses after charging expenses, tax etc. xxx
4. Losses other than trading losses xxx
5. Loss on realisation of Asset xxx
6. Other losses xxx

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 TeachMe Academy (88887 88889) Liquidation of Companies

B. Items reducing deficiency

7. Excess of Assets over Capital & Liabilities (Opening balance of profits) xxx
8. Net Trading profit after charging expenses etc. xxx
9. Profits & Income other than trading xxx
10. Other Items (Profit on realisation of asset) xxx
Deficiency xxx

Preferential Creditors

1. All Government dues E.g. Taxes.

2. Salaries & wages (salary / wages of 4 months for workers and excess of salary / wages

due over 4 months treated as unsecured).

3. Contribution to employee state insurance.
4. Compensation to employees in respect of death and disablement.
5. Pension fund/Gratuity fund.

Remuneration of Liquidator

 If percentage of remuneration is given on total assets realised then remember

that percentage shall be calculated on total amount received from assets specifically
pledged + Assets not specifically pledged.
And if ‘Surplus’ from assets specifically pledged is given then ‘Add’ payment to
secured creditors to find out total amount realised from assets specifically pledged.
 If percentage is given on payment to unsecured creditors, then ‘Deduct’ all
payments, expenses & other remuneration from total assets to find Payment
/ amount available for unsecured.

If amount is sufficient to pay unsecured If amount is not sufficient

creditors & Remuneration Treat that amount = 100 + percentage
= Amt. available x percentage of remuneration
Percentage on total Amount of 100 + Percentage
Unsecured Creditors given in Question. By this, we can separate amount made to
unsecured creditors.

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 TeachMe Academy (88887 88889) Liquidation of Companies

Liquidators Final Statement of Affairs

Receipt ₹ Payments ₹
To cash & Bank Balance xxx By Legal Charges / Expenses xxx
To Assets realised (Individually) xxx By liquidators Remuneration xxx
(Assets not Specifically pledged) By Preferential Creditors xxx
To surplus from assets specifically xxx (Debenture + Interest) -
Pledged. -If Company is solvent
To calls in arrears xxx Interest upto date of payment
To calls made on uncalled shares xxx -If Insolvent
Interest upto date of winding up
Note – At the time of payment to By Unsecured Creditors xxx
equity shareholders we shall By Preference shareholders with xxx
consider that Loss suffered by accrued dividend (if any)
each class of shareholder By calls in Advance xxx
shall be same). By Equity shareholders xxx
xxx xxx

In case one class of Equity Share -

Paid 100 (fully paid-up) and another class of shareholders paid 80 (fully paid) then
suitable adjustment shall be made to keep loss per share same for both classes of share.

For calculation assume that full amount is received and find total amount received after
calls.
Total amount available / total no. of shares (Uniform Price)
= Amount repayable if full amount is received per share

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 TeachMe Academy (88887 88889) Liquidation of Companies

Explanation
Suppose above calculation shows that amount repayable is ₹ 30 (After assumption) then
class of shareholders who paid 100 shall get ₹ 30 and class of shareholders who paid ₹
80 will get ₹ 10.
(30 – 20) = 10

(Payable) (Receivable) (Payable)

Important Concept
If one share of ₹ 100 Face Value & another is of ₹ 50 Face value.
100 FV – 1,00,000 Shares
50 FV – 1,50,000 Shares
Total - 2,50,000 Shares
Then make / convert equity shares to uniform price of ₹ 100.
After conversion
₹ 100 Face value = 1,00,000 shares
Then 1,50,000 at ₹ 50 Face Value is How much?

50 1,50000 converted to 100 FV = 75,000

Hence Total shares at uniform price of 100 = 1,75,000 (1,00,000+75,000)

Liquidation Process in case Receiver is appointed by Debenture holder.

If receiver / liquidator both are appointed then receiver will sale specific assets
given in problem and collect surplus after payment of secured liabilities.
Then he will make payment in following sequence.
1. Receiver’s Expenses
2. Receiver’s Remuneration
3. Preferential Creditors
4. Debenture holders with interest due
5. Remaining surplus with receiver after payment of other items shall be transferred
to Liquidator.

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 TeachMe Academy (88887 88889) Liquidation of Companies

Liquidator will collect surplus from receiver and sell other items & payment shall be
made as
a) Liquidation Expenses
b) Liquidation Remuneration
c) Unsecured Creditors
d) Preference shareholders including arrears (if any)
e) Equity Shareholders (Prepare working note of notional calls to find out net
amount payable / receivable to equity shareholders).

By CMA, CS Rohan Nimbalkar (88887 88889) 26

 TeachMe Academy (88887 88889) Financial Statements of Banking Companies
Financial Statements of Banking Companies

Rebate on Bill Discounted

- It is basically advance income for bank.
- This is unexpired portion of discount or it is discount / interest related to next year
which is received in current year
- It is treated as liability (similar to advance income)
- Rebate on bill discounted is advance income / liability for current year but it is
actual income for next year

Journal entries In the books of Bank

First Year:-
Particulars Entry ₹

1. Bills received for Bill Purchased/Discount A/c .................Dr. (Full Value) xxx

discounting. To Customer A/c (Full value after Discount) xxx

To Interest / Discount A/c xxx

Year end :-
Particulars Entry ₹

2. Discount / interest related to Interest/Discount A/c ..........................Dr xxx

next year is Transferred to To Rebate on Bill xxx

rebate Account (liability). (Above balance in rebate A/c is income of

next Year)

Remaining Balance:-
Particulars Entry ₹

3. Remaining balance in Interest / Discount A/c..................................Dr. xxx

Interest / discount A/c To P&L A/c. xxx

transferred to P&L A/c

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

In Next Year
Particulars Entry ₹
1. Last year rebate / advance interest is Rebate on Bill discounted A/c ........Dr. xxx
income of current year which shall To Interest/ Discount A/c xxx
be reversed & transferred to
interest / discount account (Income)

2. Bill received & Discounted Same Entry of 1st Year (1st Entry) -

3. Transfer to rebate A/c Same Entry as 2nd entry of 1st Year -

4. Remaining balance transferred to P&L A/c - -

Solution for Question No. 9 (Page No. 132) from regular batch notes.
Journal Entries

Sr. Particulars ₹ ₹
No.
1. Rebate on Bill Discounted A/c...........Dr. 9
To Interest /Discounted A/c 9
(Being transfer of opening balance and rebate
on Bills Discounted to interest A/c)

2. Bills purchased A/c.................Dr. 4000

To interest / Discount A/c (4000 x 18% x 73/365) 144
To Customer A/c (4000-144) 3856

3. Interest/ Discount A/c .........................Dr. 10.8

To Rebate on bill (600 x 18% x 36.5 / 365) 10.8
(Being unexpired portion of discount in respect of
discounted bill carried forward to next year)

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

4. Interest/Discount A/c (9+144-10.8) 142.2

To P&L A/c 142.2

Ledger Accounts
1) Interest Discount A/c
Date Particulars Amount Date Particulars Amount

2012 To Rebate on Bills Disc. 10.8 2011 By Rebate o Bill 9

2012 To P&L A/c 142.2 2011-12 By Bill purchased 144
153 153

2) Rebate on Bills Discounted A/c

Date Particulars Amount Date Particulars Amount

2011 To Interest/Discount A/c 9 2011 By Balance b/d 9

2012 To Balance C/d *10.8 2012 By Interest A/c 10.8

19.8 19.8

Bills for collection (View point of Bank)

1. When bills for collection received.
Bill for collection (asset) A/c ...............Dr.
To bill for collection (liability) A/c

2. When bills are collected on dishonoured.

Bill for collection (Assets) A/c...............Dr.
Reverse Entry
To Bill for collection (Asset) A/c

In case for bills of collection, bank shall collect amount and bank shall pay this amount
to customer. In this case, bank will not get any amount except commission (If any).
Therefore, in this case amount is receivable to bank & immediately it is payable to

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

customer & to maintain record, bank treat this bill for collection as asset as well as
liabilities.

If bank accepted any bill or endorsed any bill then it creates liability on bank. Therefore
bank will create acceptances, endorsements and other obligations account.

Non Performing Assets (NPA)

It is a loan / advanced for which the principal or interest remained overdue for period of
90 days or more.
Further classification of NPA

Sub-Standard Assets Doubtful Assets Loss Assets

Assets which has remained NPA Assets which has remained Asset is treated as loss
for less than or equal to 12m. NPA For more than 12 m. asset If is recognised as

NPA < 12 months NPA > 12 months uncollectable by

In this Case authorised person of
NPA = Substandard asset bank or RBI

Rates of Provisions

No. Category of Advances / Assets Rates

%
1. Standard Assets/ Advances
• Direct advances to agricultural and Small and Micro Enterprises (SMEs). 0 .25
• Advances to Commercial Real Estate- Residential Housing Sector (CRE-RH). 1.00
• All other loans & advances not included in above. 0.40
2. Sub- standard Advances
• Secured Exposures 15
• Unsecured Exposures 25
• Unsecured Exposures in respect of Infrastructure loan. 20

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

3. Doubtful Advances - Unsecured Portion 100

4. Doubtful Advances - Secured Portion
• For Doubtful up to 1 year 25
• For Doubtful > 1 year and up to 3 years 40
• For Doubtful > 3 years 100
5. Loss Advances/Assets 100

Recognition of Interest

In case of performing Assets In case of Non- Performing Assets

Interest on loan is recognised when it is Interest on loan is recognised only when it

is
Earned / due (No need to wait till receipt) received

Capital Adequacy Ratio

Objective - To strengthen the soundness and stability of the banking system.

Capital Adequacy Ratio = Capital Fund

Risk Funded / Weighted Asset

Minimum requirements of capital fund in India

a) Existing Banks 9%
b) New Private Sector Banks 10%
c) Banks undertaking insurance business 10%
d) Local Area Banks 15%

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

Risk weighted assets

Items % of risk
- Cash balance 0
- Cash balance with RBI 0
- Cash balance with / Loan to Government 0
- Loan Guaranteed by Government 0
- Balance with other Bank 20%
- Other Investment 100%
- Premises, Furniture & Fixtures 100%
- Bank Staff Advances 20%
- Investment in Government Securities 0
- Investment in other approved securities / In other Banks / in
Security repayment of which is guaranteed by bank 20%
- TDS, Advance tax, interest Due on government securities 0
Loan to public 100%
Other Assets 100%
Off balance sheet items
- Guarantee & other obligation 100%
- Acceptance, endorsement & letter of credit 100%

Capital Fund (Tier I + Tier II )

Tier I Capital

Particulars ₹
Paid up Share Capital xxx
(+) Statutory Reserve xxx
(+) Securities Premium xxx
(+) Reserve (Capital reserve arising out of sale of Assets) xxx
xxx

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

Tier II Capital

Particulars ₹
Capital Reserve & Other Reserve XXX

(Less) Discounted to extent of 55% (XX)

XXX

(Less) Intangible Asset (XX)

XXX

Financial statements of Banking Companies

Form Of Profit & Loss Account

Profit and Loss Account or the year ended 31st March, 20.....
Particulars Sch. No. CY ended PY ended
1. Income xx xx
Interest earned 13 xx xx
other income 14 xx xx
Total xxx xxx

2. Expenditure
Interest expended 15 xx xx
Operating expenses 16 xx xx
Provisions and contingencies
Total xxx xxx
3. Profit / Loss xx xx
Net profit/loss (-) for the year (1-2) xx xx
Profit / loss(-)brought forward xx xx
Balance carried over to balance sheet xx xx

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 TeachMe Academy (88887 88889) Financial Statements of Banking Companies

Important Points to Remember

 Transfer to reserve (Statutory Reserve) shall be out of current year’s profits only.
 In schedule No. 13 for “Interest Earned” if interest & discount includes interest on
Investment, deduct it and show it seperately in same schedule 13.
 Balance of rebate of current year shall be deducted from interest & discount in schedule
13 & Opening balance of rebate shall be added if it is not yet included.
 Provision & conntengencies shall include -
1. Substandard Doubtful Asset
2. Provison for taxation
{Percentage of tax given ( Total Income – Interest expended + other expenses +
provision for standard, substand doubtful assets)}.

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TeachMe Academy (88887 88889) Non – Banking Financial Companies
Non-Banking Financial Companies

Features of Non-Banking Financial Companies (NBFC)

- NBFC is similar to banking but some services are restricted to NBFC.

- NBFC cannot accept demand deposits.
- General functions of NBFC
1. Giving Loans
2. Giving Guarantee
3. Insurance & Investment
- Following NBFC’S require registration under RBI.
1. Loan Company
2. Core investment company
3. Infrastructure / Asset Finance Company
- Conditions
Must have net owned funds of not less than 200L

What is Net Owned Fund

1st Owned Fund 2nd Net Owned Fund

Paid up Capital xxx Owned Fund xxx

(+)Free Reserves xxx (-) Investment in subsidiary xxx
(-) Losses/Differed Exp. (xx) Excess of Investment over
Owned Fund xxx 10% of owned funds)

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TeachMe Academy (88887 88889) Non – Banking Financial Companies

Provisioning requirement on standard, substandard Asset

Particulars Non – systematically Systematically

IMP NBFC IMP NBFC
Standard Asset .25% .35%

Sub Standard Asset 10% 10%

Doubtful asset on unsecured 100% 100%

Doubtful Assets on Secured Portion

- Upto 1 Year 20% 20%

- 1 Year to 3 Year 30% 30%

- More than 3 year 50% 50%

Loss Asset 100% 100%

Provisioning Norms on Hire Purchase & Lease

Particulars ₹
Installment Due but not received xxx
(+) Installment due in future xxx
(-) Interest Income not yet recognized in future (xx)
(-) Depreciated Value of Asset (xx)
Basic Provision xxx

Additional Provision -
Where hire charges over lease rental overdue % of provision
Upto 12 month Nil

12 month and Upto 24 month 10 % of Net Book Value

24 month and Upto 36 month 40 % of Net Book value

36 month and Upto 48 month 70 % of Net Book Value

More than 48 month 100 % of Net Book Value

Calculation of Net Book Value

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TeachMe Academy (88887 88889) Non – Banking Financial Companies

Particulars Amount

Total Investment due and not due xxx

(-) Future Installment Interest (xx)

(-) Provision made (xx)

Net Book Value xxx

Classification of Assets of NBFC

1. Standard Assets -
No Defaulting repayment (Not NPA Yet)

2. Sub – Standard Assets -

Assets are classified as NPA for period not exceeding 12 months (Previously it was 12 m.)

3. Double Asset -
Asset classified as substandard asset for period exceeding 12 months (Previously it
was 14 months)

4. Loss Asset -
Recognised as not recoverable by management / Auditor
NPA:- An Asset in respect of which interest has remained overdue for 3 months
(Previously It was 6 months)

Not Paid 3 months NPA 12 Months After 12 months

Standard Substandard Doubtful Asset Unless

Recognised as loss

asset by Management
/ Auditor

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TeachMe Academy (88887 88889) Non – Banking Financial Companies

Short Note on Earning Value

When value of shares is calculated on the basis of earning then it is treated as / known
as earning value
Steps -
1. Calculate average profits after tax 3 years (After preference dividend & after
adjustment of extra ordinary items)

2. Divide the average profit calculated above by total no. of equity shares, to find out
per share earnings.

3. Earning Value =
Per share earning

Capitalisation Rate

Manufacturing Company Trading company Other company

8% 10% 12%

If company is loss making company then earning value is treated as 0

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TeachMe Academy (88887 88889) Non – Banking Financial Companies

Capital to Risk Weighted Asset Ratio

Capital Employed x 100 CRAR (Minimum 15% is expected)

=
Risk Weighted Assets

Capital Employed

Tier I Tier II

Cannot be less than 10% Preference shares other than

Compulsory convertible xxx
Net Owned Fund (+) Revaluation Reserve xxx
(Refer Previous Explanation) (+) Capital Reserve xxx
(+) Perpetual Debt Instrument xxx

Risk Weighted Assets

Particulars Risk
weights
Cash & Bank Balance 0
Investment in approved scheme 0
Bonds of public sectors Bank 20
Fixed Deposit / Certificate of Deposits / Bonds of Public finance instrument 100
Stock in Hire Purchase System 100
Inter corporate loan 100
Loan to staff 100
Other secured loans 100
Bills purchased & discounted 100
Premises & furniture 100

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TeachMe Academy (88887 88889) Non – Banking Financial Companies

Interest Income Recognition

On NPA On Receipt Basis

Interest Income Recognition On Regular Asset On Accrual Basis

Liquid Asset Requirement -

Minimum liquid assets is to maintained by NBFC is 15% of public deposits outstanding

15%

Not less than 10% Remaining

Approved Securities Scheduled Commercial Bank

Distinguish between NBFC and Bank

Sr. No. NBFC Bank

1. Cannot accept demand deposits Can accept demand deposits.
2. Cannot issue cheques drawn on itself Can issue cheques drawn on itself.
3. NBFC is not part of payment &
settlement system.
4. Deposit insurance facility of the
deposit insurance & credit
guarantee Cooperation (DICGC) is
not available for NBFC.

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TeachMe Academy (88887 88889) Non – Banking Financial Companies

Companies Exempted from RBI

1. Housing Finance Companies – Regulated by National Housing Bank
2. Merchant Banking companies - Regulated by SEBI
3. Stock Exchanges - Regulated by SEBI
4. Stock broking companies - Regulated by SEBI
5. Nidhi Companies – Regulated by SEBI
6. Insurance Company – Regulated by IRDA
7. Chit Fund Companies – Regulated by respective State Government

Registration & Regulation on NBFC

1. NBFC is not allowed to commence / carry on business without obtaining
certificate of registration issued by RBI.
2. A company incorporated under companies Act 2013 and desirous of commencing
business of NBFC.
3. Then it should comply following regulations.
a) Should be registered under- companies Act.
b) Should have net owned fund of 200L.
c) Find then apply for registration with RBI.

NBFC Non systematically NBFC – Systematically important

important / Non deposit taking company

Having Asset size below 500cr. Having Asset size below 500cr. Or above.

Nidhi Company

• It’s a NBFC. Its core business is borrowing & lending money between their members
• They are also known as permanent fund, benefit fund or mutual benefit fund.

CHIT Fund company (BHISSY)

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 Consolidated Financial
V’Smart Academy (88883 88886) Financial Statement
ConsolidatedofFinancial
Companies
Statement of Companies

Subkuch Holding company ke point of view se

Rule No. 1

Inter-company balances are required to be eliminated (to avoid double counting).

a) Share capital of subsidiary is adjusted against investment of holding company at
face Value – Remaining capital
(Remaining capital belongs to minority & added to minority interest.)
b) Inter-company debts/ loans shall be eliminated.
- Inter-company balances of Debtors (Bills Receivables) and Creditors (Bills Payables)
- Inter-company loans & advances will be cancelled.
- Cash in transit or goods in transit shall be cancelled.

Rule No. 2

Calculate minority Interest (Bacche logo ka hissa alag rakho nahi to rone lagenge)
- If minority interest is negative in consolidated balance sheet then it is shown as
negative figure on liability side, finally it will deducted form share capital.
- When holding company acquires more than 50% but less than 100% shares of
subsidiary company, then shares which are not acquired by holding company are
treated as minority Shareholders.
- Minority interest shall be shown separately to identify holding companies total
interest in Subsidiary company. It is shown below shareholders fund.
- Minority interest is the proportion of subsidiary companies net assets/shareholders
fund.
We can calculate minority interest with following formula
Particulars ₹
Portion of share capital belongs to minority xxx
(Add) Portion of pre-acquisition profit belongs to minority xxx
(Add) Portion of post Acquisition profit belongs to minority xxx
xxx

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V’Smart Academy (88883 88886) Consolidated Financial Statement of Companies

Note:- Minority interest is calculated every time on date of consolidated balance sheet.

Rule No. 3

Calculation of goodwill / Capital Reserve (Also known as Cost Control)

1. Generally calculated on date of acquisition
2. If value of investment in subsidiary company by holding company is higher than
value of Net asset acquired (share capital + Reserve ) on acquisition date then
difference is Goodwill And if the situation is opposite then there is Capital Reserve.
3. In this Case Investment cost for subsidiary company share will not be cancelled
against Share capital of subsidiary company unless goodwill = difference is shown
on asset side.

Particulars ₹ ₹
Cost of investment xxx
(-) Pre-acquisition of Investment (xx)
Net cost of Investment xxx
(-) Portion of net asset of subsidiary company (xx)
Share capital xxx
Reserve & Surplus on acquisition date xxx (xxx)
Goodwill / (Capital Reserve) xxx

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V’Smart Academy (88883 88886) Consolidated Financial Statement of Companies

Rule No. 4

Divide Reserve & Surplus in Pre-acquisition & Post Acquisition.

Pre – acquisition Post – acquisition

Portion belongs to Portion belongs to Share belongs to Share belongs to

Holding company Subsidiary company Minority 20% majority 80%
Example = 80% Example = 20%

Adjusted in Added in calculation of minority Added in Reserve /

goodwill interest along with their share P & L A/c
/ Capital Reserve capital.
Calculation.

Rule No. 5

If Assets & Liabilities are revalued on date of acquisition (such profit or loss is treated
as pre- acquisition)
1. Revaluation of fixed assets upward / increasing
either goodwill or capital reserve
2. Revaluation of assets downwards / decreasing
Either Goodwill or capital reserve

• Assets to be shown at revalued price.

• Extra depreciation on increased price = Debited to P&L A/c.
OR Reversal of Depreciation = Credited to P&L A/c.

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V’Smart Academy (88883 88886) Consolidated Financial Statement of Companies

We can find out Net Asset By

Option 1 Option 2

Assets (Revalued Price) xxx Share capital (FMV) xxx

(-) Liabilities (Revalued Price) xxx (+) P&L A/c xxx
Net Asset xxx (+) Reserves xxx
(+) Revaluation Reserve xxx
Holding Company Subsidiary Co. Net Asset xxx
80% 20%

Follow this option if Assets / liabilities Holding Company Subsidiary Co.

are revalued or share capital & reserve 80% 20%
not given

Rule No. 6

Dividend declared by subsidiary Company

If declared out of pre-acquisition profit If declared out of post acquisition

It is traded as recovery of cost of It is treated as Income & Credit to P&L

investment & deducted from cost of A/c of holding company
investment

It has impact on calculation of Goodwill

/ Capital Reserve.

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V’Smart Academy (88883 88886) Consolidated Financial Statement of Companies

Uniform Accounting Policy

At the time of consolidation of Balance sheet of two entities, if policies are not uniform,
Then before consolidation we must adjust the balances of Balance Sheet of subsidiary
Company according to accounting policies / method adopted by holding company.
Example: - Depreciation / Inventory valuation.

Rule No. 7

If Debentures / Preference shares are acquired at higher or lesser price than face value -
Treatment is similar to Rule No. 3 except pre-acquisition profit are not deducted here
to find out goodwill or capital reserve.

In case of preference shares In case of debentures

Investment in preference shares shall be Investment in debentures shall be

Cancelled as face value cancelled at Face value

Difference shall be transferred to goodwill Difference shall be transferred to P&L A/c

/ capital reserve

Note :-
- If balance sheet of holding & subsidiary company is given but date of b/s of
subsidiary company is different or is of previous year then prepare/ restate the
balance sheet of subsidiary company as per date to match with date of balance of
holding company.
- If it is not given in question to restate balance sheet then find out balances of
Assets & Liabilities on due date of Balance sheet of holding company.

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V’Smart Academy (88883 88886) Consolidated Financial Statement of Companies

- If balance sheet of holding company & subsidiary company is not available on same
date then consolidation is not possible.

- Due to continuous losses minority interest may become negative such access & any
other further losses applicable to minority (Negative balance) are adjusted and
deducted form P&L A/c or Consolidated P & L A/c.

- If subsidiary subsequent reports profit then all such profits are added / allocated in
consolidated & P&L account until minority’s share of losses previously absorbed by
majority has been recovered.

By CMA, CS Rohan Nimbalkar (88887 88889) 47

TeachMe
AS 4 - Academy (88887
CONTINGENCIES 88889)
AND AS – 4 Contingencies
EVENTS OCCURRING & Events
E
AFTER THE BALANCE occurring after ….
SHEET DATE

Events that occur after the Balance Sheet date but before approval of accounts by
Governing body i.e. (Board of Directors)

Adjusting Events are Non-Adjusting Events

Non
are

Condition Events occurring The additional

/Event information If Conditions of Adjusting
after the balance events not satisfied
exist on sheet date provide materially affects
Balance additional the Amounts on
Sheet Date. information on the the Balance Sheet
date. Do not require adjustment
conditions existing of Assets or Liabilities.
on the BS date.

Disclose Non - Adjusting

events in report of
Requires Adjustment in the balances of assets and Approving authority if
liabilities as on Balance Sheet date significant (e.g., Board's
Report)

Example of Adjusting Events

What to disclose
Insolvency of customer - Conditions: -Nature
Nature of events Nature
of event, an estimate of
financial effect, or a
a. Condition of insolvency existed on balance sheet date. statement that such an
b. Customer is not yet declared Insolvent on Balance sheet estimate cannot be made.
date.
c. He is declared insolvent after Balance sheet date but
before Approval of Financial Statement by BOD.
Then Balances of Debtors shall be adjusted by making Examples of Non Adjusting Events
provision for doubtful debts for entire amount
1. Decline in market value of investment.
2. Major Business combination after
Exceptions to the rule of Non-adjusting
adjusting event Balance Sheet date.
3. Announcing plan to discontinue
(a) Going concern assumption rendered invalid. operations.
(b) Statutory requirements. 4. The distraction of a major production
plant by a fire after reporting period.
Even though above situations are Non-
Non Adjusting 5. Announcing or commencing the
Events, it should be adjusted as on Balance sheet implementation of a major
restructuring.
cturing.
6. Abnormally large changes after
Balance Sheet date in asset prices or
foreign exchange rates.
7. Commencing major litigation arising
solely out of events that occurred
after the reporting period.
8. Changes in tax rates announced after
Balance sheet date

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Mission CA Inter Telegram Channel
Click on below image to Join
 Chart - AS
TeachMe – 5 Net profits/
Academy (88887 loss for the period, prior
88889) ASperiod
– 5 Netitems & changes
profits inthe
or loss for Accounting
pe
period, Policies
prior……..

Issues Discussed in AS-5

Presentation & Disclosure of Presentation and Accounting Treatment of

Ordinary Extraordinary Prior

Activities Activities Period Changes in Accounting Changes in
Items. Estimates Accounting Policies
These are
Activities
These items income or
which are
are not expenses A change in the A change in the
Related
expected to arise in the estimated amount in specific accounting
normal
occur as part current any items of FS principles and the
course of
of a business. period as a methods of applying
business, &
result of those principles
incidental to
errors or adopted by an
entity’s main - When it is difficult
omissions in enterprise in the
business to distinguish the
the preparation and
activities. Examples change in estimate
preparation presentation of FS.
of the FS of & change in
one or more accounting policy ,
Examples - Loss due to prior treat the change as Allowed only if-.
earthquake periods. change in
accounting -Required by Statute
- Attachment
of property of estimate. - Required by AS or
Sale of goods, providing the Examples - Adopt same - Leads to better
services, sale of scrap, enterprise classification as presentation of FS.
interest - Refund of - Omission to was previously
income/expense, salary record for used.
expense, provisions. Government Examples
Grant. income and
expenditure.
- Non Examples - Changes from
Disclosure provision of weighted average to
Exceptional items expenses FIFO(Inventory
(Ordinary Acitivities) which are Inventory Valuation )
Due to size, already Changes in the -
Nature or incurred or 1. Amount of - Changes from cost
Incidence of due. provision for model to revaluation
On size, nature or transactions doubtful debts. model
incidence of - Depreciation
those activities rate was 2. Useful life of
transactions those require
activities require incorrect. depreciable assets.
separate Disclosure
separate disclosure. disclosure, - Treating 3. Method of
These items are operating depreciation.
generally termed as lease as
exceptional items. finance lease
Disclosure 1. What is
changed?
Disclosure
2. How much
Examples -
impact on FS
-Profit /Loss on sale of - Nature of change
Asset 3. If there is no
- Amount of change impact in the
These items
- Theft of Cash/Stock should be - Any change in an year of change
-Litigation Settlements disclosed accounting estimate but there is
separately in having effect in later material impact
the P&L A/c periods. in the future
show the years, the fact
Disclosure impact of of such impact
prior period in the year of
items in the change.
Ordinary Activities current year
required Separate
Disclosure of Nature
and Amount

By CMA, CS Rohan Nimbalkar 49

TeachMe Academy (88887 88889) AS 7 – Construction Contract
AS 7 - Construction Contracts

1 Types of Construction Contract

Fixed price contract Cost plus contract

In these contracts contractor agrees for fixed price of In these contracts, contractor is reimbursed all
the contract or a fixed rate per unit of output. allowable/defined costs as defined plus fixed
percentage of fee/profit.

E.g. Contractor receives ₹ 5 crore after construction Contractor receives amount spent for
of building or he receives ₹ 5 crore per building construction + 2 % of amount spent OR
constructed. receives amount spent for construction + ₹ 5
lakh.

2 Measurement of Contract Revenue on the Basis of

Completion of a physical proportion of Percentage of work Survey method

the contract work performed

Percentage of work performed =

Important Point:-
Contracts cost incurred till balance sheet date
If Total costs > Contract Revenue Estimated total contract cost
Estimated loss can be recognized
immediately Irrespective of (Cost incurred + Expected Future cost)

(i) % of completion
(ii) Started work or not Costs =
(iii) Whether or not income from Direct costs + Allocable costs + Costs
other contracts specifically chargeable to Contract.

3 Points to remember

1. When the outcome of construction contract cannot be estimated reliably then revenue
shall be recognised to the extent of cost incurred.
2. Group of contract shall be treated as single contract if contracts are interrelated and
all contracts are negotiated as single package otherwise segmenting (separation) is
required.

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TeachMe Academy (88887 88889) AS 7 – Construction Contract

4. Calculation of Total Revenue

Initial Contract Amount XX

Add: - Variations in contract work XX
Add: - Incentives receipts received by contractor XX
(If probable that performance standards will be
met & reliable measurement is possible)
Add/Less: - Increase/Decrease in Escalation XX
Add: - Claims Amount, raised on customer for delay
Caused, errors design, etc... XX
Add: - Penalties due to delay caused by contractor XX
Add: - Penalties due to delay caused by contractor XX
Total Revenue XX

1. The amount of contract revenue recognised.

2. The methods used to determine the contract revenue; and the
percentage of completion;
5. Disclosures An entity should disclose the following for contracts in progress
at the balance sheet date:
(a) The total amount of costs incurred and recognised profits (less
recognised losses) up to the balance sheet date;
(b) The amount of advances received; and the amount of
retention money with the contractee.

By CMA, CS Rohan Nimbalkar 51

TeachMe Academy (88887 88889) As – 9 Revenue Recognition
AS 9 - Revenue Recognition

1.
As – 9 deals with the recognition (recording) of revenue in the profit and loss
statement of an entity

Revenue means Gross Inflow of cash, Receivables or other consideration arising in the
course of ordinary activities of an enterprise.
This AS does not deal with revenue which dealt under other AS.

2. This Standard discusses the following revenues

Sale of goods Rendering of services Other Income

1. Ownership of goods have been Revenue from services is

transferred generally recognised as service
2. Risk and rewards has been is performed. The performance
transferred of service measured by two
3. There is no uncertainty methods
regarding consideration (i.e.
Cash or Receivables) at the
time of recognition

Proportionate of completion Method Recognise on significant

completion Method

When performance involves more than When performance consist of single act
one act

Interest Royalty Income Dividend Income

Interest is recognised on time Royalty is recognised on Dividend income is recognised when

proportion basis based on the accrual basis in a right to receive dividend is
outstanding amount and rate accordance with the terms established irrespective of the year
applicable of agreement. it is relating to.

There should NOT be any significant uncertainty in ultimate collection at the time of
recognition. If any uncertainty exists, recognition should be postponed till the time there is
NO uncertainty.

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TeachMe Academy (88887 88889) As – 9 Revenue Recognition

3. Situations and guidance on recognition of revenue under each situation.

Situation Guidance on recognition

Installation fees Recognise only when installation is completed and

accepted by the customer;

Advertisement income Recognise the revenue when the related

advertisement appears before the public.

Insurance agency commission Recognise on the effective commencement or renewal

dates of the related insurance policies.

Admission fees on artistic - Recognise revenue when event takes place.

performances, banquets or any - When a subscription received is for number of
special programs. events, the fee received should be allocated to each
event on a systematic and rational basis.

Tuition fees Recognise over the period of instruction on SLM

basis.

Entrance fees Revenue recognition depends on the nature of the

services being provided.

Recognition of Revenue depends upon:

Financial service commissions 1. Whether the service has been provided "once for
all" or on a "continuing" basis;
2. The incidence of costs relating to service;
3. When the payment for the service will be received.

Disclosure
4.

4. Revenue recognition policy

5. Change in policy if any
6. Disclose if revenue recognition is postponed
7. Gross turnover, Excise duty and net turnover - Disclose Separately

By CMA, CS Rohan Nimbalkar 53

TeachMe Academy (88887 88889) AS 17 - Segment Reporting
Chart AS 17 SEGMENT REPORTING

Important Concepts
1.

What is Segment Disclosure/Reporting of Information of product and Location of Entity

Reporting? based on Sales, Profit, Assets, and liabilities is known as Segment
Reporting.

Core Element of AS Core Element of this standard is reporting more than Accounting
– 17

Why Segment To gives very good understanding of the company to the stake holders, so that
Reporting? stake holders can take informed decisions.

2. Types of Segment

Business Segment Geographical Segment

Segment is made on the basis of Products / Segment is made on the basis of its
Services with different risk and returns. operation/customers in different geographical
areas, which are exposed to different risk and

3. Important Definitions

Direct revenue + Allocated + Inter segment

Segment Revenue {Except extraordinary items, finance income & Investment income}

Direct expense + Allocated + Inter segment

Segment Expense {Except extraordinary items, Finance expense, Income-tax expense
and General Admin expense}

Segment Asset Operating assets + directly attributable assets

Segment Liabilities Operating Liabilities + Directly attributable liabilities

Segment Result (Profit/ Segment Revenue – Segment Expenses

Loss)

By CMA, CS Rohan Nimbalkar 54

TeachMe Academy (88887 88889) AS 17 - Segment Reporting

Is every segment reportable?

4.
No, only which satisfies anyone of the below Conditions are reportable.

Segment Revenue >= 10% of Management can add extra

total revenue of all segments segments at their discretion

At least 75% of external

Segment result is 10% or more of
a. Total of segments profits only. revenue should be reported -
b. Total of segments losses only. Segment assets >=10% If not add more segments
(Whichever is Higher) of total assets of all
segments

Note – If Any segment is reportable because, it satisfied any of first 3 conditions then, it
should continue to be reportable in the next year irrespective of criteria.

5. Disclosure

1. Primary segment 2. Secondary segment

Let us see Primary Disclosure

1) Revenue {Direct + Other Segments}. 2) Segment Results

3) Carrying amount of Segment Assets 4) Cost of acquisition of tangible and intangibles during
the year. 5) Depreciation and amortisation expenses
6) Non-cash expenses other than depreciation and amortisation.

Business Segment Disclose above Geographical segment-

Points {Disclose above points}
- By Assets
- By Customers

By CMA, CS Rohan Nimbalkar 55

TeachMe Academy (88887 88889) AS 18 – Related Party Disclosures
AS 18 – Related Party Disclosures

1. Objectives of AS 18

To establish requirements for disclosure of

Related party relationships Transactions between a reporting

enterprise and its related parties

2. Applicable To

(e) Enterprises over

(a) Enterprises that
which any person
controlled by the
described in (c) or (d)
reporting enterprise
is able to exercise
(b) Associates and joint significant influence
ventures of the entity (d) Key management
personnel and relatives of
(c) Individuals who have control or such personnel
significant influence directly or
indirectly & their relatives

3. Important Concepts

Enterprises that Enterprises that directly, or indirectly through one or more intermediaries,
controlled by the control, or are controlled by, or are under common control with, the
reporting reporting enterprise (this includes holding companies, subsidiaries and
enterprise fellow subsidiaries);

During the reporting period one party has the ability to control the other
Related Party party or exercise significant influence over the other party in making
financial and/or operating decisions.

Related party A transfer of resources or obligations between related parties regardless of

transaction price charged or not.

By CMA. CS Rohan Nimbalkar 56

TeachMe Academy (88887 88889) AS 18 – Related Party Disclosures

Ownership, directly or indirectly, of more than one-half of the voting power

of an enterprise, or
- Control of the composition of the board of directors in the case of a
Control company or of the composition of the corresponding governing body in case
of any other enterprise, or
- A substantial interest in voting power and the power to direct, by statute
or agreement, the financial and/or operating policies of the enterprise.

A Joint venture A contractual arrangement whereby two or more parties undertake an

economic activity which is subject to joint control.

– Those persons who have the authority and responsibility for

Key management planning, directing and controlling the activities of the reporting
personnel enterprise.
Example of key managerial personnel are Managing director, whole
time director, Chief executive officer etc....

Significant influence Participation in the financial and/or operating policy decisions of an

enterprise, but not control of those policies.

Does the entity has 20% or more voting power?

Yes No

Does It exercise significant influence? Does It exercise significant influence?

Yes No Yes No

It is an ASSOCIATE It is an NOT an It is an ASSOCIATE. It is an NOT an

Disclose as required ASSOCIATE. NO need Disclose as required ASSOCIATE. NO
of disclosures. (It (It should be proved) need of
should be proved) disclosures

By CMA. CS Rohan Nimbalkar 57

TeachMe Academy (88887 88889) AS 18 – Related Party Disclosures

4. AS- 18 Not Applicable to-

1. Finance providers
2. Government Dept.
3. State Controlled Entities
4. Single Supplier/customer etc...

5. Disclosures

Is it related at any time during the

period?

Yes No

Any transaction took place i.e. transfer of resources or obligation

If Yes If No Does control exist? No disclosure

required.

Yes
Disclose the following:
(a) Name
(b) Relationship Disclose the
(c) Nature of transaction following:
(d) Amount of transaction (a) Name
(e) O/S balance, if any (b) Relationship
(g) Amounts written off /back during Other disclosure not
the period. required.

Examples of the related party transactions in respect of which disclosures may be

made by a reporting enterprise:

• Purchases or sales of goods (finished or unfinished);

• Purchases or sales of fixed assets;
• Rendering or receiving of services;
• Agency arrangements;
• Leasing or hire purchase arrangements;
• Transfer of research and development;
• License agreements;
• Finance (including loans and equity contributions in cash or in kind);
• Guarantees and collaterals; and
• Management contracts including for deputation of employees.

By CMA. CS Rohan Nimbalkar 58

TeachMe Academy (88887 88889) AS 19 –Lease
AS 19 – Lease

Objectives of AS 19
1.

To prescribe in the books of lessee & lessor

The accounting treatment of Lease Accounting policies and disclosures related to lease

Leases are broadly classified into two

2.

The classification of leases is based on risk and rewards incidental to ownership of the asset.

If the risks and rewards incidental to If the risks and rewards incidental to
ownership lie with the Lessor - it is ownership lie with the Lessee - it is called as

Operating lease Finance lease

(ye scme lease he) Accounting treatment is similar to sale on the

Accounting for rental is required) basis of substance over form)

2. Accounting for operating lease

In the books of Lessor: In the books of lessee:

1. Record lease out asset as the fixed assets in the 1. Lease payments should be recognized
balance sheet as an expense in the P & L account on
2. Charge depreciation as per AS 6 a straight-line basis over the lease
3. Recognise lease income in P & L account using term.
straight-line method.
4. Other cost of operating lease should be
recognized as expenses in the year in which they
are incurred.
5. Initial direct cost of lease may be expensed out
immediately or deferred as per lease term.

By CMA, CS Rohan Nimbalkar 59

TeachMe Academy (88887 88889) AS 19 –Lease

3. Indicators of finance lease

1. Lessor will transfer ownership of asset to lessee by the end of lease term.
2. Lessee has option to purchase he asset at the price sufficiently lower than fair value on
the date of option becomes exercisable.
3. Lease term is for major part of economic life of asst (75% approx.)
4. Specified asset given on lease.
5. Total amount collected as lease payment is 90% or more of fair value (approx.)

Accounting for Finance Lease

4.

In the books of Lessor: In the books of lessee:

1. Recognise asset given under finance lease as

receivable at an amount equal to net 1. Lease assets as well as liability for lease
investment in the lease and corresponding should be recognized at the lower of:
credit to sale of assets. a. Fair value of the leased assets at the
Net Investment: Gross investment – unearned inception of lease, or
finance income
Gross Investment: Minimum lease payment b. Present Value (PV) of minimum lease
from Lessor point of view + payment (MLP) from the lessee’s point of
unguaranteed residual value view.

Unearned Finance Income: Gross investment 2. Apportionment of lease payment:

- PV of gross investment a. Principal Amount: It is reduced from the
outstanding liability.
2. Recognition of Finance Income: On the
basis net investment outstanding in respect of b. Finance charges: It is allocated over
finance lease. lease term on the remaining principal
balance.

3. Charge depreciation on finance lease

assets as per AS 10.
4. Initial direct cost for financial lease is
included in assets under lease.

Note: - If seller quotes artificially lower rate of interest then consider market rate of interest.

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TeachMe Academy (88887 88889) AS 19 –Lease

Minimum Lease Payment (MLP)

5.

Lessor Lesse
e

Rent + Guaranteed RV +Unguaranteed RV Rent + Guaranteed RV

Lease asset recorded at fair value or present value of minimum lease payment

Whichever lower

Accounting Entries for Finance Lease

6.

Lessor Lessee

1. Entry for sale Entry for sale

- Lessee A/c .......Dr. - Asset A/c ..........Dr.

To Sales/Assets To Lesser A/c
(Fair value or PV or Minimum Lease Payment
whichever less)

2. Interest due to year end Interest due to year end

- Lessee A/c ..............Dr. - Interest A/c.............Dr.

To Interest A/c To Lessor A/c

- No Depreciation
- Depreciation A/c.............Dr.
To Asset A/c

- Installment
Bank A/c .............Dr. - Lessor A/c.............Dr.
To Lessee A/c To Bank A/c

By CMA, CS Rohan Nimbalkar 61

TeachMe Academy (88887 88889) AS 19 –Lease

7. Accounting Entries for Operating Lease

Lessor Lessee

1. Rent Received Rent Paid

- Bank A/c ..........Dr. - Rent A/c ..........Dr.

To rent received A/c To Bank A/c

2. Depreciation

- Depreciation A/c ..........Dr.

To Assets A/c

8. When a manufacturer or dealer of the asset gives the asset or lease

In case of Operating Lease In case of Finance Lease

No change in accounting
treatment. Lessor Lessee
(There is only one minor Includes
change: - Initial direct
cost shall not be Includes – Same as previous
deferred) (a) Profit on sale
(b) Finance Charges

A) Sale, value = FV or PV of MPL (lower)

B) Cost of sales
= Cost of leased asset
= PV of UGRV

Profit recognised = (A – B)

(c) Inception of lease

Note: - If lessor quotes artificially lower

rate of interest then consider market rate
of interest for calculation of PV

By CMA, CS Rohan Nimbalkar 62

TeachMe Academy (88887 88889) AS 19 –Lease

9. Sale & Lease back transaction when it is operating lease

If sale price is equal to fair value If SP is less than fair value If sale price is above FV

Lessor shall transfer profit Loss shall be transferred to P&L Profit upto fair value
or loss immediately immediately except if loss will recognised as profit and
be compensated by future lease excess over is amortised
payment then sc loss to be over period of lease.
deferred; in proportion to lease
payment

10. Sale & Lease back transaction when it is Finance lease

Profit or loss on sale of asset shall be deferred / amortised over lease period in
proportion of leased asset.

Remaining treatment same

By CMA, CS Rohan Nimbalkar 63

TeachMe Academy (88887 88889) AS 20 – Earning Per Share
AS – 20 Earnings Per Share

1.

2. Presentation of Earning Per Share

An entity should present Basic EPS and Diluted EPS on the face of P&L
a/c. Basic & Diluted EPS should be presented separately for each class
of equity shares that has a different right in sharing the net profit.

Basic EPS
Diluted EPS

Net Profit or Loss for the period attributable to Equity share holders
.=...................... (i.e. after preference dividend and dividend distribution tax)
Weighted average number of equity shares outstanding during the period

= Net profit or loss attributable to equity share holders after giving effect of potentially dilutive equity shares
Weighted average number of shares outstanding after giving effect of potentially dilutive equity shares

Meaning of weighted average Number – Share should be adjusted for time weight factors & partly paid
shares converted to equivalent shares.

Assume that - All dilutive potential equity shares are converted into equity shares and hence the P&L
should be adjusted.

Meaning of Potential Equity Shares

It is a financial instrument or other contract, which entitles or may entitle the holder to equity shares.

E.g. (a) Convertible debentures/preference shares; (b) Share warrants; (c) ESOP (d) Loan agreement, if the
borrower has to issue equity shares in case of default of conditions.

By CMA, CS Rohan Nimbalkar 64

TeachMe Academy (88887 88889) AS 20 – Earning Per Share

3. Restatement of Basic EPS

• In case of bonus issue, shares splitting, consolidation of shares in current year then
previous year’s basis EPS shall also be restated as if bonus shares split took place at the
beginning of last year for better comparison.

• EPS not to be adjusted for transactions occurring after the BS date and not affecting
amount of capital used for earning profits.

4. Calculation of Basic EPS in case of Rights issue

Right shares are generally issued at less than fair value it means that there is bonus element and
treatment shall be similar to bonus issue therefore we should restate (adjust) previous years.

Fair value per share immediately prior to the exercise of rights

Bonus Factor =
Theoretical ex-rights fair value per share

Theoretical ex - rights FV per share =

Fair value of shares outstanding before rights issue + Amount received on issue of rights
=
Total number of shares after rights issue

Mandatory Disclosures
5. Basic & Diluted EPS (Whether positive or
negative)
• Fact of a change in calculations of EPS due to
bonus, right etc.,
• Reconciliation of net profit or loss with the
numerator
• Weighted average no. of equity shares for
Basic & Diluted EPS & their reconciliation with
each other
• Nominal value of shares along with EPS
figures.

By CMA, CS Rohan Nimbalkar 65

 AS 22
TeachMe Academy (88887 Accounting
88889)
) For Taxes on- Accounting
AS 22 Income For Taxes On Income

Types of INCOME
1.

Accounting Income Taxable income

Profit or loss for a The income for a period determined in

period before deducting accordance with the rules established
tax expense by the taxation Laws, upon which
income tax is payable
Reasons for differences between accounting income and taxable income
2.

Timing difference Permanent difference

This type of difference arises in one period This type of difference arises in one
and capable of reversal in one or more period and not capable of reversal
subsequent period. subsequently.

Example: The following items are income or expense

1. Difference due to rate of depreciation. either for accounting or income tax purpose
2. Difference due to method of depreciation. and it will never be reversed in life. Hence the
3, Expenses debited in P& L A/c of current entity need NOT defer the tax expense for
year but allowed for tax purpose in future years.
subsequent period. Like section 43B of (a) Agricultural Income;
Income Tax Act, 1961 (Allows expenses on (b) Expenses disallowed U/S 40A;
cash basis only) (c) Dividend income; (It is shown as income
in accounting but it won’t be taxed)
(d) Penalties or fines;
Differences are going to be realised
alised in the future, (g) Employers' contribution to unapproved
the equity should create deferred tax provident fund.
asset/liability in the year in which difference Note: Permanent differences do not result in
deferred tax asset or deferred tax liability.
arises & reverse the same in the year in which
difference is rectified

Deferred Tax Asset (DTA) Deferred Tax Liability

DTA should be recognised when DTL should be recognised when taxes of

taxes of initial year are higher & initial year are less and subsequent years
subsequent year are lower. higher
(Entity needs to pay higher
hig tax in coming
(Entity will receive benefit of tax year which is saved in current year)
paid in future years)

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TeachMe Academy (88887 88889) AS 22 - Accounting For Taxes On Income

DTA shall be recorded only if there For recognition DTL there is no

is reasonable certainly that need to analyse any certainty level
sufficient future taxable income
will be generated against which
such deferred tax can be adjusted
Accounting Profit >Taxable Profit
Accounting Profit < Taxable
Income

By CMA, CS Rohan Nimbalkar 67

TeachMe Academy (88887 88889) AS – 24 Discontinuing Operations
AS – 24 Discontinuing Operations

1. Objective of AS - 24 To establish principles for reporting information

about discontinuing operations

2. A Discontinuing
iscontinuing Operation is a component of an enterprise/Entity Which

Represents separate major line Can be separated / distinguished Is discontinued (as per a
of business or geographical area For single plan) by
of operations

Operational Purpose Financial reporting purpose

Methods of Discontinuing

Selling substantially Selling off component's Terminating through

in total either in single assets individually abandonment; i.e. stopping
transaction or (piecemeal disposal) and the operations (as it is)
demerger or spin off settling its liabilities also without selling its
individually. assets/components. (Stopping
with an intention to sell)

3. Important Points

Mere gradual phasing out is not considered as discontinuing operation.

Examples:-
1. Gradual phasing out of product line or class of service.
2. Shifting of some production or marketing activities for particular line of business
from one location to other.
3. Closing
sing of facility to achieve productivity, improvement or other cost savings.

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TeachMe Academy (88887 88889) AS – 24 Discontinuing Operations

4.
Disclosure Requirements

Initial Disclosure Event Every Year End Disclosure

Entered into binding sale • Describe discontinuance

agreement. • Which segment is discontinued?
Or BOD approved a formal plan • Date and nature of initial disclosure event.
and announced the same • Total amount of assets & Liabilities related
(Whichever is earlier). • Revenues & Expenses attributable to that
Immediately disclose the segment.
informationto most affected • Pre-tax P&L and tax expense separately.
parties. • Net cash flows attributable to the segment.

By CMA, CS Rohan Nimbalkar 69

TeachMe Academy (88887 88889) AS- 26 Intangible Assets
AS 26 Intangible Assets

Intangible Assets are assets, without physical

Meaning of Intangible Assets substance, which are identifiable (Capable of
1. (IA) being sold separately), non-monetary in nature
and held for use in Production of Goods and
Services.

2. Recognition & Measurement of Intangible Assets

Initial Recognition/Measurement of Subsequent expenditure of Intangible Assets

Intangible Asset

Intangible Assets are Capitalise only when Future Economic

Benefit is probable

Purchased By Cash/Credit Purchased by Barter & Self Generation

Issuing securities

Purchase price Phases of generation of IA

Add: - All Direct exp Value of Fixed Asset given
related to
acquisition Or
Research Development
Fair Market Value of Expenses for Expenses
Intangible Asset received. acquiring
knowledge Capitalise
Whichever is clearly only when six
evident. criteria
Charge to satisfied
P&L

Conditions for Capitalisation.

1. Technical feasibility checked.
2. Resources available for development.
3. It is expected that there will be future economic benefits.
4. Management approval obtained.
5. Goodwill, brands, masthead, title shall not be treated as an asset if it is self generated
(Not purchased) because it is not possible to calculate cost incurred for self
generated asset.
6. If any asset contains tangible as well as intangible part, then treatment shall be based
on dominant part. In other word if intangible part is dominant then it shall be treated
as intangible. Example: - software in Pendrive /CD.

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TeachMe Academy (88887 88889) AS- 26 Intangible Assets

3. Amortisation of Intangible Asset

Useful life of Intangible Asset Method of Amortisation

Any method which reflects the pattern of Flow of

Amortise over its useful life (Assumption
Economic Benefits
Max. life = 10 yrs, if expected useful life
cannot be expected.)
If not possible to determine pattern of future
economic benefit - Follow Straight Line Method

Disclosures
4.

(a) Separately for internally generated & other intangible assets Useful
lives/amortization rate, amortization method.
Gross carrying amount, accumulated amortization and
impairment losses
Additions, disposals, impairment losses recognized or reversed,
amortisation, other changes in carrying amount during the
period.
(b) If amortised period > 10 yrs - Reasons for the same.
(c) Existence & carrying amount of assets whose title is restricted & of
assets pledged as security for liabilities.
(d) Amount of commitments for acquisition of assets.
(e) Research & Development recognized as expense during the period.

By CMA, CS Rohan Nimbalkar 71

TeachMe
AS 29 Academy (88887 88889)
– Provisions AS 29liabilities
Contingent – Prov. Contingent
andliabilities
contingentand contingent
Assets Assets

1. Objective of AS – 29 is to

Recognition criteria of Measurement basis of Disclosure requirement of

Contingent Contingent
Provisions
liabilities Asset

Provision is not an Things are to happen

existing liability in future whereby a
liability may arise

Substantial Degree of
estimation is It is conditional,
required contingent upon such
things happening or
not happening

Hence the liability is

not recognised as such

Meaning of Contingent Asset

Contingent Possible Existence confirmed by of future which is not

Asset Asset occurrence /Non occurrence event controlled by
entity

By CMA, CS Rohan Nimbalkar 72

TeachMe Academy (88887 88889) AS 29 – Prov. Contingent liabilities and contingent Assets

2. Recognised Provision only when it satisfies all of the following conditions

1. The entity should have a present (Existing on Balance Sheet Date) obligation arising from
past events (Which cannot be avoided).

2. Outflow of future economic benefits should be probable (more than 50% chances); and

3. Provision should be measured reliably by using a substantial degree of estimation.

If all conditions satisfied If only one or two conditions satisfied

Create Provision Show it as contingent liability

Example

3. Contingent Liability

Present Existence Possible Existence

But cannot recognise provision because

of Existence confirmed by

Occurrence OR Non
Future Economic Amount cannot be Occurrence of One or More
Benefits out flow is measured reliably future events
not probable

Not controlled by entity

By CMA, CS Rohan Nimbalkar 73

TeachMe Academy (88887 88889) AS 29 – Prov. Contingent liabilities and contingent Assets

Points to remember

• The amount of provision should not be expected in case of decommissioning, restoration

and similar liabilities that are recognised as cost of property, plant & equipment.

• Future operating losses of a business do not meet definition of liability therefore no

provision required for future operating losses.

• Provision should be received at each balance sheet date & provision shall be adjusted
/reversed accordingly.

• Reimbursement:-
If entity will be receiving the reimbursement & expenses from another party the such
reimbursement amount should be treated as asset and if should not be adjusted from
provision made.

• Provision for restructuring may be created if it satisfies all conditions of provision.

By CMA, CS Rohan Nimbalkar 74

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