Financial Accounting 2010
MANDATORY ACCOUNTING STANDARDS
AND
THEIR APPLICATION IN FINANCIAL STATEMENTS
Submitted By:
SUMAIYA DALAL 68 RAHUL MAHABARE 88 HIMSHREE SHELAR 105 PRASHANT SONI 108
A REPORT SUBMITTED TO THE UNIVERSITY/INSTITUTE IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF POST GRADUATE MASTERS IN FINANCIAL MANAGEMENT FOR THE ACADEMIC YEAR 2010
TO 2013.
UNDER THE GUIDANCE OF PROF. L.N. CHOPDE
2
CERTIFICATE
THIS IS TO CERTIFY THAT PROJECT TITLED MANDATORY ACCOUNTING STANDARDS AND THEIR
APPLICATION IN FINANCIAL STATEMENTS IS BASED ON THE ORIGINAL STUDY CONDUCTED BY
SUMAIYA DALAL RAHUL MAHABARE HIMSHREE SHELAR PRASHANT SONI
UNDER MY GUIDANCE AND THIS HAD NOT FORMED A BASIS FOR THE AWARD OF ANY OTHER DEGREE OF
THIS INSTITUTE/UNIVERSITY.
PLACE: DATE:
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ L. N. CHOPDE
MUMBAI EDUCATION TRUST
3 DATE:
CERTIFICATE FROM THE ORGANIZATION
THIS IS TO CERTIFY THAT MS. SUMAIYA DALAL, MR. RAHUL MAHABARE, MS. HIMSHREE SHELAR
AND MR. PRASHANT SONI HAVE SUCCESSFULLY COMPLETED A STUDY ON MANDATORY ACCOUNTING
STANDARDS AND THEIR APPLICATION IN FINANCIAL STATEMENTS AND HAVE SUBMITTED THE PROJECT
REPORT ON THE SAME.
THE STUDY CONDUCTED WAS SATISFACTORY. WE WISH THEM ALL THE BEST.
SIGN OF THE OFFICER
4
PREFACE
Our purpose in writing the Mandatory Accounting Standards and Their Application in Financial
Statements Report is to explore the ways Accounting Standards impact financial reporting. The paradigm
shift in the economic environment in India during last few years has led to increasing attention being
devoted to Accounting Standards as a means towards ensuring potent and transparent financial reporting
by corporate. What are Accounting Standards? How did the Accounting Standards evolve? What is the role
of Accounting Standards in corporate reporting and how is this role changing? What is the Accounting
Standard for Fixed Assets and what is its impact on the financial reporting of companies? This report gives
the result of a study undertaken to explore these questions and includes a case study on Accounting
Standard for Fixed Assets (Accounting Standard 10) with examples of two major FMCG companies –
Britannia and Nestle.
5
ACKNOWLEDGEMENT
We express our sincere thanks to Professor L. N. Chopde, for his constant encouragement and
support throughout our course, especially for the useful suggestions regarding this report. He has been a
perfect mentor and guide to give us immense knowledge and understanding for the subject, Accounting
Standards. The project has not only given intense knowledge about the subject but also taught us, its
practical implications.
6
EXECUTIVE SUMMARY
As globalization works its way through local economies via deregulation and modern market
reforms, accounting practices in India have changed significantly. With efforts, at both a domestic and
international level, consistently have been based on the view that the only way to achieve fair, liquid and
efficient capital markets worldwide is by providing investors with information that is comparable,
transparent and reliable. That is why the Accounting Standards have pursued a dual objective of upholding
the quality of financial reporting domestically, while encouraging convergence towards a high quality
global financial reporting framework internationally. In this study, we are seeking comment on Mandatory
Accounting Standards framework and their Application in Financial Statements, as well as detailed analysis
of Accounting Standards for Fixed Assets (Accounting Standard 10).
7
CONTENTS
1. Evolution of Indian Accounting Standards………………………………………………………… 8
2. Introduction to Accounting Standards……………………………………………………………… 8
3. Process for issuing Accounting Standards………………………………………………………… 9
4. Implication of Mandatory status of Accounting Standards……………………………….. 10
5. Applicability of Accounting Standards……………………………………………………….…….. 10
6. List of Accounting Standards…………………………………………………………………………….. 11
7. Accounting Standard for Fixed Assets…………………………………………………….…………. 12
8. Case study of Nestlé India ………………………………………………………..………………………. 15
9. Case study of Britannia Industries Limited………………………………………………………… 19
10. Bibliography……………………………………………………………………………………………………… 24
8
MANDATORY ACCOUNTING STANDARDS AND THEIR APPLICATION IN FINANCIAL STATEMENTS
Evolution of Indian Accounting Standards :
Indian accounting regulation has evolved in two major phases so far. Since accounting regulation is affected by the development of economic and political institutions and policies in a country, these phases largely mirror the economic development model that was followed. The first phase was from the 1950s to the early 1990s and the second phase was from the mid‐1990s onwards. During the first phase (1950 to 1991), India’s economy remained isolated from events in the rest of the world.
A serious balance of payments crisis in 1991 forced India to radically reform its economic policies. Besides structural reforms in foreign trade, taxation and industrial policy, many of the controls on firm level economic decision making were dismantled. Free floatation of the Indian rupee within limits, permission to Indian companies to raise capital abroad, liberalization of the rules for foreign direct investment, and permission for portfolio investment by foreign financial institutions are particularly significant in the context of reforms in accounting standards.
The system of financial reporting is a function of the economic, legal and political institutions in a country. There have been major changes in financial reporting in India since the economic reforms and globalization began in the early 1990s. Important forces such as Capital, product and labor market pressures; Company law and securities law changes in India and International accounting and securities regulations have played a vital role in the evolution of Indian Accounting Standards. In 1999, the Companies Act, 1956 was amended to provide for setting up a National Advisory Committee on Accounting Standards (NACAS) to advise the Government on the formulation of accounting standards. This amendment was largely in response to an international interest in the globalization of accounting standards, and as part of India’s economic reforms to facilitate international trade and capital movements. Initiatives taken by International Organization Securities Commission (IOSCO) towards propagating International Accounting Standards/ International Financial Reporting Standards, issued by the International Accounting Standards Board (IASB), as the uniform language of business to protect the interests of international investors have brought into focus the International Accounting Standards / International Financial Reporting Standards.
Introduction to Accounting Standards:
Accounting Standards are written policy documents issued by expert accounting body or by government or other regulatory body or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The objective of Accounting Standards is to reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises with a view to provide meaningful information to various users of financial statements to enable them to make informed economic decisions. Accounting Standards helps in:
Recognition of events and transactions in the financial statements,
Measurement of these transactions and events,
Presentation of these transactions and events in the financial statements in a manner that is meaningful and understandable to the reader, and
The disclosure requirements which should enable the public, stakeholders and potential investors, to get an insight into the financial statements facilitating them to take informed business decisions.
The institute of Chartered Accountants of India (ICAI), being a premier accounting body in the country, took upon itself the leadership role by constituting the Accounting Standards Board in 1977. The
9 Accounting Standards Board considers the International Accounting Standards (IAS)/ International Financial Reporting Standards (IFRS) while framing Indian Accounting Standards and tries to integrate them, in the light of the applicable laws, customs, usages and the business environment in the country. Accounting Standards apply in respect of any enterprise engaged in commercial, industrial or business activities; even if established for charitable or religious purposes. Accounting Standards however, do not apply to enterprises solely carrying on the activities, which are not of commercial, industrial or business nature. However, even if a very small proportion of the activities of an enterprise were considered to be commercial, industrial or business in nature, the Accounting Standards would apply to all its activities including those, which are not commercial, industrial or business in nature.
Process for issuing Accounting Standards :
Broadly speaking, the following procedure is adopted for formulating Accounting Standards in India:
1. The ASB determines the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof. In the preparation of Accounting Standards, the ASB will be assisted by Study Groups constituted to consider specific subjects. In the formation of Study Groups, provision will be made for wide participation by the members of the Institute and others. The draft of the proposed standard will normally include the following:
(a) Objective of the Standard,
(b) Scope of the Standard,
(c) Definitions of the terms used in the Standard,
(d) Recognition and measurement principles, wherever applicable,
(e) Presentation and disclosure requirements.
2. The ASB will consider the preliminary draft prepared by the Study Group and if any revision of the draft is required on the basis of deliberations, the ASB will make the same or refer the same to the Study Group.
3. The ASB will circulate the draft of the Accounting Standard to the Council members of the ICAI and the following specified bodies for their comments:
• Department of Company Affairs (DCA)
• Comptroller and Auditor General of India (C&AG)
• Central Board of Direct Taxes (CBDT)
• The Institute of Cost and Works Accountants of India (ICWAI)
• The Institute of Company Secretaries of India (ICSI)
• Associated Chambers of Commerce and Industry (ASSOCHAM), Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI)
• Reserve Bank of India (RBI)
• Securities and Exchange Board of India (SEBI)
• Standing Conference of Public Enterprises (SCOPE)
• Indian Banks’ Association (IBA)
• Any other body considered relevant by the ASB keeping in view the nature of the Accounting Standard
4. The ASB will hold a meeting with the representatives of specified bodies to ascertain their views on the draft of the proposed Accounting Standard. On the basis of comments received and discussion with the representatives of specified bodies, the ASB will finalize the Exposure Draft of the proposed Accounting Standard.
10 5. The Exposure Draft of the proposed Standard will be issued for comments by the members of the Institute and the public. The Exposure Draft will specifically be sent to specified bodies (as listed above), stock exchanges, and other interest groups, as appropriate.
6. After taking into consideration the comments received, the draft of the proposed Standard will be finalized by the ASB and submitted to the Council of the ICAI. The Council of the ICAI will consider the final draft of the proposed Standard, and if found necessary, modify the same in consultation with the ASB. The Accounting Standard on the relevant subject will then be issued by the ICAI.
Implication of Mandatory status of Accounting Standards :
Where the statute governing the enterprise does not require compliance with the accounting standards, e.g. a partnership firm, the mandatory status of an accounting standard implies that, in discharging their attest functions, the members of ICAI are required to examine whether the financial statements are prepared in compliance with applicable accounting standards. The Accounting Standards are intended to apply only to items, which are material. An item is considered material. An item is considered material, if its omission or misstatement is likely to affect economic decision of the user. Materiality is not necessarily a function of size; it is the information content is the financial item which is important. The materiality should therefore be judged on case‐to‐case basis.
Applicability of Accounting Standards :
For the purpose of compliance of the Accounting Standards, all enterprises in India are classified into three broad categories: Level I Enterprise: Following enterprises are covered under this level: • Enterprises, whose equity or debt securities are either listed or is in the process to be listed in India or
outside India. • Bank, Insurance Companies and Financial Institutions • All commercial, industrial and other reporting business enterprises, whose total turnover during the
previous year is in excess of ` 50 crores (as per the audited financial statement). • All commercial, industrial and other reporting business enterprises, whose total borrowings including
public deposits during the previous year are in excess of ` 10 crores (as per the audited financial statement).
• Holding or subsidiary company of any of the above enterprises any time during the year. Level II Enterprise: Following enterprises are covered under this level: • All commercial, industrial and other reporting business enterprises, whose total turnover during the
previous year exceeds ` 40 lakhs but within the limit of ` 50 crores (as per the audited financial statement).
• All commercial, industrial and other reporting business enterprises, whose total borrowings including public deposits during the previous year exceeds ` 1 crore but within the limit of ` 10 crores (as per the audited financial statement).
• Holding or subsidiary company of any of the above enterprises any time during the year. Level III Enterprise: All the enterprises not covered in above two levels come under this level.
11 List of Accounting Standards:
Sr. No. AS Title Date Scope 1 Disclosure of Accounting Policies 1/4/1993 All Level 2 Valuation of Inventories (Revised) 1/4/1999 All Level 3 Cash Flow Statement (Revised) 1/4/2001 Level I
4 Contingencies and Events Occurring after the Balance Sheet Date 1/4/1998 All Level
5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (Revised) 1/4/1996 All Level
6 Depreciation Accounting (Revised) 1/4/1995 All Level 7 Construction Contracts (Revised) 1/4/2002 All Level 8 Research & Development Now included in AS ‐ 26 9 Revenue Recognition 1/4/1993 All Level 10 Accounting for Fixed Assets 1/4/1993 All Level
11 The Effects of Changes in Foreign Exchange Rates (Revised) 1/4/2004 All Level
12 Accounting for Government Grants 1/4/1994 All Level 13 Accounting for Investments 1/4/1995 All Level 14 Accounting for Amalgamations 1/4/1995 All Level 15 Employee Benefits 1/4/2006 All Level 16 Borrowing Costs 1/4/2000 All Level 17 Segment Reporting 1/4/2001 Level I 18 Related Party Disclosures 1/4/2001 Level I 19 Leases 1/4/2001 All Level 20 Earning Per Shares 1/4/2001 Level I 21 Consolidated Financial Statement 1/4/2001 Enterprises preparing CFS*
1/4/2001 Listed Companies 1/4/2002 Other Companies
22 Accounting for Taxes on Income 1/4/2006 All Enterprises
23 Accounting for Investment in Associates in Consolidated Financial Statements 1/4/2002 Enterprises preparing CFS
24 Discontinuing Operations 1/4/2004 Level I 25 Interim Financial Statement 1/4/2002 Level I 26 Intangible Assets 1/4/2003 All Level
27 Financial Reporting of Interests in Joint Ventures 1/4/2002 Enterprises preparing CFS 1/4/2004 Level I 1/4/2006 Level II
28 Impairment of Assets 1/4/2008 Level III
29 Provisions, Contingent Liabilities and Contingent Assets 1/4/2004 All Level 1/4/2009 (Recommendatory) All (except to a SME)
30
Financial Instruments: Recognition and Measurement and Limited Revisions to AS2, AS 11(revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29 1/4/2011 (Mandatory)
1/4/2009 (Recommendatory) All (except to a SME) 31 Financial Instruments: Presentation 1/4/2011 (Mandatory)
1/4/2009 (Recommendatory) All (except to a SME) 32
Financial Instruments: Disclosure and Limited Revision to AS 19 1/4/2011 (Mandatory)
12 Accounting Standard for Fixed Assets:
Scope: Financial statements disclose information relating to Fixed Assets belonging to the organization
such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs.
Fixed asset is an asset held for the use of producing or providing goods or services, but it is not held for sale in the course of business. Stand‐by equipment and servicing equipment are normally capitalized. Machinery spares are usually charged to the profit and loss statement as and when consumed. However, if such spares can be used only in connection with an item of fixed asset, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal item.
Accounting Standard 10 deals with such fixed assets but does not deal with accounting for the following items to which special considerations apply:
• Forests, plantations and similar regenerative natural resources.
• Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non‐regenerative resources.
• Expenditure on real estate development and
• Livestock.
This standard does not deal with the specialized aspects of accounting for fixed assets that arise under a comprehensive system reflecting the effects of changing prices but applies to financial statements prepared on historical cost basis. Also, this standard does not cover the allocation of the depreciable amount of fixed assets to future periods since this subject is dealt with in Accounting Standard 6 on ‘Depreciation Accounting’. Furthermore, this accounting standard does not the deal with the treatment of government grants and subsidies, and assets under leasing rights. Definitions:
• Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
• Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm’s length who are fully informed and are not under any compulsion to transact.
• Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements. When this amount is shown net of accumulated depreciation, it is termed as net book value.
Components of Cost of a Fixed Asset: • Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in
the books of account or financial statements. When this amount is shown net of accumulated depreciation, it is termed as net book value. The cost of an item of fixed asset comprises its purchase price, including import duties and other non‐refundable taxes or levies and any attributable cost of bringing the asset to is working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, and changes in duties or similar factors.
• The expenditure incurred on start‐up and commission of the project, including the expenditure incurred on test runs and experimental production, is usually capitalized as an indirect element of the construction cost. If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement.
13 • In case of self constructed Fixed Assets, included in the gross book value are costs of construction that
relate directly to the specific asset and cost that are attributable to the construction activity in general and can be allocated to the specific asset. Any internal profits are eliminated in arriving at such costs.
• Generally, administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset.
• If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortized over a period not exceeding 3 to 5 years after the commencement.
• When fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. It may be appropriate to consider also the fair market value of the asset acquired if this more clearly evident.
• When a fixed asset is acquired in exchange for shares or other securities in the enterprise, it is usually recorded at its fair market value, or the fair market value, or the fair market value of the securities issued, whichever is more clearly evident.
• Any expenditure that increase the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value. The cost of an addition or extension to an existing asset, which are separate identity and is capable of being used after the existing asset is disposed of, is accounted for separately.
• The revalued amounts of fixed assets are presented in financial statements both by restating both the gross book value and accumulated depreciation so as to give net book value equal to the net revalued amount or restating the net book value by adding therein the net increase on account of revaluation. Different bases of valuation are sometimes used in the same financial statements to determine the book value of the separate items within each of the categories of fixed assets or for the different categories of fixed assets. In such cases, it is necessary to disclose the gross book value included on each basis. It is not appropriate for the revaluation of a class of assets to result in the net book value of that class being greater than recoverable amount of the assets of that class. An increase in net book value arising on revaluation of fixed assets is normally credited directly to owner’s interests under the heading of revaluation reserves and is regarded as not available for distribution. A decrease in net book value arising on revaluation reserves and is regarded as not available for distribution. A decrease in net book value arising on revaluation of fixed assets is charged to profit and loss statement except that, to the extent that such a decrease is considered to be related to a previous increase on revaluation that is included in revaluation reserve.
• Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statement.
• On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value is normally charged or credited to the profit and loss statement except that, to the extent such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilized, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve.
• In the case of fixed assets acquired on hire purchase terms, although legal ownership does not vest in the enterprise, such assets are recorded at their cash value, which, if not readily available, is calculated by assuming an appropriate rate of interest. They are shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership thereof.
• Where an enterprise owns fixed assets jointly with others, the extent of its share in such assets, and the proportion in the original cost, accumulated depreciation and written down value are stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped together with
14
similar fully owned assets. Details of such jointly owned assets are indicated separately in the fixed assets register.
• Goodwill, in general, is recorded in the books only when some consideration in money or money’s worth has been paid for it. As a matter of financial prudence, goodwill is written off over a period. However, many enterprises do not write off goodwill and retain it as an asset.
• Patents are normally acquired in two ways: (i) by purchase, in which case patents are valued at the purchase cost including incidental expenses, stamp duty, etc. and (ii) by development within the enterprise, in which case identifiable costs incurred in developing the patents are capitalized. Patents are normally written off over their legal term of validity or over their working life, whichever is shorter.
• Know‐how in general is recorded in the books only when some consideration in money or money’s worth has been paid for it. Know‐how is generally of two types: Relating to manufacturing processes and relating to plans, designs and drawings of buildings or plant and machinery. Know‐how related to plans, designs and drawings of buildings or plant and machinery is capitalized under the relevant asset heads. In such cases depreciation is calculated on the total cost of those assets, including the cost of the know‐how capitalized. Know‐how related to manufacturing processes is usually expensed in the year in which it is incurred.
Disclosure: • Gross and net book values of fixes assets at the beginning and end of an accounting period showing
additions, disposals, acquisitions and other movements; • Expenditure incurred on account of fixed assets in the course of construction or acquisition; and • Revalued amounts substituted for historical costs of fixed assets, the method adopted to compute the
revalued amounts, the nature of any indices used, the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amounts.
15
Case study of Nestlé India
Introduction:
Nestlé India is a subsidiary of Nestlé S.A. of Switzerland. With seven factories and a large number of co‐packers, Nestlé India is a vibrant Company that provides consumers in India with products of global standards and is committed to long‐term sustainable growth and shareholder satisfaction. The Company insists on honesty, integrity and fairness in all aspects of its business and expects the same in its relationships. This has earned it the trust and respect of every strata of society that it comes in contact with and is acknowledged amongst India's 'Most Respected Companies' and amongst the 'Top Wealth Creators of India'.
Board of Directors:
Name Designation
Antonio Helio Wasyzk Chairman & Managing Director
Shobinder Duggal Director‐ finance & Control
Pradip Baijal Non Executive director
Michael W. O. Garnett Non Executive Director
Ravinder Narain Non Executive Director
Rajendra S. Pawar Non Executive Director
Richard Sykes Alternate Director to Michael W. O.
Garnett
B. Murli Sr. Vice President Legal & Company
Secretary
16 Balance Sheet of Nestlé India for the year 2009:
17 Schedules to the Balance Sheet of Nestlé India for the year 2009:
18 Analysis of Nestle India:
• The Company is maintaining proper records showing full particulars including quantitative details and situation of fixed assets.
• The management has physically verified most of the fixed assets of the Company during the year at reasonable intervals, having regard to the size of the Company and nature of its assets.
• During the year ended December 31, 2009, impairment loss on fixed assets (gross ‐ ` 103,168,000, net of deferred taxes ‐ ` 68,101,00) relates to various items of plant and machinery that have been brought down to their recoverable values upon evaluation of future economic benefits from their use.
• Depreciation is provided as per the straight‐line method at rates provided in Schedule XIV to the Companies Act, 1956, except for the following classes of fixed assets, where the useful life has been estimated as under: ‐
• Information technology equipment : 3 years • Furniture and fixtures and Vehicles : 5 years • Leasehold land and improvements : Lease period • Management information systems (Intangible fixed asset): 5 years. • Regular review is done to determine whether there is any indication of impairment of the carrying
amount of the Company’s fixed assets. If any indication exists, an asset’s recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value based on an appropriate discount factor. Reversal of impairment losses recognized in prior years is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. However, the increase in carrying amount of an asset due to reversal of an impairment loss is recognized to the extent it does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years.
• Fixed assets are stated at cost (net of CENVAT, wherever applicable) less accumulated depreciation. Cost is inclusive of freight, duties, levies and any directly attributable cost of bringing the assets to their working condition for intended use. An intangible asset is measured at cost and amortized so as to reflect the pattern in which the asset’s economic benefits are consumed.
• Due to increasing competition the market and the presence of new entrants, the Company has forayed into diversified segments resulting in an overall increase in Fixed Assets from ` 8,621,611,000 in 2008 to ` 9,758,321,000 in 2009.
• A breakdown of the Fixed Assets shows an increase of 17% in Buildings, 16% in Plant and Machinery and 30% increase in Furniture and Fixture over previous year.
• The need to keep updated with the times has the Company investing in Information Technology Equipment from ` 68,678,000 in 2008 to ` 88,532,000 in 2009.
19
Case study of Britannia Industries Limited
Introduction: The story of one of India's favorite brands reads almost like a fairy tale. Once upon a time, in 1892
to be precise, a biscuit company was started in a nondescript house in Calcutta (now Kolkata) with an initial investment of ` 295. The beginnings might have been humble ‐ the dreams were anything but. By 1910, with the advent of electricity, Britannia mechanized its operations, and in 1921, it became the first company east of the Suez Canal to use imported gas ovens. Britannia's business was flourishing. But, more importantly, Britannia was acquiring a reputation for quality and value. As a result, during the tragic World War II, the Government reposed its trust in Britannia by contracting it to supply large quantities of "service biscuits" to the armed forces. As time moved on, the biscuit market continued to grow and Britannia grew along with it. In 1975, the Britannia Biscuit Company took over the distribution of biscuits from Parry's who till now distributed Britannia biscuits in India. In the subsequent public issue of 1978, Indian shareholding crossed 60%, firmly establishing the Indian identity of the firm. The following year, Britannia Biscuit Company was re‐christened Britannia Industries Limited (BIL). Four years later in 1983, it crossed the ` 100 crores revenue mark.
Britannia strode into the 21st Century as one of India's biggest brands and the pre‐eminent food brand of the country. In recognition of its vision and accelerating graph, Forbes Global rated Britannia 'One amongst the Top 200 Small Companies of the World', and The Economic Times pegged Britannia India's 2nd Most Trusted Brand. Board of Directors:
Name Designation Mr. Nusli Neville Wadia Chairman
Ms. Vinita Bali Managing Director Mr. A.K.Hirjee Director Dr. Ajai Puri Director Mr. Avijit Deb Director
Mr. Jeh N Wadia Director Mr. Keki Dadiseth Director Mr. Nasser Munjee Director Mr. Ness Nusli Wadia Director Mr. Nimesh N Kampani Director Mr. Pratap Khanna Director Mr. S.S.Kelkar Director
Dr. Vijay L. Kelkar Director
20 Balance Sheet of Britannia Industries Limited for the year 2009‐2010:
21 Schedules to the Balance Sheet of Britannia Industries Limited for the year 2009‐2010:
22 Analysis of the Balance Sheet and Schedules with reference to Accounting Standard 10:
With regard to the financial reporting for Fixed Assets, we observe that:
• The Company is maintaining proper records showing full particulars, including quantitative details and situation, of fixed assets.
• The fixed assets are physically verified by the Management according to a phased programme designed to cover all the items over a period of 3 years which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. Pursuant to the programme, a portion of the fixed assets has been physically verified by the Management during the year and no material discrepancies between the book records and the physical inventory have been noticed.
• Tangible assets are stated at their original cost less accumulated depreciation. Cost includes inward freight, duties, taxes and expenses incidental to acquisition and installation, net of CENVAT and VAT credit, where applicable. Intangible assets are stated at cost of acquisition less accumulated amortization.
• Depreciation in respect of all the assets acquired up to 30 June 1984 is provided on written down value method. For additions on or after 1 July 1984, straight line method has been used. Depreciation rates are estimated by the Company and are as specified in the amended Schedule XIV of the Companies Act, 1956, except relating to vehicles which are depreciated over a period of five years. Assets costing individually up to ` 5 are fully depreciated in the year of addition. Computer software is amortized over a period of six years. Leasehold land is amortized over the period of primary lease. The assets identified and retired based on technical evaluation and held for disposal are stated at lower of net book value and estimated net realizable value.
• The Company assesses at each Balance Sheet date whether there is any indication that an asset, including intangible, may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. If such recoverable amount of the asset or the recoverable amount of the cash generating unit to which the asset belongs is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognized in the Profit and Loss Account.
• Assets acquired under lease where the Company has substantially all the risks and rewards of ownership are classified as finance lease. Such leases are capitalized at the inception of lease at lower of the fair value and present value of minimum lease payments. Assets taken on finance lease are depreciated over its estimated useful life or the lease term whichever is lower. Assets acquired under lease where the significant portion of risks and rewards of ownership are retained by the lessor are classified as operating lease. Lease rentals are charged to Profit and Loss Account on accrual basis.
• For the year ended 31st March 2010, the Company witnessed all round growth in key categories especially in Biscuits where the business has doubled in two years. The Company introduced several new and renovated offerings in Tiger, Good Day, Treat and Marie Gold. To tap the more indulgent consumers, the Company launched Good Day Classic Cookies while continuing to roll out individual consumption packs at the highly affordable ` 5 price point. This is indicated by the increase in fixed assets from ` 2,778,393,000 to ` 2,815,008,000 as the Company has increased its production capacity to accommodate the development of new products and to cope with the rapidly growing biscuit industry.
• Fierce competition from companies like ITC and Parle as well new entrants to the market such as Pepsi, UB group, Unibic, etc. have forced the Company to enter new segments. This is visible in the increase in Plant and Machinery from ` 4,056,707,000 to ` 4,366,522,000 from 2009 to 2010.
• With the increase in capacity, the Company has also taken into account the need for Data Management and hence Data Processing Equipment has seen a 9% increase over last year.
• Concentrating on creating a solid infrastructure, the Company has increased its value of Motor Vehicles and Furniture and Fittings to ` 1,388,000 and ` 44,546,000 respectively.
23 • There has been a significant increase in the intangible assets, due to addition of new Computer
Softwares worth ` 9,000,000. • In conclusion, the Company is definitely gearing up to execute expansion plans in 2011 as well as face
competition from new entrants to the market.
24 Bibliography
1. Website of Indian Institute of Chartered Accountants of India
2. Website of Times of India
3. Website of Nestle India
4. Website of Britannia Industries Limited
5. Website of Bombay Stock Exchange
6. News articles from various sources
