Question paper for CA Exams for Subject Accounting.
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PAPER - 1 : ACCOUNTING QUESTIONS 1. On 31st March, 2006 Kanpur Branch submits the following Trial Balance to its Head Office at Lucknow : Debit Balances Rs. in lacs Furniture and Equipment 18 Depreciation on furniture 2 Salaries 25 Rent 10 Advertising 6 Telephone, Postage and Stationery 3 Sundry Office Expenses 1 Stock on 1st April, 2005 60 Goods Received from Head Office 288 Debtors 20 Cash at bank and in hand 8 Carriage Inwards 7 448 Credit Balances Outstanding Expenses 3 Goods Returned to Head Office 5 Sales 360 Head Office 80 448 Additional Information : Stock on 31st March, 2006 was valued at Rs. 62 lacs. On 29th March, 2006 the Head Office despatched goods costing Rs. 10 lacs to its branch. Branch did not receive these goods before 1st April, 2006. Hence, the figure of goods received from Head Office does not include these goods. Also the head office has charged the branch Rs. 1 lac for centralised services for which the branch has not passed the entry. You are required to : (i) Pass Journal Entries in the books of the Branch to make the necessary adjustments (ii) Prepare Final Accounts of the Branch including Balance Sheet, and (iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the Branch Trial Balance. 2. FGH Ltd. has three departments I.J.K. The following information is provided for the year ended 31.3.2006: I J K Rs. Rs. Rs. Opening stock 5,000 8,000 19,000 Opening reserve for unrealised profit ― 2,000 3,000 Materials consumed 16,000 20,000 ― Direct labour 9,000 10,000 ― Closing stock 5,000 20,000 5,000 Sales ― ― 80,000 Area occupied (sq. mtr.) 2,500 1,500 1,000 No. of employees 30 20 10
Transcript
PAPER - 1 : ACCOUNTINGQUESTIONS
1. On 31st March, 2006 Kanpur Branch submits the following Trial Balance to its Head Office atLucknow :Debit Balances Rs. in lacsFurniture and Equipment 18Depreciation on furniture 2Salaries 25Rent 10Advertising 6Telephone, Postage and Stationery 3Sundry Office Expenses 1Stock on 1st April, 2005 60Goods Received from Head Office 288Debtors 20Cash at bank and in hand 8Carriage Inwards 7
448Credit BalancesOutstanding Expenses 3Goods Returned to Head Office 5Sales 360Head Office 80
448Additional Information :Stock on 31st March, 2006 was valued at Rs. 62 lacs. On 29th March, 2006 the Head Officedespatched goods costing Rs. 10 lacs to its branch. Branch did not receive these goods before1st April, 2006. Hence, the figure of goods received from Head Office does not include thesegoods. Also the head office has charged the branch Rs. 1 lac for centralised services for whichthe branch has not passed the entry.You are required to :(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments(ii) Prepare Final Accounts of the Branch including Balance Sheet, and(iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the Branch
Trial Balance.2. FGH Ltd. has three departments I.J.K. The following information is provided for the year ended
Stocks of each department are valued at costs to the department concerned. Stocks of I aretransferred to J at cost plus 20% and stocks of J are transferred to K at a gross profit of 20% onsales. Other common expenses are salaries and staff welfare Rs. 18,000, rent Rs. 6,000.Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2006.
3. ABC Ltd. sells goods on Hire-purchase by adding 50% above cost. From the following particulars,prepare Hire-purchase Trading account to reveal the profit for the year ended 31.3.2005:
Rs.1.4.2004 Instalments due but not collected 10,0001.4.2004 Stock at shop (at cost) 36,0001.4.2004 Instalment not yet due 18,00031.3.2005 Stock at shop 40,00031.3.2005 Instalments due but not collected 18,000Other details:Total instalments became due 1,32,000Goods purchased 1,20,000Cash received from customers 1,21,000
Goods on which due instalments could not be collected were repossessed and valued at 30%below original cost. The vendor spent Rs. 500 on getting goods overhauled and then sold for Rs.2,800.
4. On 1st December, 2005, Vishwakarma Construction Co. Ltd. undertook a contract to construct abuilding for Rs. 85 lakhs. On 31st March, 2006 the company found that it had already spent Rs.64,99,000 on the construction. Prudent estimate of additional cost for completion was Rs.32,01,000. What amount should be charged to revenue in the final accounts for the year ended31st March, 2006 as per provisions of Accounting Standard 7 (Revised)?
5. On 1.4.2005, Mr. Ramesh purchased 1,000 equity shares of Rs. 100 each in TELCO Ltd. @ Rs.120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs. 100 as cost ofshares transfer stamps. On 31.1.2006 Bonus was declared in the ratio of 1 : 2. Before and afterthe record date of bonus shares, the shares were quoted at Rs. 175 per share and Rs. 90 pershare respectively. On 31.3.2006 Mr. Ramesh sold bonus shares to a Broker, who charged 2%brokerage.
Show the Investment Account in the books of Mr. Ramesh, who held the shares as current assetsand closing value of investments shall be made at Cost or Market value whichever is lower.
6. Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. Thefirm Y & Co. consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.On 31st March, 2006 it was decided to amalgamate both the firms and form a new firm XY & Co.,wherein A, B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.
Balance Sheets as at 31.3.2006Liabilities X & Co., Y & Co. Assets X & Co. Y & Co.
Rs. Rs. Rs. Rs.Capital: Cash in hand/bank 40,000 30,000
The following were the terms of amalgamation:(i) Goodwill of X & Co., was valued at Rs.75,000. Goodwill of Y & Co. was valued at
Rs.40,000. Goodwill account not to be opened in the books of the new firm but adjustedthrough the Capital accounts of the partners.
(ii) Building, Machinery and Vehicles are to be taken over at Rs.2,00,000, Rs.1,00,000 andRs.74,000 respectively.
(iii) Provision for doubtful debts at Rs.5,000 in respect of X & Co. and Rs.4,000 in respect of Y &Co. are to be provided.
You are required to:(i) Show, how the Goodwill value is adjusted amongst the partners.(ii) Prepare the Balance Sheet of XY & Co. as at 31.3.2006 by keeping partners capital in their
profit sharing ratio by taking capital of ‘B’ as the basis. The excess or deficiency to be keptin the respective Partners’ Current account.
7. Ram commenced business on 1.7.2000 with a capital of Rs. 2,00,000. On 31st March, 2006 anadjudication order for insolvency was made against him. Following are the other details availablerelating to his business as on 31.3.2006:
Rs.Sundry Creditors 1,50,000Mortgage Loan (of building) 1,00,000Godown Rent (2 months) 5,000Wages due 8,000Mrs. Ram loan (given out of her own source) 25,000Cost of Building (estimated to realise Rs. 1,00,000) 1,60,000Debtors (includes bad of Rs. 10,000) 90,000Stock in trade (Realisation value 10,000) 15,000Cash in Hand/Bank 10,000
He maintained books upto 31.3.2003 and profit up to 31.3.2003 was Rs. 1,40,000. He did notmaintain books from 1.4.2003 onwards. He has been drawing Rs. 4,000 per month and goodsworth Rs. 1,500 per month uniformly from April, 2003 onwards.Prepare statement of affairs and deficiency account.
8. Apha Limited recently made a public issue in respect of which the following information isavailable:(a) No. of partly convertible debentures issued 2,00,000; face value and issue price Rs.100 per
debenture.(b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the
date of closing of issue.(c) Date of closure of subscription lists 1.5.2005, date of allotment 1.6.2005, rate of interest on
debenture 15% payable from the date of allotment, value of equity share for the purpose ofconversion Rs. 60 (Face Value Rs. 10).
(d) Underwriting Commission 2%(e) No. of debentures applied for 1,50,000.(f) Interest payable on debentures half-yearly on 30th September and 31st March.Write relevant journal entries for all transactions arising out of the above during the year ended 31stMarch, 2006 (including cash and bank entries).
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9. Following is the Balance Sheet as at March 31, 2005:(Rs. ‘000)
Liabilities Max Ltd. Mini Ltd. Assets Max Ltd. Mini Ltd.Share capital: Goodwill 20
Equity shares of Rs. 100each 1,500
1,000 Other fixed assets 1,500 760
9% Preference shares ofRs. 100 each 500 400
DebtorsStock
651393
440680
General reserve 180 170 Cash at bank 26 130Profit and loss account12% Debentures of Rs. 100each
600
15
200
Own debenture(Nominal value Rs.2,00,000)
192
Sundry creditors 415 225 Discount on issue ofdebentures 2
_____ _____ Profit and loss account 411 _____3,195 2,010 3,195 2,010
On 1.4.2005, Max Ltd. adopted the following scheme of reconstruction:(i) Each equity share shall be sub-divided into 10 equity shares of Rs. 10 each fully paid up.
50% of the equity share capital would be surrendered to the Company.(ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive
90% of the dividend claim and accept payment for the balance.(iii) Own debentures of Rs. 80,000 were sold at Rs. 98 cum-interest and remaining own
debentures were cancelled.(iv) Debentureholders of Rs. 2,80,000 agreed to accept one machinery of book value of Rs.
3,00,000 in full settlement.(v) Creditors, debtors and stocks were valued at Rs. 3,50,000, Rs. 5,90,000 and Rs. 3,60,000
respectively. The goodwill, discount on issue of debentures and Profit and Loss (Dr.) are tobe written off.
(vi) The Company paid Rs. 15,000 as penalty to avoid capital commitments of Rs. 3,00,000.On 2.4.2005 a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd. Thepurchase consideration was fixed as below:(a) Equity shareholders of Mini Ltd. will be given 50 equity shares of Rs. 10 each fully paid up,
in exchange for every 5 shares held in Mini Ltd.(b) Issue of 9% preference shares of Rs. 100 each in the ratio of 4 preference shares of Max
Ltd. for every 5 preference shares held in Mini Ltd.(c) Issue of one 12% debenture of Rs. 100 each of Max Ltd. for every 12% debentures in Mini
Ltd.You are required to give Journal entries in the books of Max Ltd. and draw the resultantBalance Sheet as at 2nd April, 2005.
10. Omega Ltd. had equity capital of Rs. 2,00,000 divided into shares of Rs.100 each, 11%cumulative redeemable preference share of Rs.100 each for Rs. 1,00,000 and Rs. 50,000 and Rs.40,000 respectively to the credit of Profit and Loss Account and General Reserves as on 31stMarch, 2006. It had also Rs. 8,000 to the credit of Share Premium Account.As per the agreement with the preference shareholders, the Directors decided to redeem theshares on 1.4.2006 at premium of 10%. It was also decided to sell certain investments whosebook and market values on 31.3.2006 were Rs. 40,000 and Rs. 50,000 respectively to enableredemption.
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For purposes of redemption, the Board decided to utilise free reserve to the minimum extentpossible. It was decided to issue right equity shares at a premium of 20% to finance theredemption.After redemption, the Board decided to issue bonus shares to equity holders in the ratio of 2 for 5Holders of 100 preference shares were not traceable.Show the necessary journal entries to record the above transactions in the books of Omega Ltd.,and also how the items will appear on the Balance Sheet of the Company.
11. A company made a public issue of 1,25,000 equity shares of Rs. 100 each. Rs. 50 is payable onapplication. The entire issue was underwritten by four parties – A, B, C and D in the proportion of30%, 25%, 25% and 20% respectively. Under the terms agreed upon, a commission of 2% waspayable on the amounts underwritten.A, B, C and D had also agreed on “firm” underwriting of 4,000, 6,000, Nil and 15,000 sharesrespectively.The total subscriptions, excluding firm underwriting, including marked applications were for 90,000 shares. Marked applications received were as under :
A : 24,000 B : 12,000 C : 20,000 D : 24,000Ascertain the liability of the individual underwriters. All workings should form part of your answer.
12. X and Y had been carrying on business independently. They agreed to amalgamate and form anew company Z Ltd. with an authorised share capital of Rs. 2,00,000 divided into 40,000 equityshares of Rs. 5 each.On 31st December, 2005, the respective Balance Sheets of X and Y were as follows :
4,81,000 2,66,375Less: Current Liabilities 2,98,500 90,125Representing Capital 1,82,500 1,76,250Additional Information :(a) Revalued figures of Fixed and Current Assets were as follows :
(b) The debtors and creditors—include Rs. 21,675 owed by X to Y.The purchase consideration is satisfied by issue of the following shares and debentures :(i) 30,000 equity shares of Z Ltd., to X and Y in the porportion to the profitability of their
respective business based on the average net profit during the last three years whichwere as follows :
(ii) 15% debentures in Z Ltd., at par to provide an income equivalent to 8% return oncapital employed in their respective business as on 31st December, 2005 afterrevaluation of assets.
You are requested to :(1) Compute the amount of debentures and shares to be issued to X and Y.(2) A Balance Sheet of Z Ltd., showing the position immediately after amalgamation.
13. The position of Unfortunate Ltd. on its liquidation is as under:Issued and paid up Capital:3,000 11% preference shares of Rs. 100 each fully paid.3,000 Equity shares of Rs. 100 each fully paid.1,000 Equity shares of Rs. 50 each Rs. 30 per share paid.Calls in Arrears are Rs. 10,000 and Calls received in Advance Rs. 5,000. Preference Dividendsare in arrears for one year. Amount left with the liquidator after discharging all liabilities is Rs.4,13,000. Articles of Association of the company provide for payment of preference dividendarrears in priority to return of equity capital. You are required to prepare the Liquidators finalstatement of account.
14. (a)
Outstanding Balance Rs.4 lakhs ECGC Cover 50% Period for which the advance has remained doubtful
More than 3 years remained doubtful (as onMarch 31, 2004)
Value of security held (excludes worth of Rs.) Rs.1.50 lakhsCalculate the amount of required provision.
(b) The following is an extract from Trial Balance of overseas Bank Ltd. as at 31st March, 2006Rs. Rs.
Bills discounted 12,64,000Rebate on bills discounted not dueon March 31st, 2005 22,160Discount received 1,05,708An analysis of the bills discounted is as follows:
Amount Due Date 2006 Rate of DiscountRs. (%)
(i) 1,40,000 June 5 14(ii) 4,36,000 June 12 14(iii) 2,82,000 June 25 14(iv) 4,06,000 July 6 16Calculate Rebate on Bills Discounted as on 31-3-2006.
15. From the following balances extracted from the books of Perfect General Insurance CompanyLimited as on 31.3.2006, you are required to prepare Revenue Accounts in respect of Fire andmarine Insurance business for the year ended 31.3.2006 to and a Profit and Loss Account for thesame period :
Rs. Rs.Directors’ Fees 80,000 Interest received 19,000Dividend received 1,00,000 Fixed Assets (1.4.2005) 90,000Provision for Taxation Income-tax paid during(as on 1.4. 2005) 85,000 the year 60,000
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Fire MarineOutstanding Claims on 1.4.2005 28,000 7,000Claims paid 1,00,000 80,000Reserve for Unexpired Risk on 1.4.2005 2,00,000 1,40,000Premiums Received 4,50,000 3,30,000Agent’s Commission 40,000 20,000Expenses of Management 60,000 45,000Re-insurance Premium (Dr.) 25,000 15,000The following additional points are also to be taken into account :(a) Depreciation on Fixed Assets to be provided at 10% p.a.(b) Interest accrued on investments Rs. 10,000.(c) Closing provision for taxation on 31.3.2006 to be maintained at Rs. 1,24,138(d) Claims outstanding on 31.3.2006 were Fire Insurance Rs. 10,000; Marine Insurance
Rs. 15,000.(e) Premium outstanding on 31.3.2006 were Fire Insurance Rs. 30,000; Marine Insurance Rs.
20,000.(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of
Fire and Marine Insurance respectively.(g) Expenses of management due on 31.3.2006 were Rs. 10,000 for Fire Insurance and Rs.
5,000 in respect of marine Insurance.16. The following balances relate to NTPC Ltd. and pertains to the accounts for the year ended on
31st December, 2006:(Rs.in lakhs)
Share Capital 200Fixed Assets 400Monthly Average of Current Assets 40Reserve Fund (invested in 6% Govt. Securities Face Value Rs. 120 lakhs) 120Contingencies Reserve (invested in 6% State Govt. Loans) 40Loan from Electricity Board 60Developments Reserve 2010% Debentures 16Depreciation Reserve on Fixed Assets 160Security Deposits of Customers 150Customers’ Contribution to main lines 4Preliminary Expenses 10Tariffs and Dividend Control Reserve 12The company earned a post tax profit of Rs. 20.4 lakhs. Indicate the disposal of profit, bearing in mindthe provisions of the Electricity (Supply) Act, 1948, assuming the Reserve Bank of India rate on therelevant date was 8%.
17. From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the yearended 31st March, 2007 in accordance with AS 3 (Revised) using the direct method. Thecompany does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.2007Rs. ’000 Rs. ’000
Balance on 1.4.2006 50 Payment to Suppliers 2,000Issue of Equity Shares 300 Purchase of Fixed Assets 200
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Receipts from Customers 2,800 Overhead expense 200Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250Dividend 50Repayment of Bank Loan 300
_____ Balance on 31.3.2007 1503,250 3,250
18. (a) Explain, why Accounting in Agricultural operation is not popular. Mention a few pealiarfeatures of Farm Accounting.
(b) Whether government accounting is totally different from commercial accounting ? State youropinion with reasons.
19. Write short notes on:(a) Basis of common expenditure among departments.(b) Preferential creditors.(c) Co-insurance.(d) Fluctuating capital method in partnership accounts.(e) Accounting in case of over subscription of shares.(f) Dividend on partly paid up shares.(g) Reserve for unexpired risks in an insurance company.
20. Theory questions based on Accounting Standards(a) What are the main considerations in selection and application of accounting policies?(b) What are the components of costs of inventories? Explain in brief.(c) Define the following terms for the purpose of AS 5:
(d) What are the two approaches for accounting of government grants? Explain in brief.(e) Explain the disclosure requirements as regards the investor ,where the associate has
contingent liabilities.(f) Describe “ theoretical ex-right value per share” in context of AS 20.(g) Explain the difference between direct and indirect methods of reporting cash flows from
operating activities with reference to Accounting Standard 3( AS 3) revised.(h) Briefly indicate the items, which are included in the expression “borrowing cost” as explained
in AS 16.21. Practical questions based on Accounting Standards
(a) A Ltd. had acquired 80% share in the B Ltd. for Rs. 15 lacs. The net assets of B Ltd. on theday are Rs. 22 lacs. During the year A Ltd. sold the investment for Rs. 30 lacs and netassets of B Ltd. on the date of disposal was Rs. 35 lacs. Calculate the profit or loss ondisposal of this investment to be recognised in consolidated financial statement.
(b) XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2002. No provision fordeferred tax liability was made in accounts for the year ended 31.3.2002. While finalisingthe accounts for the year ended 31.3.2003, the Accountant says that the entire deferred taxliability upto 31.3.2002 and current year deferred tax liability should be routed through Profitand Loss Account as the relevant Accounting Standard has already become mandatory from1.4.2001. Do you agree?
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(c) The accounting year of X Ltd. ends on 30 th September, 2006 and it makes its reportsquarterly. However for the purpose of tax, year ends on 31st March every year. For theAccounting year beginning on 1-10-2005 and ends on 30-9-2006, the quarterly income is asunder:-
1st quarter ending on 31-12-2005 Rs. 200 crores2nd quarter ending on 31-3-2006 Rs. 200 crores3rd quarter ending on 30-6-2006 Rs. 200 crores4th quarter ending on 30-9-2006 Rs. 200 crores
Total Rs. 800 crores
Average actual tax rate for the financial year ending on 31-3-2006 is 20% and for financialyear ending 31-3-2007 is 30%. Calculate tax expense for each quarter.
(d) X Ltd. is having a plant (asset) carrying amount of which is Rs. 100 lakhs on 31.3.2004. Itsbalance useful life is 5 years and residual value at the end of 5 years is Rs. 5 lakhs.Estimated future cash flow from using the plant in next 5 years are:-
For the year ended on Estimated cash flow (Rs. in lakhs)31.3.2005 5031.3.2006 3031.3.2007 3031.3.2008 2031.3.2009 20
Calculate “value in use” for plant if the discount rate is 10% and also calculate therecoverable amount if net selling price of plant on 31.3.2004 is Rs. 60 lakhs.
(e) Top & Top Limited has set up its business in a designated backward area which entitles thecompany to receive from the Government of India a subsidy of 20% of the cost ofinvestment. Having fulfilled all the conditions under the scheme, the company on itsinvestment of Rs. 50 crore in capital assets, received Rs. 10 crore from the Government inJanuary, 2005 (accounting period being 2004-2005). The company wants to treat thisreceipt as an item of revenue and thereby reduce the losses on profit and loss account forthe year ended 31st March, 2005.Keeping in view the relevant Accounting Standard, discuss whether this action is justified ornot.
(f) The notes to accounts of X Ltd. for the year 2005-2006 include the following:“Interest on bridge loan from banks and Financial Institutions and on Debentures specificallyobtained for the Company’s Fertiliser Project amounting to Rs. 1,80,80,000 has beencapitalized during the year, which includes approximately Rs. 1,70,33,465 capitalised inrespect of the utilization of loan and debenture money for the said purpose.” Is thetreatment correct? Briefly comment.
(g) Mr. Raj a relative of key Management personnel received remuneration of Rs. 2,50,000 forhis services in the company for the period from 1.4.2004 to 30.6.2004. On 1.7.2004 he leftthe service.Should the relative be identified as at the closing date i.e. on 31.3.2005 for the purposes ofAS 18?
(h) Global Ltd. has initiated a lease for three years in respect of an equipment costingRs.1,50,000 with expected useful life of 4 years. The asset would revert to Global Limitedunder the lease agreement. The other information available in respect of lease agreementis:(i) The unguaranteed residual value of the equipment after the expiry of the lease term is
estimated at Rs.20,000.
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(ii) The implicit rate of interest is 10%.(iii) The annual payments have been determined in such a way that the present value of the
lease payment plus the residual value is equal to the cost of asset.Ascertain in the hands of Global Ltd.(i) The annual lease payment.(ii) The unearned finance income.(iii) The segregation of finance income, and also,(iv) Show how necessary items will appear in its profit and loss account and balance sheet
for the various years.(i) Net profit for the year 2005 Rs. 11,00,000
Net profit for the year 2006 Rs. 15,00,000No. of shares outstanding prior to rights issue 5,00,000 sharesRights issue price Rs. 15.00Last date to exercise rights 1st March 2006Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares)Fair value of one equity share immediately prior to exercise of rights on 1st March 2006 wasRs. 21.00. Compute Basic Earnings Per Share.
(j) A firm of contractors obtained a contract for construction of bridges across river Revathi.The following details are available in the records kept for the year ended 31st March, 2007.
(Rs. in lakhs)Total Contract Price 1,000Work Certified 500Work not Certified 105Estimated further Cost to Completion 495Progress Payment Received 400To be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping in viewthe requirements of AS 7 (Revised) issued by your institute.
(k) The Board of Directors decided on 31.3.2006 to increase the sale price of certain itemsretrospectively from 1st January, 2006. In view of this price revision with effect from 1stJanuary 2006, the company has to receive Rs. 15 lakhs from its customers in respect ofsales made from 1st January, 2006to 31st March, 2006 and the Accountant cannot make uphis mind whether to include Rs. 15 lakhs in the sales for 2005-2006.
(l) ABC Ltd. is constructing a fixed asset. Following are the expenses incurred on theconstruction:Materials Rs. 10,00,000Direct Expenses Rs. 2,50,000Total Direct Labour Rs. 5,00,000(1/10th of the total labour time was chargeable to the construction)Total office & administrative expenses Rs. 8,00,000(5% is chargeable to the construction)Depreciation on the assets used for the construction of this assets Rs. 10,000Calculate the cost of fixed assets.
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(m) The closing inventory at cost of a company amounted to Rs. 2,84,700. The following itemswere included at cost in the total:(a) 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a
defect in manufacture, they were all sold after the balance sheet date at 50% of theirnormal price. Selling expenses amounted to 5% of the proceeds.
(b) 800 skirts, which had cost Rs. 20 each. These too were found to be defective. Remedialwork in April cost Rs. 5 per skirt, and selling expenses for the batch totaled Rs. 800.They were sold for Rs. 28 each.
What should the inventory value be according to AS 2 after considering the above items?(n) From the following information, calculate cash flow from operating activities:
Summary of Cash Account for the year ended March 31, 2007Particulars Rs. Particulars Rs.
To Balance b/d 1,00,000 By Cash Purchases 1,20,000To Cash sales 1,40,000 By Creditors 1,57,000To Debtors 1,75,000 By Office & Selling Expenses 75,000To Trade Commission 50,000 By Income Tax 30,000To Sale of Investment 30,000 By Investment 25,000To Loan from Bank 1,00,000 By Repay of Loan 75,000To Interest & Dividend 1,000 By Interest on loan 10,000
By Balance c/d. 1,04,0005,96,000 5,96,000
SUGGESTED ANSWERS/HINTS
1 (i) Books of BranchJournal Entries
(Rs. in lacs)Dr. Cr.
Goods in Transit A/c Dr. 10To Head Office A/c 10
(Goods dispatched by head office but notreceived by branch before 1st April, 2006)Expenses A/c Dr. 1
To Head Office A/c 1(Amount charged by head office for centralised services)
(ii) Trading and Profit & Loss Account of the Branchfor the year ended 31st March, 2006
Rs. in lacs Rs. in lacsTo Opening Stock 60 By Sales 360To Goods received from By Closing Stock 62
Head Office 288Less : Returns 5 283
To Carriage Inwards 7To Gross Profit c/d 72
422 422
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To Salaries 25 By Gross Profit b/d 72To Depreciation on Furniture 2To Rent 10To Advertising 6To Telephone, Postage & Stationery 3To Sundry Office Expenses 1To Head Office Expenses 1To Net Profit Transferred to
Head Office A/c 2472 72
Balance Sheet as on 31st March, 2006Liabilities Rs. in lacs Assets Rs. in lacsHead Office 80 Furniture & Equipment 20Add : Goods in transit 10 Less : Depreciation 2 18
Head Office Stock in hand 62Expenses 1 Goods in Transit 10Net Profit 24 Debtors 20
115 Cash at bank and in hand 8Outstanding Expenses 3
118 118
(iii) Books of Head OfficeJournal Entries
Rs. Rs.Dr. Dr.
Branch Trading Account Dr. 355To Branch Account 355
(The total of the following items in branch trialbalance debited to branch trading account
Rs. in lacsOpening Stock 60Goods received from Head Ofice 288Carriage Inwards 7)Branch Account Dr. 427
To Branch Trading Account 427(Total sales, closing stock and goods returned toHead Office credited to branch trading account, individualamounts being as follows:
Rs. in lacsSales 360Closing Stock 62Goods returned to Head Office 5)Branch Trading Account Dr. 72
T0 Branch Profit and Loss Account 72(Gross profit earned by branch credited toBranch Profit and Loss Account)Branch Profit and Loss Account Dr. 48
To Branch Account 48(Total of the following branch expenses debitedto Branch Profit & Loss Account
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Rs. in lacsSalaries 25Rent 10Advertising 6Telephone, Postage & Stationery 3Sundry Office Expenses 1Head Office Expenses 1Depreciation on furniture &Equipment 2Branch Profit & Loss Account Dr. 24
To Profit and Loss Account 24(Net profit at branch credited to (general)
Profit & Loss A/c)Branch Furniture & Equipment Dr. 18Branch Stock Dr. 62Branch Debtors Dr. 20Branch Cash at Bank and in Hand Dr. 8Goods in Transit Dr. 10
To Branch 118(Incorporation of different assets at the branchin H.O. books)Branch Dr. 3
To Branch Outstanding Expenses 3(Incorporation of Branch Outstanding
Expenses in H.O. books)
2. FGH Ltd.Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2006I J K Total I J K TotalRs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Opening stock 5,000 8,000 19,000 32,000 By Sales 80,000 80,000To
To Balance b/d 1,400 By Cash account 2,800To Cash account
(expenses)500
To Profit on sale 900 _____2,800 2,800
5. Rs.
Original cost of goods repossessed
1501003,000.Rs 2,000
Instalments due but not received 3,000Valuation of repossessed goods (70% of Rs. 2,000) 1,400Loss on repossession 1,600
4. Rs.Cost incurred till 31st March, 2006 64,99,000Prudent estimate of additional cost for completion 32,01,000Total cost of construction 97,00,000Less: Contract price 85,00,000Total foreseeable loss 12,00,000According to para 35 of AS 7 (Revised 2002), the amount of Rs. 12,00,000 is required to berecognized as an expense.
Contract work in progress =97,00,000
10064,99,000Rs. = 67%
Proportion of total contract value recognized as turnover as per para 21 of AS 7 (Revised) onConstruction Contracts.
= 67% of Rs.85,00,000 = Rs.56,95,000.5. In the books of Mr. Krishna Investment Account
for the year ended 31st March, 2003(Scrip: Equity Shares of TELCO Ltd.)
Dr. Cr.Date Particulars Nominal
Value(Rs.)
Cost
(Rs.)
Date Particulars NominalValue(Rs.)
Cost
(Rs.)1.4.2002 To Bank A/c 1,00,000 1,23,000 31.3.2003 By Bank A/c 50,000 44,10031.1.2003 To Bonus shares 50,000 31.3.2003 By Balance c/d 1,00,000 82,00031.3.2003 To Profit & loss A/c 3,100
1,50,000 1,26,100 1,50,000 1,26,100Working Notes:(i) Cost of equity shares purchased on 1.4.2002 = 1,000 Rs. 120 + 2% of Rs. 1,20,000 + ½%
of Rs. 1,20,000 = Rs. 1,23,000(ii) Sale proceeds of equity shares sold on 31st March, 2003 = 500 Rs. 90 – 2% of Rs. 45,000
= Rs. 44,100.(iii) Profit on sale of bonus shares on 31st March, 2003
(iv) Valuation of equity shares on 31st March, 2003Cost = (Rs. 1,23,000 × 1,00,000)/1,50,000 = Rs. 82,000)Market Value = 1,000 shares × Rs. 90 = Rs. 90,000Closing balance has been valued at Rs. 82,000 being lower than the market value.
6. (i) Adjustment for raising and writing off of goodwill
Raised in old profit sharing ratio Total Written off in new ratio DifferenceX & Co. Y & Co.
3:2Rs.
5:3Rs. Rs. Rs. Rs.
A. 45,000 --- 45,000 Cr. 46,000 Dr. 1,000 Dr.B. 30,000 25,000 55,000 Cr. 57,500 Dr. 2,500 Dr.C --- 15,000 15,000 Cr. 11,500 Dr. 3,500 Cr.
75,000 40,000 1,15,000 1,15,000 Nil
(ii) Balance Sheet of X Y & Co.(New firm) as on 31.3.2006
1,95,000 2,17,500 57,500Adjustment for goodwill (1,000) (2,500) 3,500
1,94,000 2,15,000 61,000
Total capital Rs. 4,30,000 (B’s capital i.e.Rs.2,15,000 x 2) to be contributed in 4:5:1 ratio. 1,72,000 2,15,000 43,000Transfer to Current Account 22,000 --- 18,000
7. Statement of Affairs as on 31.3.2006Rs. Rs. Rs. Rs. Rs.
1,80,000 Unsecured creditors Asper list A 1,80,000
Property as per list ECash in hand 10,000 10,000
1,00,000 Creditors fully securedas per list B 1,00,000
Stock in handBooks debts as per list F
15,000 10,000
Estimated value of Good 80,000 80,000
NilSecurityCreditors partly securedas per list C
1,00,000 Nil
Nil
Bad 10,000 Nil1,00,000
8,000 Creditors for taxes,wages etc. beingpayable in full as per listD
8,000
Deduct creditors for wages as perlist D 8,000
92,000
_______ Deducted as per contra 8,000 Deficiency as explained in list H 88,0002,88,000 1,80,000 1,80,000
Deficiency Account (List H)
Rs. Rs.Excess of assets over liabilitieson 1.7.2000Net profit upto 31.3.2003
2,00,0001,40,000
Net loss arising from carrying on ofbusiness from 1.4.2003 to the date ofadjudication (W.N. 2) 1,55,000
Deficiency 88,000 Loss on realisation ofBuilding 60,000Stock in trade 5,000Debtors 10,000
_______Drawings for household expensessince 1.4.2003 1,98,000
4,28,000 4,28,000
B’s Capital Rs.21,500 being one-half of the total capital of the firm.
19
Working Notes:(1) The unsecured creditors in this case will be as follows:
Rs.
Sundry Creditors 1,50,000Godown Rent 5,000Mrs. Ram loan 25,000(Since loan was given out of her own sources) 1,80,000
(2) Since accounts were not prepared for the period of 1.4.2003 to 31.3.2006 it is necessary toascertain the profit or loss incurred in these three years. Hence, the following trial balancehas been prepared with the given book figures.
Trial BalanceDr. Cr.
Rs. Rs.Building 1,60,000 Capital introduced 2,00,000Book debt
GoodBad
80,00010,000 90,000
Add: Profit upto30.3.2003 1,40,000
3,40,000Stock in trade 15,000 Less: Drawings forCash in hand/bankLoss (balancing figure)
10,0001,55,000
(Rs. 5,500 × 36 months)Creditors
1,98,000 1,42,0001,50,000
Mortgage on building 1,00,000Godown rent 5,000Wages due 8,000
_______ Mrs. Ram’s loan 25,0004,30,000 4,30,000
8. In the books of ALPHA Ltd.Journal Entries
Date Particulars Dr. Cr.Amount Amount
Rs. Rs.1.5.05 Bank A/c Dr. 150,00,000
To Debenture Application A/c 150,00,000(Application money received on1,50,000 debentures @ Rs. 100 each)
1.6.05 Debenture Application A/c Dr. 150,00,000Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 200,00,000(Allotment of 1,50,000 debenturesto applicants and 50,000 debentures to underwriters)Underwriting Commission A/c Dr. 4,00,000
To Underwriters A/c 4,00,000(Commission payable to underwriters@ 2% on Rs. 200,00,000)
20
Bank A/c Dr. 46,00,000To Underwriters A/c 46,00,000
(Amount received from underwritersin settlement of account)
30.9.05 Debenture Interest A/c Dr. 10,00,000To Bank A/c 10,00,000
(Interest paid on debentures for4 months @ 15% on Rs. 200,00,000)
31.10.05 15% Debentures A/c Dr. 120,00,000To Equity Share Capital A/c 20,00,000To Share Premium A/c 100,00,000
(Conversion of 60% of debentures intoshares of Rs.60 each with a face value of Rs.10)
31.3.2006 Debenture Interest A/c Dr. 7,50,000To Bank 7,50,000
(Interest paid on debentures for the half year)Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2006On Rs. 80,00,000 for 6 months @ 15% = Rs. 6,00,000On Rs. 120,00,000 for 1 month @ 15% = Rs. 1,50,000
Rs. 7,50,000
9. In the Books of Max Ltd.Particulars Dr. Cr.
01.04.2005 Amount AmountRs. Rs.
Equity share capital A/c Dr. 15,00,000To Equity share capital A/c 15,00,000
(Being sub-division of one share of Rs. 100 eachinto 10 shares of Rs. 10 each)Equity share capital A/c Dr. 7,50,000
To Capital reduction A/c 7,50,000(Being reduction of capital by 50%)Capital reduction A/c Dr. 13,500
To Bank A/c 13,500(Being payment in cash of 10% of arrear ofpreference dividend)Bank A/c Dr. 78,400
To Own debentures A/c 76,800To Capital reduction A/c 1,600
(Being profit on sale of own debentures transferredto capital reduction A/c)
21
12% Debentures A/c Dr. 1,20,000To Own debentures A/c 1,15,200To Capital reduction A/c 4,800
(Being profit on cancellation of own debenturestransferred to capital reduction A/c)12% Debentures A/c Dr. 2,80,000Capital reduction A/c Dr. 20,000
To Machinery A/c 3,00,000(Being machinery taken up by debentureholders forRs. 2,80,000)Creditors A/c Dr. 65,000Capital reduction A/c Dr. 29,000
To Debtors A/c 61,000To Stock A/c 33,000
(Being assets and liabilities revalued)Capital reduction A/c Dr. 4,33,000
To Goodwill A/c 20,000To Discount on debentures A/c 2,000To Profit and Loss A/c 4,11,000
(Being the balance of capital reduction transferredto capital reserve account)Capital reduction A/c Dr. 15,000
To Bank A/c 15,000(Being penalty paid for avoidance of capitalcommitments)Capital reduction A/c Dr. 2,45,900
To Capital reserve A/c 2,45,900(Being penalty paid for avoidance of capitalcommitments)
02.04.2005 Business Purchase A/c Dr. 13,20,000To Liquidators of Mini Ltd. 13,20,000
(Being the purchase consideration payable to MiniLtd.)Fixed Assets A/c Dr. 7,60,000Stock A/c Dr. 6,80,000Debtors A/c Dr. 4,40,000Cash at Bank A/c Dr. 1,30,000
To Sundry Creditors A/c 2,25,000To 12% Debentures A/c of Mini Ltd. 2,00,000To Profit and Loss A/c 15,000
22
To General reserve A/c Rs. (1,70,000 + 80,000) 2,50,000To Business purchase A/c 13,20,000
(Being the take over of all assets and liabilities ofMini Ltd. by Max Ltd.)Liquidators of Mini Ltd. A/c Dr. 13,20,000
To Equity Share Capital 10,00,000To 9% Preference share capital 3,20,000
(Being the purchase consideration discharged)12% Debentures of Mini Ltd. A/c Dr. 2,00,000
To 12% Debentures A/c 2,00,000(Being Max Ltd. issued their 12% Debentures inagainst of every Debentures of Mini Ltd.)
Balance Sheet of Max Ltd. as at 2.4.2005Liabilities Rs. Assets Rs.Share Capital: Fixed Assets 19,60,000Equity Share Capital 17,50,000 Stock 10,40,0009% Preference share capital 8,20,000 Debtors 10,30,000Profit and Loss A/c 15,000 Cash in hand/Bank 2,05,900General Reserve 4,30,000Capital Reserve 2,45,90012% Debentures 4,00,000Sundry Creditors 5,75,000 ________
9% Preference share capital 100Rs.544,000 = 3,20,000
Rs. 13,20,0002. General Reserve
Rs.Share Capital of Mini Ltd. (Equity + Preference) 14,00,000Less: Share Capital issued by Max Ltd. 13,20,000General reserve (resulted due to absorption) 80,000Add: General reserve of Mini Ltd. 1,70,000 General reserve of Max Ltd. 1,80,000
4,30,000
Rs. 80,000 is the balancing figure adjusted to general reserve A/c as per AS 14 “Accounting forAmalgamation”.
23
10. In the Books of Omega Ltd.Debit
Rs.Credit
Rs.Bank A/c
To Investment A/cTo Profit and Loss A/c
(Being the entry for sale of investments for Rs. 50,000)
Dr. 50,00040,00010,000
Bank A/cTo Equity Share Capital A/cTo Securities Premium A/c
(Being the entry for issue of right share @ 20% premium)
Dr. 60,00050,00010,000
11% Redeemable Preference Share Capital A/cPremium on Redemption of Preference Shares A/c
To Preference Shareholders A/c(Being the entry for transfer of preference Sharecapital and premium on redemption to Shareholders A/c)
Dr.Dr.
1,00,00010,000
1,10,000
Preference Shareholders A/cTo Bank A/c
(Being the entry for payment made to preferenceShareholders)
Dr. 1,08,9001,08,900
General Reserve A/cProfit and Loss A/c
To Capital Redemption Reserve A/c(Being the entry for transfer of accumulated profits to CapitalRedemption reserve)
Dr.Dr.
40,00010,000
50,000
Capital Redemption Reserve A/cProfit & Loss A/c
To Equity Share Capital A/c(Being the entry for issuing 2 bonus shares for every 5 sharesheld)
Dr.Dr.
50,00050,000 1,00,000
Securities Premium A/cTo Premium on Redemption of Preference Share A/c
(Being the entry for transfer of premium on redemption ofpreference shares to Share Premium A/c)
Dr. 10,00010,000
Omega Ltd.Balance Sheet as at ...................(an extract)
(After the redemption of 11% preference Share)Liabilities Rs. Assets Rs.Share Capital :Issued and paid up Capital :Equity Shares3,500 sharesof Rs. 100 each fully paidReserves and SurplusSecurities premiumSecured LoansUnsecured LoansCurrent Liabilities andProvisions
3,50,000
8,000
1,100
Fixed AssetsInvestmentsCurrent assets, loansand AdvancesCash in handMiscellaneous expenses
1,100
24
11. (i) Computation of Unmarked ApplicationsNo. of Shares
Shares subscribed excluding firm underwriting but including marked applicationsLess : Marked Applications
(24,000 + 20,000 + 12,000 + 24,000)
90,000
80,000 Unmarked Applications 10,000
(ii) Statement showing Liability of Underwriters
Particulars A B C D TotalGross Liability(30 : 25 : 25 : 20) 37,500 31,250 31,250 25,000 1,25,000Less : Marked Applications 24,000 20,000 12,000 24,000 80,000
Less : Firm Underwriting 4,000 6,000 -- +15,000 25,000
Surplus of D allocated to A6,500 2,750 16,750 16,000 --
B and C 30 : 25 : 25 6,000 5,000 5,000 -- --500 +2,250 11,750 -- 10,000
Surplus of B allocated 500 -- 1,750 -- ---- -- 10,000 -- 10,000
(iii) Statement of Underwriters’ Liability
A B C D TotalFirm (No. of Shares) 4,000 6,000 -- 15,000 25,000Others (No. of Shares) -- -- 10,000 -- 10,000Total 4,000 6,000 10,000 15,000 35,000
(iv) Statement of Amounts due from UnderwritersA B C D Total
Shares to be subscribedAs per (iii) above 4,000 6,000
10,000 15,000 35,000
Amount due @ Rs. 50 per share (Rs.) 2,00,000 3,00,000 5,00,000 7,50,000 17,50,000Less : Commission due @ 2% on nominal value of share underwritten (Rs.) 75,000 62,500 62,500 50,000 2,50,000
1,25,000 2,37,500 4,37,500 7,00,000 15,00,000
12. (1) Computation of Amount of Debentures and Shares to be issued:X Y
Rs. Rs.(i) Average Net Profit
3962,88,1250,1–788,24,2 = 1,37,500
3500,79,1050,71,1950,36,1 = 1,62,500
25
(ii) Equity Shares Issued(a) Ratio of distribution
X : Y1,375 1,625
(b) NumberX : 13,750Y : 16,250
30,000(c) Amount
13,750 shares of Rs. 5 each = 68,75016,250 shares of Rs. 5 each = 81,250
(iii) Capital Employed (after revaluation of assets)Fixed Assets 3,55,000 1,95,000Current Assets 1,49,750 78,875
5,04,750 2,73,875Less: Current Liabilities 2,98,500 90,125
2,06,250 1,83,750(iv) Debentures Issued
8% Return on capital employed 16,500 14,70015% Debentures to be issued to provideequivalent income :X : 16,500 ×
15100 = 1,10,000
Y : 14,700 ×15100 = 98,000
(2) Balance Sheet of Z Ltd.As at 31st December, 2005
Liabilities Amount Assets AmountRs. Rs.
Share Capital: Fixed Assets 5,50,000Authorised Current Assets 2,06,950
40,000 Equity Shares of Rs. 5 each 2,00,000Issued and Subscribed
30,000 Equity Shares of Rs. 5 each 1,50,000(all the above shares are allottedas fully paid-up pursuant to acontract without payments beingreceived in cash)
Reserves and SurplusCapital Reserve 32,000
Secured Loans15% Debentures 2,08,000
Unsecured Loans –Current Liabilities and Provisisons
Cash 4,13,000 Return to contributors:Realisation from:Calls in arrears 10,000
Preference dividendPreference shareholders
33,0003,00,000
Final call of Rs. 5 per Calls in advance 5,000equity share of Rs. 50 each(Rs. 5 1,000) 5,000
Equity shareholders ofRs. 100 each (3,000 Rs. 30) 90,000
4,28,000 4,28,000
Working Note:Rs.
Cash account balance 4,13,000Less: Payment for dividend 33,000 Preference shareholders 3,00,000 Calls in advance 5,000 3,38,000
75,000Add: Calls in arrears 10,000
85,000Add: Amount to be received from equity shareholders of Rs. 50 each (1,000 20) 20,000Amount disposable 1,05,000Number of equivalent equity shares:3,000 shares of Rs. 100 each = 6,000 shares of Rs. 50 each1,000 shares of Rs. 50 each = 1,000 shares of Rs. 50 each
= 7,000 shares of Rs. 50 each
78, 875 - 21,675£ 2,98,500 - 21,675
27
Final payment to equity shareholders =sharesequityequivalentofnumberTotal
ondistributiforleftAmount
= Rs. 1,05,000 / 7,000 shares = Rs. 15 per share to equity shareholders of Rs. 50 each.
Therefore for equity shareholders of Rs. 100 each50
10051.Rs
= Rs. 30 per share to equity shareholders of Rs. 100 each.Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equityshareholders of Rs. 50 each have to pay Rs. 20 and receive Rs. 15 each. As a result, they arerequired to pay net Rs. 5 per share.
14. (a) Outstanding balance Rs.4.00 lakhs
Less: Value of security held Rs.1.50 lakhsUnrealised balance Rs.2.50 lakhsLess: ECGC Cover (50% of unrealizablebalance) Rs.1.25 lakhs.Net unsecured balance Rs.1.25 lakhs
Provision for unsecured portion of advance Rs.1.25 lakhs (@ 100% of unsecured portion)Provision for secured portion of advance (as onMarch 31, 2006) Rs.1.125 lakhs (@ 75% of the secured portion)Total provision to be made Rs.2.375 lakhs (as on March 31, 2006)
(b) In order to determine the amount to be credited to the Profit and Loss A/c it is necessary tofirst ascertain the amount attributable to the unexpired portion of the period of the respectivebills. The workings are as given below :(i) The bill is due on 5th June; hence the number of days after March 31st, is 66. The
discount on Rs. 1,40,000 for 66 days @ 14% per annum will be14/100 × 66/365 × Rs. 1,40,000 = Rs. 3,544.
(ii) Number of days in the unexpired portion of the bill is 73: discount on Rs. 4,36,000 for73 days @ 14% per annum will be Rs. 12,208.
(iii) Number of days in the unexpired portion of the period of the bill is 86: discount on Rs.2,82,000 for 86 days @ 14% per annum will be Rs. 9,302.
(iv) Number of days in the unexpired portion of the period of the bill is 97: discount on Rs.4,06,000 for 97 days @ 16 % p.a. will be Rs. 17,263.The amount of discount to be credited to the Profit and Loss Account will be:
Rs.Transfer from Rebate on billsdiscount as on 31-3-2005 22,160Add: Discount received during
the year ended 31-3-2006 1,05,7081,27,868
Less: Rebate on bills discountedas on 31.3.2006 (see above) 42,317
85,551
28
15.Form B – RA (Prescribed by IRDA)Perfect General Insurance Co. Ltd
Revenue Account for the year ended 31st March, 2006Fire and Marine Insurance Businesses
Schedule
FireCurrent Year
Marine Current Year
Rs. Rs.Premiums earned (net) 1 4,55,000 3,35,000Change in provision for unexpired risk (-)27,500 (-) 1,95,000Interest, Dividends and Rent – Gross — —Double Income Tax refund — —Profit on sale of motor car — —Total (A) 4,27,500 1,40,000
Claims incurred (net) 2 82,000 88,000Commission 3 40,000 20,000Operating expenses related to Insurancebusiness
4 70,000 50,000
Bad debts — —Indian and Foreign taxes — —Total (B) 1,92,000 1,58,000Profit from Marine Insurance business ( A-B) 2,35,500 (18000)
Schedules forming part of Revenue AccountSchedule –1
Premiums earned (net) FireCurrent
Year
MarineCurrent
YearRs. Rs.
Premiums from direct business written 4,80,000 3,50,000Less: Premium on reinsurance ceded 25,000 15,000Total Premium earned (net) 4,55,000 33,5000
Schedule – 2Claims incurred (net) 82,000 88,000Schedule – 4Operating expenses related to insurancebusinessExpenses of Management 70,000 50,000
29
Form B-PLPerfect General Insurance Co. Ltd.
Profit and Loss Account for the year 31st March, 2006Particulars Schedule Current
4,55,000 3,35,0004. Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net
premium for marine insurance.
30
5. Provision for taxation accountRs. Rs.
31.3.2006 To Bank A/c 1.4.2005 By Balance b/d 85,000(taxes paid) 60,000 31.3.2006 By P & L A/c 99,138
31.3.2006 To Balance c/d 1,24,1381,84,138 1,84,138
16. (a) Computation of Capital BaseRs. Rs.
Fixed Assets 4,00,00,000Less:Customers’ Contribution 4,00,000 3,96,00,000Add: Cost of Intangible Assets
(Preliminary Expenses) 10,00,000Investments against Contingencies Reserve 40,00,000Monthly average of Current Assets 40,00,000
(A) 4,86,00,000Less:Amount written off on account of Depreciation 1,60,00,000Loans advanced by Electricity Board 60,00,00010% Debentures 16,00,000Security Deposits by Customers 1,50,00,000Balance of Tariffs and Dividend Control Reserve 12,00,000Balance of Development Reserve 20,00,000
(B) 4,18,00,000Capital Base (A) (B) 68,00,000
(b) Computation of Reasonable ReturnRs.
Yield 10% (i.e. 8% + 2%) on Capital Base 6,80,000Income from Reserve Fund Investments 6% on Rs. 1,20,00,000 7,20,000(Investments other than of Contingencies reserve)1/2% of Loans from Electricity Board 30,0001/2% of Development Reserve 10,0001/2% of Debentures 8,000Reasonable Return 14,48,000
20% of Reasonable return = Rs. 14,48,000 20/100 = 2,89,600(1) Excess of 20% of Reasonable Return to be
Credited to Customers Benefit Account:Rs.5,92,000 Rs. 2,89,600 (Amount refundable to consumers) 3,02,400
(2) Balance of Rs. 2,89,600 has to be disposed of as follows:(a) 1/3 of the surplus not exceeding 5% of Reasonable
Return at the disposal of the company 5% of 14,48,000or 1/3 of 2,89,600, whichever is less 72,400
31
(b) 1/2 of the balance to be credited to Tariff andDividend Control Reserve 1,08,600
(c) The balance to be credited to Customers Rebate Account(in addition to Rs. 3,02,400 shown above) 1,08,600Total Surplus 5,92,000
Amount to be refunded to customers 4,11,000(Rs. 3,02,400 + Rs. 1,08,600)Amount to be transferred to Tariff andDividend Control Reserve 1,08,600Amount at disposal of the company(Rs. 14,48,000 + Rs. 72,400) 15,20,400
Net Profit 20,40,000
17. X Ltd.Cash Flow Statement for the year ended 31st March, 2007
(Using the direct method)
Rs. ’000 Rs. ’000Cash flows from operating activitiesCash receipts from customers 2,800Cash payment to suppliers (2,000)Cash paid to employees (100)Cash payments for overheads (200)Cash generated from operations 500Income tax paid (250)Net cash from operating activities 250
Cash flows from investing activitiesPayment for purchase of fixed assets (200)Proceeds from sale of fixed assets 100Net cash used in investing activities (100)
Cash flows from financing activitiesProceeds from issuance of equity shares 300Bank loan repaid (300)Dividend paid (50)Net cash used in financing activities (50)Net increase in cash 100Cash at beginning of the period 50Cash at end of the period 150
18. (a) The features of farm accounting are as follows:(i) Agricultural sector in India is unorganized and dominated by small farmers. Most
agricultural farms are family oriented and part of the farms produce is consumed by thefamily members. Level of the education of the average farmers appears to be theprincipal barrier for adaptation of agricultural accounting system. Farmers are notaware of the technique of using accounting data for the purpose of managementdecision and usefulness of data base management.
(ii) The family takes part in management and provides labour for the farm. Farmers cannot
32
afford the additional expenses involved in hiring a person to maintain accounts.(iii) Agriculture is in some cases a seasonal occupation and many farmers have other
occupations also. Farming operations are uncertain due to natural calamities.(iv) There are many divisions in farm accounting. Finished product of one division can
become the raw material for another.(v) Tax authorities do not rigorously insist on maintenance of books of account. Collection
of statistics by the government is also not adequate.(b) The primary objective of commercial accounting is to ascertain the gain or loss of an
enterprise for a given period and to find out the position of assets and liabilities at the end ofthe accounting period. Against this, government accounts are designed to enablegovernment to determine how much money it needs to mobilize in order to maintain itsnecessary activities at the proper standard of efficiency. It is thus clear that the purpose ofgovernment accounting is totally different from that of commercial accounting. The otherbroad differences between government accounting and commercial accounting can beenumerated as follows :1. Financial Statements : Every commercial enterprise prepares a profit and loss account
and a Balance Sheet. But in case of government accounting, following two statementsare generally prepared:(i) Government account — to show the net result of all incomes and expenditure
including expenditure on capital account ;(ii) Statement of balancing accounts — to show whether the government owes or has
to receive money.2. Method of accounting : Government accounts are maintained on cash basis as against
commercial accounting in which accounts are normally maintained on mercantile basis.3. System of accounting : In commercial accounting, double entry system of book keeping
is followed. On the other hand, mass of the government accounts are kept on singleentry. There is, however, a portion of accounts which is maintained on double entrybasis.
4. Classification of accounts : In commercial accounting, accounts are broadly classifiedinto (i) personal (ii) real, and (iii) nominal accounts. Government accounts are kept inthree parts : Part 1 – Consolidated fund ; Part II – Contingency fund ; and Part III –Public account.
5. Classification of financial transactions : One of the most distinctive features of thesystem of government accounts in India is the minute elaboration with which thefinancial transactions of government under both receipts and payments, aredifferentiated and classified. Government expenditure in India is classified into a fivetier system : Sectors, Major heads, Minor heads, Sub-heads and Detailed heads ofaccounts. In case of commercial accounting, no such elaborate details are provided.
19. (a) While preparing department accounts, expenses should be allocated among the differentdepartments on the basis of the following principles :1. Expenses incurred specially for each department are charged directly thereto e.g.,
insurance charges of stock held by a department.2. Common expenses, the benefit of which is shared by all the dpeartments and which are
capable of precise allocation, (e.g., rent, lighting expenses etc.) are distributed amongthe departments concerned on some equitable basis considered suitable in thecircumstances of the case. Rent is charged to different departments according to thefloor area occupied by each department, having regard to any favourable locationspecially allocated to a department. Lighting and heating expenses are distributed onthe basis of consumption of energy by each department and so on.
33
3. Common expenses which are not capable of accurate measurement are dealt with asfollows:(i) Selling expenses, e.g., discount, bad debts, selling commission, etc. are charged on
the basis of sales.(ii) Administrative and other expenses, e.g., salaries of managers, directors, common
advertisement expenses, depreciation on assets, etc., are allocated equally among allthe departments that have benefited thereby. Alternatively, no allocation may be madeand such expenses may be charged to the combined profit and loss account.
(b) Preferential Creditors: Section 530 specifies the creditors that have to be paid in priority tounsecured creditors or creditor having a floating charge. Such creditors are known asPreferential Creditors. These are the following:(a) All revenues, taxes, cesses and rates, becoming due and payable by the company
within 12 months next before the commencement of the winding up.(b) All wages or salaries (including wages payable for time or piece work and salary earned
wholly or in part by way of commission) of any employee due for the period notexceeding 4 months within the twelve months next before commencement of windingup provided the amount payable to one claimant will not exceed Rs. 20,000.
(c) All accrued holiday remuneration becoming payable to any employee on account ofwinding up.Note: Persons who advance money for the purpose of making preferential paymentsunder (b) and (c) above will be treated as preferential creditors, provided the money isactually so used.
(d) Unless the company is being wound up voluntarily for the purpose of reconstruction, allcontributions payable during the 12 months next under the Employees State InsuranceAct, 1948, or any other law for the time being in force.
(e) All sums due as compensation to employees under the Workmen’s Compensation Act,1923.
(f) All sums due to any employee from a provident fund, pension fund, gratuity fund or anyother fund, for the welfare of the employees maintained by the company.
(g) The expenses of any investigation held under section 235 or 237 in so far as they arepayable by the company.
(c) Co-Insurance: In cases of large risks the business is shared between more than one insurerunder co-insurance arrangements at agreed percentages. The leading insurer issues thedocuments, collects premium and settles claims. Statements of Account are rendered by theleading insurer to the other co-insurers. Accounting for premium, claims etc. under co-insurance is done in the same manner as that of the direct business except in respect of thefollowing peculiar features.Incoming co-insurance(i) Premium:The co-insurer books the premium based on the statement received from the
leading insurer usually by issuing dummy documents. Entries are made in thePremium Register from which the Premium Account is credited and the Leading InsurerCompany’s Account debited. In case the statement is not received, the premium isaccounted for on the basis of advices to ensure that all premium in respect of riskassumed in any year is booked in the same year; share of premium relatable to furtherextension/endorsements on policies by the leading insurer are also accounted for onthe basis of subsequent advices. Reference to the relevant communications should bemade from the concerned companies to ensure that premium collected by them andattributable to the company is recorded.
(ii) Claims Paid: Normally, on the basis of claims paid, advices received from the leading
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insurer, the Claims Paid Account is debited with a credit to the co-insurer. All suchadvices are entered into the Claims Paid Register. It is a practice to treat all claimspaid advices relating to the accounting year received upto 31st January of thesubsequent year from leading insurer as claims paid.
Outgoing co-insurance: The share of the insurer only for both premium and claims has to beaccounted under respective accounts. The share of other co-insurers is credited or debited,as the case may be, to their personal accounts and not routed through revenue accounts.
(d) Under fluctuating capital method, no current account is maintained. All such transactions andevents are passed through capital accounts. Naturally, capital account balance of thepartners fluctuates everytime. So in fixed capital method a fixed capital balance ismaintained over a period of time while in fluctuating capital method, capital accountbalances fluctuate all the time.
(e) In actual practice, issue of shares are either under-or-over subscribed. When an issue isunder-subscribed, entries are made on the basis of the shares applied for, provided theminimum subscription has been raised and the company can proceed to allotment. On theother hand, if an issue is over-subscribed, some applications may be rejected andapplication money refunded and in respect of others, only a part of the shares applied formay be allotted and the excess amount received can be utilized towards allotment or callmoney which has fallen or will soon fall due for payment. The entries are:(1) On refund of application money to applicants to whom shares have not been allotted:
Share Application A/c Dr.To Bank A/c
(2) When only a part of shares applied for are allowed:Share Application A/c Dr.
To Share Allotment A/cTo Share Calls-in-Advance Account
(With the amount received inadvance for allotment)
(f) In the case of partly paid-up shares, the dividend is payable either on the nominal, called-upor the paid-up amount of shares, depending on the provisions in this regard that there maybe in the articles of the company. In the absence of any such provisions, Table A would beapplicable. In such a case the amount of dividend payable will be calculated on the amountpaid-up on the shares, and while doing so, the dates on which the amounts were paid mustbe taken into account. Calls paid in advance do not rank for payment of dividend. Instead,interest may be paid on such calls, the rate of interest is 6% p.a. according to Table A;Articles of a company may prescribe different rate. A company may if so authorised by itsarticles, pay a dividend in proportion to the amount paid on each share, where a largeramount is paid on some shares than on others (Section 93 of the Companies Act, 1956).But where the articles are silent and Table A has been excluded, the amount of dividendpayable will have to be calculated on the nominal amount of shares. It should, however, benoted that according to Clause 88 of Table A dividends are to be declared and paidaccording to the amounts paid or credited as paid on the shares in respect whereof thedividend is paid, but if and so long as nothing is paid upon any of the shares of the company,dividends may be declared and paid according to the nominal amounts of the shares.
(g) In most cases policies are renewed annually except in some cases where policies are issuedfor a shorter period. Since insurers close their accounts on a particular date, not all risksunder policies expire on that date. Many policies extend into the following year during whichthe risk continues. Therefore on the closing date, there is unexpired liability under variouspolicies which may occur during the remaining term of the policy beyond the year andtherefore, a provision for unexpired risks is made at normally 50% in case of Fire Insuranceand 100% of in case of Marine Insurance. This Reserve is based on the net premiumincome earned by the insurance company during the year.
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20. (a) The main considerations in selection of accounting policies is the presentation of true andfair picture. The financial picture presented by Balance Sheet and the net result shown byProfit & Loss Account should be true and fair. To ensure the true and fair consideration thisstatement issues following guidelines:Prudence: As defined in the statement, prudence means recognising all losses immediatelybut ignoring anticipated profits. Business environment is highly dynamic, therefore,enterprises has to keep anticipate the future and take managerial decisions accordingly. Thisstatement suggests that accounting policies should be such that no profit is recognised onthe basis of anticipation but all anticipated losses are provided for.For Example: If valuation of stock is always done at cost, consider a situation where marketprice of the relevant goods has reduced below the cost price, then valuing stock at cost pricemeans ignoring anticipated losses. Similarly if stock is always valued at market price, thentake a situation where cost price is below market price, indirectly we are recognising theanticipated gross profit on stock in the books. Therefore, accounting policy should be costprice or market price whichever is less, in this case we are ignoring anticipated profits (ifany) but any anticipated losses would be taken care of.Substance over form: While recording a transaction one should look into the substance ofthe transaction and not only the legal form of it.For Example: The ownership of an asset purchased on hire purchase is not transferred tillthe payment of the last instalment is made but the asset is shown in the books of the hirepurchaser. Similarly, in the case of the amalgamation, the entry for amalgamation in thebooks of the amalgamated company is recorded on the basis of the status of theshareholders of amalgamating company after amalgamation i.e. if all or almost all theshareholders of the amalgamated company has become shareholder of the amalgamatingcompany by virtue of amalgamation, we record all the transactions as Amalgamation innature of Merger otherwise it is recorded as Amalgamation in nature of Purchase.Materiality: All the items which are material should be recorded. The materiality of an itemis decided on the basis that whether non-disclosure of the item will effect the decisionmaking of the user of accounts. If the answer is positive then the item is material and shouldbe disclosed, in case answer is negative, item is immaterial. By this statement does notmean that immaterial item should not be disclosed, disclosure or non-disclosure of animmaterial item is left at the discretion of the accountant but disclosure of material item isbeen made mandatory.For Example, Any penalty paid by the enterprise should be disclosed separately even though theamount paid is negligible, payment of any tax also should be disclosed separately and not to bemerged with office expenses or miscellaneous expense.
(b) Inventories should be valued at the lower of cost and net realisable value. Cost of goods isthe summation of:(a) Cost of Purchase.(b) Cost of Conversion.(c) Other cost necessary to bring the inventory in present location and condition.Finished goods should be valued at cost or market price whichever is lower, in other words,finished goods are valued at the lower of cost or net realisable value.Cost has three elements as discussed below:Cost of Purchase: Cost of purchase includes the purchase price plus all other necessaryexpenses directly attributable to purchase of stock like, taxes, duties, carriage inward,loading/unloading excluding expenses recoverable from the supplier. From the above sum,following items are deducted, duty drawback, CENVAT, VAT, trade discount, rebates.Cost of Conversion: For a trading company cost of purchase along with other cost
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(discussed below) constitutes cost of inventory, but for a manufacturer cost of inventory alsoincludes cost of conversion. Readers can recollect the calculation of factory cost calculatedin Cost Accounting:Direct Material + Direct Labour = Prime CostPrime Cost + Factory Variable Overhead + Factory Fixed Overhead = Factory Cost.Direct material is included in cost of purchase and the rest items i.e. direct labour andoverheads are termed as cost of conversion. Direct labour is cost of workers in the unit whoare directly associated with the production process, in other words we can say that directlabour is the cost of labour which can be directly attributed to the units of production.Overheads are indirect expenses. Variable overheads are indirect expenses which is directlyrelated to production i.e., it changes with the change in production in the same proportion.Fixed overheads generally remains constant, it varies only there is some major shift inproduction.Other Costs: Other costs are included in the cost of inventories only to the extent that theyare incurred in bringing the inventories to their present location and condition. For example,it may be appropriate to include overheads other than production overheads or the costs ofdesigning products for specific customers in the cost of inventories.In determining the cost of inventories, it is appropriate to exclude the following costs andrecognise them as expenses in the period in which they are incurred:(a) Abnormal amounts of wasted materials, labour, or other production costs.(b) Storage costs, unless those costs are necessary in the production process prior to a
further production stage.(c) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition and(d) Selling and distribution costs.
(c) (i) Ordinary activities: Any activities which are undertaken by an enterprise as part of itsbusiness and such related activities in which the enterprise engages in furtherance of,incidental to, or arising from, these activities. For example profit on sale ofmerchandise, loss on sale of unsold stock at the end of the season.
(ii) Extraordinary items: Income or expenses that arise from events or transactions that areclearly distinct from the ordinary activities of the enterprise and, therefore, are notexpected to recur frequently or regularly. For example, profit on sale of furniture orheavy loss of goods due to fire.
(d) Two broad approaches may be followed for the accounting treatment of government grants:the ‘capital approach’, under which a grant is treated as part of shareholders’ funds, and the‘income approach’, under which a grant is taken to income over one or more periods.Those in support of the ‘capital approach’ argue as follows:(i) Many government grants are in the nature of promoters’ contribution, i.e., they are given
by way of contribution towards its total capital outlay and no repayment is ordinarilyexpected in the case of such grants.
(ii) They are not earned but represent an incentive provided by government without relatedcosts.
Arguments in support of the ‘income approach’ are as follows:(i) The enterprise earns grants through compliance with their conditions and meeting the
envisaged obligations. They should therefore be taken to income and matched with theassociated costs which the grant is intended to compensate.
(ii) As income tax and other taxes are charges against income, it is logical to deal also withgovernment grants, which are an extension of fiscal policies, in the profit and loss
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statement.(iii) In case grants are credited to shareholders’ funds, no correlation is done between the
accounting treatment of the grant and the accounting treatment of the expenditure towhich the grant relates.It is generally considered appropriate that accounting for government grant should bebased on the nature of the relevant grant. Grants which have the characteristics similarto those of promoters’ contribution should be treated as part of shareholders’ funds.Income approach may be more appropriate in the case of other grants.
(e) Paragraph 21 of Accounting Standard 23 on Accounting for Investments in Associates saysthat where the associate has a contingent liability , the investor has to disclose the followingin the consolidated financial statements in accordance with AS 4:-- Its share of the contingencies and capital commitments of an associate for which it is
also contingently liable; and- those contingencies that arise because the investor is severally liable for the liabilities
of the associate.(f) As per paragraph 25 of Accounting Standard 20 on Earnings Per Share:
“The theoretical ex-rights fair value per share is calculated by adding the aggregate fairvalue of the shares immediately prior to the exercise of the rights to the proceeds from theexercise of the rights, and dividing by the number of shares outstanding after the exercise ofthe rights. Where the rights themselves are to be publicly traded separately from the sharesprior to the exercise date, fair value for the purposes of this calculation is established at theclose of the last day on which the shares are traded together with the rights.”
(g) As per para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should reportcash flows from operating activities using either:(a) the direct method whereby major classes of gross cash receipts and gross cash
payments are disclosed; or(b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions
of a non-cash nature, any deferrals or accruals of past or future operating cash receiptsor payments, and items of income or expense associated with investing or financingcash flows.
The direct method provides information which may be useful in estimating future cash flowsand which is not available under the indirect method and is, therefore, considered moreappropriate than the indirect method. Under the direct method, information about majorclasses of gross cash receipts and gross cash payments may be obtained either:(a) from the accounting records of the enterprise; or(b) by adjusting sales, cost of sales (interest and similar income and interest expense and
similar charges for a financial enterprise) and other items in the statement of profit andloss for:(i) changes during the period in inventories and operating receivables and payables:(ii) other non-cash items; and(iii) other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is determined byadjusting net profit or loss for the effects of:(a) changes during the period in inventories and operating receivables and payables;(b) non-cash items such as depreciation, provisions, deferred taxes, and unrealized foreign
exchange gains and losses; and(c) all other items for which the cash effects are investing or financing cash flows.
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Alternatively, the net cash flow from operating activities may be presented under the indirectmethod by showing the operating revenues and expenses, excluding non-cash itemsdisclosed in the statement of profit and loss and the changes during the period in inventoriesand operating receivables and payables.
(h) Borrowing costs are interest and other costs incurred by an enterprise in connection with theborrowing of funds.As per para 4 of AS 16 on Borrowing Costs, borrowing costs may include :(a) interest and commitment charges on bank borrowings and other short-term and long-
term borrowings;(b) amortisation of discounts or premiums relating to borrowings ;(c) amortisation of ancillary costs incurred in connection with the arrangement of
borrowings;(d) finance charges in respect of assets acquired under finance leases or under other
similar arrangements; and(e) exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.21. (a) Calculation of Profit/Loss on disposal of investment in subsidiary
Particulars Rs. Rs.Net Assets of B Ltd. on the date of disposal 3,500,000Less: Minority Interest (35 lacs x 20%) 700,000A Ltd.'s Share in Net Assets 2,800,000
Proceeds from the sale of Investment 3,000,000Less: A Ltd.'s share in net assets 2,800,000
200,000Less: Capital Reserve in the Consolidated Financial Statement A Ltd.'s Share in net asset on the date (22 lacs x 80%) 1,760,000 Less: Cost of investment 1,500,000 260,000Profit on sale of investment 460,000
(b) Paragraph 33 of AS 22 on “Accounting For Taxes on Income” relates to the transitionalprovisions. It says, “On the first occasion that the taxes on income are accounted for inaccordance with this statement, the enterprise should recognise, in the financial statements,the deferred tax balance that has accumulated prior to the adoption of this statement asdeferred tax asset/liability with a corresponding credit/charge to the revenue reserves,subject to the consideration of prudence in case of deferred tax assets.Further Paragraph 34 lays down, “For the purpose of determining accumulated deferred taxin the period in which this statement is applied for the first time, the opening balances ofassets and liabilities for accounting purposes and for tax purposes are compared and thedifferences, if any, are determined. The tax effects of these differences, if any, should berecognised as deferred tax assets or liabilities, if these differences are timing differences.”Therefore, in the case of XYZ, even though AS 22 has come into effect from 1.4.2001, thetransitional provisions permit adjustment of deferred tax liability/asset upto the previous yearto be adjusted from opening reserve. In other words, the deferred taxes not provided foralone can be adjusted against opening reserves.
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Provision for deferred tax asset/liability for the current year should be routed through profitand loss account like normal provision.
(c) Calculation of tax expense
1st quarter ending on 31-12-2005 20020% Rs. 40 lakhs2nd quarter ending on 31-3-2006 20020% Rs. 40 lakhs3rd quarter ending on 30-6-2006 20030% Rs. 60 lakhs4th quarter ending on 30-9-2006 20030% Rs. 60 lakhs
118.82Present value of residual price on 31.3.2009 = 5 0.620 3.10
121.92Present value of estimated cash flow by use of an asset andresidual value, which is called “value in use”.
If net selling price of plant on 31.3.2004 is Rs. 60 lakhs, the recoverable amount will behigher of Rs. 121.92 lakhs (value in use) and Rs.60 lakhs (net selling price), hencerecoverable amount is Rs.121.92 lakhs
(e) As per para 10 of AS 12 ‘Accounting for Government Grants’, where the government grantsare of the nature of promoters’ contribution, i.e. they are given with reference to the totalinvestment in an undertaking or by way of contribution towards its total capital outlay (forexample, central investment subsidy scheme) and no repayment is ordinarily expected inrespect thereof, the grants are treated as capital reserve which can be neither distributed asdividend nor considered as deferred income.In the given case, the subsidy received is neither in relation to specific fixed asset nor inrelation to revenue. Thus it is inappropriate to recognise government grants in the profit andloss statement, since they are not earned but represent an incentive provided bygovernment without related costs. The correct treatment is to credit the subsidy to capitalreserve. Therefore, the accounting treatment followed by the company is not proper.
(f) The treatment done by the company is not in accordance with AS 16 ‘Borrowing Costs’. Asper para 10 of AS 16, to the extent that funds are borrowed specifically for the purpose ofobtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on thatasset should be determined as the actual borrowing costs incurred on that borrowing duringthe period. Hence, the capitalisation of borrowing costs should be restricted to the actualamount of interest expenditure i.e. Rs. 1,70,33,465. Thus, there is an excess capitalisationof Rs. 10,46,535. This has resulted in overstatement of profits by Rs. 10,46,535 and amountof fixed assets has also gone up by this amount.
(g) According to para 10 of AS 18 on Related Party Disclosures, parties are considered to berelated if at any time during the reporting period one party has the ability to control the otherparty or exercise significant influence over the other party in making financial and/oroperating decisions. Hence, Mr. Raj, a relative of key management personnel should beidentified as relative as at the closing date i.e. on 31.3.2005.
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(h) (i) Calculation of Annual Lease Payment
Rs.Cost of the equipment 1,50,000Unguaranteed Residual Value 20,000PV of residual value for 3 years @ 10% (Rs.20,000 x 0.751) 15,020Fair value to be recovered from Lease Payment(Rs.1,50,000 – Rs.15,020) 1,34,980PV Factor for 3 years @ 10% 2.487Annual Lease Payment (Rs. 1,34,980 / PV Factor for 3 years @10% i.e. 2.487) 54,275
(ii) Unearned Financial IncomeTotal lease payments [Rs. 54,275 x 3] 1,62,825Add: Residual value 20,000Gross Investments 1,82,825Less: Present value of Investments (Rs.1,34,980 + Rs.15,020) 1,50,000Unearned Financial Income 32,825
(iii) Segregation of Finance IncomeYear Lease Rentals
Rs.
Finance Charges @ 10% on outstanding amount of the year
1,82,825 32,825 1,50,000(iv) Profit and Loss Account ( Relevant Extracts)
Credit side Rs.
I Year By Finance Income 15,000II year By Finance Income 11,073III year By Finance Income 6,752
Balance Sheet ( Relevant Extracts)Assets side Rs. Rs.
I year Lease Receivable 1,50,000Less: Amount Received 39,275 1,10,725II year Lease Receivable 1,10,725Less: Received 43,202 67,523III year :Lease Amount Receivable 67,523Less: Amount received 47,523
Residual value 20,000 NIL
Annual lease payments are considered to be made at the end of each accounting year. Rs. 74,275 includes unguaranteed residual value of equipment amounting Rs. 20,000.
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Notes to Balance SheetYear 1 Rs.
Minimum Lease Payments (54,275 + 54,275) 1,08,550Residual Value 20,000
1,28,550Unearned Finance Income(11,073+ 6,752) 17,825Lease Receivables 1,10,725Classification:Not later than 1 yearLater than 1 year but not more than 5 yearsTotal
43,20267,523
1,10,725Year II:
Minimum Lease Payments 54,275Residual Value (Estimated) 20,000
74,275Unearned Finance Income 6,752Lease Receivables (not later than 1year) 67,523
III Year:Lease Receivables (including residual value) 67,523Amount Received 67,523
Computation of earnings per share:EPS for the year 2005 as originally reported: Rs. 11,00,000/5,00,000 shares = Rs. 2.20EPS for the year 2005 restated for rights issue: Rs. 11,00,000/ (5,00,000 shares x 1.05) =Rs. 2.10EPS for the year 2006 including effects of rights issue:(5,00,000 x 1.05 x 2/12) + (6,00,000 x 10/12) = 5,87,500 sharesEPS = 15,00,000/5,87,500 = Rs. 2.55
(j) (a) Amount of foreseeable loss (Rs in lakhs)Total cost of construction (500 + 105 + 495) 1,100Less: Total contract price 1,000Total foreseeable loss to be recognized as expense 100
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According to para 35 of AS 7 (Revised 2002), when it is probable that total contractcosts will exceed total contract revenue, the expected loss should be recognized as anexpense immediately.
(b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs (Rs in lakhs)Work certified 500Work not certified 105
605This is 55% (605/1,100 100) of total costs of construction.
(c) Proportion of total contract value recognised as revenue as per para 21 of AS 7(Revised).55% of Rs. 1,000 lakhs = Rs. 550 lakhs
(d) Amount due from/to customers = Contract costs + Recognised profits – Recognised losses – (Progress payments received + Progress
payments to be received) = [605 + Nil – 100 – (400 + 140)] Rs. in lakhs
= [605 – 100 – 540] Rs. in lakhsAmount due to customers = Rs. 35 lakhsThe amount of Rs. 35 lakhs will be shown in the balance sheet as liability.
(e) The relevant disclosures under AS 7 (Revised) are given below:
Rs. in lakhsContract revenue 550Contract expenses 605Recognised profits less recognized losses (100)Progress billings (400 + 140) 540Retentions (billed but not received from contractee) 140Gross amount due to customers 35
(k) Price revision was effected during the current accounting period 2005-2006. As a result, thecompany stands to receive Rs. 15 lakhs from its customers in respect of sales made from1st January, 2006 to 31st March, 2006. If the company is able to assess the ultimatecollection with reasonable certainty, then additional revenue arising out of the said pricerevision may be recognised in 2005- 2006 vide Para 10 of AS 9.
(l) Calculation of the cost of construction of AssetsParticulars Rs.Direct Materials 1,000,000Direct Labour 50,000Direct Expenses 250,000Office & Administrative Expenses 40,000Depreciation 10,000Cost of the Asset 1,350,000
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(m) Valuation of Closing StockParticulars Rs. Rs.Closing Stock at cost 2,84,700Less :Cost of 400 coats (400 x 80) 32,000 Less: Net Realisable Value (400 x 75) – 5% 28,500 3,500
2,81,200Provision for repairing cost to be incurred in future (800 x 5) 4,000Value of Closing Stock 2,77,200
(n) Cash Flow Statement of …… for the year ended March 31, 2007 (Direct Method)
Particulars Rs. Rs.Operating Activities:Cash received from sale of goods 1,40,000Cash received from Debtors 1,75,000Trade Commission received 50,000 3,65,000Less: Payment for Cash Purchases 1,20,000
Payment to Creditors 1,57,000 Office and Selling Expenses 75,000 Payment for Income Tax 30,000 3,82,000Net Cash Flow from Operating Activities (17,000)
APPENDIX – I
Accounting Standard (AS) 15 ( revised 2005) on ‘Employee Benefits’ comes into effect in respect ofaccounting periods commencing on or after April 1, 2006. AS 15 (revised 2005) was originallypublished in March, 2005 issue of the ICAI’s Journal ‘The Chartered Accountant’. Subsequently, theICAI, in January 2006, made limited revision to AS 15 (revised 2005) primarily with a view to bring thedisclosure requirements of the standard relating to the defined benefit plans in line with thecorresponding International Accounting Standard (IAS) 19, Employee Benefits; to clarify the applicationof the transitional provisions ; and to provide relaxation/exemption to the small and medium-sizedenterprises(SMEs). The limited revision has been duly incorporated by the ICAI in AS 15 (revised2005) which has been published in published in the ‘The Chartered Accountant’, March 2006 (pagenos. 1354 to 1385).
Note: AS 1 to AS 29 [including AS 15 (Revised 2005)] are applicable for May, 2007 Examination.
APPENDIX-IIAnnouncements and Limited Revisions to Standards
Applicability of Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in ForeignExchange Rates, in respect of exchange differences arising on a forward exchange contractentered into to hedge the foreign currency risk of a firm commitment or a highly probableforecast transaction
1. The revised Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates,was published in the March 2003 issue of the Institute's Journal, 'The Chartered Accountant', (pp.
Issued on the basis of the decision of the Council at its meeting held on June 24-26, 2004.
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916 to 922). AS 11 (revised 2003) has come into effect in respect of accounting periodscommencing on or after 1-4-2004 and is mandatory in nature from that date.
2. AS 11 (revised 2003) deals, inter alia, with forward exchange contracts. Paragraphs 36 and 37 ofAS 11 (revised 2003) deal with accounting for a forward exchange contract or any other financialinstrument that is in substance a forward exchange contract, which is not intended for trading orspeculation purposes, i.e., it is for hedging purposes. Paragraphs 38 and 39 of AS 11 (revised2003) deal with forward exchange contracts intended for trading or speculation purposes.
3. An issue has been raised regarding the applicability of AS 11 (revised 2003) to the exchangedifference arising on a forward exchange contract or any other financial instrument that is insubstance a forward exchange contract (hereinafter the term 'forward exchange contract' is usedto include such other financial instruments also), entered into by an enterprise to hedge theforeign currency risk of a firm commitment1 or a highly probable forecast transaction.2
4. In this regard, it may be noted that paragraphs 36 and 37 of AS 11 (revised 2003) are notintended to deal with forward exchange contracts which are entered into to hedge the foreigncurrency risk of a firm commitment or a highly probable forecast transaction. Further, paragraphs38 and 39 are also not applicable in respect of such forward exchange contracts since thesecontracts are not for trading or speculation purposes. Accordingly, it is clarified that AS 11(revised 2003) does not deal with the accounting of exchange difference arising on a forwardexchange contract entered into to hedge the foreign currency risk of a firm commitment or ahighly probable forecast transaction.
5. It may be noted that the hedge accounting, in its entirety, including hedge of a firm commitment ora highly probable forecast transaction, is proposed to be dealt with in the accounting standard onFinancial Instruments: Recognition and Measurement, which is presently under formulation.
Accounting for exchange differences arising on a forward exchange contract entered into to hedgethe foreign currency risk of a firm commitment or a highly probable The Institute of Chartered Accountants of India (ICAI) issued an Announcement on ‘Applicability
of Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign ExchangeRates, in respect of exchange differences arising on a forward exchange contract entered into tohedge the foreign currency risk of a firm commitment or a highly probable forecast transaction ’(see ‘The Chartered Accountant’, July 2004 (pp. 110)). As per the Announcement, AS 11 (revised2003) is not applicable to the exchange differences arising on forward exchange contractsentered into to hedge the foreign currency risks of a firm commitment or a highly probableforecast transaction. It is stated in the Announcement that the hedge accounting, in its entirety,including hedge of a firm commitment or a highly probable forecast transaction, is proposed to bedealt with in the Accounting Standard on ‘Financial Instruments: Recognition and Measurement’,which is under formulation.
It may be noted that as per the above Announcement, AS 11 (revised 2003) is not applicable tothe exchange differences arising on the forward exchange contracts entered into to hedge theforeign currency risks of a firm commitment or a highly probable forecast transaction. Accordingly,the premium or discount in respect of such contracts continues to be governed by AS 11 (revised2003), The Effects of Changes in Foreign Exchange Rates.
1 A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified priceon a specified future date or dates.
2 A forecast transaction is an uncommitted but anticipated future transaction.Note: Clarification on Applicability of AS 11 to Forward Exchange ContractsSome persons have expressed a view that the Announcement amounts to withdrawal of AS 11 with regard toforward exchange contracts. It is hereby clarified that AS 11 continues to be applicable to exchange differences inrespect of all forward exchange contracts other than those entered into, to hedge the foreign currency risk of a firmcommitment or a highly probable forecast transaction.
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It has been noted that in the absence of any authoritative pronouncement of the Institute on thesubject, different enterprises are accounting for exchange differences arising on such contracts indifferent ways which is affecting the comparability of financial statements. Keeping this in view,the matter has been reconsidered and the Institute is of the view that pending the issuance of theproposed Accounting Standard on ‘Financial Instruments: Recognition and Measurement’, whichis under formulation, exchange differences arising on the forward exchange contracts entered intoto hedge the foreign currency risks of a firm commitment or a highly probable forecast transactionshould be recognised in the statement of profit and loss in the reporting period in which theexchange rate changes. Any profit or loss arising on renewal or cancellation of such contractsshould be recognised as income or expense for the period.
Applicability Date of Announcement on 'Accounting for exchange differences arising on aforward exchange contract entered into to hedge the foreign currency risk of a firm commitmentor a highly probable forecast transaction' The Institute of Chartered Accountants of India (ICAI), in January 2006, issued an Announcement
on 'Accounting for exchange differences arising on a forward exchange contract entered into tohedge the foreign currency risk of a firm commitment or a highly probable forecast transaction'.Pending the issuance of the proposed Accounting Standard on 'Financial Instruments:Recognition and Measurement', which is under formulation, the said Announcement prescribesthe accounting treatment which should be followed in respect of the exchange differences arisingon the forward exchange contracts entered into to hedge the foreign currency risks of a firmcommitment or a highly probable forecast transaction.
An issue has been raised regarding the applicability date of the Announcement. The ICAI hasconsidered the issue and it has been decided that this Announcement is applicable in respect ofaccounting period(s) commencing on or after April 1, 2006. Earlier application of theAnnouncement is however encouraged.
Limited Revision to Accounting Standard (AS) 29,Provisions, Contingent Liabilities and Contingent Assets
The Council of the Institute of Chartered Accountants of India has decided to make the followinglimited revisions of Accounting Standard (AS) 29, Provisions, Contingent Liabilities and ContingentAssets.Paragraphs 1, 3 and 5 of AS 29 have been decided to be modified as under (modifications are shownas underlined):Scope1. This Statement should be applied in accounting for provisions and contingent liabilities and indealing with contingent assets, except:(a) those resulting from financial instruments that are carried at flair value;(b) those resulting from executory contracts, except where the contract is onerous;(c) those arising in insurance enterprises from contracts with policy-holders; and(d) those covered by another Accounting Standard.”“3. Executory contracts are contracts under which neither party has performed any of its obligationsor both parties have partially performed their obligations to an equal extent. This Statement does notapply to executory contracts unless they are onerous.”“5. Where another Accounting Standard deals with a specific type of provision, contingent liability orcontingent asset, an enterprise applies that Statement instead of this Statement. For example, certaintypes of provisions are also addressed in Accounting Standards on:(a) construction contracts (see AS 7, Construction Contracts);(b) taxes on income (see AS22, Accounting for Taxes on income);
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(c) leases (see AS 19, Leases). However, as AS 19 contains no specific requirements to deal withoperating leases that have become onerous, this Statement applies to such cases; and
(d) retirement benefits (see AS 15, Accounting for Retirement Benefits in the Financial Statements ofEmployers).
Pursuant to the above limited revision, paragraph 2 of Appendix E (dealing with comparison of AS 29with IAS 37) to AS 29 stands withdrawn. Consequently, the numbering of subsequent paragraphs ofAppendix E is also changed.The limited revision comes into effect in respect of accounting periods commencing on or after April 1,2006.As a consequence to the Limited Revision to AS 29, Accounting Standards Interpretation(ASI) 30 has been issued.
Limited Revision to AS 25The Council of the Institute of Chartered Accountants of India has decided to make the followinglimited revision to Accounting Standard (AS) 25, Interim Financial Reporting:Paragraph 29(c) of AS 25 has been decided to be revised as under. The revisions made are shown instrike-through form.“29. To illustrate:
(a) …………..(no change)(b) …………..(no change)(c) income tax expense is recognised in each interim period based on the best estimate of theweighted average annual effective income tax rate expected for the full financial year. Amountsaccrued for income tax expense in one interim period may have to be adjusted in a subsequentinterim period of that financial year if the estimate of the annual effective income tax ratechanges.”
As a consequence to the above, the following revisions are made in the relevant paragraphs ofAppendix 3 to AS 25 (the revisions made are shown in strike-through form).“Measuring Income Tax Expense for Interim Period8. ………….. (no change)9. This is consistent with the basic concept set out in paragraph 27 that the same accounting
recognition and measurement principles should be applied in an interim financial report as areapplied in annual financial statements. Income taxes are assessed on an annual basis. Therefore,interim period income tax expense is calculated by applying, to an interim period’s pre-taxincome, the tax rate that would be applicable to expected total annual earnings, that is, theestimated average annual effective income tax rate. That estimated average annual effectiveincome-tax rate would reflect the tax rate structure expected to be applicable to the full year’searnings including enacted or substantively enacted changes in the income tax rates scheduled totake effect later in the financial year. The estimated average annual effective income tax ratewould be re-estimated on a year-to-date basis, consistent with paragraph 27 of this Statement.Paragraph 16(d) requires disclosure of a significant change in estimate.
10. …………..(no change)11. As illustration, an enterprise reports quarterly, earns Rs. 150 lakhs pre-tax profit in the first
quarter but expects to incur losses of Rs 50 lakhs in each of the three remaining quarters (thushaving zero income for the year), and is governed by taxation laws according to which itsestimated average annual effective income tax rate is expected to be 35 per cent. The followingtable shows the amount of income tax expense that is reported in each quarter:
Difference in Financial Reporting Year and Tax Year12. ……………… (no change)13. To illustrate, an enterprise’s financial reporting year ends 30 September and it reports quarterly.
Its year as per taxation laws ends 31 March. For the financial year that begins 1 October, Year 1ends 30 September of Year 2, the enterprise earns Rs 100 lakhs pre-tax each quarter. Theestimated weighted average annual effective income tax rate is 30 per cent in Year 1 and 40 percent in Year 2.
14. ……………(no change)Tax Loss Carry forwards15. …………(no change)16. To illustrate, an enterprise that reports quarterly has an operating loss carryforward of Rs 100
lakhs for income tax purposes at the start of the current financial year for which a deferred taxasset has not been recognised. The enterprise earns Rs 100 lakhs in the first quarter of thecurrent year and expects to earn Rs 100 lakhs in each of the three remaining quarters. Excludingthe loss carryforward, the estimated average annual effective income tax rate is expected to be40 per cent. The estimated payment of the annual tax on Rs. 400 lakhs of earnings for the currentyear would be Rs. 120 lakhs {(Rs. 400 lakhs – Rs. 100 lakhs) x 40%}. Considering the losscarryforward, the estimated average annual effective income tax rate would be 30% {(Rs. 120lakhs/Rs. 400 lakhs) x 100}. This average annual effective income tax rate would be applied toearnings of each quarter. Accordingly, tax expense would be as follows:
The limited revision comes into effect in respect of accounting periods commencing on or after1-4-2004. It may be noted that the limited revision has been made to align the drafting of AS 25with the corresponding International Accounting Standard (IAS) 34.
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Deferment of the Applicability of AS 22 to Non-Corporate Enterprises
Non-corporate enterprises, such as sole proprietors, partnership firms, trusts, Hindu UndividedFamilies, association of persons and co-operative societies will now be required to follow AccountingStandards (AS) 22, Accounting for Taxes on Income, in respect of accounting periods commencing onor after 1-4-2006. The decision to this effect has been taken by the Council of the Institute of CharteredAccountants of India (ICAI), at its meeting, held on June 24-26, 2004. The applicability of AS 22 hasbeen deferred for those non-corporate enterprises which were required to follow AS 22 in respect ofaccounting periods commencing on or after 1-4-2003.
It may be noted that the applicability paragraphs of AS 22 provided as below:
" Accounting Standards (AS) 22, 'Accounting for Taxes on Income', issued by the Council of theInstitute of Chartered Accountants of India, comes into effect in respect of accounting periodscommencing on or after 1-4-2001. It is mandatory in nature for:
a. All the accounting periods commencing on or after 01.04.2001, in respect of the following:i. Enterprises whose equity or debt securities are listed on a recognized stock exchange in
India and enterprises that are in the process of issuing equity or debt securities that will belisted on a recognized stock exchange in India as evidenced by the board of directors'resolution in this regard.
ii. All the enterprises of a group, if the parent presents consolidated financial statements andthe Accounting Standard is mandatory in nature in respect of any of the enterprises of thatgroup in terms of (i) above.
b. All the accounting periods commencing on or after 01.04.2002, in respect of companies notcovered by (a) above.
c. All the accounting periods commencing on or after 01.04.2003, in respect of all other enterprises."The decision to defer the applicability of AS 22 to enterprises covered by ( c ) above so as to make itmandatory in respect of accounting periods commencing on or after 1-4-2006 instead of 1-4-2003 hasbeen taken by the Council on a consideration of certain representations and views expressed atvarious forums. The decision has been taken with a view to provide some more time to suchenterprises for effective implementation of AS 22.
AnnouncementElimination of unrealized profits and losses under AS 21, AS 23 and AS 27
Accounting Standard (AS) 21, Consolidated Financial Statements, came into effect in respect ofaccounting periods commencing on or after 1-4-2001 and is mandatory from that date if an enterprisepresents consolidated financial statements. Paragraph 16 of AS 21 requires that intragroup balancesand intragroup transactions and resulting unrealised profits should be eliminated in full. It furtherprovides that unrealised losses resulting from intragroup transactions should also be eliminated unlesscost cannot be recovered.There may be transactions between a parent and its subsidiary(ies) entered into during accountingperiods commencing on or before 31-3-2001. While preparing consolidated financial statements, inrespect of some of the transactions entered into during accounting periods commencing on or before31-3-2001, it may not be practicable to eliminate resulting unrealised profits and losses. It has,therefore, been decided that elimination of unrealised profits and losses in respect of transactionsentered into during accounting periods commencing on or before 31-3-2001, is encouraged, but notrequired on practical grounds.
The above position also applies in respect of AS 23, Accounting for Investments in Associates in
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Consolidated Financial Statements and AS 27, Financial Reporting of Interests in Joint Ventures whileapplying the 'equity method' and 'proportionate consolidation method' respectively.
AnnouncementTreatment of Inter-Divisional Transfers
Attention of the members is invited to the definition of the term 'revenue' in Accounting Standard (AS)9, Revenue Recognition, issued by the Institute of Chartered Accountants of India, which is reproducedbelow:"Revenue is the gross inflow of cash, receivables or other consideration arising in the course of theordinary activities of an enterprise from the sale of goods, from the rendering of services, and fromhe use by others of enterprise resources yielding interest, royalties and dividends. Revenue ismeasured by the charges made to customers or clients for goods supplied and services rendered tothem and by the charges and rewards arising from the use of resources by them. In an agencyrelationship, the revenue is the amount of commission and not the gross inflow of cash, receivables orother consideration." (emphasis supplied)The use of the word 'enterprise' in the definition of the term 'revenue' clearly implies that the transferswithin the enterprise cannot be considered as fulfilling the definition of the term 'revenue'. Thus, therecognition of inter-divisional transfers as sales is an inappropriate accounting treatment and isinconsistent with Accounting Standard (AS) 9, Revenue Recognition. This aspect is furtherstrengthened by considering the recognition criteria laid down in AS 9. Paragraphs 10 and 11 of AS 9,reproduced below, provide as to when revenue from the sale of goods should be recognised:
"10. Revenue from sales or service transactions should be recognised when the requirementsas to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time ofperformance it is not unreasonable to expect ultimate collection. If at the time of raising of anyclaim it is unreasonable to expect ultimate collection, revenue recognition should bepostponed.
11. In a transaction involving the sale of goods, performance should be regarded as beingachieved when the following conditions have been fulfilled:(i) the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and theseller retains no effective control of the goods transferred to a degree usually associatedwith ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will bederived from the sale of the goods."
Since in case of inter-divisional transfers, risks and rewards remain within the enterprise and also thereis no consideration from the point of view of the enterprise as a whole, the recognition criteria forrevenue recognition are also not fulfilled in respect of inter-divisional transfers.
AnAnnouncementDisclosures in cases where a Court/ Tribunal makes an order sanctioning an accounting
treatment which is different from that prescribed by an Accounting Standard
Paragraph 4.2 of the ‘Preface to the Statements of Accounting Standards’ (revised 2004) provides asunder:“4.2 The Accounting Standards by their very nature cannot and do not override the local regulationswhich govern the preparation and presentation of financial statements in the country. However, theICAI will determine the extent of disclosure to be made in financial statements and the auditor’s reportthereon. Such disclosure may be by way of appropriate notes explaining the treatment of particular
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items. Such explanatory notes will be only in the nature of clarification and therefore need not betreated as adverse comments on the related financial statements.”In the case of Companies, Section 211 (3B) of the Companies Act, 1956, provides that “Where theprofit and loss account and the balance sheet of the company do not comply with the accountingstandards, such companies shall disclose in its profit and loss account and balance sheet, thefollowing, namely:-a. the deviation from the accounting standards;b. the reasons for such deviation; andc. the financial effect, if any, arising due to such deviation.”In view of the above, if an item in the financial statements of a Company is treated differently pursuantto an Order made by the Court/Tribunal, as compared to the treatment required by an AccountingStandard, following disclosures should be made in the financial statements of the year in whichdifferent treatment has been given:1. A description of the accounting treatment made along with the reason that the same has been
adopted because of the Court/Tribunal Order.2. Description of the difference between the accounting treatment prescribed in the Accounting
Standard and that followed by the Company.3. The financial impact, if any, arising due to such a difference.It is recommended that the above disclosures should be made by enterprises other than companiesalso in similar situations.ca
Applicability of AS 4 to impairment of assets not covered by presentIndian Accounting Standard
1. Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, issued bythe Institute in November 2003, comes into effect in respect of accounting periods commencing on orafter 1-4-2004. As per AS 29, from the date of this Accounting Standard becoming mandatory, allparagraphs of Accounting Standard (AS) 4, Contingencies and Events Occurring After the BalanceSheet Date, that deal with contingencies (viz., paragraphs 1 (a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1 to 5.6), 6,7 (7.1 to 7.3), 9.1 (relevant portion), 9.2, 10, 11, 12 and 16), stand withdrawn.2. Paragraph 7 of AS 29 provides that this Statement defines provisions as liabilities which can bemeasured only by using a substantial degree of estimation. It further provides that the term ‘provision’is also used in the context of items such as depreciation, impairment of assets and doubtful debts:these are adjustments to the carrying amounts of assets and are not addressed in this Statement. Inview of this, impairment of assets and doubtful debts are not covered by AS 29.3. It may be noted that the paragraphs of AS 4 dealing with contingencies also cover provision forcontingent loss in case of impairment of assets, not covered by other Accounting Standards, such as,AS 2, Valuation of Inventories, AS 10, Accounting for Fixed Assets, AS 13, Accounting for Investmentsand AS 28, Impairment of Assets (coming into effect from 1-4-2004). Accordingly, AS 4 deals withimpairment of certain assets, for example, the impairment of financial assets like receivables(commonly referred to as the provision for bad and doubtful debts).4. As may be noted from paragraph 1 above, pursuant to AS 29 coming into effect, the paragraphs ofAS 4 that deal with contingencies stand withdrawn. It may further be noted that while impairment ofcertain assets is covered by some existing Accounting Standards referred to in paragraph 3 above,impairment of financial assets such as receivables, which are not covered by AS 29, is expected to becovered in an Accounting Standard on Financial Instruments: Recognition and Measurement, which isunder preparation.5. In view of the above, it is brought to the notice of the members and others that till the issuance ofthe proposed Accounting Standard on financial instruments, the paragraphs of AS 4 which deal withcontingencies would remain operational to the extent they cover the impairment of assets not covered
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by other Indian Accounting Standards. Thus, for instance, impairment of receivables (commonlyreferred to as the provision for bad and doubtful debts) would continue to be covered by AS 4.
Announcement
Applicability of Accounting Standard (AS) 28, Impairment of Assets, to Small and MediumSized Enterprises (SMEs)
1. Accounting Standard (AS) 28, Impairment of Assets, issued by the Council of the Institute ofChartered Accountants of India, comes into effect in respect of accounting periods commencingon or after 1-4-2004. The Standard is mandatory in nature from different dates for different levelsof enterprises as below:(i) To Level I enterprises- from accounting periods commencing on or after 1.4.2004.(ii) To Level II enterprises- from accounting periods commencing on or after 1.4.2006.(iii) To Level III enterprises- from accounting periods commencing on or after 1.4.2008.The criteria for different levels are given in Annexure I.
2. Considering the feedback received from various interest-groups and the concerns expressed atvarious forums, it is felt that relaxation should be given to Level II and Level III enterprises(referred to as ‘Small and Medium Sized Enterprises’ (SMEs)), from the measurement principlescontained in AS 28, Impairment of Assets.
3. AS 28 defines, inter alia, the following terms:An impairment loss is the amount by which the carrying amount of an asset exceeds itsrecoverable amount.Recoverable amount is the higher of an asset’s net selling price and its value in use.Net selling price is the amount obtainable from the sale of an asset in an arm’s lengthtransaction between knowledgeable, willing parties, less the costs of disposal.Value in use is the present value of estimated future cash flows expected to arise from thecontinuing use of an asset and from its disposal at the end of its useful life.
4. The relaxations for SMEs in respect of AS 28 have been decided as below:(i) Considering that detailed cash flow projections of SMEs are often not readily available,SMEs are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereofinstead of computing the value in use by present value technique. Therefore, the definition of theterm ‘value in use’ in the context of the SMEs would read as follows:“Value in use is the present value of estimated future cash flows expected to arise from thecontinuing use of an asset and from its disposal at the end of its useful life, or areasonable estimate thereof”.(ii) The above change in the definition of ‘value in use’ implies that instead of using the presentvalue technique, a reasonable estimate of the ‘value in use’ can be made. Consequently, if anSME chooses to measure the ‘value in use’ by not using the present value technique, the relevantprovisions of AS 28, such as discount rate etc., would not be applicable to such an SME. Further,such an SME need not disclose the information required by paragraph 121(g) of the Standard.Subject to this, the other provisions of AS 28 would be applicable to SMEs.
5. An enterprise, which, pursuant to the above provisions, does not use the present value techniquefor measuring value in use, should disclose, the fact that it has measured its ‘value in use’ on thebasis of the reasonable estimate thereof and the manner in which the estimate has been arrivedat including assumptions that govern the estimate.
6. Where an enterprise has been covered in Level I and subsequently, ceases to be so covered, theenterprise will not qualify for relaxation/exemption from the applicability of this Standard, until theenterprise ceases to be covered in Level I for two consecutive years.
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7. Where an enterprise has previously qualified for the above relaxations (being not covered in Level1) but no longer qualifies for relaxation in the current accounting period, this Standard becomesapplicable from the current period without the above relaxations. However, the correspondingprevious period figures in respect of the relevant disclosures need not be provided.
The above provisions are applicable in respect of the accounting periods commencing on or after 1-4-2006 (for Level II enterprises) and 1-4-2008 (for Level III enterprises). However, if an enterprise beinga Level II enterprise starts applying AS 28 from accounting periods beginning on or after 1-4-2006, itwill continue to apply this Standard even if it ceases to be covered in Level II and becomes a Level IIIenterprise.
Annexure ICriteria for classification of enterprises
Level I EnterprisesEnterprises which fall in any one or more of the following categories, at any time during the accountingperiod, are classified as Level I enterprises:(i) Enterprises whose equity or debt securities are listed whether in India or outside India.(ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the
board of directors’ resolution in this regard.(iii) Banks including co-operative banks.(iv) Financial institutions.(v) Enterprises carrying on insurance business.(vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately
preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore.Turnover does not include ‘other income’.
(vii) All commercial, industrial and business reporting enterprises having borrowings, including publicdeposits, in excess of Rs. 10 crore at any time during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above at any time during the accountingperiod.
Level II EnterprisesEnterprises which are not Level I enterprises but fall in any one or more of the following categories areclassified as Level II enterprises:(i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately
preceding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhsbut does not exceed Rs. 50 crore. Turnover does not include ‘other income’.
(ii) All commercial, industrial and business reporting enterprises having borrowings, including publicdeposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during theaccounting period.
(iii) Holding and subsidiary enterprises of any one of the above at any time during the accountingperiod.
Level III EnterprisesEnterprises which are not covered under Level I and Level II are considered as Level III enterprises.
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ANNOUNCEMENTTax effect of expenses/income adjusted directly against the reserves and/or Securities
Premium Account
1. It has been noticed that some companies are charging certain expenses, which are otherwiserequired to be charged to the profit and loss account, directly against reserves and/or Securities
Premium Account pursuant to the court orders. In such a case, while the expenses are charged toreserves and/or Securities Premium Account, the tax benefit arising from admissibility of suchexpenses for tax purposes is not recognised in the reserves and/or Securities Premium Account.Such a situation may also arise where an enterprise adjusts its reserves to give effect to achange, if any, in accounting policy consequent upon adoption of an Accounting Standard, inaccordance with the transitional provisions contained in the standard. Further, a company mayadjust an expense against the Securities Premium Account as allowed under the provisions ofsection 78 of the Companies Act, 1956. A similar situation may arise where, pursuant to a courtorder or under transitional provisions prescribed in an accounting standard, an income, whichshould have otherwise been credited to the profit and loss account in accordance with therequirements of generally accepted accounting principles, may have been directly credited to areserve account or a similar account and the tax effect thereof is not recognised in the reserveaccount or a similar account.
2. Not recognising the tax benefit, arising from admissibility of expense charged to the reservesand/or Securities Premium Account, in the reserves and/or Securities Premium Account iscontrary to the generally accepted accounting principles because it results in recognition andpresentation of tax effect of an expense in a manner which is different from the manner in whichthe expense itself has been recognised and presented. Similarly, recognising and presenting thetax effect of an income in a manner which is different from the manner in which income itself hasbeen recognised and presented is contrary to the generally accepted accounting principles.Accordingly, any expense charged directly to reserves and/or Securities Premium Account shouldbe net of tax benefits expected to arise from the admissibility of such expenses for tax purposes.Similarly, any income credited directly to a reserve account or a similar account should be net ofits tax effect.
3. In view of the above, any item of income or expense adjusted directly to reserves and/orSecurities Premium Account should be net of its tax effect.
ANNOUNCEMENT
Applicability of Accounting Standards to an Unlisted Indian Company,which is a Subsidiary of a Foreign Company Listed Outside India
1. The Council of the Institute of Chartered Accountants of India has issued an Announcement (see‘The Chartered Accountant’, November 2003 (pp. 480-489)) on ‘Applicability of Accounting Standards’with a view to lay down the scheme of applicability of Accounting Standards to Small and MediumSized Enterprises (SMEs). As per the said scheme, all accounting standards are applicable to Level Ienterprises. Level I enterprises, inter alia, include (i) enterprises whose equity or debt securities arelisted whether in India or outside India, and (ii) holding or a subsidiary of a Level I enterprise.2. With regard to above, an issue has been raised as to whether, as per the above scheme, a foreigncompany which is incorporated and listed outside India would also be considered as a Level Ienterprise and consequent to this, whether an unlisted Indian company, which is a subsidiary of thisforeign company, would become a Level I enterprise merely because of it being a subsidiary of thesaid foreign company.
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3. It is clarified that, in the above-stated scheme, the term ‘enterprise’ includes all entities that arerequired to prepare their financial statements as per the Indian GAAPs. Accordingly, all Indian entities,i.e., the entities which are incorporated in India, are covered in the said scheme. The scheme alsocovers those foreign entities which are required to prepare their financial statements as per the IndianGAAPs. Thus, in case a foreign company, which is incorporated and listed outside India, is required toprepare its financial statements as per the Indian GAAPs, it will be considered as a Level I enterprise.In such a case, the Indian company, which is a subsidiary of the aforesaid foreign company, would alsobe considered as a Level I enterprise for the reason that it is a subsidiary of another Level I enterprise.In case the parent foreign company is not required to prepare its financial statements as per the IndianGAAPs, its Indian subsidiary would not be considered to be a Level I enterprise provided it does notmeet any other criteria for becoming Level I enterprise as per the said scheme. Thus, in such asituation, the status of the Indian company under the above scheme will be determined independent ofthe status of its parent foreign company.
APPENDIX-IIIACCOUNTING STANDARDS INTERPRETATIONS
The authority of the Accounting Standards Interpretations (ASI) is the same as that of the AccountingStandard to which it relates. The contents of the ASI are intended for the limited purpose of theAccounting Standard to which it relates. ASI is intended to apply only to material items. The Instituteof Chartered Accountants of India has, so far, issued 30 ASIs. These interpretations are available atthe institute’s website www.icai.org. The students are advised to refer PE-II Course Study Material(June, 2004 edition) for the text of ASI 1 to ASI 28. The further interpretations - ASI 29 and ASI 30including revised ASI 3, ASI 4, ASI 14 and ASI 20 are given below:
Accounting Standards Interpretation (ASI) 29Turnover in case of Contractors
Accounting Standard (AS) 7, Construction Contracts (revised 2002)
ISSUE
1. AS 7, Construction Contracts (revised 2002) deals, inter alia, with revenue recognition in respectof construction contracts in the financial statements of contractors. It requires recognition of revenueby reference to the stage of completion of a contract (referred to as ‘percentage of completionmethod’). This method results in reporting of revenue which can be attributed to the proportion of workcompleted. Under this method, contract revenue is recognised as revenue in the statement of profitand loss in the accounting period in which the work is performed.
The issue is whether the revenue so recognised in the financial statements of contractors as per therequirements of AS 7 can be considered as ‘turnover’.
CONSENSUS
2. The amount of contract revenue recognised as revenue in the statement of profit and loss as perthe requirements of AS 7 should be considered as ‘turnover’.
BASIS FOR CONCLUSIONS
3. The paragraph dealing with the ‘Objective’ of AS 7 provides as follows:
“Objective
The objective of this Statement is to prescribe the accounting treatment of revenue and costsassociated with construction contracts. Because of the nature of the activity undertaken in constructioncontracts, the date at which the contract activity is entered into and the date when the activity is
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completed usually fall into different accounting periods. Therefore, the primary issue in accounting forconstruction contracts is the allocation of contract revenue and contract costs to the accountingperiods in which construction work is performed. This Statement uses the recognition criteriaestablished in the Framework for the Preparation and Presentation of Financial Statements todetermine when contract revenue and contract costs should be recognized as revenue and expensesin the statement of profit and loss. It also provides practical guidance on the application of thesecriteria.”From the above, it may be noted that AS 7 deals, inter alia, with the allocation of contract revenue tothe accounting periods in which construction work is performed.4. Paragraphs 21 and 31 of AS 7 provide as follows:
“21. When the outcome of a construction contract can be estimated reliably, contract revenueand contract costs associated with the construction contract should be recognised as revenueand expenses respectively by reference to the stage of completion of the contract activity at thereporting date. An expected loss on the construction contract should be recognised as anexpense immediately in accordance with paragraph 35.”
“31. When the outcome of a construction contract cannot be estimated reliably:
a. revenue should be recognised only to the extent of contract costs incurred of whichrecovery is probable; and
b. contract costs should be recognised as an expense in the period in which they areincurred.
An expected loss on the construction contract should be recognised as an expense immediatelyin accordance with paragraph 35.”
From the above, it may be noted that the recognition of revenue as per AS 7 may be inclusive of profit(as per paragraph 21 reproduced above) or exclusive of profit (as per paragraph 31 above) dependingon whether the outcome of the construction contract can be estimated reliably or not. When theoutcome of the construction contract can be estimated reliably, the revenue is recognised inclusive ofprofit and when the same cannot be estimated reliably, it is recognised exclusive of profit. However, ineither case it is considered as revenue as per AS 7.
5. ‘Revenue’ is a wider term. For example, within the meaning of AS 9, Revenue Recognition, the term‘revenue’ includes revenue from sales transactions, rendering of services and from the use by others ofenterprise resources yielding interest, royalties and dividends. The term ‘turnover’ is used in relation tothe source of revenue that arises from the principal revenue generating activity of an enterprise. Incase of a contractor, the construction activity is its principal revenue generating activity. Hence, therevenue recognised in the statement of profit and loss of a contractor in accordance with the principleslaid down in AS 7, by whatever nomenclature described in the financial statements, is considered as‘turnover’.
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Accounting Standards Interpretation (ASI) 301
Applicability of AS 29 to Onerous ContractsAccounting Standard (AS) 29, Provisions, Contingent Liabilities and
Contingent Assets
ISSUE1. An ‘onerous contract’ is a contract in which the unavoidable costs of meeting the obligationsunder the contract exceed the economic benefits expected to be received under it. The issue is howthe recognition and measurement principles of AS 29 should be applied to the ‘onerous contracts’covered within its scope.
CONSENSUS2. If an enterprise has a contract that is onerous, the present obligation under the contract should berecognised and measured as a provision as per AS 29.3. For a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligationunder the contract should exceed the economic benefits expected to be received under it. Theunavoidable costs under a contract reflect the least net cost of exiting from the contract, which is thelower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it.4. The amount of provision in respect of an onerous contract should be measured by applying theprinciples laid down AS 29. Accordingly, the amount of the provision should not be discounted to itspresent value.The Appendix to this Interpretation illustrates the application of the above requirements.
BASIS FOR CONCLUSIONS5. Paragraph 14 of AS 29 provides as follows:
“14. A provision should be recognised when:(a) an enterprise has a present obligation as a result of a past event;(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and(c) a reliable estimate can be made of the amount of the obligation.If these conditions are not met, no provision should be recognised.”
Many contracts (for example, some routine purchase orders) can be cancelled without payingcompensation to the other party, and therefore, there is no obligation. Other contracts establish bothrights and obligations for each of the contracting parties. Where events make such a contract onerous,a liability exists, which is recognised. In respect of such contracts the past obligating event is thesigning of the contract, which gives rise to the present obligation. Besides this, when such a contractbecomes onerous, an outflow of resources embodying economic benefits is probable.6. Recognition of losses with regard to onerous contracts relating to items of inventory arerecognised, under AS 2, Valuation of Inventories, by virtue of the consideration of the net realisablevalue. Further, the recognition of losses in case of onerous construction contracts is dealt with in AS 7,Construction Contracts. Therefore, it is inappropriate if in case of onerous contracts to which AS 29 isapplicable, the provision is not recognised.
1 This ASI has been issued as a consequence to the Limited Revision to AS 29, Provisions, Contingent Liabilities andContingent Assets. The said Limited Revision comes into effect in respect of accounting periods commencing on orafter April 1, 2006 (see the ‘Limited Revision’ under the heading ‘Resources: Accounting Standards’).
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Appendix
Note: This appendix is illustrative only and does not form part of the Accounting StandardsInterpretation. The purpose of this appendix is to illustrate the application of the Interpretation to assistin clarifying its meaning.An enterprise operates profitably from a factory that it has leased under an operating lease. DuringDecember 2005 the enterprise relocates its operations to a new factory. The lease on the old factorycontinues for the next four years, it cannot be cancelled and the factory cannot be relet to anotheruser.Present obligation as a result of a past obligating event - The obligating event occurs when thelease contract becomes binding on the enterprise, which gives rise to a legal obligation.An outflow of resources embodying economic benefits in settlement - When the lease becomesonerous, an outflow of resources embodying economic benefits is probable. (Until the lease becomesonerous, the enterprise accounts for the lease under AS 19, Leases).Conclusion - A provision is recognised for the best estimate of the unavoidable lease payments.
Accounting Standards Interpretation (ASI) 3 (Revised)Accounting for Taxes on Income in the situations of Tax Holiday under
Section 80-IA and 80-IB of the Income-tax Act, 1961Accounting Standard (AS) 22, Accounting for Taxes on Income
ISSUE 1. Sections 80-IA and 80-IB of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) providecertain deductions, for certain years, in determining the taxable income of an enterprise. Thesedeductions are commonly described as ‘tax holiday’ and the period during which these deductions areavailable is commonly described as ‘tax holiday period’.2. The issue is how AS 22 should be applied in the situations of tax-holiday under sections 80-IA and80-IB of the Act.
CONSENSUS3. The deferred tax in respect of timing differences which reverse during the tax holiday periodshould not be recognised to the extent the enterprise’s gross total income is subject to the deductionduring the tax holiday period as per the requirements of the Act.4. Deferred tax in respect of timing differences which reverse after the tax holiday period should berecognised in the year in which the timing differences originate. However, recognition of deferred taxassets should be subject to the consideration of prudence as laid down in paragraphs 15 to 18 ofAS 22.5. For the above purposes, the timing differences which originate first should be considered toreverse first.The Appendix to this Interpretation illustrates the application of the above requirements.
BASIS FOR CONCLUSIONS6. Section 80A (1) of the Act provides that in computing the total income of an assessee, there shallbe allowed from his gross total income, in accordance with and subject to the provisions of thisChapter, the deductions specified in sections 80C to 80U. Therefore, the deductions under sections80-IA and 80-IB are the deductions from the gross total income of an assessee determined inaccordance with the provisions of the Act. For example, depreciation under section 32 of the Act isprovided for arriving at the amount of gross total income even if it is not claimed in view of Explanation5 to clause (ii) of sub-section (1) of section 32 of the Act.
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7. In view of the above, the amount of the deduction under sections 80-IA and 80-IB of the Act, isbased on the gross total income which is determined in accordance with the provisions of the Act. Inrespect of the situations covered under sections 80-IA and 80-IB, the difference in the relevantaccounting income and taxable income (relevant gross total income minus deduction allowed undersections 80-IA and 80-IB) of an enterprise during a tax holiday period is classified into permanentdifferences and timing differences. The amount of deduction in respect of sections 80-IA and 80-IB is apermanent difference whereas the differences which arise because of different treatment of items ofincome and expenses for determination of relevant accounting income and relevant gross total incomesuch as depreciation are timing differences.8. The Framework for the Preparation and Presentation of Financial Statements provides that “Anasset is recognised in the balance sheet when it is probable that the future economic benefitsassociated with it will flow to the enterprise and the asset has a cost or value that can be measuredreliably”. The Framework also provides that “A liability is recognised in the balance sheet when it isprobable that an outflow of resources embodying economic benefits will result from the settlement of apresent obligation and the amount at which the settlement will take place can be measured reliably”. Inthe situation of tax holiday under Sections 80-IA and 80-IB of the Act, it is probable that deferred taxassets and liabilities in respect of timing differences which reverse during the tax holiday period,whether originated in the tax holiday period or before that (refer provisions of section 80-IA(2) of theAct), will not be realised or settled. Accordingly, a deferred tax asset or a liability for timing differenceswhich reverse during the tax holiday period does not meet the above criteria for recognition of asset orliability, as the case may be, and therefore is not recognised to the extent the gross total income of theenterprise is subject to the deduction during the tax holiday period.9. Deferred tax assets/liabilities for timing differences which reverse after the tax holiday period,whether originated in the tax holiday period or before that, are recognised in the period in which thesedifferences originate because these can be realised/paid after the expiry of the tax holiday period bypayment of lesser or higher amount of tax after the tax holiday period because of reversal of timingdifferences.10. According to one view, during the tax holiday period, no deferred tax should be recognised evenfor the timing differences which reverse after the tax holiday period, because timing differences do notoriginate, for example, in the situation of a 100 percent tax holiday period the taxable income is nil.This view was not accepted because in the aforesaid situation, although the current tax is nil butdeferred tax, on account of the timing differences which will reverse after the tax holiday period, exists.Further, even in case of carry forward of losses which can be set-off against future taxable income,deferred tax may be recognised, as per AS 22, in respect of all timing differences irrespective of thefact that the taxable income of the enterprise is nil in the period in which the timing differencesoriginate.11. According to another view, the timing differences which will reverse after the tax holiday periodshould be recognised at the beginning of the first year after the expiry of the tax holiday period and notin the year in which the timing differences originate. Accordingly, as per this view, during the taxholiday period, deferred tax should not be recognised. This view was also not accepted because as perAS 22 deferred tax should be recognised in the period in which the relevant timing differencesoriginate.
Appendix
Note:
This appendix is illustrative only and does not form part of the Accounting Standards Interpretation.The purpose of this appendix is to illustrate the application of the Interpretation to assist in clarifying itsmeaning.
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Facts:
1. The income before depreciation and tax of an enterprise for 15 years is Rs. 1000 lakhs per year,both as per the books of account and for income-tax purposes.
2. The enterprise is subject to 100 percent tax-holiday for the first 10 years under section 80-IA. Taxrate is assumed to be 30 percent.
3. At the beginning of year 1, the enterprise has purchased one machine for Rs. 1500 lakhs.Residual value is assumed to be nil.
4. For accounting purposes, the enterprise follows an accounting policy to provide depreciation onthe machine over 15 years on straight-line basis.
5. For tax purposes, the depreciation rate relevant to the machine is 25% on written down valuebasis.
The following computations will be made, ignoring the provisions of section 115JB (MAT), in thisregard:
Table 1Computation of depreciation on the machine for accounting purposes and tax purposes
(Amounts in Rs. lakhs)Year Depreciation for accounting purposes Depreciation for tax purposes
At the end of the 15th year, the carrying amount of the machinery for accounting purposes would be nilwhereas for tax purposes, the carrying amount is Rs. 19 lakhs which is eligible to be allowed insubsequent years.
Table 2Computation of Timing differences
(Amounts in Rs. lakhs)1 2 3 4 5 6 7 8 9
Year Incomebeforedepreciationand tax(both foraccountingpurposesand taxpurposes
1. Timing differences originating during the tax holiday period are Rs. 644 lakhs, out of which Rs. 228lakhs are reversing during the tax holiday period and Rs. 416 lakhs are reversing after the tax holidayperiod. Timing difference of Rs. 19 lakhs is originating in the 15th year which would reverse insubsequent years when for accounting purposes depreciation would be nil but for tax purposes thewritten down value of the machinery of Rs. 19 lakhs would be eligible to be allowed as depreciation.2. As per the Interpretation, deferred tax on timing differences which reverse during the tax holidayperiod should not be recognised. For this purpose, timing differences which originate first areconsidered to reverse first. Therefore, the reversal of timing difference of Rs. 228 lakhs during the taxholiday period, would be considered to be out of the timing difference which originated in year 1. Therest of the timing difference originating in year 1 and timing differences originating in years 2 to 5 wouldbe considered to be reversing after the tax holiday period. Therefore, in year 1, deferred tax would berecognised on the timing difference of Rs. 47 lakhs (Rs. 275 lakhs - Rs. 228 lakhs) which wouldreverse after the tax holiday period. Similar computations would be made for the subsequent years.The deferred tax assets/liabilities to be recognised during different years would be computed as perthe following Table.
Table 3Computation of current tax and deferred tax
1 No deferred tax is recognized since in respect of timing differences reversing during the tax holidayperiod, no deferred tax was recognized at their origination.
Accounting Standard (AS) 22, Accounting for Taxes on Income
[This revised Accounting Standards Interpretation replaces ASI 4 issued in December 2002.]
ISSUE1. The issue is how AS 22 should be applied in respect of ‘loss’ arising under the head ‘Capital gains’of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’), which can be carried forward and set-off in future years, only against the income arising under that head as per the requirements of the Act.
CONSENSUS2. Where an enterprise’s statement of profit and loss includes an item of ‘loss’ which can be set-off infuture for taxation purposes, only against the income arising under the head ‘Capital gains’ as per therequirements of the Act, that item is a timing difference to the extent it is not set-off in the current yearand is allowed to be set-off against the income arising under the head ‘Capital gains’ in subsequentyears subject to the provisions of the Act. In respect of such ‘loss’, deferred tax asset should berecognised and carried forward subject to the consideration of prudence. Accordingly, in respect ofsuch ‘loss’, deferred tax asset should be recognised and carried forward only to the extent that there isa virtual certainty, supported by convincing evidence, that sufficient future taxable income will beavailable under the head ‘Capital gains’ against which the loss can be set-off as per the provisions ofthe Act. Whether the test of virtual certainty is fulfilled or not would depend on the facts andcircumstances of each case. The examples of situations in which the test of virtual certainty, supportedby convincing evidence, for the purposes of the recognition of deferred tax asset in respect of lossarising under the head ‘Capital gains’ is normally fulfilled, are sale of an asset giving rise to capital gain(eligible to setoff the capital loss as per the provisions of the Act) after the balance sheet date butbefore the financial statements are approved, and binding sale agreement which will give rise to capitalgain(eligible to set-off the capital loss as per the provisions of the Act).3. In cases where there is a difference between the amounts of ‘loss’ recognised for accountingpurposes and tax purposes because of cost indexation under the Act in respect of long-term capitalassets, the deferred tax asset should be recognised and carried forward (subject to the considerationof prudence) on the amount which can be carried forward and set-off in future years as per theprovisions of the Act.Transitional Provision4. Where an enterprise first applies this revised ASI, the deferred tax asset recognized previouslyconsidering the reasonable level of certainty, as per the pre-revised ASI 4, and no longer meets therecognition criteria laid down in the revised ASI, should be written-off with a corresponding charge tothe revenue reserves.
2 Deferred tax asset of Rs. 6 lakhs would be recognized at the end of year 15 subject to consideration of prudence asper AS 22. If it is so recognized, the said deferred tax asset would be realized in subsequent periods when for taxpurposes deprecation would be allowed but for accounting purposes no depreciation would be recognized.
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BASIS FOR CONCLUSIONS5. Section 71 (3) of the Act provides that “Where in respect of any assessment year, the net result ofthe computation under the head “Capital gains” is a loss and the assessee has income assessableunder any other head of income, the assessee shall not be entitled to have such loss set off againstincome under the other head”.6. Section 74 (1) of the Act provides that “Where in respect of any assessment year, the net result ofthe computation under the head “Capital gains” is a loss to the assessee, the whole loss shall, subjectto the other provisions of this Chapter, be carried forward to the following assessment year, and—(a) in so far as such loss relates to a short-term capital asset, it shall be set off against income, if
any, under the head “Capital gains” assessable for that assessment year in respect of any othercapital asset;
(b) in so far as such loss relates to a long-term capital asset, it shall be set off against income, ifany, under the head “Capital gains” assessable for that assessment year in respect of any othercapital asset not being a short-term capital asset;
(c) if the loss cannot be wholly so set-off, the amount of loss not so set off shall be carried forward tothe following assessment year and so on.” Section 74 (2) of the Act provides that “No lossshall be carried forward under this section for more than eight assessment years immediatelysucceeding the assessment year for which the loss was first computed”.
7. AS 22 defines ‘timing differences’ as “the differences between taxable income and accountingincome for a period that originate in one period and are capable of reversal in one or more subsequentperiods”.8. Where an enterprise’s statement of profit and loss includes an item of loss, which is considered a‘loss’ under the head ‘Capital gains’ as per the provisions of the Act, the loss is a timing difference, tothe extent the same is not set-off in the current year, because this loss can be allowed to be set-offagainst income arising under the head ‘Capital gains’ in future, subject to the provisions of the Act, andto that extent the amount of income under that head will not be taxable in the future year even thoughthe said income would be included in the determination of the accounting income of that year.9. AS 22 provides that “Deferred tax should be recognised for all the timing differences,subject to the consideration of prudence in respect of deferred tax assets as set out inparagraphs 15-18”. Paragraph 15 of AS 22 provides that “Except in the situations stated inparagraph 17, deferred tax assets should be recognised and carried forward only to the extentthat there is a reasonable certainty that sufficient future taxable income will be available againstwhich such deferred tax assets can be realised .”Paragraphs 17 and 18 of AS 22 provide as follows:
“17. Where an enterprise has unabsorbed depreciation or carry forward of losses under taxlaws, deferred tax assets should be recognised only to the extent that there is virtualcertainty supported by convincing evidence that sufficient future taxable income will beavailable against which such deferred tax assets can be realised.18. The existence of unabsorbed depreciation or carry forward of losses under tax laws is strongevidence that future taxable income may not be available. Therefore, when an enterprise has ahistory of recent losses, the enterprise recognises deferred tax assets only to the extent that ithas timing differences the reversal of which will result in sufficient income or there is otherconvincing evidence that sufficient taxable income will be available against which such deferredtax assets can be realised. In such circumstances, the nature of the evidence supporting itsrecognition is disclosed.”The income under the head ‘Capital gains’ does not arise in the course of the operating activitiesof an enterprise. Thus, for the purpose of recognition of a deferred tax asset, the degree ofcertainty of such an income arising in future should be higher. Accordingly, in case of ‘loss’ underthe head ‘Capital gains’, deferred tax asset should be recognised and carried forward only to theextent that there is a virtual certainty, supported by convincing evidence, that sufficient futuretaxable income will be available under the head ‘Capital gains’ against which the loss can be set-
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off as per the provisions of the Act.In this regard, virtual certainty of the availability of sufficient future taxable income against whichdeferred tax assets can be realised, will be construed to mean virtual certainty of the availabilityof taxable income under the head “Capital gains” in future in accordance with the provisions of theAct.
10. In cases where there is a difference between the amounts of ‘loss’ recognised for accountingpurposes and tax purposes because of cost indexation under the Act in respect of long-term capitalassets, deferred tax asset is recognised and carried forward (subject to the consideration of prudence)on the amount which can be carried forward and set-off in future years as per the provisions of the Actsince that is the amount which will be available for set-off in future years as per the provisions of theAct.11. As per the requirements of the pre-revised ASI 4, deferred tax asset in respect of a loss arisingunder the head ‘Capital Gains’, in certain situations, was recognised on the consideration of thereasonable certainty. The revised ASI 4, however, requires that in all cases, deferred tax asset inrespect of such loss is recognised only to the extent there is a virtual certainty, supported byconvincing evidence, that sufficient future taxable income will be available under the head ‘Capitalgains’ against which the loss can be set-off as per the provisions of the Act. As a result, a deferred taxasset, recognised as per the pre-revised ASI 4, may not meet the recognition criteria laid down in therevised ASI and consequently, would be required to be written-off. A deferred tax asset, which isrequired to be written-off in this manner, is charged to the revenue reserves.
Accounting Standard (AS) 9, Revenue Recognition[This revised Accounting Standards Interpretation replaces ASI 14 issued in March 2004.]
ISSUE1. What should be the manner of disclosure of excise duty in the presentation of revenue from salestransactions (turnover) in the statement of profit and loss.
CONSENSUS2. The amount of turnover should be disclosed in the following manner on the face of the statementof profit and loss:Turnover (Gross) XXLess: Excise Duty XXTurnover (Net) XX3. The amount of excise duty to be shown as deduction from turnover as per paragraph 2 aboveshould be the total excise duty for the year except the excise duty related to the difference between theclosing stock and opening stock. The excise duty related to the difference between the closing stockand opening stock should be recognised separately in the statement of profit and loss, with anexplanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.
BASIS FOR CONCLUSIONS4. Financial analysts and other users of financial statements, sometimes, require the informationrelated to turnover gross of excise duty as well as net of excise duty for meaningful understanding offinancial statements. However, it was noted that some enterprises disclose turnover net of excise dutywhile others disclose turnover at gross amount. Accordingly, this Interpretation requires disclosure ofturnover gross of excise duty as well as net of excise duty on the face of the statement of profit andloss.
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INVITATION TO EMPLOYERS5. The excise duty related to the difference between the closing stock and opening stock is notshown as deduction from turnover since it is not included in the turnover (gross). As per theinterpretation, the excise duty related to the difference between the closing stock and opening stock isrecognised separately in the statement of profit and loss.6. As per the interpretation, two amounts of excise duty would be appearing in the statement ofprofit and loss: one as deduction from turnover and the other as a separate item in the statement ofprofit and loss. With a view to explain the nature of these two amounts of excise duty appearing in thestatement of profit and loss, this Interpretation requires an explanatory note to be included in thisregard in the notes to accounts.
Accounting Standards Interpretation (ASI) 20 (Revised)Disclosure of Segment Information
Accounting Standard (AS) 17, Segment Reporting
ISSUE1. Whether an enterprise, which has neither more than one business segment nor more than onegeographical segment, is required to disclose segment information as per AS 17.
CONSENSUS2. In case by applying the definitions of ‘business segment’ and ‘geographical segment’, contained inAS 17, it is concluded that there is neither more than one business segment nor more than onegeographical segment, segment information as per AS 17 is not required to be disclosed. However, thefact that there is only one ‘business segment’ and ‘geographical segment’ should be disclosed by wayof a note.
BASIS FOR CONCLUSIONS3. The paragraph of AS 17 dealing with ‘Objective’ provides as under:“The objective of this Statement is to establish principles for reporting financial information, about thedifferent types of products and services an enterprise produces and the different geographical areas inwhich it operates. Such information helps users of financial statements:
a. better understand the performance of the enterprise;b. better assess the risks and returns of the enterprise; and
c. make more informed judgements about the enterprise as a whole.Many enterprises provide groups of products and services or operate in geographical areas that aresubject to differing rates of profitability, opportunities for growth, future prospects, and risks.Information about different types of products and services of an enterprise and its operations indifferent geographical areas - often called segment information - is relevant to assessing the risks andreturns of a diversified or multi-locational enterprise but may not be determinable from the aggregateddata. Therefore, reporting of segment information is widely regarded as necessary for meeting theneeds of users of financial statements.”
In case of an enterprise, which has neither more than one business segment nor more than onegeographical segment, the relevant information is available from the balance sheet and statement ofprofit and loss itself and, therefore, keeping in view the objective of segment reporting, such anenterprise is not required to disclose segment information as per AS 17. The disclosure of the fact thatthere is only one ‘business segment’ and ‘geographical segment’ and, therefore, the segmentinformation is not provided by the concerned enterprise is useful for the users of the financialstatements while making a comparison among various enterprises.
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PAPER – 2 : AUDITING
QUESTIONS
1. (a) Briefly explain the procedure for the formulation of Auditing and Assurance Standards.(b) Is compliance with documents issued by the Institute of Chartered Accountants of India
necessary for the proper discharge of functions of members of the Institute?2. (a) “The detection of errors and frauds is no longer an audit objective.” Comment.
(b) What are the inherent limitations of audit? Explain in brief.3. What is audit evidence? Explain different types of audit evidence.4. “Audit materiality requires that the auditor should consider materiality and its relationship with
audit risk when conducting an audit.” Explain this statement.5. (a) What is meant by the term internal control?
(b) Draft a form of questionnaire, which you would use for determining the effectiveness of theclient’s internal control over bank balances.
6. How will you vouch and/or verify the following?(a) Recovery of Bad Debts written off(b) Foreign Travel Expenses(c) Goodwill(d) Work-in-Progress
7. Give your comments and observations on the following:(a) Balance confirmations from debtors/creditors can only be obtained for balances standing in
their accounts at the year-end.(b) The management has obtained a certificate from an actuary regarding provision of gratuity
payable to employees.(c) Fixed assets have been revalued and the resulting surplus has been adjusted against the
brought forward losses.8. (a) As an auditor comment on the following situation:
A company had a branch office, which recorded a turnover of Rs.1,99,000 in the earlier year.The auditor’s report of the earlier year had no reference regarding the branch although, thebranch audit had not been carried out by the statutory auditor.
(b) When an application for exemption is made to the Central Government,, it may, after makingthe necessary inquiry, exempt the branch office of a company from the provisions of auditWhat are the various grounds under which exemption may be given?
9. Comment on the following:(a) In case the existing auditor(s) appointed at the Annual General Meeting refused to accept
the appointment, whether the Board of Directors could fill up the vacancy.(b) X and Co., Chartered Accountants, who were appointed as the first auditors of the company,
were removed without the prior approval of the Central Government, before the expiry oftheir term, by calling an Extraordinary General Meeting.
(c) Due to the resignation of the existing auditor(s), the Board of directors of X Ltd appointed Mr.Hari as the auditor. Is the appointment of Hari as auditor valid?
(d) At the Annual General Meeting of the Company, a resolution was passed by the entire bodyof shareholders restricting some of the powers of the Statutory Auditors. Whether powers ofthe Statutory Auditors can be restricted?
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10. What is Computer Information System Environment (CIS)? Describe the nature of the risks andthe internal control characteristics in CIS environment.
11. (a) True and fair report of the auditor on the financial statements of the enterprises ensures thefuture viability of the enterprises. Comment.
(b) Who is responsible for the preparation of the financial statements?(c) How the auditor should determine the scope and extent of auditing?(d) Can terms of engagements restrict the scope of audit?(e) Does audit ensures that there are no frauds or errors?
12. (a) Who are joint auditors? Discuss the responsibility of joint auditors.(b) In case of difference of opinion among joint auditors, is a joint auditor bound by the views of
the majority of the joint auditors.(c) Is it necessary to review the work of other joint auditor?
13. Discuss the duties of Comptroller and Auditor General as defined in C & AG (Duties, Powers andConditions of Service) Act, 1971.
14. What is the meaning of ‘Analytical Procedures’ ? What are the purposes of Analytical Procedure?15. Write short notes on the following :
(a) Option on share capital(b) Capital Redemption Reserve(c) Fundamental Accounting Assumptions(d) Buy Back of Own Securities
16. Distinguish between:(a) Auditing and Investigation(b) Auditing around the computer and Auditing through the computer(c) Depreciation and Fluctuation in Value(d) Clean Audit Report and Qualified Audit Report
SUGGESTED ANSWERS/HINTS
1. (a) Broadly, the following procedure is adopted for the formulation of Auditing and AssuranceStandards.(i) The Auditing and Assurance Standards Board (AASB) determines the broad areas in
which the Auditing and Assurance Standards (AASs) need to be formulated and thepriority in regard to the selection therefor.
(ii) In the preparation of AASs, the AASB is assisted by study groups constituted toconsider specific subjects. In the formation of study groups, provision is made forparticipation of a cross-section of members of the Institute.
(iii) On the basis of the work of the study groups, an exposure draft of the proposed AAS isprepared by the Board and issued for comments by members of the Institute.
(iv) After taking into consideration the comments received, the draft of the proposed AAS isfinalised by the AASB and submitted to the Council of the Institute.
(v) The Council of the Institute will consider the final draft of the proposed AAS, and ifnecessary, modify the same in consultation with the AASB. The AAS is issued underthe authority of the Council.
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(b) The Institute has, from time to time, issued ‘Guidance Notes’ and ‘Statements’ on a numberof matters. The ‘Statements’ have been issued with a view to securing compliance bymembers on matters which, in the opinion of the Council, are critical for the proper dischargeof their functions. ‘Statements’ therefore are mandatory. Accordingly, while dischargingtheir attest function, it will be the duty of the members of the Institute:(a) to examine whether ‘Statements’ relating to accounting matters are complied with in the
presentation of financial statements covered by their audit. In the event of anydeviation from the ‘Statements’, it will be their duty to make adequate disclosures intheir audit reports so that the users of financial statements may be aware of suchdeviations; and
(b) to ensure that the ‘Statements’ relating to auditing matters are followed in the audit offinancial information covered by their audit reports. If, for any reason, a member hasnot been able to perform an audit in accordance with such ‘Statements’, his reportshould draw attention to the material departures thereform.
‘Guidance Notes’ are primarily designed to provide guidance to members on matters whichmay arise in the course of their professional work and on which they may arise in the courseof their professional work and on which they may desire assistance in resolving issues whichmay pose difficulty. Guidance Notes are recommendatory in nature. A member shouldordinarily follow recommendations in a guidance note relating to an auditing matter exceptwhere he is satisfied that in the circumstances of the case, it may not be necessary to do so.Similarly, while discharging his attest function, a member should examine whether therecommendations in a guidance note relating to an accounting matter have been followed ornot. If the same have not been followed, the member should consider whether keeping inview the circumstances of the case, a disclosure in his report is necessary.
2. (a) Detection of errors and frauds is indeed an audit objective because statements of accountdrawn up from books containing serious mistakes and fraudulent entries cannot be consid-ered as a true and fair statement. To establish whether the financial statements show a trueand fair state of affairs, the auditors must carry out a process of examination and verificationand, if errors and frauds exist they would come to his notice in the ordinary course ofchecking. But detection of errors and frauds is not the primary aim of audit; the primary aimis the establishment of a degree of reliability of the annual statements of account.If there remains a deep laid fraud in the accounts, which in the normal course of examinationof accounts may not come to light, it will not be construed as failure of audit, provided theauditor was not negligent in the carrying out his normal work. This principle was establishedas early as in 1896 in the leading case in Re-Kingston Cotton Mills Co.
(b) The process of auditing is such that it suffers from certain inherent limitations, i.e., thelimitation which cannot be overcome irrespective of the nature and extent of auditprocedures. It is very important to understand these inherent limitations of an audit sinceunderstanding of the same would only provide clarity as to the overall objectives of an audit.The inherent limitations are :(i) Auditor’s work involves exercise of judgment, for example, in deciding the extent of
audit procedures and in assessing the reasonableness of the judgment and estimatesmade by the management in preparing the financial statements. Further much of theevidence available to the auditor can enable him to draw only reasonable conclusionstherefrom. The audit evidence obtained by an auditor is generally persuasive in naturerather than conclusive in nature. Because of these factors, the auditor can only expressan opinion. Therefore, absolute certainty in auditing is rarely attainable. There is alsolikelyhood that some material misstatements of the financial information result ing fromfraud or error, if either exists, may not be detected.
(ii) The entire audit process is generally dependent upon the existence of an effectivesystem of internal control. Further, it is clearly evident that there always be some risk ofan internal control system failing to operate as designed. No doubt, internal control
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system also suffers from certain inherent limitations. Any system of internal control maybe ineffective against fraud involving collusion among employees or fraud committed bymanagement. Certain levels of management may be in a position to override controls;for example, by directing subordinates to record transactions incorrectly or to concealthem, or by suppressing information relating to transactions. Such inherent limitationsof internal control system also contribute to inherent limitations of an audit.
3. Types of Audit Evidence: Internal evidence and external evidence : Evidence which originateswithin the organisation being audited is an internal evidence. Example-sales invoice. Copies ofsales challan and forwarding notes, goods received note, inspection report, copies of cash memo,debit and credit notes, etc.External evidence on the other hand is the evidence that originatesoutside the client’s organisation; for example, purchase invoice, supplier’s challan and forwardingnote, debit notes and credit notes coming from parties, quotations, confirmations, etc.
Types of Audit Evidence
Depending upon nature Depending upon source
Internal External
Visual Oral Documentary
In an audit situation, the bulk of evidence that an auditor gets is internal in nature. However,substantial external evidence is also available to the auditor. Since in the origination of internalevidence, the client and his staff have the control, the auditor should be careful in putting relianceon such evidence. It is not suggested that they are to be suspected; but an auditor has to be aliveto the possibilities of manipulation and creation of false and misleading evidence to suit the clientor his staff. The external evidence is generally considered to be more reliable as they come fromthird parties who are not normally interested in manipulation of the accounting information ofothers. However, if the auditor has any reason to doubt the independence of any third party whohas provided any material evidence e.g. an invoice of an associated concern, he should exercisegreater vigilance in that matter. As an ordinary rule the auditor should try to match internal andexternal evidence as far as practicable. Where external evidence is not readily available to match,the auditor should see to what extent the various internal evidence corroborate each other.
4. AAS-13 on “Audit Materiality” requires that the auditor should consider materiality and itsrelationship with audit risk when conducting an audit. According to it, information is material if itsmisstatement (i.e., omission or erroneous statement) could influence the economic decisions ofusers taken on the basis of the financial information. Materiality depends on the size and natureof the item, judged in the particular circumstances of its misstatement. Thus, materiality providesa threshold or cut-off point rather than being a primary qualitative characteristic which theinformation must have if it is to be useful. It stresses that the assessment of what is material is amatter of professional judgement.The audit should be planned so that audit risk is kept at an acceptably low level. After the auditorhas assessed the inherent and control risks, he should consider the level of detection risk that heis prepared to accept and, based upon his judgement, select appropriate substantive auditprocedures. If the auditor does not perform any substantive procedures, detection risk, that is,the risk that the auditor will fail to detect a misstatement, will be high. The auditor reducesdetection risk by performing substantive procedures - the more extensive the proceduresperformed, the lower the detection risk. The nature and timing of substantive procedures will alsoaffect the detection risk, for example, confirmation with third parties will lead to lower detectionrisk than reliance on internal data, as will procedures carried out closer to year-end.
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5. (a) According to AAS-6 (Revised) entitled, “Risk Assessment and Internal Control”, the systemof internal control may be defined as “the plan of organization and all the methods andprocedures adopted by the management of an entity to assist in achieving management’sobjective of ensuring, as far as practicable, the orderly and efficient conduct of its business,including adherence to management policies, the safeguarding of assets, prevention anddetection of fraud and error, the accuracy and completeness of the accounting records, andthe timely preparation of reliable financial information. The system of internal control extendsbeyond those matters which relate directly to the functions of the accounting system.
(b) Questionnaire for determining the effectiveness of the client’s internal control overbank balances:1. Are bank statements opened by a person other than the person signing cheques,
recording cash and receiving or disbursing?2. Are the bank accounts reconciled at regular intervals?3. Is Bank reconciliation statement drawn by a person independent of cash receipt and
disbursement function?4. Does the reconciler compare each item in the deposit and withdrawal columns of the
bank statement with amount deposited or withdrawn as shown by the cash records bothas regards date and amount?
5. Is there a periodic follow-up of old :(i) outstanding deposits?(ii) outstanding payments?(iii) outstanding stop-payment advices?
6. Are the items under reconciliation reviewed by a responsible official promptly or uponcompletion?
7. Are confirmations of balances obtained periodically in respect of all bank balances andcompared with the bank statements?
8. Is there a periodic review of balances held as security, for letters of Credit, Guarantees,etc., to ensure the need for their continuance?
9. Are Fixed Deposit Receipts held in safe custody?10. Is there a register of Fixed Deposits showing maturity dates, rates of interest and dates
for payment of interest?11. Is there a follow-up system to ensure that interest on Fixed Deposits is received on due
dates?12. Is a Certificate obtained from the bank for Deposit Receipts lodged as security?
6. (a) Recovery of Bad Debts written off:(i) Ascertain the total amount of bad debts.(ii) Ensure that all recoveries of bad debts have been properly recorded in the books of
account.(iii) Examine notification from the Court or from bankruptcy trustee, letters from collecting
agencies or from debtors should also be seen.(iv) Check Credit Manager’s file for the amount received and see that the said amount has
been deposited into the bank promptly.(b) Foreign Travel Expenses:
(i) Examine T.A. bills submitted by the employees stating the details of tour, details ofexpenses, etc.
(ii) Verify that the tour programme was properly authorised by the competent authority.
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(iii) Check the T.A. bills along with accompanying supporting documents such as air tickets,travel agents bill, hotel bills with reference to the internal rules for entitlement of theemployees and also make sure that the bills are properly passed.
(iv) See that the tour report accompanies the T.A. bill. The tour report will show thepurpose of the tour. Satisfy that the purpose of the tour as shown by the tour reportconforms with the authorisation for the tour.
(v) Check Reserve Bank of India’s permission, if necessary, for withdrawing the foreignexchange. For a company the amount of foreign exchange spent is to be disclosedseparately in the accounts as per requirement of Part I of Schedule VI to theCompanies Act, 1956.
(c) Goodwill:(a) Ensure that as required by AS 10 on "Accounting for Fixed Assets", goodwill has been
recorded in the books only when some consideration in money or money's worth hasbeen paid for. Goodwill arises from business connections, trade name or reputation ofan enterprise or from other intangible benefits enjoyed by an enterprise.
(b) Check the vendor's agreement on the basis of which assets of the running businesshave been acquired by the company at a price existing in the book value of the assetsor where a specific sum has been paid for the goodwill.
(c) See that only the amount paid to the vendors not represented by tangible assets hasbeen debited to the goodwill account. Therefore, it is not prudent that goodwill shouldbe shown in the company's accounts by way of writing up the value of its assets onrevaluation or writing back the amount of goodwill earlier written off by the company.
(d) See whether goodwill has been written off as a matter of financial prudence.(d) Work-in-Progress: The audit procedures regarding work-in-progress are similar to those
used for raw materials and finished goods. However, the auditor has to carefully assess thestage of completion of the work-in-progress for assessing the appropriateness of itsvaluation. For this purpose, the auditor may examine the production/costing records (i.e.,cost sheets), hold discussions with the personnel concerned, and obtain expert opinion,where necessary. The auditor may advise his client that where possible the work-in-progressshould be reduced to the minimum before the closing date. Cost sheets of work-in-progressshould be verified as follows:(i) Ascertain that the cost sheets are duly attested by the works engineer and works
manager.(ii) Test the correctness of the cost as disclosed by the cost records by verification of
quantities and cost of materials, wages and other charges included in the cost sheetsby reference to the records maintained in respect thereof.
(iii) Compare the unit cost or job cost as shown by the cost sheet with the standard cost orthe estimated cost expected.
(iv) Ensure that the allocation of overhead expenses had been made on a rational basis.Compare the cost sheet in detail with that of the previous year. If they vary materially,investigate the cause thereof.
7. (a) Confirmation of Balances: Direct confirmation of balances from debtors/creditors in respectof balances standing in their accounts at the year-end is, perhaps, the best method ofascertaining whether the balances are genuine, accurately stated and undisputedparticularly where the internal control system is weak. The confirmation date, method ofrequesting confirmation, etc. are to be determined by the auditor. Guidance Note on Audit ofDebtors, Loans and Advances issued by the Institute recommends that the “debtors may berequested to confirm the balance either as at the date of the balance sheet, or as at anyother selected date which is reasonably close to the date of the balance sheet.
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The date should be settled by the auditor in consultation with the entity. Where the auditordecides to confirm the debtors at a date other than the balance sheet date, he shouldexamine the movements in debtor balances which occur between the confirmation date andthe balance sheet date and obtain sufficient evidence to satisfy himself that debtor balancesstated in the balance sheet are not materially mis-stated”.Therefore, it is not necessary that balances of debtors/ creditors should necessarily beverified only at the end of the year only. In fact, in order to incorporate an element ofsurprise, the auditor may consider different confirmation dates periodically, i.e., Dec, 31 as acut-off date in one year and June 30 in another year and so on. Therefore, the statementthat balance confirmation from debtors/creditors can only be obtained for balances standingin their accounts at the year-end is not correct.
(b) Certificate from an Expert: The computation of gratuity liability payable to employees isdependent upon several factors such as age of the employee, expected span of service inthe organisation, life expectancy of the employee, prevailing economic environment, etc.Thus, it gives rise to uncertainty in the determination of provisions of liabilities. Under suchcircumstances, the management is required to make an assessment and estimate theamount of provision. In view of this, the management may engage an expert in the field toassist them in arriving at fair estimation of the liability. Therefore, it is an accepted auditingpractice to use the work of an expert. SAP-9 on “Using the Work of an Expert” also statesthat an expert may be engaged/employed by the client. It further requires the auditor toassess skill, competence and objectivity of the expert amongst other factors and evaluatethe work of an expert independently to conclude whether or not to rely upon such acertificate obtained by the management from the actuary. Therefore, the auditor must followthe requirements of AAS-9 before relying upon the certificate obtained by the managementfrom the actuary.
(c) Revaluation of Fixed Assets: The revaluation of fixed assets is a normally acceptedpractice which involves writing up the book value of fixed assets. AS-10 on ‘Accounting forFixed Assets’ requires that “an increase in net book value arising on revaluation of fixedassets is normally credited directly to owner’s interests under the heading of revaluationreserves and is regarded as not available for distribution”. Thus, creation of revaluationreserves does not result into any cash inflows and represents unrealised gains. However,brought forward losses are in the nature of revenue losses. As a matter of prudence,revenue losses can be adjusted against revenue reserves only and not the capital reserves.Therefore, the accounting treatment followed by the entity is not correct and the auditorshould qualify the audit report by mentioning the above fact.
8. (a) Reference to branch audit in the audit report: Under section 228(4) of the CompaniesAct, 1956, the Central Government has formulated Companies (Branch Audit Exemption)Rules, 1961 to exempt any branch office of a company from being audited having regard toquantum of activity.These Rules require that, if during the said financial year, the average quantum of activity ofthe branch does not exceed Rs.2 lakhs or 2% of the average of total turnover and theearnings from other sources of the company as a whole, whichever is higher, the saidbranch is exempted.In the case under review, the turnover is below Rs. 2 lakhs and other information has notbeen furnished. Accordingly, it may be presumed, exemption may have been granted butstill it is necessary that the fact must be mentioned in the audit report.Since, reference to branch is called for in the auditor’s report even if the same has beenexempted by the Central Government, the auditor remains responsible. The auditor has,however, no responsibility in respect of the audit of earlier period accounts.
(b) When an application for exemption is made to the Central Government, it may, after makingthe necessary inquiry, exempt the branch office from the provisions of audit in section 228on any one of the following grounds, viz.
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(i) that the company carrying on activities other than those of manufacturing or processing,or trading, has made satisfactory arrangements for the security and check, at regularintervals, of the accounts of the branch office by a responsible person competent toscrutinise and check the accounts;
(ii) that the company has made arrangements for the audit of the accounts of the branchoffice by a person otherwise qualified for appointment as branch auditors, even thoughsuch a person is an employee of the company;
(iii) that having regard to the nature and the quantum of activity carried on at the branchoffice or for any other reason a branch auditor is not likely to be available at a rea-sonable cost; and
(iv) that, for any other reason, the Central Government is satisfied that exemption may begranted.A copy of the Central Government’s order or exemption is required to be forwarded tothe company which shall forthwith send a copy thereof to the auditor of the companyand shall also cause it to be read before the next general meeting (Rule 4).In every case in which an exemption is granted on the above grounds the companyshall afford such a person access, at all the times, to the books, accounts andvouchers maintained at the branch office and also shall furnish him with suchinformation and explanation as he may require. Such a person, during the period ofexemption, is required to prepare in respect of each financial year, a report on theaccounts of the branch office examined by him, as well as, to forward the same to thecompany’s auditor. A certificate to the effect that no material change had taken place inthe arrangements made for the audit of the accounts of the branch office shall have tobe attached to the balance sheet for each financial year. Such a certificate shall besigned by the manager or secretary of the company and by two directors, one of whomshall be managing director where there is one (Rule 6).
9. (a) Board's Powers to Appoint an Auditor: The appointment of an auditor is complete only onthe acceptance of the offer by the auditor. The non-acceptance of appointment by theauditor does not result in any casual vacancy. Moreover, even if the auditor is existing one,the matter would not make any difference since the appointment has to be made at eachAGM and the auditor must accept the same. The casual vacancy is said to arise only in caseof death, resignation, etc. Therefore, the Board is not empowered to fill such a vacancy.Thus, the Board of Directors are not authorised to fill up the vacancy in case the existingauditor (s) appointed at the Annual General Meeting refuse to accept the appointment.
(b) Removal of First Auditors: With a view to safeguarding the auditor's independence, the lawprovides very stringent provisions so far as removal of an auditor before the expiry of theterm is concerned. Section 224(7) of the Companies Act, 1956 provides that an auditor maybe removed before the expiry of his term by the company in a general meeting only afterobtaining the prior approval of the Central Government. An exception to this rule is that nosuch approval is required for the removal of the first auditor appointed by the Board ofDirectors under Section 224(5) of the Companies Act, 1956. Accordingly, X & Co., CharteredAccountants, being the first auditor of the company can be removed without the approval ofthe Central Government by the company by passing a general resolution to that effect in theextra-ordinary general meeting called for the purpose.
(c) Board's Powers to Appoint Auditor(s): The resignation of the existing auditor(s) wouldgive rise to a casual vacancy. As per Section 224(6) (a) of the Act, casual vacancy can befilled by the Board of Directors, provided such vacancy has not been caused by theresignation of the auditor. The rationale behind such a provision is to ensure that resignationis a matter of great concern and, thus, it is necessary that all shareholders must be apprisedof reasons connected with resignation in case of a casual vacancy arising on account ofresignation. The vacancy shall only be filled by the company in general meeting. Thus theappointment of Mr. Hari as the auditor of the company is not valid.
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(d) Restrictions on Powers of Statutory Auditors: Section 227(1) of the Companies Act, 1956provides that an auditor of a company shall have right of access at all times to the books andaccounts and vouchers of the company whether kept at the Head Office or other places andshall be entitled to require from the offices of the company such information andexplanations as the auditor may think necessary for the purpose of his audit. These specificrights have been conferred by the statute on the auditor to enable him to carry out his dutiesand responsibilities prescribed under the Act, which cannot be restricted or abridged in anymanner. Hence' any such resolution even if passed by entire body of shareholders is ultravires and therefore void. In the case of Newton vs.Birmingham Small Arms Co., it was heldthat any regulations which preclude the auditors from availing themselves of all theinformation to which they are entitled under the Companies Act, are inconsistent with theAct.
10. A CIS environment exists when one or more computer(s) of any type or size is (are) involved inthe processing of financial information, including quantitative data, of significance to the audit,whether those computers are operated by the entity or by a third party.When the computer information systems are significant, the auditor should also obtain anunderstanding of the CIS environment and whether it may influence the assessment of inherentand control risks. The nature of the risks and the internal control characteristics in CISenvironments include the following:(a) Lack of transaction trails: Some computer information systems are designed so that a
complete transaction trail that is useful for audit purposes might exist for only a short periodof time or only in computer readable form. Where a complex application system performs alarge number of processing steps, there may not be a complete trail. Accordingly, errorsembedded in an application’s program logic may be difficult to detect on a timely basis bymanual (user) procedures.
(b) Uniform processing of transactions: Computer processing uniformly processes liketransactions with the same processing instructions. Thus, the clerical errors ordinarilyassociated with manual processing are virtually eliminated. Conversely, programming errors(or other systemic errors in hardware or software) will ordinarily result in all transactionsbeing processed incorrectly.
(c) Lack of segregation of functions: Many control procedures that would ordinarily beperformed by separate individuals in manual systems may become concentrated in a CISenvironment. Thus, an individual who has access to computer programs, processing or datamay be in a position to perform incompatible functions.
(d) Potential for errors and irregularities: The potential for human error in the development,maintenance and execution of computer information systems may be greater than in manualsystems, partially because of the level of detail inherent in these activities. Also, thepotential for individuals to gain unauthorised access to data or to alter data without visibleevidence may be greater in CIS than in manual systems.
(e) Initiation or execution of transactions: Computer information systems may include thecapability to initiate or cause the execution of certain types of transactions, automatically.The authorisation of these transactions or procedures may not be documented in the sameway as that in a manual system, and management’s authorisation of these transactions maybe implicit in its acceptance of the design of the computer information systems andsubsequent modification.
(f) Dependence of other controls over computer processing: Computer processing mayproduce reports and other output that are used in performing manual control procedures.The effectiveness of these manual control procedures can be dependent on theeffectiveness of controls over the completeness and accuracy of computer processing. Inturn, the effectiveness and consistent operation of transaction processing controls incomputer applications is often dependent on the effectiveness of general computerinformation systems controls.
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(g) Potential for increased management supervision: Computer information systems can offermanagement a variety of analytical tools that may be used to review and supervise theoperations of the entity. The availability of these analytical tools, if used, may serve toenhance the entire internal control structure.
(h) Potential for the use of computer-assisted audit techniques: The case of processing andanalysing large quantities of data using computers may require the auditor to apply generalor specialised computer audit techniques and tools in the execution of audit tests.Both the risks and the controls introduced as a result of these characteristics of computerinformation systems have a potential impact on the auditor’s assessment of risk, and thenature, timing and extent of audit procedures.
11. (a) The auditor’s opinion helps determination of the true and fair view of the financial positionand operating results of an enterprise. But it does not mean that the auditor’s opinion is anassurance as to the future viability of the enterprise or the efficiency or effectiveness withwhich management has conducted the affairs of the enterprise.
(b) While the auditor is responsible for forming and expressing his opinion on the financialstatements, the responsibility for their preparation is that of the management of theenterprise. Management’s responsibilities include the maintenance of adequate accountingrecords and internal controls, the selection and application of accounting policies and thesafeguarding of the assets of the enterprise.
(c) The scope of an audit of financial statements will be determined by the auditor having regardto the Terms of the engagement The requirements of relevant legislation and The pronouncements of the Institute.
(d) Terms of engagements prescribe the scope of the audit are determined by the appointingauthority of the auditor. However, The terms of engagement cannot restrict the scope of anaudit in relation to matters which are prescribed by legislation or by the pronouncements ofthe Institute.
(e) AAS-2 states that audit cannot ensure that there are no frauds errors in audited financialstatements.
12. (a) In some cases a large entity appoints the joint auditors to conduct the audit of the entityjointly. Such auditors, known as joint auditors, conduct the audit jointly and report on thefinancial statements of the entity.Responsibility of joint auditors: In respect of audit work divided among the joint auditors,each joint auditor is responsible only for the work allocated to him, whether or not he hasprepared a separate report on the work performed by him. On the other hand, all the jointauditors are jointly and severally responsible –(i) in respect of the audit work which is not divided among the joint auditors and is carried
out by all of them;(ii) in respect of decisions taken by all the joint auditors concerning the nature, timing or
extent of the audit procedures to be performed by any of the joint auditors. It may,however, be clarified that all the joint auditors are responsible only in respect of theappropriateness of the decisions concerning the nature, timing or extent of the auditprocedures agreed upon among them; proper execution of these audit procedures isthe separate and specific responsibility of the joint auditor concerned;
(iii) in respect of matters which are brought to the notice of the joint auditors by any one ofthem and on which there is an agreement among the joint auditors;
(iv) for examining that the financial statements of the entity comply with the disclosurerequirements of the relevant statute; and
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(v) for ensuring that the audit report complies with the requirements of the relevant statute.(b) Normally, the joint auditors are able to arrive at an agreed report. However, where the joint
auditors are in disagreement with regard to any matters to be covered by the report, eachone of them should express his own opinion through a separate report. A joint auditor is notbound by the views of the majority of the joint auditors regarding matters to be covered inthe report and should express his opinion in a separate report in case of a disagreement.
(c) Each joint auditor is entitled to assume that the other joint auditors have carried out their partof the audit work in accordance with the generally accepted audit procedures.3[3] It is notnecessary for a joint auditor to review the work performed by other joint auditors or performany tests in order to ascertain whether the work has actually been performed in such amanner. Each joint auditor is entitled to rely upon the other joint auditors for bringing to hisnotice any departure from generally accepted accounting principles or any material errornoticed in the course of the audit.
13. The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971defines functions and powers in detail. The relevant provisions are discussed hereunder :—Duties of the C & AG :(i) Compile and submit Accounts of Union and States - The Comptroller and Auditor General
shall be responsible for compiling the accounts of the Union and of each State from theinitial and subsidiary accounts rendered to the audit and accounts offices under his controlby treasuries, offices or departments responsible for the keeping of such account. TheComptroller and Auditor General shall, from the accounts compiled by him or [by theGovernment or any other person responsible in that behalf] prepare in each accounts(including, in the case of accounts compiled by him, appropriation accounts) showing underthe respective heads the annual receipts and disbursements for the purpose of the Union, ofeach State and of each Union Territory having a Legislative Assembly, and shall submitthose accounts to the President or the Governor of a State or Administrator of the UnionTerritory having a Legislative Assembly, as the case may be, on or before such dates as hemay, with the concurrence of the Government concerned, determine.The C & AG Act of 1971 has provisions for relieving him of this responsibility to giveinformation and render assistance to the Union and States : The Comptroller and AuditorGeneral shall, in so far as the accounts, for the compilation or keeping of which he isresponsible, enable him so to do, give to the Union Government, to the State Government orto the Governments of Union Territories having Legislative Assemblies, as the case may be,such information as they may, from time to time, require and render such assistance in thepreparation of the annual financial statements as they may reasonably ask for.
(ii) General Provisions Relating to Audit - It shall be the duty of the Comptroller and AuditorGeneral—(a) to audit and report on all expenditure from the Consolidated Fund of India and of each
State and of each Union Territory having a Legislative Assembly and to ascertainwhether the moneys shown in the accounts as having been disbursed were legallyavailable for and applicable to the service or purpose to which they have been appliedor charged and whether the expenditure conforms to the authority which governs it;
(b) to audit and report all transactions of the Union and of the States relating toContingency Funds and Public Accounts;
(c) to audit and report on all trading, manufacturing profit and loss accounts and balance-sheets and other subsidiary accounts kept in any department of the Union or of a State.
(iii) Audit of Receipts and Expenditure - Where any body or authority is substantially financed bygrants or loans from the Consolidated Fund of India or of any State or of any Union Territoryhaving a Legislative Assembly, the Comptroller and Auditor General shall, subject to the
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provisions of any law for the time being in force applicable to the body or authority, as thecase may be, audit all receipts and expenditure of that body or authority and to report on thereceipts and expenditure audited by him.Where the grant or loan to a body or authority from the Consolidated Fund of India or of anyState or of any Union Territory having a Legislative Assembly in a financial year is not lessthan rupees twenty-five lakhs and the amount of such grant or loan is not less than seventy-five per cent of the total expenditure of that body or authority, such body or authority shall bedeemed, for this purpose to be substantially financed by such grants or loans as the casemay be.
(iv) Audit of Grants or Loans - Where any grant or loan is given for any specific purpose from theConsolidated Fund of India or of any State or of any Union Territory having a LegislativeAssembly to any authority or body, not being a foreign State or international organisation,the Comptroller and Auditor General shall scrutinise the procedures by which the sanctioningauthority satisfies itself as to the fulfillment of the conditions subject to which such grants orloans were given and shall for this purpose have right of access, after giving reasonableprevious notice, to the books and accounts of that authority or body.
(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller and AuditorGeneral to audit all receipts which are payable into the Consolidated Fund of India and ofeach State and of each Union Territory having a Legislative Assembly and to satisfy himselfthat the rules and procedures in that behalf are designed to secure an effective check on theassessment, collection and proper allocation of revenue and are being duly observed and tomake for this purpose such examination of the accounts as he thinks fit and report thereon.
(vi) Audit of Accounts of Stores and Stock - The Comptroller and Auditor General shall haveauthority to audit and report on the accounts of stores and stock kept in any office ordepartment of the Union or of a State.
(vii) Audit of Government Companies and Corporations - The duties and powers of theComptroller and Auditor General in relation to the audit of the accounts of governmentcompanies shall be performed and exercised by him in accordance with the provisions of theCompanies Act, 1956.
14. “Analytical procedures” means the analysis of significant ratios and trends, including the resultinginvestigation of fluctuations and relationships that are inconsistent with other relevant informationor which deviate from predicted amounts.The auditor should apply analytical procedures at the planning and overall review stages of theaudit. Analytical procedures may also be applied at other stages.Purposes of analytical procedures : Analytical procedures are used for the following purposes:(a) To assist the auditor in planning the nature, timing and extent of other audit
procedures: The auditor should apply analytical procedures at the planning stage to assistin understanding the business and in identifying areas of potential risk. Application ofanalytical procedures may indicate aspects of the business of which the auditor wasunaware and will assist in determining the nature, timing and extent of other auditprocedures.Analytical procedures in planning the audit use both financial and non-financial information,for example, the relationship between sales and square footage of selling space or volumeof goods sold.
(b) Analytical procedures as substantive procedures: The auditor's reliance on substantiveprocedures to reduce detection risk relating to specific financial statement assertions may bederived from tests of details, from analytical procedures, or from a combination of both. Thedecision about which procedures to use to achieve a particular audit objective is based onthe auditor's judgement about the expected effectiveness and efficiency of the availableprocedures in reducing detection risk for specific financial statement assertions.The auditorwill ordinarily inquire of management as to the availability and reliability of information
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needed to apply analytical procedures and the results of any such procedures performed bythe entity. It may be efficient to use analytical data prepared by the entity, provided theauditor is satisfied that such data is properly prepared.When intending to perform analytical procedures as substantive procedures, the auditor willneed to consider a number of factors such as the: Objectives of the analytical procedures and the extent to which their results can be
relied upon Nature of the entity and the degree to which information can be disaggregated Availability of information, both financial, such as budgets or forecasts, and non-
financial, such as the number of units produced or sold. Reliability of the information available, for example, whether budgets are prepared with
sufficient care. Relevance of the information available, for example, whether budgets have been
established as results to be expected rather than as goals to be achieved. Source of the information available, for example, sources independent of the entity are
ordinarily more reliable than internal sources. Comparability of the information available Knowledge gained during previous audits, together with the auditor's understanding of
the effectiveness of the accounting and internal control systems and the types ofproblems that in prior periods have given rise to accounting adjustments.
(c) Analytical procedures in overall review of the financial statements in the final reviewstage of the audit: The auditor should apply analytical procedures at or near the end of theaudit when forming an overall conclusion as to whether the financial statements as a wholeare consistent with the auditor's knowledge of the business. The conclusions drawn from theresults of such procedures are intended to corroborate conclusions formed during the auditof individual components or elements of the financial statements and assist in arriving at theoverall conclusion as to the reasonableness of the financial statements. However, in somecases, as a result of application of analytical procedures, the auditor may identify areaswhere further procedures need to be applied before the auditor can form an overallconclusion about the financial statements.
15. (a) Option on Share Capital: Part I of Schedule VI to the Companies Act, 1956 requiresdisclosure of the particulars of any option on unissued share capital. An option on sharesarises when a person has acquired a right under an agreement with the company tosubscribe for share in the company if he so chooses. Such options generally arise under thefollowing circumstances:(i) Under the promoter's agreements, subsequently ratified by the company;(ii) Collaboration agreement;(iii) Loan agreements, debenture deeds (Refer to Section 81 of the Companies Act, 1956);(iv) Other contracts, such as for supply of capital goods and/or merchandise.
(b) Capital Redemption Reserve: As per section 80 of the Companies Act, 1956 wherepreference shares are redeemed otherwise than out of a fresh issue, these shall be out ofprofits, otherwise available for dividends, be transferred to a reserve fund called CapitalRedemption Reserve Account, an amount equal to the nominal value of the sharesredeemed. The provisions of the Companies Act, 1956, relating to the reduction of sharecapital of a company shall apply as if the Capital Redemption Reserve account were paid upshare capital of the company. The Capital Redemption Reserve Account may be applied bythe company in paying up in issued share of the company to be issued to members of thecompany as fuIly paid up bonus shares. Capital Redemption Reserve should be disclosedunder the head "Reserves & Surplus" on the Liabilities side of the Balance Sheet as perPart-I of Schedule VI to the Companies Act, 1956.
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(c) Fundamental Accounting Assumptions: AS-1 states that certain fundamental accountingassumptions underlie the preparation and presentation of financial statements. The followinghave been generally accepted as fundamental accounting assumptions:(i) Going Concern: The enterprise is normally viewed as a going concern, that is, as
continuing in operation for the foreseeable future. It is assumed that the enterprise hasneither the intention nor the necessity of liquidation or of curtailing materially the scaleof the operations.
(ii) Consistency: It is assumed that accounting policies are consistent from one period toanother.
(iii) Accrual: Revenues and costs are accrued, that is, recognised as they are earned orincurred (and not as money is received or paid) and recorded in the financialstatements of the periods to which they relate.
If the fundamental accounting assumptions, viz., Going Concern, Consistency and Accrualare followed in financial statements, specific disclosure is not required. If a fundamentalaccounting assumption is not followed, the fact should be disclosed.
(d) Buy Back of Own Securities: Section 77A of the Companies (Amendment) Act, 1999contains elaborate provisions enabling a company to buy-back its own securities.The auditor should ensure the compliance of all the provisions relating to buy-back and alsosee that proper accounting entries have been passed. Audit procedure to be followed maybe as under:(i) Ensure that the buy-back has been done only out of the company’s free reserves or its
securities premium account or out of the proceeds of any shares or other specifiedsecurities other than out of the proceeds of an earlier issue of the same kind of sharesor same kind of other specified securities.
(ii) Check authorisation in the Articles of Association which is a prerequisite of anybuyback.
(iii) Examine special resolution passed in the general meeting authorising buyback.(iv) Ascertain that quantum of buy-back is either equal to or less than 25% of the total paid
up share capital and free serves but in case of buy-back of equity shares in anyfinancial year it should not exceed 25% of its total paid-up equity capital in that financialyear.
(v) Check that the debt equity ratio should not be more than 2 : 1 except in cases whereCentral Government allows higher ratio for a class or classes of companies.
(vi) Ensure that shares or other specified securities to be bought back should be fully paid-up.
(vii) Buy-back should be completed within 12 months from the date of passing the specialresolution.
(viii) Ascertain that declaration of solvency in Form No.4A was filed with the SEBI and/or theRegistrar of Companies before making buy-back but subsequent the passing of thespecial resolution.
(ix) See that SEBI (buy-back of securities) Regulations, 1998 have been followed by listedcompany.
16. (a) Auditing is different from investigation which is another significant service, a professionalaccountant renders. Investigation is a critical examination of the accounts with a specialpurpose. For example if fraud is suspected and an accountant is called upon to check theaccounts to whether fraud really exists and if so, the amount involved, the character of theenquiry changes into investigation. Investigation may be undertaken in numerous areas ofaccounts, e.g., the extent of waste and loss, profitability, cost of production, etc. It normallyconcerns only specified areas, but at times, it may involve the whole field of accounting. Itsessence lies in going into the matter with some pre-conceived notion suited to the objective.
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The techniques fit the circumstances of the case. For auditing on the other hand, the generalobjective is to find out whether the accounts show a true and fair view.Audit never undertakes discovery of specific happenings and is never started with a pre-conceived notion about the state of affairs. The auditor seeks to report what he finds in thenormal course of examination of the accounts adopting generally followed techniques unlesscircumstances call for a special probe : fraud, error, irregularity, whatever comes to theauditor’s notice in the usual course of checking, are all looked into in depth and sometimesinvestigation results from the prima facie findings of the auditor.
(b) Audit Around the Computer: Audit around the computer involves forming of an auditopinion wherein the existence of computer is not taken into account. Rather the principle ofconventional audit like examination of internal controls and substantive testing is done. Theauditor views the computer as a black box, as the application system processing is notexamined directly. The main advantage of auditing around the computer is its simplicity.Audit around the computer is applicable in the following situations:(i) The system is simple and uses generalised software that is well tested and widely used.(ii) Processing mainly consists of sorting the input data and updating the master file in
sequence.(iii) Audit trail is clear. Detailed reports are prepared at key processing points within the
system.(iv) Control over input transactions can be maintained through normal methods, i.e.
separation of duties, and management supervision.Generalised software packages, like payroll and provident fund package, accountsreceivable and payable package, etc. are available, developed by software vendors. Thoughthe auditor may decide not to go in details of the processing aspects, if there are well testedwidely used packages provided by a reputed vendor. However, he has to ensure that thereare adequate controls to prevent unauthorised modifications of the package. However, itmay be noted that all such generalised packages do not make the system amenable to audit.Some software packages provide generalised functions, that still must be selected andcombined to achieve the required application system. In such a case, instead of simplyexamining the systems input and output, the auditor must check the system in depth tosatisfy himself about such system. The main disadvantages of the system of auditingaround the computer are:(a) It is not beneficial for complex systems of large scale in very large multi unit, multi
locational companies, having various inter unit transactions. It can be used only incase of small organisations having simple operations.
(b) It is difficult for the auditor to assess the degradation in the system in case of change inenvironment, and whether the system can cope with a changed environment.
Auditing Through the Computer: This approach involves actual use of computer forprocessing the information by auditor. The circumstances, where auditing through thecomputer is done are as follows:(i) The organisation has developed either in house or through a reputed vendor, a software
package suitable to its requirement, because of inability of a generalised package tocater to the complex nature of transactions.
(ii) The system processes very large volumes of output. This makes examination of validityof input and output difficult.
(iii) The major part of the internal control system in the organisation is in the computersystem itself, as the majority of the records is processed through the computer.Examples are system in bank, insurance companies, online booking in case of Railway,etc.
(iv) The logic of the system is quite complex, and there is virtually no visible audit trail. Theauditor has to use the computer to test the logic and controls existing within the system.
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The auditor has to use the computer system itself for verification, for which he has to besufficiently computer literate, and should have adequate technical knowledge and expertise.The auditor can through the computer, increase his performance, and can rely on the dataprocessing by carrying out the required tests and applying his skill.
(c) Depreciation and Fluctuation in Value: Depreciation is a measure of the wearing out,consumption or other loss of value of a depreciable asset arising from use, effluxion of timeor obsolescence through technology and market changes. It directly affects the earningcapacity of an asset. Hence, it is a charge against the profit of the year.Fluctuation, on the other hand, is a temporary shrinkage or decrease and increase in thevalue of an asset usually due to external causes such as rise and fall in market price of anasset. But the fluctuation does not affect the earning capacity or working life of an asset.Hence, it is not taken into account and no charge is made against the profit of the year.Depreciation is only in connection with fixed assets while fluctuation is usually in connectionwith current assets. Depreciation generally means fall in the value of fixed asset whilefluctuation may mean either increase or decrease in the value of any asset, current as wellas fixed. Depreciation has a significant effect determining and presenting the financialposition and results of operations of an enterprise. Depreciation is charged in eachaccounting period by reference to the extent of the depreciable amount, irrespective of anincrease in the market value of the assets.
(d) Clean Audit Report and Qualified Audit Report: A clean report which is otherwise knownas unconditional opinion is issued by the auditor when he does not have any reservation withregard to the matters contained in the financial statements. In such a case, the audit reportmay state that the financial statements give a true and fair view of the state of affairs andprofit and loss account for the period. Under the following circumstances an auditor isjustified in issuing a clean report:(a) the financial information has been prepared using acceptable accounting policies, which
have been consistently applied;(b) the financial information complies with relevant regulations and statutory requirements;
and(c) there is adequate disclosure of all material matters relevant to the proper presentation
of the financial information, subject to statutory requirements, where applicable.Qualified audit report, on the other hand, is one which does not give a clear cut about thetruth and fairness of the financial statements but makes certain reservations.The gravity of such reservations will vary depending upon the circumstances. In majority ofcases, items which are the subject matter of qualification are not so material as to affect thetruth and fairness of the whole accounts but merely create uncertainty about a particularitem. In such cases, it is possible for the auditors to report that in their opinion but subject tospecific qualifications mentioned, the accounts present a true and fair view.Thus, an auditor may give his particular objection or reservation in the audit report and state"subject to the above, we report that balance sheet shows a true and fair view……..". Theauditor must clearly express the nature of qualification in the report. The auditor should alsogive reasons for qualification. According to 'Statement on Qualifications in Auditor's Report'issued by the ICAI, all qualifications should be contained in the auditor's report.The words "subject to" are essential to state any qualification. It is also necessary that theauditors should quantify, wherever possible the effect of these qualifications on the financialstatements in clear and unambiguous manner if the same is material and state aggregateimpact of qualifications.Thus, it is clear from the above that in case of a clean report, the auditor has no reservationin respect of various matters contained in the financial statements but a qualified report mayinvolve certain matters involving difference of opinion between the auditor and themanagement.
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PAPER – 3 : BUSINESS AND CORPORATE LAWSQUESTIONS
1. Mr. X, is employed as a cashier on a monthly salary of Rs. 2,000 by ABC bank for a period of threeyears. Y gave surety for X’s good conduct. After nine months, the financial position of the bankdeteriorates. Then X agrees to accept a lower salary of Rs. 1,500/- per month from Bank. Twomonths later, it was found that X has misappropriated cash since the time of his appointment. Whatis the liability of Y?
2. Comment on the following:(i) Principal is not always bound by the acts of a sub-agent.(ii) In a sale of goods ‘goods’ sold must be of merchantable quality.(iii) To form a valid contract consideration must be adequate.(iv) Risk prima facie passes with the property in the goods.
3. What are the principles of law of guarantee with regard to contribution of the same debt between theco-sureties?
4 A, who owes B Rs. 10,000, appoints B as his agent to sell his landed property at Delhi and afterpaying himself (B) what is due to him, to hand over the balance to A. Can A revoke his authoritydelegated to B?
5. M advances to N Rs. 5,000 on the guarantee of P. The loan carries interest at ten percent perannum. Subsequently, N becomes financially embarrassed. On N’s request, M reduces the interestto six per cent per annum and does not sue N for one year after the loan becomes due. N becomesinsolvent. Can M sue P?
6. Mr. S an industrialist has been fighting a long drawn litigation with Mr. R another industrialist. Tosupport his legal campaign Mr. S enlists the services of Mr. X a legal expert stating that an amountof Rs. 5 lakhs would be paid, if Mr. X does not take up the brief of Mr. R. Mr. X agrees, but at theend of the litigation Mr. S refuses to pay. Decide whether Mr. X can recover the amount promisedby Mr. S under the provisions of the Indian Contract Act, 1872.
7. (a) What is meant by Anticipatory Breach of Contract?(b) Mr. Dubious textile enters into a contract with Retail Garments Show Room for supply of 1,000
pieces of Cotton Shirts at Rs. 300 per shirt to be supplied on or before 31st December, 2006.However, on 1st November, 2006 Dubious Textiles informs the Retail Garments Show Roomthat he is not willing to supply the goods as the price of Cotton shirts in the meantime has goneupto Rs. 350 per shirt. Examine the rights of the Retail Garments Show Room in this regard.
8. ‘A’ applies to a banker for a loan at a time where there is stringency in the money market. Thebanker declines to make the loan except at an unusually high rate of interest. A accepts the loan onthese terms. Whether the contract is induced by undue influence? Decide.
9. A’ stands surety for ‘B’ for any amount which ‘C’ may lend to B from time to time during the nextthree months subject to a maximum of Rs. 50,000. One month later A revokes the guarantee, whenC had lent to B Rs. 5,000. Referring to the provisions of the Indian Contract Act, 1872 decidewhether ‘A’ is discharged from all the liabilities to ‘C’ for any subsequent loan. What would be youranswer in case ‘B’ makes a default in paying back to ‘C’ the money already borrowed i.e. Rs. 5,000?
10. For the purpose of making uniform for the employees B bought dark blue coloured cloth from Vivek,but did not disclose to the seller the purpose of said purchase. When uniforms were prepared andused by the employees, the cloth was found unfit. However, there was evidence that the cloth wasfit for caps, boots and carriage lining. Advise B whether he is entitled to have any remedy under thesale of Goods Act, 1930?
11. Mr. J sells and consigns certain goods to Mr. S for cash and sends the Railway Receipt to him. Mr.S becomes insolvent and while the goods are in transit, he assigns the Railway Receipt to Mr. Nwho does not know that Mr. S is insolvent. Mr. J being an unpaid seller wants to exercise his rights.
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Advise:(a) whether Mr. J can exercise the right of stoppage of goods in transit ?(b) would your answer be different if Mr. N was aware of Mr. J’s insolvency before the assignment
of the Railway Receipt in favour of Mr. N ?12. What are the exceptions to the doctrine of ‘Caveat Emptor’ ?13. Ram, Shyam and Gopal are partners in a firm. Ram retires. Shyam and Gopal continue to carry on
firm’s business in the same “firm name”. Do you agree that in this situation change in therelationship between partners is involved, but this is not extinguishment of the existence of the firmitself? Give reasons.
14. Briefly explain minor’s position in a partnership firm.15. State the privileges of a “Holder in due course” under the Negotiable Instruments Act, 1881.
A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C’sindorsement and collected proceeds to the cheque through his Bankers. B the drawer wants torecover the amount from C’s Bankers. Decide in the light of the provisions of NegotiableInstruments Act, 1881-(i) Whether B the drawer, can recover the amount of the cheque from C’s Bankers?(ii) Whether C is the Fictitious Payee?(iii) Would your answer be still the same in case C is a fictitious person?
16. A issues a cheque for Rs. 25,000/- in favour of B. A has sufficient amount in his account with theBank. The cheque was not presented within reasonable time to the Bank for payment and the Bank,in the meantime, became bankrupt. Decide under the provisions of the Negotiable Instruments Act,1881, whether B can recover the money from A?
17. On 1st January, 2006, Aryan Textiles Ltd. agreed with the employees for payment of an annualbonus linked with production or productivity instead of bonus based on profits subject to the limit of30% of their salary wages during the relevant accounting year. It was also agreed by theemployees that they will not claim minimum bonus stated under Section 10 of the Payment of BonusAct, 1965. As per the agreement the employees of Aryan Textiles Ltd claimed annual bonus linkedwith production or productivity in the relevant accounting year. On refusal of the company theemployees of the company moved to the court for relief.Decide in reference to the provisions of the payment of Bonus Act, 1965 whether the employees willget the relief? Inspite of the aforesaid agreement whether the employees are still entitled to receiveminimum bonus.
18. In an accounting year, a company to which the payment of Bonus Act, 1965 applies, suffered heavylosses. The Board of Directors of the said company decided not to give bonus to the employees.The employees of the company move to the Court for relief. Decide in the light of the provisions ofthe said Act whether the employees will get relief?
19. Manorama Group of Industries sold its textile unit to Giant Group of Industries. Manorama Groupcontributed 25% of total contribution in Pension Scheme, which was due before sale under theprovisions of Employees Provident Fund and Miscellaneous Provisions Act, 1952. The transfereecompany (Giant Group of Industries) refused to hear the remaining 75% contribution in the PensionScheme. Decide, in the light of the Employees Provident Fund and Miscellaneous Provisions Act,1952, who will be liable to pay for the remaining contribution in case of transfer of establishment andupto what extent?
20 An employee leaves the establishments in which he was employed and gets employment in anotherestablishment wherein he has been employed. Explain the procedure laid down in the Employees'Provident Fund and Miscellaneous Provisions Act, 1952 in this relation.
21. M/s Supreme Society Ltd., a Multi-state Cooperative Society, is contemplating to transfer some of itsassets and liabilities to another Multi-state Cooperative Society. Advise the management of the
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society about the steps to be taken in this regard.22. Sohan is a member of a co-operative society registered with the unlimited liability under the
Cooperative Societies Act, 1912. Holding shares of the society for ten months, Sohan transfers hisshares to Mohan. Decide whether transfer of shares in favour of Mohan is valid?
23. A Co-operative Society with unlimited liability wants to expel its member, who prejudices the societyby his misconduct. For this purpose, the society wants to amend its bye-laws. State the groundswhich should be included in the bye-laws of the society so as to expel such member from themembership of the society.
24. Some of the creditors of M/s Get Rich Quick Ltd. have complained that the company was formed bythe promoters only to defraud the creditors and circumvent the compliance of legal provisions of theCompanies Act, 1956. In this context they seek your advice as to the meaning of corporate veil andwhen the promoters can be made personally liable for the debts of the company.
25. M/s ABC Ltd. a company registered in the State of West Bengal desires to shift its registered officeto the State of Maharashtra. Explain briefly the steps to be taken to achieve the purpose.Would it make a difference, if the Registered Office is transferred from the Jurisdiction of oneRegistrar of Companies to the jurisdiction of another Registrar of Companies within the same State?
26. M/s Honest Cycles Ltd. has received an application for transfer of 1,000 equity shares of Rs.10 eachfully paid up in favour of Mr. Balak. On scrutiny of the application form it was found that theapplicant is minor. Advise the company regarding the contractual liability of a minor and whethershares can be allotted to the Balak by way of transfer.
27. Annual General Meeting of a Public Company was scheduled to be held on 15.12.2006. Mr. A, ashareholder, issued two Proxies in respect of the shares held by him in favour of Mr. ‘X’ and Mr. ‘Y’.The proxy in favour of ‘Y’ was lodged on 12.12.2006 and the one in favour of Mr. X was lodged on15.12.2006. The company rejected the proxy in favour of Mr. Y as the proxy in favour of Mr. Y wasof dated 12.12.2006 and thus in favour of Mr. X was of dated 13.12.2006. Is the rejection by thecompany in order ?
28. A company issued a prospectus. All the statements contained therein were literally true. It alsostated that the company had paid dividends for a number of years, but did not disclose the fact thatthe dividends were not paid out of trading profits, but out of capital profits. An allottee of shareswants to avoid the contract on the ground that the prospectus was false in material particulars.Decide.
29. The Articles of Association of Mars Company Ltd. provides that documents may be served upon thecompany only through Fax. Ramesh despatches a document to the company by post, undercertificate of posting. The company does not accept it on the ground that it is in violation of theArticles of Association. As a result Ramesh suffers loss. Explain with reference to the provisions ofthe Companies Act, 1956:(i) What refusal of document by the company is valid?(ii) Whether Ramesh can claim damages on this basis?
30. A Company was incorporated on 6th October, 2006. The certificate of incorporation of the companywas issued by the Registrar on 15th October, 2006. The company on 10th October, 2006 enteredinto a contract, which created its contractual liability. The company denies from the said liability onthe ground that company is not bound by the contract entered into prior to issuing of certificate ofincorporation. Decide, under the provisions of the Companies Act, 1956, whether the company canbe exempted from the said contractual liability.
31. Dinesh, a director in a company, gave in writing to the company that notice for any General Meetingand the Board of Directors' Meeting be sent to him at his address in India only by Registered Mailand for which he paid sufficient money. The company sent two notices to him, of such meetings, byordinary mail, under certificate of posting. Dinesh did not receive the said notices and could notattend the meetings and the proceedings thereof on the ground of improper notice. Decide in thelight of the provisions of the Companies Act, 1956:
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(i) Whether the contention of Dinesh is valid?(ii) Would you answer be still the same in case Dinesh remained outside India for two months
(when such notices were given and meetings held).
SUGGESTED HINTS / ANSWERS
1. If the creditor makes any variance (i.e. change in terms) without the consent of the surety, thensurety is discharged as to the transactions subsequent to the change. In the instant case Y is liableas a surety for the loss suffered by the bank due to misappropriation of cash by X during the firstnine months but not for misappropriations committed after the reduction in salary. [Section 133,Indian Contract Act, 1872].
2. (i) The statement is correct. Normally, a sub-agent is not appointed, since it is delegation ofpower by an agent given to him by his principal. The governing principle is, a delegate cannotdelegate’. (Latin version of this principle is, “delegates non potest delegare”). However, thereare certain circumstances where an agent can appoint sub-agent.In case of proper appointment of a sub-agent, by virtue of Section 192 of the Indian ContractAct, 1872 the principal is bound by and is held responsible for the acts of the sub-agent. Theirrelationship is treated to be as if the sub-agent is appointed by the principal himself.However, if a sub-agent is not properly appointed, the principal shall not be bound by the actsof the sub-agent. Under the circumstances the agent appointing the sub-agent shall be boundby these acts and he (the agent) shall be bound to the principal for the acts of the sub-agent.
(ii) Goods must be of Merchantable Quality: It is one of the implied conditions that the goodssold to a customer must be of merchantable quality. Section 16(2) of the Sale of Goods Act,1930 provides where goods are bought by description from a seller who deals in goods of thatdescription (whether he is the manufacturer or producer or not), there is an implied conditionthat the goods are of merchantable quality. The expression “merchantable quality” though notdefined in the Act, nevertheless connotes goods of such a quality and in such condition that aman of ordinary prudence would accept them as goods of that description. Goods should alsobe such as are commercially saleable under the description by which they are known in themarket at their full value. If goods are of such a quality and in such a condition that areasonable person acting reasonably would accept them after having examined themthoroughly, they are of merchantable quality.Sub-section (2) of Section 16 further provides that where the buyer has examined the goods,there is an implied condition as regards defects which such examination ought to haverevealed.
(iii) The law provides that a contract should be supported by consideration. So long asconsideration exists, the Courts are not concerned to its adequacy, provided it is of somevalue. The adequacy of the consideration is for the parties to consider at the time of makingthe agreement, not for the Court when it is sought to be enforced (Bolton v. Modden).Consideration must however, be something to which the law attaches value though it need notbe a equivalent in value to the promise made.According to Explanation 2 to Section 25 of the Indian Contract Act, 1872, an agreement towhich the consent of the promisor is freely given is not void merely because the considerationis inadequate but the inadequacy of the consideration may be taken into account by the Courtin determining the question whether the consent of the promisor was freely given.
(iv) Section 26 of the Sale of Goods Act, 1930 lays down the general rule that “risk prima faciepasses with the property”. In other words, risk always follows ownership and the owner has tobear the burden or loss. Thus, whoever is the owner, carries the risk. The goods remain atthe seller’s risk until the ownership therein is transferred to the buyer and the goods are atbuyer’s risk when their ownership is transferred to him whether the delivery has been made tohim or not.
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However, there are following exceptions to the general rule that risk prima facie passes withthe property-1. If the parties have by a special agreement stipulated that the risk will pass sometime
after or before the ownership has passed.2. where the delivery of the goods has been delayed due to the fault of either the seller or
the buyer, in such cases the goods are at the risk of that party who is responsible forsuch fault as resulted in loss of any kind. The defaulting party will bear the loss.
3. Sometimes trade customs may put the ownership and risk separately in two parties.3. Contribution as between co-sureties: The principle in this regard is laid down in Section 146 of
the Indian Contract Act, 1872 which is as follows:“When two or more persons are co-sureties for the same debt, or duty either jointly, or severally andwhether under the same or different contracts and whether with or without the knowledge of eachother, the co-sureties in the absence of any contract to the company, are liable, as betweenthemselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaidby the principal debtor”.A co-surety is entitled to recover from other sureties the amount that he has paid but the right arisesonly if the surety has paid an amount beyond his share of the debt to the creditor, for only then doesit become certain that there is ultimately a case for contribution at all. A judgement against thesurety at the suit of the creditor for the full amount of the guarantee will have the same effect aspayment made for these parties and would entitle the surety or his representative to a declaration ofthe right to contribution on the very same principle by which the rights of company trustees inrespect of amount which they are made liable to pay are settled.Liabilities of two sureties are not affected by mutual agreements between them. This principle hasbeen laid down in Section 132 which runs thus, where two persons, contract with a third party toundertake a certain liability, and also contract with each other that one of them shall be liable onlyon the default of the other the third person not being a party to such contract, the liability of each ofsuch two persons to the third person under the first contract is not affected by the existence of thesecond contract, although such third person may have been aware of its existence.This position is applicable when the liability is undertaken jointly by two parties in respect of thesame debt but not in different debts [Pogose v. Bank of Bengal (1877)].
4. According to Section 202 of the Indian Contract Act, 1872 where the agent has himself an interest inthe property which forms the subject-matter of the agency, the agency cannot, in the absence of anexpress contract, be terminated to the prejudice of such interest. In the instant case the doctrine ofagency coupled with interest applies. Therefore, A cannot revoke the authority delegated to B.
5. M cannot sue P, because a surety is discharged from liability when, without his consent, the creditormakes any change in the terms of his contract with the principal debtor, no matter whether thevariation is beneficial to the surety or does not materially affect the position of the surety (Sec. 133,Indian Contract Act, 1872).
6. The problem as asked in the question is based on one of the essentials of a valid contract.Accordingly, one of the essential elements of a valid contract is that the agreement must not be onewhich the law declares to be either illegal or void. A void agreement is one without any legal effect.Thus any agreement in restraint of trade, marriage, legal proceedings etc., are void agreements.Thus Mr. X cannot recover the amount of Rs. 5 lakhs promised by Mr. S because it is an illegalagreement and cannot be enforced by law.
7. Anticipatory breach of contractAnticipatory breach of contract occurs when the promisor refuses altogether to perform his promiseand signifies his unwillingness even before the time for performance has arrived. In such a situationthe promise can claim compensation by way of loss or damage caused to him by the refusal of thepromisor. For this, the promisee need not wait till the time stipulated in the contract for fulfillment ofthe promise by the poimisor is over.
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In the given problem Dubious Textiles has indicated its unwillingness to supply the cotton shirts on1st November 2006 itself when it has time upto 31st December 2006 for performance of the contractof supply of goods. It is therefore called anticipatory breach of contract. Thus Retail Garments showroom can claim damages from Dubious Textiles immediately after 1st November, 2006, withoutwaiting upto 31st December 2006. The damages will be calculated at the rate of Rs. 50 per shirt i.e.the difference between Rs. 350/- (the price prevailing on 1st November) and Rs. 300/- the contractedprice.
8. In the given problem, A applies to the banker for a loan at a time when there is stringency in themoney market. The banker declines to make the loan except at an unusually high rate of interest. Aaccepts the loan on these terms. This is a transaction in the ordinary course of business, and thecontract is not induced by undue influence. As between parties on an equal footing, the court will nothold a bargain to be unconscionable merely on the ground of high interest. Only where the lender isin a position to dominate the will of the borrower, the relief is granted on the ground of undueinfluence. But this is not the situation in this problem, and therefore, there is no undue influence.
9. The problem as asked in the question is based on the provisions of the Indian Contract Act 1872, ascontained in Section 130 relating to the revocation of a continuing guarantee as to futuretransactions which can be done mainly in the following two ways:1. By Notice: A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor.2. By death of surety: The death of the surety operates, in the absence of any contract to the
contrary, as a revocation of a continuing guarantee, so far as regards future transactions.(Section 131).
The liability of the surety for previous transactions however remains.Thus applying the above provisions in the given case, A is discharged from all the liabilities to C forany subsequent loan.Answer in the second case would differ i.e. A Is liable to C for Rs. 5,000 on default of B since theloan was taken before the notice of revocation was given to C.
10. As per the provision of Section 16(1) of the Sale of Goods Act, 1930, an implied condition in acontract of sale that an article is fit for a particular purpose only arises when the purpose for whichthe goods are supplied is known to the seller, the buyer relied on the seller’s skills or judgement andseller deals in the goods in his usual course of business. In this case, the cloth supplied is capableof being applied to a variety of purposes, the buyer should have told the seller the specific purposefor which he required the goods. But he did not do so. Therefore, the implied condition as to thefitness for the purpose does not apply. Hence, the buyer will not succeed in getting any remedyfrom the seller under the Sale of Goods Act [Jones v. Padgett. 14 Q.B.D. 650].
11. (a) Mr. J cannot exercise the right of stoppage of goods in transist, because the goods are beingtaken by Mr. N in good faith and for consideration.
(b) Yes, Mr. J in this case can exercise his right of stoppage of goods in Transit, as Mr. N has notacted in good faith. (Refer to section 27 of The Sale of Goods Act, 1930)
12. The term Caveat Emptor means let the buyer beware; i.e. it is the duty of the buyer to select thegoods of his requirement. The seller is in no way responsible for the bad selection of the buyer andnot bound to disclose the defects in the goods which is selling. If the goods turn out to be defective,the buyer cannot hold the seller responsible. This is known as the doctrine of ‘Caveat Emptor’. Thisdoctrine is however, subject to the following exceptions:1. Where the buyer makes it known to the seller the particular purpose for which the goods are
required, so as to show that he relies on the seller’s skill or judgement and the goods are of adescription which is in the course of seller’s business to supply, it is the duty of the seller tosupply such goods are reasonable fit for that purpose.
2. Where the goods are sold by description there is an implied condition that the goods shallcorrespond with the description (Section 15 of Sale of Goods Act, 1930).
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3. Where the goods are bought by description from a seller who deals in goods of that descriptionthere is an implied condition that the goods shall be of merchantable quality. But where thebuyer has examined the goods this rule shall apply if the defects were such which ought tohave been revealed by an ordinary examination (Section 16(2)).
4. Where the goods are bought by sample, this rule of Caveat Emptor does not apply if the bulkdoes not correspond with the sample (Section 17).
5. Where the goods are brought by sample as well as description, the rule of Caveat Emptor isnot applicable in case the goods do not correspond with both the sample and description(Section 15).
6. An implied warranty or condition as to quality or fitness for a particular purpose may beannexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor isnot applicable.
7. Where the seller sells the goods by making some misrepresentation or fraud and the buyerrelies on it or when the seller actively conceals some defect in the goods so that the samecould not be discovered by the buyer on a reasonable examination, then the rule of CaveatEmptor will not apply. In such a case the buyer has a right to avoid the contract and claimdamages.
13. As per the provision of Section 39 of the Indian Partnership Act, 1932, “The dissolution ofpartnership between all the partners of a firm is called the dissolution of firm.” But when one ormore partner cease to be a partner in a firm, but other continue the business of partnership, it iscalled dissolution of partnership. Thus in this case when Ram retires and Shyam and Gopalcontinue to carry on firm’s business in the old firm’s name. The firm in such a case is called areconstituted firm. Re-constitution of a firm involves a change in the relation of partner and not theend of the firm.
14. Minor’s Position in a partnership firm: In order to constitute a partnership there must be acontract. Since a minor is incompetent to enter into an agreement, he cannot become a partner in afirm. Section 30 of the Partnership Act, 1932, provides that though a minor cannot become apartner, he may be admitted to the benefits of partnership.The position of minor is very peculiar. He is entitled to all the benefits as a partner but he is notsubject to all the liabilities of a partner. His position may be broadly studied under two heads- (a)before attaining majority, and (b) on attaining majority.(i) Before attaining majority:
Rights: A minor has right to:(1) share in the property and the profits of the firm as agreed upon.(2) have access to and inspect and copy any of the accounts of the firm.(3) sue the partners for accounts and payment.Liabilities:(1) A minor’s liability is limited to his share in the partnership business. In other words, the
minor’s personal property cannot be held liable for the debts of the firm.(2) A minor cannot be adjudged as insolvent if the debts of the firm cannot be satisfied out
of property of the firm.(ii) On attaining majority:
When he opts to become a partner:(1) He becomes personally liable to the third parties for all acts of the firm done from the
date when he was admitted to the benefits of partnership.(2) His share in the profits and the property will remain the same as it was when he was a
minor.
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When he opts not to become a partner:(1) His rights and liabilities as a minor continues up to the date on which he gives public
notice of his intention not to become a partner.(2) His share shall not be liable for any act of the firm after the date of such notice.(3) He shall have a right to sue the partners for his share of the property and profits of the
firm.15. Privileges of a “Holder in Due Course”: According to the provisions of the Negotiable
Instruments Act, 1881, a holder in due course has the following privileges:(i) A person signing and delivering to another a stamped but otherwise inchoate instrument is
debarred from asserting, as against a holder in due course, that the instrument has not beenfilled in accordance with the authority given by him, the stamp being sufficient to cover theamount (Section 20).
(ii) In case of bill of exchange is drawn payable to drawer’s order in a fictitious name and isendorsed by the same hand as the drawer’s signature. It is not permissible for acceptor toallege as against the holder in due course that such name is fictitious (Section 42).
(iii) In case a bill or note is negotiated to a holder in due course, the other parties to the bill or notecannot avoid liability on the ground that the delivery of the instrument was conditional or for aspecial purpose only (Section 42 and 47).
(iv) The person liable in a negotiable instrument cannot set up against the holder in due course thedefences that the instrument had been lost or obtained from the former by means of an offenceor fraud or far an unlawful consideration (Section 58).
(v) No maker of a promissory note, and no drawer of a bill or cheque and no acceptor of a bill forthe honour of the drawer shall, in a suit thereon by a holder in due course be permitted to denythe validity of the instrument as originally made or drawn (Section 120).
(vi) No maker of a promissory note and no acceptor of a bill payable to order shall, in a suitthereon by a holder in due course, be permitted to deny the payee’s capacity, at the rate of thenote or bill, to endorse the same (Section 121).
In brief, it is clear that a holder in due course gets a good title in many respects.According to Section 42 of the Negotiable Instruments Act, 1881 an acceptor of a bill of exchangedrawn in a fictitious name and payable to the drawer’s order is not, by reason that such name isfictitious, relieved from liability to any holder in due course claiming under an instrument by thesame hand as the drawer’s signature, and purporting to be made by the drawer.The word ‘fictitious payee’ means a person who is not in existence or being in existence, was neverintended by the drawer to have the payment. Where drawer intends the payee to have the payment,then he is not a fictitious payee and the forgery of his signature will affect the validity of the cheque.Applying the above, answers to the questions asked can be as under:I. In this case B, the drawer can recover the amount of the cheque from C’s bankers because C’s
title was derived through forged endorsement.II. Here C is not a fictitious payee because the drawer intended him to receive payment.III. The result would be different if C is not a real person or is a fictitious person or was not
intended to have the payment.16. The problem as asked in the question is based on the provisions of the Negotiable Instruments Act,
1881 as contained in Section 84. The section provides that where a cheque is not presented by theholder for payment within a reasonable time of its issue and the drawer suffers actual damagethrough the delay because of the failure of the bank, he is discharged from liability to the extent ofsuch damage. In determining what is reasonable time, regard shall be had to the nature of theinstrument, the usage of trade and bankers, and the facts of the particular case.Accordingly, in the given case, the drawer is discharged from the liability to pay the amount of
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cheque to B. However, B can sue against the bank for the amount of the cheque applying theabove provisions.
17. As per Section 31(A) of the Payment of Bonus Act, 1965, there may be an agreement or settlementby the employees with their employer for payment of an annual bonus linked with production orproductivity in lieu of bonus based on profits, as is payable under the Act. Accordingly, when suchan agreement has been entered into the employees are entitled to receive bonus as per terms of theagreement/settlement, subject to the following restriction imposed by Section 31A:(a) any such agreement/settlement whereby the employees relinquish their right to receive
minimum bonus under Section 10, shall be null and void in so far as it purports to deprive theemployees of the right of receiving minimum bonus.
(b) If the bonus payable under such agreement exceed 20% of the salary/wages earned by theemployees during the relevant accounting year, such employees are not entitled to the excessover 20% of salary/wages.
In the given case Aryan Textile Ltd. agreed with the employees for payment of an annual bonuslinked with production or productivity instead of based on profits subject to the limit of 30% of theirsalary/ wages during the relevant accounting year. According to Section 31A the maximum bonusunder this provision can be given which should not exceed 20% of the salary/wages earned by theemployee during the relevant accounting year. Hence, the maximum bonus may be paid upto 20%of the salary/wages. If the company agrees to pay more than 20% then it will be against theprovisions of the Payment of Bonus Act, 1965.The employees of Aryan Textiles also agreed not to claim minimum bonus stated in Section 10 ofthe Payment of Bonus Act, 1965 such an agreement shall be null and void as it purports to deprivethe employees of their right of receiving minimum bonus. Hence, the relief may be given by thecourt, as regards to the payment of bonus to the employees, based on the production orproductivity, if it is agreed, subject to a maximum of 20%. The employees will also be entitledlegally to claim bonus which is minimum prescribed under Section 10 of the Act, even though theyhave relinquished such right as per the agreement.
18. Section 10 of the Payment of Bonus Act, 1965 provides that subject to the other provisions of theAct, every employer shall be bound to pay to employee in respect of the accounting yearcommencing on any day in 1979 and in respect of any subsequent year, a minimum bonus whichshall be 8.33 per cent of the salary or wage earned by the employee during the accounting year orRs. 100 (Rs. 60 in case of employees below 15 years of age), whichever is higher. The minimumbonus is payable whether or not employer has any allocable surplus in the accounting year.Therefore based on the above provision (Section 10) the question asked in the problem can beanswered as under:Yes, applying the provisions as contained in Section 10 the employees shall succeed and they areentitled to be paid minimum bonus at rate 8.33% of the salary or wage earn during the accountingyear or Rs. 100 (Rs. 60 in case of employees below 15 Years of age), whichever is higher.
19. Problem relating to liability in case of transfer of establishmentThe problem as asked in the question is based on the provisions of section 17(B) of the EmployeesProvident Funds and Miscellaneous Provisions Act, 1952. Accordingly where an employer inrelation to an establishment, transfers that establishment in whole or in part by sale, gift, lease orlicence or in any other manner whatsoever, the employer and the person to whom the establishmentis so transferred shall be jointly or severally liable to pay the contribution and other sums due fromthe employer under the provisions of this Act of the scheme or pension scheme, as the case maybe, in respect of the period upto the date of such transfer. It is provided that the liability of thetransferee shall be limited to the value of the assets obtained by him by such transfer.It would be thus evident from the aforesaid provisions that 17-B deals with the liability of transferorand transferee in regard to the money due under (a) the Act or (b) the scheme (c) and pensionscheme. In the case of the transfer of the establishment brought in by sale, gift, lease etc. Theliability of the transferor and transferee is joint and several, but it is limited to the period upto the
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date of transfer.Therefore applying the above provisions in the given case the transferor Manorama Group ofIndustries, the transferor has paid only 25% of the total liability as contribution in pension schemebefore sale of the establishment. With regards to remaining 75% liability both the transferor andtransferee companies are jointly and severally liable to contribute. In case, the transferor refuses tocontribute, the transferee will be liable.The liability is limited upto the date of transfer and upto remaining amount. Further, the liability ofthe transferee i.e. Giant Group of Industries, is limited to the extent of assets obtained by it from thetransfer of the establishment.
20. Transfer of accumulated amount to the credit of Employees Provident Fund on change ofemployment: Section 17-A of the Employees’ Provident Funds and Miscellaneous Provisions Act,1952 provides for the transfer of accounts of an employee in case of his leaving the employmentand taking up employment and to deal with the case of an establishment to which the Act appliesand also to which it does not apply. The option to get the amount transferred is that of theemployee. Where an employee of an establishment to which the Act applies leaves his employmentand obtains re-employment in another establishment to which the Act does not apply, the amount ofaccumulations to the credit of such employees in the Fund or, as the case may be, in the providentFund in the establishment left by him shall be transferred to the credit of his account in the providentfund of the establishment in which he is re-employed, if the employee so desires and the rules inrelation to that provident fund permit such transfer. The transfer has to be made with in such time asmay be specified by the Central Govt. in this behalf. [Sub-Section (I)].Conversely, when an employee of an establishment to which the Act does not apply leaves hisemployment and obtains re-employment in another establishment to which this Act applies, theamount of accumulations to the credit of such employee in the provident fund of the establishmentleft by him, if the employee so desires and the rules in relation to such provident fund permit, maybe transferred to the credit of his account in the fund or as the case may be, in the provident fund ofthe establishment in which he is re-employed. [Sub-Section (2)].
21. Transfer of Assets & Liabilities - Steps to be taken1. M/s Supreme Society Ltd can transfer its assets and liabilities in whole or in part to any other
Multi-State Co-operative Society by passing a resolution by a majority of not less than two-thirds of the members present and voting at a general meeting of the society held for thispurpose. The resolution should contain the particulars of the assets and liabilities to betransferred.
2. After passing the resolution, M/s Supreme Society Ltd should give notice thereof in writing toall the members and creditors giving them an option of withdrawing their shares, deposits orloans as the case may be. This option has to be exercised within a period of one month ofthe date of service of the notice and if any member or creditor who does not exercise hisoption within one month, shall be deemed to have assented to the proposal contained in theresolution. The resolution passed by the society shall not take effect until the assent theretoof all the members and creditors has been obtained.
3. The society should make arrangements for meeting in full or otherwise satisfy all claims ofthe members and creditors who exercise the option to exist from the society.
4. On receipt of necessary documents relating to the resolution passed by the society, theCentral Registrar on being satisfied that the resolution has become effective will issue anorder under Section 21 of the Multi-state Co-operative Societies Act, 2002. This will be asufficient conveyance to vest the assets and liabilities in the transferee society without anyfurther assurance.
22. Transfer of Share of a Member In a Co-operative SocietyAccording to Section 14(2) of the Co-operative Societies Act, 1912, in case of a society registeredwith unlimited liability, a member cannot transfer any share held by him or his interest in the capitalof the society or any part thereof unless:
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(i) he has held such shares or interest for not less than one year; and(ii) the transfer or charge is to the society or to a member of the society.A member can transfer his shares only when both the conditions are fulfilled.Hence, the transfer of shares by Sohan is not valid since he had held these shares only for 10months.
23. Expulsion of a member of a society:A member who degenerates in conduct or character and thereby prejudices the society may beexpelled from the society subject to the provisions in the bye-laws of the society for this purpose.The bye-laws of the society should contain such provisions and thereupon he may be expelled if :(i) he fails to fulfil his obligations in the matter of dues ( the number of months arrears being
specified).(ii) he becomes a member of another similar society and refuses to withdraw and thereby it may
be possible that he may pass on such information to a rival society of which he is a member.(iii) he is to be proceeded against for debts;(iv) he becomes insolvent.(v) he engages in such activities as might be contrary to the principles of the society;(vi) he becomes insane;(vii) he is convicted by a criminal court, especially of bribery, forgery, theft or fraud; and(viii) he has committed an act which is considered dishonourable by a managing committee.If a member of a society with unlimited liquidity joins another society and so pledges his liquiditytwice over he should be expelled.
24. Corporate VeilAfter incorporation the company in the eyes of law is a different person altogether from theshareholders who have formed the company. The company has its own existence and as a resultthe shareholders cannot be held liable for the acts of the company even though the shareholderscontrol the entire share capital of the company. This is popularly known as Corporate Veil and incertain circumstances the courts are empowered to lift or pierce the corporate veil by ignoring thecompany and directly examine the promoters and others who have managed the affairs of thecompany after its incorporation. Thus, when the corporate veil is lifted by the courts, (i.e., the courtshave disregarded the company as an entity), the promoters can be made personally liable for thedebts of the company. In the following circumstances, corporate veil can be lifted by the courts andpromoters can be held personally liable for the debts of the company.(i) Trading with enemy country.(ii) Evasion of taxes.(iii) Forming a subsidiary company to act as its agent.(iv) The benefit of limited liability is destroyed by reducing the number of members below 7 in
the case of public company and 2 in the case of private company for more than six months.(v) Under law relating to exchange control.(vi) Device of incorporation is adopted to defraud creditors or to avoid legal obligations.
25. Transfer of Registered Office of a CompanyIn order to shift the registered office from the State of West Bengal to the State of Maharashtra, M/sABC Ltd has to take the following steps:(i) To pass a special resolution and thereafter file the same with the Registrar of Companies.(ii) To file a Petition before the Company Law Board (Central Government)* under Section 17, of
the Companies Act, 1956.
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(iii) To give an advertisement in two newspapers one in English language and the other in locallanguage indicating the change and any member/creditor having objection can write to theCompany Law Board (Central Government)*.
(iv) To give notice to the State Government of West Bengal.(v) To submit all the required documents along with the fee to Company Law Board (Central
Government)*.The Company Law Board (Central Government)* after hearing the petition passes an orderconfirming the alteration in the memorandum of association of the company regarding the shifting ofthe registered office. The Company Law Board’s (Central Government)* order should be filed byABC Ltd with both the Registrars of Companies West Bengal and Maharashtra. After registration ofthe said order the Registrar of Companies Maharashtra will issue a certificate which is theconclusive proof that all the formalities have been complied with.Change of registered office from the jurisdiction of one Registrar to the other Registrar within thesame State: The procedure and law pertaining to the change of registered office from thejurisdiction of one Registrar to the other Registrar within the same State is contained in Section 17Aof the Companies Act, 1956 as amended upto date is as follows:(i) Company can do so only if the Regional Director permits to it.(ii) Application for permission has to be made on a prescribed form.(iii) The Regional Directors are required to confirm the Company’s application and inform it
accordingly within a period of four weeks.(iv) After getting the confirmation of the Regional Director, the company must file a copy of the
same with the Registrar of Companies within two months from the date of the confirmationtogether with a copy of the altered memorandum.
(v) The Registrar is required to register the same and inform the company within one monthfrom the date of filing.
(vi) The Registrar’s certificate is a conclusive evidence of the fact of alteration and of compliancewith the requirements (Section 17-A).
(*Note: Students may kindly note that, all Sections of the Companies (Second Amendment) Act,2002 have not come into force. Till such time, jurisdiction of Company Law Board will continue toremain unchanged.)
26. The Companies Act, 1956 does not prescribe any qualification for membership. Membership entailsan agreement enforceable in a court of law. Therefore, the contractual capacity as envisaged by theIndian Contract Act, 1872 should be taken into consideration. It was held in the case of Mohri BibiVs. Dharmadas Ghose (1930) 30 Cal. 531 (P.C.) that since minor has no contractual capacity, theagreement with a minor is void. Therefore, a minor or a lunatic cannot enter into an agreement tobecome a member of the company. However, the Punjab High Court held in the case of DiwanSingh vs. Minerva Films Ltd (AIR 1956 Punjab 106) that there is no legal bar to a minor becoming amember of a company by acquiring shares by way of transfer provided the shares are fully paid upand no further obligation or liability is attached to these. The same view was upheld by theCompany Law Board in the case of S.L. Bagree Vs. Britannia Industries Ltd (1980).In view of the above, M/s Honest Cycles Ltd can give membership to Balak through 1000 shares,received by way of transfer, in favour of Mr. Balak a minor because the shares are fully paid upand no further liability is attached to these.
27. In case more than one proxies have been appointed by a member in respect of the same meeting,one which is later time shall prevail and the earlier one shall be deemed to have been revoked.Thus, in the normal course, the proxy in favour of Mr. X, being later in time, should be upheld asvalid.But, as per Section 176 of the Companies Act, 1956, a proxy should be deposited 48 hours beforethe time of the meeting. In the given case, the proxies should have, therefore, been deposited on or
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before 13.12.2006 (the date of the meeting being 15.12.2006). X deposited the proxy on15.12.2006. Therefore, proxy in favour of Mr. X has become invalid. Thus, rejecting the proxy infavour of Mr. Y is unsustainable. Proxy in favour of Y is valid since it is deposited in time.
28. Mis-leading ProspectusAny person who takes shares on the faith of statement of facts contained in a prospectus canrescind the contract if those statements are false or untrue. The words ‘untrue statement’ have tobe construed as explained in Section 65(1)(a), which says that a statement included in a prospectusshall be deemed to be untrue, if the statement is misleading in the form and context in which it isincluded. Again, where the omission from a prospectus of any matter is calculated to mislead, theprospectus is deemed, in respect of such omission to be a prospectus in which an untrue statementis included [Section 65(1)(b)].In this case, the fact that dividends were paid out of capital profit and not out of trading profits wasnot disclosed in the prospectus and to that extent the prospectus contained a materialmisrepresentation of a fact giving a false impression that the company was a profitable one. Hencethe allottee can avoid the contract of allotment of shares. (Rex V. Lord Kylsant).
29. Problem on service of document upon a company: The problem as asked in the question isbased on the provisions of the Companies Act, 1956 as contained in Section 51. Accordingly adocument may be served on a company or on its officer at the registered office of the company. Itmust be sent either by post or by leaving it at its registered office. If it is sent by post, it must beeither by post under a certificate of posting or by registered post. When a notice has beenaddressed to the company and served on the directors, it constitutes a good service (Benabo v. Jay(William) and Partners Ltd.) The articles of a company which contain the provisions contrary toSection 51 cannot be enforced nor can they limit the mode of service to only one of the modesprovided by the Statute (Sadasiv Shankar Dandige V. Gandhi Seva Samaj Ltd.).Accordingly in the first case the refusal by the Mars Company Ltd. of the service of the document isnot valid.In the second case Ramesh can claim damages on this account from the Company.
30. Problem on Company Law; Certificate of Incorporation and the binding effect:Upon the registration of the documents as required under the Companies Act, 1956 for incorporationof a company, and on payment of the necessary fees, the Registrar of Companies issues aCertificate that the company is incorporated (Section 34).Section 35 provides that a certificate of incorporation issued by the Registrar is conclusive as to alladministrative acts relating to the incorporation and as to the date of incorporation. The facts asgiven in the problem are similar to those in case of Jubilee Cotton MIlls v. Lewis (1924) A.C. 1958where it was held that an allotment of shares made on the date after incorporation could not bedeclared void on the ground that it was made before the company was incorporated when thecertificate of incorporation was issued at a later date.Applying the above principles the contention of the company in this case cannot be tenable. It isimmaterial that the certificate of incorporation was issued at a later date. Since the company cameinto existence on the date of incorporation stated on the certificate, it is quite legal for the companyto enter into contracts. To conclude the contracts entered into by the company before the issue ofcertificate of incorporation shall be binding upon the company. The date of issue of certificate isimmaterial.
31. Problem on notice and validity of proceedings of the meeting: The problem as asked in thequestion is based on the provisions of the Companies Act, 1956 as contained in Section 172 readwith Section 53. Accordingly, the notice may be served personally or sent through post to theregistered address of the members and, in the absence of any registered office in India, to theaddress, if there be any within India furnished by him to the company for the purpose of servicingnotice to him. Service through post shall be deemed to have effected by correctly addressing,preparing and posting the notice. If, however, a member wants to notice to be served on him undera certificate or by registered post with or with acknowledgement due and has deposited money with
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the company to defray the incidental expenditure thereof, the notice must be served accordingly,otherwise service will not be deemed to have been effected.Accordingly, the questions as asked may be answered as under:(i) The contention of Diensh shall be tenable, for the reason that the notice was not properly
served and meetings held by the company shall be invalid.(ii) In view of the provisions of the Companies Act, 1956, as contained in Section 172, the
company is not bound to send notice to Dinesh at the address outside India. Therefore,answer in the second case shall differ from the first one.
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
PROFESSIONAL COMPETENCE COURSE(PCC)
SYLLABUS
GROUP I
Paper – 1 : Advanced Accounting
Paper – 2 : Auditing and Assurance
Paper – 3 : Law, Ethics and Communication
GROUP II
Paper – 4 : Cost Accounting and Financial Management
Paper –5 : Taxation
Paper – 6 : Information Technology and Strategic Management
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PAPER – 1 : ADVANCED ACCOUNTING(One paper – Three hours – 100 Marks)
Level of Knowledge: Working knowledgeObjectives:(a) To lay a theoretical foundation for the preparation and presentation of financial statements,(b) To gain working knowledge of the professional standards, principles and procedures of accounting
and their application to different practical situations,(c) To gain the ability to solve simple problems and cases relating to company accounts including
special type of corporate entities, partnership accounts and(c) To familiarize students with the fundamentals of computerized system of accounting.Contents1. Conceptual Framework for Preparation and Presentation of Financial Statements2. Accounting Standards
An overview; standards setting processWorking knowledge of:AS 1: Disclosure of Accounting PoliciesAS 2: Valuation of InventoriesAS 3: Cash Flow StatementsAS 4: Contingencies and Events occurring after the Balance Sheet DateAS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting PoliciesAS 6: Depreciation AccountingAS 7: Construction Contracts (Revised 2002)AS 9: Revenue RecognitionAS 10: Accounting for Fixed AssetsAS 11: The Effects of Changes in Foreign Exchange Rates (Revised 2003)AS 12: Accounting for Government GrantsAS 13: Accounting for InvestmentsAS 14: Accounting for AmalgamationsAS 16: Borrowing CostsAS 19 LeasesAS 20 Earnings Per ShareAS 26: Intangible AssetsAS 29: Provisions, Contingent Liabilities and Contingent Assets.
3. Company Accounts(a) Preparation of financial statements – Profit and Loss Account, Balance Sheet and Cash Flow
Statement(b) Profit (Loss) prior to incorporation(c) Alteration of share capital, Conversion of fully paid shares into stock and stock into shares,
Accounting for bonus issue, Accounting for employee stock option plan, Buy back ofsecurities, Equity shares with differential rights, Underwriting of shares and debentures,Redemption of debentures
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(d) Accounting for business acquisition, Amalgamation and reconstruction (excluding problemsof amalgamation on inter-company holding)
(e) Accounting involved in liquidation of companies, Statement of Affairs (includingdeficiency/surplus accounts) and Iiquidator’s statement of account of the winding up.
4. Financial Statements of Banking, Insurance and Electricity Companies5. Average Due Date, Account Current, Self-Balancing Ledgers6. Financial Statements of Not-for-Profit Organisations7. Accounts from Incomplete Records8. Accounting for Special Transactions
(a) Hire purchase and instalment sale transactions(b) Investment accounts(c) Departmental and branch accounts including foreign branches(d) Insurance claims for loss of stock and loss of profit.
9. Advanced Issues in Partnership AccountsFinal accounts of partnership firms – Admission, retirement and death of a partner includingtreatment of goodwill; Dissolution of partnership firms including piecemeal distribution of assets;Amalgamation of partnership firms; Conversion into a company and Sale to a company.
10. Accounting in Computerised EnvironmentAn overview of computerized accounting system–Salient features and significance, Concept ofgrouping of accounts, Codification of accounts, Maintaining the hierarchy ofledger, Accounting packages and consideration for their selection, Generating AccountingReports.Note – If either old Accounting Standards (ASs), Announcements and Limited Revisions to
ASs are withdrawn or new ASs, Announcements and Limited Revisions to ASs areissued by the Institute of Chartered Accountants of India in place of existing ASs,Announcements and Limited Revisions to ASs, the syllabus will accordinglyinclude/exclude such new developments in place of the existing ones with effect fromthe date to be notified by the Institute.
PAPER– 2: AUDITING AND ASSURANCE(One Paper —Three hours — 100 Marks)
Level of knowledge: Working KnowledgeObjective:To understand objective and concepts of auditing and gain working knowledge of generally acceptedauditing procedures and of techniques and skills needed to apply them in audit and attestationengagements and solving simple case-studies.Contents1. Auditing Concepts —Nature and limitations of Auditing, Basic Principles governing an audit,
Ethical principles and concept of Auditor’s Independence, Relationship of auditing with otherdisciplines.
2. Auditing and Assurance Standards —Overview, Standard-setting process, Role of InternationalAuditing and Assurance Standards Board and Auditing and Assurance Standards Board in India.
3. Auditing engagement —Audit planning, Audit programme, Control of quality of audit work—Delegation and supervision of audit work.
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4. Documentation — Audit working papers, Audit files: Permanent and current audit files,Ownership and custody of working papers.
6. Internal Control — Elements of internal control, Review and documentation, Evaluation ofinternal control system, Internal control questionnaire, Internal control check list, Tests of control,Application of concept of materiality and audit risk, Concept of internal audit.
7. Internal Control and Computerized Environment, Approaches to Auditing in ComputerisedEnvironment.
8. Audit Sampling — Types of sampling, Test checking, Techniques of test checks.9. Analytical review procedures.10. Audit of payments — General considerations, Wages, Capital expenditure, Other payments and
expenses, Petty cash payments, Bank payments, Bank reconciliation.11. Audit of receipts — General considerations, Cash sales, Receipts from debtors, Other Receipts.12. Audit of Purchases — Vouching cash and credit purchases, Forward purchases, Purchase
returns, Allowance received from suppliers.13. Audit of Sales — Vouching of cash and credit sales, Goods on consignment, Sale on approval
basis, Sale under hire% purchase agreement, Returnable containers, Various types of allowancesgiven to customers, Sale returns.
14. Audit of suppliers’ ledger and the debtors’ ledger — Self-balancing and the sectionalbalancing system, Total or control accounts, Confirmatory statements from credit customers andsuppliers, Provision for bad and doubtful debts, Writing off of bad debts.
15. Audit of impersonal ledger — Capital expenditure, deferred revenue expenditure and revenueexpenditure, Outstanding expenses and income, Repairs and renewals, Distinction betweenreserves and provisions, Implications of change in the basis of accounting.
16. Audit of assets and liabilities.17. Company Audit — Audit of Shares, Qualifications and Disqualifications of Auditors, Appointment
of auditors, Removal of auditors, Powers and duties of auditors, Branch audit , Joint audit ,Special audit, Reporting requirements under the Companies Act, 1956.
19. Special points in audit of different types of undertakings, i.e., Educational institutions, Hotels,Clubs, Hospitals, Hire-purchase and leasing companies (excluding banks, electricity companies,cooperative societies, and insurance companies).
20. Features and basic principles of government audit, Local bodies and not-for-profitorganizations, Comptroller and Auditor General and its constitutional role.
Note: Candidates are expected to have working knowledge of relevant Auditing and AssuranceStandards issued by the ICAI with reference to above-mentioned topics.
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PAPER – 3 : LAW, ETHICS AND COMMUNICATION(One paper – Three hours — 100 Marks)
Level of Knowledge: Working knowledge
Part I : Law ( 60 Marks)Objective:To test working knowledge of business laws and company law and their practical application incommercial situations.ContentsBusiness Laws (30 Marks)1. The Indian Contract Act, 18722. The Negotiable Instruments Act, 18813. The Payment of Bonus Act, 19654. The Employees’ Provident Fund and Miscellaneous Provisions Act, 19525. The Payment of Gratuity Act, 1972.Company Law (30 Marks)The Companies Act, 1956 – Sections 1 to 197(a) Preliminary(b) Board of Company Law Administration — National Company Law Tribunal; Appellate Tribunal(c) Incorporation of Company and Matters Incidental thereto(d) Prospectus and Allotment, and other matters relating to use of Shares or Debentures(e) Share Capital and Debentures(f) Registration of Charges(g) Management and Administration – General Provisions – Registered office and name, Restrictions
on commencement of business, Registers of members and debentures holders, Foreign registersof members or debenture holders, Annual returns, General provisions regarding registers andreturns, Meetings and proceedings
(h) Company Law in a computerized Environment – E-filing.Note: If new legislations are enacted in place of the existing legislations, the syllabus would include
the corresponding provisions of such new legislations with effect from a date notified by theInstitute.
Part II : Business Ethics (20 Marks)Objective:To have an understanding of ethical issues in business.Contents1. Introduction to Business Ethics
The nature, purpose of ethics and morals for organizational interests; Ethics and Conflicts ofInterests; Ethical and Social Implications of business policies and decisions; Corporate SocialResponsibility; Ethical issues in Corporate Governance.
2. Environment issuesProtecting the Natural Environment – Prevention of Pollution and Depletion of Natural Resources;Conservation of Natural Resources.
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3. Ethics in WorkplaceIndividual in the organisation, discrimination, harassment, gender equality.
4. Ethics in Marketing and Consumer ProtectionHealthy competition and protecting consumer’s interest.
5. Ethics in Accounting and FinanceImportance, issues and common problems.
Part III : Business Communications (20 Marks)Objective:To nurture and develop the communication and behavioural skills relating to businessContents1. Elements of Communication
(a) Forms of Communication: Formal and Informal, Interdepartmental, Verbal and non-verbal; Activelistening and critical thinking
(b) Presentation skills including conducting meeting, press conference(c) Planning and Composing Business messages(d) Communication channels(e) Communicating Corporate culture, change, innovative spirits(f) Communication breakdowns(g) Communication ethics(h) Groups dynamics; handling group conflicts, consensus building; influencing and persuasion skills;
2. Communication in Business Environment(a) Business Meetings – Notice, Agenda, Minutes, Chairperson’s speech(b) Press releases(c) Corporate announcements by stock exchanges(d) Reporting of proceedings of a meeting.
3. Basic understanding of legal deeds and documents(a) Partnership deed(b) Power of Attorney(c) Lease deed(d) Affidavit(e) Indemnity bond(f) Gift deed(g) Memorandum and articles of association of a company(h) Annual Report of a company.
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GROUP – II
PAPER – 4: COST ACCOUNTING AND FINANCIAL MANAGEMENT(One paper – Three hours — 100 Marks)
Level of Knowledge: Working knowledge
Part I : Cost Accounting (50 Marks)Objectives:(a) To understand the basic concepts and processes used to determine product costs,(b) To be able to interpret cost accounting statements,(c) To be able to analyse and evaluate information for cost ascertainment, planning, control and
decision making, and(d) To be able to solve simple cases.Contents1. Introduction to Cost Accounting
(a) Objectives and scope of Cost Accounting(b) Cost centres and Cost units(c) Cost classification for stock valuation, Profit measurement, Decision making and control(d) Coding systems(e) Elements of Cost(f) Cost behaviour pattern, Separating the components of semi-variable costs(g) Installation of a Costing system(h) Relationship of Cost Accounting, Financial Accounting, Management Accounting and
Financial Management.2. Cost Ascertainment
(a) Material Cost(i) Procurement procedures— Store procedures and documentation in respect of receipts
and issue of stock, Stock verification(ii) Inventory control —Techniques of fixing of minimum, maximum and reorder levels,
Economic Order Quantity, ABC classification; Stocktaking and perpetual inventory(iii) Inventory accounting(iv) Consumption — Identification with products of cost centres, Basis for consumption
entries in financial accounts, Monitoring consumption.(b) Employee Cost
(i) Attendance and payroll procedures, Overview of statutory requirements, Overtime, Idletime and Incentives
(ii) Labour turnover(iii) Utilisation of labour, Direct and indirect labour, Charging of labour cost, Identifying
labour hours with work orders or batches or capital jobs(iv) Efficiency rating procedures(v) Remuneration systems and incentive schemes.
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(c) Direct ExpensesSub-contracting — Control on material movements, Identification with the main product orservice.
(d) Overheads(i) Functional analysis — Factory, Administration, Selling, Distribution, Research and
DevelopmentBehavioural analysis — Fixed, Variable, Semi variable and Step cost
(ii) Factory Overheads — Primary distribution and secondary distribution, Criteria forchoosing suitable basis for allotment, Capacity cost adjustments, Fixed absorptionrates for absorbing overheads to products or services
(iii) Administration overheads — Method of allocation to cost centres or products(iv) Selling and distribution overheads — Analysis and absorption of the expenses in
products/customers, impact of marketing strategies, Cost effectiveness of variousmethods of sales promotion.
3. Cost Book-keepingCost Ledgers—Non-integrated accounts, Integrated accounts, Reconciliation of cost and financialaccounts.
4. Costing Systems(a) Job Costing
Job cost cards and databases, Collecting direct costs of each job, Attributing overhead coststo jobs, Applications of job costing.
(b) Batch Costing(c) Contract Costing
Progress payments, Retention money, Escalation clause, Contract accounts, Accounting formaterial, Accounting for plant used in a contract, Contract profit and Balance sheet entries.
(d) Process CostingDouble entry book keeping, Process loss, Abnormal gains and losses, Equivalent units,Inter-process profit, Joint products and by products.
(e) Operating Costing System5. Introduction to Marginal Costing
Marginal costing compared with absorption costing, Contribution, Breakeven analysis and profitvolume graph.
6. Introduction to Standard CostingVarious types of standards, Setting of standards, Basic concepts of material and Labourstandards and variance analysis.
Part II : Financial Management (50 Marks)Objectives:(a) To develop ability to analyse and interpret various tools of financial analysis and planning,(b) To gain knowledge of management and financing of working capital,(c) To understand concepts relating to financing and investment decisions, and(d) To be able to solve simple cases.
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Contents1. Scope and Objectives of Financial Management
(a) Meaning, Importance and Objectives(b) Conflicts in profit versus value maximisation principle(c) Role of Chief Financial Officer.
2. Time Value of MoneyCompounding and Discounting techniques— Concepts of Annuity and Perpetuity.
3. Financial Analysis and Planning(a) Ratio Analysis for performance evaluation and financial health(b) Application of Ratio Analysis in decision making(c) Analysis of Cash Flow Statement.
4. Financing Decisions(a) Cost of Capital — Weighted average cost of capital and Marginal cost of capital(b) Capital Structure decisions — Capital structure patterns, Designing optimum capital
structure, Constraints, Various capital structure theories(c) Business Risk and Financial Risk — Operating and financial leverage, Trading on Equity.
5. Types of Financing(a) Different sources of finance(b) Project financing — Intermediate and long term financing(c) Negotiating term loans with banks and financial institutions and appraisal thereof(d) Introduction to lease financing(e) Venture capital finance.
6. Investment Decisions(a) Purpose, Objective, Process(b) Understanding different types of projects(c) Techniques of Decision making: Non-discounted and Discounted Cash flow Approaches —
Payback Period method, Accounting Rate of Return, Net Present Value, Internal Rate ofReturn, Modified Internal Rate of Return, Discounted Payback Period and Profitability Index
(d) Ranking of competing projects, Ranking of projects with unequal lives.7. Management of Working Capital
(a) Working capital policies(b) Funds flow analysis(c) Inventory management(d) Receivables management(e) Payables management(f) Management of cash and marketable securities(g) Financing of working capital.
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PAPER – 5 : TAXATION(One paper — Three hours – 100 Marks)
Level of Knowledge: Working knowledgeObjectives:(a) To gain knowledge of the provisions of Income-tax law relating to the topics mentioned in the
contents below and(b) To gain ability to solve simple problems concerning assessees with the status of ‘Individual’ and
‘Hindu Undivided Family’ covering the areas mentioned in the contents below.
Part I : Income-tax (75 marks)Contents1. Important definitions in the Income-tax Act, 19612. Basis of charge; Rates of taxes applicable for different types of assessees3. Concepts of previous year and assessment year4. Residential status and scope of total income; Income deemed to be received / deemed to accrue
or arise in India5. Incomes which do not form part of total income6. Heads of income and the provisions governing computation of income under different heads7. Income of other persons included in assessee’s total income8. Aggregation of income; Set-off or carry forward and set-off of losses9. Deductions from gross total income10. Computation of total income and tax payable; Rebates and reliefs11. Provisions concerning advance tax and tax deducted at source12. Provisions for filing of return of income.
Part II : Service tax and VAT (25 marks)Objective:To gain knowledge of the provisions of service tax as mentioned below and basic concepts of Valueadded tax (VAT) in India.Contents:1. Service tax – Concepts and general principles2. Charge of service tax and taxable services3. Valuation of taxable services4. Payment of service tax and filing of returns5. VAT – Concepts and general principles.Note: If new legislations are enacted in place of the existing legislations the syllabus will
accordingly include the corresponding provisions of such new legislations in the place of theexisting legislations with effect from the date to be notified by the Institute. Students shallnot be examined with reference to any particular State VAT Law.
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PAPER – 6 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT(One paper – Three hours – 100 Marks)
Level of Knowledge: Working knowledge
Section A : Information Technology (50 Marks)Objective:To develop an understanding of Information Technology and its use by the business as facilitator anddriver.Contents1. Introduction to Computers(a) Computer Hardware
Classification of Computers - Personal computer, Workstation, Servers and Super computersComputer Components - CPU, Input output devices, Storage devices
(b) BUS, I/O CO Processors, Ports (serial, parallel, USB ports), Expansion slots, Add on cards, Onboard chips, LAN cards, Multi media cards , Cache memory, Buffers, Controllers and drivers
(c) Computer SoftwareSystems Software - Operating system, Translators (Compilers, Interpreters and Assemblers),System utilitiesGeneral Purpose Software/ Utilities - Word Processor, Spread Sheet, DBMS, Scheduler / Planner,Internet browser and E-mail clientsApplication Software - Financial Accounting, Payroll, InventorySpecialised Systems – Enterprise Resource Planning (ERP) , Artificial Intelligence , ExpertSystems, Decision Support Systems – An Overview
2. Data Storage, Retrievals and Data Base Management Systems(a) Data and Information Concepts: Bits, Bytes, KB, MB, GB, TB(b) Data organization and Access
Storage Concepts : Records, Fields, Grouped fields, Special fields like date, Integers, Real,Floating, Fixed, Double precision, Logical, Characters, Strings, Variable character fields(Memo); Key, Primary key, Foreign key, Secondary key, Referential integrity, Index fields.Storage techniques: Sequential, Block Sequential, Random, Indexed, Sequential access,Direct access, Random access including RandomizingLogical Structure and Physical structure of files
(c) DBMS Models and Classification:Need for database, Administration, Models, DML and DDL (Query and reporting); DataDictionaries, Distributed data bases, Object oriented databases, Client Server databases,Knowledge databases
(d) Backup and recovery – backup policy, backup schedules, offsite backups, recycling ofbackups, frequent checking of recovery of backup
(e) Usage of system software like program library management systems and tape and diskmanagement systems – features, functionalities, advantages
(f) Data Mining and Data Warehousing - An overview
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3. Computer Networks & Network Security(a) Networking Concepts – Need and Scope, Benefits
(b) Local Area Networks- Components of a LAN, Advantages of LAN(c) Client Server Technology
Limitation of Single user systems and need for Client Server TechnologyServers - Database, Application, Print servers, Transaction servers, Internet servers, Mailservers, Chat servers, IDSIntroduction to 3- tier and “n” tier architecture (COM, COM+)
(d) Data centres: Features and functions, Primary delivery centre and disaster recovery site(e) Network Security
Need; Threats and Vulnerabilities; Security levels; techniques4. Internet and other technologies
(a) Internet and world-wide web, Intranets, Extranets, applications of Internet, Internet protocols(b) E-Commerce - Nature, Types (B2B, B2C, C2C), Supply chain management, CRM, Electronic
data interchange (EDI), Electronic fund transfers (EFT), Payment portal, E-Commercesecurity;
(c) Mobile Commerce, Bluetooth and Wi-Fi5. Flowcharts, Decision Tables.
Section B : Strategic Management (50 Marks)Objectives:(a) To develop an understanding of the general and competitive business environment,(b) To develop an understanding of strategic management concepts and techniques,(c) To be able to solve simple cases.Contents1. Business Environment
General Environment % Demographic, Socio-cultural, Macro-economic, Legal/political,Technological, and Global; Competitive Environment.
2. Business Policy and Strategic ManagementMeaning and nature; Strategic management imperative; Vision, Mission and Objectives; Strategiclevels in organisations.
5. Formulation of Functional StrategyMarketing strategy, Financial strategy, Production strategy, Logistics strategy, Human resourcestrategy.
6. Strategy Implementation and ControlOrganisational structures; Establishing strategic business units; Establishing profit centers bybusiness, product or service, market segment or customer; Leadership and behaviouralchallenges.
7. Reaching Strategic EdgeBusiness Process Reengineering, Benchmarking, Total Quality Management, Six Sigma,Contemporary Strategic Issues.
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TRANSITION SCHEME FOR STUDENTS OF PROFESSIONAL EDUCATION (COURSE -II)
(1) Professional Education (Course-II) students who have passed Professional Education(Examination-I) / Foundation Examination can switch over to Professional Competence Course.Such students are classified into two categories –
Category (a)Students who have passed one of the Groups of Professional Education (Examination-II);Students who have appeared in Professional Education (Examination-II), but not passed any of the
Groups; andStudents who have registered for Professional Education (Course- II) and eligible to appear in
Professional Education (Examination-II), but not yet appeared.
Category (b)Students who are registered, provisionally or otherwise, for Professional Education
(Course-II), but ineligible to appear in Professional Education (Examination-II).Transition scheme for the students falling under Category (a) above is as under:
(i) Register concurrently for Professional Competence Course (PCC), Articled / Audit training and100 Hours Information Technology Training.Complete 100 hours Information Technology Training:Appear in Professional Competence Examination (PCE) in the eligible attempt of ProfessionalCompetence Examination without the requirement of completion of minimum 18 months ofpractical training in accordance with the eligibility norm stated in Para (2); or
(ii) Continue with Professional Education (Examination-II) till the last Professional Education(Examination - II) to be held in May 2008.
Transition scheme for the students falling under Category (b) above is as under: -(i) Register concurrently for Professional Competence Course (PCC), Articled / Audit training and
100 Hours Information Technology Training;Complete 100 hours Information Technology Training;Appear in Professional Competence Examination (PCE) in May 2008 or thereafter, aftercompletion of minimum 15 months of articled training or equivalent period of audit training 3months prior to the first day of the month in which examination is held. The students are permittedto undergo training partly as an articled assistant and partly as an audit assistant.
(ii) Continue with Professional Education (Course-II)/Examination till the last Professional Education(Examination-II) to be held in May 2008.
Note: 6 months of articleship training is equivalent to 8 months of audit training. Any fractionalperiod of audit training is not counted. So a student who falls under Category (a) and who isundergoing audit training has to complete 24 months of training for appearing in PCE.
Relevant extracts of Implementation ScheduleCommencement of New Scheme September 13, 2006Registration commences for Articles under New Scheme [Applicable to students whoare studying Professional Education (Course-II) after passing Professional Education(Examination-I) / Foundation Examination]
September 13, 2006
Last Professional Education (Examination–II) May, 2008First Professional Competence Examination for students joining ProfessionalCompetence Course after passing Professional Education (Examination–I)/Foundation Examination
May, 2007
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(2) Eligibility norm of Professional Education ( Course –II) students who have switched over /will switch over to Professional Competence Course (PCC) to appear in ProfessionalCompetence Examination ( PCE)
(i) All such students have already appeared in Professional Education (Examination –II) and passedone of the Groups or could not pass any of the Groups or eligible to appear ProfessionalEducation ( Examination-II) .
(ii) Students should successfully complete 250 Hours Compulsory Computer Training programme /100 Hours Information technology Training programme before appearing in the PCE.
Sl No. 1 2Category of students of PE-II Eligibility to appear in Professional Competence
Examination \ ( PCE)As Modified
1. PE- II students who have passed foundationexamination
May 2007
2. PE- II students who have passed PE-Iexamination held in May 2005 or in any earlierterm
May 2007
3. PE- II students who have passed PE-Iexamination held in November 2005
November 2007
4. PE-II students who have passed PE-Iexamination held in May, 2006
These students fall in category (b) and will appearPCE as per the transition scheme
See also Figure-1.(3) Transition Scheme for Professional Education (Course-II) Students other than those who
have passed Professional Education (Examination –I) or Foundation ExaminationContinue with Professional Education (Examination-II) till the last Professional Education
(Examination-II) to be held in May 2008; orSwitch over to Common Proficiency Test.See Figure-2.
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Students of Professional Education (Course-II) who have passed PE-I/Foundation Examination
Category A:Students who have passed one of
the groups of ProfessionalEducation (Examination-II);
Students who have appeared inProfessional Education(Examination-II), but not passedany of the Groups; and
Students who have registered forProfessional Education (Course-II)and eligible to appear inProfessional Education(Examination-II) but not yetappeared
Category BStudents who are registered,
provisionally or otherwise, forProfessional Education (Course-II), but not eligible to appear inProfessional Education(Examination-II)
Register for Professional CompetenceCourse (PCC), Articled/Audit trainingand 100 Hours Information TechnologyTraining;
Join articles thereafter for 3 ½ years /equivalent period of audit training (56months);
Appear in Professional CompetenceExamination (PCE) as stated in para(2) without the requirement ofcompletion of minimum 18 months ofpractical training; or
Continue with Professional Education(Examination-II) till the lastProfessional Education (Examination-II) to be held in May 2008
Register for Professional CompetenceCourse (PCC), Articled / Audit trainingand 100 Hours Information TechnologyTraining;
Join articles concurrently for 3 ½ years/ equivalent period of audit training (56months);
Appear in Professional CompetenceExamination (PCE) In May 2008 orthereafter on completion of minimum18 months of articled training; or
Continue with Professional Education(Course-II) / Examination till the lastProfessional Education (Examination-II) to be held in May 2008.
Figure-1
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Figure-2(4) Subject-wise exemption: A Professional Education (Course-II) student who has been granted an
exemption under Regulation 37A(7) in one or more papers shall continue to enjoy the saidexemption in the corresponding paper(s) under PCC as given below :
Subject-wise Exemption for PE-II ExaminationExisting NewProfessional Education (Course-II) Professional Competence CourseGroup IPaper 1: Accounting
Group IAdvanced Accounting (100 Marks)
Paper 2: Auditing Auditing and Assurance (100 Marks)Paper 3: Business and Corporate Laws
Section A: Business Law (60 marks)Section B: Corporate Laws (40 marks)
Law, Ethics and CommunicationPart I: Law (60 Marks)Business Laws (30 Marks)Part II: Business Ethics (20 Marks)Part III: Business Communication (20 Marks)
Group IIPaper 4: Cost Accounting and Financial Management
Group IICost Accounting and Financial ManagementPart I: Cost Accounting (50 Marks)Part II: Financial Management (50 Marks)
Paper 5: Income-tax and Central Sales TaxSection A: Income Tax (75 marks)Section B: Central Sales Tax (25 marks)
TaxationPart I: Income-tax (75 Marks)Part II: Service Tax and VAT (25 Marks)
Paper 6: Information Technology Information Technology and StrategicManagementSection A: Information Technology (50 Marks)Section B: Strategic Management (50Marks)
Students of Professional Education (Course-II) who havenot passed PE-I/Foundation
Continue in PE-II till last PE-IIexamination is held, complete 250Hours CCT/100 Hours ITT and join 3years articleship
In case a student does not qualify PE(Examination-II) in the last PE(Examination-II) to be held in May,2008, he / she is allowed to appear inProfessional Competence Examination(PCE) to be held in November, 2008and thereafter. On qualifying PCE andcompletion of 250 Hours CCT/100Hours ITT, he / she is allowed to join 3years articleship
Switch over to CPT
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(5) Group-wise exemption: A student of Professional Education (Course-II) who has passed in anyone but not in both the groups of the Professional (Education-II) is granted exemption frompassing the same group in PCE, i.e., if a student has passed Group I of Professional Education(Course-II) he is granted exemption from appearing in Group I of PCE, or if a student has passedGroup II of Professional Education (Examination-II) he is granted exemption from appearing inGroup II of PCE.
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RECENT PUBLICATIONS OF THE BOARD OF STUDIES
Postal ChargesBy Registered Parcel
English Hindi English HindiRs. Rs. Rs. Rs.
I. STUDY MATERIALSCOMMON PROFICIENCY TEST (CPT)Fundamentals of Accounting 200 140Mercantile Laws 50 40General Economics 100 70Quantitative Aptitude 250 150Self Assessment CD 40 40
640 440 145 145
PROFESSIONAL COMPETENCE COURSE (PCC)Group IAdvanced Accounting Vol. I & Vol. II 500Auditing and Assurance 175Law, Ethics and Communication 275
FINAL (NEW COURSE)Group IFinancial Reporting 600Strategic Financial Management 260Advanced Auditing and Professional Ethics 520Corporate and Allied Laws 200
1580 320Group IIAdvanced Management Accounting 240Information Systems Control and Audit 150Direct Tax Laws 340Indirect Tax laws 290
1020 225Both Groups 2600 540Information Technology Training Course MaterialInformation Technology Training Programme- Modules I & II
500 90
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II. COMPILATIONS OF SUGGESTED ANSWERSProfessional Education (Course-II)Auditing (May, 2000 to May, 2005) 40 40Income Tax and Central Sales Tax (May, 1996 toNov. 2005)
40 40
FinalAdvanced Auditing (May, 2000 to May, 2005) 60 40Direct Taxes (May 2000 to Nov. 2005) 60 40
III. SUGGESTED ANSWERS FOR NOV. 2006Professional Education (Course –I)Professional Education (Course –II) (Group I & II)Final (Group I & II)
Each Suggested Answer is priced Rs.40 per volume plus Postal charges for Registered parcel Rs.40.
IV. REVISION TEST PAPERS FOR MAY 2007Professional Education (Course –I) 40 40Professional Education (Course –II) (Group I & II) 80 55Final (Group I & II) 80 55
V. PROSPECTUS1. Common Proficiency Test – A Simplified
Entry to the Chartered Accountancy Course 100 40
2. Professional Competence Course – FirstStage of Theoretical Education of theChartered Accountancy Course inclusiveof conversion form– With Form Nos. 102 and 103 100 40– Without Form Nos. 102 and 103 50 40
VI. MISCELLANEOUS1 Select cases Direct and Indirect Taxes - 2006 40 402. Information Brochure about Common Proficiency Test
– A Simplified Entry to the Chartered Accountancy CourseBoth in English and Hindi
3. Information Brochure about Professional Competence Course– First Stage of Theoretical Education of the Chartered AccountancyBoth in English and Hindi
Available free of cost in allDecentralised Offices and Branchesof the Institute
4. Information Brochure on 100 Hours Information Technology Training5. Information Brochure about Chartered Accountancy - Global Career
Opportunities through a premier Professional InstituteBoth in English and Hindi
VII. COMPACT DISCS (CDs) New Series1. Membership in Company - PE-II 50 402. Capital Gains (Part I and Part II) - Final 50 403. Insurance Claims - PE-I / CPT 50 404. Hire Purchase and Instalment Payment - PE-II/PCC 50 405. Taxation of Salaries - PE-II/ PCC 50 40
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Applicability of various Publications for Professional Education (Examination –II)to be held in May 2007
Paper – 1 : Accounting
Accounting Standards 1 to 29 [including revised AS 15(2005)].For the students at PE-II level, Accounting Standards and Guidance Notes related to the topics givenin the study material are more relevant. They are not expected to know in detail the advancedstandards like Consolidated Financial Statements (AS 21), Accounting for Investments in Associates inConsolidated Financial Statements (AS 23), Discontinuing Operations (AS 24), Financial Reporting ofInterests in Joint Ventures (AS 27), Impairment of Assets (AS 28) and Provisions, Contingent Liabilitiesand Contingent Assets (AS 29).For the topic of Accounts of Insurance Companies, the Insurance Regulatory and DevelopmentAuthority (Preparation of Financial Statements and Auditor’s Report of Insurance Companies)Regulations, 2002 will be applicable. Students should refer to Fifth Edition (December 2005) of thestudy materials.
Paper – 2 : Auditing
Auditing and Assurance Standards – 1 to 30.Students at PE II level are expected to have familiarity with all these Auditing and AssuranceStandards. They are expected to know in-depth only such Auditing Standards, which have been dealtwithin the main text of the study material. Students should refer to Fifth Edition (September 2005) ofthe study materials.
Paper – 3 : Business & Corporate Laws
The study material revised and updated as on 15 th November 2005 edition is relevant for May, 2007Examination. There has been no legislative change since then.
Paper – 5 : Income-tax and Central Sales Tax
Study Material for Income-tax and Central Sales Tax - June 2005 edition read along with“Professional Education (Course-II) – Supplementary Study Paper - 2006 – Income-tax and CentralSales-tax” containing amendments made by the Finance Act, 2006, relevant for assessment year2007-08.Note – For the purposes of setting the questions in Income-tax and central sales tax, the June 2005edition of the study material read along with the “Supplementary Study Paper - 2006 – Income-tax andCentral Sales-tax” containing the amendments made by the Finance Act, 2006, relevant forassessment year 2007-08 should be taken into account. The study material contains theamendments made by notifications/circulars/other legislations up to 30.04.2005 and the supplementarystudy paper – 2006 contains the amendments made by the Finance Act, 2006 as well as amendmentsmade by notifications/circulars/other legislations between 1.5.05 and 30.04.2006. Further, theamendments made between 1.05.2006 and 31.10.2006 would be published in the Revision TestPapers for May 2007 examination. All these amendments are relevant for May 2007 examination andhence should be taken into account for the purpose of setting questions for this exam.
