Unit – 2: Final Accounts and Financial reporting
MEANING OF DIVIDEND AND ITS TYPES
Shareholders
expect some return for the money invested by them in the company. They get the
return on their investment in the form of dividends given to them from time to
time. Thus, dividends are the profits of the company distributed amongst the
shareholders. The company may declare dividends in general meeting, but no
dividend shall exceed the amount recommended by the Board of Directors. Thus,
shareholders in annual general meeting can only reduce the amount of dividends
but cannot increase the amount of dividends recommended by the Board of
Directors. The directors may no recommend dividend even if there are profits if
they think that distribution of dividend will impair the financial position of
the company.
Dividends
are usually paid on the paid up value shares in the absence of any indication
to the contrary in the Articles of Association. For example, if a company has
share capital of 1,00,000 equity shares of Rs. 10 each, Rs. 7 per share called
up, and paid up and if the rate of dividend is 15%, total dividend paid will be
15% of Rs. 7,00,000 paid up capital (i.e. 1,00,000 shares @ 7 each) i.e. Rs.
1,05,000.
Sources of Declaring Dividend
As
per Section 123 of the Companies Act, 2013 dividend may be declared out of the
following three sources:
1)
Out of
Current Profits: Dividend may be declared out of the profits of the company for
the current year after providing depreciation. The company must transfer the
prescribed percentage of its profits to general reserve before declaring
dividends. This percentage depends on the percentage of dividend declared.
2)
Out of
Past Reserves: Dividend may be declared out of the profits of the company for
any previous financial year or years arrived at after providing for
depreciation in accordance with the provisions of Schedule II of the Companies
Act, 2013 and remaining undistributed. Section 123 of the Act, requires that
dividend can be declared out of the reserves only in accordance with the rules
framed by the Central Government in this behalf.
3)
Out of
Money provided by the Government: A company can also declare dividend
out of the moneys provided by the Central Government for payment of such
dividend in pursuance of guarantee given by the Government.
Dividends may be of the following two types:
1)
Interim Dividend.
2)
Final Dividend.
Interim Dividend: This
dividend is declared between two annual general meetings. Section 123 of the
Companies Act, 2013 provides that the Board of Directors of a company may
declare interim dividend during any financial year out of the surplus in the
profit and loss account and out of profits of the financial year which interim
dividend is sought to be declared. It further provides that in case the company
has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such
interim dividend shall no be declared at a rate higher than the average
dividends declared by the company during the immediately preceding three
financial years. The Board may from time to time pay to the shareholders such
interim dividends as appear to it to be justified keeping in view the profits
of the company.
Final Dividend: It is a
dividend which is declared at the annual general meeting of the shareholders
and is declared by the shareholders only on the recommendation of the
directors. The dividend proposed by the directors is provided for in the final
accounts of the company and is paid only after it has been passed at the annual
general meeting of the shareholders.
Distinction between Interim Dividend
and Final Dividend
1) Interim
dividend is the dividend which is paid in anticipation of profits. It is
dividend paid by the directors any time between the two annual general meetings
of the company, that is, on the basis of less than a full year’s results. Final
dividend is recommended by the directors and declared by the shareholders in
the Annual General meeting.
2) The
payment of interim dividends depends much more upon estimates and opinions than
the declaration of a final dividend which is made upon the information
contained in the Final Balance Sheets.
3) Once a
final dividend is declared, it is a debt payable to the shareholders and cannot
be revoked or reduced by any subsequent action of the company. But declaration
of interim dividend does not create a debt against the company and can be
rescinded or reduced at any time before payment.
4) For
declaration and payment of interim dividend, the directors need to satisfy that
there are adequate distributable profits and payment of interim dividend would
not result in payment out of capital.
Corporate Dividend Tax: As per the
Finance Act, 1997 dividends paid or declared were subject to corporate dividend
tax @ 10% with effect from 1st June, 1997. Such corporate dividend
tax is deducted from Surplus sub-head in the Balance Sheet and it is also shown
under the heading current liabilities as a provision till it is paid. But as
per recent Finance Act, the rate of this tax is 15% plus 10% surcharge and cess
of 2%. Total percentage of corporate dividend tax with surcharge and education
cess comes to 17% approximately.
Divisible Profits and Rules regarding Dividends and Transfer to
reserves
The
term “Divisible Profit” is a very complicated term because all profits are not
divisible profits. Only those profits are divisible profits which are legally
available for dividend to shareholders. Dividends cannot be declared except out
of profits, i.e. excess of income over expenditure; ordinarily capital profits
are not available for distribution amongst shareholders because such profits
are not trading profits. Thus, profits arising from revaluation or sale of
fixed assets or redemption of fixed liabilities should not be available for
distribution as dividend amongst shareholders. The principles of determination
of the divisible profit are given below:
1)
According to Section 123 of the Companies Act,
2013 no dividends can be declared unless:
Ø
Depreciation has been provided for in respect
of the current financial years for which dividend is to be declared;
Ø
Arrears of depreciation in respect of previous
years have been deducted from the profits; and
Ø
Losses incurred by the company in the previous
years.
2)
Section 123 of the Companies Act, 2013
provides that before any dividend is declared or paid a certain percentage of
profits for that financial year depending upon the rate of dividend to be paid
or declared should be transferred to the reserves of the company.
Provided
that nothing in this sub-section shall be deemed to prohibit the voluntary
transfer by a company of a higher percentage of its profits to the reserves in
accordance with such rules as may be made by the Central Government in this
behalf.
3)
No dividend shall be payable except in cash;
4)
There is no prohibition on the company for the
capitalization of profits or reserves of a company for the purpose of issuing
fully paid-up bonus shares or paying up any amount for the time unpaid on any
shares held by the members of the company.
5)
Any dividend payable in cash may be paid by
cheque or warrant sent through the post directed to the registered address of
the shareholder entitled to the payment of the dividend or in the case of joint
shareholder to the registered address of that one of the joint shareholder
which is first named on the register of members or to such person and to such
address as the shareholder or the joint shareholder may in writing direct.”
Transfer to Reserves:
Section 123 of the Companies Act, 2013 provides that
No
dividend shall be declared or paid by a company for any financial year out of
the profits of the company for that year arrived at after providing for
depreciation in accordance with the provisions of Schedule II, except after the
transfer to the reserves of the company a certain percentage of its profits for
that year as specified:
i.
Where the dividend proposed exceeds 10 percent
but not 12.5 percent of the paid-up capital, the amount to be transferred to
the reserves shall not be less than 2.5 percent of the current profits;
ii.
Where the dividend proposed exceeds 12.5
percent but does not exceeds 15 percent of the paid-up capital, the amount to
be transferred to the reserves shall not be less than 5 percent of the current
profits;
iii.
Where the dividend proposed exceeds 15
percent, but does not exceed 20 percent of the paid-up capital, the amount to
be transferred to the reserves shall not be less than 7.5 percent of the
current profits; and
iv.
Where the dividend exceeds 20 percent of the
paid-up capital, the amount to the transferred to reserves shall not be less
than 10 percent of the current profits.
Books of Accounts to be maintained by a Company
Section
128 of the Companies Act, 2013 requires that every company shall prepare and
keep at its registered office books of accounts and other relevant books and
papers and financial statements for every financial year which give a true and
fair view of the state of affairs of the company, including that of its branch
office or offices, if any, and explain the transactions effected both at the
registered office and its branches and such book will be kept on accrual basis
and according to the double entry system of accounting. All or any of the books
of account aforesaid and other relevant papers may be kept at such other place
in India as the Board of Directors may decide and where such a decision is
taken, the company shall, within seven days thereof, file with the Registrar a
notice in writing giving full address of that other place.
The
company may keep such books of account or other relevant papers in electronic
mode in such manner as may be prescribed. The books of account and other books
and papers maintained by the company within India shall be open for inspection
at the registered office of the company. The books of account of every company
relating to a period of not less than eight financial years immediately
preceding a financial year, or where the company had been in existence for a
period less than eight years, in respect of all the preceding years together
with the vouchers relevant to any entry in such books of account shall be kept
in good order.
Section
129 of the Companies Act, 2013 requires that the financial statements shall
give a true and fair view of the state of affairs of the company or companies,
comply with the accounting standards under Section 133 and shall be in the form
or forms as may be provided for different class or classes of companies in
Schedule III.
Where
a company has one or more subsidiaries, it shall in addition to its financial
statements, prepare a consolidated financial statements of the company and of
all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the annual general meeting of the company along with the
laying of its financial statements.
It
is further stated that the books of account should be maintained on accrual
basis and according to the double entry system of accounting to ensure that these
represent true and fair view of the affairs of the company or branch office, as
the case may be. The Act requires that proper stock records should form a
necessary part of proper books of account and also that the books of account
and the relevant vouchers must be preserved for a minimum period of eight years
in good order.
Meaning of Financial Reporting, its components and objectives
Basically,
financial reporting is the process of preparing, presenting and circulating the
financial information in various forms to the users which helps in making
vigilant planning and decision making by users. The core objective of financial
reporting is to present financial information of the business entity which will
help in decision making about the resources provided to the reporting entity
and in assessing whether the management and the governing board of that entity
have made efficient and effective use of the resources provided. The components of financial reporting are:
a)
The financial statements – Balance Sheet, Profit &
loss account, Cash flow
statement & Statement of changes in stock holder’s equity
b)
The notes to financial statements
c)
Quarterly &
Annual
reports (in case
of listed companies)
d)
Prospectus (In
case of companies going for IPOs)
e)
Management Discussion & Analysis (In
case of public companies)
Objectives of Financial
Reporting
The following points sum up the objectives & purposes of
financial reporting:
a)
Providing information to
management of an organization which is used for the purpose of planning, analysis,
benchmarking and decision making.
b)
Providing information to
investors, promoters, debt provider and creditors which is used to enable them
to male rational and prudent decisions regarding investment, credit etc.
c)
Providing information to
shareholders & public at large in case of listed companies about various
aspects of an organization.
d)
Providing information about the
economic resources of an organization, claims to those resources (liabilities
& owner’s equity) and how these resources and claims have undergone change
over a period of time.
e)
Providing information as to how
an organization is procuring & using various resources.
f)
Providing information to various
stakeholders regarding performance of management of an organization as to how
diligently & ethically they are discharging their fiduciary duties &
responsibilities.
g)
Providing information to the
statutory auditors which in turn facilitates audit.
h)
Enhancing social welfare by
looking into the interest of employees, trade union & Government.
Qualitative Characteristics of Financial Reports
The
Qualitative characteristics that make financial information useful:
a)
Relevance: Information is relevant if it would
potentially affect or make a difference in users’ decisions. A related concept
is that of materiality i.e. information is considered to be material if
omission or misstatement of the information could influence users’ decisions.
b)
Faithful Representation: This means that the
information is ideally complete, neutral, and free from error. The financial
information presented reflects the underlying economic reality.
c)
Comparability: This means that the information
is presented in a consistent manner over time and across entities which enables
users to make comparisons easily.
d)
Verifiability: This means that different
knowledgeable and independent observers would agree that the information
presented faithfully represents the economic phenomena it claims to represent.
e)
Timeliness: Timely information is available to
decision makers prior to their making a decision.
f)
Understandability: This refers to clear and
concise presentation of information. The information should be understandable
by users who have a reasonable knowledge of business and economic activities
and who are willing to study the information with diligence.
International Financial Reporting
Standards (IFRS)
IFRS is a set of international
accounting standards stating how particular types of transactions and other
events should be reported in financial statements. IFRS are generally
principles-based standards and seek to avoid a rule-book mentality. Application
of IFRS requires exercise of judgment by the preparer and the auditor in
applying principles of accounting on the basis of the economic substance of
transactions. IFRS are issued by the International Accounting Standards
Board (IASB).
IASB
issued only thirteen (13) IFRS which are as follows:
IFRS
1 - First-time adoption of International Financial Reporting Standards
IFRS
2 - Share-based payment
IFRS
3 - Business combinations
IFRS
4 - Insurance contracts
IFRS
5 - Non-current assets held for sale and discontinued operations
IFRS
6 - Exploration for and evaluation of mineral resources
IFRS
7 - Financial instruments: disclosures
IFRS
8 - Operating segments
IFRS
9 - Financial instruments
IFRS
10 - Consolidated financial statements
IFRS
11- Joint arrangements
IFRS
12- Disclosure of interests in other entities
IFRS
13- Fair Value measurement
Need and Importance of IFRS
The
goal of IFRS is to provide a global framework for how public companies prepare
and disclose their financial statements. IFRS provides general guidance for the
preparation of financial statements, rather than setting rules for
industry-specific reporting. Having an international standard is especially
important for large companies that have subsidiaries in different countries.
Adopting a single set of world-wide standards will simplify accounting
procedures by allowing a company to use one reporting language throughout. A
single standard will also provide investors and auditors with a comprehensive
view of finances.
Merits of IFRS
1.
IFRS brings improvement in comparability of financial information and financial
performance with global peers and industry standards. This will result in more
transparent financial reporting of a company’s activities which will benefit
investors, customers and other key stakeholders in India and overseas.
2.
The adoption of IFRS is expected to result in better quality of financial
reporting due to consistent application of accounting principles and
improvement in reliability of financial statements.
3.
IFRS provide better access to the capital raised from global capital markets
since IFRS are now accepted as a financial reporting framework for companies
seeking to raise funds from most capital markets across the globe.
4.
IFRS minimize the obstacles faced by Multi-national Corporations by reducing
the risk associated with dual filings of accounts.
5.
The impact of globalization causes spectacular changes in the development of
Multi-national Corporations in India. This has created the need for uniform accounting
practices which are more accurate, transparent and which satisfy the needs of
the users.
6.
Uniform accounting standards (IFRS) enable investors to understand better the
investment opportunities as against multiple sets of national accounting standard.
7.
With the help of IFRS, investors can increase the ability to secure cross
border listing.
Limitations of IFRS
1.
The perceived benefits from IFRS’ adoption are based on the experience of IFRS
compliant countries in a period of mild economic conditions. Any decline in
market confidence in India and overseas coupled with tougher economic
conditions may present significant challenges to Indian companies.
2.
IFRS requires application of fair value principles in certain situations and
this would result in significant differences in financial information currently
presented, especially in relation to financial instruments and business
combinations.
3.
This situation is worsened by the lack of availability of professionals with
adequate valuation skills, to assist Indian corporate in arriving at reliable
fair value estimates.
4.
Although IFRS are principles-based standards, they offer certain accounting
policy choices to preparers of financial statements.
5.
IFRS are formulated by the International Accounting Standards Board (IASB)
which is an international standard body. However, the responsibility for
enforcement and providing guidance on implementation vests with local
government and accounting and regulatory bodies, such as the ICAI in India. Consequently,
there may be differences in interpretation or practical application of IFRS
provisions, which could further reduce consistency in financial reporting and
comparability with global peers.
Explanation of Some
Important IFRS
IFRS
1 – First-time adoption of International Financial Reporting
Standards: The IASB issued the IFRS 1 on June 19, 2003. It applies to all those
business concerns which are going to converge their accounting statements with
IFRS from the first time. The IFRS1 has come into with effect from 1st
January 2004. The main purpose of IFRS1 is to set out the basic rules or
regulations for preparing and presenting first IFRS financial statements and
interim financial statements by business concerns. The IFRS1 applies to first
IFRS complied financial statements and each interim report which is presented under IAS 34 for
part of the period is covered by first IFRS financial statements of a business
concern
IFRS
2 - Share-based payment: The major objective of this IFRS is to reflect
the effect of share based transitions in the financial statements of an
entity, including expenses associated with transactions in which share
options are granted to employees. It is entailed for an entity to mention all
the transactions which are associated with employees or other parties to
be settled either in cash or other equity instruments of the business
entity.
IFRS
3 - Business combinations: The major objective of this IFRS is to specify
all requirements for an entity when it undertakes a business. Business
combination means combining two separate entities in to a single
economic entity. As a result of this, an enterprise obtains the control over
the net assets or operations of other enterprises.
IFRS
4 - Insurance contracts: An insurance contract is that where one party
(the insurer) accepts the insurance risk of another party (the policy
holder) by agreeing to reimburse the amount of policy to the policy holder
if any specified uncertain future events occur and adversely affect the policy
holder. The primary objective of this IFRS for an entity is to determine
the financial reporting for the issued insurance contracts (described in
this IFRS as an insurer) until the Board completes the second phase of
its project on insurance contracts.
IFRS
5 - Non-current assets held for sale and discontinued operations: The main
purpose of this IFRS is to measure the accounting for the assets held for sale,
and the preparation and disclosure of discontinued operations in the
financial statements of an entity. Particularly, the IFRS requires those
assets which can be categorized as held for sale to be measured at the
lower degree of carrying amount and fair value less costs to sell, and the
amount of depreciation on such assets to cease.
IFRS
6 - Explorations for and evaluation of mineral resources: The
primary objective of this IFRS is to specify the effects of exploration for and
evaluation of mineral resources in the financial reporting of an entity.
This IFRS state that initially an entity should measure mineral resources
assets on cost and subsequently measurement can be at cost or revalued amount.
The IFRS demands for an entity to perform an impairment test when there are indications
that the carrying amount of exploration and evaluation assets exceeds
recoverable amount.
IFRS
7 - Financial instruments disclosures: The main purpose of this IFRS is to
compel entities to prescribe disclosures that enable financial
statements users to measure the significance of financial instruments for the
entity’s financial position and performance; the nature and extent of
their risk and how the entity manage these risks. This IFRS applies to
all type of entities, either that have few financial instruments or
those that have many financial instruments. This IFRS does not apply to
those financial instruments which are associated with insurance contracts
and financial instruments, contracts and obligations under share based payment
transactions.
IFRS
8 - Operating segments: The primary objective of this IFRS is to
disclose such information that enables the users of financial statements
to evaluate the nature and financial effects of the business activities in which
it is engaged and the economic environments in which it operates. This IFRS
applies to the separate or individual financial statements of an entity
and to the consolidated financial statements of a group with a parent
whose debt or equity instruments are traded in a public market. If the
parent company presents both separate and consolidated financial statement in
a single financial report then segment information should be presented only
on the basis of consolidated financial statements.
IFRS
9 - Financial instruments: This IFRS is replacement of IAS 39 and its
major objective is to set some principles for the financial reporting of
financial assets and financial liabilities of an entity’s financial statements
and providing useful information to the users of these financial statements so
that they can take rational decisions. This IFRS prescribes general
guidelines such as how an entity should classify and determine the
financial assets and financial liabilities.
ACCOUNTING STANDARDS – MEANING, OBJECTIVES AND LIMITATIONS
Accounting
Standards are the policy documents or written statements issued, from time to
time, by an apex expert accounting body in relation to various aspects of
measurement, treatment and disclosure of accounting transactions for ensuring
uniformity in accounting practices and reporting. These standards are prepared
by Accounting Standard Board (ASB).
Every
statement of profit and loss and balance sheet of a company shall comply with
the accounting standards. Accounting Standards recommended by the Institute of
Chartered Accountants of India and prescribed by the Central Government in
consultation with National Advisory Committee on accounting Standards are
mandatory and applicable to all companies while preparing statement of profit
and loss and balance sheet. Where the statement of profit and loss and the
balance sheet of a company do not comply with the accounting standards, such a
company shall disclose in its statement of profit and loss and balance sheet
(a) the deviation from the accounting standards; (b) the reasons for such
deviation and (c) the financial effect, if any, arising due to such deviation.
Objectives
or Purposes of Accounting Standards:
a. To provide
information to the users as to the basis on which the accounts have been
prepared and the financial statements have been presented.
b. To
harmonize the diverse accounting policies & practices which are in use the
preparation & presentation of financial statements.
c. To make
the financial statements more meaningful and comparable and to make people
place more reliance on financial statements prepared in conformity with the
accounting standards.
d. To guide
the judgment of professional accountants in dealing with those items, which are
to be followed consistently from year to year.
e. To
provide a set
of standard accounting
policies, valuation norms and
disclosure requirements.
By
setting the accounting standards, the accountant has following benefits:
a.
Standards
reduce to a reasonable extent or
eliminate altogether confusing
variations in the
accounting treatments used
to prepare financial statements.
b.
There are certain areas where important
information is not statutorily required to be disclosed. standards may call for
disclosure beyond that required by law.
c.
The
application of
accounting standards would
,to a
limited extent, facilitate comparison
of financial statements
of companies situated in
different parts of the
world and also of different
companies situated in
the same country.
However,
there are some limitations of setting
of accounting standards:
(i)Alternative solution to
certain accounting problems may each have
arguments to recommend them. Therefore, the choice between different alternative accounting
treatments may become difficult.
(ii)there may be
a trend towards
rigidity and away
from flexibility in applying
the accounting standards.
(iii)Accounting standards cannot
override the statute. The standards are
required to be framed
within the ambit of
prevailing statutes.
Convergence of Indian accounting standards with International financial
reporting standards (IFRS):
MEANING
of convergence: The convergence of accounting standards refers to the goal of
establishing a single set of accounting standards that will be used
internationally, and in particular the effort to reduce the differences between
the US generally accepted accounting principles (USGAAP) and the International
financial reporting standards (IFRS)
Meaning
of convergence with IFRS: Convergence means to achieve harmony with IFRSs;
in precise terms convergence can be considered “to design and maintain national
accounting standards in a way that financial statements prepared in accordance
with national accounting standards draw unreserved statement of compliance with
IFRSs”, i.e., when the national accounting standards will comply with all the
requirements of IFRS.
But
convergence doesn’t mean that IFRS should be adopted word by word, e.g.,
replacing the term ‘true & fair’ for ‘present fairly’, in IAS
1, ‘Presentation of Financial Statements’. Such changes do not lead to
non-convergence with IFRS.
A
set of accounting standards notified by the Ministry of Corporate Affairs which
are converged with International Financial Reporting Standards (IFRS) which are
now termed as IND AS’s.
Need for convergence with IFRS
In
the present era of globalization and liberalization, the World has become an
economic village. The globalization of the business world and the attendant
structures and the regulations, which support it, as well as the development of
e-commerce make it imperative to have a single globally accepted financial
reporting system. A number of multi-national companies are establishing their
businesses in various countries with emerging economies and vice versa. The
entities in emerging economies are increasingly accessing the global markets to
fulfill their capital needs by getting their securities listed on the stock
exchanges outside their country. Capital markets are, thus, becoming integrated
consistent with this world-wide trend. More and more Indian companies are also
being listed on overseas stock exchanges. Sound financial reporting structure
is imperative for economic well-being and effective functioning of capital
markets.
The
use of different accounting frameworks in different countries, which require
inconsistent treatment and presentation of the same underlying economic
transactions, creates confusion for users of financial statements. This
confusion leads to inefficiency in capital markets across the world. Therefore,
increasing complexity of business transactions and globalization of capital
markets call for a single set of high quality accounting standards. High
standards of financial reporting underpin the trust investors place in
financial and non-financial information. Thus, the case for a single set of
globally accepted accounting standards has prompted many countries to pursue
convergence of national accounting standards with IFRS.
Benefits of achieving convergence with
IFRS
There
are many beneficiaries of convergence with IFRS such as the economy, investors,
industry and accounting professionals.
1) Economy: As the markets expand
globally, the need for convergence also increases. The convergence benefits the
economy by increasing growth of its international business. It facilitates
maintenance of orderly and efficient capital markets and also helps to increase
the capital formation and thereby economic growth.
2)
Investors: A strong case for convergence can be made from the viewpoint of the
investors who wish to invest outside their own country. Investors want the
information that is more relevant, reliable, timely and comparable across the
jurisdictions. Financial statements prepared using a common set of accounting standards
help investors better understand investment opportunities as opposed to
financial statements prepared using a different set of national accounting
standards.
3)
Industry: A major force in the movement towards convergence has been the
interest of the industry. The industry is able to raise capital from foreign
markets at lower cost if it can create confidence in the minds of foreign
investors that their financial statements comply with globally accepted
accounting standards.
4)
Accounting professionals: Convergence with IFRS also benefits the accounting
professionals in a way that they are able to sell their services as experts in
different parts of the world. It offers them more opportunities in any part of
the world if same accounting practices prevail throughout the world.
Relevance/Applicability of Ind AS
(Converged IFRS)
The
Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting
Standards) Rules, 2015 (the ‘Rules’) on 16th February, 2015. The Rules specify
the Indian Accounting Standards (Ind AS) applicable to certain class of
companies and set out the dates of applicability as follows:
1)
Voluntary adoption: Companies may voluntarily adopt Ind AS for financial
statements for accounting periods beginning on or after 1 April, 2015, with the
comparatives for the periods ending 31 March, 2015 or thereafter. Once a
company opts to follow the Ind AS, it will be required to follow the same for
all the subsequent financial statements.
2)
Mandatory adoption: The following companies will have to adopt Ind AS for
financial statements from the accounting periods beginning on or after 1 April,
2016:
a) Companies whose equity and/or debt
securities are listed or are in the process of listing on any stock exchange in
India or outside India (listed companies) and having net worth of Rs. 500
crores or more.
b) Unlisted companies having a net worth
of Rs. 500 crores or more.
c) Holding, subsidiary, joint venture or
associate companies of the listed and unlisted companies covered above.
Comparatives
for these financial statements will be periods ending 31 March, 2016 or
thereafter.
3) The following companies will have to
adopt Ind AS for financial statements from the accounting periods beginning on
or after 1 April, 2017:
a) Listed companies having net worth of
less than Rs. 500 crore.
b) Unlisted companies having net worth of
Rs. 250 crore or more but less than Rs. 500 crore.
c) Holding, subsidiary, joint venture or
associate companies of the listed and unlisted companies covered above.
Comparatives
for these financial statements will be periods ending 31 March, 2017 or
thereafter.
4) The above mentioned roadmap for
adoption will not be applicable to:
a) Companies whose securities are listed
or in the process of listing on SME exchanges (Exchanges meant for small and
medium-sized enterprises).
b) Companies not covered by the roadmap
in the ‘Mandatory adoption’ categories mentioned above.
c) Insurance companies, banking companies
and non-banking finance companies.
Challenges
envisaged in convergence:
a)
Change to regulatory environment: For the
success of convergence in India, certain regulatory amendment is required.
b)
Lack of Preparedness: Corporate India and accounting
professionals need to be trained for effective migration to IFRS. Additionally
auditors would need to train their staff to audit under IFRS environment
c)
Significant cost: Significant one-time costs of
converting to IFRS (including costs of adapting IT systems, training personnel
and educating investors)
d)
Impact on financial performance: Due to
the significant differences between Indian GAAP and IFRS, adoption of IFRS is
likely to have a significant impact on the financial position and financial
performance of most Indian companies
e)
Communication of Impact of IFRS to investors: Companies
also need to communicate the impact of IFRS convergence to their investors to
ensure they understand the shift from Indian GAAP to IFRS.
Important
Short Notes
1) Preliminary Expenses: Preliminary
expenses are those expenses which are incurred on the formation of the company.
Such expenses include stamp duty and fees payable on registration of the
company, legal and printing charges for preparing the Prospectus, Memorandum
and Articles of Association, Accountants’ and Valuers’ fees for reports,
certificates, etc. Cost of printing the stamping letters of allotment and share
certificates, cost of company seal, books of account, statutory books and
statistical books, etc. Such expenses are written off from the Statement of
Profit and Loss in the year in the year of their incurrence as per AS-26.
2) Pre-operative
Expenses: Such expenses are incurred by a company after the stage of
incorporation till the time it is in a position to start its operations. These
expenses are charged to the Statement of Profit and Loss.
3) Capital
Profits: Capital profits are not earned during the normal course of the
business and arise in the following special circumstances:
a)
Profit on sale of fixed assets.
b)
Profits on purchase of business, such profit
arises when the value of assets taken over minus the liabilities taken over is
more then the amount paid for the purchase of the business.
c)
Profit prior to incorporation.
d)
Premium received on issue of shares or
debentures.
e)
Balance left in Forfeited Shares Account after
the reissue of forfeited shares.
f)
Profit made on redemption of debentures.
g)
Profit set aside for redemption of preference
shares.
Ordinarily
capital profits are not available for the distribution of dividend. Such
profits can be utilized for writing off capital losses and fictitious assets
like preliminary expenses, goodwill, discount or commission on issue of shares
or debentures etc. or for issuing bonus shares.
Capital profits
can be distributed as dividend only if (a) The Articles of a company permit;
(b) they are realized in cash; (c) surplus remains after a revaluation of all
assets; and (d) capital losses have been written off. It may be noted that
securities premium account, Capital redemption reserve account, profit prior to
incorporation and profit on reissue of forfeited shares cannot be distributed
as dividend under the Companies Act.
4) Political Contribution: According to
Section 182 of the Companies Act, 2013 Government companies and companies which
have been in existence for less than three financial years are not allowed to
make any political contribution. However, other companies may make political
contributions in a financial year not exceeding 7.5% of their average net
profits determined on the basis of three immediately preceding financial year’s
profits if a resolution authorizing such contribution is passed at a meeting of
the Board of Directors. Such political contributions along with the name of the
parties or persons to which or to whom such amount has been contributed should
be disclosed in the Statement of Profit and Loss.
5) Profits
of Subsidiary Companies: Profits of subsidiary companies are not to be
included in divisible profits of the holding company. Only share of dividend
declared by the subsidiary company belonging to the holding company should be
treated as divisible profit. Dividend received out of profits existing on the
date of acquiring shares of the subsidiary company mush be treated as a capital
receipt and is not to be included in divisible profits of the holding company.
6) Provision
for Taxation: Statement of Profit and Loss of a company must set out the
amount of charge for Indian income-tax and other Indian taxation on profits,
including where practicable, with Indian Income-tax, any taxation imposed
elsewhere to the extent of the relief, if any, from Indian income-tax and
distinguishing, where practicable, between income-tax and other taxation.
A company is
liable to pay income-tax or tax on profits under the Income-tax Act, 1961 and
such tax is treated as charge against the profits of the accounting year,
although the profits are assessed and actual liability for tax is determined in
the following year. Moreover, the assessable profits (taxable profits) are
seldom the same as accounting profits. As such it is not possible to determine
the actual amount of tax payable at the time the financial statements are
prepared. Therefore, liability for tax is estimated and provided for while
preparing the final statements. Such provision is change against profit in the
profit and loss statement and credited to provision for taxation account.
While making the estimate of provision for
taxation, due consideration should be given to the following points:
a)
Whether the net profit has been determined after
deducting depreciation according to Income-tax Act and managerial remuneration.
b)
Whether income-tax has been computed at the
rates prescribed.
c)
Whether profit sur-tax is payable or not.
d)
Whether capital gains tax is payable or not.
e)
Whether penalty is payable under any tax laws.
f)
Whether rebate is available for double taxation.
g)
Whether investment allowance, extra shift
allowance, etc., if any, have been duly deducted or not in estimating the tax
liability.
h)
Whether adjustment has made for the last year’s
actual tax liability or not.
7) Advance Payment of Tax and Provision for
Taxation
Under Income Tax
Act 1961, companies are required to pay advance tax on their expected profits.
When advance payment of tax is made, the entry is:
|
Advance Income Tax Account
………………………………………………………………….. Dr.
To Bank
Account
(Being payment of tax in advance)
|
L/f
|
Amount
|
Amount
|
Since the actual
amount payable as income tax will be known long after the preparation of the
Profit and Loss Account (i.e. when the assessment is made by the Income Tax
Department), the liability for taxes has to be estimated while preparing the
Profit and Loss Account so that dividend to shareholders may be made from
revenue profits and not from capital profits. So, liability for taxes is
estimated and provided for in the books. The entry is:
|
Profit and Loss
Account……………………………………………………………..…………... Dr.
To Provision for Income Tax Account
(Being provision for income tax for the year)
|
L/f
|
Amount
|
Amount
|