Financial Statements Analysis Solved Question Paper May' 2020
COMMERCE (Speciality)
Course: 602 (Financial Statement Analysis)
Full Marks: 80
Pass Marks: 24
Time: 3 hours
1. (a) State whether the
following statements are True or False: 1x4=4
1) Fund flow and Cash flow statements are the part of Financial
Statement.
Ans: True
2) Return on Capital Employed measures profit earning capacity of an
enterprise.
Ans: True
3) The Corporate Governance rules were notified on March 25, 2014
under Companies Act, 2013.
Ans: False, 31st March 2014
4) According to IRFS, Banking Companies are to adopt Historical
Value Accounting.
Ans: False, Fair value
(b) Fill in the blanks
with appropriate word(s): 1x4=4
1) EVA = _______ – Taxes Paid – (Capital Employed x WACC) (Operating Profit / Sales / Direct
Incomes)
Ans: Operating Profit
2) Rule of thumb for acid-test ratio is _______. (1: 1 / 2:
1 / 2: 2)
Ans: 1:1
3) The GRI first released its sustainability reporting guidelines in
_______. (1998 / 1999 / 2000)
Ans: 2000
4) As per the IRDA regulations, 2002, all the _______ companies
shall comply with the requirements of Schedule A while preparing their
financial statements. (general insurance / life
insurance / general and life insurance)
Ans: life insurance
2. Write short notes on
any four of the following: 4x4=16
(a) Value Added Statement
(VAS).
Ans:
Value Added Statement is a financial statement that depicts wealth created by
an organization and how is that wealth distributed among various stakeholders.
The various stakeholders comprise of the employees, shareholders, government,
creditors and the wealth that is retained in the business. As per the concept of Enterprise
Theory, profit is calculated for various stakeholders by an organization. Value
Added is this profit generated by the collective efforts of management,
employees, capital and the utilization of its capacity that is distributed
amongst its various stakeholders. Consider
a manufacturing firm. A typical firm would buy raw materials from the market.
Process the raw materials and assemble them to produce the finished goods. The
finished goods are then sold in the market. The additional work that the firm
does to the raw materials in order for it to be sold in the market is the value
added by that firm. Value added can also be defined as the difference between
the value that the customers are willing to pay for the finished goods and the
cost of materials.
Advantages of a
Value Added Statement
a)
It is easy to calculate.
b)
Helps a company to apportion the
value to various stakeholders. The company can use this to analyze what
proportion of value added is allocated to which stakeholder.
c)
Useful for doing a direct
comparison with your competitors.
d)
Useful for
internal comparison purposes and to devise employee incentive schemes.
(b) Leverage Ratios.
Ans: Leverage
Ratios: These ratios show relationship between proprietor's fund and debts
used in financing the assets of the business organization. Example: Capital gearing ratio,
debt-equity ratio, and proprietary ratio. This ratio measures the relationship
between proprietor’s fund and borrowed funds.
(c) Harmonization of
Corporate Reporting.
Harmonization
may be defined as the process aimed at enhancing the comparability of financial
statements produced in different countries’ according regulations. Having
understood the causes for differences and suitably classifying the accounting
system across the world, it is necessary to achieve harmony or uniformity in
the accounting system. Harmony will ensure easy comparability, which is
essential in the context of global funding and multi-national company’s
regulators who monitor capital markets, and the securities industries
(including stock exchanges). The Global Reporting Initiatives’ (GRI) vision is
that reporting on economic, environmental, and social performance by all
organizations becomes as routine and comparable as financial reporting. GRI
accomplishes this vision by developing, continually improving, and building
capacity around the use of its Sustainability Reporting Framework.
(d) Provisions of IFRS-4:
Insurance Contract.
Ans: 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.
(e) Demand and Time
Liability (DTL).
Demand liabilities are
those liabilities which are to be paid as and when demanded by the consumers. Deposit
in saving banks and current accounts are demand liabilities because banks have
to pay them to their customers as and when demanded.
Time liabilities are those
liabilities which are to be paid on completion of a specified period. For Example,
if bank fixed deposit for done for 12 months, it becomes a time liability
payable after completion of 12 months.
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Financial Statements Analysis Solved Question Paper 2014
Financial Statements Analysis Solved Question Paper 2015
3. (a) “Financial
Statement reflects a combination of recorded facts, accounting conventions and
personal judgement.” Discuss. 14
Ans: Financial statements are the
summarized statements of accounting data produced at the end of accounting
process by an enterprise through which accounting information are communicated
to the internal and external users.
The American
Institute of Certified Public Accountants states the nature of financial
statements as “Financial Statements are prepared for the purpose of presenting
a periodical review of report on progress by the management and deal with the
status of investment in the business and the results achieved during the period
under review. They reflect a combination of recorded facts, accounting
principles and personal judgments.”
In the
words of Myer,” The financial statements provide a summary of accounts of a business
enterprise, the balance sheet reflecting the assets, liabilities and capital as
on a certain date and income statement showing the result of operations during
a certain period”.
Nature of Financial Statements:
The nature
of financial statements is the combination of the following forms:
a)
Recording facts of a business
transactions;
b)
Accounting Conventions;
c)
Accounting Concepts;
d)
Legal implications
e)
Personal judgments used in the
application of conventions and postulates.
a)
Recorded Facts: The Financial statements
are statements prepared on the basis of recorded facts; they do not depict the
unrecorded facts. Recorded facts means recording of transactions based on
evidence in the accounting books.
b)
Accounting Conventions: Certain
accounting conventions are followed while preparing financial statements such
as convention of ‘Conservatism’, convention of ‘Materiality’, convention of
‘Full disclosure’, convention of ‘Consistency’. According to convention of
‘Conservatism’, provisions are made of expected losses but expected profits are
ignored. This means that the real financial position of the business may be
better than what has been shown by the financial statements. The use of
accounting conventions makes financial statements simple, comparable, and
realistic.
c)
Accounting Concepts: While
preparing financial statements the accountants make a number of assumptions
known as accounting concepts such as going concern concept, money measurement
concept, realisation concept, etc. According to the going concern concept, it
is assumed that the business of the concern shall be continued indefinitely.
The assets are shown in the balance sheet at their book value rather than their
market value.
d)
Legal implications: Financial
statements are prepared following the legal obligations of the country. For
example, while preparing the financial statement of an Indian company, the
requirements as per the companies Act, 2013 and its amendments from time to
time must be followed.
e)
Personal Judgement: Personal
judgement also has an important bearing on financial statements. For example,
selection of one method out of various methods of charging depreciation,
inventory valuation etc., depends on the personal judgement of the accountant.
Or
(b) Following
are the Income Statements of a company for the years ending March 31, 2018 and
2019:
|
Particulars
|
2018
(Rs. in ‘000) |
2019
(Rs. in ‘000) |
|
Sales Miscellaneous
Income |
500 20 |
700 15 |
|
|
520 |
715 |
|
Expenses Cost of Sales
Office
Expenses Selling
Expenses Interest |
325 20 30 25 |
510 25 45 30 |
|
Net Profit |
400 120 |
610 105 |
|
|
520 |
715 |
Prepare a
common-size income statement and interpret them. 7+7=14
4. (a)
“Return on Investment is considered to be the master ratio which reflects the
overall performance of the company.” Elucidate and show by examples how various
managerial decisions affect Returns on Investment. (ROl). 14
Or
(b) What
relationship would you examine to study the following? 5+5+4=14
1) The Capital Structure.
2) The liquidity.
3) The earning power of a business unit.
5. (a) What should be the
objectives of financial reporting by business enterprises? Distinguish between
Financial Reporting and Financial Statement. 7+7=14
Ans: 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.
Difference between Financial Reporting
and Financial Statements
Meaning of Financial Reporting
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. Financial reporting is of two types – Internal reporting
and external reporting. The financial report made to the management is
generally known as internal reporting and the financial report made to the
shareholders and creditors is generally known as external reporting. The
internal reporting is a part of management information system and they use MIS
reporting for the purpose of analysis and as an aid in decision making process.
Meaning of Financial Statements
Financial statements are the summarized statements of accounting
data produced at the end of accounting process by an enterprise through which
accounting information are communicated to the internal and external users.
The American Institute of Certified Public Accountants states the
nature of financial statements as “Financial Statements are prepared for the
purpose of presenting a periodical review of report on progress by the
management and deal with the status of investment in the business and the
results achieved during the period under review. They reflect a combination of
recorded facts, accounting principles and personal judgments.”
In the words of Myer,” The financial statements provide a summary
of accounts of a business enterprise, the balance sheet reflecting the assets,
liabilities and capital as on a certain date and income statement showing the
result of operations during a certain period”.
Difference between Financial Reporting
and Financial Statements
|
Basis |
Financial Reporting |
Financial Statements |
|
Meaning |
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. |
Financial
statements are the summarized statements of accounting data produced at the
end of accounting process by an enterprise through which accounting
information are communicated to the internal and external users. |
|
Objective |
The
main objective of financial reporting is to present financial information of
the business entity which will help in decision making. |
The
main objective of financial statements are to show operating efficiency and
financial position. |
|
Process |
Financial
reporting is process of disclosure of financial results and related
information to management and external stakeholders. |
Financial
analysis is the process of evaluating businesses, projects, budgets, and
other finance-related transactions to determine their performance and
suitability. |
|
Part |
All
financial reports are not a part of financial reporting. |
All
financial statements are part of financial reporting. |
|
Length |
A
Financial report is much longer than financial statements. |
Financial
statements are in summarised format. |
|
Format |
There
is not specific format of financial reports. It is prepared according to the
need of the internal and external users. |
Financial
statements are prepared in a format prescribed under Schedule III of the
Companies Act’ 2013. |
Or
(b) “Corporate Social
Responsibility Reporting is often called the triple bottom line approach –
sustainability in environment, social community and business.” Discuss. 14
Ans: CSR and TRIPLE BOTTOM
LINE (TBL) REPORTING
A corporation practicing CSR strives to comply with the laws and
regulations, make a profit, be ethical and provide social accountability. It is
responsible for the wider impact on society and not just the return of
investments to stakeholders alone. Changing business practices and internal
operations is considered vital for those organizations practicing CSR. In 1998
John Eklington coined the term “Triple Bottom Line” which is a coincident
approach to that of CSR and an integrated concept under the umbrella of Social
Responsibility. The “Triple Bottom Line (TBL)” approach is a means for
corporations to achieve the adequate level of Corporate Social Responsibility
which is necessary in the age of sustainable development for future
generations.
There is no single, universally accepted definition of TBL
reporting. In its broadest sense, TBL reporting is defined as corporate
communication with stakeholders that describes the company’s approach to
managing one or more of the economic, environmental and / or social dimensions
of its activities and through providing information on these dimensions.
Consideration of these three dimensions of company management and performance
is sometimes referred to as sustainability or sustainable development. In its
purest sense, the concept of TBL reporting refers to the publication of
economic, environmental and social information in an integrated manner that
reflects activities and outcomes across these three dimensions of a company’s
performance.
Also termed as the 3P approach- People, Planet, Profit, the TBL
considers CSR as an investment rather than a method of achieving sustainability.
It focuses on the three aspects of-
People: A
triple bottom line organization takes steps to ensure that its operations
benefit the company's employees as well as the community in which it conducts
business. Human resources managers of TBL entities are concerned, not just with
providing adequate compensation to its workers, but also with creating a safe
and pleasant working environment and helping employees find value in their
work.
Planet:
A TBL company avoids any activities that harm the environment and
looks for ways to reduce any negative impact its operations may have on the
ecosystem. It controls its energy consumption and takes steps to reduce its
carbon emissions. Many TBL companies go beyond these basic measures by taking
advantage of other means of sustainable development, such as using wind power.
Many of these practices actually increase a company's profitability while
contributing to the health of our planet.
Profit:
The profit or economic bottom line deals with
the economic value created by the organization after deducting the cost of all
inputs, including the cost of the capital tied up. It therefore differs from
traditional accounting definitions of profit. In the original concept, within a
sustainability framework, the "profit" aspect needs to be seen as the
real economic benefit enjoyed by the society. It is the real economic impact
the organization has on its economic environment.
QUALITIES
AND CHARACTEISTICS OF INFORMATION IN TBL REPORTS
TBL reports usually contain both qualitative and
quantitative information. In order for all reported information to be credible,
it should possess the following characteristics: -
a)
Reliability:
Information should be accurate, and provide a true reflection of
the activities and performance of the company.
b)
Usefulness:
The information must be relevant to both internal and external
stakeholders, and be relevant to their decision-making processes.
c)
Consistency
of presentation: Throughout the report there should
be consistency of presentation of data and information. This includes
consistency in aspects such as format, timeframes, graphics etc.
d)
Full
disclosure: Reported information should
provide an open explanation of specific actions undertaken and performance
outcomes.
e)
Reproducible:
Information is likely to be published on an ongoing basis, and
companies must ensure that they have the capacity to reproduce data and
information in future reporting periods.
f)
Audit
ability: All statements and data within the report are able to be readily
authenticated.
6. (a) Discuss the impact
of IFRS on Indian Banking Companies. 14
Ans: A banking company is defined as a
company which transacts the business of banking in India. Section 5 (b) of The
Banking Regulation Act, 1949 defines the term banking as “accepting for the
purpose of lending or investment of deposits of money from the public,
repayable on demand or otherwise and withdraw able by cheque, draft, order or
otherwise.
Section –
7 of this Act makes it essential for every company carrying on the business of
banking in India to use as part of its name at least one of the words – bank,
banker, banking or banking company. Section 49A of the Act prohibits any
institution other than banking companies to accept deposit money from public
withdraw able by cheque. The essence of banking business is the function of
accepting deposits from public with the facility of withdrawal of money by
cheque. In other words, the combination of the functions of acceptance of
public deposits and withdrawal of the money by cheque by any institution cannot
be performed without the approval of Reserve Bank.
DISCLOSURE OF ACCOUNTS AND
BALANCE SHEETS OF BANKS (RBI Guidelines)
There are
various types of users of the financial statements of banks who need
information about the financial position and performance of the banks. The
financial statements are required to provide the information about the
financial position and performance of the bank in making economic decisions by
the users. The important information sought by these users are, about bank’s
Liquidity and solvency and the risks related to the assets and liabilities
recognized on its balance sheet and to its off balance sheet items. This useful
information can be provided by way of ‘Notes’ to the financial statements,
hence notes become an integral part of the financial statements of banks. The
users can make use of these notes and supplementary information to arrive at a
meaningful decision. Some of the specific disclosure requirements in Bank’s
financial statement are given below:
a)
Presentation: Summary of Significant Accounting Policies’ and ‘Notes to
Accounts’ may be shown under Schedule 17 and Schedule 18 respectively, to
maintain uniformity.
b) Minimum
Disclosures: While complying with the requirements of Minimum disclosures,
banks should ensure to furnish all the required information in ‘Notes to
Accounts’. In addition to the minimum disclosures, banks are also encouraged to
make more comprehensive disclosures to assist in understanding of the financial
position and performance of the bank.
c) Summary
of Significant Accounting Policies: Banks should disclose the accounting
policies regarding key areas of operations at one place (under Schedule 17)
along with Notes to Accounts in their financial statements. The list includes –
Basis of Accounting, Transactions involving Foreign Exchange, Investments –
Classification, Valuation etc, Advances and Provisions thereon, Fixed Assets
and Depreciation, Revenue Recognition, Employee Benefits, Provision for
Taxation, Net Profit, etc.
d)
Disclosure Requirements: In order to encourage market discipline, Reserve Bank
has over the years developed a set of disclosure requirements which allow the
market participants to assess key pieces of information on capital adequacy,
risk exposures, risk assessment processes and key business parameters which
provide a consistent and understandable disclosure framework that enhances
comparability. Banks are also required to comply with the Accounting Standard 1
(AS 1) on Disclosure of Accounting Policies issued by the Institute of
Chartered Accountants of India (ICAI). The enhanced disclosures have been
achieved through revision of Balance Sheet and Profit & Loss Account of
banks and enlarging the scope of disclosures to be made in “Notes to Accounts”.
e)
Additional/Supplementary Information: In addition to the 16 detailed prescribed
schedules to the balance sheet, banks are required to furnish the following
information in the “Notes to Accounts”. Such furnished (information should
cover the current year and the previous year). “Notes to Accounts” may contain
the supplementary information such as:
1.
Capital (Current & Previous
Year) with breakup including CRAR – Tier I/II capital (%), % of shareholding of
GOI, amount of subordinated debt raised as Tier II capital. Also it should show
the total amount of subordinated debt through borrowings from Head Office for
inclusion in Tier II capital etc.
2.
Investments: Total amount should
be mentioned in crores, with the total amount of investments, showing the gross
value and net value of investments in India and Abroad. The details should also
cover the movement of provisions held towards depreciation on investments.
3.
Derivatives: Forward Rate
Agreement/Interest Rates Swap: Important aspects of the disclosures would
include the details relating to:
a.
The notional principal of swap
agreements;
b.
Losses which would be incurred if
counterparties failed to fulfill their obligations under the agreements;
c.
Collateral required by the bank
upon entering into swaps;
d.
Nature and terms of the swaps
including information on credit and market risk and the accounting policies
adopted for recording the swaps etc.
4.
Exchange Traded Interest Rate
Derivatives: As regards Exchange Traded Interest Rate Derivatives, details
would include the notional principal amount undertaken:
a.
During the year (instrument-wise),
b.
Outstanding as on 31st
March (instrument-wise),
c.
Outstanding and not “highly
effective” (instrument-wise),
d.
Mark-to-market value of exchange
traded interest rate derivatives outstanding and not “highly effective”
(instrument-wise).
f)
Qualitative Disclosure: Banks should discuss their risk management policies
pertaining to derivatives with a specific reference to the extent to which
derivatives are used, the associated risks and business purposes served. This
also includes:
a.
The structure and organization for
management of risk in derivatives trading,
b.
The scope and nature of risk
measurement, risk reporting and risk monitoring systems,
c.
Policies for hedging and/or
mitigating risk and strategies and processes for monitoring the continuing
effectiveness of hedges/mitigants, and accounting policy for recording hedge
and non-hedge transactions; recognition of income, premiums and discounts;
valuation of outstanding contracts; provisioning, collateral and credit risk
mitigation.
g)
Quantitative Disclosures: Apart from qualitative disclosures, banks should also
included the quantitative disclosures. The details are both Currency
Derivatives and Interest rate derivatives.
h) Asset
Quality: Banks’ performances are considered good based on the quality of assets
held by banks. With the changing scenario and due to number of risks associated
with banks like Credit, Market and Operational risks, banks are concentrating
to ensure better quality assets are held by them. Hence, the disclosure needs
to cover various aspects of asset quality consisting of:
a.
Non-Performing Assets, covering
various details like Net NPAs, movement of NPAs (Gross)/(Net) and relevant
details provisioning to different types of NPAs including Write off/write-back
of excess provisions, etc., Details of Non-Performing financial assets
purchased, sold, are also required to be furnished.
b.
Particulars of Accounts
Restructured: The details under different types of assets such as (i) Standard
advances (ii) Sub-standard advances restructured (iii) Doubtful advances
restructured (iv) TOTAL with details number of borrowers, amount outstanding,
sacrifice.
c.
Banks disclose the total amount
outstanding in all the accounts/facilities of borrowers whose accounts have
been restructured along with the restructured part or facility. This means even
if only one of the facilities/accounts of a borrower has been restructured, the
bank should also disclose the entire outstanding amount pertaining to all the
facilities/accounts of that particular borrower.
d.
Details of financial assets sold
to Securitization/Reconstruction Company for Assets Reconstruction.
e.
Provisions on Standard Assets:
Provisions towards Standard Assets need not be netted from gross advances but
shown separately as ‘Provisions against Standard Assets’, under ‘Other
Liabilities and Provisions – Others’ in Schedule No. 5 of the balance sheet.
f.
Other Details: Business Ratios:
(i) Interest Income as a percentage to Working Funds (ii) Non-interest income
as a percentage to Working Funds (iii) Operating Profit as a percentage to
Working Funds (iv) Return on Assets (v) Business (Deposits plus advances) per
employee (vi) Profit per employee.
i) Assets
Liability Management: As part of Assets Liability Management, the maturity
pattern of certain items of assets and liabilities such as deposits, advances,
investments, borrowings, foreign current assets, and foreign currency
liabilities. Banks are required to disclose the information based on the
maturity patterns covering daily, monthly and yearly basis.
j) Break
up Exposures: Banks should also furnish details of exposures to certain sectors
like Real Estate Sector.
Exposure
to Capital Market: Capital Market exposure details should be disclosed for the
current and previous year in crores. The details would include direct
investment in equity shares, convertible bonds, convertible debentures and
units of equity-oriented mutual funds the corpus of which is not exclusively
invested in corporate debt and also loan raised against such securities. A bank
must also disclose the risk associated with such investments. The risks are to
be categorized as Insignificant, Low, Moderate, High, Very high, Restricted and
Off-credit.
Apart from
the above category of exposures, banks are required to disclose details
relating to Single Borrower Limit (SGL)/Group Borrower Limit (GBL) exceeded by
the bank, and Unsecured Advances are to be furnished. Miscellaneous items would
include Amount of Provisions made for Income Tax during the year, and
Disclosure of Penalties imposed by RBI, etc.
AUDIT AND INSPECTION OF BANKING
COMPANY
Audit: The
balance sheet and the profit and loss account of a banking company have to be
audited as stipulated under Section 30 of the Banking Regulation Act. Every
banking company’s account needs to be verified and certified by the Statutory
Auditors as per the provisions of legal frame work. The powers, functions and
duties of the auditors and other terms and conditions as applicable to auditors
under the provisions of the Companies Act are applicable to auditors of the
banking companies as well. The audit of banking companies books of accounts
calls for additional details and certificates to be provided by the auditors.
Apart from
the balance sheet audit, Reserve Bank of India is empowered by the provisions
of the Banking Regulation Act to conduct/order a special audit of the accounts
of any banking company. The special audit may be conducted or ordered to be
conducted, in the opinion of the Reserve Bank of India that the special audit
is necessary;
a.
In the public interest and/or
b.
In the interest of the banking
company and/or
c.
In the interest of the depositors.
The Reserve
Bank of India’s directions can order the bank to appoint the same auditor or
another auditor to conduct the special audit. The special audit report should
be submitted to the Reserve Bank of India with a copy to the banking company.
The cost of the audit is to be borne by the banking company.
Or
(b) Discuss the important
provisions need to be taken into consideration for financial reporting of
insurance companies. 14
Ans: Financial Reporting
Requirements of Insurance Companies in India
To protect
the interests of policyholders and to increase transparency and credibility of
insurance companies there is a need to have an effective regulatory system for
financial reporting of insurance companies. Reporting requirements of insurance
companies are different from that of other companies, because of the concept of
policyholders and shareholders’ fund, segment reporting in respect of all the
funds maintained by the company, complexity of insurance contracts and
insurance itself is an intangible product.
Earlier
the accounts of insurance companies were governed by Insurance Act 1938, but
passing of Insurance Regulatory Development Authority Act (IRDA Act) in 1999
opened a new chapter for disclosure norms of insurance companies. In the year
2002, the IRDA came up with regulations for the preparation of the financial
statements of insurance companies. According to the Insurance (Amendment) Act,
2002, the first, second and third schedules prescribed for balance sheet,
profit and loss account and revenue account respectively as given in Insurance
Act, 1938 have been omitted. Now revenue account, profit and loss account and
balance sheet are to be prepared as per the formats prescribed by IRDA.
However, the statutes governing financial reporting practices of insurance companies
in India are: Insurance Act 1938, IRDA Act, 1999 (including IRDA Regulations),
Companies Act and Institute of Chartered Accountants of India (ICAI).
IRDA Act 1999 (Including IRDA Regulations)
Insurance
Regulatory Development Authority (IRDA) has prescribed various regulations from
time to time. Preparation of Financial Statements and Auditor’s Report of
Insurance Companies Regulations, 2002 are one of them. These regulations are
related to the financial reporting practices of insurance companies. These
regulations are important constituents of the Indian regulatory regime.
According to the regulations made by the authority in consultation with the
Insurance Advisory Committee, accounts of insurance companies are prepared
according to the prescribed formats given by the authority. Details are given
as under:
a)
Preparation of Financial Statements: After the commencement of Insurance
Regulatory Development Authority, Regulations, 2002, all the life insurance
companies shall comply with the requirements of Schedule A and general
insurance companies with Schedule B of these regulations while preparing their
financial statements. The auditor’s report on the financial statements of all
insurance companies shall be in conformity with the requirements of Schedule C.
IRDA given the list of items to be disclosed in the financial statements of
insurance companies under Part II of Schedule A (for life insurance companies)
and Schedule B (for general insurance companies) of the (Preparation of
Financial Statements and auditor’s report of Insurance Companies) Regulations,
2002. According to these regulations, following disclosure will form part of
financial statements of insurance companies:
1.
Every insurance company will
disclose all significant accounting policies and accounting standards followed
by them in the manner required under Accounting Standard I issued by the
Institute of Chartered Accountants of India. (ICAI).
2.
All companies will separately
disclose if there is any departure from the accounting policies with reasons
for such departure.
3.
Disclosure of investments made in
accordance with statutory requirements separately together with its amount,
nature, security and any special rights in and outside India.
4.
Disclosure of performing and
non-performing investments separately.
5.
Disclosure of assets to the extent
required to be deposited under local laws for otherwise encumbered in or
outside India.
6.
All the companies are required to
show sector-wise percentage of their business.
7.
To include a summary of financial
statements for the last five years in their annual report to be prepared as
prescribed by the IRDA.
8.
Disclose the basis of allocation
of investments and income thereon between policyholders’ account and
shareholders’ account.
9.
To disclose accounting ratios as
prescribed by the Insurance Regulatory and Development Authority.
Disclosure
of following items is made by way of notes to balance sheet:
1.
Contingent Liabilities.
2.
Actuarial assumptions for
valuation of liabilities for life policies in force.
3.
Encumbrance’s to assets of the
company in and outside India.
4.
Commitments made and outstanding
for loans, investments and fixed assets.
5.
Basis of amortization of debt
securities.
6.
Claims settled and remaining
unpaid for a period of more than six months as on the balance sheet date.
7.
Value of contracts in relation to
investments, for purchases where deliveries are pending and sales where
payments are overdue.
8.
Operating expenses relating to
insurance business and basis of allocation of expenditure to various segments
of business.
9.
Computation of managerial
remuneration.
10.
Historical costs of those
investments valued on fair value basis.
11.
Basis of revaluation of investment
property.
b)
Management Report: According to the IRDA Regulations 2002, all the insurance
companies are required to attach a management report to their financial
statements. The contents of the management report are given under PART IV
(Schedule A and Schedule B) of these regulations and reproduced below:
1.
Confirmation regarding the
continued validity of the registration granted by the IRDA.
2.
Certification that all the dues
payable to the statutory authorities has been duly paid.
3.
Confirmation to the effect that
the shareholding patterns and the transfer of shares during the year are in
accordance with the statutory or regulatory requirements.
4.
Declaration that the management
has not directly or indirectly invested outside India the funds of the
policyholders.
5.
Confirmation regarding required
solvency margins.
6.
Certification to the effect that
no part of the life insurance fund has been directly or indirectly applied in
contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating
to the application and investment of the life insurance funds.
7.
Disclosure with regard to the
overall risk exposure and strategy adopted to mitigate the same.
8.
Operations in other countries, if
any, with a separate statement giving the management’s estimate of country risk
and exposure risk and the hedging strategy adopted.
9.
Ageing of claims indicating the
trends in average claim settlement time during the preceding five years.
10.
Certification to the effect as to
how the values, as shown in the balance sheet, of the investments and stocks
and shares have been arrived at, and how the market value thereof has been
ascertained for the purpose of comparison with the values so shown.
11.
Review of assets quality and
performance of investment in terms of portfolio, i.e. separately in terms of
real estate, loans, investments. Etc.
12.
A schedule payments, which have
been made to individuals, firms, companies and organizations in which directors
of the insurance company are interested.
13)
A responsibility statement indicating therein that:
Ø In
the preparation of financial statements, the applicable amounting standards,
principles and policies have been followed along with proper explanations
relating to material departures, if any;
Ø The
management has adopted accounting policies and applied them consistently and
made judgements and estimates that are reasonable and prudent so as to give a
true and fair view of the state of affairs of the company at the end of the
financial year and of the operating profit or loss and of the profit or loss of
the company for the year;
Ø The
management has taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the applicable provisions of the
Insurance Act, 1938 and Companies Act 1956 for safeguarding the assets of the
company and for preventing and detecting fraud and other irregularities;
Ø The
management has prepared the financial statements on a going concern basis;
Ø The
management has ensured that an internal audit system commensurate with the size
and nature of the business exists and is operating effectively.
(Old Course)
Full Marks: 80
Pass Marks: 32
1. (a) State whether the following statements are True or False: 1x5=5
1) The term ‘Financial Analysis’ includes both
‘analysis’ and ‘interpretation’. True
2) Net worth includes working capital. False
3) High stock velocity indicates efficient management
of inventory. True
4) OCED stands for Organization for Economic
Cooperation and Development. True
5) Liquidity of companies improves with increase in
cash purchases. False, Cash Sales
(b) Fill in the blanks with appropriate words: 1x3=3
1) IFRS-10 is associated with _______. (financial
instruments / consolidated financial statement
/ fair value management)
2) Section _______ deals with the definition of
banking business. [6(i) / 5(i)(b) / 7]
3) Inventory is part of _______. (current liabilities
/ fixed assets / liquid assets)
2. Write short notes on any four of the following: 4x4=16
(a) Economic Value Added Statement.
(b) Global Reporting Initiative (GRI).
(c) Financial Accounting Standards Board (FASB).
(d) Statutory Liquidity Ratio (SLR).
(e) IRDA.
(f) Segment Reporting.
3. (a) “Analysis without interpretation is meaningless and
interpretation without analysis is impossible.” Discuss. 11
Or
(b) State the different types of financial analysis. Write the
limitations of analysis and interpretation of financial statement. 6+5=11
4. (a) What are the important profitability ratios? How are they
worked out? 4+8=12
Or
(b) (1) Discuss the significance of ratio analysis. 6
(2) The following are the information collected from the final
accounts of a firm:
|
|
Rs. |
|
Total Purchases Cash Purchases Purchases Returns Creditors at the end Bills Payable at the end |
10,00,000 2,00,000 60,000 1,60,000 40,000 |
You are required to calculate the following: 3+3=6
1) Creditors turnover ratio.
2) Average payment period.
5. (a) What is triple bottom line (TBL) reporting? Discuss its
characteristics and benefits. 4+3+4=11
Or
(b) (1) “Financial reporting is a mandatory requirement in the
annual report of a company.” Discuss. 6
(2) Discuss the major qualitative characteristics of financial
reporting. 5
6. (a) Discuss the purposes underlying the issue of accounting
standard. How the Global Accounting Standard (IFRS) affected Indian GAAP? 7+4=11
Or
(b) Discuss briefly the various International Financial Reporting
Standards (IFRS) formulated by IASB. 11
7. (a) Define Banking Company. Mention the essential features of
Banking Company. Write the important provisions of Banking Regulation Act,
1949. 3+3+5=11
Or
(b) Discuss the important provisions need to be taken into
consideration for financial reporting of NBFCs.
***
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