Financial Statement Analysis Solved Question Paper 2022 (May / June)
COMMERCE (Discipline Specific
Elective)
(For Honours/Non-Honours)
Paper: DSE-602 (Group-I) (Financial
Statement Analysis)
Full Marks: 80
Pass Marks: 32
Time: 3 hours.
The figures in the margin indicate
full marks for the questions
1. Write True or False: 1x5=5
(a)
Financial statement in ordinary sense means a statement relating to financial
matter.
Ans:
True
(b)
Debt equity ratio is a solvency ratio.
Ans:
True
(c)
CRR stands for Cash Reserve Ratio.
Ans:
True
(d)
IFRS-10 is associated with consolidation and joint ventures.
Ans:
False, Consolidated financial statements
(e)
Corporate social responsibility reporting is not mandatory for any business in
India.
Ans:
False, the following companies are necessary to constitute a CSR committee:
Companies with a net worth of Rs. 500 crores or greater, or Companies with a
turnover of Rs. 1000 crores or greater, or Companies with a net profit of Rs. 5
crores or greater.
2. Fill in the blanks: 1x3=3
(a)
Creditors are always interested in knowing the _______ of the business.
(financial soundness / earning capacity / solvency position.)
Ans:
solvency position
(b)
Ratio of net profit before interest and taxes to sales is _______ ratio. (net
profit / profit / operative profit)
Ans:
operative profit
(c)
Cash certificates are _______. (time liabilities / demand liabilities / time
and demand liabilities)
Ans:
time liabilities
3. Write short notes on any four of
the following: 4x4=16
(a) Objectives of financial statement
analysis.
Ans:
Financial analysis serves the following purposes and that brings
out the significance of such analysis:
a)
To judge the financial health of
the company: The main objective of the financial analysis is to determine the
financial health of the company. It is done by properly establishing the
relationship between the items of balance sheet and profit and loss account.
b)
To judge the earnings performance
of the company: Potential investors are primarily interested in earning
efficiency of the company and its dividend paying capacity. The analysis and
interpretation is done with a view to ascertain the company’s position in this
regard.
c)
To judge the Managerial
efficiency: The financial analysis helps to pinpoint the areas wherein the
managers have shown better efficiency and the areas of inefficiency. Any
favourable and unfavourable variations can be identified and reasons thereof
can be ascertained to pinpoint weak areas.
d)
To judge the Short-term and
Long-term solvency of the undertaking:
On the basis of financial analysis, Long-term as well as short-term
solvency of the concern can be judged. Trade creditors or suppliers are mainly
interested in assessing the liquidity position for which they look into the
following:
Ø Whether
the current assets are sufficient to pay off the current liabilities.
Ø The
proportion of liquid assets to current assets.
e) Indicating the trend of Achievements: Financial
statements of the previous years can be compared and the trend regarding various
expenses, purchases, sales, gross profits and net profit etc. can be
ascertained. Value of assets and liabilities can be compared and the future
prospects of the business can be envisaged.
(b) Solvency ratio.
Ans: These ratios are primarily calculated
to predict the ability of the firm to meet all its liabilities including those
not currently payable. A set of ratios will give us information on the ability
of the firm to meet all its financial obligation in future. Before proceeding
further let us make a distinction between long term and short tem financial
liabilities. Long-term financial liabilities are those financial liabilities
which are to be met in the subsequent financial years whereas short-term
liabilities are to be met in the current financial year itself. The ratios
which are used to measure solvency are as follows:
• Debt Equity Ratio
• Shareholders Equity Ratio
• Debt to Net Worth Ratio
• Capital Gearing Ratio
• Fixed Asset to Long-Term Funds Ratio
• Proprietary Ratio
• Dividend Cover
• Interest Cover
• Debt Service Coverage Ratio
(c) Inter-firm comparison.
Ans: Inter-firm comparison is the
technique which studies the performances, efficiencies, costs and profits of
various concerns in an industry with the help of exchange of information in
order to have a relative comparison.
It involves the process by bringing
together a number of identical firms and collecting their business figures and
statistics through a neutral organisation in which the participating firms
repose their full confidence.
The firms are carefully screened and
put into different size groups, their figures examined from a close range,
comparative performance of each firm of the group drawn up showing the strong
and weak points of its operations, and finally the reports are published
without disclosing their identity, but using only codes and expressed in terms
of certain well established ratios and percentages.
(d) Worth of equities.
Ans:
(e) Corporate Governance.
Ans: Corporate governance is the system of rules, practices and
processes by which a company is directed and controlled. Corporate governance essentially involves balancing the
interests of a company's many stakeholders, such as shareholders, management,
customers, suppliers, financiers, government and the community.
Corporate
governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance
framework is there to encourage the efficient use of resources and equally to
require accountability for the stewardship of those resources. This article
outlines the relationship between corporate governance and corporate social
responsibility (CSR). It begins by examining the role of corporate governance
in creating value for shareholders. It focuses on the actions of the
corporation and the board toward its shareholders and other stakeholders, i.e.,
how corporate governance serves or fails to serve their interests. It covers
the assumptions that underlie theories of corporate governance and the expected
outcomes of various board structures and compositions. It then examines the
state of corporate democracy, the issue of accountability, and key legislation
relative to corporate governance.
James D.
Wolfensohn "Corporate Governance is about promoting corporate fairness,
transparency and accountability".
In the
words of Robert Ian (Bob) Tricker, "Corporate Governance is concerned with
the way corporate entities are governed, as distinct from the way business
within those companies is managed. Corporate governance addresses the issues
facing Board of Directors, such as the interaction with top management and
relationships with the owners and others interested in the affairs of the
company"
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Financial Statements Analysis Solved Question Paper 2014
Financial Statements Analysis Solved Question Paper 2015
4. (a) What is ratio analysis? What
are its characteristics? State the limitations of ratio analysis. 2+6+6=14
Ans:
Meaning of Ratio Analysis
A ratio is
one figure expressed in terms of another figure. It is mathematical yardstick
of measuring relationship of two figures or items or group of items, which are
related, is each other and mutually inter-dependent. It is simply the quotient
of two numbers. It can be expressed in fraction or in decimal point or in pure
number. Accounting ratio is an expression relating to two figures or two
accounts or two set accounting heads or group of items stated in financial
statement.
Ratio
analysis is the method or process of expressing relationship between items or
group of items in the financial statement are computed, determined and
presented. It is an attempt to draw quantitative measures or guides concerning
the financial health and profitability of an enterprise. It can be used in
trend and static analysis. It is the process of comparison of one figure or
item or group of items with another, which make a ratio, and the appraisal of
the ratios to make proper analysis of the strengths and weakness of the
operations of an enterprise.
According
to Myers, “Ratio analysis of financial statements is a study of relationship
among various financial factors in a business as disclosed by a single set of
statements and a study of trend of these factors as shown in a series of
statements."
Characteristics or Nature of Ratio
Analysis:
Ratio analysis is a technique of analysis and interpretation of
financial statements. It is the process of establishing and interpreting
various ratios for helping in making certain decisions. However, ratio analysis
is not an end in itself. It is only a means of better understanding of
financial strengths and weaknesses of a firm.
Calculation of mere ratios does not serve any purpose, unless
several appropriate ratios are analyzed and interpreted. There are a number of
ratios which can be calculated from the information given in the financial
statements, but the analyst has to select the appropriate data and calculate
only a few appropriate ratios from the same keeping in mind the objective of
analysis. The ratios may be used as a symptom like blood pressure, the pulse
rate or the body temperature and their interpretation depends upon the calibre
and competence of the analyst.
Limitations
of Ratio Analysis
In spite
of many advantages, there are certain limitations of the ratio analysis
techniques. The following are the main limitations of accounting ratios:
a)
Limited Comparability: Different
firms apply different accounting policies. Therefore, the ratio of one firm cannot
always be compared with the ratio of other firm.
b)
False Results: Accounting ratios
are based on data drawn from accounting records. In case that data is correct,
then only the ratios will be correct. For example, valuation of stock is based
on very high price, the profits of the concern will be inflated and it will
indicate a wrong financial position. The data therefore must be absolutely correct.
c)
Effect of Price Level Changes:
Price level changes often make the comparison of figures difficult over a
period of time. Changes in price affect the cost of production, sales and also
the value of assets. Therefore, it is necessary to make proper adjustment for
price-level changes before any comparison.
d)
Qualitative factors are ignored:
Ratio analysis is a technique of quantitative analysis and thus, ignores
qualitative factors, which may be important in decision making. For example,
average collection period may be equal to standard credit period, but some
debtors may be in the list of doubtful debts, which is not disclosed by ratio
analysis.
e)
Effect of window-dressing: In
order to cover up their bad financial position some companies resort to window dressing.
They may record the accounting data according to the convenience to show the
financial position of the company in a better way.
Or
(b)
Dibrugarh Tea Ltd. presents its Profit and Loss A/c for the year ending 31st
March, 2022 and a Balance Sheet as on that date as follow:
Profit
and Loss A/c for the year ending 31st March, 2022
|
|
Rs. |
|
Rs. |
|
To Opening Inventory To Purchase of raw material To Factory expenses To Administrative expenses To Selling expenses To Interest on debenture To Depreciation To Net Profit |
40,000 50,000 60,000 20,000 10,000 2,000 5,000 50,000 |
By Sales By Closing Inventory By Profit on sale of furniture |
2,00,000 30,000 7,000 |
|
|
2,37,000 |
|
2,37,000 |
Balance
Sheet as on 31st March, 2022
|
Liabilities |
Rs. |
Assets |
Rs. |
|
Equity shares of Rs. 10 each. 9% Preference share of Rs. 100 each Reserve 6% debenture Trade Creditors Outstanding expenses |
20,000 20,000 15,000 40,000 25,000 5,000 |
Fixed Assets Inventory Debtors Bank |
85,000 30,000 8,000 2,000 |
|
|
1,25,000 |
|
1,25,000 |
The company has paid 20% dividend to equity shareholders and
preference dividend has also been paid. Tax rate is 30%. The equity shares are
quoted in stock exchange at Rs. 40 per share. Compute the following:
(a) Liquid Ratio.
(b) Debt-Equity Ratio.
(c) Dividend Coverage Ratio.
(d) Debtors Turnover Ratio.
(e) Working Capital Turnover Ratio.
(f) Net Profit Ratio.
(g) Return on Investment Ratio.
5.
(a) The following information are available for a firm:
(1) Gross Profit Ratio – 25%.
(2) Net Profit / Sales – 20%.
(3) Stock Turnover – 10.
(4) Net Profit / Capital – 1/5.
(5) Capital / Total Liabilities – 1/2.
(6) Fixed Assets / Capital – 5/4.
(7) Fixed Assets / Current Assets – 5/7.
(8) Fixed Assets – Rs. 10,00,000.
(9) Closing Stock – Rs. 1,00,000.
Find
out: 2x7=14
(a) Cost of Sales.
(b) Gross Profit.
(c) Net Profit.
(d) Current Assets.
(e) Capital.
(f) Total Liabilities.
(g) Opening Stock.
Or
(b) “Financial reporting should be a
part of the Annual Report of the Companies and it is the best way to provide
information to its shareholders.” Considering this statement, write a brief
note on financial statement and its types.
Ans: 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”.
Financial
statements are very useful as they serve varied affected group having an
economic interest in the activities in the business entity. Let us analyse the
purpose served by financial statement:
a)
The basic purpose of financial
statement is communicated to their interested users, quantitative and objective
information are useful in making economic decisions.
b)
Secondly, financial statements are
intended to meet the specialized needs of conscious creditors and investors.
c)
Thirdly, financial statements are
prepared to provide reliable information about the earning of a business
enterprise and it ability to operate of profit in future. The users who are
interested in this information are generally the investors, creditors,
suppliers and employees.
d)
Fourthly, financial statements are
intended to provide the base for tax assessments.
e)
Fifthly, financial statement are
prepare in a way a provide information that is useful in predicting the future
earning power of the enterprise.
f)
Sixthly, financial statements are
prepares to provide reliable information about the changes in economic
resources.
g)
Seventhly, financial statements
are prepares to provide information about the changes in net resources of the
organization that result from profit directed activities.
h)
Thus, financial statement satisfy
the information requirements of a wide cross-section of the society
representing corporate managers, executives, bankers, creditors, shareholders
investors, labourers, consumers, and government institution.
Types
of Financial statements
A set of
financial statements includes (Types):
a)
Profit and loss account or Income
statements
b)
Balance sheet or Position
statements
c)
Cash flow statements
d)
Funds flow statements or
e)
Schedules and notes to accounts.
a) Profit
and loss account or income statement: Income statement is one of the
financial statements of business enterprises which shows the revenues,
expenses, and profits or losses of business enterprises for a particular period
of time. Its main aim to show the operating efficiency of the enterprises.
Income Statement is sometime called the statement of financial performance
because this statement let the users to assess and measure the financial
performance of entity from period to period of the same entity or with
competitors.
b) Balance
sheet or Position statement: Balance Sheet is sometime called
statement of financial position. It shows the balance of assets, liabilities
and equity at the end of the period of time. Balance sheet is sometime called
statement of financial position since it shows the values of net worth of
entity. The net worth of the entity can be obtained by deducting liabilities
from total assets. It is different from income statement since balance sheet
report account’s balance as on a particular date while income statement report
that the account’s transactions during a particular period of time.
c) Cash
flow statement: A Cash Flow Statement is similar to the Funds
Flow Statement, but while preparing funds flow statement all the current assets
and current liabilities are taken into consideration. But in a cash flow
statement only sources and applications of cash are taken into consideration,
even liquid asset like Debtors and Bills Receivables are ignored. A Cash Flow
Statement is a statement, which summarises the resources of cash available to
finance the activities of a business enterprise and the uses for which such
resources have been used during a particular period of time. Any transaction,
which increases the amount of cash, is a source of cash and any transaction,
which decreases the amount of cash, is an application of cash. Simply, Cash Flow is a statement which
analyses the reasons for changes in balance of cash in hand and at bank between
two accounting period. It shows the inflows and outflows of cash.
d) Funds flow statement: The financial
statement of the business indicates assets, liabilities and capital on
a particular date and also the profit or loss during a period. But it is
possible that there is enough profit in the business and the financial position
is also good and still there may be deficiency of cash or of working capital in
business. Financial statements are not helpful in analysing such situation.
Therefore, a statement of the sources and applications of funds is prepared
which indicates the utilisation of working capital during an accounting period.
This statement is called Funds Flow statement.
According to
R.N. Anthony, “Fund Flow is a
statement prepared to indicate the increase in cash resources and the
utilization of such resources of a business during the accounting period.”
According to
Smith Brown, “Fund Flow is prepared
in summary form to indicate changes occurring in items of financial condition
between two different balance sheet dates.”
From the above discussion, it is clear
that the fund flow statement is statement summarising the significant financial
change which have occurred between the beginning and the end of a company’s
accounting period.
e) Schedule and
notes to account: The notes to the
financial statements are integral part of a company's external financial
statements. They are necessary because not all relevant financial information
can be communicated through the amounts shown (or not shown) on the face of the
financial statements. Generally, the notes are the main method for complying
with the full disclosure principle and are also referred to footnote
disclosures. The first note to the financial statements is usually a summary of
the company's significant accounting policies for the use of estimates, revenue
recognition, inventories, property and equipment, goodwill and other intangible
assets, fair value measurement, discontinued operations, foreign currency
translation, recently issued accounting pronouncements, and others.
6. (a) What do you mean by financial
statement analysis? Discuss three objectives of financial statement analysis.
4+10=14
Ans: Financial Statement Analysis
We know
business is mainly concerned with the financial activities. In order to
ascertain the financial status of the business every enterprise prepares
certain statements, known as financial statements. Financial statements are
mainly prepared for decision making purposes. But the information as is
provided in the financial statements is not adequately helpful in drawing a
meaningful conclusion. Thus, an effective analysis and interpretation of
financial statements is required.
Financial
Statement Analysis is the process of identifying the financial strength and
weakness of a firm from the available accounting and financial statements. The
analysis is done by properly establishing the relationship between the items of
balance sheet and profit and loss account.
In the
words of Myer “Financial Statement analysis is largely a study of relationship
among the various financial factors in a business, as disclosed by a single set
of statements, and a study of trends of these factors, as shown in a series of
statements.”
In simple
words, analysis of financial statement is a process of division, establishing
relationship between various items of financial statements and interpreting the
result thereof to understand the working and financial position of a business.
Objectives
(Purposes) and significance of Financial Statement analysis:
Financial
analysis serves the following purposes and that brings out the significance of
such analysis:
f)
To judge the financial health of
the company: The main objective of the financial analysis is to determine the
financial health of the company. It is done by properly establishing the
relationship between the items of balance sheet and profit and loss account.
g)
To judge the earnings performance
of the company: Potential investors are primarily interested in earning
efficiency of the company and its dividend paying capacity. The analysis and
interpretation is done with a view to ascertain the company’s position in this
regard.
h)
To judge the Managerial efficiency:
The financial analysis helps to pinpoint the areas wherein the managers have
shown better efficiency and the areas of inefficiency. Any favourable and
unfavourable variations can be identified and reasons thereof can be
ascertained to pinpoint weak areas.
i)
To judge the Short-term and
Long-term solvency of the undertaking:
On the basis of financial analysis, Long-term as well as short-term
solvency of the concern can be judged. Trade creditors or suppliers are mainly
interested in assessing the liquidity position for which they look into the
following:
Ø Whether
the current assets are sufficient to pay off the current liabilities.
Ø The
proportion of liquid assets to current assets.
j)
Indicating
the trend of Achievements: Financial statements of the previous
years can be compared and the trend regarding various expenses, purchases,
sales, gross profits and net profit etc. can be ascertained. Value of assets
and liabilities can be compared and the future prospects of the business can be
envisaged.
k)
Inter-firm Comparison: Inter-firm
comparison becomes easy with the help of financial analysis. It helps in
assessing own performance as well as that of others.
l)
Understandable: Financial analysis helps the users of the
financial statement to understand the complicated matter in simplified manner.
m)
Assessing
the growth potential of the business: The trend and
other analysis of the business provide sufficient information indicating the
growth potential of the business.
Or
(b) Give a brief note on mandatory and
voluntary disclosures on Corporate Social Responsibility Reporting. 14
Ans:
Corporate Governance in India
Concept of corporate Governance in India is not very old. For the
first time, the CII had set up a task force under Rahul Bajaj in 1995. On the
basis of this CII had released a voluntary code called “Desirable Corporate
Governance” in 1998. SEBI had also established few committees towards corporate
governance of which the notable are Kumar
Mangalam Birla report (2000), Naresh Chandra Committee (2002)
and Narayana Murthy Committee (2002). While Kumar Mangalam Birla committee came up with mandatory
and non-mandatory requirements, Naresh Chandra committee extensively covered
the statuary auditor-company relationship, rotation of statutory audit
firms/partners, procedure for appointment of auditors and determination of
audit fees, true and fair statement of financial affairs of companies. Further,
Narayan Murthy Committee focused on responsibilities of audit committee,
quality of financial disclosure, requiring boards to assess and disclose
business risks in the company’s annual reports.
Clause 49
of SEBI Listing Agreement
As a major step towards codifying the corporate governance norms,
SEBI incorporate the Clause 49 in the Equity Listing Agreement (2000), which
now serves as a standard of corporate governance in India. With clause 49 was
born the requirement that half the directors on a listed company’s board must
be Independent Directors. In the same clause, the SEBI had put forward the
responsibilities of the Audit Committee, which was to have a majority
Independent Directors. Clause 49 of the Listing Agreement is applicable to
companies which wish to get themselves listed in the stock exchanges. This
clause has both mandatory and non-mandatory provisions.
Mandatory provisions comprise
of the following:
a)
Composition of Board and its
procedure - frequency of meeting, number of independent directors, code of
conduct for Board of directors and senior management;
b)
Audit Committee, its composition,
and role
c)
Provision relating to Subsidiary
Companies.
d)
Disclosure to Audit committee,
Board and the Shareholders.
e)
CEO / CFO certification.
f)
Quarterly report on corporate
governance.
g)
Annual compliance certificate.
Non-mandatory provisions
consist of the following:
a)
Constitution of Remuneration
Committee.
b)
Dispatch of Half-yearly results.
c)
Training of Board members.
d)
Peer evaluation of Board members.
e)
Whistle Blower policy.
As per Clause 49 of the Listing Agreement, there should be a
separate section on Corporate Governance in the Annual Reports of listed
companies, with detailed compliance report on Corporate Governance. The
companies should also submit a quarterly compliance report to the stock
exchanges within 15 days from the close of quarter as per the prescribed format.
The report shall be signed either by the Compliance Officer or the Chief
Executive Officer of the company.
Apart from Clause 49 of the Equity Listing Agreement, there are
certain other clauses in the listing agreement, which are protecting the minority
shareholders and ensuring proper disclosures:
a)
Disclosure of Shareholding
Pattern.
b)
Maintenance of minimum public
shareholding (25%)
c)
Disclosure and publication of
periodical results.
d)
Disclosure of Price Sensitive
Information.
e)
Disclosure and open offer
requirements under SAST.
7. (a) Discuss the new standards of
corporate governance under the Companies Act, 2013. 14
Ans: Companies Act 2013 – Current
status of corporate governance in India
Despite of all the mandatory and non-mandatory requirements as per
Clause 49, India was still not in a position to project itself having highest
standards of corporate governance. Taking forward, the Companies Law 2013 also
came up with a dedicated chapter on Corporate Governance. Under this law,
various provisions were made under at least 11 heads viz. Composition of the
Board, Woman Director, Independent Directors, Directors Training and
Evaluation, Audit Committee, Nomination and Remuneration Committee, Subsidiary
Companies, Internal Audit, SFIO, Risk Management Committee and Compliance to
provide a rock-solid framework around Corporate Governance. The key provisions
in Clause 49 and 2013 act are summarized as follows:
a) Aligning Listing
Agreement with the Companies Act 2013: Companies Act requirements on
issuing a formal letter of appointment, performance evaluation and conducting
at least one separate meeting of the independent directors each year and
providing suitable training to them are now included in the revised norms of
SEBI. Independent directors are not entitled to any stock option, and companies
must establish a whistle-blower mechanism and disclose them on their websites.
b) Restricting Number of
Independent Directorships: Per Clause 49, the maximum number of boards a
person can serve as independent director is seven and three in case of
individuals also serving as a full-time director in any listed company. The
Companies Act sets the maximum number of directorships at 20, of which not more
than 10 can be public companies. There are no specific limits prescribed for
independent directors in the Companies Act.
c) Maximum Tenure of
Independent Directors: Based on the Companies Act as well as the new Equity
Listing Agreement, an independent director can serve a maximum of two
consecutive terms of five years each (aggregate tenure of 10 years). These
directors are eligible for reappointment after a cooling-off period of three
years.
d) Board-Mix Criteria
Redefined: Per Clause 49 of the Equity Listing Agreement, 50% of the board
should be made up of independent directors if the board chair is an executive
director. Otherwise, one-third of the board should consist of independent
directors. Additionally, the board of directors of a listed company should have
at least one female director.
e) Role of Audit Committee
Enhanced: The SEBI reforms call for two-thirds of the members of audit
committee to be independent directors, with an independent director serving as
the committee’s chairman. While the Companies Act requires the audit committee
to be formed with a majority of independent directors, SEBI has gone a step
further to improve the independence of the audit committee.
f) More Stringent Rules for
Related-Party Transactions: The scope of the definitions of RPTs has been
broadened to include elements of the Companies Act and accounting standards:
1.
All RPTs require prior approval of
the audit committee.
2.
All material RPTs must require
shareholder approval through special resolution, with related parties
abstaining from voting.
3.
The threshold for determining
materiality has been defined as any transaction with a related party that
exceeds 5% of the annual turnover or 20% of the net worth of the company based
on the last audited financial statement of the company, whichever is higher.
g)
Improved Disclosure Norms: In certain areas, SEBI resorts to
disclosures as an enforcement tool. Listed companies are now required to
disclose in their annual report granular details on director compensation
(including stock options), directors’ performance evaluation metrics, and
directors’ training. Independent directors’ formal letter of appointment /
resignation, with their detailed profiles and the code of conduct of all board
members, must now be disclosed in companies’ websites and to stock exchanges.
h)
E-voting Mandatory for All Listed Companies: Until now,
resolutions at shareholder meetings in listed Indian companies were usually
passed by a show of hands (except for those that required postal ballot). This
means votes were counted based on the physical presence of shareholders. SEBI
also has changed Clause 35B of the Equity Listing Agreement to provide e-voting
facility for all shareholder resolutions.
i)
Enforcement: SEBI is setting up the infrastructure to assess
compliance with Clause 49 to ensure effective enforcement. Companies need to
buckle up and assess the impact of these reforms and step up compliance.
Or
(b) What is Non-Banking Financial
Company? Discuss the RBI guidelines on regulatory framework of NBFC. 4+10=14
Ans:
Non-Banking Financial Company
A
Non-Banking Financial Company (NBFC) is a company engaged in the business of
loans and advances, acquisition of shares/stocks/bonds/debentures/securities
issue by Government or local authority or other marketable securities of a like
nature, leasing, hire purchase, insurance business, chit business but does not
include any institution whose principal business is that of agriculture
activity, industrial activity, purchase or sale of any goods (other than securities)
or providing any services and sale/purchase/construction of immovable property.
A non-banking institution which is a company and has principal business of
receiving deposits under any scheme or arrangement in one lump sum or in
instalments by way of contributions or in any other manner, is also a
non-banking financial company (Residuary non-banking company).
As per
Sec. 45I(f) of RBI Act, 1934, a non-banking financial company’’ means:
(i) a
financial institution which is a company;
(ii) a
non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in any
other manner, or lending in any manner;
(iii) such
other non-banking institution or class of such institutions, as the Bank may,
with the previous approval of the Central Government and by notification in the
Official Gazette, specify.
A
Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 2013 which is engaged in the business of:
a)
loans and advances,
b)
acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local
authority or other marketable securities of a like nature,
c)
leasing,
d)
hire-purchase,
e)
insurance business,
f)
chit business.
However,
such a company but does not include any institution whose principal business is
that of:
a)
agriculture activity,
b)
industrial activity,
c)
purchase or sale of any goods
(other than securities), or providing any services, and
d)
sale/ purchase/ construction of
immovable property.
Moreover,
a non-banking institution which is a company and has principal business of
receiving deposits, under any scheme or arrangement, in one lump sum or in
installments, by way of contributions or in any other manner, is also a
non-banking financial company (called a Residuary non-banking company).
RBI – GUIDELINES REGARDING FINANCIAL STATEMENTS OF NBFC’S
The issues
related to accounting include Income Recognition criteria, Accounting of
Investments, asset classification and provisioning requirements. These have
been provided in details in the RBI Directions, namely “Non-Systemically
Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2015” and “Systemically Important
Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential
Norms (Reserve Bank) Directions, 2015”.
RBI has
prescribed that Income recognition should be based on recognised accounting
principles, however Accounting
Standards and Guidance Notes issued by the Institute of Chartered Accountants
of India (referred to in these
Directions as “ICAI” shall be followed in so far as they are not inconsistent
with any of these Directions.
Income
Recognition
1. The
income recognition of NBFCs, irrespective of their categorisation, shall be
based on recognised accounting principles.
2. Income
including interest/ discount/ hire charges/ lease rentals or any other charges
on NPA shall be recognised only when
it is actually realised. Any such income recognised before the asset became
non-performing and remaining
unrealised shall be reversed.
3. Income
like interest /discount /any other charges on NPAs shall be recognised only
when actually realised, RBI also
requires that income recognised before asset becoming NPA should be reversed in
the financial year in which such
asset becomes NPA.
4. The
NBFCs are required to recognise income from dividends on shares of corporate
bodies and units of mutual funds on
cash basis, unless the company has declared the dividend in AGM and right of
the company to receive the same has
been established, in such cases, it can be recognized on accrual basis.
5. Income
from bonds and debentures of corporate bodies and from government
securities/bonds may be taken into
account on accrual basis provided it is paid regularly and is not in arrears.
6. Income
on securities of corporate bodies or public sector undertakings may be taken
into account on accrual basis
provided the payment of interest and repayment of the security has been
guaranteed by Central Government.
Principles for accounting of Investments
Investing is one of the core activities of NBFCs, hence RBI
requires the Board of Directors to Frame investment policy of the
company and implement the same. The investments in securities shall be
classified into current and long term, at the time of making each investment.
The Board of the company should include in the investment policy the criteria
for classification of investments into current and long-term. The
investments need to be classified into current or long term at the time of
making each investment. There can be no inter-class transfer of
investments on ad hoc basis later on. Inter class transfer, if warranted, should
be done at the beginning of half year, on April 1 or October 1, and with the
approval of the Board. The investments shall be transferred scrip-wise,
from current to long-term or vice-versa, at book value or market value,
whichever is lower;
The depreciation, if any, in each scrip shall be fully provided
for and appreciation, if any, shall be ignored.
Moreover, the depreciation in one scrip shall not be set off
against appreciation in another scrip, at the time of such inter-class
transfer, even in respect of the scrips of the same category.
Valuation of Investments
A) The directions also specifies various
valuation guidelines in respect of Quoted and Unquoted current investments
leaving the Long term Investments to be valued as per ICAI Accounting
Standards. It requires Quoted current investments to be grouped into
specified categories, viz. (i) equity shares, (ii) preference shares, (iii)
debentures and bonds, (iv) Government securities including treasury bills, (v)
units of mutual fund, and (vi) others.
The valuation of each specified category is to be done at
aggregate cost or aggregate market value whichever is lower. For this purpose,
the investments in each category shall be considered scrip-wise and the cost
and market value aggregated for all investments in each category. If the
aggregate market value for the category is less than the aggregate cost for
that category, the net depreciation shall be provided for or charged to the
profit and loss account. If the aggregate market value for the category exceeds
the aggregate cost for the category, the net appreciation shall be ignored.
Depreciation in one category of investments shall not be set off against
appreciation in another category.
B) Unquoted equity shares in the nature of current investments shall
be valued at cost or break-up value, whichever is lower. However, the RBI
Directions has prescribed that fair value for the break-up value of the shares
may be replaced, if considered necessary.
C) Unquoted preference shares in the nature of current
investments shall be valued at cost or face value, whichever is lower.
D) Investments in unquoted Government securities or Government
guaranteed bonds shall be valued at carrying cost.
E) Unquoted investments in the units of mutual funds in the
nature of current investments shall be valued at the net asset value
declared by the mutual fund in respect of each particular scheme.
F) Commercial papers shall be valued at carrying cost.
G) A long term investment shall be
valued in accordance with the Accounting Standard issued by ICAI.
Preparation of Balance Sheet and Profit and Loss Account
1.
Every non-banking financial
company shall prepare its balance sheet and profit and loss account as on March
31 every year. Whenever a non-banking financial company intends to extend
the date of its balance sheet as per provisions of the Companies Act, it
should take prior approval of the Reserve Bank of India before approaching
the Registrar of Companies for this purpose.
2.
Further, even in cases where the
Bank and the Registrar of Companies grant extension of time, the nonbanking financial
company shall furnish to the Bank a proforma balance sheet (unaudited ) as on
March 31 of the year and the statutory returns due on the said date.
Every non-banking financial company shall finalise its balance sheet
within a period of 3 months from the date to which it pertains.
3.
Every non-banking financial
company shall append to its balance sheet prescribed under the Companies Act,
2013, the particulars in the schedule as set out in Annex I.
Disclosures in the Balance Sheet
1.
The directions specify certain
disclosure requirements in the balance sheet.
2.
Disclosure of provisions created
without netting them from the income or against the value of assets. The
provisions shall be distinctly indicated under separate heads of account as (i)
Provisions for bad and doubtful debts; and (ii) Provisions for depreciation in
investments.
3.
Provisions shall not be
appropriated from the general provisions and loss reserves held. Provisions
shall be debited to the profit and loss account.
4.
The excess of provisions, if any,
held under the heads general provisions and loss reserves may be written back
without making adjustment against the provisions.
5.
Every non-banking financial
company shall append to its balance sheet prescribed under the Companies Act,
2013, the particulars in the schedule as set out in Annex I.
6.
The following disclosure
requirements are applicable only to systemically important (Asset Size more
than Rs. 500 crores) non-deposit taking non-banking financial company:
a)
Capital to Risk Assets Ratio
(CRAR);
b)
Exposure to real estate sector,
both direct and indirect; and
c)
Maturity pattern of assets and
liabilities.”
7. The formats for the above disclosures are also specified by
RBI.
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