Bachelor of Business Administration-BBA Semester 4 BB0017 Financial Reporting 2 Credits

(Book ID: B0097)

Assignment Set- 1 (30 Marks)

Q.1. What are the disclosure requirements for share capital.

Ans:Statutory disclosure requirements of Schedule VI Part 3 of the Schedule VI to the Companies Act 1956 requires the following particulars to be disclosed regarding share capital: (a) Authorized.........shares of Rs.....................each (b) Issued : (distinguishing between the various classes of capital and stating the following particulars in respect of each classes). (c) Subscribed (distinguishing between the various classes of capital and stating the particulars specified below, in respect of each class) (d) .........Shares of Rs...........each. Rs.........Called up. Of the above shares, .........shares are allotted as fully paid up pursuant to a contract without payment being received in cash. Of the above shares................ shares are allotted as fully paid bonus shares. (Specify the source from which bonus shares are issued, e.g. capitalization of profits or reserves or from share premium account) Less: Calls unpaid by Directors by others Add: Forfeited Shares (amount originally paid up) It is clear from the above that the details are to be given with regard to (i) types of or classes of share capital e.g. equity share capital and preference share capital; (ii) terms on which shares have been issued; (iii) the extent of allotment under each category of shares and extent to which they are paid up. Apart from the above the issue of shares for cash as well as issue of shares otherwise than for cash and bonus shares has to be stated. In the case of preference shares the terms of redemption or conversion and the earliest date of such redemption or conversion will have to be stated. Particulars of calls unpaid both by directors and by others will have to be disclosed. The amount of forfeited shares should be shown as an addition to the paid up capital. In the case of subsidiary companies the number of shares held by the holding companies must be stated separately.

Presentation of Share Capital in the Balance Sheet The Share Capital should be presented in the Balance Sheet as under: As at --------Rupees Share Capital Authorised: ................Cumulative Preference Shares of Rs. 10/- each ............... As at -----Rupees

............. ............Equity Shares of Rs. 10/- each ............ . ............... ............... .. ............... ................ Subscribed: .. Issued and ................Cumulative Preference Shares of Rs. 10/- each . fully paid up ........................................................................................ ............Equity Shares of Rs. 10/- each fully paid ............ The Authorized Capital of the company has been increased by Rs................... by creation of .............. Equity Shares of Rs. 10/- each pursuant to an Ordinary Resolution passed at the Annual General Meeting of the Shareholders held on.............. Of the above shares: (i) ............ Cumulative Preference Shares and .............. Equity Shares were allotted as fully paid up for consideration other than cash pursuant to contracts. (ii) ............ Equity shares were issued as fully paid up by way of Bonus Shares through the Capitalization of Reserves. Accounting Treatment and disclosure requirements: Authorized Capital: The amount upto which a company can raise share capital by issue of shares is called Authorized Capital and is stated in the memorandum of association. The authorized or nominal capital sets the limit of capital available for issue and the issued capital cannot exceed the authorized capital. The authorized capital may be increased by passing a resolution at the meeting of the members.

Issued, Subscribed and Paid up Share Capital: (i) Total amount of the number of shares issued for subscription of the public is known as Issued Share Capital. Out of the issued capital the total amount actually subscribed or agreed to be subscribed by the shareholders is known as Subscribed Capital. The subscribed capital again may be fully paid or partly paid. In the latter case balance is payable on calls when made. When company receives the money on application by the shareholders, the amount will be kept under "Share Application Money Pending Allotment". On allotment of shares by the Board of Directors to the shareholders the amount of share capital is credited to 'Issued, Subscribed and paid up Share Capital' by debit to 'Share Application Money pending Allotment'. (ii) In case the shares are allotted as fully paid for consideration other than for cash, the number of shares so allotted and their values are recorded separately under the head 'Shares issued otherwise than for cash" and finally credited to Issued Subscribed and Paid up Share Capital. A note is also inserted under the schedule Share Capital stating that Paid up share capital includes................... fully paid equity shares of Rs............. each allotted pursuant to an agreement for consideration other than cash. Share Application Money Pending Allotment: Application money received by the company from prospective shareholders is kept under 'Share Application Money Pending Allotment' account till shares are allotted to them. It should be shown in the Balance Sheet under a separate heading between 'Share Capital' and 'Reserves and Surplus'. However, invalid or revoked applications and excess application moneys received due to over subscription may be shown as part of current liabilities. Issue of Bonus Shares: Certain companies issue bonus shares to the shareholders by capitalizing free reserves. These free reserves are nothing but accumulated profits, which otherwise available for distribution of dividends to shareholders. These free reserves are utilized for issuance of Bonus shares to the shareholders either as fully paid or partly paid. The shareholders are not required to pay anything for such shares. Since no cash is received on issue of Bonus Shares it will be treated as issue of shares for a consideration other than cash. In the balance sheet of a company the number of Bonus Shares issued and the source from which it has been issued should be indicated by way of a note as under:

Share Capital Authorized: ......... Equity Shares of Rs. 10/-each Issued and Subscribed and paid up : .......Equity Shares of Rs. 10/-each fully paid............................. ....... ........................

Of the above shares: (i) ........... Equity shares of Rs. 10/- were allotted as fully paid bonus shares by capitalization of General Reserves. Calls in Arrears: The amount called and due but not paid by the shareholders is called calls in arrears. The calls in arrears are deducted from the called up amount and the balance is paid up capital. In the balance sheet of a company the calls in arrears should be shown distinguishing between arrears from directors and others. Share Capital Authorized: ..........Equity Shares of Rs. 10/-each ..........................

Issued, Subscribed paid up: ..........Equity Shares of Rs. 10/-each fully called up Less: Calls in arrears (from other than Directors) Advance Call Payments: The calls shall be made on uniform basis on all the shares falling under the same class. A company if authorized by its articles may accept from any shareholders a part or whole of the amount remaining unpaid in any shares held by him although no part of the amount has been called up. The calls received in advance are not repayable as long as the company is a going concern but will be appropriated as and when the calls fall due for payment. The right of calls in advance for repayment in the event winding up is, after the creditors are paid and before the share capital is paid. If the articles of the company permits the interest may be paid on advance calls. .................. ..........................

Forfeiture of shares: The Companies Act 1956 does not contain any specific provisions regarding forfeiture of shares. The articles of a company usually contain power to forfeit the shares of a member who fails to pay any calls or installments of a call on the appointed day for payment thereof. The company should give 14 days notice to the defaulting shareholder so as to give him an opportunity to pay the call money along with interest if any. The forfeited shares do not vest the property of the shares in the company. It is not an asset of the company and therefore there is no reduction in the share capital of the company. Sale of forfeited shares: The forfeited shares can be disposed of and the sale proceeds of the shares can be applied towards the liability attached to it. The shares forfeited cannot be re-allotted at a discount as fully paid shares, otherwise it will contravenes the provisions of section 79 of the Companies Act. In other words the discount allowed should not exceed the amount previously paid by the defaulting shareholder. When the discount allowed to new shareholder is less than the amount already received, the company makes a capital profit and it should be transferred to Capital Reserve. When forfeited shares are reissued at a premium, the amount of premium should be credited to share premium account and entire amount standing at the credit of forfeited shares account shall be treated as capital profit and transferred to Capital Reserve. Issue of shares at premium: When the shares of a company are issued at a rate more than their nominal value, then they are said to be issued at a premium. Thus a company can issue further shares at a higher price than the face value with same rights as those enjoyed by the existing shareholders. Where a company issues shares at premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premium on those shares shall be transferred to account called "share Premium account'. When the consideration is received in kind which is more than the nominal value of the shares, the excess value of consideration should be credited to share premium account. The annual balance sheet must disclose the amount of share premium separately and any amount is utilized from share premium account must be disclosed.
Q.2 What are the expenditures that are shown under capital work in progress.

Ans:Capital work in progress The expenditure incurred on installation of plant and machinery and other assets, which is yet to be capitalized is shown under the head 'capital work-

in-progress'. The expenditure incurred during construction (net of Income) as allocated and distributed to work-in-progress awaiting capitalization is also included under the head 'Capital-work-in-progress. However, the Institute of Chartered Accountants of India in its 'Guidance note on Terms used in Financial Statements' has defined 'Capital work in progress' as 'expenditure on capital assets which are in the process of Construction or completion.' The Companies Act including Schedule VI does not contain any specific disclosure requirement regarding capital work in progress. The Institute of Chartered Accountants of India has studied this subject, which is covered in its study on 'Expenditure during construction period'. The expenditure on various projects/works/schemes is booked to the respective works/jobs and is grouped under the followed sub-heads: i) Expenditure during construction awaiting allocation. ii) Work-in-progress. iii) Capital equipments awaiting erection, installation, commissioning and adjustments. iv) Construction Stores & Spares. v) Advances. vi) Others. Issues involved: Three major issues arise regarding disclosure of capital work in progress in the financial statements: i) Manner of disclosure of advances to contractors in respect of construction or fabrication of plants and machinery or others assets during the construction/fabrication period; ii) Manner of disclosure of capitalized indirect revenue expenditure during the construction period to ensure compliance with disclosure requirements of Part II of Schedule VI of Companies Act, 1956; and iii) Depreciation of Fixed Assets used in construction period. Each of the above issue is discussed in the following paragraphs. i) Disclosure of advances to contractors-The Research Committee of Institute of Chartered Accountants of India in its 'Study of Expenditure during construction period' states that advances to contractors on capital contracts may be disclosed separately preferably under the head 'Fixed Assets' alternatively under the head 'Loans and Advances'. In any case, they should not be identified against any specific fixed assets until Construction work is completed and the title of the property delivered from the contractor to the company. ii) Disclosure of indirect revenue expenditure-The Research Committee of Institute of Chartered Accountants of India opines that indirect revenue expenditure relating to or incidental to construction period should be disclosed under the general heading of 'Fixed Assets.'

iii) Depreciation on fixed assets used in construction period-The Research Committee of Institute of Chartered Accountants of India opines that appropriate depreciation on assets used actually or indirectly utilized in the work of construction, should be treated as part of the indirect expenditure during construction period and accordingly should be capitalized as part of construction cost. Notes on Capital work in Progress - Examples of notes to accounts relating to capital work in progress are given below: 1. Cost of Fixed Assets and Capital Work in Progress includes the following pre-operative expenses.

31-3......
(Rs. Lacs) Opening Stock of goods produced Salary & Wages. Contribution to Provident and other funds. Rent (Net) Rates and Taxes. Insurance Payment to Branch Auditors: - Audit Fees. - Certification Work Interest on Term Loans & Debentures. Interest on others Miscellaneous Expenses Depreciation Raw materials consumed. Power and Fuel Excise Duty Legal and Professional Fees Total Less: Sale of Cement mfg.-during trial run Closing stock of goods purchased during trial run Material produced in trial run

31-3.....
(Rs. Lacs)

2. Capital Work-in-Progress includes Rs..........for Delhi Project, the details of which are as follows : (a) Capital Work-in-Progress (after adjustment of Rs..........being net increase due to change in the rate of exchange of the rupee and payment to Auditors-other matters-consultancy services Rs.............)

(b) Capital Goods in transit (c) Advances for Capital Goods-Unsecured considered good. (d) Stock of construction materials-valued at cost (e) Interest on Loans 3. Additions to Fixed Assets and Capital Work in Progress include expenditure on new industrial units as follows: Year ended Year ended 31-3. . Lacs) (i) Repairs to Buildings (ii) Salaries & Wages (iii) Contribution to Provident Fund (iv) Employee Welfare Expenses (v) Insurance (vi) Rent (vii) Rates & Taxes (viii) Miscellaneous Expenses. (ix) Interest Total Cost of Capital Work-in-Progress include pre-operative expenses of Rs.... lacs consisting of Stores & Spare parts consumed Rs.... lacs, Power & Water charges Rs.... lacs, Salaries Rs.... lacks, Contribution to Provident & other Fund Rs.... lacs, employees Welfare expenses Rs.... lacs, Rent Rs... lacs, Rates & taxes Rs.... lacs, Insurance Rs...lacs, and Miscellaneous expenses Rs.... lacs. Capital Work in Progress includes: Project Expenses pending Allocations as under: i) Salaries & Wages ( Rs........) ii) Contribution to Provident & other Funds (Rs.....) iii) Staff Welfare Expenses (Rs......) iv) Interest on Term Loan (Rs..........) v) Depreciation (Rs..........) vi) Miscellaneous Expense (Rs............) 6. As commercial production has not been commenced as at the date of this balance sheet at the Delhi Plant, certain expenditure incurred by the company as detailed in Schedule which cannot be regarded as part of the incidental cost of construction of buildings and plant and machinery, has been treated as deferred revenue expenditure. It is proposed that such expenditure will be written off to the future profit or loss account starting from the year in which commercial production commences. These 31-3.... (Rs. (Rs. Lacs)

expenses have been identified as relatable to the work to be undertaken after the company commences commercial production and includes certain expenses allocated to deferred revenue expenditure on the basis of estimates made by management 7. The Company started trial runs and trial production at its Plant on Commercial production has not been commenced as at the date of Balance Sheet The expenditure incurred on the Project during the period from..... to...... has been included in Schedule .... 'Pre-operative and Trial Production expenditure allocated to Fixed Assets and Capital Work in Progress'. The preoperative and trial production expenditure has been allocated to Buildings, Plant and Machinery, Capital Work in Progress in the ratio of direct costs. 8. Interest amounting to Rs on loans for capital work in progress has been capitalised during the year. 9. Commitments against capital expenditure sanctioned by the Board up to 31st March,.......in so far as they have not been provided for in the account amounted to Rs.......... 10. Capital work in progress includes the entire interest of Rs............... lakhs (including Rs......lakhs for the year) on deferred payment credits availed under ICICI re-discounting scheme for purchase of machineries.
Q.3 What are the statutory disclosure requirements for reserves and surplus.

Ans:Disclosure of Reserves and Surplus Part III of Schedule VI of the Companies Act 1956 has negatively defined "Reserve" as under: "The expression reserve shall not include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy" In other words, reserve refer to amount set aside out of profits of the company or other surpluses of the company which are neither meant to meet any loss in respect of depreciation, renewals, or diminution in the value of assets nor meant to meet any known liability. Statutory disclosure Requirements of Schedule VI Part I of Schedule VI requires presentation of the following items under the group heading 'Reserves and Surplus' 1. Capital Reserves. 2. Capital Redemption Reserve. 3. Share Premium account

4. Other Reserves specifying the nature of each reserve and the amount in respect thereof.

Less debit balance in profit and loss account (if any) 5. Surplus i.e. balance in profit and loss account after providing for proposed allocation namely dividend, bonus or reserves. 6. Proposed addition to reserves 7. Sinking Funds Under each of the above items, additions and deductions since the last balance sheet are required to be disclosed. The item share premium amount shall include details of its utilization in the manner provided in section 78 in the year of utilization. The debit balance in the profit and loss account shall be shown as a deduction from the uncommitted reserves if any. The word 'fund' in relation to any reserve should be used only where such reserve is specifically represented by earmarked investments.
Presentation of Reserve and Surplus in Balance Sheet Reserves and surplus may be presented in the balance sheet as under: Reserves & Surplus As at Capital Reserve As per last balance sheet Received during the year Investment Allowance Reserve As per last balance sheet Add: Transfer from Profit & Loss account Less: Utilized for purchase of machinery during the year Investment Allowance Utilized reserve Investment Allowance Utilized Reserve As per last balance sheet Add: Transfer from Investment Allowance Reserve General Reserve As per last balance sheet Add: Set aside this year Profit and Loss Account Balance as per P & L account ............................. ............................. ............................ Less: Utilized for issue of Bonus shares during the year ........................................ ............................. ............................. ............................. ............................. ................... ............................. .............................

As at

Accounting treatment and disclosure requirements Capital Reserve: Capital reserve represents surpluses or profit earned in respect of certain type of transactions; example, on sale of a fixed assets at a price in excess of cost, realization of profit on issue of forfeited shares etc. It is a reserve, which does not include any amount regarded as free for distribution through the profit and loss account. It includes share premium, capital redemption reserve, development rebate reserve, profits on reissue of forfeited shares. It also includes any grants received from Central or State Government or other agencies for acquisition of capital assets. Land and other assets gifted by Central or State Governments free of cost are notionally valued and credited to capital reserve. Grant-in-aid for capital expenditure received during the year is shown as under: (a) Grant-in-aid from the Government of India (b) Grant-in-aid from others Government grants defined: Government grants are assistance by governments in the form of transfer of resources to an enterprise in return for the past and future compliance with certain conditions relating to the operating activities of the enterprise. They exclude those forms of government assistance, which cannot be distinguished from the normal trading transactions of the enterprise. Non-monetary Government Grants: The non-monetary may be in the shape of free land or other resources company. The asset or resources can be assessed at fair value is not available then it should be assessed at accounted for. government grants for the use of the value, or if the fair normal value and

The capital reserve may be utilized in the following manner: (a) To utilize for writing down fictitious assets or losses (subject to provision in the Articles) or for issuing bonus shares. But the amount of share premium or capital redemption reserve account can be utilized only for the purpose specified in section 78 and 80 respectively of the Companies Act. (b) To write-off capital losses on transfer of assets received free of cost or assets acquired out of grant, which had been accounted for under capital reserve.

(c) In case grant is received for acquisition of specific fixed asset the value of the fixed asset is capitalized net of grant received for that asset. Where the grant relates to a specific asset equals the cost of that asset, the asset is shown in the balance sheet at nominal value. In case the asset concerned is discarded or disposed off before the asset is exhausted the book value of such asset is removed from the fixed assets and the amount is credited to Profit & Loss Account. (d) In case certain materials are received out of the grant under specific conditions regarding its utilization, the cost of such materials is charged to capital account/ inventory, based on the purpose for which it is received and the Capital account/ inventory are valued notionally and corresponding credit is given to "Capital Reserve". (e) In case the grant cannot be linked with a particular asset, the same is to be adjusted in ten equal annual installments. Revenue Reserve: It is an amount set aside out of the profits or surplus of a business to provide additional working capital or to strengthen the liquid resources of the business so that they may be available for any unforeseen contingencies or to equalize the dividend or for expansion of business. It is an appropriation of profit and accumulated over a period. Share Premium account: When shares are issued at a price higher than its nominal value, money received over and above the nominal value is credited to Share Premium Account. The balance lying in this account may be utilized to write off/adjust the expenses etc. on any issue of shares or debentures of the company; issue of fully paid bonus shares; writing off preliminary expenses; providing for premium payable on redeemable preference shares or debentures of the company. It is not available for distribution of dividend. Investment Allowance Reserve: The Investment Allowance Reserve is created by the company under section 32A of the Income Tax Act, 1961. The amount of investment allowance reserve is transferred to this account to the extent investment allowance is utilized.

Bonds / Debenture Redemption Reserve: This reserve is created for redemption of the Bonds or Debentures issued by the company. The redemption reserve may be created either in equal installments for the remaining period or higher amounts if profit permits. Withdrawal from the reserve is permitted for redemption purposes only. Surplus as per Profit & Loss Account: Surplus left over all appropriations such as dividend, tax, and transfer to general reserve is shown under this head. This is shown directly in the Balance Sheet under the main head Reserves & Surplus. Reserve Created on Revaluation of Fixed Assets: Accounting Standard 10 on Accounting for Fixed Assets states that increase in net book value on revaluation of fixed assets should be credited directly to owners interest under the head 'revaluation reserve' which is usually regarded as not available for distribution as dividend. Proposed Addition to Reserve: The proposed addition to reserves is to be separately shown in the balance sheet. It is common practice in many companies that year after year certain amount is transferred to reserves out of profits without referring the matter to the shareholders. In such cases the transfer to reserves will be shown in the balance sheet as addition to reserves. But when the proposal of directors to transfer the amount to reserves is placed before the shareholders for their confirmation, then it will be shown in the balance sheet as proposed additions to reserve. Sinking Fund: A sinking fund is a fund created for redemption of long term liabilities like debentures, bonds etc. A fixed amount is debited to profit and loss account (below the line) every year till sufficient amount is accumulated to repay the liability on the date of maturity. The reason for debiting profit and loss appropriation account (below the line) is that sinking fund is in the nature of allocation of profits and is not a charge against it. The amount set apart is invested is invested in outside the business so that sufficient amount, inclusive of interest is accumulated to discharge the said liability. Sinking fund is also created for replacement of wasting assets and the amount so provided is invested outside the business so that liquid assets are available at the time of replacement of original asset. In order to avoid confusion the funds created for replacement of asset and repayment of liability should be

separately shown in the balance sheet as 'sinking fund for replacement of machinery' and 'sinking fund for redemption of debentures'.