INNER - ADV. ACCOUNTING SM · PDF fileChapter 2 Accounting Standards ... Issues in Partnership Accounts 2 Amalgamation, Conversion and Sale of ... Shares 1.1.2 Important

STUDY MATERIAL Intermediate (IPC) Course

PAPER: 5

ADVANCED ACCOUNTING

VOLUME – I

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text books. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies.

All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees.

Permission of the Institute is essential for reproduction of any portion of this material.


All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher.

Revised Edition : July, 2013

Website : www.icai.org

E-mail : [email protected]

Committee/ : Board of Studies Department

ISBN No. : 978-81-8441-134-8

Price : ` 380/-

Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi 110 002, India.

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003 July/2013/30,000 Copies


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A WORD ABOUT STUDY MATERIAL

The study material has been divided into two parts, namely, Volume I dealing with conceptual theoretical framework; and Volume II comprising of practice manual. The Study Material has been designed having regard to the needs of home study and distance learning students. The students are expected to cover the entire syllabus and also practice solving the questions given in the practice manual on their own. Volume I of the study material deals with the conceptual theoretical framework in detail. The main features of Volume I are as under: • The entire syllabus has been divided into Nine chapters. • In each chapter, learning objectives have been stated. The learning objectives would enable

you to understand the sequence of various aspects dealt within the chapter before going into the details so that you know the direction of your studies.

• In each chapter, the topic has been covered in a step by step approach. The text has been explained, where appropriate, through illustrations and practical problems. You should go through the chapter carefully ensuring that you understand the topic and can tackle the exercises.

• Many illustrations have been included in each chapter of Volume I. Likewise, many questions have been included for practice in Volume II comprising practice manual.

• Exercises have been given at the end of each topic in volume II for independent practice. • In this revised study material, sincere efforts and care has been taken to incorporate the

relevant amendments.

• Attention is invited to the Significant Additions/Modifications made in this edition of the study material which are given in the next three pages.

• Flow charts have been inserted in Chapters at appropriate places for quick reference of students.

• Please note that the changes over the previous edition have been indicated in bold and italics in the chapters.

• New illustrations have been added to explain the application of the existing concepts in some of the chapters and these have been indicated in grey background.

• Feedback form is given at the end of this study material wherein students are encouraged to give their feedback/suggestions.

These features would add value to the study material and aid the students in the learning process. In case you need any further clarification/guidance, you may send your queries at [email protected], [email protected]; [email protected].


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Significant Additions/Modifications in this Edition

Chapter No.

Name of the Chapter

Unit No.

Name of the Unit

Section/Sub-Sections

Changes

Chapter 2 Accounting Standards

2.1 AS 4 “Contingencies and Events occurring after the Balance Sheet date"

Illustration no. 3 added

2.3 AS 11 “The Effects of changes in Foreign Exchange Rates”

(1)Insertion of Para 46A in AS 11 and clarification on Para 46A; (2)Matter added on Presentation of FCMITDA; (3)Illustration no. 11 added

2.4 AS 12 “Accounting for Government Grants”


2.5 AS 16 “Borrowing Costs”


2.6 AS 19 “Leases” Illustrations no. 19, 20 added

2.8 AS 26 “Intangible Assets”

Illustrations no. 29, 30 added

Chapter 3 Advanced Issues in Partnership Accounts

2 Amalgamation, Conversion and Sale of Partnership Firms

2.2 Conversion of Partnership Firm into a Company 2.2.1 Apportionment of Shares amongst Partners



Chapter 4 Company

Accounts 1 ESOP and

Buyback of Shares

1.1.2 Important Provisions as per SEBI Guidelines

Matter added

3 Redemption of Debentures

3.3 Debenture Redemption Reserve

Matter added

4 Amalgamation and Reconstruction

Illustrations no. 7, 8, 12 and 13

added 5 Liquidation of

Companies 5.4 Preferential Creditors

Example added


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Chapter 5 Financial Statements of Insurance Companies

2 Accounting Technique of General Insurance Business

2.8 Investments Pattern of Investible Funds

updated

3 Financial Statements of Insurance Companies

3.5 Preparation of Financial Statements


Chapter 6 Financial Statements of Banking Companies

1 Relevant provisions of Banking Regulations, Act

1.8 Cash Reserve Matter added

4 Income Recognition, Classification of Assets and Provisions

4.2 Classification of Bank Advances on basis of Performance

Matter added

4.8 Disclosure Requirements on Advances restructured by Banks and Financial Institutions

Para added

5 Some Special transactions of Banks

5.1 Discounting, Collection and Acceptance of Bills

Matter added

6 Preparation of Financial Statements

Annexure IV Updated

Chapter 7 Financial Statements of Electricity Companies

1 Relevant Legal and Administrative provisions

1.2 Electricity Act, 2003

Matter added

1.3 Tariff Principles Matter added

1.4 CERC (Terms and Conditions of Tariff) Regulations, 2009

Matter added

2 Preparation of Financial Statements

2.1 Formats of financial statements

Matter added

2.2. Specific Transactions of Electricity Supply Company

Matter added

2.4 Deprecation Matter added


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2.7 2009 Regulations


2.11 Application of Accounting Standards in Electricity Companies

Para added

Chapter 8 Departmental Accounts

6. Inter-departmental Transfers Matter added

7. Memorandum stock and Memorandum mark up account method

Para added

Miscellaneous Illustrations


Chapter 9 Accounting for Branches including Foreign Branches

2. Distinction between Branch Accounts and Departmental Accounts

Para added

5 Accounting for Dependent Branches

Illustration nos. 1, 7 added

5.1 When goods are invoiced at cost

Matter on Branch trading and profit and loss account method added

6. Accounting for Independent branches

Salient features of accounting system of independent branches added

13. Techniques for foreign currency translation


Appendix II

Applicability of Accounting Standards to various entities

Criteria for classification of non-corporate entities as decided by the Institute of Chartered Accountants of India

Updated

Appendix III

Accounting Standards AS 11: The effects of changes in Foreign Exchange Rates Updated


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STUDY PLAN – KEY TO EFFECTIVE LEARNING

This paper will acquaint you with the basic concepts, theories and accounting techniques followed by few different entities and expects you to gain working knowledge of few more professional standards and application of accounting principles to different practical situations. Understand the syllabus To start your preparation for the subject, it is necessary to understand clearly what is to be studied, from where to be studied and then how to be studied. Let’s start with the first step in the process of your preparation. At the initial stage of preparation, one should study the syllabus carefully; also try to understand the relationships between various topics and the depth of the study required in different topics. The study material of Paper 5 ‘Advanced Accounting’ is divided into nine chapters/topics based on the syllabus. The topics covered under this paper can be comprehended in the following manner: Category Name of the chapters Topics on Accounting Standards

Chapter 1 Framework for Preparation and Presentation of Financial Statements Chapter 2: Accounting Standards

Partnership form of business

Chapter 3: Advanced issues in Partnership Accounts

Company form of business Chapter 4: Company Accounts Industry specific Financial statements

Chapter 5: Financial Statements of Insurance Companies Chapter 6: Financial Statements of Banking Companies Chapter 7: Financial Statements of Electricity Companies

Accounting for Special Transactions

Chapter 8: Departmental Accounts Chapter 9: Accounting for Branches including Foreign Branches

Gather the course-ware to study Once you acquaint yourself with the syllabus, the next step is to gather the knowledge inputs which have been provided by the Board of Studies, to study the paper. 1. Study Material (Volume I) 2. Practice Manual (Volume II) Board of studies at the time of registration provides you the above two books.


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3. Suggested Answers After announcement of results, the suggested answers of the questions asked in that particular attempt are issued by the Board of studies. 4. Revision Test Papers For every examination, Board of studies comes out with Revision Test Papers (RTP) meant for that particular attempt. However, in Accounts, you may refer RTPs of past few attempts. 5. Mock Test Papers Mock Test Papers are also issued by the Board of Studies time to time. These mock test papers are based on the pattern of the question paper of the past examination. Now, after knowing the various knowledge inputs provided by the Board of Studies, you should plan your studies accordingly. As stated earlier that all the course-ware mentioned above is not provided to you at the same time, hence one can comprehend that the objective of each knowledge input provided is different and requires your practice of the same, at different stage of your study. How to study? There is a very popular saying that if you fail to plan then you plans to fail. Planning is one of the essential elements for studying a subject of professional course. By planning, here we mean time management for subject as a whole and individually as well for each and every chapter. We would like to state that for the paper of accounting, one needs at least three rounds of study. Advanced Accounting examination paper is purely practical based. Therefore, one has to do written practice of good number of questions on each topic. So, at the time of planning the study for accounting you should keep into mind the written practice of practical questions also. Considering the practical nature of the paper, start your studies from the day you receive the course material. Keeping in mind the quantum of the syllabus, it is suggested that you should study one to two hours a day. By doing so, you will be able to manage first round of complete study and two rounds of revision well before time. Your first round of study should be completed well in advance that is at least three months before your exam. However, your planning should be based on the availability of time and the contents of the subject. Your second round of study i.e. your first revision should be over before one month of your exam. Your second revision should be in the last month before exam so that you will be in the position to remember all the concepts. These three rounds of study will help in boosting the confidence level for the subject and will make you mentally prepared to appear in the examination.


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First round of study Similar to the paper of Accounting, the syllabus of ‘Advanced Accounting’ also covers Accounting Standards as well as other topics, so here also, your planning should be divided in two parts namely- 1. Accounting Standards 2. Other chapters of the course curriculum. Every day when you start your study first go through the concepts which you have read last day then start learning new concepts. Remember, out of sight, out of mind. Ideally your first study should be within 24 hours of initial reading, the second within 1 week of reading. In Paper 1 ‘Accounting’ at Intermediate (IPC) Course Group I level, we already had chapters on Partnership firm and Company accounts which dealt with some of the aspects of such form of businesses. Like in partnership, aspects of admission, retirement or death of a partner have been dealt with and the topics of company’s accounts dealt with the issue of bonus shares, amalgamation, internal reconstruction etc. The paper of ‘Advanced Accounting’ covers some more aspects of partnership firm and company accounts. Therefore, we in this paper recommend you to take these topics first as you are familiar with the accounting treatment followed in such types of businesses and will be in a position to grasp quickly the accounting treatment to be done for other aspects covered in this paper. However, considering the importance of these topics, unit on amalgamation and internal reconstruction has been included in this paper also. For other topics, you may decide, at your convenience as to which topic should be taken up next and in what sequence. However, for this paper, we suggest you to study accounting standards at the end as we do not have any chapter which is specifically based on the provisions of accounting standards though accounting standards may apply in some situations like for valuation of investments of banks you may have to apply the provisions of AS 13 if nothing is specified in the Banking Regulations or the RBI Act in this regard. Again in this paper also, we would like to re-iterate that for accounting standards, study the explanation given in chapter 2 first and then study the bare text of the accounting standard given as an appendix at the end, after chapter 9 of the study material. Following this procedure will help you in-depth understanding of the underlying concepts of accounting standards specified in the syllabus and the manner in which it is interpreted and should be interpreted. Use of BoS Knowledge inputs in a systematic pattern Step 1 Study material To lay a strong foundation of the understanding of any particular topic, study material explains the concepts of each and every topic in detail with adequate illustrations. Study the underlying concepts and accounting treatment specified therein analytically before proceeding towards illustrations. Keep questioning yourself until you are absolutely clear on the topic. Solve the illustrations after understanding the topic.


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Step 2 Practice Manual After solving the illustrations given in the study material, solve the questions given in the practice manual. Practice Manual is highly useful for the students appearing in the examination as it includes questions from past examinations which would facilitate in thorough understanding of the chapters explained in the study material. In Advanced Accounting paper, it is very necessary that one should practice a good number of questions dealing with different adjustments. Practice Manual will help serve this purpose. Your first round of study should cover both Study Material and Practice Manual. Second round of study Step 3 Suggested answers Your second round of study i.e. your first revision should cover practice of suggested answers of recent two to three examinations. Suggested answers of past few examinations give you an idea of what type of questions are asked in the examination and how to solve and present the solution for such questions in the examination. Solving the question paper in the examination situation will help you, not only in time management but will also give you the confidence to attempt different types of questions in the examination. Step 4 Revision Test Papers (RTP) After you complete revision of whole syllabus at least once, you should solve the questions given in the RTP. For every examination, Board of Studies comes out with a Revision Test Paper. Revision Test Paper is issued for every attempt containing a fresh set of questions which will help you to evaluate your preparation level. RTP of Advanced Accounting is divided into two parts namely Part I: Recent amendments, Notifications and Announcements which are relevant for that particular examination and are not given in the study material or were not applicable in the immediate past examination. You will be able to know all such relevant information applicable for the exam at one place. Part II carries questions and answers for your practice. In Advanced Accounting, questions on each topic are given with full solution to enable you to get an insight on how to present the solutions in an orderly manner. In Advanced Accounting paper, RTP of past few attempts can also be referred subject to amendments for which you have to refer the latest Study Material and RTP. Third round of study Step 5 Mock Test Papers After second revision of the complete syllabus, you may assess your preparation by taking mock tests conducted by various branches at their end. Also Mock test papers are hosted on the institute’s website www.icai.org which you may download and solve within a time period of three hours. Important points to be kept in mind 1. Preparation of notes Prepare concise notes in the first round of study itself. Your notes should be prepared in a manner, which supplements your understanding of the concept and the illustrations you have


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solved. You may either make a separate copy where you write down the important concepts of the chapter or can underline the important concepts in the book itself and read those underlined portion at the time of revision. You should also shortlist the illustrations to be revised again in your second and third round of study. Short listing of illustrations should be based on the difficulty you faced while solving the question. Besides preparation of important points of the topic (which will help you to recapitulate the whole concepts), a summary of tricky points and adjustments gathered from the practice of various good illustrations may also be prepared which will help in grasping the intricate practical aspects. Such tricky points or adjustments should be cross linked with the concerned illustration number so that at the time of revision you not only study the accounting treatment but also refer the whole solution again. These notes may also be accompanied by the proforma of relevant accounts and diagrams so that at the later stages of preparation, the conceptual knowledge underlying different topics may be gained within minimum time and efforts without going through a number of books again. 2. Use of proper and prescribed format for presentation of accounts There are some chapters which require the solution or financial statements to be presented in particular format. You should make it a practice to adopt the prescribed formats while presenting the accounts of particular entities. For example: Financial Statements of companies should be in the format prescribed in the Schedule VI to the Companies Act, 1956. 3. Recapitulation of previously read topics The chapter of Partnership accounts was also there in the paper of ‘Fundamentals of Accounting’ at CPT level. Therefore, here at Intermediate (IPC) Course level, you are required to whet your skills on this topic. Also the concepts and provisions read at CPT level lays down the foundation for studying and understanding the topics specified at the Intermediate (IPC) Course level. For example, concept of revenue and capital receipt and expenditure is applied in every topic while preparing the financial statements of an entity. Similarly, valuation of inventory, accounting for depreciation etc. are some of the topics the concepts of which are applied in general to all entities. 4. Keep yourself continuously updated We at Board of studies endeavor to update you with the latest amendments or notifications as and when they are issued. One of the sections in the Students’ Journal is on ‘Academic Update’ which contains recent amendments in accounting also. You should be in a habit to read this continuously as it will help you in avoiding last moment pressure to acquaint yourself with all the relevant amendments. Also list of publications comprising of all relevant accounting standards and guidance notes are published well in time in the Students’ Journal and the institute’s website to apprise you with the applicability part of the same in the particular examination. 5. Keep in mind the Inter-linking of various topics The provisions of accounting standards have to be kept in mind and applied while studying the related chapter based on the particular accounting standard. If your concepts are clear relating


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to a particular standard, you should not face any problem in applying the same to solve problems in an inter-connected chapter. Sometimes even though the chapter may not directly relate to an accounting standard, it may contain adjustments involving application of one or more standards. Tips for examination Following are accounting related examination tips which you should keep in mind at the time of appearing for the examination: 1. Use of proper formats Certain statutes prescribe specific formats for presentation of the accounts. You should take care of the same at the time of solving the questions in the exam. Accounts presented in the prescribed manner will help you in scoring due marks. 2. Adequate Working Notes In accounts, your solution is generally divided in two parts viz- main solution and working notes. Working notes form part of your solution and carries marks. Therefore, it is advised that calculations made on your calculator should also be written in your answer sheet as working note, wherever required, neatly and precisely. Also your working note should be cross referenced with the figure used in the main solution so that examiner can easily understand that how you have arrived at the particular figure. 3. Answer the questions with due emphasis on the provisions of Accounting

Standards Support your answers/conclusions with proper reasoning. Answers for questions based on accounting standards should be supported with provisions of that accounting standard rather than a mere common sense or guess work. It is not required to quote paragraph number of Accounting standard but you are expected to quote accounting standard number along with the name of the standard. However, if you state, paragraph number of accounting standard, then it will add value to the solution and will also help create a good impression in the mind of the examiner. You should quote number of accounting standard or name only when you are sure. It is better not to quote than to misquote the accounting standard number. 4. State the assumption clearly In case a question leaves room for making an assumption and there is a possibility of more than one assumption, it is important to clearly state the assumption you have taken and solve the question accordingly.

Happy Reading and Best Wishes!


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SYLLABUS

GROUP II PAPER 5: ADVANCED ACCOUNTING

(One paper – Three hours – 100 Marks)

Level of Knowledge: Working Knowledge

Objectives:

(a) To have an understanding of the conceptual framework for the preparation and presentation of financial statements,

(b) To gain working knowledge of the professional standards and application of accounting principles to different practical situations, and

(c) To gain the ability to solve advanced problems in the case of different entities.

Contents :

1. Conceptual Framework for Preparation and Presentation of Financial Statements

2. Accounting Standards

Working knowledge of:

AS 4 : Contingencies and Events occurring after the Balance Sheet Date

AS 5 : Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

AS 11 : The Effects of Changes in Foreign Exchange Rates (Revised 2003)

AS 12 : Accounting for Government Grants

AS 16 : Borrowing Costs

AS 19 : Leases

AS 20 : Earnings Per Share

AS 26 : Intangible Assets

AS 29 : Provisions, Contingent Liabilities and Contingent Assets.


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3. Advanced Issues in Partnership Accounts

Dissolution of partnership firms including piecemeal distribution of assets; Amalgamation of partnership firms; Conversion into a company and Sale to a company.

4. Company Accounts

(a) Accounting for employee stock option plan, Buy back of securities, Equity shares with differential rights, Underwriting of shares and debentures, Redemption of debentures

(b) Advanced problems for business acquisition, Amalgamation and reconstruction (excluding problems of amalgamation of inter-company holding)

(c) Accounting involved in liquidation of companies, Statement of Affairs (including deficiency/surplus accounts) and Iiquidator’s statement of account of the winding up.

(d) Financial Reporting of Insurance, Banking and Electricity Companies and legal and regulatory requirements thereof

5. Accounting for Special Transactions

Departmental and branch accounts including foreign branches

Note – If either old Accounting Standards (ASs), Announcements and Limited Revisions to ASs are withdrawn or new ASs, Announcements and Limited Revisions to ASs are issued by the Institute of Chartered Accountants of India in place of existing ASs, Announcements and Limited Revisions to ASs, the syllabus will accordingly include/exclude such new developments in place of the existing ones with effect from the date to be notified by the Institute.


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CONTENTS

CHAPTER 1: FRAMEWORK FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS .................................................... 1.1 – 1.23

1. Introduction ................................................................................................... 1.1

2. Purpose of the Framework ............................................................................. 1.2

3. Status and Scope of the Framework ............................................................... 1.2

4. Components of Financial Statements .............................................................. 1.2

5. Objectives and Users of Financial Statements .............................................. 1.3

6. Fundamental Accounting Assumptions ............................................................ 1.4

7. Qualitative Characteristics ............................................................................. 1.7

8. Elements of Financial Statements .................................................................. 1.9

9. Measurement of Elements of Financial Statements ....................................... 1.15

10. Capital Maintenance .................................................................................... 1.18

CHAPTER 2: ACCOUNTING STANDARDS ...................................................... 2.1 – 2.88

1. Introduction ................................................................................................... 2.1

2. Overview ....................................................................................................... 2.1

2.1 AS 4: Contingencies and Events Occurring after the Balance Sheet Date .... 2.1

2.2 AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies .................................................... 2.7

2.3 AS 11: The Effects of changes in Foreign Exchange Rates ................... 2.13

2.4 AS 12: Accounting for Government Grants ........................................... 2.25

2.5 AS 16: Borrowing Costs ...................................................................... 2.33

2.6 AS 19 : Leases ................................................................................... 2.38

2.7 AS 20: Earnings per Share ................................................................. 2.58

2.8 AS 26: Intangible Assets ..................................................................... 2.66

2.9 AS 29: Provisions, Contingent Liabilities and Contingent Assets ........... 2.78


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CHAPTER 3 : ADVANCED ISSUES IN PARTNERSHIP ACCOUNTS ................. 3.1 – 3.66

Unit 1 : Dissolution of Partnership Firms

1.1 Introduction ................................................................................................... 3.1

1.2 Circumstances Leading to Dissolution of Partnership ...................................... 3.1

1.3 Consequences of Dissolution ......................................................................... 3.2

1.3.1 Dissolution before expiry of a fixed term ................................................ 3.3

1.4 Closing of Partnership Books on Dissolution ................................................... 3.3

1.5 Consequences of Insolvency of a Partner ....................................................... 3.9

1.6 Loss arising from Insolvency of a Partner ..................................................... 3.10

1.7 Piecemeal Payments ................................................................................... 3.24

1.7.1 Maximum loss Method ........................................................................ 3.24

1.7.2 Highest Relative Capital Method ......................................................... 3.26 Unit 2 : Amalgamation, Conversion and Sale of Partnership Firms 2.1 Amalgamation of Partnership firms ............................................................... 3.39 2.1.1 Closing the books of old firm ............................................................... 3.39 2.1.2 Opening the books of the new firm ...................................................... 3.39 2.2 Conversion of Partnership Firm into a Company ............................................ 3.48 2.2.1 Apportionment of shares amongst the partners .................................... 3.63 CHAPTER 4 : COMPANY ACCOUNTS ........................................................... 4.1 – 4.150 Unit 1 ESOP and Buy-back of Shares 1.1 Employees Stock Option Plan ........................................................................ 4.1 1.1.1 Important terms to be Remembered ...................................................... 4.1 1.1.2 Important Provisions as per SEBI Guidelines ......................................... 4.2 1.1.3 Provisions of Guidance Note on Employee Share-Based Payments ........ 4.6 1.2 Buy-Back of Securities ................................................................................. 4.13 1.2.1 Provisions of Section 77B of the Companies Act .................................. 4.16 1.3 Equity shares with differential rights ............................................................. 4.28


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Unit 2 : Underwriting of Shares and Debentures 2.1 Introduction ................................................................................................. 4.30 2.2 Underwriting Commission ............................................................................ 4.30 2.3 Provisions in the Companies Act Affecting Underwriting ................................ 4.31 2.4 Underwriting Contract ................................................................................... 4.31 2.4.1 Determination of Liability in respect of a Normal Underwriting Contract ...... 4.31 2.4.1.1 Determination of Liability where whole of the issue has been underwritten by one person ......................................... 4.31 2.4.1.2 Determination of Liability where only part of the issue has been underwritten ......................................................... 4.31 2.4.2 Firm Underwriting ............................................................................... 4.34 2.4.2.1 When the issue is fully underwritten [with Firm Underwriting] ..... 4.34 Unit 3 : Redemption of Debentures 3.1 Introduction ................................................................................................. 4.44 3.2 Redemption of Debentures ........................................................................... 4.44 3.3 Debenture Redemption Reserve ................................................................... 4.45 3.3.1 Liability of the Company to create Debenture Redemption Reserve ....... 4.46 3.3.2 Balance in Debenture Redemption Reserve .......................................... 4.46 3.3.3 Investment of Debenture Redemption Reserve Amount ......................... 4.48 3.4 Methods of Redemption of Debentures ......................................................... 4.48 3.4.1 By payment in Lumpsum ..................................................................... 4.49 3.4.2 By payment in Instalments ................................................................... 4.49 3.4.3 Purchase of Debentures in Open Market .............................................. 4.49 Unit 4 : Amalgamation and Reconstruction 4.1 Amalgamation ............................................................................................. 4.76 4.1.1 Types of Amalgamation ....................................................................... 4.76 4.2 Reconstruction ............................................................................................ 4.76 4.3 Advanced Problems ..................................................................................... 4.77


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Unit 5 : Liquidation of Companies 5.1 Statement of Affairs .................................................................................... 4.126 5.2 Deficiency account ..................................................................................... 4.127 5.3 Overriding preferential payments ................................................................. 4.128 5.4 Preferential creditors .................................................................................. 4.128 5.5 Liquidator’s final statement of account ......................................................... 4.142 5.6 B list contributories ..................................................................................... 4.149 CHAPTER 5 : FINANCIAL STATEMENTS OF INSURANCE COMPANIES ....... 5.1 – 5.106

Unit 1 : Introduction to Insurance Business

1.1 Introduction ................................................................................................... 5.1

1.1.1 Principles of Insurance ......................................................................... 5.5

1.2 Various types of insurance ............................................................................. 5.5

1.2.1 Life Insurance Policy ............................................................................ 5.5

1.2.2 General Insurance ................................................................................ 5.6

1.3 Various Types of General Insurance ............................................................... 5.6

1.3.1 Fire Insurance ...................................................................................... 5.8

1.3.2 Marine Insurance ................................................................................. 5.9

1.3.3 Miscellaneous Insurance Policies ........................................................ 5.12

1.4 Distinction between Life Insurance and other forms of Insurance .................. 5.13

1.5 Some relevant provisions of the Insurance Act, 1938 .................................... 5.13

1.6 Insurance Regulatory and Development Authority Act, 1999 (Some Relevant Amendments in Insurance Act, 1938) .................................. 5.15

Unit 2 : Accounting Technique of General Insurance Business

2.1 Functional divisions and books of account maintained therein ....................... 5.20

2.2 Claims provision at divisional offices ............................................................ 5.21

2.3 Claims paid ................................................................................................. 5.22

2.4 Co-insurance ............................................................................................... 5.23

2.5 Outstanding premium ................................................................................... 5.23


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2.6 Commission ................................................................................................ 5.24

2.7 Loans ......................................................................................................... 5.24

2.8 Investments ................................................................................................ 5.25

2.9 Unexpired risks reserve ............................................................................... 5.28

2.10 Re-insurance ............................................................................................... 5.30

Unit 3 : Financial Statements of Insurance Companies

3.1 Introduction ................................................................................................. 5.33

3.2 Structure of Schedules A and B .................................................................... 5.33

3.3 Financial Statements ................................................................................... 5.34

3.4 IRDA Regulations, 2002 ............................................................................... 5.34

3.5 Preparation of financial statements............................................................... 5.35

Annexure I: Schedule A for Life Insurance Business .................................................. 5.63

Annexure II: Schedule B for General Insurance Business........................................... 5.87

CHAPTER 6 : FINANCIAL STATEMENTS OF BANKING COMPANIES .......... 6.1 – 6.122

Unit 1 : Some relevant provisions of the Banking Regulations Act, 1949

1.1 Meaning of banking ....................................................................................... 6.1

1.1.1 Types of Banks .................................................................................... 6.2

1.1.2 Banking Company Business .................................................................. 6.3

1.2 Prohibition of trading .................................................................................... 6.5

1.3 Disposal of non-banking assets ...................................................................... 6.5

1.4 Management ................................................................................................. 6.5

1.5 Capital and reserve ....................................................................................... 6.6

1.6 Reserve funds ............................................................................................... 6.6

1.7 Restriction as to payment of dividend ............................................................. 6.7

1.8 Cash reserve ................................................................................................. 6.7

1.9 Licensing of banking companies ..................................................................... 6.8

1.10 Liquidity norms .............................................................................................. 6.9


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1.11 Restriction on acquisition of shares in other company ..................................... 6.9

1.12 Restriction on loans and advances ............................................................... 6.10

1.13 Prohibition of charge on unpaid capital and floating charge on assets ............ 6.10

1.14 Unclaimed deposits ..................................................................................... 6.10

1.15 Accounts and Audit ...................................................................................... 6.11

Unit 2 : Books of Accounts, Returns and Forms of Financial Statements

2.1 Main characteristics of a bank’s book-keeping system ................................... 6.12

2.1.1 Slip (or voucher) system of ledger posting ........................................... 6.13

2.1.2 Need of the Slip System ..................................................................... 6.14

2.2 Principal books of accounts ......................................................................... 6.14

2.3 Subsidiary books ......................................................................................... 6.15

2.4 Other subsidiary registers ............................................................................ 6.15

2.5 Departmental Journals ................................................................................. 6.16

2.6 Other memorandum books ........................................................................... 6.16

2.7 Statistical books .......................................................................................... 6.18

2.8 Forms of balance sheet and profit and loss account ...................................... 6.18

2.9 Notes on Accounts ...................................................................................... 6.21

2.10 Disclosure of Accounting Policies ................................................................. 6.25

Unit 3 : Capital Adequacy Norms

3.1 Capital framework of banks functioning in India............................................. 6.26

3.2 Capital Funds .............................................................................................. 6.26

3.3 Tier I and Tier II Capital for Indian Banks ...................................................... 6.27

3.3.1. Tier I Capital comprises ...................................................................... 6.27

3.3.2 Tier II Capital ..................................................................................... 6.27

3.3.3 Deductions from Tier I and Tier II Capital ............................................ 6.29

3.4 Ratio of Tier II Capital to Tier I Capital ......................................................... 6.30

3.5 Tier I and Tier II capital for foreign banks ..................................................... 6.30


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3.6 Risk – Adjusted Assets ................................................................................ 6.30

3.7 Reporting for capital adequacy norms ........................................................... 6.31

Unit 4 : Income Recognition, Classification of Assets and Provisions 4.1 Income recognition ...................................................................................... 6.34 4.1.1 Regularisation of Account by year-end ............................................... 6.39 4.1.2 Interest application ............................................................................. 6.40 4.2 Classification of Bank advances on the basis of performance ....................... 6.42 4.3 Provisions ................................................................................................... 6.45 4.3.1 Provisioning for advances covered by ECGC/DICGC guarantee ........... 6.48 4.4 Classification of investments ........................................................................ 6.50 4.5 Shifting among categories of Investments ..................................................... 6.52 4.6 Valuation of investments .............................................................................. 6.53 4.7 Investment Fluctuation Reserve ................................................................... 6.54 4.8 Disclosure Requirements on Advances Restructured by Banks and Financial institutions ................................................................... 6.55 Unit 5 : Some Special Transactions of Banks

5.1 Discounting, Collection & Acceptance of Bills................................................ 6.57

5.1.1 Discounting ......................................................................................... 6.57

5.1.2 Collection of Bills ............................................................................... 6.64

5.1.3 Acceptance and Endorsement ............................................................. 6.65

5.1.3.1 Drafts and telegraphic Remittances ......................................... 6.65

5.1.3.2 Letters of Credit and Travellers’ Cheques ................................. 6.65

Unit 6 : Preparation of Financial Statements of Banks

6.1 Introduction ................................................................................................. 6.70

Annexure I: Schedules forming part of Balance Sheet .......................................... 6.89

Annexure II: Schedules forming part of Profit and Loss Account ......................... 6.95

Annexure III: Guidelines of Reserve Bank of India for Compliance of Financial Statements ..................................................................................... 6.97

Annexure IV: Risk weights for calculation of capital charge for credit risk.......... 6.111


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CHAPTER 7 : FINANCIAL STATEMENTS OF ELECTRICITY COMPANIES ....... 7.1 – 7.52

Unit 1 : Relevant Legal and Administrative Provisions

1.1 Introduction ................................................................................................... 7.1 1.1.1 Historical Background of Legislative Initiatives .......................................... 7.2

1.2 Electricity Act, 2003 ....................................................................................... 7.2 1.2.1 Objectives ............................................................................................ 7.2 1.2.2 Licensing. ............................................................................................ 7.3 1.2.3 Generation ........................................................................................... 7.3 1.2.4 Transmission ........................................................................................ 7.4 1.2.5 Trading ................................................................................................. 7.5 1.2.6 Distribution and Retail Supply ................................................................ 7.6 1.2.7 Unregulated Rural Markets .................................................................... 7.6 1.3 Tariff Principles ............................................................................................. 7.6 1.4 CERC (Terms and Conditions of Tariff) Regulations, 2009 ............................... 7.7

Unit 2 : Preparation of Financial Statements

2.1 Formats of Financial Statements .................................................................... 7.9

2.2 Specific Transactions of Electricity Supply Company ....................................... 7.9

2.2.1 Security Deposit.................................................................................... 7.9

2.2.2 Advance against Depreciation ............................................................ 7.11

2.2.3 Accounting for Exchange Rate Variations on the Foreign

Currency Borrowings .......................................................................... 7.11

2.2.4 Assets under 5 Km Scheme of Government of India .............................. 7.11

2.2.5 Capital Service Line Contributions ....................................................... 7.11

2.3 Implementation of Accelerated Power Development and Reforms Program (APDRP) .......................................................................... 7.13

2.3.1 Objectives of APDRP .......................................................................... 7.13

2.3.2 Funding Pattern ................................................................................. 7.15

2.3.3 Accounting of Grant received under APDRP ......................................... 7.15


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2.4 Depreciation ................................................................................................ 7.15

2.4.1 Purpose of Depreciation ...................................................................... 7.16

2.4.2 Philosophy of depreciation ................................................................... 7.16

2.5 CERC (Terms and Conditions of Tariff) Regulations, 2009 Statement of Objects and Reasons ............................................................... 7.22

2.6 Comparison between depreciation as per provision of Schedule XIV to the Companies Act, 1956 and as per tariff policy under Electricity Act, 2003 ...................................................................................... 7.24

2.7 2009 Regulations ........................................................................................ 7.25

2.7.1 Depreciation provisions as per CERC Regulations, 2009 ................. 7.25

2.7.2 Appendix III of Regulations, 2009 .................................................. 7.26

2.8 Additional Capital Expenditure ..................................................................... 7.33

2.9 ODRC Method (Optimised Depreciated Replacement Cost) ........................... 7.35

2.10 Recommendation ......................................................................................... 7.36

2.11 Application of Accounting Standards in Electricity Companies ....................... 7.37

2.11.1 AS 2: Valuation of Inventories ......................................................... 7.38

2.11.2 AS 6: Deprecation Accounting ........................................................ 7.38

2.11.3 AS 9: Revenue Recognition ............................................................ 7.39

2.12 Miscellaneous Illustrations ........................................................................... 7.39

CHAPTER 8 : DEPARTMENTAL ACCOUNTS ................................................... 8.1 – 8.22

1. Introduction ................................................................................................... 8.1

2. Advantages of Departmental Accounting ......................................................... 8.1

3. Methods of Departmental Accounting ............................................................. 8.2

4. Basis of Allocation of Common Expenditure among different Departments ........ 8.2

5. Types of Departments .................................................................................... 8.3

5.1 Independent Departments ..................................................................... 8.3

5.2 Dependent Departments ....................................................................... 8.4


xxii

6. Inter-departmental Transfers .......................................................................... 8.4

6.1 Basis of Inter-Department at Transfers .................................................. 8.4

6.2 Elimination of Unrealised Profit ............................................................. 8.4

6.3 Stock Reserve ...................................................................................... 8.5

6.4 Journal Entry........................................................................................ 8.5

6.5 Disclosure in Balance Sheet ................................................................. 8.5

7. Memorandum stock and Memorandum mark up account method ........ ………….8.5

8. Miscellaneous Illustrations ..... …………………………………………………………..8.6

CHAPTER 9 : ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCHES ........ 9.1 – 9.61

1. Introduction ................................................................................................... 9.1

2. Distinction between Branch Accounts and Departmental Accounts……………9.2

3. Dependent branches ...................................................................................... 9.3

4. Methods of charging goods to branches .......................................................... 9.3

5. Accounting for Dependent branches ............................................................... 9.3

5.1 When goods are invoiced at cost .......................................................... 9.4

5.2 When goods are invoiced at selling price ............................................. 9.14

5.3 Goods invoiced at wholesale price to retail branches ........................... 9.28

6. Accounting for Independent branches ........................................................... 9.30

7. Adjustment and reconciliation of branch and head office accounts ................. 9.32

7.1 Reasons for Disagreement .................................................................. 9.32

7.2 Other Points ....................................................................................... 9.34

8. Incorporation of branch balance in head office books .................................... 9.35

9. Incomplete information in branch books ........................................................ 9.45

10. Foreign branches ........................................................................................ 9.51

11. Accounting for foreign branches ................................................................... 9.51

11.1 Integral foreign operation (IFO) ........................................................... 9.51

11.2 Non Integral foreign operation (NFO) .................................................. 9.52


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12. Change in classification ............................................................................... 9.53

12.1 Integral to non integral ....................................................................... 9.53

12.2 Non integral to integral ...................................................................... 9.53

13. Techniques for foreign currency translation................................................... 9.53

13.1 Integral Foreign Operation (IFO) ......................................................... 9.53

13.2 Non-Integral Foreign Operation ........................................................... 9.54

APPENDIX I : FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS ....... ……………………………………I-1 – I-17

APPENDIX II : APPLICABILITY OF ACCOUNTING STANDARDS TO VARIOUS ENTITIES .................................................... …………II-1 – II-8

APPENDIX III : ACCOUNTING STANDARDS .............................................. III-1 – III-100

AS 4 : Contingencies and Events Occurring After the Balance Sheet Date .......... …….III-1

AS 5 : Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies ……………………………………………………………………III-6

AS 11 : The Effects of Changes in Foreign Exchange Rates…… ..... ……………………III-10

AS 12 : Accounting for Government Grants .... ………………………………………………III-21

AS 16 : Borrowing Costs ... ………………………………………………………………………III-26

AS 19 : Leases………………… ............... …………………………………………………….III-31

AS 20 : Earnings Per Share……… ............. ………………………………………………….III-43

AS 26 : Intangible Assets……………… ..... ……………………………………………………III-59

AS 29 : Provisions, Contingent Liabilities and Contingent Assets ........ …………………III-84

APPENDIX IV : SCHEDULE VI ......................................................... …………IV-1 – IV-18


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