KDF1D Advanced Corporate Accounting and. Accounting Standards Unit : 1-5

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1 KDF1D Advanced Corporate Accounting and Accounting Standards Unit : 1-5

2 UNIT-1 (SYLLABUS) Advanced problems in share capital Debenture transactions including underwriting Valuation of goodwill and shares KDF1D-Advanced corporate accounting and accounting standards 2

3 3 TM Types of share capital Authorized Capital Issued Capital Un-Issued Capital Subscribed Capital Unsubscribed Capital Called-Up Capital Un-Called Capital Paid-Up Capital Calls in Arrears

4 Cont.. Authorized or Registered Share Capital Maximum amount of capital, which a company is allowed to raise during its lifetime. Issued Capital The portion of authorized capital, which has been issued to all the investors including public Subscribed Capital The portion of the issued capital, which has been subscribed by all the investors including the public Called up Capital The portion of the subscribed capital that has been called up by the company for payments is the called up capital Paid-up Capital That part of called up capital, which has been paid up by the subscribers of share capital KDF1D-Advanced corporate accounting and accounting standards 4

5 Kinds of Shares Preference Shares Equity Shares Shares with difference rights Cumulative Non-cumulative Deferred i.dividend ii.voting rights Participating Redeemable Guaranteed KDF1D-Advanced corporate accounting and accounting standards 5

6 Cont. Issue of shares can be classified as : 1. for full consideration --- a. for cash b. Non- cash 2. for consideration receivable as calls : a. Receiving applications for shares: 5% of share value or 25% of the issue price is received as application money. b. Allotment of shares: receiving Min. subscription shares are allotted.. Without consideration- bonus shares.. Rights issue, employee stock schemes, sweat equity. Under subscription : Applications received less than issue. Over subscription : Applications received more than issue. KDF1D-Advanced corporate accounting and accounting standards 6

7 Cont.. Full allotment : Board of Directors make allotment to Applicants. Partial allotment : Shares are partially allotted according to ratios. Pro-rata allotment : Shares may be allotted proportionate to the applications received excess appl. Money adjusted towards allotment and calls. Calls of shares : Call money is collected for the balance amount after application and allotment money. Calls-in-Arrears : When shareholder fails to pay the amount due towards allotment/calls. 5% interest is charged. Calls-in-Advance :Shareholders pay in advance towards calls not yet made by the company. 6% interest is paid KDF1D-Advanced corporate accounting and accounting standards 7

8 Issue of shares Issue at Par Value : Shares are issued at the face value Issue of Shares at Premium : Shares are issued at a price higher than their face value. Excess amount is share premium transferred to Securities Premium A/c. Issue of Shares at Discount : Shares are issued below their face value. It is capital loss and to be shown in B/S under Mis.Exp. Forfeiture of shares : A shareholder ceases to be member because of default in payment of allotment/call money. KDF1D-Advanced corporate accounting and accounting standards 8

9 Cont.. Reissue of forfeited shares : They become property of the company and can be reissued at par or at discount or at premium. They are fully or partly reissued. Issue of Bonus shares Buy back of shares : Shares are issued to the existing shareholders in settlement of the bonus are Bonus shares - process is Capitalisation of profits. : Repurchase of shares by the company of its own shares. For Journal Entries follow the given link below. KDF1D-Advanced corporate accounting and accounting 9

10 Underwriting of shares Meaning - It is a contract entered into by the company with persons or institutions for undertaking shares or debentures to subscribe for public. Underwriters Underwriters Sub-underwriters Brokers Managers to the issue Underwriting commission They guarantee subscription for a company s shares and debentures. He takes financial risks. An underwriter may appoint one or more subunderwriters to under take work under them. A broker brings his customers and the company together for brokerage Managers are appointed to issue and fees is paid. For shares it should not exceed 5% and for debentures 2.5% of the issue price. KDF1D-Advanced corporate accounting and accounting standards 10

11 Types of Underwriting o Pure underwriting - Public subscribes for entire issue. a. Complete underwriting- Whole issue is underwritten. b. Partial underwriting -Only a part of the issue is underwritten. ofirm underwriting o Marked applications ounmarked applications - Underwriter s liability is partly definite and partly contingent. - Applications bearing the Marking or stamp of the underwriter. - Applications issued by the company to the public directly. ofirm underwriting applications- Underwriters in addition to the shares underwritten take up firm s shares. KDF1D-Advanced corporate accounting and accounting standards 11

12 Debentures Debentures -- It includes debenture stock, bonds and any other securities of a Company, whether constituting a charge on the assets of a Company or not. It is creditor ship securities issued by the companies. Classification of Debentures on the basis of Security Permanence Priority Convertibility Recording KDF1D-Advanced corporate accounting and accounting standards 12

13 Issue of Debentures 1. Issue of debentures for cash. 2. Issue of debentures for consideration other than cash. 3.Issue of debentures as Collateral Security. 4. Issue may be at par or at discount or at premium. 5. Redemption of debentures may be repayable at par or at discount or at premium. KDF1D-Advanced corporate accounting and accounting standards 13

14 Valuation of Goodwill and Shares Goodwill is the 'good name' or 'reputation' earned by a firm as it trades. To express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets. The difference between the purchase price and the sum of the fair value of the net assets is by definition the value of the "goodwill" of the purchased company. It has hopefully have a positive impact on the future turnover and profits of the business. KDF1D-Advanced corporate accounting and accounting standards 14

15 Methods of valuation of Goodwill KDF1D-Advanced corporate accounting and accounting standards 15

16 Methods of valuation of Goodwill Average Profit Method Average Profit = Total Profits/ No. of Years Goodwill = Average Profit x No. of Years Purchased Super Profit Method Super Profit = Actual Average Profit Normal Profit Normal Profit = Average Capital Employed x Normal Rate of Return Goodwill = Super Profit x No. of Years Purchased Capitalisaton method Capitalised value of the business= Expected average net profit x 100 Normal rate of return KDF1D-Advanced corporate accounting and accounting standards 16

17 Valuation of Goodwill Annuity method Q = 1-(1+ r/n) r\100 Goodwill = Average annual super profit x Annuity rate. KDF1D-Advanced corporate accounting and accounting standards 17

18 Need for valuation of shares Purchase / Sale Raising loans Reconstruction Amalgamation/absorption Assessment When Nationalisation Conversion of shares KDF1D-Advanced corporate accounting and accounting standards 20

19 Methods of Valuation of Shares For formula view: CPZ3A/ CPG3A/ CPW3A/ CPC3A - Corporate Accounting 56/65

20 UNIT II Acquisition Amalgamation Absorption and reconstruction (internal and external) schemes Statements for liquidation of companies KDF1D-Advanced corporate accounting and accounting standards Slide number / Total slides

21 MEANING:- AMALGAMATION When two or more existing companies combine together to form a new company is known as Amalgamation. For e.g. If a new co XY Ltd. Is formed to take over the business of two existing companies, X Ltd. and Y Ltd.,it is a case of amalgamation KDF1D-Advanced corporate accounting and accounting standards 21

22 22 ABSORPTION MEANING:- Term absorption is used when one or more existing company goes into liquidation and some existing company takes over its business. Foe e.g. if the business of existing co X Ltd. Is taken over by another co. Y Ltd.,it is a case of absorption

23 RECOSTRUCTION OF COMPANIES MEANING:- Term is used when one existing company goes into liquidation and a new co. is formed to take over its business. Foe e.g. if a new company X (New) Ltd. Is formed to take over the business of an existing co. X Ltd. Then it is a case of External reconstruction KDF1D-Advanced corporate accounting and accounting standards 23

24 Types of Amalgamation Amalgamation in the nature of merger Amalgamation in the nature of purchase Amalgamation in the nature of merger includes:- 1. Transfer of all assets and liabilities 2. Same equity shareholders holding 90% 3. Purchase consideration in equity shares 4. Same business 5. Recording of Assets and liabilities at book value KDF1D-Advanced corporate accounting and accounting standards 24

25 Methods of Accounting for Amalgamation in the nature of merger POOLING OF INTEREST METHOD:- It includes:- Recording of assets and liabilities Recording of Reserves( whether capital or revenue or arising on revaluation) Recording of balance of profit & loss A/c Difference between the purchase consideration and the amount of share capital of the transferor Co. Uniform set of Accounting policies KDF1D-Advanced corporate accounting and accounting standards 25

26 Amalgamation in the nature of purchase It is an amalgamation which does not satisfy anyone or more of the condition specified for amalgamation in the nature of merger. KDF1D-Advanced corporate accounting and accounting standards 26

27 CALCULATION OF PURCHASE CONSIDERATION KDF1D-Advanced corporate accounting and accounting standards 27

28 Meaning of Liquidation Liquidation or winding up is a process by which a company is dissolved. The process of winding-up of a company is completed by selling all its assets and paying all creditors in preferential orders. For this purpose, a liquidator is appointed by the court to complete the liquidation process. The duties of the liquidator are to realize the assets, discharge the liabilities and distribute the surplus, if any to the shareholders KDF1D-Advanced corporate accounting and accounting standards 28

29 Cont.. Percentage On Assets Realized Here, assets realized means the amount collected if Percentage On Amount Distributed To Equity Shareholders For the calculation of this commission, firstly the amount available for equity shareholders should be ascertained. For finding out the amount available for equity share holders, the following equation can be used: Amount available = Total receipt - Total Payment ( up to the payment made to preference shareholders) If the amount available is sufficient for the payment of equity share capital amount: Commission = Equity share capital amount X Commission rate/100 KDF1D-Advanced corporate accounting and accounting standards 29

30 Cont.. If the amount available is sufficient for the payment of equity share capital amount: Commission = Equity share capital amount X Commission rate/100 If the amount available is not sufficient: Commission = Amount available X Commission rate/100+ Commission raterom the realization of fixed assets, current assets and other assets, other than fictitious assets. The cash and bank balance should not be included in total assets for the calculation of remuneration. But in the question, if the cash and bank balance are given in the list of assets, then cash and bank balance should be included in the total assets for the calculation of remuneration KDF1D-Advanced corporate accounting and accounting standards 30

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32 UNIT-III(SYLLABUS) Consolidated final statement of Holding companies and subsidiary companies. inter-company holdings. owings -treatment of dividends KDF1D-Advanced corporate accounting and accounting standards 32

33 Holding company A Holding company is one which controls one or more other companies by means of: a) Holding majority shares or b) Controlling the composition of Board of directors c) Controlling a holding company with subsidiary KDF1D-Advanced corporate accounting and accounting standards 33

34 Subsidiary Company Sec.4(4) of the Companies Act says A company shall be deemed to be the holding company of another, if, but only if, that other is its subsidiary KDF1D-Advanced corporate accounting and accounting standards 34

35 Consolidation of P&L A/c The consolidated profit & loss a/c of the holding Company and it s subsidiaries are prepared to show the operating activities of the Companies. The items appearing in the P&L a/c of both individual companies are aggregated in the consolidated P&L a/c.

36 Cont.. While consolidating, the following adjustments has to be made: profit and loss account in columnar form. Amounts relating to inter company transactions are entered in the adjustment column and are subtracted. All inter company operating transaction such as purchase and sale of goods, interest on loans among the companies are eliminated All inter company profits are adjusted. KDF1D-Advanced corporate accounting and accounting standards 36

37 Cont.. Dividends received by the holding company from the subsidiary company should be eliminated. Interest accrued and outstanding on debenture of the subsidiary company held but the holding company should be accounted by both and then eliminated The balance in holding company columns will represent the total profit or loss made by the company as a whole KDF1D-Advanced corporate accounting and accounting standards 37

38 Consolidation of Balance Sheet It is where the balance sheet of the holding company and the subsidiary company is combined. Few points to be kept on mind when consolidating: Share of holding company and share of minority(outside shareholders) Date of balance sheet of the holding company and that of the various other subsidiary companies must be same. Inter company owing KDF1D-Advanced corporate accounting and accounting standards 38

39 Minority Interest Minority interest is the share of the outsider in the following: Share in share capital of subsidiary. Share in reserves Share in accumulated loss should be deducted. Proportionate share of profit or loss on revaluation of assets. KDF1D-Advanced corporate accounting and accounting standards 39

40 Inter Company Transactions The holding and the subsidiary company may have a number of inter company transactions. Some are: Loan advanced by the holding company to the subsidiary company or vice versa. Sale or purchase of goods on credit by the holding company from the subsidiary company or vice versa. Debentures issued by one company may be held by the other. KDF1D-Advanced corporate accounting and accounting standards 40

41 UNIT-4 Final statements of banking companies. Insurance companies Accounting for price level changes. Social responsibility accounting. Human resources Accounting KDF1D-Advanced corporate accounting and accounting standards 41

42 DEFINITION Section 5 of banking regulation act defines banking as the accepting, for the purpose of lending or investment, of deposit of money from the public repayable on demand or otherwise and with drawable by cheque, draft, order or otherwise. KDF1D-Advanced corporate accounting and accounting standards 42

43 Accounting System The accounting system of a banking company is different from that of a trading or manufacturing company. A bank has a large number of customers whose acc are to be maintained in such a way so that these should be kept upto date. KDF1D-Advanced corporate accounting and accounting standards 43

44 Features Of Banking Acc System Entries in the personal ledgers are made directly from vouchers. From such entries in personal acc each day summary sheets in total are prepared. The general ledger s trial balance is extracted and agreed every day. A trial balance of detailed personal ledger is prepared periodically and get agreed with general ledger. Two vouchers are prepared for every transaction not involving cashdebit and credit voucher. KDF1D-Advanced corporate accounting and accounting standards 44

45 Principal Books Of Accounts Are: Cash book: This book gives the summary of the receiving cashier s counter cash book and paying cashier s cash book. General ledger: This ledger contains control acc for subsidiary ledger listed above and acc of expenses and assets not covered by the subsidiary ledger. KDF1D-Advanced corporate accounting and accounting standards 45

46 Notes And Instruction For Compilation The formats of balance sheet and profit or loss account cover all items likely to appear in these statement. The words current year and previous year used in the formats are only to indicate the order of presentation and may not appear in account. Figures should be rounded off to nearest thousand. KDF1D-Advanced corporate accounting and accounting standards 46

47 BANKING REGULATION ACT, 1949 THE FINAL ACCOUNTS OF BANK ARE IN VERTICAL FORMAT THE FINAL ACCOUNTS CONSIST OF :- a) PROFIT and LOSS ACCOUNT b)profit and LOSS APPROPRIATION ACCOUNT c) BALANCE SHEET THERE ARE 16 SCHEDULES IN THE FINAL ACCOUNTS OF BANKS. KDF1D-Advanced corporate accounting and accounting standards 47

48 Balance Sheet PARTICULARS SCHEDULE NO. Equity and Liabilities Capital 1 Reserves and surplus 2 Deposits 3 Borrowings 4 Other liabilities 5 Total KDF1D-Advanced corporate accounting and accounting standards 48

49 Cont. PARTICULARS SCHEDULE NO. Assets Cash in hand and with RBI 6 Balance with other banks and money at Call and short notice 7 Investments 8 Advances 9 Fixed assets 10 Other assets 11 Total CONTINGENT LIABILITIES 12 KDF1D-Advanced corporate accounting and accounting standards 49 49

50 PROFIT AND LOSS ACCOUNT INCOMES:- Interest earned 13 Other incomes 14 TOTAL(A) EXPENDITURE:- Interest expanded 15 Operating expenses 16 Provision and contingencies PROFIT (A-B) TOTAL (B) KDF1D-Advanced corporate accounting and accounting standards 50

51 TYPES OF INSURANCE LIFE INSURANCE GENERAL INSURANCE Preparation of Final Accounts of Life Insurance: The preparation of final accounts must be made in accordance with the provisions of the Insurance Act, 1938, together with its prescribed forms. KDF1D-Advanced corporate accounting and accounting standards 51

52 FORMS of final accounts prescribed by the Insurance Act, 1938, are: (i) FORM A: Form of Balance Sheet both for Life and General Insurance. (ii) FORM B: Form of Profit and Loss Account both for Life and General Insurance. (iii) FORM C: Form of Profit and Loss Appropriation both for Life and General Insurance. (iv) FORM D: Form of Revenue Account for Life Insurance only. (v) FORM F: Form of Revenue Account for General Insurance only. (vi) FORM I: Valuation Balance Sheet. KDF1D-Advanced corporate accounting and accounting standards 52

53 Life Insurance Revenue Account (a)premium (Schedule 1) It includes: (i) Premiums; (ii) Re-insurance ceded; (iii) Re-insurance accepted. (b) Income from Investment: These include: (i) Interest Dividends; Rent; (ii) Profit on sale/redemption of investments; (iii) Loss on sale/redemption of investments; (iv) Transfer/Gain on revaluations, etc. KDF1D-Advanced corporate accounting and accounting standards 53

54 Cont. ( c) Commission (Schedule 2) Commission is paid on premium paid by the policyholders on first year, or on renewal or on single premium. The life insurance companies pay premium to their agents. In case of re-insurance, commission is paid to other companies. (d) Operating Expenses (Schedule 3) Operating expenses include office and administration, selling and distributions expenses and comes under the head Schedule 3. These expenses include: Rents, Rates and Taxes, Training Expenses, Depreciation, Repairs, Auditor Fees etc. KDF1D-Advanced corporate accounting and accounting standards 54

55 Cont (e) Benefits paid (Net) (Schedule 4) It includes: (i) Annuities; (ii) Surrenders; and (iii) Claims. KDF1D-Advanced corporate accounting and accounting standards 55

56 Profit and Loss Account The incomes or expenses which are not related to any particular fund are recorded in this account (including tax payable to Government). It is practically the Profit and Loss Account of a business as a whole. It highlights the amount of profit paid to the shareholders and the amount that is transferred to any particular fund. KDF1D-Advanced corporate accounting and accounting standards 56

57 Balance Sheet As per IRDA Regulation, a Balance Sheet is divided into two parts: (a) Sources of Fund; and (b) Application of Funds. Sources of Fund The first one under this head is the Shareholders Fund. Under the head, various classification of capital is to be shown separately (viz, Authorized Capital, Issued Capital, etc.). Application of Funds It must be remembered that Shareholders Fund and Policyholders Fund are to be shown separately KDF1D-Advanced corporate accounting and accounting standards 57

58 UNIT-V Basic postulates of accounting theory Generally accepted accounting principles Practices recommended by the ICAI Mandatory Accounting Standards (AS) issued by the ICAI KDF1D-Advanced corporate accounting and accounting standards 58

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