group 1nov 2009

PAPER – 1 : ADVANCED ACCOUNTING

Answer all questions.Working Notes should form part of the answer.

Wherever necessary, suitable assumption(s) should be made by the candidates.

Question 1The Balance Sheets of Aqua Ltd. and Baqa Ltd. as on the dates of last closing of accounts areas under:

Aqua Ltd. Baqa Ltd.as on 31.03.2009 as on 31.12.2008

Rs. Rs.LiabilitiesShare capital (equity shares of Rs.10 each) 11,00,000 5,00,000Accumulated Profits & Reserves 4,50,000 2,05,00015% Rs.100 non-convertible debentures - 3,00,000Accounts Payable 4,80,000 2,80,000Other liabilities 1,00,000 40,000Tax Provision 1,50,000 2,50,000Total 22,80,000 15,75,000AssetsFixed Assets at Cost 8,45,000 5,26,500Less: Depreciation 1,95,000 1,21,500

6,50,000 4,05,000Investments:40,000 shares in Baqa Ltd. 8,00,000

1,000 debentures in Baqa Ltd. 1,50,000

Current Assets:Inventories 2,00,000 3,50,000Accounts Receivable 2,50,000 4,65,000Cash & Bank 2,30,000 3,55,000Total 22,80,000 15,75,000The following information is also available:

1. On 8th February, 2009 there was a fire at the factory of Baqa Ltd., resulting in inventoryworth Rs.20,000 being destroyed. Baqa received 75 per cent of the loss as insurance.

FINAL EXAMINATION: NOVEMBER, 2009

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2. The same fire resulted in destruction of a machine having a written down value ofRs.1,00,000. The Insurance company admitted the Company’s claim to the extent of 80per cent. The machine was insured at its fair value of Rs.1,50,000.

3. On 13th March, 2009, Aqua sold goods costing Rs.1,50,000 to Baqa at a mark-up of 20per cent. Half of these goods were resold to Aqua who in turn was able to liquidate theentire stock of such goods before closure of accounts on 31st March, 2009. As on 31st

March, 2009 Baqa’s accounts payable show Rs.60,000 due to Aqua on the twotransactions.

4. Aqua acquired the holdings in Baqa on 1st January, 2007 when the reserves andaccumulated profits of Baqa Ltd. stood at Rs.75,000.

5. Both Companies have not provided for tax on current year profits. The current yeartaxable profits are Rs.33,000 and Rs.66,000 for Aqua Ltd. and Baqa Ltd. respectively.The tax rate is 33%.

6. The incremental profits earned by Baqa Ltd. for the period January, 2009 to March 2009over that earned in the corresponding period in 2008 was Rs.56,000. Except for theprofits that resulted from the transactions with Aqua in the aforesaid period, the entireprofits have been realised in cash before 31st March, 2009.

You are requested to consolidate the accounts of the two companies and prepare aConsolidated Balance Sheet of Aqua Limited and its subsidiary as at 31st March, 2009.

(20 Marks)

AnswerConsolidated Balance Sheet of Aqua Ltd. and its Subsidiary Baqa Ltd. as on 31.03.2009

Liabilities Rs.Share Capital (equity shares of Rs.10 each) 11,00,000Minority Interest (W.N. 4) 1,50,844Accumulated Profits & Reserves (W.N. 5) 5,67,48615% Rs.100 Non-Convertible Debentures (Rs.3,00,000 – Rs.1,00,000) 2,00,000Accounts Payable (W.N. 6) 7,60,000Other Liabilities (Rs.1,00,000 + Rs.40,000) 1,40,000Tax Provision (1,50,000 + 2,50,000+21,780+10,890) 4,32,670Total 33,51,000AssetsFixed Assets at Cost (W.N. 7) 12,41,500Less:Depreciation (W.N. 7) 2,86,500


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9,55,000Goodwill (W.N. 3) 3,90,000Current Assets:Inventories (W.N. 8) 6,05,000Accounts Receivable (W.N. 6) 6,55,000Insurance claim Receivable 1,20,000Cash & Bank (2,30,000 + 3,96,000) 6,26,000Total 33,51,000

Working Notes:1. Adjustments to Balance sheet of Baqa Ltd. and its Adjusted balance Sheet

Rs.(i) Inventories as on 31.12.2008 3,50,000

Add: Unsold Stock =2

%)120000,50,1.Rs( 90,000

4,40,000Less:Cost of inventory destroyed in fire 20,000Inventories as on 31.3.2009 4,20,000

(ii) Incremental profits earned in January, 2009 to March, 2009 overcorresponding period in 2008Total incremental profit earned in January 2009 – March, 2009 56,000

Less:Earned on transaction with Aqua Ltd. [W.N(viii)] 30,000Balance profits realised in cash 26,000

(iii) Cash and Bank Balance as on 31.12.2008 3,55,000Add: Insurance Claim received 15,000

Incremental profits realised [W.N(ii)] 26,000Cash and Bank Balance as on 31.3.2009 3,96,000

(iv) Fixed assets as on 31.12.2008 4,05,000Less:Written down value of machine destroyed 1,00,000Fixed assets as on 31.3.2009 3,05,000

(v) Insurance Claim Receivable = 80% of Rs.1,50,000 1,20,000

Before adjustments of profit/loss on destruction by fire but after including profit on sale of goods to Aqua Ltd.


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(vi) Accounts Payable as on 31.12.2008 2,80,000Add: Amount payable to Aqua Ltd. 60,000Accounts Payable as on 31.3.2009 3,40,000

(vii) Accumulated profits and Reserves as on 31.12.2008 2,05,000Less:Tax Provision = 33% of Rs.66,000 21,780Less:Goods destroyed in Fire after adjusting claim received 5,000Add: Profit on sale of goods [W.N.(viii)] 30,000

Incremental profits realised in cash in Jan-March 2009 over priorperiod 26,000Additional amount receivable from Insurance Company overwritten down value for machine destroyed [1,20,000 – 1,00,000] 20,000

Accumulated profits and Reserves as on 31.3.2009 2,54,220(viii) Profit made by Baqa Ltd. on transaction with Aqua Ltd.

Cost of goods sold from Aqua to Baqa Ltd. 1,50,000Add: Mark up of 20% (profit of Aqua Ltd.) 30,000Purchases by Baqa payable to Aqua Ltd. (A) 1,80,000Less:50% unsold 90,000Cost of goods sold back to Aqua Ltd. 90,000Balance payable to Aqua Ltd. after 50% goods were sold back (B) 60,000Sales price charged by Baqa Ltd. for selling 50% of the goods (A-B) 1,20,000Less:Cost of these goods to Baqa Ltd. 90,000Profit on sale of 50% goods to Aqua Ltd. 30,000

(ix) Balance Sheet of Baqa Ltd.as at 31.3.2009

Rs.LiabilitiesShare Capital (equity shares of Rs. 10 each) 5,00,000Accumulated Profits and Reserves 2,54,22015% Non-convertible debentures 3,00,000Accounts Payable 3,40,000Other Liabilities 40,000Tax provision (Rs.2,50,000 + Rs.21,780) 2,71,780

17,06,000


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AssetsFixed assets at cost 3,96,500

Less: Depreciation

000,05,3

000,05,4500,21,1 91,500

3,05,000Inventories 4,20,000Accounts Receivable 4,65,000Insurance Claim receivable 1,20,000Cash and Bank 3,96,000

17,06,000

2. Analysis of Accumulated Profits and Reserves of Baqa Ltd.

Pre-acquisition

Postacquisition

Rs. Rs.Profits and Reserves 75,000 1,79,220Share of Aqua Ltd. (80%) 60,000 1,43,376Minority Interest (20%) 15,000 35,844

3. Calculation of Goodwill/ Cost of Control

Rs.Amount paid for shares in Baqa Ltd. 8,00,000Amount paid for 1,000 debentures 1,50,000

9,50,000Less:Nominal Value of shares acquired 4,00,000

Nominal Value of debentures acquired 1,00,00080% share in pre-acquisition profits 60,000

Goodwill 3,90,0004. Minority Interest

Share Capital (20%) 1,00,00020% of Profits and Reserves of Baqa Ltd. (15,000 + 35,844) 50,844

1,50,844


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5. Accumulated Profits and Reserves in the Consolidated Balance Sheet

Balance as on 31.03.2009 4,50,000Add: 80% Share in revenue reserves(2,54,220-75,000) of Baqa Ltd. 1,43,376

Less:Unrealised profits on inventory

21%20000,50,1.Rs 15,000

Less:Provision for taxation 33% on Rs.33,000 10,8905,67,486

6. Accounts Payable and Accounts Receivable in Consolidated Balance Sheet

Accounts payable as per Balance Sheet of Aqua Ltd. 4,80,000Accounts payable as per Balance Sheet of Baqa Ltd [W.N. 1(vi)] 3,40,000

8,20,000Less:Inter company dues set off 60,000Balance of Accounts Payable for Consolidated Balance Sheet 7,60,000Accounts Receivable as per Balance Sheet of Aqua Ltd. 2,50,000Accounts Receivable as per Balance Sheet of Baqa Ltd. [W.N. 1(ix)] 4,65,000

7,15,000Less:Inter company dues 60,000Balance of Accounts Receivable for Consolidated Balance Sheet 6,55,000

7. Fixed Assets and accumulated Depreciation in Consolidated Balance Sheet

WDV of Fixed Assets of Baqa Ltd. as per Balance Sheet (given in question) 4,05,000Accumulated depreciation 1,21,500% of Depreciation (1,21,500/ 4,05,000) 30Original Cost of Destroyed Asset (W.D.V. of Rs.1,00,000) 1,30,000Original Cost of Fixed Assets of Aqua Ltd. as per Balance sheet(given in question) 8,45,000Original Cost of Fixed Assets of Baqa Ltd. as per Balance Sheet(given in question) 5,26,500

13,71,500Less:Original Cost of Destroyed Asset of Baqa Ltd. 1,30,000Original Cost of Fixed Assets for Consolidated Balance Sheet 12,41,500


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Accumulated DepreciationAs per Balance Sheet of Aqua Ltd. (given in question) 1,95,000As per Balance Sheet of Baqa Ltd. (given in question) 1,21,500

3,16,500Less:Accumulated Depreciation on Destroyed asset 30,000Accumulated Depreciation for Consolidated Balance Sheet 2,86,500

8. Inventories

As per Balance Sheet of Aqua Ltd. 2,00,000Balance in Baqa Ltd. Balance Sheet [W.N. 1(i)] 4,20,000

6,20,000Less:Unrealised Profits on closing inventory 15,000Balance in Consolidated Balance Sheet 6,05,000

Question 2Small Ltd. and Little Ltd., two Companies in the field of speciality chemicals, decided to go in for afollow on Public Offer after completion of an amalgamation of their businesses. As per agreedterms initially a new company Big Ltd. will be incorporated on 1st January, 2010 with an authorizedcapital of Rs.2 crore comprised of 20 lakh equity shares of Rs.10 each. The holding companywould acquire the entire shareholding of Small Ltd. & Little Ltd. and in turn would issue its sharesto the outside holders of these shares. It is also agreed that the consideration would be a multipleof the average P/E ratio for the period 1st January, 2009 to 31st March, 2009 times the rectifiedprofits of each company, subject to necessary adjustments for complying with the terms of theshare issue.The following information is supplied to you:

Small Ltd. Little Ltd.Ordinary Shares of Rs.10 each (Nos.) 40 lakhs 20 lakhs10% Preference shares of Rs.100 each (Nos.) 2 lakh Nil10% Preference shares of Rs.10 each (Nos.) Nil 2 lakh5% debentures of Rs.10 each (Nos.) 4 lakh 4 lakhInvestments Held(a) 4 lakh ordinary shares in Small Ltd. - Rs.40 lakhs(b) 2 lakh ordinary shares in Little Ltd. Rs.20 lakhs -Profit before Interest & Tax (PBIT) after considering impact ofInter-company Transactions and Holdings. Rs.50 lakhs Rs.25 lakhsAverage P/E ratio January, 2009 to March, 2009 10 8


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The following additional information is also furnished to you in respect of adjustments required tothe profit figure as given above:1. The profits of the respective companies would be adjusted for half the value of contingent

liabilities as on 31st March, 2009.2. Debtors of Small Ltd. include an irrecoverable amount of Rs.2 lakh against which Rs.1 lakh

was recovered but kept in Advance account.3. Little Ltd. had omitted to provide for increased FOREX liability of US$10,000 on loan availed

in financial year 2005-06 for purchase of Machinery. The machinery was acquired on 1st

January, 2006 and put to use in Financial year 2006-07. The additional liability arose due tochange in exchange rates and is arrived at in conformity with prevailing provisions of AS 11.The exchange rate is US $ 1 = INR 50.

4. Small Ltd. has omitted to invoice a sale that took place on 31st March, 2009 of goods costingRs.2,50,000 at a mark up of 15 per cent instead the goods were considered as part of closinginventory.

5. Closing Inventory of Rs.45 lakhs of Little Ltd. as on 31st March, 2009 stands undervalued by10 per cent.

6. Contingent liabilities of Small Ltd. and Little Ltd. as on 31st March, 2009 stands at Rs.5 lakhsand Rs.10 lakhs respectively.

The terms of the share issue are as under:(i) Shares in Big Ltd. will be issued at a premium of Rs.13 per share for all external shareholders

of Small Ltd. The Premium will be Rs.15 per share for shares in Big Ltd. issued to allexternal shareholders of Little Ltd.

(ii) No shares in Big Ltd. will be issued in lieu of the investments (intercompany holdings) of bothcompanies. Instead the shares so held shall be transferred to Big Ltd. at the close of thefinancial year ended 31st March, 2010 at Par Value consideration payable on date of transfer.

(iii) Big Ltd. would in addition to the issue of shares to outside shareholders of Small Ltd. andLittle Ltd. make a preferential allotment on 31st March, 2010 of 2 lakhs ordinary shares at apremium of Rs.28 per share to Virgin Capital Ltd. (VCL). These shares will not be eligible forany dividends declared or paid till that date.

(iv) Big Ltd. will go in for a 18 per cent unsecured Bank overdraft facility to meet incorporationcosts of Rs.16 lakhs and towards management expenses till 31st March, 2010 estimated atRs.14 lakhs. The overdraft is expected to be availed on 1st February, 2010 and closed on31st March, 2010 out of the proceeds of the preferential allotment.

(v) It is agreed that interim dividends will be paid on 31.03.2010 for the period January, 2010 toMarch, 2010 by Big Ltd. at 2 per cent; Small Ltd. at 3 per cent and Little Ltd. at 2.5 per cent.Ignore Dividend Distribution tax.


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(vi) The prevailing Income Tax Rate is 25 per cent.You are required to compute the number of shares to be issued to the shareholders of each of thecompanies and prepare the projected Profit and Loss Account for the period from 1st January, 2010to 31.03.2010 of Big Ltd. and its Balance Sheet as on 31st March, 2010. (20 Marks)

AnswerComputation of number of shares issuedCalculation of Rectified Profits and Purchase consideration

Rs. Rs.Small Ltd.Given profits 50,00,000Less:Irrecoverable Debtors 1,00,000

50% Contingent Liability 2,50,000 3,50,00046,50,000

Add: Profit on omitted sale (15% of Rs.2,50,000) 37,50046,87,500

Less:Debenture interest 2,00,00044,87,500

Less:Income Tax @ 25% 11,21,875Profits after Tax (PAT) 33,65,625Less:Preference Dividend (10% of Rs.2,00,00,000) 20,00,000Rectified Profits 13,65,625Average PE ratio = 10Total consideration for all equity shareholders(Average PE ratio × Profit)

136,56,250

Less:10% thereof for shareholders of Little Ltd. 13,65,625Balance available for other shareholders of Small Ltd. 122,90,625

Little Ltd.Given profits 25,00,000Less:Increase in FOREX liability (US$10,000 × 50) 5,00,000

50% Contingent Liability 5,00,000 10,00,00015,00,000

Add: Undervaluation of inventory (45,00,000×10/90) 5,00,00020,00,000


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Less:Debenture interest 2,00,00018,00,000

Less:Income Tax @ 25% 4,50,000Profits after Tax (PAT) 13,50,000Less:Preference Dividend (10% of Rs.20,00,000) 2,00,000Rectified Profis 11,50,000Average PE ratio = 8Total consideration for all equity shareholders(Average PE ratio × Profit)

92,00,000

Less:10% thereof for shareholders of Small Ltd. 9,20,000Balance available for other shareholders of Little Ltd. 82,80,000

Statement showing Disposal of Purchase Consideration

Small Ltd. Little Ltd. Total

Rs. Rs. Rs.

Number of shares [Purchase consideration/(FaceValue + Securities Premium) ] 5,34,375 3,31,200 8,65,575Share Capital 53,43,750 33,12,000 86,55,750Securities Premium 69,46,875 49,68,000 1,19,14,875Purchase Consideration 122,90,625 82,80,000 2,05,70,625

Projected Profit and Loss Account of Big Ltd.for the period 1st January, 2010 to 31st March, 2010

Rs.

Dividends received from Subsidiaries (12,00,000 + 5,00,000) 17,00,000Less:Management expenses 14,00,000

Interest on Bank O/D 90,000 14,90,000Net profit for the period 2,10,000Less:Proposed Dividend (2% of Rs.86,55,750) 1,73,115Balance of Profit and Loss Account carried forward 36,885


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Projected Balance Sheet of Big Ltd.as on 31st March, 2010

Liabilities Rs. Assets Rs.Equity Share Capital InvestmentsAuthorised Shares in Subsidiaries (W.N. 4) 2,65,70,62520 lakhs shares of Rs.10 each 2,00,00,000 Current AssetsIssued & Paid up Cash at Bank (W.N. 3) 36,88510,65,575 shares of Rs.10 each(out of the above 8,65,575shares have been issued forconsideration other than cash)

1,06,55,750 Miscellaneous ExpenditurePreliminary expenses 16,00,000

Reserves & SurplusSecurities Premium(1,19,14,875 + 56,00,000)

1,75,14,875

Profit and loss Account 36,8852,82,07,510 282,07,510

Working Notes:

1. Shares issued by Big Ltd. to Virgin capital Ltd. (VCL)Number of shares issued 2,00,000

Rs.Face Value of Share Capital @ Rs.10 each 20,00,000Securities Premium @ Rs.28 each 56,00,000Total cash received from VCL 76,00,000

2. Overdraft of Big Ltd. as on 31.3.2010 Rs.Towards Incorporation expenses i.e. preliminary expenses 16,00,000Towards Management expenses 14,00,000Total Bank Overdraft availed 30,00,000Interest @ 18% p.a. for 2 months 90,000

3. Bank balance of Big Ltd. as on 31.3.2010Bank Account of Big Ltd.

Rs. Rs.01.02.2010 To Overdraft 30,00,000 01.02.2010 By Incorporation

expenses16,00,000

31.03.2010 To VCL 76,00,000 31.03.2010 By Managementexpenses

14,00,000


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31.03.2010 To Dividend 31.03.2010 By Interest onOverdraft 90,000

Small 12,00,0001 31.03.2010 By Overdraft 30,00,000Little 5,00,0002 31.03.2010 By Dividend paid 1,73,1153

31.03.2010 By Shares in SmallLtd. bought fromLittle Ltd. 40,00,000

31.03.2010 By Shares in Little Ltd.bought from SmallLtd. 20,00,000

By Balance c/d(Balancing figure)

36,885123,00,000 123,00,000

4. Investments of Big Ltd. in Projected Balance Sheet Rs.Purchase consideration paid for acquiring shares of outside holders of -

Small Ltd 122,90,625 Little Ltd. 82,80,000

Consideration paid in cash for acquiring cross holdingsFrom Small Ltd. (shares of Little Ltd.) 20,00,000From Little Ltd. (shares of Small Ltd.) 40,00,000

2,65,70,625

Question 3(a) Timby Ltd. is in the business of making sports equipment. The Company operates from

Thailand. To globalise its operations Timby has identified Fine Toys Ltd. an IndianCompany, as a potential take over candidate. After due diligence of Fine Toys Ltd. thefollowing information is available:

(a) Cash Flow Forecasts (Rs. in crore):Year 10 9 8 7 6 5 4 3 2 1Fine Toys Ltd. 24 21 15 16 15 12 10 8 6 3Timby Ltd. 108 70 55 60 52 44 32 30 20 16

1 (40,00,000 x 10) x 3% = 12,00,000.2 (20,00,000 x 10) x 2.5% = 5,00,000.3 [(5,34,375 + 3,31,200) x 10] x 2% = 1,73,115.


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(b) The net worth of Fine Toys Ltd. (in lakh Rs.) after considering certain adjustmentssuggested by the due diligence team reads as under:

Tangible 750Inventories 145Receivables 75

970Less:Creditors 165Bank Loans 250 (415)Represented by equity shares of Rs. 1000 each 555

Talks for take over have crystalized on the following:1. Timby Ltd. will not be able to use Machinery worth Rs.75 lakhs which will be disposed of

by them subsequent to take over. The expected realization will be Rs.50 lakhs.2. The inventories and receivables are agreed for takeover at values of Rs.100 and Rs.50

lakhs respectively which is the price they will realize on disposal.3. The liabilities of Fine Toys Ltd. will be discharged in full on take over alongwith an

employee settlement of Rs.90 lakhs for the employees who are not interested incontinuing under the new management.

4. Timby Ltd. will invest a sum of Rs.150 lakhs for upgrading the Plant of Fine Toys Ltd. ontakeover. A further sum of Rs.50 lakhs will also be incurred in the second year torevamp the machine shop floor of Fine Toys Ltd.

5. The Anticipated Cash Flows (in Rs. crore) post takeover are as follows:

Year 1 2 3 4 5 6 7 8 9 10

18 24 36 44 60 80 96 100 140 200

You are required to advise the management the maximum price which they can pay pershare of Fine Toys Ltd. if a discount factor of 20 per cent is considered appropriate.

(b) Investors Mutual Fund is registered with SEBI and having its registered office at Pune. Thefund is in the process of finalising the annual statement of accounts of one of its open endedmutual fund schemes. From the information furnished below you are required to prepare astatement showing the movement of unit holders’ funds for the financial year ended 31st

March, 2009.Rs.’000

Opening Balance of net assets 12,00,000Net Income for the year (Audited) 85,000


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8,50,200 units issued during 2008-09 96,5007,52,300 units redeemed during 2008-09 71,320The par value per unit is Rs100

(10+4 = 14 Marks)Answer(a) Calculation of Maximum Price that can be quoted for take over of Fine Toys Ltd.

Rs. in lakhs Rs. in lakhsPresent (Discounted) value of incremental cash flows(Refer Working Note)

7,845.02

Add: Proceeds from disposal of fixed assets 50.00Proceeds from disposal of inventories 100.00Receipts from debtors 50.00 200.00

8,045.02Less:Settlement of creditors 165.00

Bank Loans 250.00Employee settlement 90.00Renovation of Plant 150.00Revamp of machine shop floor (Rs. 50 lakhs× 0.6944) 34.72 689.72

Maximum value that can be offered 7,355.30Maximum price per share of Fine Toys Ltd. (Rs.7,355.30 lakhs / 55,500shares) = Rs. 13,252.79

Working Note:Present Value of Incremental Cash Flows (Rs. in lakhs)

Year Cash flow aftertakeover

Cash flowsbefore takeover

IncrementalCash flows

Discountfactor@20%

DiscountedCash flows

1 1,800 1600 200 0.8333 166.662 2,400 2000 400 0.6944 277.763 3,600 3000 600 0.5787 347.224 4,400 3200 1200 0.4823 578.765 6,000 4400 1600 0.4019 643.046 8,000 5200 2800 0.3349 937.727 9,600 6000 3600 0.2791 1,004.76

Discount factor of year 2 @20% .


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8 10,000 5500 4500 0.2326 1,046.709 14,000 7000 7000 0.1938 1,356.60

10 20,000 10800 9200 0.1615 1,485.807,845.02

(b) Statement showing the Movement of Unit Holders’ Funds for the year ended 31st

March, 2009

(Rs.’000)Opening balance of net assets 12,00,000Add: Par value of units issued (8,50,200 × Rs.100) 85,020

Net Income for the year 85,000 Transfer from Reserve/Equalisation fund (Refer working Note) 15,390

13,85,410Less: Par value of units redeemed (7,52,300 × Rs.100) 75,230Closing balance of net assets (as on 31st March, 2009) 13,10,180

Working Note:

Particulars Issued RedeemedUnits 8,50,200 7,52,300

Rs.’000 Rs.’000Par value 85,020 75,230Sale proceeds/Redemption value 96,500 71,320Profit transferred to Reserve /Equalisation Fund 11,480 3,910Balance in Reserve/Equalisation Fund 15,390

Question 4(a) Pankaj Ltd. is a company engaged in manufacture of Nuclear Power Stations. The Company

usually resorts to long term Foreign Currency borrowings for its fund requirements. TheCompany had on 1st April, 2005 borrowed U.S. $100 million from Global Fund Consortiumbased in Washington, USA. The funds were used by Pankaj Ltd. for purposes OTHER THANacquiring ‘Depreciable Capital Assets’. The loan carries an interest rate of 3 per cent onreducing balance and is repayable in two instalments, the first one due on 1st April, 2010 andthe next on 1st April, 2012. The interest due on the loan has been paid in full on 31st March ofeach year. The exchange rate on the date of borrowing was 1 U.S. $ = INR 40.The accounting treatment followed by the Company for the subsequent three years withexchange rates prevailing on those dates were as under:


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Year ended Exchange Rate Accounting Treatment31st March, 2006 1 US $ = 41 Forex Loss of Rs.10 crore

charged to Profit and Lossaccount;

31st March, 2007 1 US $ = 39 Forex gain of Rs.20 crorerecognised in Profit and LossAccount;

31st March, 2008 1 US $ = 48 Forex Loss of Rs.90 crorecharged to Profit and Lossaccount;

Note: Interest payment were charged to Profit and Loss account of each year at transactionvalue on payment dates.Pankaj Ltd. is in the process of finalising its accounts for the year ended 31st March, 2009 andunderstands that AS 11 has been amended and opts to follow the Companies (AccountingStandards) Amendment Rules, 2009.(i) You are required to show treatment of the Forex Losses/gains in the light of the above

amendment to AS 11 for the years 2005-06; 06-07; 07-08 & 08-09. The exchange rateto 1 US Dollar on 31st March, 2009 is Rs.50. Assuming that the rates of Exchange on31st March, 2010 and 31st March, 2011 will be Rs.51 and Rs.52 respectively theaccounting for the Forex Losses/gains may also be shown for these years also.

(ii) What are the disclosure requirements to be complied with by Pankaj Ltd. as a result ofhaving opted to follow the amendment in the Companies (Accounting Standard) Rules,2006.

(iii) Would your answer to (i) above be different if Pankaj Ltd. was not a Company and werea Co-operative Society.

(b) As on 1st April, 2008 the fair value of plan assets was Rs.1,00,000 in respect of a pensionplan of Zeleous Ltd. On 30th September, 2008 the plan paid out benefits of Rs.19,000 andreceived inward contributions of Rs.49,000. On 31st March, 2009 the fair value of plan assetswas Rs.1,50,000 and present value of the defined benefit obligation was Rs.1,47,920.Acturial losses on the obligations for the year 2008-09 were Rs.600.On 1st April, 2008 the company made the following estimates, based on its market studies,understanding and prevailing prices.

%Interest & dividend income, after tax payable by the fund 9.25Realised and unrealised gains on plan assets (after tax) 2.00Fund administrative costs (1.00)Expected Rate of Return 10.25You are required to find the expected and actual returns on plan assets.(10+4= 14 Marks)


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Answer(a) Central Govt. in consultation with National advisory Committee on Accounting Standards

made an amendment to AS 11 “The Effects of Changes in Foreign Exchange Rates” videNotification No. G.S.R.225(E), dated 31st March, 09 in the form of Companies(Accounting Standards) Amendment Rules, 2009. According to the Notification, anyexchange gain or loss resulting from the translation of foreign currency monetary itemsnot attributable to a depreciable asset should be accumulated in the Foreign CurrencyMonetary Item Translation Difference (FCMITD) Account and should be written off overthe useful life of the assets but not beyond 31st March, 2011. The treatment availed at theoption of the company shall be irrevocable and shall be exercised till 31st March, 2011.Any difference pertaining to accounting periods which commenced on or after 7thDecember, 2006, previously, recognised in the profit and loss account before theexercise of the option shall be reversed in case of non-depreciable asset by transfer toForeign Currency Monetary Item Translation Difference (FCMITD) Account, and by debitor credit, as the case may be, to the general reserve.(i) Table showing the Treatment of Forex Losses/gains as per amendment to AS 11

Year ended OpeningBalance inFCMITD A/c(Rs. incrores)

ExchangeGain/ (Loss) (Rs. incrores)

Total(Rs. incrores)

AmountRecognised inP&L A/c(Rs. in crores)

ClosingBalance inFCMITD A/c(Rs. in crores)

31st March, 06 Nil (10) (10) (10) NIL

31st March, 07 NIL 20 20 NIL

31st March, 08 NIL (90 ) (22.50)1 (67.50)

31st March, 09 (67.50) (20) (87.50) (29.17)2 (58.33)

31st March, 10 (58.33) (10) (68.33) (34.17)3 (34.16)

31st March, 11 (34.16) (10) (44.16) (44.16)4 NIL(ii) Disclosure Requirements:

1. The company has chosen to avail the option provided by way of amendment inthe Companies (AS) Amendment Rules, 2009.

2. According to AS 1 “Disclosure of Accounting Policies”, Exercise of option dueto amendment in AS 11 is a change in accounting policy.

3. The amount amortized to profit and loss account and the amount carriedforwarded in each year till 31st March, 2011 should be disclosed.

1 Total loss of Rs.90 crores will be amortised over 4 years till 2011. The amount of Rs.67.50 crores would be credited toGeneral reserve and debited to FCMITD Account in the year 2008-09.2 Amount written off in 2008-09 is 29.17 crores [1/4 of Rs. 90 crores + 1/3 of Rs. 20 crores]3 Amount written off in 2009-10 is 34.17 crores [1/4 of Rs. 90 crores + 1/3 of Rs. 20 crores + ½ of Rs. 10 crores]4 Entire balance including exchange loss of current year is fully amortized.


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(iii) Notification No. G.S.R.225(E) is relevant only for companies. If Pankaj Ltd., is a co-operative society, then the said notification would not be applicable. In that case,option to amortise FOREX losses over the period till 31.03.2011 will not be availableto it. The amounts charged to Profit and loss account would be same as shown inthe column carrying the heading “Exchange gain/Loss” in the table given under (i).

(b) Computation of Expected and Actual Returns on Plan Assets

Rs.Return on Rs. 1,00,000 held for 12 months at 10.25% 10,250Return on Rs. 30,000 (49,000-19,000) held for six months at 5%(equivalent to 10.25% annually, compounded every six months) 1,500Expected return on plan assets for 2008-09 11,750Fair value of plan assets as on 31 March, 2009 1,50,000Less: Fair value of plan assets as on 1 April,2008 1,00,000 Contributions received 49,000 1,49,000

1,000Add: Benefits paid 19,000Actual return on plan assets 20,000

Question 5(a) Global Health Foundation furnishes the following information with regard to its Development

Fund for the year 2009:Rs.

UN Grant received for building construction in Afganisthan 50,00,000Development Grant from Prize Foundation 40,00,000Grants from private charities for acquiring land at Afganisthan 30,00,000Interest received on Fixed Deposits invested in Trust Bank @ 10 percent per annum on 1st July, 2009

2,00,000

Cost of land purchased for setting up Rehabilitation Centre atAfganisthan

12,25,000

Transfers from unrestricted fund for purchasing moveable assets 45,00,000Advance payment for acquiring balance land at Afganisthan 7,00,000Furniture purchased for Rehabilitation Project 3,00,000Cost of 5 Desert Deuller Jeeps 35,00,000Amount settled to builders for construction of Rehabilitation CentreBuilding at Afganisthan based on percentage of work completed

12,50,000

Prepare a statement of Changes in Development Fund and a Balance Sheet of the Fund atthe year end.


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(b) AS Ltd. Leased a machine to SB Ltd. on the following terms:

(Rs. In lakhs)Fair value of the machine 4.00Lease term 5 yearsLease Rental Per annum 1.00Guaranteed Residual value 0.20Expected Residual value 0.40Internal Rate of Return 15%Depreciation is provided on straight line method at 10 per cent per annum. AscertainUnearned Financial Income. Necessary Journal entries in the books of the Lessee infirst year may be shown. (8+8= 16 Marks)

Answer(a) Statement of Changes in Development Fund for the year 2009

Particulars Rs. Rs.Receipts/TransfersUN Grant 50,00,000Grant - Prize Foundation 40,00,000Private grants 30,00,000Fixed deposit Interest 2,00,000Transfer from unrestricted funds 45,00,000 1,67,00,000Payments/TransfersLand purchase- Afganisthan 12,25,000Furniture purchased 3,00,000Vehicles purchased 35,00,000 50,25,000Balance as on 31.12.09 1,16,75,000

Balance sheet of the Development Fund of Global Heath Foundationas on 31st December, 2009

Liabilities Amount Assets AmountRs. Rs.

Fund balance 116,75,000 Capital work in progress 12,50,000Land advance- Afghanistan 7,00,000Fixed deposit at Trust Bank


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(2,00,000 x 100/10x 2) 40,00,000Bank balance(Refer working note) 57,25,000

116,75,000 116,75,000

Working Note:Bank Account

Rs. Rs.To UN Grants 50,00,000 By Fixed deposits 40,00,000To Grant - Prize Foundation 40,00,000 By Land purchased 12,25,000To Private grants 30,00,000 By Land advance 7,00,000To Interest on fixed deposit 2,00,000 By Furniture purchased 3,00,000To Transfers fromunrestricted funds 45,00,000

By Vehicles purchasedBy Payment to builders

35,00,00012,50,000

____ By Balance c/d 57,25,000167,00,000 167,00,000

Note: Land costing Rs.12.25 lakhs, Furniture Rs.3 lakhs and Vehicles Rs.35 lakhs will beshown in the General balance sheet of Global Heath Foundation.

(b) As per AS 19 on Leases, unearned finance income is the difference between (a) thegross investment in the lease and (b) the present value of minimum lease paymentsunder a finance lease from the standpoint of the lessor; and any unguaranteed residualvalue accruing to the lessor, at the interest rate implicit in the lease.where :(a) Gross investment in the lease is the aggregate of (i) minimum lease payments

from the stand point of the lessor and (ii) any unguaranteed residual value accruingto the lessor.Gross investment = Minimum lease payments + Unguaranteed residual value = [Total lease rent + Guaranteed residual value(GRV)] + Unguaranteed residualvalue (URV)= [(Rs. 1,00,000 5 years) + Rs. 20,000] + Rs. 20,000

= Rs. 5,40,000 (a)


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(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii)Unguaranteed residual value (URV).

Year M.L.P. inclusive of URVRs.

Internal rate of return( Discount factor @ 15%)

Present ValueRs.

1 1,00,000 0.8696 86,9602 1,00,000 0.7561 75,6103 1,00,000 0.6575 65,7504 1,00,000 0.5718 57,1805 1,00,000 0.4972 49,720

20,000 (GRV) 0.4972 9,9445,20,000 3,45,164 (i)

20,000 (URV) 0.4972 9,944 (ii)5,40,000 (i) + (ii) 3,55,108 (b)

Unearned Finance Income = (a) – (b)= Rs. 5,40,000 – Rs. 3,55,108= Rs. 1,84,892

Journal Entries in the books of SB Ltd.

Rs. Rs.At the inception of lease

Machinery account Dr. 3,45,164

To AS Ltd.’s account 3,45,164*(Being lease of machinery recorded atpresent value of minimum leasepayments)

At the end of the first year of leaseFinance charges account(Refer Working Note)

Dr. 51,775

As per para 11 of AS 19, the lessee should recognize the lease as an asset and a liability at an amount equal to the fairvalue of the leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the presentvalue of minimum lease payments from the standpoint of lessee, the amount recorded should be the present value ofthese minimum lease payments. Therefore, in this case, as the fair value of Rs. 4,00,000 is more than the present valueamounting Rs. 3,45,164, the machinery has been recorded at Rs. 3,45,164 in the books of SB Ltd. (the lessee) at theinception of the lease. According to para 13 of the standard, at the inception of the lease, the asset and liability for thefuture lease payments are recognised in the balance sheet at the same amounts.


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To AS Ltd.’s account 51,775(Being the finance charges for first year

due)AS Ltd.’s account Dr. 1,00,000

To Bank account 1,00,000(Being the lease rent paid to the lessorwhich includes outstanding liability of Rs.48,225 and finance charge of Rs. 51,775)Depreciation account£ Dr. 34,516

To Machinery account 34,516(Being the depreciation provided @ 10%p.a. on straight line method)Profit and loss account Dr. 86,291

To Depreciation account 34,516To Finance charges account 51,775

(Being the depreciation and financecharges transferred to profit and lossaccount)

Working Note:Table showing apportionment of lease payments by SB Ltd. between the financecharges and the reduction of outstanding liability

Year Outstandingliability

(openingbalance)

Minimumlease

payments

Financecharges

Reduction inprincipalamount

Outstandingliability

(closingbalance

Rs. Rs. Rs. Rs. Rs.1 3,45,164 1,00,000 51,775 48,225 2,96,9392 2,96,939 1,00,000 44,541 55,459 2,41,4803 2,41,480 1,00,000 36,222 63,778 1,77,7024 1,77,702 1,00,000 26,655 73,345 1,04,3575 1,04,357 1,00,000 15,654 84,346 20,011

£ Depreciation has been provided on the basis that the machine has been leased at the beginning of the year. The difference between this figure and guaranteed residual value (Rs. 20,000) is due to approximation in computing theinterest rate implicit in the lease.


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Question 6

In preparing the Financial Statements of Santhanam Ltd. for the year ended 31st March, 2009, youcome across the following features. State with reasons, how you would deal with them in theFinancial Statements:

(i) An unquoted long term investment is carried in the books at its cost of Rs.5 lakhs. ThePublished Accounts of the unlisted company received in May, 2009 showed that the companywas incurring cash losses with declining market share and the long term investment may notfetch more than Rs.80,000.

(ii) The Company invested Rs.560 lakhs in April, 2009 in the acquisition of another companydoing similar business, the negotiations for which had started during the current financialyear.

(iii) There was a major theft of stores valued at Rs.46 lakhs in the preceding year which wasdetected only during the current financial year. (5+5+6= 16 Marks)

AnswerAs it is stated in the question that financial statements for the year ended 31.3.2009 are underpreparation, the views given are on the basis that the financial statements are yet to beapproved by the Board of Directors. Para 3.2 of AS 4 (Revised)"Contingencies and Eventsoccurring after the Balance Sheet Date" defines "Events occurring after the balance sheetdate" as those significant events, both favourable and unfavourable, that occur between thebalance sheet date and the date on which the financial statements are approved by the Boardof Directors in the case of a company.(i) Investments classified as long term investments should be carried in the financial

statements at cost. However, provision for diminution shall be made to recognise adecline, other than temporary, in the value of the investments, such reduction beingdetermined and made for each investment individually. Para 17 of AS 13 ‘Accounting forInvestments’ states that indicators of the value of an investment are obtained byreference to its market value, the investee's assets and results and the expected cashflows from the investment. On this basis, the facts of the given case clearly suggest thatthe provision for diminution should be made to reduce the carrying amount of long terminvestment to Rs. 80,000 in the financial statements for the year ended 31st March,2009.

(ii) The acquisition of another company is an event occurring after the balance sheet date.However, no adjustment to assets and liabilities is required as the event does not affectthe determination and the condition of the amounts stated in the financial statements forthe year ended 31st March, 2009. Applying Para 15 of AS 4 (Revised), which clearlystates that disclosure should be made in the report of the approving authority of thoseevents occurring after the balance sheet date that represent material changes andcommitments affecting the financial position of the enterprise, the investment of Rs. 560


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lakhs in April, 2009 in the acquisition of another company should be disclosed in thereport of the Board of Directors to enable users of financial statements to make properevaluations and decisions.

(iii) Due to major theft of stores in the preceding year (2007-08) which was detected onlyduring the current financial year (2008-09), there was overstatement of closing stock ofstores in the preceding year. This must have also resulted in the overstatement of profitsof previous year, brought forward to the current year. The adjustments are required to bemade in the current year as 'Prior Period Items' as per AS 5 (Revised) “Net Profit or Lossfor the Period, Prior Period Items and Changes in Accounting Policies”. Accordingly, theadjustments relating to both opening stock of the current year and profit brought forwardfrom the previous year should be separately disclosed in the statement of profit and losstogether with their nature and amount in a manner that their impact on the current profitor loss can be perceived. The disclosure as to the theft and the resulting loss is requiredin the notes to the accounts for the current year i.e, year ended 31st March, 2009.

PAPER – 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS

Answer all questions.Working notes should form part of the answer.

Question 1

(a) From the following details relating to a project, analyse the sensitivity of the project tochanges in initial project cost, annual cash inflow and cost of capital:

Initial Project Cost (Rs.) 1,20,000

Annual Cash Inflow (Rs.) 45,000

Project Life (Years) 4

Cost of Capital 10%

To which of the three factors, the project is most sensitive? (Use annuity factors: for 10%3.169 and 11% ... 3.109). (10 Marks)

(b) ABC Company is considering acquisition of XYZ Ltd. which has 1.5 crores sharesoutstanding and issued. The market price per share is Rs. 400 at present. ABC's averagecost of capital is 12%.Available information from XYZ indicates its expected cashaccruals for the next 3 years as follows:

Year Rs. Cr.1 2502 3003 400

Calculate the range of valuation that ABC has to consider. (PV factors at 12% for years 1to 3 respectively: 0.893, 0.797 and 0.712). (4 Marks)

(c) Describe the interface of financial policy with corporate strategic management. (6 Marks)

Answer(a) CALCULATION OF NPV

Rs.PV of cash inflows (Rs. 45,000 x 3.169 ) 1,42,605Initial Project Cost 1,20,000NPV 22,605If initial project cost is varied adversely by 10%*NPV (Revised) (Rs. 1,42,605 - Rs. 1,32,000 ) Rs. 10,605Change in NPV (Rs. 22,605 – Rs. 10,605)/ Rs. 22,605 i.e 53.08 %


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If annual cash inflow is varied adversely by 10%*Revised annual inflow Rs. 40,500NPV (Revised) (Rs. 40,500 x 3.169) – (Rs. 1,20,000) (+) Rs. 8,345Change in NPV (Rs. 22,605 – Rs. 8,345) / Rs. 22,605 63.08 %If cost of capital is varied adversely by 10%*NPV ( Revised ) ( Rs. 45,000 x 3.109 ) – Rs. 1,20,000 (+) Rs. 19,905Change in NPV (Rs. 22,605 – Rs. 19,905 ) / Rs. 22,605 11.94 %Conclusion: Project is most sensitive to ‘annual cash inflow’.*Note: Students may please note that they may assume any other percentage rate otherthan 10 % say 15% , 20 % 25 % etc.

(b) VALUATION BASED ON MARKET PRICEMarket Price per share Rs. 400Thus value of total business is (Rs. 400 x 1.5 Cr.) Rs. 600 Cr.VALUATION BASED ON DISCOUNTED CASH FLOWPresent Value of cash flows(Rs. 250 cr x 0.893) + (Rs. 300 cr. X 0.797) + ( Rs. 400 cr. X 0.712 ) = Rs. 747.15 Cr.Value of per share (Rs. 747.15 Cr. / 1.5 Cr) Rs. 498.10 per share

RANGE OF VALUATION

Per Share Rs.

TotalRs. Cr.

Minimum 400.00 600.00Maximum 498.10 747.15

(c) INTERFACE OF FINANCIAL POLICY AND STRATEGIC MANAGEMENTFinancial policy required the resource deployments such as materials, labour etc.,whereas strategic management considers all markets such as material, labour andcapital as imperfect and changing. Strategies are developed to manage the business firmin uncertain and imperfect market conditions and environment, for forecasting planningand formulation of financial policies, for generation and allocation of resources, thefinance manager is required to analyse changing market conditions and environment.The strategy focuses on how to compete in a particular product-market segment orindustry. For framing strategy it is considered that the shareholders are not the onlyinterested group in the unit. There are many other influential constituents such aslenders, employees, customers, suppliers etc. The success of a company depends on itsability to service in the product market environment which is possible only when thecompany considers to maintain and improve its product market positions.


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The strategic management is multi-dimensional. It focuses on growth profitability andflow of funds rather than only on the maximization of market value of shares. This focushelps the management to create enough corporate wealth for achieving marketdominance and the ultimate successful survival of the company.Hence, the financial policy of a company is closed linked with its corporate strategy. Thecorporate strategy establishes an efficient and effective match between its competencesand opportunities and environmental risks. Financial policies of a company should bedeveloped in the context of its corporate strategy. Within the overall framework of acompany’s strategy, there should be consistency between financial policies- investment,debt and dividend.

Question 2

(a) New Projects Ltd. is evaluating 3 projects, P-I, P-II, P-III. Following information isavailable in respect of these projects:

P-I P-II P-IIICost Rs. 15,00,000 Rs. 11,00,000 Rs. 19,00,000

Inflows-Year 1 6,00,000 6,00,000 4,00,000Year 2 6,00,000 4,00,000 6,00,000Year 3 6,00,000 5,00,000 8,00,000Year 4 6,00,000 2,00,000 12,00,000

Risk Index 1.80 1.00 0.60Minimum required rate of return of the firm is 15% and applicable tax rate is 40%. Therisk free interest rate is 10%.

Required:

(i) Find out the risk-adjusted discount rate (RADR) for these projects.(ii) Which project is the best? (10 Marks)

(b) The following data relate to Anand Ltd.'s share price:

Current price per share Rs. 1,8006 months future's price/share Rs. 1,950

Assuming it is possible to borrow money in the market for transactions in securities at12% per annum, you are required:

(i) to calculate the theoretical minimum price of a 6-months forward purchase; and(ii) to explain arbitrating opportunity. (6 Marks)

(c) Saranam Ltd. has issued convertible debentures with coupon rate 12%. Each debenturehas an option to convert to 20 equity shares at any time until the date of maturity.Debentures will be redeemed at Rs. 100 on maturity of 5 years. An investor generally


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requires a rate of return of 8% p.a. on a 5-year security. As an investor when will youexercise conversion for given market prices of the equity share of (i) Rs. 4, (ii) Rs. 5 and(iii) Rs. 6.

Cumulative PV factor for 8% for 5 years : 3.993PV factor for 8% for year 5 : 0.681 (4 Marks)

Answer(a) (i) The risk free rate of interest and risk factor for each of the projects are given. The

risk adjusted discount rate (RADR) for different projects can be found on the basisof CAPM as follows:Required Rate of Return = IRf + (ke-IRF ) Risk FactorFor P-I : RADR = 0.10 + (0.15 – 0.10 ) 1.80 = 19%For P-II : RADR = 0.10 + (0.15 – 0.10 ) 1

= 15 %For P-III : RADR = 0.10 + (0.15 – 0.10) 0.60 = 13 %

(ii) The three projects can now be evaluated at 19%, 15% and 13% discount rate asfollows:

Project P-I

Annual Inflows Rs. 6,00,000PVAF (19 %, 4) 2.639PV of Inflows (Rs. 6,00,000 x 2.639 ) Rs. 15,83,400Less: Cost of Investment Rs. 15,00,000Net Present Value Rs. 83,400

Project P-II

Year Cash Inflow (Rs.) PVF (15%,n) PV (Rs.)1 6,00,000 0.870 5,22,0002 4,00,000 0.756 3,02,4003 5,00,000 0.658 3,29,0004 2,00,000 0.572 1,14,400Total Present Value 12,67,800Less: Cost of Investment 11,00,000Net Present Value 1,67,800


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Project P-III

Year Cash Inflow (Rs.) PVF (13%,n) PV (Rs.)1 4,00,000 0.885 3,54,0002 6,00,000 0.7831 4,69,8603 8,00,000 0.693 5,54,4004 12,00,000 0.613 7,35,600Total Present Value 21,13,860Less: Cost of Investment 19,00,000Net Present Value 2,13,860

Project P-III has highest NPV. So, it should be accepted by the firm(b) Anand Ltd

(i) Calculation of theoretical minimum price of a 6 months forward contract-Theoretical minimum price = Rs. 1,800 + (Rs. 1,800 x 12/100x 6/12) Rs. 1,908

(ii) Arbitrage Opportunity-The arbitrageur can borrow money @ 12 % for 6 months and buy the shares at Rs.1,800. At the same time he can sell the shares in the futures market at Rs. 1,950.On the expiry date 6 months later, he could deliver the share and collect Rs. 1,950pay off Rs. 1,908 and record a profit of Rs. 42 (Rs. 1,950 – Rs. 1,908)

(c) If Debentures are not converted its value is as under: -

PVF @ 8 % Rs.Interest @ Rs. 12 % for 5 years 3.993 47.916Redemption Rs. 100 in 5th year 0.681 68.100

116.016Value of equity shares:-

Market Price No. TotalRs. 4 20 Rs. 80Rs. 5 20 Rs. 100Rs. 6 20 Rs. 120

Hence, unless the market price is Rs. 6 conversion should not be exercised.Question 3

(a) Mr. Sinha has invested in three Mutual fund schemes as per details below:

Scheme X Scheme Y Scheme ZDate of Investment 01.12.2008 01.01.2009 01.03.2009


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Amount of Investment Rs. 5,00,000 Rs. 1,00,000 Rs. 50,000Net Asset Value at entry date Rs. 10.50 Rs. 10.00 Rs. 10.00Dividend received upto 31.03.2009 Rs. 9,500 Rs. 1,500 NilNAV as at 31.3.2009 Rs. 10.40 Rs. 10.10 Rs. 9.80You are required to calculate the effective yield on per annum basis in respect of each ofthe three schemes to Mr. Sinha upto 31.03.2009. (6 Marks)

(b) Classic Finance, a Leasing Company, has been approached by a prospective customerintending to acquire a machine whose cash down price is Rs. 6 crores. The customer, inorder to leverage his tax position, has requested a quote for a three year lease withrentals payable at the end of each year but in a diminishing manner such that they are inthe ratio of 3 : 2 : 1. Depreciation can be assumed to be on WDV basis at 25% andClassic Finance's marginal tax rate is 35%. The target rate of return for Classic Financeon the transaction is 10%. You are required to calculate the lease rents to be quoted forthe lease for three years. (8 Marks)

(c) Explain briefly the capital Asset pricing model used in the context of valuation ofsecurities. (6 Marks)

Answer(a) Calculation of effective yield on per annum basis in respect of three mutual fund schemes

to Mr. Sinha up to 31-03-2009:

PARTICULARS MFX MFY MFZ(a) Investments Rs. 5,00,000 Rs. 1,00,000 Rs. 50,000(b) No. of units 47,619.05 10,000 5,000(c) Unit NAV ON 31-3-2009 Rs. 10.40 Rs. 10.10 Rs. 9.80(d) Total NAV on 31-3-2009 ( b x c) Rs . 4,95,238.12 Rs. 1,01,000 Rs. 49,000(e) Increase / Decrease of NAV ( a-d) (Rs. 4,761.88) Rs. 1,000 (Rs. 1000)((f) Dividend Received Rs. 9,500 Rs. 1,500 Nil(g) Total yield (e + f) Rs. 4,738.12 Rs. 2,500 (Rs. 1,000)(h) Number of Days 121 90 31(i) Effective yield p.a. ( g/a x 365/h x 100) 2.859% 10.139% (-) 23.55%

(b) Calculation of depreciation tax shield (Rs. Lakhs)

Year Cost / WDV Dep. @ 25 % Tax shield @ 0.35 PVF PV of dep. tax shield1 600.00 150.00 52.50 0.909 47.722 450.00 112.50 39.38 0.826 32.53


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3 337.50 84.38 29.53 0.751 22.18102.43

Capital sum to be placed on lease (Rs. Lakhs )Cash down price 600.00Less: PV of depreciation tax shield 102.43To be placed on lease 497.57Let the normal annual lease rent were to be “x” then

Year Post tax PVF PV of cash flow1 3 x (1-0.35 ) or 1.95 x 0.909 1.773 x2 2x (1-0.35 ) or 1.30x 0.826 1.074x3 1x ( 1-0.35 ) or 0.65x 0.751 0.488x

3.335 xValue of x = Rs. 497.57 lakhs / 3.335 i.e Rs. 149.196 lakhsYear wise lease rental will be

Rs.lakhsYear 1 3X 149.196 447.59Year 2 2X 149.196 298.39Year 3 1X 149.196 149.20

(c) Capital Asset Pricing Model (CAPM)Capital Asset Pricing Model was developed by Sharpe, Mossin and Lintner in 1960s.The model explains the relationship between the expected return, non-diversifiable riskand the valuation of securities. It considers the required rate of return of a security onthe basis of its contribution to the total risk. It is based on the premise that thediversifiable risk of a security is eliminated when more and more securities are added tothe portfolio. However, the systematic risk cannot be diversified and is correlated withthat of the market portfolio. All securities do not have same level of systematic risk.Therefore, the required rate of return goes with the level of systematic risk. Thesystematic risk can be measured by beta, β. Under CAPM, the expected return from asecurity or portfolio can be expressed as:Expected return on security (Er) = R f + β (Rm – Rf)Where,

Rf = Risk-free rate of returnβ = Beta of security or portfolio(Rm – Rf) = Risk premiumRm = Market return


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The model shows that the expected return of a security or a portfolio consists of the risk-free rate of interest plus a risk premium. If the expected return does not meet therequired return, then the investment should not be undertaken. The CAPM, when plottedon a graph, is known as the Security Market Line (SML). A major implication of CAPM isthat not only every security but all portfolios too must plot on SML. This implies that in anefficient market, all securities are expected to yield returns commensurate with theirriskiness, measured by β.CAPM is based on following assumptions:(i) The Investor’s objective is to maximise the utility of terminal wealth.(ii) Investors make choices on the basis of risk and return.(iii) Investors have homogenous expectations of risk and return.(iv) Investors have identical time horizon.(v) Information is freely and simultaneously available to investors.(vi) There is a risk-free asset, and investors can borrow and lend unlimited amounts at

the risk-free rate.(vii) There are no taxes, transaction costs, restrictions on short rates, or other market

imperfections.(viii) Total asset quantity is fixed, and all assets are marketable and divisible.Thus, CAPM provides a conceptual frame work for evaluating any investment decisionwhere capital is committed with a goal of producing future returns. However, there arecertain limitations of the theory. Some of these limitations are as follows:(i) Reliability of Beta: Statistically reliable Beta might not exist for shares of many

firms. It may not be possible to determine the cost of equity of all firms using CAPM.All shortcomings that apply to Beta value apply to CAPM too.

(ii) Other Risks: It emphasis only on systematic risk while unsystematic risks are alsoimportant to share holders who do not possess a diversified portfolio.

(iii) Information Available: It is extremely difficult to obtain important information onrisk- free interest rate and expected return on market portfolio as there are multiplerisk- free rates for one while for another, markets being volatile it varies over timeperiod.

Question 4

(a) B Ltd. is a highly successful company and wishes to expand by acquiring other firms. Itsexpected high growth in earnings and dividends is reflected in its PE ratio of 17. TheBoard of Directors of B Ltd. has been advised that if it were to take over firms with alower PE ratio than it own, using a share-for-share exchange, then it could increase itsreported earnings per share. C Ltd. has been suggested as a possible target for a


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takeover, which has a PE ratio of 10 and 1,00,000 shares in issue with a share price ofRs. 15. B Ltd. has 5,00,000 shares in issue with a share price of Rs. 12.

Calculate the change in earnings per share of B Ltd. if it acquires the whole of C Ltd. byissuing shares at its market price of Rs.12. Assume the price of B Ltd. shares remainsconstant. (8 Marks)

(b) An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is threemonths. Exchange rates in London are:

Spot Rate ($/£) 1.5865 - 1.59053-Month Forward Rate ($/£) 1.6100 - 1.6140

Rate of Interest in Money Market:

Deposit Loan$ 7% 9%£ 5% 8%

Compute and show how a money-market hedge can be put in place. Compare andcontrast the outcome with a forward contract. (7 Marks)

(c) Explain the importance of the budget and the revised budget to public sectorundertakings. (5 Marks)

Answer(a) Total market value of C Ltd is = 1,00,000 x Rs. 15 = Rs. 15,00,000

PE ratio (given) = 10Therefore , earnings = Rs. 15,00,000 /10

= Rs. 1,50,000Total market value of B Ltd. is = 5,00,000 x Rs. 12 = 60,00,000PE ratio ( given) = 17Therefore, earnings = Rs. 60,00,000/17

= Rs. 3,52,941The number of shares to be issued by B Ltd.Rs. 15,00,000 ÷ 12 = 1,25,000Total number of shares of B Ltd = 5,00,000 + 1,25,000 = 6,25,000The EPS of the new firm is = (Rs. 3,52,941+1,50,000)/6,25,000

= Re. 0.80


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The present EPS of B Ltd is = Rs. 3,52,941 /5,00,000= Re. 0.71

So the EPS affirm B will increase from Re. 0.71 to Rs. 0.80 as a result of merger.(b) Identify: Foreign Currency is an asset. Amount $ 3,50,000.

Create: $ Liability.Borrow: In $. The borrowing rate is 9 % per annum or 2.25 % per quarter.Amount to be borrowed $ 3,50,000/ 1.0225 = $ 3,42,298.29Convert: Sell $ and buy £. The relevant rate is the Ask rate, namely, $ 1.5905 per £,(Note: This is an indirect quote). Amount of £s received on conversion is £ 2,15,214.27[£ 3,42,298.29 / 1.5905]Invest: £ 2,15,214.27 will be invested at 5 % for 3 months to get £ 2,17,904.45.Settle: The liability of $ 3,42,298.29 at interest of 2.25 per cent per quarter matures to$ 3,50,000/-. This will be settled with the amount of $ 3,50,000 received from customer.Using forward rate, amount received is = £ 3,50,000 / 1.6140 = £ 2,16,852.54Amount received through money market hedge = £ 2,17,904.45Gain = £ 2,17,904.45 - £ 2,16,852.54 = £ 1,051.91So, money market hedge is beneficial for the exporter.

(c) Importance of Budget and Revised Budget to Public Sector Undertakings (PSUs)The budget exercise in public sector undertakings is an annual exercise. All revenue andexpenditure, (including capital expenditures) and sources and application of funds arebudgeted prior to the commencement of financial year. The budget is very importantexercise in the public sector undertakings. The budget is important to the PSUs due tothe following reasons:(i) There is a separate Budget Section of the Accounts and Finance Department

responsible for coordinating the budget exercise, collecting data from alldepartments/divisions concerned and finalising the budget for presentation to theBoard of Directors.

(ii) The budget is prepared on the basis of 'Zero based budgeting' i.e. revenue andexpenditure are estimated from scratch or afresh based only on targets set to beachieved during the ensuing year as broadly determined by the Board of Directorsor the Management Committee.

(iii) The budget approved by the Board of Directors forms the basis for all expenditureand yardstick for revenue earning.

(iv) The works of budgeting- estimating revenue and expenditure is meticulously doneand the sanctioned budget becomes a sort of ‘bible’ for the operating departments.No expenditure can be incurred unless it has been included in the budget. Items of


35

expenditure are screened for prior sanction under the budget.(v) The revenue target set in the budget needs to be achieved.(vi) To keep the expenditure trend balanced with revenue, a fortnightly or monthly

reporting of budgeted and actuals is done to all departmental heads.(vii) Budget variance report is to be regularly submitted to the top management for its

review, decision and corrective directions, where and when necessary.Revised Budget : In public sector units, there is a also convention of preparing a revisedbudget ,if required, after expiry of the first two quarters or three quarters of the financialyear depending upon exigencies. The revised budget is important to the PSUs due to thefollowing reasons:(i) It helps in recognizing developments after the initial budget preparation exercise

and in coordinating action plans for the balance part of the year.(ii) It also takes into consideration any material change taking place which could not

have been envisaged at the time of preparation of the original budget and which isbound to affect the budgeted estimates and actual performance. Thus, the originalbudget is revised accordingly. Example of significant happenings could be changein exchange rate, new levy of substantial Direct and Indirect taxes and duties, etc.

(iii) Same level of exercise is carried out in preparation of revised budget as in the caseof original budget.

It is, however, very important to keep in mind that the practice of preparing the RevisedBudget be strictly followed only when the situation compels such an exercise and shouldnot be liberally pursued.

Question 5

(a) XYZ established the following spread on the Delta Corporation's stock:

(i) Purchased one 3-month call option for 100 Nos. with a premium of Rs. 30 and anexercise price of Rs. 550.

(ii) Purchased one 3-month put option for 100 Nos. with a premium of Rs. 5 and anexercise price of Rs. 450.

The current price of Delta Corporation's stock is Rs. 500. Determine XYZ profit or loss ifthe price of Delta Corporation:(i) Stays at Rs. 500 after 3 months.(ii) Falls to Rs. 350 after 3 months.(iii) Rises to Rs. 600. (6 Marks)

(b) Subhash & Co. earns Rs. 8 per share having capitalisation rate of 10 per cent and has areturn on investment at the rate of 20 per cent. According to Walter's model, what should


36

be the price per share at 25 per cent dividend payout ratio? Is this the optimum payoutratio as per Walter? (6 Marks)

(c) A stock costing Rs. 120 pays no dividends. The possible prices that the stock might sellfor at the end of the year with the respective probabilities are:

Price Probability115 0.1120 0.1125 0.2130 0.3135 0.2140 0.1

Required:

(i) Calculate the expected return.

(ii) Calculate the Standard deviation of returns. (8 Marks)Answer(a) (i) Total premium paid on purchasing a call and put option

= ( Rs. 30 per share x 100 ) + ( Rs. 5 per share x 100 ).= Rs. 3,000 + Rs. 500 = Rs. 3,500In this case, XYZ exercises neither the call option nor the put option as both willresult in a loss for her.Ending value = -Rs. 3,500 + Zero gain

= -Rs. 3,500i.e. Net loss = Rs. 3,500

(ii) Since the price of the stock is below the exercise price of the call , the call will notbe exercised. Only put is valuable and is exercised.

Total premium paid = Rs. 3,500Ending value = -Rs.3,500 + Rs. [(450 – 350 ) x 100]

= - Rs. 3,500 + Rs. 10,000 = Rs. 6,500i.e. Net gain = Rs. 6,500

(iii) In this situation, the put is worthless, since the price of the stock exceeds the put’sexercise price. Only call option is valuable and is exercised.Total premium paid = Rs 3,500


37

Ending value = – Rs. 3,500 + Rs.[(600-550 ) x 100]Net Gain = – Rs. 3,500 + Rs. 5,000 = Rs. 1,500

(b) Walter Model is as follows:-

a

ce

c

RD + ( E - D )RV =

RVc = market value of the shareRa = Return on retained earningsRe = Capitalisation rateE = Earnings per shareD = Dividend per shareHence, if Walter model is applied-

Market value of the share

10.0

00.2.Rs00.8.Rs10.020.000.2.Rs

VC

or

10.0

00.6.Rs10.020.000.2.Rs

VC

or

140.Rs10.0

00.14.Rs10.0

00.12.Rs00.2.RsVC

This is not the optimum payout ratio because Ra> Rc and therefore Ve can further group ifpayout ratio is reduced.

(c) Here, the probable returns have to be calculated using the formula

0

01

0 PPP

PDR

Calculation of Probable Returns

Possible prices (P1) P1-P0 [(P1-P0)/ P0 ] x 100Rs. Rs. Return (per cent )115 -5 -4.17120 0 0.00125 5 4.17


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130 10 8.33135 15 12.50140 20 16.67

Calculation of Expected Returns

Possible return Probability ProductXi p( Xi) X1-p(Xi)

-4.17 0.1 -0.4170.00 0.1 0.0004.17 0.2 0.8348.33 0.3 2.499

12.50 0.2 2.50016.67 0.1 1.667

X = 7.083Expected return X = 7.08 per

Calculation of Standard Deviation of Returns

Probable Probability Deviation Deviationsquared

Product

return Xi p(Xi) (Xi – X) ( Xi – X)² ( Xi – X)²p(Xi)-4.17 0.1 -11.25 126.56 12.660.00 0.1 -7.083 50.17 5.0174.17 0.2 -2.913 8.49 1.6988.33 0.3 1.247 1.56 0.467

12.50 0.2 5.417 29.34 5.86916.67 0.1 9.587 91.91 9.191

σ² = 34.902Variance, σ² = 34.902 per centStandard deviation, σ= 34.902 = 5.908 per cent

PAPER – 3: ADVANCED AUDITINGAnswer all questions.

Question 1

As an auditor, how would you deal with the following:

(a) During the audit of ABC Pvt. Ltd. for the year ended 31st March, 2009, it is noticed thatthe company has not maintained proper books of account and the final accounts weredrawn up from the bank summaries. The number of transactions in the entire year for thecompany were only 30. (5 Marks)

(b) PQR Ltd. had acquired a Brand from another company for Rs.100 lakhs. PQR Ltd.contends that since the said brand is a very popular and famous brand, no depreciationor amortisation needs to be provided. (4 Marks)

(c) XY Ltd. had entered into derivative transactions in foreign currency which were based onprobable export orders. As at the year end on 31st March, 2009, the mark-to-market (MTM) losson the said derivatives was Rs.250 lakhs. The company contends that since the MTM loss isnotional and likely to be recouped in the next year, the same need not be provided for. (5 Marks)

(d) The statutory auditor of the Holding Company demands for the working papers of theauditors of the subsidiary company, of which you are the auditor. (4 Marks)

Answer(a) Non maintenance of Books of Accounts by Private Limited Company:

Section 209 of the Companies Act, 1956 provides for keeping of proper books of accountby a company and the auditor is specifically required to report under section 227.Accordingly, auditors are required to state as to whether proper books of account, asrequired by law , have been maintained by the company so far as it appears from theexamination of the books.In the instant case, though the members of transactions are small and the final accountsproperly drawn up from the bank summaries, the books of account, as required bySection 209 can not be said to have been maintained by ABC Pvt. Ltd., Auditors,therefore, have to state disclaimer of opinion in the audit report.

(b) Amortization or Depreciation of Brand:AS 26 “Intangible Assets” provides that an intangible asset should be measured initiallyat cost. After initial recognition, an intangible asset should be carried at cost less anyaccumulated amortization and any accumulated impairment losses. The depreciableamount of an intangible asset should be allocated on a systematic basis over the bestestimate of its useful life. There is a rebuttable presumption that the useful life of anintangible asset will not exceed ten years from the date when the asset is available foruse. The auditor should satisfy himself that the value of brand is amortized inaccordance with AS 26 , as brand is considered to be an intangible asset.


40

The contention of PQR Ltd., that Brand is very popular and famous, no depreciation oramortization needs to be provided, is wrong in view of the above and hence, the auditorwill have to qualify in this report this matter and quantify, the amount of non-amortisation.

(c) Derivative transactions (MTM) LossThe ICAI has issued an announcement “Accounting for Derivatives” in March, 2008 toclarify the best practice treatment to be followed for all derivatives. According to thisannouncement, the entity is required to provide for losses in respect of all outstandingderivative contracts at the balance sheet date by marking them to market, keeping inview the principle of prudence as enunciated in AS 1 “Disclose of Accounting Policies”.The Guidance Note on Accounting for Equity Index and Equity Stock Futures andOptions (2003) and AS 11(Revised 2003) “Effects of Changes in Foreign ExchangeRates”. The auditors should consider making appropriate disclosures in their reports ifthe aforesaid accounting treatment and disclosures are not made. In the given case, XYLtd. should provide for mark to-market (MTM) losses amounting Rs. 250 Lakhs alsoprovide for the similar treatment. The auditor will have to make necessary disclosuresand quantify the amount of MTM losses.

(d) Access to Working PaperAs per SA 230, “Audit Documentation” working papers are the property of the auditor.The auditor may, at his discretion, make portion of or extracts of his working papersavailable to his client.SA 600 “Using the Work of Another Auditors” also states that an auditor should respectthe confidentiality of information acquired during the course of his audit work and shouldnot disclose such information unless there is a legal or professional duty to disclose. PartI of the Second Schedule to the Chartered Accountants Act, 1949 also provides that achartered accountant in practice shall be deemed to be guilty of professional misconductif he“ Discloses information acquired in the course of his professional engagement to anyperson other than his client, without the consent of his client, or otherwise than asrequired by any law for the time being in force”.The ICAI has clarified that except to the extent stated above, the auditor is not requiredto provide the client or the other auditors of the same enterprise or its related enterprisessuch as a parent or a subsidiary, access to his audit working papers. The statutoryauditor of an enterprise do not have right of access to the audit working papers of thebranch auditor. An auditor can rely on the work of another auditor, without having anyright of access to the audit working papers of other auditor.In view of the above guidelines, issued by the Council of ICAI, the statutory auditor ofHolding company can not have access to audit working papers of the subsidiarycompany’s auditor. He can however, ask the auditor to answer certain questions about

The said guidance note and paragraph 36 to 39 (under the heading forward exchange contracts)of AS 11 (Revised) stand withdrawn from the date AS 30 Financial Instruments: Recognition andMeasurement, became recommendatory in nature, i.e. 1-4-2009. AS 30 will be mandatory inrespect of accounting periods commencing on or after 1st April, 2011.

PAPER – 3: ADVANCED AUDITING

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the manner in which the audit is conducted and certain other clarifications regardingaudit.

Question 2

Comment on the following with reference to the Chartered Accountants Act, 1949 as amendedby the Chartered Accountants (Amendment) Act, 2006 and Schedules thereto:

(a) M/s MN & Co., a firm of Chartered Accountants prepared and signed the forecast of acompany's earnings contingent upon future transactions without mentioning the basis onwhich the said estimates were prepared. A bank granted a loan to the said companybased on the above forecast signed by M/s MN & Co. When the company defaulted inrepayment of the loan, the bank filed a complaint against M/s MN & Co. (5 Marks)

(b) Mr. P, a Chartered Accountant, did not maintain any books of account on the ground thathis income did not exceed the limits prescribed u/s 44AA of the Income-tax Act, 1961.

(4 Marks)

(c) M/s ABC, a Kolkata based firm of Chartered Accountants having 5 partners accepts thestatutory audit of D Pvt. Ltd for 2008-09 at an audit fee of Rs.5,000. D Pvt. Ltd wasincorporated on 1st October, 2005. (5 Marks)

(d) An auditor of a cooperative society has agreed to charge fees @ 5% of the profits of thesociety. (4 Marks)

Answer(a) Forecast of a company’s earning

Clause (3) of the Second Schedule of Chartered Accountants Act, 1949 provides that aChartered Accountant in practice shall be deemed to be guilty of professionalmisconduct if he permits his name or the name of the firm to be used in connection withthe estimates of earnings, contingent upon future transactions, in a manner which maylead to the belief that he vouches for the accuracy of the forecast.The Council has issued a guidance note wherein they have considered the implicationsof the above clause. After consideration of the various factors, council has taken the viewthat the above clause does not preclude a chartered accountant from associating hisname with forecasts. He can participate in the preparation of profit or financial forecastsand also can review them provided he indicates clearly in his report:(i) the sources of information(ii) the basis of forecasts and(iii) the major assumptions made in arriving at such forecasts so long as he does not

vouch for the accuracy of the forecasts.

The Council recognises that all forecasts are estimates, based on certain assumptions,


42

duly evaluated on a consideration of various relevant factors and as such not capable ofbeing ascertained with accuracy.

In the instant case, the Chartered Accountant can prepare and sign financial forecastsand also can review them, but he must indicate clearly in his report the basis of forecastsetc. as discussed earlier. In the given case, he has not mentioned in his report the baseson which the estimated earnings of the company is ascertained. This made the bank tobelieve that he had vouched the accuracy of the forecast and advanced the loan, therebysuffering losses.

The Chartered Accountant is guilty of professional misconduct under the above clause.The bank is justified in making a complaint to the Institute against M/s. MN & Co.

(b) Non-maintenance of books of account by a chartered accountant:In exercise of the powers conferred by clause (ii) of Part II of the Second Schedule to theChartered Accountants Act, 1949, the Council of the Institute has specified that amember of the Institute in practice, shall be deemed to be guilty of professionalmisconduct, if he or the firm of chartered accountants of which he is a partner, fails tomaintain and keep in respect of his/its professional practice, proper books of accountwhether the income exceeds the limit prescribed under section 44AA of the Income TaxAct, 1961 or not.

The books of account required mainly are:

(i) a cash book and

(ii) a ledger.

In view of the above clause, Mr. P, a chartered accountant will be guilty of professionalmisconduct.

(c) Minimum audit fees in respect of audit:According to ICAI guideline, it is specified by the Council that a member of the Institute inpractice shall not, on behalf of the firm of chartered accountants in which he is a partner,accept or carry out any audit work involving receipt of audit fees (excluding re-imbursement of expenses, if any for such work of an amount less than what is specifiedhereunder;(a) Consisting of 5 or more partners but less than 10 partners with at least one partner

holding a certificate of practice for five years or more; or(b) Consisting of 10 or more partners with at least one partner holding certificate of

practice for five years or more.


43

Practicing firmhaving 5 or morepartners but lessthan 10 partners

Practicing firmhaving 10 or

more partners

(i) In cities with population of 3 millionand above

Rs.6000/- p.a. Rs.12000/- p.a.

(ii) In cities/towns having population ofless than 3 million

Rs.3500/- p.a. Rs.8000/- p.a.

In view of the above, audit fees charged by M/s. ABC Rs.5000/- is less than theprescribed limit of rs.6000/-. Thus member of the Institute in practice M/s. ABC shall bedeemed to be guilty of professional misconduct.

(d) Charging Fees on Percentage Basis.As per the above clause Chartered Accountant in practice shall charge or offer tocharge, accept or offer to accept in respect of any professional work, fees which arebased on a percentage of profits or which are contingent upon the findings or result ofwork, provided that:(i) In case of a receiver or a liquidator, the fees may be based on a percentage of the

realisation or disbursement of the assets.(ii) In the case of an audit of a co-operative society, the fees may be based on a

percentage of the paid up capital or the working capital or the gross or net incomeor profits, and

(iii) In the case of a valuer, for the purposes of direct taxes and duties, the fees may bebased on a percentage of the value of property valued.

As the co-operative society is included in the above exception, the auditor is not guilty ofany professional misconduct.

Question 3

(a) What are the procedures to be followed by a Statutory Auditor in the audit of openingbalances if the financial statements for the preceding year were audited by anotherauditor? (8 Marks)

(b) Give an illustration of an Audit Report containing 'Emphasis of Matter' for a significantuncertainty. (8 Marks)


44

Answer(a) Audit Procedures for Opening Balances (SA 510)

The sufficiency and appropriateness of the audit evidence, the auditor will need toobtain regarding opening balances, would depend on the following matters: The accounting polices followed by the entity. Whether the auditor’s report contained an unqualified opinion, a qualified opinion,

adverse opinion or disclaimer of opinion where the financial statements of the precedingperiod were audited.

The nature of the opening balances, including the risk of their misstatement in thefinancial statements for the current period.

The materiality of the opening balances relating to the financial statements for thecurrent period.

The auditor will need to consider whether the accounting polices followed in thepreceding period as per which the opening balances have been arrived at, wereappropriate and that those policies are consistently applied in the financial statements forthe current period and where such accounting policies are inappropriate, the same havebeen changed in the current period and adequately disclosed.When the financial statements for the proceeding period were audited by another auditorthe current auditor may be able to obtain sufficient appropriate audit evidence regardingopening balances by perusing the copies of the audited financial statements. Ordinarily,the current auditor can place reliance on the closing balances contained in the financialstatements for the preceding period, except when during the performance of auditprocedures for the current period, the possibility of misstatements in opening balances isindicated.When the financial statements of the preceding period were not audited or the auditor isnot satisfied by using the procedures described above, the auditor will need to performother procedures discussed as under:1. For current assets and liabilities, some audit evidence can ordinarily be obtained as

part of the audit procedures preformed during the current period. For example, thecollection / payment of opening accounts receivable / accounts payable during thecurrent period will provide some audit evidence as to their existence, right andobligations, completeness and valuation at the beginning of the period.

2. For other assets and liabilities, such as fixed assets, investments and long-termdebt, the auditor will ordinarily examine the records underlying the openingbalances. In certain cases, the auditor may be able to obtain confirmation ofopening balances from third parties, for example, for long-term debt andinvestments.


45

(b) An Illustration of an Audit Report containing emphasis of matter paragraph for asignificant uncertainty.1. An illustration of an emphasis of matter paragraph for a significant uncertainty in an

auditor’s report is as follows:

“Without qualifying our opinion, we draw attention to Note X of Schedule ………. tothe financial statements. The entity is the defendant in a lawsuit alleginginfringements of certain patent rights and claiming royalties and punitive damages.The entity has filed a counter action, and preliminary hearings and discoveryproceedings on both actions are in progress. The ultimate outcome of the mattercannot presently be determined, and no provision for any liability, that may result,has been made in the financials statements.

In our opinion …………… -

In our opinion and to the best of our information and according to the explanationgiven to us, the financial statements give a true and fair view in conformity with theaccounting principles generally accepted in India:

(a) in the case of the balance sheet, of the State of affairs of -------------- as on 31st

March 2xxxx and

(b) in the case of the profit and loss account, of the profit/loss for the year endedon that date.

2 The addition of a paragraph, emphasising a going concern problem or significantuncertainty is ordinarily adequate to meet the auditor’s reporting responsibilitiesregarding such matters. However, in extreme cases, such as situations involvingmultiple uncertainties that are significant to the financial statements, the auditor mayconsider it appropriate to express a disclaimer of opinion instead of adding anemphasis of matter paragraph.

Question 4

(a) In the context of Audit of Banks, how will you verify the following:

(i) Contingent liabilities. (4 Marks)

(ii) Inter office adjustments. (4 Marks)

(b) Discuss the reporting requirements in Form 3CD of the Tax Audit Report U/S 44AB of theIncome-tax Act, 1961 for the following:

(i) Tax on distributed profits. (4 Marks)

(ii) Brought forward loss or depreciation allowance. (4 Marks)


46

Answer 4(a) (i) Verification of contingent liabilities in the context of Bank audit

In respect of contingent liabilities, the auditor is primarily concerned with seekingreasonable assurance that all contingent liabilities are identified and propertyvalued. Auditor should generally follow the audit procedures given below:(1) Ascertain whether there are adequate internal controls to ensure that

transactions giving rise to contingent liabilities are executed only by personsauthorised to do so and in accordance with the laid down procedures.

(2) Ascertain whether the accounting system of the bank provides for maintenanceof adequate records in respect of such obligations and whether the internalcontrols insures that contingent liabilities are properly identified and recorded.

(3) Perform substantive audit tests to establish the completeness of the recordedobligations. Such tests include confirmation procedures as well as examinationof relevant records in appropriate cases.

(4) Review the reasonableness of the year end amount of contingent liabilities inthe light of previous experience and knowledge of the current year’s activities.

(5) Obtain representation from the management that all contingent liabilities havebeen disclosed and that the disclosed contingent liabilities do not include anycontingencies which are likely to result in a loss and which, therefore, requireadjustments of assets or liabilities.

(6) To verify that the provisions of AS 29, “Provisions, contingent liabilities andcontingent assets” have been complied with.

(ii) Verification of Inter-office Adjustments in Bank audit:Inter-office Adjustments represent the balance of all inter-branch transactions ofthe bank. The same are to be disclosed “NET”. If the inter-office adjustment (Net) isa debit, it is to be shown under “other assets” and if it is a credit, it is shown under“other Liabilities and Provisions”. These can be subdivided into segments like DDpaid, Inter-branch remittances, Head Office Account, etc.The auditor should pay special attention to the following points:(i) The origin and validity of old outstanding unmatched entries, particularly debit

entries. The auditor may also seek confirmation of transactions relating tooutstanding.

(ii) Whether there are any reversal entries indicating the possibilities of irregularpayments or frauds.

(iii) Whether the balances include any items in the nature of cash-in-transit, whichremain pending for more than a reasonable period. This is because such itemsare not expected to remain outstanding beyond a very small period duringwhich they are in transit.


47

(iv) Whether transactions, other than those relating to inter-branch transactionshave been included in inter-branch accounts.

(v) Any unusual items put through inter-branch accounts as well as old or largeentries outstanding in inter-branch accounts should be carefully looked into.The auditor may also seek explanations from the management in this regard.

(b) Reporting requirements in Form 3 CD of the Income Tax Report u/s.44AB of IncomeTax Act, 1961(i) Tax on distributed profits

Section 115-O provides for a special levy at the prescribed rate, on the amount ofdividend declared, distributed or paid by domestic company whether such dividendis out of current profit or accumulated profits. The tax auditor has to report on profitdistributed during the financial year and therefore the amount of tax paid on suchdistributed profit at the prescribed rate plus surcharge at the applicable rate on taxand education cess thereon, the dates of payment with amount, has to be reportedin this clause.

(ii) Brought forwards loss or Depreciation allowances:The manner of reporting:

S.No Ass. Year Nature ofloss/allowance

(in rupees)

Amount asreturned (in

rupees)

Amount asassessed

Remark

For giving the above information, the auditors should verify the assessment recordsi.e., Income tax return filed. Assessment orders Appellate orders Rectification / revision orders of the earlier years and ascertain if the figures

given in the above clause are correct.Question 5

(a) As a Statutory Auditor, how do you verify the existence of Related Parties and disclosureof Related Party Transactions? (8 Marks)

(b) Draft an illustrative engagement letter for an engagement to compile financial statementsof DEF Ltd. (8 Marks)


48

Answer(a) SA 550 Related Parties: Its Existence and Disclosure

SA 550 “Related Parties” establishes standard on the auditor’s responsibilities and auditprocedures regarding related parties and transactions with such parties. It requires thatthe auditor should perform audit procedures designed to obtained sufficient appropriateaudit evidence regarding the identification and disclosure by management of relatedparties and the related party transactions that are material to the financial statements.The auditor should review information provided by the management of the entity,identifying the names of all known related parties and should perform the followingprocedures in respect of the completeness of this information:

(a) review the working papers for the prior years for names of known related parties;

(b) review the entity’s procedures for identification of related parties;

(c) inquire as to the affiliation of directors and key management personnel, officerswith other entities;

(d) review shareholders records to determine the names of principal shareholders or, ifappropriate, obtain a list of principal shareholders from the share register;

(e) review memorandum and articles of association, minutes of the meetings ofshareholders and the board of directors and its committees and other relevantstatutory records such as the register of directors’ interest;

(f) inquire of other auditors (Internal auditor, special auditors appointed under anystatute, cost auditors and concurrent auditors) of the entity as to their knowledge ofadditional related parties and review the report of the predecessor auditors;

(g) review the entity’s income tax returns and other information supplied to regulatoryagencies; and

(h) review the joint venture and other relevant agreements entered into by the entity.

If, in the auditor’s judgment, the risk of significant related parties remaining undetected islow, these procedures may be reduced or modified as per the circumstances.

Where the financial reporting framework requires disclosure of related partyrelationships, the auditor should satisfy himself that disclosure is adequate.

Finally, if the auditor is unable to obtain sufficient appropriate audit evidence concerningrelated parties and transactions with such parties or conclude that their disclosure in thefinancial statements is not adequate, the auditor should express a qualified opinion or adisclaimer of opinion in the report, as may be appropriate.


49

(b) As per SRS 4410 “Engagements to compile Financial Information” an illustrationreport of an Engagement Letter for a Compilation of financial statements is givenbelow:

(Date)

To the Board of Directors (or other appropriate representatives of senior management):

You have, vide your letter dated ________ requested that we compile the balance sheetof __________(name of the company) as at ______________(date) and the related profitand loss account and the cash flow statement for the year ended on that date. We arepleased to confirm our acceptance and understanding of the engagement by means ofthis letter. As no audit or review engagement procedures would be carried out, no opinionon the financial statements will be expressed. Further, our engagement cannot be reliedupon to disclose whether frauds or defalcations, or illegal acts exist. However, we willinform you of any such matters which might come to our attention in the course of theengagement.

As management, you are responsible for:

(a) the accuracy and completeness of the information supplied to us, includingmaintenance of adequate accounting records and internal controls and selectionand application of appropriate accounting policies.

(b) preparation and presentation of the financial statements of the entity, in accordancewith the applicable laws and regulations, if any.

(c) safeguarding the assets of the entity and also establishing appropriate controlsdesigned to prevent and detect fraud and other irregularities.

(d) ensuring that the activities of the entity are carried in accordance with applicablelaws and regulations and that it institutes appropriate controls to prevent and detectany non-compliance.

You will confirm that events and transactions are recorded in accordance with theapplicable Accounting Standard(s), issued by the Institute of Chartered Accountants ofIndia and other recognised accounting principles and practices and inform us of anydepartures therefrom.

As part of our normal procedures, we may request you to provide written confirmation ofany information or explanations given to us orally during the course of our work.

We understand that the intended use and distribution of the information we havecompiled is _________________ (specify).


50

We look forward to full cooperation with your staff and we trust that they will makeavailable to us whatever records, documentation and other information requested inconnection with our engagement.

Our fees will be billed as the work progresses.

Please sign and return the attached copy of this letter to indicate that it is in accordancewith your understanding of the arrangements for our compilation of your financialstatements.

XYZ & Co.Chartered Accountants

……………………………

Signature

Question 6

Write short notes on the following:

(a) Register of Claims for General Insurance Companies(b) Current Period Consolidation Adjustments(c) External Confirmations in Audit

(d) Propriety elements in CARO, 2003. (4x4=16 Marks)

Answer(a) Register of claims for General Insurance Companies

The following register and records are generally prepared in respect of claims by theGeneral Insurance Companies:(i) Claims intimation register.(ii) Claims paid register.(iii) Claims Disbursement bank book.(iv) Claims Dockets, normally containing the following records:

Claim intimation, claim forms, particulars of policy, survey report, photographshowing damage, Repairer’s bills, letter of subrogation, police report, fire servicereport, claim settlement note, claim satisfaction note, salvage report, salvagedisposal note, claims discharge voucher etc.

(v) Report of quality assurance team and(vi) Salvage register.


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(b) Current Period Consolidation AdjustmentThese are those adjustments made in the accounting period for which consolidatedfinancial statements are prepared. Current period consolidation adjustments primarilyrelate to elimination of intra-group transactions and account balances including:(a) intra-group interest paid and received or management fees, etc;(b) unrealised intra-group profits on assets acquired from other subsidiaries;(c) intra-group indebtedness;(d) adjustments relating to harmonising the different accounting policies being followed

by the parent enterprise and its subsidiaries;(e) adjustments made for effects of significant transactions or other events that occur

between the date of the financial statements of the parent and one or more of thecomponents, if the financial statements to be used for consolidation are not drawnupto the same reporting date; and

(f) determination of movement in equity attributable to the minorities since the date ofacquisition of the subsidiary.

(c) SA 505 External Confirmations in AuditSA 505 “External Confirmations” establishes standards on the auditor’s use of externalconfirmations as a means of obtaining audit evidence. According to SA, the auditorshould determine whether the use of external confirmations is necessary to obtainsufficient appropriate audit evidence to support certain financial statement assertions. Inmaking this determination, the auditor should consider materiality, the assessed level ofinherent and control risk, and how the evidence from other planned audit procedures willreduce audit risk to an acceptably low level for the applicable financial statementassertions. The auditor should employ external confirmation procedures in consultationwith the management.SA 500 indicates that, in general, audit evidence obtained from external sources is morereliable than audit evidence generated internally, and that written (documentary) auditevidence is more reliable than audit evidence in oral form. Accordingly, audit evidence inthe form of written responses to confirmation request received directly by the auditor fromthird parties who are not related to the entity being audited, when considered individuallyor cumulatively with audit evidence from other procedures, may assist in reducing auditrisk for the related financial statement assertions to an acceptably low level.Situations where external confirmations may be used include the following: Bank Balances and other information from bankers Accounts receivable balances Stocks held by third parties Property title deeds held by third parties Investments purchased but delivery not taken


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Loans from lenders Accounts payable balances Long outstanding share application money.

(d) Propriety elements in CARO, 2003Propriety audit stands for verification of transactions on the tests of public interest,commonly accepted customs and standards of conduct. The following are the proprietyelements of CARO, 2003:(a) If the company has given or taken loans, secured or unsecured to/from companies,

firms or other parties listed in the register maintained under Section 301 of theCompanies Act, whether the rate of interest and other terms and conditions of suchloans are prima-facie prejudicial to the interests of the company.

(b) If overdue amount of loan the given to or taken from companies firms or otherparties listed in the register maintained under Section 301 of the Companies Act, ismore than Rupees one lakh, whether reasonable steps have been taken by thecompany for recovery/payment of principal and interest.

(c) Whether particulars of contracts or arrangements referred to in Section 301 of theAct have been entered in the register required to be maintained.

(d) Is the company regular in depositing undistributed statutory dues like Providentfund, Employee State Insurance, Income Tax, Sales Tax, Service Tax etc. with theappropriate authorities.

(e) Whether the company has made any preferential allotment of shares to parties andcompanies covered in the register maintained under section 301 of the CompaniesAct, 1956 and if so whether the price at which the shares have been issued isprejudicial to the interest of the company.

PAPER – 4 : CORPORATE LAWS AND SECRETARIAL PRACTICEAnswer all questions.

Question 1

(a) A stock exchange desirous of taking over another stock exchange, seeks your advice oncorporatisation. Examining the provisions of the Securities Contracts (Regulation) Act,1956 and the meaning of the terms ‘corporatisaton’ and ‘demutualisation’, advise thestock exchange about the steps to be taken to give effect to the scheme ofcorporatisation. (5 Marks)

(b) Mr. Veer a newly entered investor in the field of securities business seeks your advice onthe investments to be made in securities of large Companies for long term purposes.With this object in view, he wants to know the meaning of the following terms commonlyused in any stock exchange.

(i) Derivative(ii) Option in securities(iii) Spot delivery contract

Advise suitably. (5 Marks)

Answer(a) CORPORATISATION & DEMUTUALISATION OF STOCK EXCHANGES

‘Corporatisation’ means the succession of a recognized stock exchange, being a body ofindividuals or a society registered under the Societies Registration Act, 1860, by anotherstock exchange, being a Company incorporated for the purpose of assisting, regulatingor controlling the business of buying, selling or dealing in securities carried on by suchindividuals or society. ‘Demutualisation’ means the segregation of ownership andmanagement from the trading rights of the members of a recognized stock exchange inaccordance with a scheme approved by the SEBI.Steps for Corporatisation & Demutualisation. [Section 4B-Securities Contracts(Regulations) Act,1956]In accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, ascontained in Section 4B:1. All recognized stock exchanges referred to in Section 4A shall, within such time as

may be specified by the SEBI submit a scheme for corporatisation anddemutualization for its approval.

2. On receipt of the scheme, the SEBI may, after making such enquiry as may benecessary in this behalf and obtaining such further information, if any, as it mayrequire and if it is satisfied that it would be in the interest of the trade and also in thepublic interest, approve the scheme with or without modification.


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3. No scheme shall be approved by the SEBI if the issue of shares for a lawfulconsideration or provision of trading rights in lieu of membership card of themembers of a recognized stock exchange or payment of dividends to membershave been proposed out of any reserves or assets of that stock exchange.

4. Where the scheme is approved, the scheme so approved shall be publishedimmediately by-(a) The SEBI in the Official Gazette(b) The recoginised Stock Exchange in such two daily newspapers circulating in

India, as may be specified by the SEBI, and upon such publication,notwithstanding anything to the contrary contained in this Act or any other lawfor the time being in force or any agreement, award, judgment, decree or otherinstrument for the time being in force, the scheme shall have effect and bebinding on all persons and authorities including all members, creditors,depositors and employees of the recognized stock exchange and on allpersons having any contract, right, power, obligation or liability with, against,over, to, or in connection with, the recognized stock exchange or its members.

5. Where the SEBI is satisfied that it would not be in the interest of the trade and alsoin the public interest to approve the scheme, it may, by an order, reject the schemeand such order of rejection shall be published by it in the Official Gazette. SEBIshall give a reasonable opportunity of being heard to all the persons concerned andthe recognized stock exchange concerned before passing an order rejecting thescheme.

6. SEBI may, while approving the scheme by an order in writing, restrict -(a) the voting rights of the shareholders who are stock brokers of the recognized

stock exchange.(b) the right of shareholders or a stock broker of the recognized stock exchange

to appoint the representatives on the governing board or the stock exchange.7. The order made by SEBI shall be published in the Official Gazette and on the

publication thereof, the order, notwithstanding anything to the contrary contained inthe Companies Act,1956. or any other law for the time being in force, have fulleffect.

8. Every recognized stock exchange, in respect of which the scheme forcorporatisation or demutualization has been approved shall either by fresh issue ofequity shares to the public or in any other manner as may be specified by theregulations made by SEBI, ensure that at least 51% of its equity share capital isheld, within 12 months from the date of publication of the order by the public otherthan shareholders having trading rights. The SEBI may, on sufficient cause beingshown to it and in the public interest, extend the said period by another 12 months.

(b) Mr. Veer, a new investor, desirous of entering investments business in any StockExchange, on different terms commonly used in any Stock Exchange as follows:

PAPER – 4 : CORPORATE LAWS AND SECRETARIAL PRACTICE

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(i) Derivative:“Derivative” includes –(a) a security derived from a debt instrument, share, loan whether secured or

unsecured risk instrument or contract for differences or any other form of security.(b) a contract, which derives its value from the prices or index of prices, of underlying

securities.[Section 2 (ac) of the Securities Contracts (Regulation) Act, 1956].(ii) Option in Securities:

“Option in Securities” means a contract for the purchase or sale of a right tobuy or sell or a right to buy and sell, securities in future, and includes a teji, amandi, a teji mandi, a galli, a put, a call or a put and call securities. [Section2(d) of the Securities Contracts (Regulation) Act, 1956].

(iii) Spot Delivery Contract“Spot delivery contract” means a contract which provides for:(i) actual delivery or securities and the payment of a price therefore either on the

same day as the date of the contract or on the next day, the actual period taken forthe dispatch of the securities or the remittance of money therefore through the postbeing excluded from the computation of the period aforesaid if the parties to thecontract do not reside in the same town or locality;

(ii) transfer of the securities by the depository from the account of a beneficial ownerto the account of another beneficial owner when such securities are dealt with by adepository. [Section 2(i) of the Securities Contracts (Regulation) Act, 1956].

Question 2(a) (i) Mr. Ruchi resided for a period of 170 days in India during the financial year 2008-09

and thereafter went abroad. He came back to India on 1st April,2009 as anemployee of a business organization. What would be his residential status duringfinancial year 2009-10 under the Foreign Exchange Management Act,1999.

(ii) Pamtop is a London based Company having several business units all over theworld. It has manufacturing unit called Laptop with headquarters in Bengaluru. Ithas a branch in Seoul, South Korea which is controlled by the headquarters inBengaluru. What would be the residential status under the FEMA, 1999 of Laptop inBengaluru and that of Seoul branch? (7 Marks)

(b) Referring to the provisions of the Foreign Exchange Management Act, 1999, examinewhether V, an exporter is bound to make declaration of the following goods exportedfrom India to United Kingdom: ( 7 Marks)

(i) Exports software valuing Rs.50,000.(ii) V gifts certain items of jewellery valued at Rs.20,000 to his friend in Australia.(iii) V exports certain goods valuing US $ 5,000 to Myanmar under Barter Trade Agreement.


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Answer(a) (i) Residential status of an individual for a particular financial year is determined with

reference to his residence in India in the immediately preceding financial year. Inthe given problem Mr. Ruchi resided in India for less than 183 days in the financialyear 2008-09. Therefore for the financial year 2009-10 he is a person resident outside India. Unless a person resides in India for more than 182 days in the precedingfinancial year, he can in no case be termed as a person resident in India. [Section2(v) FEMA, 1999].

(ii) Pamptop being a London based Company would be a person resident outside IndiaSection 2 (u) of the FEMA, 1999 defines ‘person’ Under clause (vii) thereof ‘person’would include any agency office or branch owned or controlled by such person. Theterm ‘such person’ appears to refer to person who is included in clauses (i) to (vi).Accordingly, a laptop unit in Bengaluru, being a branch of a Company, would be a‘person.’Section 2(v) defines person ‘resident in India’, under clause (iii) thereof person‘resident in India’, would include an office, branch or agency in India owned orcontrolled by a person resident outside India. Laptop unit in Bengaluru is owned orcontrolled by a person ‘resident outside India’ Hence, it would be a person ‘residentin India’.However Seoul branch ‘though not owned’ is controlled by Laptop unit in Bengaluruwhich is a person resident in India. Hence, prima-facie, it may be possible to hold aview that the Seoul branch is also a ‘person resident in India’.

(b) In accordance with provisions of the FEMA, 1999 as contained in Section 7read withSection 8, it imposes on an exporter to make appropriate declaration of the value of thegoods being exported and he is also required to repatriate the foreign exchange due toIndia in respect of such exports to India in the manner within the time as may beprescribed. Under Section 8, the exporter is under an obligation to realise and repatriateto India such foreign exchange. However, if there is an delay in the receipt of export, itwill not be a violation which shall be punishable. Section 8 applies to a resident whoshall take all the reasonable steps, depending upon the individual case.There are certain categories of export for which declaration need not be made. Theseare:(a) Export of goods/software no exceeding Rs.25,000 in value.(b) Export by way of gift not exceeding Rs.1 lac in value.(c) Export of goods not under exceeding US $ 1000 or its equivalent per transaction to

Myanmar under Barter Trade Agreement.Taking into consideration the above:(i) In the first case since the value is exceeding Rs.25,000 in value, therefore,

declaration has to be completed.


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(ii) In the second case since the value of gift of jewellery to V’s friend in Australia isless than Rs.1 lac in value, the gift does not need any declaration to be completed.

(iii) In the third case since the value is more than U.S.$ 1,000,therefore, the declarationhas to be completed.

Note : In the question, it has been stated that goods are exported from India to UnitedKingdom which has no relevance when subsequently, it has been stated that goods areexported to different countries such as Australia, Myanmar. There is no relevance ofmentioning the name of the Country i.e. UK in the question. This perhaps might haveconfused the students while writing the answer

Question 3(a) AVD Limited was incorporated on 1st April,2006. The Company got its shares listed at

Bombay Stock Exchange on 30th September, 2007. The Company at an Extra-OrdinaryGeneral Meeting held on 31st October,2009, decided to go for public issue of equityshares to an extent of Rs.300 crores. The net worth of the Company as per the auditedBalance sheets in the financial years 2007-08 and 2008-09 was Rs.50 crores and 60crores respectively. During the financial year 2008-09 the Company had already issuedequity shares amounting to Rs.20 crores. There is no change in the name of theCompany or its business activities during the financial year 2008-09. Referring to theguidelines issued by Securities and Exchange Board of India, advise the Company on thefollowing: (8 Marks)(i) Whether the Company can go ahead with the public issue of equity shares as stated

above.(ii) What would by your advice in case the net worth of the Company as per audited

balance sheets in the financial years 2007-08 and 2008-09 was Rs.20 crores and 30crores respectively?

(iii) What would be the position in case the Company in question changed its name toAJD Limited during the year 2008-09, three months before filing the offer documentand the revenue due to change of business activity suggested by the new nameduring the financial year 2008-09 was 40% less than the total revenue for thefinancial year 2007-08 reckoned from the date of filing the offer document?

(b) (i) An arrangement has been made among the cotton producers that the cottonproduced by them will not be sold to mills below a certain price. The arrangement isin writing but it is not intended to be enforced by legal proceeding. Examine whetherthe said arrangement can be considered as an agreement within the meaning ofSection 2(b) of the Competition Act,2002.

(ii) The orange producers of Nagpur have formed an association to control theproduction of oranges. Examine whether it will be considered as a cartel within themeaning of Section 2(c)of the Competition Act,2002. ( 8 Marks)


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Answer(a) PUBLIC ISSUE OF SHARES BY A LISTED COMPANY:

As per the SEBI (DIP) Guidelines 2000 a listed Company shall be eligible to make apublic issue of equity shares or any other security which may be converted into orexchanged with equity shares at a later date provided that the aggregate of the proposedissue and all the previous issues made in the same financial year in terms of the size (i.e.offer through offer document + allotment + promoters’ contribution through the offerdocument), issue size not exceed 5 times its pre-issue net worth as per the auditedbalance sheet of the last financial year. It is further provided that in case there is achange in the name of the issuer Company within the last 1 year (reckoned from the dateof filing of the offer document), the revenue accounted for by the activity suggested bythe new name is not less than 50% of its total revenue in the preceding 1 full yearperiod).Applying the above guidelines, the questions as asked in the problem can be answeredas under:1. There are two conditions in the guidelines as stated above viz.i) that the aggregate

issue i.e. proposed + proposed + all the previous issues made in the same financial yearshould not exceed 5 times the net worth of the Company; ii) there is no change in thename of the issuer Company within the last 1 year. In the question the proposed issueof Rs.300 crores + Previous issue in the same financial year is Rs.20 crores, making anaggregate of Rs.320. Since the aggregate of the issue is more than 5 times of NetWorth, i.e. more than Rs.300 crores , the proposed offer is not within the limit, Companycannot proceed ahead with in the proposed issue of Rs.300 crores.

2. In the second case the net worth is only Rs.30 crores. 5 times of the net worthcomes to Rs.150 crores only. Since the aggregate of the proposed issue and theprevious issue during the same financial year is Rs.320 crores, which is exceedingthe limits of Rs.150 crores, as calculated above, the Company cannot proceed withthe public issue of shares as proposed in the second case.

3. In the third case the offer cannot be made since the current year revenue is lessthan 50% of the total revenue of the previous year.

(b) (i) As per Section 2(b) of the Competition Act, 2002 an Agreement includes anyarrangement or understanding or action in concert:-(i) whether or not, such arrangement, understanding or action is formal or in

writing; or(ii) whether or not, such arrangement, or understanding or action is intended to be

enforceable by legal proceedings.In the given case the understanding reached among the cotton producers not to sellbelow a certain price shall amount to an agreement as defined under Section 2(b)notwithstanding the fact that through the arrangement is in writing but not intendedto be enforced by legal proceeding.


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(ii) As per Section 2(c) of the Competition Act, 2002 the term “cartel” includes anassociation of producers, sellers, distributors, traders or service providers who, byagreement amongst themselves, limit, control, or attempt to control the production,distribution, sale or price of, or, trade in goods or provision of services.The term “cartel” has an inclusive meaning. Thus an association formed to control theproduction of oranges is within the aforesaid definition of a cartel. Hence the association oforange producers of Nagpur will be considered as a cartel under the provisions of the Act.

Question 4(a) (i) Many a time a proviso is added to a Section of the enactment. Explain the function

of such a proviso while carrying out the interpretation?(ii) Discuss the rules of interpretation of deeds and documents. (8 Marks)

(b) PQR Limited held three board meetings till 31st December, 2008 during the financial year2008-09. The next board meeting was due to be held on 27 th March,2009, but for want ofquorum the meeting could not be held. A group of shareholders complained that theCompany has violated the provisions of Section 285 of the Companies Act, 1956 in notholding the required board meeting. Further, Mr. P and Mr. Q who are the directors of theCompany informed the Company their inability to attend the meeting because the noticeof the meeting was not served on them. Discuss whether there is any default on the partof the Company and the consequences thereof. What will be the quorum in the givensituation ? ( 7 Marks)

Answer(a) (i) The normal function of a provisio is to except something out of the enactment or to

qualify something stated in the enactment which would be within its purview if theproviso were not there. The effect of the proviso is to qualify the precedingenactment which is expressed in terms which are too general. As a general rule, aproviso is added to an enactment to qualify or create an exception to what is in theenactment. Ordinarily a proviso is not interpreted as it stating a general rule.It is a cardinal rule of interpretation that a proviso to a particular provision of astatute only embraces the field which is covered by the main provision. It carves outan exception to the provision to which it has been enacted as a proviso and not tothe other. (Ram Narain Sons Ltd. Vs. Assistant Commissioner of SalesTax.,A.I.R,1995 SC 765)An explanation is at times appended to a Section to explain the meaning of the textof the section. An explanation may be added to include something within theSection or to exclude something from it. An explanation should normally be so readas to harmonise with and clear up any ambiguity in the main section. It should notbe so construed as to widen the ambit of the section.

(ii) The rules regarding interpretation of deeds and documents are as follows:First and the foremost point that has to be borne in mind is that one has to find out


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what a reasonable man, who has taken care to inform himself of the surroundingcircumstances of a deed or a document, and of its scope and intendments, wouldunderstand by the words used in that deed or document.It is inexpedient to construe the terms of one deed by reference to the terms ofanother. Further, it is well established that the same word cannot have two differentmeanings in the same document, unless the context compels the adoption of such arule.The Golden Rule is to ascertain the intention of the parties to the instrument afterconsidering all the words in the document/deed concerned in their ordinary naturalsense. For this purpose, the relevant portions of the document have to beconsidered as a whole. The circumstances in which the particular words have beenused have also to be taken into account. Very often, the status and training of theparties using the words have also to be taken into account as the same words maybe used by a ordinary person in one sense and by a trained person or a specialist inquite another sense and a special sense. It has also to be considered that verymany words are used in more than one sense. It may happen that the same wordunderstood in one sense will give effect to all the clauses in the deed while taken inanother sense might render one or more of the clauses ineffective. In such a casethe word should be understood in the former and not in the latter sense.It may also happen that there is conflict between two or more clauses of the samedocument. An effort must be made to resolve the conflict by interpreting the clausesso that all the clauses are given effect to. If, however, it is not possible to give effectto all of them,then it is the earlier clause that will over ride the latter one.Similarly, if one part of the document is in conflict with another part, an attemptshould always be made to read the two parts of the documents harmoniously, ifpossible. If that is not possible, then the earlier part will prevail over the latter onewhich, therefore, be disregarded.

(b) Section 285 of the Companies Act, 1956 requires Board of Directors to meet at leastonce in every three months, respective of whether it is the board of a public Company ora private Company and at least four such meetings must be held in every year. However,the Central Government may, by notification in the Official Gazette, direct that theseprovisions will not apply in relation to any class of Companies or will apply in relationthereto subject to such exceptions, modifications or conditions as may be specified in thenotificationAs per Section 288 of the Act-(1) if a meeting of the board could not be held for want of quorum, then, unless the

articles otherwise provide, the meeting shall automatically stand adjourned till thesame day in the next week, at the same time and place, or if that day is a publicholiday, till the next succeeding day which is not a public holiday, at the same timeand place.


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(2) The provisions of Section 285 shall not be deemed to have been contravenedmerely by reason of the fact that a meeting of the board which had been called incompliance with the terms of that Section could not be held for want of a quorum.

(3) As the meeting could not be held for want of quorum, it cannot be said that PQR Ltdhas violated the provisions of Section 285 of the act.Notice of every meeting has to be served in writing on each director for the timebeing in India, and at his usual address in India to every other director(Section 286).Every officer of the Company whose duty is to serve the notice as aforesaid andwho fails to do so shall be punishable with fine extending to Rs.1000 (Section 286).As no notice, was served on officer of the Company who is responsible for thedefault shall be punishable with fine to the extent of one thousand rupees.The Supreme Court, in case of Parmeshwari Prasad Vs. Union of India.(1974) hasheld that the resolutions passed in the board meeting shall not be valid, since noticeto all the Directors was not given in writing. Notice must be given to each Director inwriting. Hence, even though the directors concerned knew about the meeting, themeeting shall not be valid and resolutions passed at the meeting also shall not bevalid.In relation to board meeting quorum implies fully qualified and disinteresteddirectors who must be present at the meeting, so as to enable the board of whichthey are the constituents to legally transact the business thereat. According toSection 287 the quorum of board meeting is one third of the total strength of board(any fraction contained in the said one third being rounded of as one) or twodirectors whichever is higher. The total strengths is to be derived after deducting thenumber of directors whose offices are vacant.

Question 5

(a) Mr. Weldon was appointed as a director of Esquire Engineering Ltd. with effect from 1st

October,2008. Since the Company wanted to take full advantage of the wisdom andexperience of Mr. Weldon, it offered him attractive remuneration payable on monthlybasis and made an application to the Central Government for approval to pay suchremuneration. Anticipating the approval of the Central Government. Esquire EngineeringLtd. started paying such remuneration from the date of appointment and continued to doso till 31st March, 2009. The Central Government did not fully approve the remunerationproposed by the Company and restricted the same to a lower amount. On scrutiny ofaccounts, the Company noticed that till 31st March, 2009 it has paid to Mr. Weldon a totalsum of Rs.5.50 lakhs in excess of the remuneration sanctioned by the CentralGovernment. Explain the relevant provisions of the Companies Act, 1956, in respect ofrecovery and waiver of recovery of the excess remuneration so paid. Draft a resolutionfor recovery/waiver of recovery of the excess remuneration paid by the Company.

(8 Marks)


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(b) SKD an employee of M/s Moreh Ltd. met with an accident and died. The accidentoccurred when SKD was on Company’s duty. He held one hundred Shares partly paid.Normally the Company has a first and paramount lien on the shares. The Board ofDirectors, however, relaxed the said provision with regard to the hundred shares held bySKD as a goodwill gesture on the part of the Company. Is the action of the Companyvalid? State the reasons. Also state whether the Company’s lien can be extended todividend payable on such shares. (7 Marks)

Answer(a) A director who is not a Managing Director or Whole Time Director can draw remuneration

by way of monthly, quarterly or annual payment only if so authorized by the CentralGovernment (Section 309). The Central Government may while sanctioning the paymentof remuneration under Section 309, fix remuneration at such amount as it may deem fit(Section 637AA). If any director draws any remuneration in excess of the remunerationsanctioned by the Central Government, he shall refund such excess remuneration to theCompany. Until such excess remuneration is refunded he shall hold it in trust for theCompany. The Company shall not waive the recovery of any sum refundable to it unlesspermitted by the Central Government.In the present case, Mr. Weldon cannot keep remuneration drawn by him which is inexcess of the remuneration sanctioned by the Central Government. Accordingly he shallrefund to the Company Rs.5.50 lakhs. Until such refund is made he shall hold the excessamount in trust for the Company. Further the Company cannot waive the recovery ofexcess remuneration.However, if on an application made to the Central Government, the Central Governmentmay permit, the waiver of recovery of excess remuneration. The Company can waive therecovery of excess remuneration and then Mr. Weldon shall have a right to retain theexcess remuneration drawn by him. For recovery of the excess remuneration paid to Mr.Weldon, there is no need to pass any resolution. However, for waiver of recovery aresolution is required to be passed by the Company in a general meeting and approval ofthe Central Government in necessary.Resolution“Resolved that subject to the approval of the Central Government, consent of theCompany be and is hereby given waiving the recovery of an amount of Rs.5.50 lakhspaid to Mr. Weldon, the director of the Company, during the period 1st October, 2008 to31st march 2009 being in excess of the remuneration sanctioned by the CentralGovernment vide letter no ………………… date …………………………….Resolved further that an application to be made to the Central Government and theCompany Secretary be and is here by authorized to take the necessary steps in thisregard.”

(b) A Company cannot have lien on shares unless provided in the Articles of Association.Therefore provision to this effect should be in the articles. As per Regulation 9 of Table A


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of the Companies Act,1956 the Company has first and paramount lien on every sharewhich has not been fully paid up for all monies (whether presently payable or not) calledor payable at a fixed time in respect of that share and on all shares which are not fullypaid up standing registered in the name of a single person, for all moneys presentlypayable by him or his estate to the Company.The Board of Directors may, however, at any time declare any share to be wholly or inpart exempt from the said provision. Hence the decision of the Board of Directors of M/sMoreh Ltd to relax the provisions of lien in respect of shares held by SKD is in order andvalid (Vide Regulation 9 of Table A).Further the Company’s lien is extended to all dividends payable on such shares as perregulation 9(2) of Table A to the Companies Act,1956.

Question 6

(a) MDV Ltd. is an infra-structure Company with paid up capital and free reserves of Rs.twocrores and one crore respectively. The Board of Directors granted a loan of Rs.50 lakhsto ABC Ltd., and also gave a guarantee to IDBI for giving a loan of Rs.one crore to RMACo. MDV Ltd., has not given any other loan or guarantee to any one. A group ofshareholders of MDV Ltd. objected to the above deals on the ground that they areviolative of the provisions of the Companies Act, 1956. Applying that provisions of thesaid enactment relating to inter-corporate loans and investments in the given case,decide: (7 Marks)

(i) Whether the objection raised by the shareholders is tenable?(ii) Would your answer be the same in case the amount of loan granted is Rs.one crore

and the guarantee given is for an amount of Rs.one and half crores?(iii) What would be your answer in case MDV Ltd .is a Private Company not being the

subsidiary of any Public Limited Company?(b) (i) The Comptroller and Auditor General of India has appointed KOL & Co. to conduct a

supplementary audit of XYZ Ltd., a subsidiary of a Government Company. XYZ Ltd,however, is of the opinion that the Comptroller and Auditor General has no power toauthorize such audit, it being merely a subsidiary of the Government Company. Isthe argument correct? Discuss.

(ii) CRE Ltd., a Government Company wants to appoint Parasnath & Co. as its auditorsfor the period 2009-10. State with reference to the provisions applicable toGovernment Companies, the procedure to appoint the auditors. (7 Marks)

Answer(a) Problem as asked in the question is based on the provisions, as contained in Section

372A (1) and (8) of the Companies Act, 1956. The Section provides for the ceiling onloans, guarantees, investments etc. Accordingly no Company shall, directly or indirectly -(a) make any loan to any other body corporate;


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(b) give any guarantee, or provide security, in connection with a loan made by anyother person to, or to any other person by, any body corporate; and

(c) acquire, by way of subscription, purchaser or otherwise the securities of any otherbody corporate,

exceeding 60% of its paid-up share capital and free reserves, or 100% of its freereserves, whichever is more. Where the aggregate of the above exceeds the aforesaidlimit, no investment or loan shall be made or guarantee shall be given or security shall beprovided unless previously authorized by a special resolution passed in a generalmeeting.Thus applying the above provisions in the given case the answers to the questions shallbe as under:1. The objection raised by the shareholders of MDV Ltd. is not tenable because

Section 372A does not apply, if the investment is made by a Company of providinginfrastructural facilities. Making loan by the Company in this case is in order and isvalid since the provisions of Section 372A do not apply in this case [Sub-Section(8) of Section 372A].

2. In the second case also the answer remains the same as the Company is exemptedfrom the provisions of Section 372, being infrastructural facilities providingCompany.

3. Even in the third case the provisions of Section 372A do not apply to a privateCompany, unless it is a subsidiary of a Public Company. Thus in case MDV Ltd. is aPrivate Company not being a subsidiary of a Public Company. It can grant loans orprovide guarantees without complying with the restrictions stated in Section 372A.The guarantee given by a holding Company in respect of loan made to the whollyowned subsidiary Company is valid since the provisions of Section,372A do notapply in this case also. [Sub-Section (8) Clause (d) of Section 372A].

(b) (i) As per Section 617 of the Companies Act, 1956 Government Company means anyCompany in which not less than fifty-one percent of the paid-up share capital is heldby the Central Government, or by any State Government or Governments, or partlyby the Central Government and partly by one or more State Governments andincludes a Company which is a subsidiary of a Government Company as thusdefined.As such a Government Company includes subsidiary to a Government Company.So the contention of XYZ Ltd that they are mere subsidiary of the GovernmentCompany and as such is not covered by the directions of Comptroller and AuditorGeneral of India is not correct. The Company as such cannot avoid supplementaryaudit by KOL& Co.

(ii) Appointment of auditor of a Government Company is as per section 619(2) of theCompanies Act,1956. As per this Section, the auditor of a Government Companyshall be appointed or reappointed by the Comptroller and Auditor General of India


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provided that the limits specified in Section 224 (1B) and (1C) of the CompaniesAct, 1956 shall apply in relation to the appointment or reappointment of an auditorunder the said Section.Therefore the Company cannot appoint Parsnath & Company as its auditor of theCompany, unless they are appointed by Comptroller and Auditor General of India.Procedure for appointment of auditor of a Government Company:Under Section 619 read with Section 224(5) of the Companies Act,1956 the firstauditors of a Government Company should be appointed by the Comptroller andAuditor General of India within one month of the date of registration of theCompany. Practically, there is no difference in the procedure of appointment of firstauditor and the subsequent auditors as in all cases the auditor is to be appointed bythe Comptroller and Auditor General of India.The Ministry of Corporate affairs has advised that in order to obviate the delays inthe appointment of auditors in Government Companies, the particulars of theCompany like name, location of registered office, capital structure, period offinancial year, etc; should be sent to Comptroller and Auditor General immediatelyon registration. In the case of public limited Government Companies, the date onwhich the Company become entitled to commence business and the certificate ofcommencement of business was granted should also preferable be furnished alongwith aforesaid particulars. This timely information will facilitate early appointment ofauditors and will be before the statutory meeting, under Section 165 (circular no20/30/letter no 15/17/73 e.g. date 23rd July, 1973).For subsequent appointment of auditors again the Government Company shall writeto the Comptroller and Auditor General of India immediately after the annual generalmeeting is held for recommending the appointment of auditor.The statutory auditors are appointed for a period of one year and are usually re-appointed for not more than two consecutive years.

Question 7

(a) X Ltd. had gone into liquidation and a liquidator was appointed to administer the assetsand liabilities of the Company. The liquidator of the Company finds that the assets of theCompany are not sufficient to meet out the liabilities. He therefore, calls on thecontributories including the pat members as per List B to contribute towards the assets.The past members objects to the liquidator’s act on the ground that since they are nomore members of the Company, they are not liable to contribute. Referring to theprovisions of the Companies Act, 1956 decide:

(i) Whether the contention of the past member is tenable and can they be exemptedfrom the liability to contribute?

(ii) What would be your answer in case the members in question are the presentmembers? ( 8 Marks)


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(b) A group of shareholders holding more than 15% of the issued capital of M/S Defraud Ltd.have filed a petition before the Company Law Board alleging various acts of illegal,invalid and irregular transactions entered into in the name of the Company. Examine themerits of the petition in the light of the judicial pronouncements made in this regard.

( 7 Marks)Answer(a) In accordance with the Section 426 of the Companies Act, 1956, in the event of a

Company being wound up every present and past member shall be liable to contribute tothe assets of the Company to an amount sufficient -(a) for payment of (i) its debts and liabilities, and (ii) costs, charges and expenses of

the winding up, and(b) for the adjustment of the rights of the contributories among themselves.The liability of the present member i.e. as per List A shall be limited(i) in case of a Company limited by shares , to the amount remaining unpaid on the

shares; and(ii) in case of a Company limited by guarantee, to the amount undertaken to be

contributed by him to the assets of the Company in the event of its being wound up.However, in the winding up of a Company limited guarantee, which has a share capital,every member of the Company shall be liable, to contribute not only the amountundertaken to be contributed by him in the event of winding up but also tocontribute tothe extent of any sum unpaid on any shares held by him as if the company were acompany limited by shares.Liability of Past Members : (List B)A past member shall not be liable to contribute:(i) if he has ceased to be a member for 1 year or more before the commencement of

the winding up;(ii) in respect of any debt or liability of the Company contracted after he ceased to be a

member;(iii) if it appears to the Court that the present members will be able to satisfy the

contributions required to be made by them.The past members can be called upon only after the Court has called upon thecontributories in List A to pay and their contributions are found insufficient. In the case ofa Company limited by shares a past member shall not be liable to contribute more thanthe amount unpaid on the shares in respect of which he is liable as such member:Thus examining the above provisions, answer to the given questions shall be:1. The past members’ contention shall be tenable only:


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(i) Whey they have ceased to be a member for 1 year or more before thecommencement of the winding up of the Company.

(ii) If the liability of the Company was contracted after he ceased to be a member.(iii) If it appears to the court that the present members will be able to satisfy the

contributions required to made by them.2. In the second case, the present members shall be liable to the extent of the amount

remaining unpaid on the shares in case of a Company limited by shares. In case ofa Company limited by guarantee, to the amount undertaken to be contributed by himto the assets of the Company.

(b) A group of shareholders of M/s Defraud Ltd. must hold more than 15% of the issuedshare capital of the Company or satisfy other requirements under Section 399(1) of theCompanies Act,1956 .Since the group holds 15% of the issue capital they are entitled tofile a petition before the Company Law Board under sections 397 and 398 of theCompanies Act,1956 by alleging that the affairs of the Company are being conducted in amanner prejudicial to public interest or in a manner oppressive to any member ormembers of the Company. There are however, several judicial pronouncementsaccording to which mere illegal, invalid or irregular acts by themselves do not constitute aground for invoking the provisions of Section 397 unless it is proved that they areoppressive to any shareholder or prejudicial to the interest of the Company or to thepublic interest. [ Sheth Mohanlal Ganpatram Vs Shri savaji Jubilee Cotton and Jute MillsCompany Ltd.] Thus in the present case, the petition filed by the group of shareholderswill fail unless they can prove to the satisfaction of the Company Law Board that the actsComplained of in the petition are oppressive and prejudicial to the interest of theCompany and the public interest. And that to wind up the Company would unfairlyprejudice such member or members, but that otherwise that facts would justify themaking of a winding up order on the ground that it was just and equitable that theCompany should be wound up.

SUMMARY OF EXAMINERS’ COMMENTS ON THE PERFORMANCE OF CANDIDATES


General CommentsThe overall performance of the candidates, as commented by the examiners, was notsatisfactory. The answers of the candidates showed lack of knowledge and understanding ofthe subject, particularly the accounting standards and guidance notes. The candidates areadvised to brush up their skills regarding practical problems based on application ofaccounting standards. A thorough practice and lots of reading of the subject is required tomaintain the level of knowledge expected from the students of Final Level. The candidatesmust present their answers in organized manner and solutions to practical problems should begiven in prescribed formats along with suitable working notes.

Specific Comments

Question 1. Large number of candidates erred in calculation of (i) incremental profit earnedby Baqa Ltd. during three months ended 31.3.09, (ii) analysis of accumulated profits andreserves of Baqa Ltd. between capital (pre-acquisition) and revenue (post-acquisition),(iii) computation of goodwill and minority interest. Few among them did not prepare theconsolidated balance sheet of Aqua Ltd. and its subsidiary Baqa Ltd. as per the format givenunder the Companies Act. Few candidates showed inadequate knowledge of AS 21‘Consolidated Financial Statements’ in their answers.Question 2. The candidates have performed badly in this question. Hardly few candidatescould ascertain the correct amount of rectified profits and purchase consideration of Small Ltd.and Little Ltd. respectively. They could not calculate the required number of shares issued tothe shareholders of each of the two companies. They also erred in calculation of investmentsin subsidiaries to be shown in the projected balance sheet of Big Ltd. Projected profit and lossaccount of Big Ltd. was also not correctly prepared by some of the candidates.Question 3.(a) Few candidates failed to provide the present value of incremental cash flowsand consequently, could not calculate the maximum price that can be quoted for take over ofFine Toys Ltd.(b) The candidates exhibited poor knowledge on topic of Mutual Funds. Majority of thecandidates could not prepare the statement showing the movement of unit holders’ funds forthe year ended 31st March, 2009. They failed to arrive at the correct amounts of closingbalance of net assets and balance in equalization fund.Question 4.(a) Almost all the candidates were not able to give the required answer in linewith amendment to AS 11 vide Companies (Accounting Standards) Amendment Rules, 2009.(b) Most of the candidates were not able to find the expected and actual returns on planassets.

SUMMARY OF EXAMINERS’ COMMENTS

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Question 5.(a) Few candidates made small mistakes while preparing the statement ofchanges in development fund and the balance sheet.(b) Some candidates did not prepare the table showing apportionment of lease paymentsbetween finance charges and reduction of outstanding liability. Few among them could notascertain the correct amount of unearned finance income and did not give the required journalentries.Question 6 Some candidates could not apply the relevant provisions of the AS 4, AS 5 andAS 13 in the required manner. Even if the conclusions were correct in few cases, reasoningwas not accurate.

PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS

General CommentsThe performance in general is “satisfactory”. However, following errors have been observed inanswering the questions, which candidates are required to make note for the improvement.(a) The conceptual knowledge of the candidates was not adequate considering the

expected standard level.(b) Answers have exhibited lack of systematic and logical approach, clear presentation,

proper and adequate conceptual and analytical explanation.(c) Candidates have shown poor knowledge of the concepts and also lacked of adequate

practice to solve diverse range of questions.(d) It has also observed that many candidates did not prepare the subject in depth and

make selective study.(e) In many cases candidates not answered the questions serially/completely in one

sequence. Different parts of the answers to a particular question were scattered overdifferent pages, which should normally be avoided.

(f) Candidates have shown lack of knowledge in answering the theoretical questions,even though they were simple. Therefore candidates should answer theoreticalquestions correctly, lucidly and precisely.

(g) Where solution involves making of assumptions it should be clearly stated.

Specific Comments

Question 1.(a) In this question the average performance was shown by most of candidates,as calculation of NPV was usually found correct but sensitivity has not been calculatedproperly indicating that they have not properly understood the concept of sensitivity.(b) This part of question was answered fairly in general. However, most of students eithergiven minimum price or maximum price per share (total also) but not total range.


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(c) In this theoretical part of question the performance of candidates was not upto the markas it appears that candidates did not apprehend the question and the answer expected fromthem. Majority of candidates proceeded to described Financial Management (FM) aspects.Question 2.(a) In this theoretical part of question the performance of candidates was notsatisfactory as most of the candidates could get few steps rights, but failed to calculate RADRand consequently NPV of projects. Many candidates have answered without evaluating RADRas desired so DCF also varied due to basic present value factor, tax effect an cash flow etc.(b) In this part of question performance of candidates was fairly good.(c) Being the easy question the performance of majority of candidates was above averagelevel.Question 3.(a) Being a straight forward question on mutual fund. The performance of majorityof candidates was good. However, some candidates made error in describing the total yieldv/s effective % yield p.a.(b) In this question of calculation of lease rentals, the performance of majority of candidateswas poor because of following reasons:(i) It appears that the question was not property understood by many candidates.(ii) Not calculated lease rent in expected way.(iii) Most of candidates ignored the PV of the depreciation tax shield.(c) In this theoretical question the performance was overall satisfactory. However, fewcandidates gave correct formula of CAPM but, were not able define the concept properly.Question 4.(a) In this question of mergers and acquisition the performance of candidates wasaverage as following errors in their answers were noted:(i) Error in calculation of number of shares given to C Ltd. by B Ltd.(ii) Errors in calculation of earnings of merged firm and consequently EPS of the merged

firm.(b) In this question of foreign exchange risk management the performance was candidatewas not satisfactory as majority of candidates were unable to appreciate the currency quotes,its significances and impact on proposed transactions. Lack of conceptual knowledge inrespect of Ask Rate & Bid Rate was observed in many cases.Further most candidates could not compute the amount of money market hedge correctly.Therefore, failed to compare with the amount of forward contract.(c) In this theoretical question the performance of majority of candidates was poor as theyhave shown an unsystematic approach in answering the question writing unnecessary andirrelevant details. Some students confused PSU Budgeting with Central GovernmentBudgeting. Some students explained budget and revised budget which was not asked for.


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Question 5.(a) Though few candidates innovated their own ways to solve the question. Theoverall performance was satisfactory in the question requiring the comparison of Call and Putoption.(b) In this question the overall performance of candidates was satisfactory. However, it hasbeen found that most of examinees succeeded to calculate the market price of the share asper Walter Model, but failed to describe properly about whether dividend payout is optimum ornot.(c) In this question the performance of candidates was average. As some candidates evenshown the lack of knowledge of ordinary concept of “average”? Many candidates failed tocalculate the value of S.D. due to lack of knowledge of the concept.

PAPER – 3 : ADVANCED AUDITING

General CommentsIt was also observed that there appears to be a tendency of quoting/referring various irrelevantaccounting standards for all questions which needs re look and self correction by students. Itshould be made clear to students that such tactics would not give extra weightage to theiranswers.Many students had written their answers in general and failed to address the specific issuesin the practical questions. Those examinees who completed theirs answers within main bookonly obtained better marks than students who attempted to fill up more additional answerbooks. It was observed that majority of the students presented relevant subject matter butcould not apply the same for the practical issues posed questions.

Specific Comments

Question 1.(a) Many candidates have wrongly interpreted income tax provisions regardingmaintenance of books u/s. 44AA rather than provisions of Companies Act .(b) Overall performance of the students was poor.(c) A few students have answered well. However the over all performance of thestudents was poor.(d) Majority of the candidates did not understand the question correctly.Question 2.(a) Many students have performed well. However, a few students haveanswered wrongly.(b) Poor performance of the students could be found in this part of the question.(c) Many candidates wrote wrong answers to this part of the question.(d) Many students did not understand the audit of Co-operative Societies well.


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Question 3.(a) Most of the students’ answers were in general.(b) Average performance of the candidates could be witnessed in this part of the question.Question 4.(a) Many of the students did not perform this part of the question well.(b)(i) A few candidates gave answer correctly. However, a few students were confusedover TDS requirement and remittance and dividend distribution tax.(ii) The performance of the students was satisfactory.Question 5.(a) Many of the candidates have answered the verification of the existence of“Related Parties”.(b) Poor performance of the students could be seen in this part of the question.Question 6.(a) Majority of the students failed to answer to the point.(b) Performance of the candidates were found satisfactory.(c) Many students have written their answers correctly, while a few students’ answers weregiven in general.(d) Overall performance of the students was satisfactory.


General CommentsThe performance in general was “average”. Candidates are required to make note of thefollowing improvements:(a) Arriving at conclusions/interpretation of the answer to the question based specific

section/Important case laws, if any.(b) Writing answers in a sequence and logical manner.(c) Drafting of resolution to be specific by mentioning relevant section of the concerned law.(d) Avoid writing answers in general.(e) Study of allied laws requires attention.

Specific Comments

Question 1 In respect of second part of the question relating to explanation of the terms“Option in Securities”, “Spot Delivery Contract” and “Derivatives” used in stock exchange,could not be explained by most of the candidates as per the SecuritiesContracts(Regulations)Act,1956 . Answer was given in general.Question 2 In respect to determination of residential status of an individual for a particularfinancial year, many candidates were confused relating to numbers of days .Instead of ‘morethan 182 days’, some students used ‘182 days’, ‘not less than182 days’,182 days or more’


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which are all incorrect. Whereas in respect to second part of the question relating to makingof declaration of the goods for an export ,most of the candidates failed to mention theprovision given in the Foreign Exchange Management Act,1999.Question 3 Based on the language used in the question and with reference to interpretationof question based on SEBI(DIP) Guidelines 2000, there is a possibility of alternate answers tothe question. Some of the candidates have stated that the proposed offer is within the limit,while some others have mentioned that the proposed offer is not within the limit. Candidatesmay refer to the alternate answers given in the suggested answers.In respect to part (i) of the second part of the question relating to meaning of ‘Agreement’given in the section 2(b) of the Competition Act,2002, most of the candidates have notconceptually understood the terminology in reference to the Competition Act,2002 and sowere unable to give, answer satisfactorily.Question 4 In respect to second part of the question, reference to section 285 of theCompanies Act, 1956 was not applied appropriately .Most of the candidates were confusedregarding the holding of four meetings on 27 th March 2009 in the given question. Evenstudents were not clear about the difference in the Financial year and the Calendar year, sothis laid to the confusion among the candidates about the total number of meetings held by theBoard in the calendar year 2008.Question 5 In respect of question relating to recovery and waiver of recovery of the excessremuneration paid by the company, the relevant section 309 and 637AA were not clear tomost of the candidates. As regard the drafting of the resolution for recover/waiver of recoveryof the excess remuneration was not upto the mark. It was mostly drafted on recovering of theexcess remuneration but not on the waiver of recovery of the excess remuneration . Inrespect to second part of the question no conceptual clarity relating to the rule of lien as perthe Regulation 9 of Table A of the Companies Act,1956.Question 6 In relation to question of objection raised by the shareholders in respect to givingof intercorporate loans and investments ,the reference of Section 372(1) and 372(8) has notbeen satisfactorily given by most of the candidates. Exemption available to infrastructurecompany was mostly lacking in the answer of the most of the candidates. In relation to sub-part (ii) of the second part of the question, the provision relating to the procedure forappointment of auditor of a Government Company given under section 619 and 224(5) of theCompanies Act,1956 not given generally by most of the candidates.Question 7 In respect to question relating to liability of past members and of the presentmembers to contribute in the assets of the company in the case of winding up given under thesection 426 of the Companies Act,1956 has not been appropriately laid down as is expectedfrom the final year students. In the second part of the question relating to filing of the petitionalleging illegal, invalid and irregular transactions entered into the name of the company by thegroup of shareholders ,mostly candidates have given general answer rather than mentioningthe requirements given under section 399(1) of the Companies Act,1956.

group 1nov 2009

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