intricacies of corporate bs and fs

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INTRICACIES OF

BALANCE SHEET/

FINANCIAL STATEMENTS

By:

Prof: R.K.GUPTAB.COM (Hons); CAIIB; AIB (London); LL.B(I)



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WHAT IS FINANCIAL STATEMENT ?

Periodical Review of the status of Investmentand progress made by the Management.

They contain facts recorded on the basis of

accounting conventions and exercise of personal judgements.

Integrity & Competence of Accountants, whoprepare them, have a bearing on the ultimate

results furnished by them.



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NEED OF ANALYSIS OF

FINANCIAL STATEMENTS

Parameters taken for the analysis must satisfy thecriteria of good lending.

Safety of depositors¶/ Investors¶ money/funds.

Requirement of Depositors:

± Yield on their deposit/investment ± Safety of funds/investment

± Liquidity of funds i.e. available at any point of time.

PURPOSE though is not requirement of depositors butit boost the depositors¶ confidence in long run. To

maintain the confidence, the regulator in India i.e. RBIissues guidelines to maintain CRR, SLR, Selectivecredit Control, Awareness and advisory guidelines for particular sectors like home loan, retail, SSI, SME or Large Corporate sector.



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Need for Ethics in Accounting

No body except the promoters and/ or say

Executives Officers are involved directly in the

management of the company.

The information must reach to all concerns

present and prospective stake holders so that

they may be aware of the present financial

position of the company solely for the purpose of

continuing or take out their investment to some

other better opportunity.



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NEED FOR ETHICS IN ACCOUNTING-2

Changes in world economy during last 3decades: ± Unification of east and west Germany in 1990

± Transformation of East European ³Iron curtain´

economies into open economies ± Disintegration of USSR

± Formation of World Trade Organization (WTO).

± Lowering the Bamboo curtain and gradual integrationof China¶s economy with the rest of the world

± Formation of west European economic zone by 11countries including Germany and France andacceptance of Euro as their common currency.

±



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NEED FOR ETHICS IN ACCOUNTING-3

± Adoption of New Economic Policy (NEP) of deregulation,privatization and globalization by India in 1991.

± Opening up of almost all the world economies since 1990s.

± Most of the countries have adopted the policy of currencyconvertibility on current account and many of them are now

moving in stages towards capital accounts convertibility ± After opening of economies of various countries, there is greater

movement of international investment by FIIs.

Keeping in view the above developments, the interest of shareholders and other investor stake holders across theborders of the country have become of vital importance.Hence if the accounts are prepared in accordance withthe high standard of ethics, it creates confidence in themind of the investors and the lenders as well.



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High quality accounting standards

High quality accounting standards consists

of a comprehensive set of neutral principle

that require consistent, comparable,relevant and reliable information that is

useful for investors, lenders, creditors and

all others who make capital allocation

decisions



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Main source of financial information

Published accounts of the company which should therefore be notonly transparent but reflect true and fair view of the financial healthof the company also.

This information is submitted in various forms like:

± Balance sheet & Profit & Loss Accounts as on 31st of March of

every year (u/s 210 (1) of Companies Act 1956 and if deviations,then the reasons thereof should be furnished u/s 211(3b)

± Cash flow statement which is mandatory for the listed companiesin India under clause no 32 of Listing agreement (SEBI-cir/08/2000 of 04.02.08) should be prepared in accordance with AS 3 of ICAI (only cash)

± Fund Flow Statement is studied particularly in reference not onlyto know the source and uses of fund but also to see whether short term sources are used to finance long term uses, which istechnically known as diversion of fund (working capital).



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Various forms for submission of

information -2 ± Consolidated financial statements for thelisted companies in case there aresubsidiaries of such listed companies besides

their individual financial statements. ( SEBI²SMRP/POLICY/CIR-44 OF 31.08.2001) Statutory Audit and filing of the statement is

mandatory( Clause 32 of listing agreement)

Board¶s Reports shall include a Directors¶

responsibility statement confirming that theaccounts have been prepared in accordance withthe relevant accounting guidelines ( u/s 217 (2AA)of companies Act



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Various forms for submission of

information -3 ± EPS (earning per share data) in accordance with AS20 of ICAI on or after 01.04.2001. It is mandatory for all listed companies.

± Directors responsibility statement - Material

information on issues covering all functions of thecompany and how the interest of the stake holders isprotected by the company.

± Auditors Reports which confirms for following up of the Indian General Accepted Accounting Principlesand Practices (GAAP)

This does not mean that after audit of accounts themanagement is relieved of its responsibility. The auditorsonly certify on the basis of information supplied hencesafeguarding the assets of the company is the soleresponsibility of the management. (Satyam)



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Meaning of True and Fair view of

Financial Statements

The financial statements are to be preparedstrictly in accordance with:

± Companies Act and other applicable laws of

the land. ± Generally Accepted Accounting Principles

and Practices (GAAP) UK and USA GAAP are more stricter as compare

to Indian standards on GAAP. The Indian companies which wants to raise capital

in foreign countries are to rewrite their accounts inaccordance with the international GAAP



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MAJORWEAKNESS OF FINANCIAL

STATEMENTS

Lack of objectivity.

Being influenced largely by the subjectiveexercise of judgement.

± (SATYAM COMPUTERS, Verification Of Balances And Cash On The Date Of Balance Sheet).

LARGE DEPOSITS on HIGEHR RATE OFINTEREST (Banking Companies),

± BANK DEPOSITS shown in PUBLIC DEPOSITS,

FAKE BALANCE SHEET containing FAKESIGNATURES OF AUDITORS/DIRECTORS.(certificate from auditors should be obtainedand kept on record)



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BALANCE SHEET & TYPES OF

BALANCE SHEETS

WHAT IS BALANCE SHEET

It is a balance of all recorded transactions relating tofinance and should be prepared in accordance withschedule VI of Companies Act 1956.

There is no guidelines for firms other than companies.

The assets and liabilities are shown in accordance withthe permanency of assets and liabilities.

TYPE OF BALANCE SHEETS

± PROJECTED BALANCE SHEET ± ESTIMATED BALANCE SHEET

± PROVISIONAL BALANCE SHEET

± AUDITED BALANCE SHEET.



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Formats of Balance Sheet

The Companies Act provides for two formats of BalanceSheet.

One is the conventional 'T" format, wherein assets andliabilities are grouped in descending order of their

liquidity.

The other is the vertical format, which was introduced in1979 on the basis of International Accounting Standards.

So far as non-corporate entities are concerned, IBA, in

collaboration with Institute of Chartered Accountants of India, evolved formats for Financial Statements whichwere later on approved by RBI.



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CLASSIFICATION OF ASSETS AND

LIABILITIES

Fixed assets and Term Liabilities

Current assets and Current Liabilities

CAPITAL ± AUTHORIZED, ISSUED &PAID UP CAPITAL

± QUASHI CAPITAL-unsecured loans ± PREFERENTIAL CAPITAL (not repayable or to be converted

equity share capital)

RESERVES: ± Capital Reserves/Perpetual Reserves

± Revaluation Reserves of Assets

± Share Premium

± Profit on sale of Assets

± Specific reserves for specific purpose

± Capital subsidy received from Central/State Government.



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CLASSIFICATION OF ASSETS AND

LIABILITIES-2

Revenue Reserves:

± General Reserves

± Reserve for Bad Debts ± Reserve for fall in value of investment

Specific Reserve:

± Debenture Redemption Reserve

± Depreciation Reserves



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TERM LIABILITY

Debentures not payable during the year

Redeemable preference share after 12 years or more

Secured Loan

Unsecured Loans Deposits from public payable after 12 months

Provision for Gratuity.

Share application Money

CURRENT LIABILITY TL & Deposits repayable during the year

Sundry creditors for goods and expenses

Provisions for expenses



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FIXED ASSETS/CURRENT ASSETS

Fixed Assets

Cash and Bank Balances

Investment

Current assets ± Stock, Sundry Debtors, Loans and

Advances

Debtors below 6 months: Govt Debtors

Debtors over 6 months: Govt Debtors Study of Debtors/Creditors List

Bank Staff-involvement,



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FIXED ASSETS/CURRENT ASSETS

Large advances to Directors, partners,Diversion of funds

Allied Concerns. MSVS Agro P Ltd Amroha SBI/OBC

Debtors and Creditors not dealing in goods. Name of Beneficiary of Bank Guarantees in SundryCreditors²Dunroll Industries

Valuation of Stock

Position of Govt Dues i.e. custom, excise, trade tax or

any other tax. Stock obsolete

Verification of Balances with Bank on that day. (SatyamComputers)



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INTANGIBLE ASSETS

Good will

Losses

Patent Trade Mark

Preliminary Expenses incurred not fully

written off



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NOTES TO BALANCE SHEET

Contingent Liability ± Claims against a company not acknowledged as

debt.

± Arrears of fixed cumulative dividend on cumulativepreference shares.

± Uncalled liability on account of partly paid shares inthe investment portfolio

± Pending suit in court of law against the borrower or vice-versa

Change of method of depreciation

Accounting standards applied or not

Corporate Governance ±Disclosures



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DISCLOSURE

Disclosure means a policy for unveiling the

information to one or more

persons/institution/society at large which

may be in the interest of the company/

stakeholders/lenders/creditors/ depositors.



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Indian Accounting Standards

The role of ICAI in framing the accounting standards. ± ³Financial statements also show the results of stewardship of

management, or the accountability of management for theresources entrusted to it. Those users and assessors of thestewardship and accountability of management do so in order that they may make economic decisions. These decisions mayinclude, for example, whether to hold or sell their investment inthe enterprises or whether to reappoint or replace themanagement´

± Chairman/CEO and CFO take the responsibility by signing the

annual accounts of the company every year. Chairman/ CEOand CFO signs the responsibility statements.

Number of reporting accounting standards set up byICAI²(28) known as AS-1 TO AS-28



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DETAILS OF AS 1 to AS 28

AS NO STANDARDS IN RESPECT OF

AS-1 Disclosure of Accounting practices

AS-2 Valuation of inventories

AS-3 Cash flow Statement

AS-4 Contingencies and events occurring after the balance date

AS-5 Net profit or Loss for the period and extraordinary, items and

changes in Accounting Policies

AS-6 Depreciation Accounting

AS-7 Construction Contracts



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AS-8 Accounting for research and Development

AS-9 Revenue Recognition

AS-10 Accounting for Fixed Assets

AS-11 Accounting for the effects of changes in foreign exchange rates

AS-12 Accounting for Government Grants

AS-13 Accounting for Investments

AS-14 Accounting for amalgamations



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AS-15 Accounting for Retirement Benefits in financial statements of

employees

AS-16 Borrowing Cost

AS-17 Segmental Reporting

AS-18 Related Party Disclosures

AS-19 Leases

AS-20 Earning Per Share

AS-21 Consolidated Financial Statements



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AS-22 Accounting for Taxes on Income

AS-23 Accounting for investment in Associates in Consolidated

Financial Statements AS-24 Discontinuing Operations

AS-25 Interim Financial Reporting

AS-26 Intangible Assets

AS-27 Financial Reporting of interest of joint ventures

AS-28 Impairment of Assets

Generally accounting reporting system in India matches with the international

standards of GAAP . Besides the above, ICAI issues several statements and

guidelines, notes and opinion with a view to ensuring uniformity in corporate

accounting and reporting practices



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ACCOUNTING STANDARDS

SCENARIO IN INDIA

After amendment in companies act 1956, amendingsection 210 it is mandatory on the part of the companiesto adhere to the accounting standards set up by theInstitute of Chartered accountants of India which has

been described hereinabove from AS-1 to AS 28 anydeviation to the Indian GAAP, require cogent reasonsand proper clarifications

Indian GAAP is though not as stricter as that of USGAAP but still the accounting standards of Indian GAAP

are in accordance with the International AccountingStandards Board (IASB)



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PROFIT AND LOSS ACCOUNT

Comparison be studied

± Capacity installed & utilized vis-à-vis sales and

purchases (value and quantity)

± Interest amount ± Electricity charges

± Labour expenses

± Other expenses

± Depreciation Charged

± Other income

± Repair of machineries expenses



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LIMITATION OF

BALANCE SHEETS FAIRNESS

± unrealised Income as revenue or realisationof book debts on last day increasing hugecash balance on the day of B/S

± Maximum Receivable and Payables on thelast day by showing huge sales andissuance of cheques but not paid in bankbooks.( Average Sundry Creditors/Debtors be taken into consideration)

± Increasing sales and increasing profits onthe last week/month/day



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REMEDY OF THE LIMITATION

Quality of Management

Management efficiency

Technology

Marketing Growth perspective.

Stock Market perceptions.

RATIOS:

± Current Ratio: 1:1; 1.17:1, 1.33:1 ± Debt Equity Ratio: 2:1,

± Leverage Ratio: 4:1

± DSCR : 1.5:1



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REMEDY OF THE LIMITATION-2

RATING OF BOROWER

± Why rating is down and up critical analysis

be done and recorded

INTERNAL ACCRUALS

± To improve the current ratio or DER or meet

out the working capital margin. Accruals

should be examined keeping in view thecapacity, efficiency and marketing.



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THANK YOUFor your kind attention

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