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CA FINAL NOTES BY MD IMRAN
ACCOUNTING STANDARDS 2- 31
LAW 32-40
AUDIT 41- 43
Dedicated to Dedicated person.
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ACCOUNTING STANDARDS – 1
DISCLOSURE OF ACCOUNTING POLICIES
All accounting policies followed in preparation and presentation of financial
statement should be separately disclosed at one place separately. Accounting
policies means accounting principle and method of applying those principle
adopted in the preparation and presentation of financial statement.
There are three fundamental accounting assumption going concern,
consistency and accrual. There are presumption of adoption of fundamental
accounting assumption in preparation and presentation of financial statement.
Disclosure of non compliance with fundamental accounting assumption should
be made.
Going concern : Enterprises is viewed as continuing in operation for
foreseeable future period that is neither it has intention nor necessity to
liquidate or curtail operation, that is why depreciation is provided, assets is
capitalised, etc. If it is not expected to continue for foreseeable future
depreciation and provision not provided, assets is disclosed at realisable value
and liabilities at payable value.
Consistency: Accounting policies expected to follow consistently from one year
to next year, if there is change in accounting policies then disclosure should be
made. Accrual : Income and expenses expected to record on accrual basis. If in
enterprises follow other than accrual basis of accounting then disclosure
should be made in the books of accounts
SELECTION OF ACCOUNTING POLICIES
Selection of accounting policies should be made in following order: 1. Select such accounting policies, so as to give true and fair view.
2. Consider prudence, substance over form and materiality.
CHANGE IN ACCOUNTING POLICIES
Effect of change in accounting policies should be provided retrospectively.
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ACCOUNTING STANDARDS - 2
VALUATION OF INVENTORIES
Inventories : An asset held for sale in normal course of business. Assets means
anything from which future economic benefit is expected and which can be
measured using substantial degree of estimation. It constitutes finished goods,
work in progress and raw materials.
Valuation: Finished goods and WIP should be valued at lower of cost or Net
realisable value. Raw material should be valued at cost, however if finished
goods in which such raw material is to be used , is expected to sold at lower of
cost, then Raw material should valued at lower of replacement cost or net
realisable value Actual Cost.
Scrap and By-product: Recognise by-product and Scrap and at NRV ( Net
Realisable Value). Profit from sale of Scrape and by-product should be
deducted from joint cost of main product, and such net joint cost would be th e
cost of main product.
NRV= Sale value – Expenses – Cost of completion
Determination of cost
Following method is used in determining of cost 1. Actual cost
Cost of purchase including cost of conversion and other cost to bring the
inventories in current location and position.
2. Standards cost
3. Retail selling price – Profit %
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ACCOUNTING STANDARDS 3
CASH FLOW STATEMENT
Cash flow statement consist of cash flow from operating activity, cash flow
from investing activity and cash flow from financing activity.
Cash flow from operating activity means cash from principle revenue
generating activity. Cash flow from investing activity means cash from sales of
investment, property or assets. Cash flow from financing activity means cash
from/to interest, dividend, and capital structure.
There are two methods to calculate cash flow from operating activity, direct
and indirect method.
Direct method = cash sales + Receipt from debtor – cash purchase and
payment to creditor
Indirect method = Net profit + Depreciation, other non- cash expenditure,
outstanding expenses debited to p/l – Profit on sale of investment and assets
and non- cash income + increase in current liabilities & decrease in assets –
increase in assets & decrease in current liabilities.
CASH FLOW STATEMENT
1. Cash flow from operating activity ####
2. Cash flow from investing activity ####
3. Cash flow from financing activity ####
CASH FLOW FROM ALL ACTIVITY (1+2+3) ####
ADD: opening cash and cash equivalent ####
Closing cash and cash equivalent ####
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ACCOUNTING STANDARDS – 4
EVENT OCCURRING AFTER THE BALANCE SHEET DATE
Event occurring after the balance sheet date are of two types, first the
condition of which exist on balance sheet date and other the condition of
ih doesv’t est ov the alave sheet date, for former adjustment is
required in financial statement but for later no any adjustment is required in
financial statement except when it result in violation of going concern
assumption.
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ACCOUNTING STANDARDS – 5
NET PROFIT OR LOSS, PRIOR PERIOD ITEM AND CHANGE IN ACCOUNTING
POLICIES
After announcement of Schedule III, Concept for Net profit or loss no more
relevant.
Prior period item – income or expenses recognised in current year due to error
or omission in earlier period, it should be provided prospectively. It should be
disclosed separately.
Change in accounting policies – eg. Change in valuation of inventories, change
in method of depreciation. Change in accounting policies should be provided
retrospectively. It should be disclosed separately. Policy which is substantially
different from existing accounting policy, not regarded as change in accounting
policy.
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ACCOUNTING STANDARDS – 6
DEPRECIATION ACCOUNTING
Depreciation means wearing out of fixed assets or decrease in value of fixed
assets due to effluxion of time, obsolescence through technology, due to use
or due to any other reason over useful life of depreciable assets.
Depreciable assets
Assets expected to used more than one accounting period, but having a limited
useful life and held by enterprises for production or supply of good or for
rendering of services or rental to other.
Generally adopted method of depreciation
Straight line Method: Depreciation = Purchase price – Scrap Value
No. of year
Written down value method: Depreciation Rate : 1 − �
√ �
� #56406;
Change in method of depreciation
It is change in accounting policies. It should be provided retrospectively.
Change in Expected useful life
It is change in accounting estimate. It should be provided prospectively.
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ACCOUNTING STANDARDS- 7
CONSTRUCTION CONTRACT
Construction contract: contract to construct or destruct any assets of group of
assets.
Method to recognise revenue
Step 1- Calculate degree of completion: ��� �
��� �
∗
Lets assume degree of completion is X%
Step 2- Revenue to be recognised
Total revenue * X% ###
Less- Total Actual cost ###
Or total cost * X%____
Cumulative Profit ####
Less: Profit Recognised ####
Current year profit ####
Para 35: Recognise expected loss on contract entered irrespective of degree of
completion, when contract cost expected to exceed contract revenue.
Actual cost #####
Le ss: Revenue recognised #####
Actual loss up to current year #####
Provision for expected loss
Total expected loss 56406; #####
Less: loss recognised #####
Provision to be made #####
Para 14: Incentive payment for early completion to be recognised only when :
1. The contract is sufficiently advanced that is probable that the specified
performance will be met or exceeded.
2. Amount of incentive can be measured reliably.
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ACCOUNTING STANDARDS - 9
REVENUE RECOGNITION
This AS deals with Sale of goods, Rendering of services, interest, dividend and
Royality.
Revenue Recognition
Sale of goods: Sale of goods should be recognised when Risk and reward
incidental to ownership have been transferred.
Rendering of Services: There are two method to recognise revenue from
rendering of serves- Proportionate completion method and Completed
Services method.
Proportionate Completion Method: It is used when services provided in more
than one act.
Completed Services Method: It is used when services provided in single act.
Interest: Income from interest should be recognised on accrual basis.
Dividend: Income from dividend should be recognised when right to receive
dividend has been established. i.e when dividend is declared by companies.
Royalty: Income from royalty should be recognised as per agreement.
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ACCOUNTING STANDARDS – 10
ACCOUNTING FOR FIXED ASSETS
Fixed assets: Assets held for production of goods, rendering of services, or for
Administrative purpose.
Cost of fixed assets: Cost of purchase including all cost incurred to acquire
fixed assets, cost incurred in bringing fixed assets at current location and
position, installation cost, borrowing cost and Reduced by met by any
authority in the form of CENVAT CRDIT or Subsidy.
Cost of fixed assets in case of exchange: Fair value of assets given or obtained
whichever is more clearly evident.
Cost of Self constructed assets: Recognise to the extent of actual cost
incurred.
Improvement: Recognise to the extent of cost incurred in improved
performance beyond the standards performance.
Disposed off: Profit or loss on sale of fixed assets is recognised in Statement of
Profit and loss.
Revaluation: It is optional. It should be on class of assets uniformly.
Revaluation should be adjusted in cost or carrying amount, there should be no
any adjustment in accumulated depreciation on account of depreciation.
Revaluation profit should be credited to Revaluation reserve. Revaluation loss
to be adjusted with revaluation reserve to the extent of revaluation reserve
beyond that should be debited to Statement of Profit and loss accounts. On Disposal such revaluation reserve should be cancel and net loss should be
transfer to profit and loss.
Revaluation Reserve cannot be distributed as dividend.
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ACCOUNTING STANDARDS- 11
THE AFFECT OF CHNAGE IN FOREIGN EXCHANGE RATE
Foreign exchanges are dealt in two aspect foreign operation and foreign currency transaction.
FOREIGN CURRENCY TRANSACTION
Foreign currency transaction recognised using reporting currencies. Reporting currency means Spot
rate, approximate rate or average rate of subjected currency.
PARA 38 & 39 of AS 11: When Forward contract entered for speculation purpose then Premium
(difference between exchange rate and forward) should not be considered. Only on sale the
difference between contract rate and sale rate will be recognised in the profit and loss account.
Foreign currency monetary Item: Known amount of assets, liabilities, receivable or payable.
PARA 13: Foreign currency monetary item should be reported as closing rate on balance sheet d ate,
the difference transfer to exchange difference and such exchange difference to Statement of Pro fit
and Loss accounts.
LONG TERM FOREIGN CURRENCY MONTRORY ITEM (LTFCMI)
Foreign currency monetary item expected to settle in subsequent year or in more than one
accounting period. LTFCMI has two optional treatment either PARA-13 or PARA-46.
PARA-46
Depreciable Assets: Exchange difference related to depreciable assets, Capitalised to assets and
depreciate it over life of assets.
Non depreciable assets: Exchange difference shown as FOREIGN CURRENCY MONETARY ITEM
(FCMIT) Difference account under head of RESEREVE AND SURPLUS if credit balance and under h ead
of non-current assets if Debit balance. It is written of over life of LTFCMI.
LOAN/ BORROWING
Both difference, exchange difference due to reporting and due to settlement, should be consider. FOREIGN OPERATION
On translation of financial statement of foreign operation convert all assets and li abilities at closing
rate and all income and expenses at transaction date rate or average rate.
However in case of integral foreign operation convert fixed assets, invest ment, and Depreciable
assets at transaction date rate.
Exchange difference resulting from translation of financial statement transfer to foreign currency
translation reserve as capital profit in case of non-integral foreign operation.
However in case of integral foreign operation exchange difference transferred to statem ent of profit
and loss.
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ACCOUNTING STANDARDS- 12
GOVERNMENT GRANT
Recognition: Government grant should be recognised when subsidies received from government or
certain to receive. Grant may be in many forms their types and recognition is given as fol lows.
Income grant, Expenses grant or bailout grant: Credited to statement of profit and loss.
Grant for promoter contribution or for situation in backward area: Credited to capital reserve.
Grant for non-depreciable assets: Credited to capital reserve.
Grant for Depreciable assets: It is having two optional treatments either net method or gross
method.
Net method: initially grant is deducted from assets and assets net of grant is d epreciated over life of
assets.
Gross method: Grant is deferred over life of assets in the ratio of depreciation.
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ACCOUNTING STANDARDS- 13
ACCOUNTING FOR INVESTMENT
INVESTMENT: Investment means assets held for earning income or appreciation.
Cost of investment: Purchase cost including tax on purchase, Expenses to obtain title.
Cost of investment when issued own share to acquire inves tment: the value of investment or Fair
value of securities issued.
Cost of investment in case of exchange : Fair value of assets given or obtain whichever is more
clearly evident.
RIGHT SHARE: When share acquired cum-right, then proceeds from sale of right share deducted
from cost of acquisition to the extent of difference between cum-right share price an d ex-right share
price and excess transfer to profit and loss account s.
VALUATION: Current investment should be valued at lower of cost or FMV. Permanent investment
should be valued at cost only, however permanent decline should be consider. On v aluation
reduction in the value of investment should be charged to statement of profit and loss.
RECLASSIFICATION: When current classified as Permanent Investment then value at lower of cost or
FMV. When Permanent investment classified as Current investment then value at lower of cost or
carrying amount.
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ACCOUNTING STANDARDS- 14
ACCOUNTING FOR AMALGAMATION
AMALGAMATION: Amalgamation means external reconstruction. When two or more company
merge to form a new company, known as amalgamation.
NATURE: An amalgamation may be either in the nature of merger of nature of purchase. Accounting
treatment in both the cases is as follows.
AMALGAMATION IN THE NATURE OF MERGER
All assets and liabilities including reserve of amalgamating company inc orporated at book value. The
difference between the purchase consideration and Share capital of Transferor Company should be
adjusted in RESERVE.
AMALGAMATION IN THE NAUTRE OF PURCHASE
Only assets and liabilities of amalgamating company incorporated at taken ov er value. The
difference between NET ASSETS TAKEN OVER and PURCHASE CONSIDERATION is result in either
goodwill or capital reserve. Excess of net assets taken over, over purchase consideratio n is goodwill.
Excess of purchase consideration over net assets taken over is capital reserve.
Statutory Reserve incorporated with corresponding amalgamation adjustment accounts.
PURCHASE CONSIDERATION: It is the amount payable by amalgamated company to shareholder of
amalgamating company.
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ACCOUNTING STANDARDS- 15
EMPLOYEE BENEFITS
EMPLOYEE BENEFITS: Employee benefits means consideration paid by employer to em ployee for
value of services performed by employee.
Types of employee benefit:
Short term employee benefit
Long term employee benefit
Termination benefit or voluntary retirement scheme
SHORT TERM EMPLOYEE BENEFIT
It is expected to paid with in 12 months from balance sheet date.
LEAVE
UNPAID: No any treatment
PAID: If vested in nature that is cash against leave or leave against leave then full amoun t should be
recognised for all accumulated leave.
However if unvested in nature that in only leave against leave then pro portionate amount
recognised for leave expected to avail.
LONG TERM EMPLOYEE BENEFIT
It is expected to pay in more than one accounting period. There are two ty pes of long term
employee benefits DEFINED CONTRIBUTION PLAN and DEFINED BENEFIT OBLIGATIO N.
DEFINED CONTRIBUTION PLAN: It contain Employer and employee both contribution. Employee
benefit is recognised as normal expenses and charged to profit and loss accounts.
DEFINED BENEFIT OBLIGATION: It contains only employer contribution. Here entity maintain Plan
assets and defined benefit obligation. Projected unit credit method is used to recognise expenses.
Step of projected unit credit method is as follows:
Step 1 – Estimate total amount of employee benefit to be paid.
Step 2 – Allocate estimated employee benefit over the year.
Step 3 – Calculate current service cost ( Present value of allocated estimated employee b enefit using
reverse discounting)
Step 4 – Prepare liabilities sheet year wise as follows:
Opening balance ####
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Add: Current Service cost ####
Add: Interest ####
Closing balance ####
Example: Lets assume Retirement benefit is 10% of last salary drawn, tenure of employee is 5 year
and current salary is 10000, increment each year is 5%.
Step 1- Estimate total amount of employee benefit to be paid
10% of 10000*(1.05) 5
*5year= 6380
Step 2 – Allocate estimated employee benefit over the year.
Year
1 1276
2 1276
3 1276
4 1276
5 1276
6380
Step 3 – Calculate current service cost ( using Reverse discounting Assuming interest rate is 10%)
Year Amount Discounting Factor Current Service cost
1 1276 .683 872
2 1276 .751 958
3 1276 .826 1054
4 1276 .909 1160
5 1276 1 1276
6380
Step 4 – Prepare liabilities sheet year wise as follows: 1 2 3 4 5
Opening balance 0 876 1921.6 3167.6 4645
Add: Current Service cost 872 958 1054 1160 1276
Add: Interest 0 87.6 192 317 460
Closing balance 876 1921.6 3167.6 4645 6380
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ACCOUNTING STANDARDS- 16
BORROWING COST
CAPITALISATION: Borrowing cost incurred on qualifying assets should be capitalised. Qualifying
assets means, Assets which takes substantial period of time to get ready to use, that is exceedi ng 12
month. Borrowing cost can be capitalised to the extent of actual borrowing cost, if bo rrowing cost to
be capitalised exceed actual borrowing cost then cancel it in the ratio of borrowing co st to be
capitalised. Incidental and ancillary cost incurred in acquisition or arrangement of bo rrowing is also
considered as borrowing cost, consider it while calculating general borrowing rate.
RATE: Rate would be effective interest rate. Calculate effective interest on special borrowing and on
general borrowing separately. In case of special borrowing if any interest received on sur plus then
deduct it while calculating effective interest rate of special borrowing.
COMMENCEMENT OF CAPITALISATION:
Capitalisation of borrowing cost commence when all of the following condition satisfied:
1. Borrowing cost is being incurred.
2. Expenditure on qualifying assets is being incurred.
3. Active development is being taken place.
SUSPENTION OF CAPITALISAITON OF BORRWING COST
Capitalisation of borrowing cost is suspended when active development is not taking pl ace in due to
abnormal reason in extended period.
CESSATION OF CAPITALISATION OF BORROWING COST
No capitalisation of borrowing cost when it is ceases to incur or Assets is ready to use, whichever
falls earlier.
FOREIGN EXCHANGE LOSS DUE TO BORROWING
Recognise exchange loss on foreign borrowing but to the extent of differenc e between estimated
cost of local borrowing and Actual borrowing cost. This exchange loss in addition to borrowing cost.
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ACCOUNTING STANDARDS- 17
SEGMENT REPORTING
SEGMENT: Different unit of an entity is known as segment. Segment is identified as business
segment or geographical segment. Business segment identified on the basis of production of good or
rendering of services. Geographical segment identified on the basis of situated in di fferent
geographical location.
INDENTIFICATION OF REPORTABLE SEGMENT
A seguevt of av evtit uld e ovsidered as reportale seguevt if it’s revue, result o r assets
ovsist of % or uore of total evtits sales, result or assets respetil
Seguevt idevtified should ovsist of of total evtits sales (eludivg iv tersegment transfer), if it
falls below 75% then further selection to cover 75% of organisation sales.
Segment assets do not include income tax assets (example- Deferred tax assets, refund recei vable
etc)
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ACCOUNTING STANDARDS- 18
RELATED PARTY TRANSACTI ON
RELATED PARTY AS PER PARA 3
3a. Enterprises who control, are controlled by or under common control of any entity.
3b. Associates or Joint venture
3c. Individual having power to control or power to exercise significant influence*.
3d. Key Managerial Person or their relative.
3e. Enterprises under common control of person defined under section 3c and 3d.
,* Significant influence can be exercised if holds 20% or more directly or indirectly.
DISCLOSURE REQUIREMENT
Following should be disclosed.
Mnemonics: N 3DTV
1. Name of Related party.
2. Nature of transaction.
3. Nature of relationship.
4. Discount or Bad debt.
5. Travsatiov at Aru’levght or at vorual prie.
6. Volume of transaction.
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ACCOUNTING STANDARDS- 19
LEASE
LEASE: An agreement, whereby lessor agree to transfer right to use an assets in return of
payment or series of payment. There are two types of lease finance lease and operating
lease.
FINANCE LEASE: When risk and reward incidental to ownership has been transferred.
Satisfied any of the following condition: 1. Automatic transfer of ownership at end.
2. Purchase option at end of lease term at very reduced price.
3. Lease term is equal to economic life of assets.
4. Present value of lease rent is equal to fair value of assets.
5. Assets is of special nature that can be used in only special case, like ambulance.
JOURNAL ENTRIES
LESSEE LESSOR
Assets on lease A/c Dr.*** To Lessor A/c
(Being assets purchased on lease) Lease receivable A/c Dr. **
To Assets on lease
(Being assets Transfered on lease)
Lessor A.c Dr. To Bank a/c
(Being Down payment made.) Bank a/c Dr.
To Lease Receivable A/c
(Being Down payment receipt.)
Lessor A/c Dr.
Finance Charge A/c Dr.
To Bank A/c
(Being instalment paid) Bank A/c Dr.
To Finance charge A/c
To Lease receivable A/c
(Being instalment received)
Depreciation A/c Dr.
To Assets A/c
(Being depreciation charged on assets) No depreciation Entry
Statement of Profit and loss a/c Dr.
To Finance Charge
To depreciation
(Being finance charge and depreciation
charged to Statement of profit and loss a/c) Finance charges A/c Dr.
To Statement of Profit and loss
(Being Finance charge Transferred to
Statement of Profit and loss a/c)
*** Assets or Liabilities will be recoreded at
lower of Present value of minimum lease
payment or Fiar value. Whenever Value is
fair value the calculate IRR and then use such
IRR to chalculate Finance charge. ** it will be recorded at present value of
Gross investment or at net investment.
OPERATING LEASE
Lease other than finance lease is Operating lease. Lease rental is considered as normal
business income for lessor and normal business expenses for lessee.
LESSEE LESSOR
Lease rent A/c Dr. To, Bank A/c
(Being Lease rent paid) Bank A/c Dr. To, Lease Rent A/c
(Being lease rent received)
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Statement of Profit and loss a/c Dr. To, Lease rent A/c
(Being lease rent Charged to Statement of
Profit and Loss A/c.) Lease Rent A/c Dr.
To, Statement of Profit and Loss
(Being Rental income Transferred to
Statement of Profit and loss A/c.)
Depreciation A/c Dr.
To, Assets
(Being Depreciation Charged on Assets)
Statement of Profit and loss Dr. To, Depreciation A/c
(Being Depreciation Charged to SPL)
SALE AND LEASE BACK TRANSACTION
FINANCE LEASE BACK OPERATING AND LEASE BACK
Only deferred income or loss. Determine
Profit of loss on Sale and amortise it in the
ratio of depreciation. Difference between
Sale value and book value is treated as
Deferred income or loss as the case may be. Deferred income or loss amortise to SPL in
the ratio or lease rental over lease term.
Difference between FAIR VALUE and SALES
PRICE is treated as deferred income or loss.
Difference between BOOK VALUE and FAIR
VALUE is considered as impairment loss,
direct transfer to SPL.
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ACCOUNTING STANDARDS- 20
EARNING PER SHARE
BASIC EARNING PER SHARE:
: ;
: ;
WEIGHTED AVERAGE NUMBER OF SHARE
Average number of days for which share is actually held.
Do not weight for following AND also always restate basic earning per share of earlier period for
following
1. Bonus share
2. Share received on merger
3. Bonus part of right share
Weight only for following 1. New issue of share
2. Buy back
3. Paid part of right share
4. Share received in amalgamation in the nature of purchase.
Calculation of bonus part and paid part in case of right issue
Step 1- Calculate Post right fair value 56406; 56406; 56406; + #56406; #56406; 56406;
Step 2- Calculate paid part ���ℎP Oℎ�N� � #56406; 56406; #56406; 56406;
Step 3- Calculate bonus art
Total number of right share – Paid part of right share
CALCULATION OF EARNING PER SHARE IN CASE OF DIFFERENTIAL DIVIDENT RIGHT AND
PROPOTIONAL RIGHT
1. Differential dividend right
i. Calculate EATESH
ii. Deduct special earnings from EATESH
iii. Balance earning used for regular earning per share.
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iv. Calculate special earning per share by dividing special earning from respective no. of
share.
v. Basic earnings per share = Regular earning per share + Special earning per share
2. Proportional dividend right
i. Calculate equivalent share of each class.
ii. Allocate EATESH in above ratio.
iii. Calculate BEPS= 56406; #56406; .
DILUTED EARNING PER SHARE
Earnings per share for equity share holder as well as potential equity share.
Step 1 - Identify potential equity share. That share warrant, convertible debenture, convertible
preference share to be converted in to equity share. Number of equity share to be issu ed on
co nversion is known as potential equity share.
Step 2- Calculate incremental earnings per share
Incremental earnings per share = #56406;
� #56406; � � �
� � � � �
� �
if there are more than one potential equity share then rank incremental earning per share in
ascending order.
Step 3 - Test for dilution
Numerator Denominator Ratio
Profit No. of share Numerator / Denominator
Serially check all the potential equity share in above format, if ratio is reduced on potential equity
share then it is known as diluted earnings per share. Diluted earnings per share = 56406; 56406; 56406; 56406; � �
#56406; � � � � �
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ACCOUNTING STANDARDS – 22
ACCOUNTING FOR TAXES ON INCOME
DIFFERED TAX: Actually in statement of profit and loss, accounting profit is disclosed whereas tax
expenses is disclosed as per income tax profit (Total income), Generally accoun ting profit and Total
taxable income differ due allowance and disallowance of different income and expenses under
income tax. So, for proper calculation of profit and to provide appropri ate amount of taxes, differed
tax assets and differed tax liabilities is calculated and provided to mitigate the affect of temporary
difference.
TEMPORARY DIFFERENCE AND PERMANENT DIFFERENCE
TEMPORARY DIFFERECNCE: When difference in accounting profit and taxable total in come resulting
from those income and expenses which are capable of reversal in future, known as tempo rary
difference. For example-
Uvder setiov of ivoue taat Bovus, Ivterest ov loav, Tas, Euplor’s ovtriu tiov to
provident fund and Leave encashment payable to employee are allowed as per on ly cash basis
where as in books of accounts it is provided as per accrual basis. Suppose in current year such
expenses is provided in accrual basis but all the above expenses will be disallowed as per income ta x,
however all the above expenses will be allowed in subsequent year when it is actually paid . This is
called temporary difference because it is capable of reversal in subsequent year.
PERMANENT DIFFERENCE
When difference resulting from income or expenses which is never taxes under income tax o r
allowed under income tax respectively, then it is called permanent difference.
For example- Bribe paid to any authority for doing business, amount contributed to po litical party
and debited to profit and loss accounts, which is never going to allow un der income tax act in
current year or subsequent year, it is known as permanent difference which is never going to
reversal in future.
DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
The affect of timing difference provided in the books of accounts in the form o f deferred tax assets
and deferred tax liabilities.
DEFERRED TAX ASSETS
Tax on temporary difference will result in deferred tax assets if temporary difference is resultin g
from disallowed expenses which will be allowed later, simply speaking if in future y ou will save taxes
then it is called deferred tax assets.
Para 15- Recognise deferred tax assets only when reasonable certainty that there will be sufficient
future taxable income against which it can be realised.
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DEFERRED TAX LIABILITIES
Excess expenses allowed in current year, which will tax in future year. Simply speaking if in future
you will have to pay more tax for such temporary difference then it is called deferred tax liabil ities.
UNABSORBED DEPRECIATION AND UNABSORBED LOSSES
Para – 17
Deferred tax will be created on unabsorbed depreciation only when there is virtual certai nty
supported by convincing evidence that there will be future income against which such deferred tax
assets can be realised.
TAX HOLIDAY
Some time some entity is allowed exemption from tax for certain period, i t is called tax holiday
period.
In case of tax holiday, Recognise DTA/DTL only for the timing difference which is expected to reverse
beyond tax holiday. Do not recognise DTA/DTL for the timing difference whi ch is expected to reverse
with in tax holiday.
Section 115JB of Income tax act 1961- MINIMUM ALTERNATIVE TAX Minimum alternative tax is minimum amount of tax which must be paid irrespective of total taxable
income and accounting profit. Minimum alternative tax is required to be paid whene ver tax as per
income tax falls below minimum alternative tax.
Regular income tax is higher of MINIMUM ALTERNATIVE TAX or INCOME TAX ON TOTAL TAXABLE
INCOME.
MAT CREDIT
When minimum alternative tax is in excess of tax as per income tax act, then minimum alternative
tax is required to be paid, however credit available for such excess, which will be allowed to set off
with in 10 year. Credit is allowed in the year in which regular tax is more than minimu m alternative
tax to the extent of difference between income tax in total taxable income and min imum alternative
tax.
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ACCOUNTING STANDRDS- 24
DISCONTINUING OPERATION
DISCONTINUING OPERATION: An operation is said to be discontinuing operation:
1. Which is being disposed off* pursuant to a single plan.
2. Which is reportable segment.
3. Which is financially and operationally separable.
*Where disposed off means
Sale of substantial assets and liabilities in lump sum.
Sale of substantial assets and liabilities in instalmen t.
Termination of operation
REPORTING OF DISCONTINUING OPERATION
Reporting of discontinuing operation is required to be made when initial disc losure event takes
place. Initial disclosure event said to be taken place in any of the following circumstances:
a. Entity has entered in to binding sale agreement to sale substantial assets or liabilities.
b. Entity has prepared a detailed plan to discontinue operation.
Following event is not regarded as discontinuing operation 1. Gradual decline in operation.
2. Shifting of location.
3. Outsourcing of process.
4. Sale of investment in subsidiary.
5. Improvement in machine.
6. Change in product mix.
27
ACCOUTING STANDARDS – 25
INTERIM FINANCIAL REPORTING
INTERIM FINANCIAL REPORTING: Reporting of financial statement for interim period, That is for a
period shorter than the financial year, is known as interim financial reporting.
In case of interim financial reporting, Statement of profit and loss, Balance sheet and Cash flow
statement should be presented for following period.
Statement
of profit
and loss 1. For interim period.
2. For from beginning of financial year to the end of interim period.
3. For previous year- for comparable interim period and comparable SPL for fr om
beginning of financial year to the end of the interim period.
Balance
Sheet 1. As at end of current interim period.
2. As at end of immediate preceding financial year.
Cash flow
statement 1. For from beginning of financial year to the end of interim period.
2. For previous year- comparable CFS for from beginning or financial year t o the
end of interim period.
INCOME, EXPENSES AND LOSSES RECOGNITION IN CASE OF INTERIM PERIOD
Periodic nature
income and
expenses Accrual basis, that is as per period.
Change in
accounting
policy Apportioned over interim period.
Other income
and Expenses Neither can be Allocated nor can be deferred.
GUIDANCE NOTES ON INTERIM FINANCIAL REPORTING FOR TAX TREATMENT
Following step should be following to recognised tax expenses:
Step 1. Calculate estimated annual income.
Step 2. Calculate income tax, Special tax and deferred tax.
Step 3. Allocate income tax and deferred tax over interim period in the ratio of no rmal income
earned over interim period.
Step 4. Allocate Special tax in the ratio of Special income earned.
28
ACCOUNTING STANDARDS - 26
INTANGIBLE ASSETS
INTANGIBLE ASSETS: Identifiable non-monetary assets without physical substance, used for
production of goods, rendering of services or for administrative purpose.
ASSETS: Resource under control of an entity having future economic benefit.
RECOGNITION
Recognise only when future economic benefit ensured from the assets and cost can be measur ed
using substantial degree of estimation or reliably. Recognise intangible assets to the ext ent of future
economic benefit ensure from assets and amortise it in the ratio of future economic benefit ensured
from assets over year, if ratio not available the in straight line method.
RESEARCH
Expenditure incurred during research phase or before it should not be capitalise, it should be
recognised as expenses when it is incurred.
IMPROVEMENT
Improvement should be recognised to the extent of improved performance beyond standard
performance.
DEVELOPMENT
Development of intangible assets would be recognised when it is satisfied all of the following
condition:
Mnemonics: TIMR
1. Technical feasibility should exist.
2. Intention to develop should exist.
3. Marketability of assets should exist.
4. Resource to finance intangible should exist.
29
ACCOUNTING STANDARDS – 28
IMPAIRMENT OF ASSETS
IMPAIRMENT OF ASSETS: Impairment of assets means reduction in the value of assets. An assets is
said to be impaired when carrying amount of assets falls below recoverable value o f assets.
Impairment loss charged to profit and loss account. If there is impairment loss on already revalued
assets then impairment loss to the extent of revaluation surplus recognised against such rev aluation
surplus and beyond that charge to statement of profit and loss.
Impairment loss is calculated for both CASH GENERATING UNIT and NON-CASH GENERATING UNIT.
Following method to calculate impairment loss for cash generating unit and for non-cash generating
unit laid down separately:
CASH GENERATING UNIT
Impairment loss = Carrying amount – Recoverable value
Carrying amount = Cost of assets – Accumulated depreciation
Recoverable value = higher of following
Net Sales price (Budgeted selling price – Expenses on sale)
Value in use (Present value of future expected cash flow.)
Value in use and net selling price should be calculated for each cash generating unit, howe ver if unit
is not able to generate cash it own, then smallest unit should be identified which is able to generate
cash. Impairment of main assets should be recognised only when it Cash generating unit get
impaired.
INDICATOR OF IMPAIRMENT LOSS
Impairment of asset should be done when any of the following circumstances takes place:
1. Decline in market value.
2. Adverse market condition.
3. Increased in rate of interest.
4. Obsolescence or physical damage of assets.
5. Restructuring of operation.
6. Worse economic condition.
NON-CASH GENERATING UNIT
Impairment loss for non-cash generating unit is calculated in two steps, firs t bottom up approach
and second top down approach.
Step 1- Bottom up approach
30
Identify cash generating unit and allocate allocable goodwill and corporate assets ov er Cash
generating unit, now calculate impairment loss for all cash generating unit and su ch impairment loss
allocate first toward goodwill in full and then towards in other assets includ ing corporate in assets in
respective ratio. Step – II
Top down approach
Calculate revise carrying amount of all assets by deducting impairment loss from carryi ng amount,
now add goodwill and corporate assets which was not earlier allocated and cal culate impairment
loss as whole. And allocate impairment loss first towards goodwill and balance to corporate assets.
REVERSAL OF IMPAIRMENT LOSS
When indicator of reversal of impairment loss exist then reverse impairment loss to the extent of
lower of following:
Impairment loss already recognised.
Or Recoverable amount - carrying amount
In dicator of reversal of impairment loss: Simply if circumstance encountered opposite of indicator of
impairment loss (opposite of above defined 6 point of indicator of impairment loss).
31
ACCOUNTING STANDARDS – 29
PROVISION, CONTINGENT ASSETS AND CONINGENT LIABILITIES
PROVISION
Provision is present obligation arising during the past event settlement of which result in an outflow
of resources embodying economic benefit and which can be measured using substantial degree of
estimation. Provision should be made in books of accounts for such.
CONTINGENT LIABILITIES
Only disclosure is required to be made in the report of approving authority. No any provision is
required to be made.
CONTINGENT ASSETS
Neither any disclosure nor any provision is require to be made.
32
COMPANY LAW AND
ALLIED LAW MOST IMPORTANT SECTION
AND SOME SHORT
QUICK NOTES,
REFERENCE AND NEMONICS
33
Section Particular
123 Condition for declaration and payment of dividend
205A to
205C Unpaid dividend and investor education
protection fund. Transfer to : DADU GII
( Deposits, Application
money, Debenture, Unpaid,
Grant, Interest of DADU,
Interest or other income)
126 Dividend, etc to be held in abeyance
127 Failure to distribute
dividend with in 30 days. Exception- NODAD ( Non- Payment
without co. Default, Operation of any Law,
Disputed, Adjusted against any due,
Direction give to the companies but same has
not been complied)
128 Location, manner, period of maintenance and inspection of books of
accounts
129 Financial Statement
134 (3) Content of Boards report
END FDN ELRS in RDMC & REC (Extract of annual return, Number of
board meeting, Director Responsibilities Statement, Fraud Reported
by auditor, Declaration given by independent auditor, Nomination
remuneration committee, Explanation on every qualification
reservation or adverse remarks makes by auditor or CS, Loan,
Related parties, State of companies affairs, Reserve created, Dividend
recommended, Material change and commitment, Conservation of
energy, Risk management policy, Evaluation by board it own
performance, Corporate Social Responsibilities.)
134(5) Director Responsibilities Statements
AAJ PG kal ID (Accounting Standards, Accounting policies, Judgments
and estimates, Proper and Sufficient care, Going concern basis,
Internal financial control, Devised proper systems to ensure
compliance)
135 Corporate Social
Responsibilities. Duties- FRMI, No CSR- NPO 2
136 Circulation of financial
statement. 21/14 Days
34
137 Filling of financial statement
and other with the registrar. 30/180 Days
138 Internal audit. 25/50/100/200 -----100/200 for pvt
139 Appointment, Reappointment and rotation of auditor.
140 Removal, resignation of auditor and giving of Special notice.
141 Eligibility, qualification and disqualification of auditor.
BOD and SIG ne mil kar BRFC kardia 144 laga kar
142 Remuneration of auditor
143 (1) Duties to make inquiry LTILPC
143(3) Duties to make report I B 2A
3D MIS
144 Auditor not to render certain
cervices
145 Auditor to sign audit report.
146 Auditor to attend general
meeting.
147 Punishment for contravention
148 Power of central government to order maintenance of cost records
and conduct of cost audit
149 Independent director/ women director
150 Manner of selection of independent director and maintenance of
databank of independent director.
151 Appointment of director by small shareholders.
152 First director, general provision relating to director, rotational and
non-rotational director, retirement of director and DIN
160 Appointment of a person other than retiring director.
161(1) Appointment of Additional
director.
161(2) Appointment of Alternate
director.
161(3) Nominee director.
161(4) Filling of casual vacancies by
board
162 Appointment of director to be voted individually
163 Appointment of director by proportional representation
35
164(1) Qualification and
disqualification of director UUACOLON
164(2) Disqualification for default
made by company 1. F.st , annual return for 3 year
2. D/D/D 1 year
165 Number of directorship. 20/10
166 Duties of director.
167(1) Vacation of office by director. DACF DCRA
168 Resignation of director. DIR 11, DIR 12
169 Removal of director
170 Register of director and KMP.
171 Member right to inspect the register of directors and KMP and their
shareholding.
173 Number of board meeting and notice of board meeting.
1 ST
BM with in 30 days of COI.
Normally 4BM in a year gap between two BM not exceeding 120 days
For NPO 1 in each half calendar year
For OPC,DC,SC 1 in each half calendar year but gap not exceeding 90
days.
174 Quorum for a Board meeting 1/3 rd
or 2 w.i.h, For co u/s 8 lower
of 8 or 25% of total strength.
175 Passing of resolution by
circulation If 1/3 rd
decides at BM no, then
NOPRBC
176 Validity of act of director
177 Audit committee 10/50/100, >3 director majority
independent
177 Vigil mechanism for director
and employee. For listed co, Co. Accepting deposit,
Borrod H5rores
178 NRC/SRC 10/50/100, > 3 director majority
should be independent SRC- If no. of SDDO > 1000
179 Power of board
180 Restriction on power of board. RBI Sale
181 Company to contribute to
bonafide and charatible fund. 5%
182 Prohibition and restriction Maximum 7.5%
36
regarding political contribution. Prohibited for govt. Co and
Company in existence for less then
3 year
183 Contribution to national
defence fund
184 Disclosure of interest by
director
185 Loan to director
186 Loan and investment by
companies.
187 Investment of companies to be held in its own name
188 Related party transaction
189 Register of contracts in which director are interested.
190 Contract of employment with MD/WTD
191 Payment to director for loss of
office.
196 Appointment of MD, WTD or
Manager Disqualification – AUSC
Age 21-70, Undischarge insolvent,
Suspended Payment to creditor,
Convicted for > 6 mth.
197 Managerial remuneration Capital base
G5 Crores - 30 lacs, 5-100 Crores- 42
lacs, 100-250 Crores- 60 lacs,
>250Crores- 60lacs + .01% of
Effective Capital
Profit base 11%/5%/10%/1%/3%
199 Recovery of remuneration in
certain cases.
202 Compensation for loss of office
of MD, WTD and Manager. For lower of 3 year or unexpired
period @ Average Salary of 3year
or expired period
203 Appointment of KMP For listed Co, Puli Co. PUSCH
Crores
204 Secretarial audit for bigger companies.
206 Power to call for information, inspect books and conduct surveys
37
207 Conduct of inspection and inquiry.
209 Search and seizure.
210 Investigation in to affair of company.
212 Investigation in to affair of company by serious fraud investigation
officer.
216 Investigation of ownership of company
217 Procedure, power, etc of inspector
219 Power of inspector to conduct investigation into affair of related
companies.
220 Seizure of document by inspector
224 Action to be taken in pursuance of inspector report.
229 Penalty of furnishing false statement mutilation, destruction of
documents.
Companies Act, 1956
391/393 Procedure for compromise and arrangement
394 Reconstruction, Demerger or amalgamation by sale of undertaking.
395 Reconstruction by sale of share or takeover of companies.
396 Amalgamation of companies in public interest.
397 Claiming relief from oppression
398 Claiming relief from mismanagement.
399 Right to apply u/s 397//398
433 Ground for compulsory winding up
462 Consequent of no document filled by liquidator.
488 Meuer’s luvtary vdivg up
428 &
467 Contributory liabilities to contribute
38
529A &
530 Order of Payment of Liabilities
531 Fraudulent preference to be invalid
531A Voluntary transfer to be invalid
534 Floating charge to be invalid in certain cases
39
Allied Law
The prevention of money laundering Act, 2002
2 Definition – money laundering
4 Punishment for money laundering
12 Banking Companies financial institution to Maintain,
furnish and verify records.
26 Appeal to Appellate tribunal
45 Certain offence to be cognizable and non-bail able.
The banking regulation Act, 1949
7 The word Bank, Banker, banking can only be used by
banking companies.
9 Disposal of non- banking Assets with in 7 year and
maximum 5 year extension can be by RBI.
17 Transfer of Profit to Reserve fund
30 Audit
31 Publish and submission of return.
The insurance Act, 1938
3 Registration of insurer
3A Renewal of Registration.
6 Requirement of Capital
34 Control over management.
39 Nomination of policy holder.
64VA Sufficiency of assets.
The Securitisation and reconstruction of financial assets and
enforcement of securities interest Act, 2002
2 Definition- Obligor, originator, Financial Assets, Assets
Reconstruction, Securities receipt.
3 Registration – prerequisites and condition.
40
4 Cancellation of certification of registration.
6 Notice to obligor and discharge of obligation of such
obligor.
15 Manner and affect of takeover of management.
The foreign exchange management Act,19 99
2(u) Person
2(v) Person Resident in India.
2(w) Person resident outside India.
5 Current account transaction
6 Capital account transaction.
The Competition Act, 2002
2 Definition- Acquisition, agreement, cartel, consumer,
goods, Services, person, enterprises
8,9,10 Composition of Chairmen.
15 Validity of Act
11 Removal by CG
12 Restriction of employment
3 Anti competitive agreement
41
AUDIT STANDARDS WORDS TO SCORE WELL
IN AUDIT EXAM
NOW A DAYS INSTITUTE REQUIRE
STANDARDS WORDS VIEWING THE
COMPLEXITY OF EXAM I HAVE SELECTED
MOSTLY USED WORD FROM MODULE AFTER
GOING THROUGH MORE THAN 20 TIMES.
USE YOUR CONCEPT BUT WITH THIS
IMPORTANT WORD YOUR ANSWER WILL
LOOK LIKE PRINTED MODULE. THIS VALUABLE
NOTES WILL SAVE YOUR 50% TIME IN STUDY
AUDIT SUBJECT. PLEASE REMEMBER THIS
WORDS.
42
SAAE (Sufficient appropriate audit evidence),
ROMM(Risk of Material Misstatement), NTE (Nature
timing extent) of audit, NCOB (Normal course of
business), FFR(Fraudulent financial reporting) ,
MOA(Miss appropriation of Assets), RPRT (Related
Party Relationship transaction),AFRF(Applicable
financial reporting framework), FRF(Fraud risk factor) ,
NSO(Nature Scope Objective of audit), ALRR(Aplicable
Legal regulatory requirement), LER(Legal ethical
requiremet),RLR(Regulatory Legal requirement) ,
PS(Professional scepticism), MPAE(More persuasive
audit evidence) (,ABCD(Account Balance classes of
transaction and disclosure),AASTAA(Authorise
approve significant transaction and
arrangement ),Management & TCWG, Relevance,
Reliability, Reliable audit evidence, Review and
appraisal, Planning and performing audit, Nature
Scope Objective of Audit, Regulatory legal
requirement, Deficient, Future viability, Alert, Other
audit procedure, Oversight of management and
TCWG, Unusual, Due diligence, Design and
implementation, Design implementation and
operation, Relevant to financial reporting, Significant,
Justifiable, Pervasive to financial Statement, Test of
43
Control- Substantive Procedure, Compliance
Procedure, Potential consequence, Existence and
condition of inventory, Event and condition, More
persuasive audit evidence, Class of transaction/
account balance & disclosure, Effectiveness of control,
Integrity, Suceptibile, Contradict, corroborative,
Releive, On use of type -1 or type-2 report reference
to SO iv report doesv’t diuivish the user’s auditor
responsibilities for that opinion, Consider reliability of
Written Representation, Compliance with applicable
legal and regulatory requirement, Assess evaluate ,
Adequate, Reasonable assurance, Extend audit
procedure, Relevant Ethical requirement, Individual
or in aggregate, Complete set of financial statement,
Single financial statement, Unless required by law and
regulation , Reasonable justification, Standard on
review engagement, Standards of assurance
engagement, Standards of related services, At
assertion level, At financial Statement Level.
3.6
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