FACULTY OF COMMERCE

2023 - 24

SEMESTER 4

SUBJECT:
CORPORATE FINANCIAL REPORTING

UNIT NO.1:
CONCEPTUAL FRAMEWORK FOR
CORPORATE FINANCIAL REPORTING

COMPILED BY
Dr. Bhavin Bhatt Dr. Gaurang Prajapati
STUDY MATERIAL FOR REFERENCE
 GLS University
Faculty of Commerce
Semester – IV
Subject: Corporate Financial Reporting
Unit-1
Conceptual Framework for Corporate Financial Reporting

Sr. PARTICULARS
No.
1 Introduction to IND AS
2 History of IND AS
3 Objectives of IND AS
4 IFRS Introduction
5 Difference Between IFRS and IND As
6 Corporate Financial Reporting Meaning and its need.
7 Introduction of Reporting and its Significance
8 7F for Transparent Disclosure
9 Characteristics of CFR
10 Significance of CFR
11 Value Added Statement
12 Economic Value Added (EVA)
13 Market Value Added (MVA)
14 Shareholder Value Added (SVA)
15 Illustrations
17 Long Questions
18 Short Notes
19 Multiple Choice Questions
20 Practice Sums

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 UNIT - 1
Conceptual Framework for Corporate Financial Reporting

● Introduction to IND AS

[1] Introduction
Indian Accounting Standards (Ind AS) are IFRS-converged standards issued by the
Central Government of India under the supervision and control of the Accounting
Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) and in
consultation with the National Financial Reporting Authority (NFRA).
The Indian Accounting Standard (Ind-AS) is the accounting standard used by Indian
companies and is issued under the supervision of the Accounting Standards Board, which
was established in 1977.

Accounting Standards (AS) are basic policy documents. Their main aim is to ensure
transparency, reliability, consistency and comparability of the financial statements. They
do so by standardizing accounting policies and principles of a nation. So the transactions
of all companies will be recorded in a similar manner if they follow these accounting
standards.
An accounting standard is a common set of principles, standards and procedures that
define the basis of financial accounting policies and practices. Accounting standards
improve the transparency of financial reporting in all countries.
Accounting standards apply to assets, liabilities, revenue, expenses and shareholders'
equity. Banks, investors, and regulatory agencies, trust accounting standards to ensure
information about a given entity is relevant and accurate

[2] History of Accounting Standards and Purpose

The American Institute of Accountants, which is now known as the AmericanInstitute of

Certified Public Accountants, and the New York Stock Exchange attempted to launch the
first accounting standards in the 1930s.

Financial Accounting Standards Board (FASB) has the authority to establish and interpret
generally accepted accounting principles (GAAP) in the United States ofAmerica.

International Accounting Standards Board (IASB) establish the International Financial

Reporting Standards (IFRS), which serve as guideline for International

[3] Accounting Standards mainly deal with major issues of accounting,

namely
i. Recognition of financial events

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 ii. Measurement of financial transactions

iii. Presentation of financial statements in a fair manner

iv. Disclosure requirement of companies to ensure stakeholders are not

misinformed.

Objectives of Accounting Standards (IND AS)

Objectives of Accounting Standards of India include:

The Indian Accounting Standards (IND AS) primary objective is to ensure that large-scale
activities are properly accounted for through continuous disclosure, treatment, and
reformation.
IND AS standardizing accounting policies and principles for the country’s economy.
Provides a unified framework for the preparation of books of accounts and ensures financial
transparency.
The Indian Accounting Standards (IND AS) ensure that all institutions and governmental
bodies are accepted globally.

● Comparison of IND AS with Accounting Standards (AS)

Accounting standards are traditional Accounting standards followed in India for decades.
They have been amended from time to time and serve the purpose of reporting for small and
medium entities. For large enterprises, there is a need to follow a global reporting standard
because their reports are used globally. Indian Accounting Standards (Ind AS) are a set of
accounting standards converged with International Financial Reporting Standards (IFRS).
The ‘Ind AS’ are named and numbered in the same way as the corresponding IFRS.
Both AS and Ind AS are formulated by the Accounting Standards Board of the Institute of
Chartered Accountants of India. National Financial Reporting Authority (NFRA)
recommends these standards to the Ministry of Corporate Affairs. The Ministry of Corporate
Affairs notifies these accounting standards.

● International Accounting Standards (IAS)

International Accounting Standards (IASs) were issued by the antecedent International

Accounting Standards Council (IASC), and endorsed and amended by the International
Accounting Standards Board (IASB). The IASB will also reissue standards in this series
where it considers it appropriate.

What Are International Accounting Standards (IAS)?

International Accounting Standards (IAS) are a set of rules for financial statements that were
replaced in 2001 by International Financial Reporting Standards (IFRS) and have
subsequently been adopted by most major financial markets around the world.1 Both sets of
standards were issued by the International Accounting Standards Board (IASB), an
independent body based in London.
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 The United States does not follow IFRS. Instead, the U.S. Securities & Exchange
Commission requires public companies in the U.S. to follow Generally Accepted
Accounting Standards (GAAP). China and Japan also declined to adopt IFRS.

International Accounting Standards (IAS) were the first international accounting standards
that were issued by the International Accounting Standards Committee (IASC), formed in
1973. The goal then, as it remains today, was to make it easier to compare businesses around
the world, increase transparency and trust in financial reporting, and foster global trade and
investment.6

Globally comparable accounting standards promote transparency, accountability, and

efficiency in financial markets around the world. This enables investors and other market
participants to make informed economic decisions about investment opportunities and risks
and improves capital allocation. Universal standards also significantly reduce reporting and
regulatory costs, especially for companies with international operations and subsidiaries in
multiple countries.

● International Financial Reporting System (IFRS)

What IFRS means?

International financial reporting standards
What is IFRS? IFRS stands for international financial reporting standards. It's a set of
accounting rules and standards that determine how accounting events should be reported in
your business's financial statements.

IFRS stands for international financial reporting standards. It’s a set of accounting rules and
standards that determine how accounting events should be reported in your business’s
financial statements. Issued by the International Accounting Standards Board (IASB), IFRS
aims to make financial statements consistent, comparable, and transparent across the world.

The United States is one notable country that doesn’t prescribe to IFRS, instead following a
system called GAAP

Benefits of IFRS
Today, cross-border transactions are commonplace, with vast numbers of businesses seeking
investment opportunities across the globe. In the past, this sort of internationalism was
hampered by different countries maintaining different accounting standards, adding cost,
complexity, and risk to business deals. IFRS eliminates that problem by ensuring that
different countries adopt the same, globally applicable set of accounting standards.

There are many different IFRS standards that we need to pay attention to. Here are a couple
of areas where IFRS provides comprehensive rules:

 Statement of Financial Position – More commonly referred to as a balance sheet, IFRS details
the different components and how it should be reported.
 Statement of Comprehensive Income – This can be presented as a single statement or a profit
and loss statement and a statement of other income.

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 Statement of Changes in Equity – Sometimes referred to as a statement of retained earnings,
this should document your business’s change in profits over the course of a given financial
period.
 Statement of Cash Flow – This document should provide a summary of your business’s
financial transactions over the given period, separating your cash flow into Financing,
Operations, and Investing.

Why is IFRS used?

IFRS or International Financial Reporting Standards refers to a globally-accepted set of
accounting and financial reporting guidelines for preparing and presenting financial
statements. It ensures uniformity in accounting practice that makes financial records
comparable across different reporting entities worldwide.

What is the scope of IFRS?

In today's globalized economy, the scope of IFRS is crucial as it enables businesses to

operate across borders and facilitates transparency and comparability in financial reporting.

What are features of IFRS?

Set of globally accepted accounting standards for financial reporting. Promotes transparency
and consistency in financial reporting. Provides a common language for financial reporting,
making it easier for comparison between different organizations

● Various Requirements of Corporate Reporting

What do you mean by corporate reporting?

Corporate Reporting refers to the presentation and disclosure aspects of reporting and
includes Integrated Reporting, Financial Reporting, Corporate Governance, Corporate
Responsibility etc. Internationally, most regulations include both mandatory and voluntary
disclosures to add value for the stakeholders.

What is the requirement of corporate financial reporting?

To provide information about cash flows from operating, investing and financial activities of
a company during the reporting period. To provide information useful to present and potential
investors, creditors and other users in making rational investment, credit and similar
decisions.

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Difference between IFRS and IND AS
The following are the major differences between IFRS and Indian Accounting Standards
(IND AS):
Topic IFRS IND AS
Definition International Financial Reporting IND AS stands for Indian accounting
Standards (IFRS) is a globally standards; it is also recognized as the
recognized accounting standard. India-specific version of IFRS.
Developed by the International accounting Ministry of corporate affairs (MCA),
standards board (IASB). Govt. of India.
Followed by Followed by 144 countries across the Followed only in India.
world.
Components of IFRS includes the following: IND AS includes the following:
financial o Financial position disclosure. o Cash flow statement.
statements o Profit and loss statement. o Balance Sheet.
o Equity statement for the o Profit and loss account.
period. o Disclosure of accounting
o Cash flow statement for the policies.
timeframe. o Statement of changes in equity.
o Notes to financial statements.

What is the need for corporate reporting?

Corporate reporting helps communicate the value a company creates and its impact on
people, the environment, and society. Corporate reports are composed of both financial and
non-financial data and are a must-have for any company that aims for transparency, equity,
and accountability
Relevance and materiality
A report should include relevant information, that is, information that is capable of making a
difference to decisions made by the users of the report: for example should they buy or sell the
company's shares, or contract with the company? Materiality is a measure of relevance specific to
the reporting entity. Information would be 'material' if its omission or misstatement would influence
the decisions that users make on the basis of that report.
Completeness
A report should contain all relevant information allowing a user to understand the position,
performance and, where appropriate, the prospects of the reporting entity. As with relevance
and materiality, because separate corporate reports may be produced for different user
groups, what constitutes 'completeness of information' may differ from one report to another.
Reliability – neutral and free from error
For users to be able to rely on the information in the report it should be unbiased in its
presentation. A report will most often have to include estimates. Some of those may turn out
to be inaccurate, but to be free from error those estimates should be based on the best
evidence available at the time. Significant estimation uncertainties should be disclosed.
Comparability
Users want to be able to understand the similarities and differences between items and
between reporting entities. Consistency can be identified separately as meaning comparability
between different reports of the same entity or between different reporting periods.
Comparative information from previous years is often an aid to understanding trends.

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Standardised information may provide an inherent comparability from year to year or
between companies.
Verifiability
Information should, as far as possible, be objective and open to testing. Knowledgeable and
independent observers should be able to reach a reasonable consensus on that information,
even if absolute agreement may not be possible.
Timeliness
Generally, the more up to date information is, the more useful it is.
Understandability
Reports should aim to communicate complex matters clearly. Reasonable assumptions may
have to be made about the users' level of understanding.

CORPORATE FINANCIAL REPORTING

INTRODUCTION:

Financial reporting is the communication of financial information of an enterprise to the

external world. Bedford conceptualizes the financial reporting process as consisting of four
procedural steps:

1. Perception of the significant activity of the accounting entity or in the environment in

which the entity performs. Implicit in the traditional perception is the belief that financial
transactions represent the significant activities.

2. Symbolizing the perceived activities in such fashion that a database of the activities is
available that can then be analyzed to grasp an understanding of the interrelationship of the
mass of perceived activities. Conventionally, this symbolization has taken the form of
recordings in accounts, journals, and ledgers using well-established bookkeeping and
measurement procedures.

3. Analysis of the model of activities in order to summarize the interrelationships among

activities and to provide a status picture or map of the entity. Traditionally, this analysis
process has been viewed as one of developing accounting reports to provide insights into the
nature or entity activities.

4. Communication (transmission) of the analysis to users of the accounting products to

guide decision makers in directing future activities of the entity or in changing their
relationship with the entity.

First two steps constitute the process of accounting measurement, the quantification of an
entity’s past, and present, or future economic phenomena

on the basis of observations and

rules. Implicit in this conception are the requirements that (a) there exist some attribute or
feature of a business-related objects or event (e.g.; the value of an asset) worthy of
measurement and (b) there exist a means of making the measurements (e.g., the use of
exchange prices to value enterprise assets). Step 3 and 4 of the financial reporting processes
constitute disclosure. Hence, measurement and disclosure are two dimensions of reporting

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process and these two aspects are interrelated. Together, they give corporate reporting its
substance.

Corporate financial reporting is a series of activities that allows companies to record

operating data and report accurate accounting statements at the end of each month, quarter
and year. Bookkeepers record operating data by debiting and crediting financial accounts.
Accountants prepare financial statements in accordance with corporate policies, industry
practices and regulatory guidelines.

As per Section 2(40) of the Companies Act, 2013, the Financial statements of the company
include:

1. a balance sheet at the end of the financial year;

2. a profit and Loss account, or in the case of a company carrying on any activity not for
profit, an income and expenditure account for the financial year;

3. cash flow statement for the financial year;

4. a statement of change in equity, if applicable; and

5. any explanatory note annexed to, or forming part of, any document referred to in sub-
clause(i) to sub-clause (iv).

Provided that the financial statements, with respect to One Person Company, small company
or dormant company, may not include the cash flow statement.

The financial statements, augmented by footnotes and supplementary data (often referred to
as ‘Notes to the Accounts’) are intended to provide relevant, reliable and timely information
essential for making investment, credit and similar decision. Such financial statements are
called general purpose financial statements.

7 F FOR TRANSPARENT DISCLOSURE

The 7 F mean:

(1) FAIR that is OBJECTIVE ORIENTED

(2) FULL that is ALL-INCLUSIVE

(3) FIT that is ACCEPTABLE

(4) FAITHFULL that is LOYAL/DEPENDABLE

(5) FRUITFULL that is PRODUCTIVE/EFFECTIVE

(6) FACTUAL that is AUTHENTIC

(7) FETCHING that is UPLIFT

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(1) Fair Disclosure: Universally it is accepted that accounting and non- accounting
information of business must be impartial and without any bias. Various users use financial
reports for different purposes. A subjective attitude is a hurdle for Fair Disclosure. During the
preparation of accounts for disclosure, the aptitude of accounts preparers may be inwardly
centered; it might be influenced by individual prejudices, individual perceptions etc.,
Accounts which are prepared with objectivity and without prejudices can be considered as
Fair Disclosure. The Fair Disclosure would be essentially objective oriented.

(2) Full Disclosure: Full Disclosure communicates all those details which are mandatory
and voluntary as well i.e. it (report) must be inclusive of all those data which have got
relevance and utility to all the users. It is known that disclosure in the reports is not confined
to meet legitimate necessities. This report is useful to the company itself and to the users who
have a direct or indirect concern with it. An abstract or abridged form of disclosure loses its
own utility and might not be useful to the common man. In the corporate world Full
Disclosure is the basic philosophy of transparency. An adverse attitude for Full Disclosure
may be a big loss to the society as a whole. If useful, feasible and maximum data are
provided to the users, it would serve possibly all the required expectations of the users. Thus,
the Full disclosure would be all-inclusive.

(3) Fit Disclosure: Fitness of a disclosure relates to its adequacy. The term adequacy is
full of subjectivity. An adequacy in financial statements and report varies from person to
person who prepares and uses it. It is very difficult to establish adequacy of report, which is
acceptable to all, because no standard format is available for an adequate disclosure. The
measurement of adequacy is not an easy task because this consists of quantitative and
qualitative information i.e. accounting and non-accounting information. Standardized
adequacy of financial report cannot be established until and unless an exclusive study for it is
undertaken.

But the formation and implementation of accounting standards are useful to demonstrate
uniform adequate accounting information to the users. So far 32 accounting standards are
framed by the Institute of Chartered Accountants of India (ICAI). Still the concept of
adequacy cannot be disregarded. It has its own significance from the viewpoint of the users.
Disclosure can be said to be adequate when it answers the following important questions:

(1) Who are the users of financial statements i.e. for whom it is to be prepared?

(2) What is the purpose of this report for the users?

(3) What do they expect from the disclosure?

In brief fit disclosure means well-prepared and acceptable information to all concerned. Thus
adequate disclosure = provision of related legislation + voluntary disclosure by entity + needs
of users.

(4) Faithful Disclosure: Apart from existing and potential shareholders, other parties are
also concerned with disclosure. Their future decisions are based on accurate and true
disclosure. All real information must be shown in the reports. Due to misleading information
users will be the sufferers, may be by losing their capital and/or misguided to take (or to
avoid) any other investment decision. Faithful Disclosure is concerned with loyalty because
all investment issues as well as other decisions of interested parties are based on this. By

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providing information interested groups should not be exploited due to false information.
Therefore, faithful disclosure will be treated as loyal disclosure.

(5) Fruitful Disclosure: Companies provide information to the users. But this
information should be provided in such a way that it should not lose sustainability and utility.
This information should be provided in a usable form. The report preparers must identify
irrelevant and useless information. Relevant and useful details enhance the significance of
reports. The Fruitful information emphasizes qualities like productive information and
effectiveness of the disclosure hence it car. be considered as useful disclosure.

(6) Factual Disclosure: Correct Factual information has got great importance in financial
reports. To investigate and to verify the authenticity of the report, the intervention of the third
party is desirable. The appointment of an auditor is an outcome of this objective. To check
this report legitimate powers are given to the auditor. He is allowed to give a qualified report.
In brief, the authenticity of accounts is based on loyalty of two entities: (a) accounts
preparer's (b) accounts investigators. Higher the loyalty, higher is the authenticity of the
report. A factual disclosure carries quality of reliability it can be recognized as authentic
disclosure.

(7) Fetching Disclosure: An attractive presentation is always eye-catching. To attract the

reader quality of papers, slogans, pictures of product, plant, etc. are considered as significant
components. The physical appearance of report has to compel the common man to read it. If a
common man likes to see the report the user would definitely read report in detail. An
attractive disclosure is an escort to the report presentation, which accelerates the enlistment of
the annual report.

CHARACTERISTICS OF CORPORATE FINANCIAL REPORTING:

1. Prescribed format: The mandatory disclosure of corporate report is always

identical, because the preparation of mandatory disclosure is based on prescribed format. The
main purpose of prescribed format is to maintain similarity in different reports. Due to this
similarity the report becomes comparable and comparability gives results about performance
of the company.

2. Private domain to public domain: Accounting information of any business entity is

generally confined to personal needs. This information in case of non corporate form of
business is not available for all users. But in case of corporate financial report after
completion of all legal formalities is made available to the public. Thus the shifting
information from private domain to public domain is one of significant features of CFR.

3. Tool of communication: In CFR two types of information is included. 1 Mandatory 2

Voluntary. For certain components it is mandatory for the company to provide information
and for certain components it is not mandatory. To make it available for all stakeholders it is
being provided in two forms- hard copy form and soft copy form. Thus annual report is
treated as tool of communication.

4. Performance evaluation: There prescribed norms to prepare CFR. These norms are
developed in such a way which provides information about financial performance of the
business entity. For example Income statement gives information about earning efficiency of
the entity, Balance Sheet provides information about financial status of the company and

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Cash flow statement provides information about cash inflow and outflow during that
respective period. In brief through financial statements one can measure different types of
performance of business entity.

SIGNIFICANCE OF CORPORATE REPORT / FINANCIAL REPORT:

The most important components of corporate disclosure are the balance sheet, profit and loss
account and directors' report. Corporate disclosures are based on the philosophy of pursuing
the activities of the company. This enables the investor and others to assess the, success or
failure of the company and its prospects.

The use of corporate report is not confined to internal purpose only. Since in a corporate
organization, shareholders and management are separate entities, the availability of corporate
report is a basic legitimate right of shareholders. In addition to these two parties some other
parties also have direct and indirect stake in corporate report. The significance of corporate
report can be considered in reference to three categories: (a) for company (b) for shareholders
(c) for others.

For company:

(1) To meet legitimate requirements: The basic element of corporate entity is

disassociation of ownership and management. When management and ownership are
separate, the protection of the interest of the shareholders is of great importance.
Consequently, the intervention of the government is essential. In order to protect the interest
of the general public it is necessary for the company to prepare and provide annual accounts
to the shareholders in the prescribed form. The provisions of Indian companies' act 1956 are
for the preparation of accounts. Besides these, other legal requirements have also influenced
the preparation of and disclosure in the annual reports. With incorporation of other acts like
Income Tax, Sales Tax, Central sales Tax etc. legitimate shape can be given to annual
accounts.

(2) Measurement of Business Performance: The success of any organization is based

on business performance. Therefore, any big or small organized business unit always
contemplates to know the efficiency of unit through revenue surplus. Theoretically higher the
surplus, better is the performance. To know the status of business performance, it should be
compared either with a predetermined target or with competitor performance or with
performance of industry. Through this comparison, a company can frame policy for future
plan to enhance the business performance. Hence, from this point of view preparation of
financial report is useful to the company.

(3) To know financial status: The measurement of business performance would deal
with revenue incomes and expenses. Financial status is a concept, which has considerable
influence on business activities. Theoretically, better business performance would lead to
better financial status. The term financial status can be referred as debt equity ratio. This ratio
has inverse relation with financial status. This information is available only through corporate
report. This is another area where corporate report is useful.

(4) For the purpose of Inter-firm comparison: The preparation of corporate report
makes comparison feasible with the reports of the competitors. The Inter-firm comparison

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helps to know the status of profitability and financial soundness amongst other equal
competent competitors.

(5) To attract potential investors: The need of funds can be met in two ways i.e.
externally and internally. If the entity is unable to raise the funds through internal source of
finance, external sources are to be used. It means invitation to general public to buy securities
of the company. A rational investor would contemplate to examine past performance and
future plan of the company and this is only possible if corporate reports are prepared and
provided. The potential investors are one of the significant sources of finance. Hence, the
preparation and disclosure of accounts are very essential.

(6) Image: The presentation of accounts is considered as a key factor, to create positive
image in the mind of users. After 1991, all good Indian companies have started the practice to
make corporate report more attractive and useful. For best accounts presentation, the
professional body like Institute of chartered Accountants of India (ICAI) 'gives award in four
categories. Since the areas of activities are spread out throughout the world, accounts are
required, to be prepared in domestic and as well as in the international context. Infosys Ltd is
one of the best illustrations, who does its own business at global level and provides required
corporate disclosure as per domestic and global norms. The company was awarded by ICAI
for presentation of best corporate report for last five consecutive years.

For shareholders:

(i) To know result: Like management, the shareholders would like to see business
performance and financial status of the company. It is legally binding for the management to
prepare and provide accounts in prescribed form and time. At the same time it is the lawful
right of shareholders to get annual reports in prescribed forms and time. The duty of
management and the right of shareholders in reference to providing and acquiring the
corporate report respectively is the 'result of disassociation of owners and management, being
a corporate firm. Hence availability of corporate report is basic right of shareholders.

(ii) Evaluation of investment decision: A significant (as well as interesting) provision

for the investor in corporate form is, easy transfer of ownership. A shareholder has got full
freedom to transfer his right of ownership in favor of anybody, anywhere, any time. The
availability of corporate report to the shareholders is a base to evaluate their investment
decision. True and fair disclosure provides a platform to the investors as to whether they
should maintain their investment in the company or not. Therefore, continuity of investment
decision of investors is based on corporate reports.

(iii) Future Plans: Compulsory provisions are made to disclose information since the
inception of corporate form. As per the need of time, necessary amendments were
incorporated. The reference to corporate disclosure, what is to be disclosed? How is to be
disclosed? When is to be disclosed? To whom is to be disclosed? By who is to be disclosed?
All these questions are taken care of in mandatory norms of corporate disclosure. As part of
compulsory disclosure, the directors' report is mandatory including qualitative disclosure of
corporate report. In their report it is the tradition to mention future plans of the company and
evaluation of these plans can be done by shareholders with help of available information from
corporate reports.

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(iv) Queries Reply: The availability of corporate report is the media and annual general
meeting is the place to get answers of queries of shareholders and thoughts from the board of
directors. It is a right if every shareholder to examine the books of the company on demand
but it is practically not feasible.

For others:

(i) Potential Investors: The publication of corporate report is the best source to attract
the potential investors. The corporate reports help to decide investment by potential investors.
These investment decisions are based on profitability, financial soundness; future plans etc.
of the company and those disclosures are mandatory and are also useful to the investors.

(ii) Academicians, Researchers, Analysts: It is this group of users which provides

serviceable information and constructive suggestions to the society, by using corporate
report. Non-disclosure of information in reports creates doubts and severely limits the
usefulness of the reports. Thus, availability of report with all the information is very useful to
the academicians, researchers and analysts in carrying out their activities. This is the most
authentic source of financial information related to a company available in the public domain.

(iii) Employees: There are two main categories of corporate report users (i) direct
category (ii) indirect category. The Direct category consists of shareholders, the company
itself and third key party is the employees. Like management and shareholders, employees
would also like to assess the business performance and financial status of their company.
Employees can visualize their own growth in all along with the growth of their company.
Through corporate report - the basis of business performance and financial status, they can
frame their future strategy for their demands. Hence, availability of corporate report can be
considered as a significant base for negotiation with the management for their wages related
problems

(iv) Government: The development of any country is based on contribution of different

industries. Which industries are flourishing? Which are having downward trend? To whom
support is required? To whom support / assistance should be provided? All these questions
are to be solved by the government. It is possible only when full financial information is
available to the government about the industries and companies in the form of reports.

(v) Financial Institutions and creditors: The sanction of loan or any other financial
help can be determined on the basis of historical information and future plans of the
company. Lenders would like to assess the repayment ability of their loan by the borrower,
and to examine present financial status and to predict future financial status of the
organization. For this publication and procurement of corporate report is extremely
important.

VALUE ADDED STATEMENT:

Value added is a measure of wealth contributed by employees who provide skills, finance and
owners who provide capital and governments, which provide facilities and conducive
environment to carry on the business. Thus the value added Is the result of joint efforts of
owners, employees and governments. Value added is not only a measure of wealth created by
business enterprise, but also a parameter to measure the socio-economic efficiency of a
business unit.

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Roger (1978) The simplest and most effective way of putting profit into proper perspective
vis-a-vis, the whole enterprise as collective effort by capital, management and employees is
by presentation of value added i.e. the wealth, the reporting entity has been able to create by
its own and its employees' efforts. The statement would show how value added has been used
to pay those contributing to its creation."

Richard Lewis and David Pendvill (1987) The value added may be calculated as difference
between the value of goods or services produced by the team i.e. sales revenue less the value
of the goods and services purchased from outsiders, i.e. the cost of bought in materials and
services.

Value added computation : Following methods can be used.

(i) value added = value after alteration - value before alteration

(ii) value added = (value of output + income from other sources) - (cost of materials and
services purchased from outsiders)

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 STATEMENT OF VALUE ADDED
Particulars Rs. Rs.
Sales ***
Less: Agents Commission ***
****
Add: Increase in Finished Stock (CL -OP) ***
Gross Profit ****
Less: Outside Purchase:
1. Raw Material Purchased ***
(-) Difference in RawMaterial Stock (CL - OP) *** ***
2. Other Material Expenses:
a. Consumables ***
b. Packing Materials ***
c. Stationery ***
d. Fuel and Oil ***
e. Electricity ***
f. Repairs to Plants ***
g. Repairs to Buildings ***

Total Materials (2) ****

3. Purchase Services Expenses:
a. Audit Fees ***
b. Insurance ***
c. Rent, Taxes etc. ***
d. Travelling Expenses ***
e. Advertisements ***
f. Post and Telegrams ***
g. Subscriptions ***
h. Carriage ***
Total Service (3) ****
Total Outside Purchase and Services (1+2 + 3) ***
Total Value Added XXXX
STATEMENT OF DISTRIBUTION OF VALUE ADDED
Particulars Rs. Rs.
1. To Employees: ***
a. Managing Director’s Remuneration ***
b. Director’s Sitting Fees ***
c. Salaries and Wages ***
d. PF Contribution ***
e. Staff Welfare Expense xxx
2. To Government:
a. Provision for Tax *** xxx
3. To Providers of Capital:
a. Interest on Loan ***
b. Dividends *** xxx
4. Reinvestment in Business:
a. Depreciation ***
b. Retained Earning/Reserves *** xxx
Total Distribution of Value Added XXXXX

15
ILLUSTRATION-1
The following figures for a period were called out from the books of Nisarg
Corporation. Prepare statement of value Added and Statement of Distribution of Value
Added.
Particulars Rs.
Sales 24,80,000
Purchase of Raw Material 10,00,000
Agent’s Commission 20,000
Consumable Stores 25,000
Packing Material 10,000
Stationery 10,000
Audit Fees 4,000
Staff Welfare Expenses 1,58,000
Insurance 26,000
Rent, Rates and Taxes 16,000
Managing Directors Remuneration 84,000
Travelling Expenses 21,000
Fuel & Oil 9,000
Electricity 5,000
Material used in repairs:
- To plant & Machinery 24,000
- To Building 10,000
Advertisement 25,000
Salaries & Wages 6,30,000
Postage & Telegrams 14,000
PF Contribution 60,000
Director’s Sitting fees and Travelling Expenses 40,000
Subscription paid 2,000
Carriage 22,000
Interest on loan taken 18,000
Dividend to Shareholders 30,000
Depreciation Provided 55,000
Income Tax Provided 1,00,000
P & L A/C (Retained Earning) 1,25,000
Opening Stock:
- Raw Material 85,000
- Finished Goods 2,00,000
Closing Stock:
- Raw Material 1,08,000
- Finished Goods 2,40,000

16
Solution:1 Nisarg Corporation STATEMENT OF VALUE ADDED
Particulars Rs. Rs.
Sales 24,80,000
Less: Agents Commission 20,000
24,60,000
Add: Increase in Finished Stock (CL -OP)(240000-200000) 40,000
Gross Profit 25,00,000
Less: Outside Purchase:
1. Raw Material Purchased 10,00,000
(-) Difference in Raw Material Stock
(CL - OP) (108000-85000) 23,000 9,77,000
2. Other Material:
a. Consumables 25,000
b. Packing Materials 10,000
c. Stationery 10,000
d. Fuel and Oil 9,000
e. Electricity 5,000
f. Repairs to Plants 24,000
g. Repairs to Buildings
10,000
Total Materials (2) 93,000
3. Purchase Services: 4,000
a. Audit Fees 26,000
b. Insurance 16,000
c. Rent, Taxes etc. 21,000
d. Travelling Expenses 25,000
e. Advertisements 14,000
f. Post and Telegrams
2,000
g. Subscriptions
22,000
h. Carriage
Total Service (3) 1,30,000
Total Outside Purchase and Services (1+2+3) 12,00,000
Total Value Added 13,00,000
STATEMENT OF DISTRIBUTION OF VALUE ADDED
Particulars Rs. Rs.
1. To Employees:
a. Managing Director’s Remuneration 84,000
b. Director’s Sitting Fees 40,000
c. Salaries and Wages 6,30,000
d. PF Contribution 60,000
e. Staff Welfare Expense 1,58,000 9,72,000
2. To Government:
a. Provision for Tax 1,00,000 1,00,000
3. To Providers of Capital:
a. Interest on Loan 18,000
b. Dividends 30,000 48,000
4. Reinvestment in Business:
a. Depreciation 55,000
b. Retained Earning/Reserve 1,25,000 1,80,000
Total Distribution of Value Added 13,00,000

17
ILLUSTRATION -2
The following figures for a period were extracted from the books of Nitya Ltd. Prepare
statement of value Added and Statement of Distribution of Value Added.
Particulars Rs.
Sales 49,60,000
Commission on sales 40,000
Finished Stock:
Opening 4,00,000
Closing 4,80,000
Purchase of Raw Materials 20,00,000
Stock of Raw Material:
Opening 1,70,000
Closing 2,16,000
Other Materials(net) 1,86,000
Carriage Outward 44,000
Depreciation 1,10,000
Income-tax Provided 2,00,000
Audit Fees 8,000
Staff Welfare Expenses 3,16,000
Insurance 52,000
Rent, Rates, Taxes 32,000
Managing director’s remuneration 1,68,000
Travelling Expenses 42,000
Advertisement 50,000
Postage and Telegrams 28,000
Salaries and Wages 12,60,000
Contribution to P.F. 1,20,000
Subscription 4,000
Directors’ sitting fees 80,000
Interest on Bank Loan 36,000
Dividend to share Holders 60,000
Retained Earning 2,50,000

18
Solution:2 Statement of Value Added STATEMENT OF VALUE ADDED
Particulars Rs. Rs.
Sales 49,60,000
Less: Agents Commission 40,000
49,20,000
Add: Increase in Finished Stock (CL -OP) 80,000
Gross Profit 50,00,000
Less: Outside Purchase:
1.Raw Material Purchased 20,00,000
(-) Difference in Raw Material Stock
(CL - OP) 46,000 19,54,000
2.Other Material Expenses:
a. Consumables
b. Packing Materials
c. Stationery
d. Fuel and Oil
e. Electricity
f.Repairs to Plants
g.Repairs to Buildings
Total Materials (2) 1,86,000
3.Purchase Services:
a. Audit Fees 8,000
b. Insurance 52,000
c. Rent, Taxes etc. 32,000
d. Travelling Expenses 42,000
e. Advertisements 50,000
f. Post and Telegrams 28,000
g. Subscriptions
4,000
h. Carriage
44,000
Total Service (3) 2,60,000
Total Outside Purchase and Services (1+2+3) 24,00,000
Total Value Added 26,00,000
STATEMENT OF DISTRIBUTION OF VALUE ADDED
Particulars Rs. Rs.
1. To Employees:
a. Managing Director’s Remuneration 1,68,000
b. Director’s Sitting Fees 80,000
c. Salaries and Wages 12,60,000
d. PF Contribution 1,20,000
e. Staff Welfare Expense 3,16,000 19,44,000
2. To Government:
a. Provision for Tax 2,00,000 2,00,000
3. To Providers of Capital:
a. Interest on Loan 36,000
b. Dividends 60,000 96,000
4. Reinvestment in Business:
a. Depreciation 1,10,000
b. Retained Earning/Reserve 2,50,000 3,60,000
Total Distribution of Value Added 26,00,000

19
 ECONOMIC VALUE ADDED:
To examine the real economic value addition to the business unit, all
conventional measurement techniques fail to demonstrate it to the users of corporate
report. Conventional measures such as EPS and RE on In (ROI) have ignored firm's risk
adjusted cost of capital. Thus, in modem time, this cannot be used as a tool to measure
corporate investment performance.
Thus M/S Stem Steward & Co has developed new method for performance
evaluation that is EVA. This was introduced in the early eighties.
Stem J (1990) stated thus: "As a performance measure economic value added
comes to closer than any other tool to capture true economic profit of an enterprise. It is
directly linked to the creation of the shareholders wealth over the time. EVA based
financial management and incentive system gives manager superior
information and motivation to make decision that will create the greatest shareholder
private enterprise."
The computation of economic value added can be done as follows:
EVA = operating profit - (capital employed * ko)
This calculation shows the surplus of operating profit with the company after
giving return to all those parties who have provided funds to the company.
Significance:
(i) The use of economic value added eliminates the limitations of ROL
(ii) This shows real surplus with the company, after making payment of
compensation to all the parties from whom funds are raised.
(iii) It is more rational and logical measurement of retained earnings compared to
conventional retained earnings.

MARKET VALUE ADDED (MVA)

Market value Added (MVA) is the difference between the current market value of
a firm and the capital contributed by investors, if MVA is positive, the firm has added
value. If it is negative the firm has destroyed value.
To find out whether management has created or destroyed value since its
inception, the firm’s MVA can be used:
MVA = Market value of capital - capital employed
This calculation shows the difference between the market value of a company and
the capital contributed by investors [both bondholders and shareholders). In other words,
it is the sum of all capital claims held against the company plus the market value of debt
and equity calculated as:
The higher the MVA, the bette... A high MVA indicates the company has created
substantial wealth for the shareholders. A negative MVA means that the value of the
actions and investments of management is less than the value of the capital contributed
to the company by the capital markets, meaning wealth or value has been destroyed.
The aim of the company should be to maximize MVA. The aim should not be
to maximize the value of the firm, since this can be easily accomplished by investing
ever-increasing amounts of capital.
SHAREHOLDER VALUE ADDED (SVA)
Shareholder Value Added (SVA), represents the economic profits generated by a
business above and beyond the minimum return required by all providers of capital.
“Value” is added when the overall net economic cash flow of the business exceeds the
economic cost of all the capital employed to produce the operating profit. Therefore,
SVA integrates financial statements of the business profit and loss, balance sheet and
cash flow) into one meaningful measure.

20
 The SVA methodology is a highly flexible approach to assist management in the
decision-making process. Its applications include performance monitoring, capital
budgeting output pricing and market valuation of the entity.
Comparison with Conventional Performance Measures
Conventional ratio analysis based on accounting data, has historically been
regarded as more useful to the management of a business rather than to the investors of
the business.
Whereas accounting measures focus on residual profits after tax equivalents
measured against the total asset base, the value-based income statement concentrates on
the operating performance of the firm by adjusting net operating revenue (NOPAT) by
the allocation of a capital charge incorporating the economic operations of the business.
As such, SVA takes into consideration one important variable that most
traditional accounting measures do not - how much capital is being employed in the
business. SVA combines income statement and balance sheet data to determine the
excess returns available to all capital holders. Additionally, through the use of a
weighted average cost of capital [WACC]. SVA implicitly address the concepts of risk
and shareholder expectations.
Calculate of SVA
SVA = Net Operating Profit After Taxes [NOPAT] - (Capital of WACC)
The first Step in calculating SVA is to calculate NOPAT; the second step is to
estimate capital employed; the third is to estimate the appropriate WACC; the fourth step
is to calculate the capital charges; and the fifth step is to calculate SVA.
NOPAT is operating performance measure after taking account of taxation, but
before any financing costs. Interest is totally excluded from NOPAT as it appears
implicitly in capital charge. NOPAT also requires further equity-equivalent adjustments.
Capital costs include both the cost of debt finance and the cost of equity finance.
The cost of these sources of finance is reflected by the return required by the funds
provider, be they a lender or a shareholder. These capital cost is referred to as Weighted
Average Cost of Capital (WACC) and is determined having regard to the related capital
structure of the business. The WACC is used in SVA as the minimum hurdle rate of
return the GBE needs to exceed for value to be added.
SVA is a useful concept as it enables both actual results and forecasts to be used
to assess whether value has been added in the post and/or whether the financial forecasts
and investment decisions will lead to value being added in future. If forecasted balance
sheet and income statements indicate that value will be diminished the strategic,
decisions which underpin the forecasts will of course need to be reviewed. As such SVA
provides a further basis for evaluating the potential ‘investor value impact’ of forecasts
and capital projects contained in corporate plans. Relationship Between EVA and MVA
• The relationship between EVA and Market Value Added is more complicated
than the one between EVA and Firm Value.
• The market value of a firm reflects not only the Expected EVA of Assets in
place but also the Expected EVA from future projects.
• To the extent that the actual economic value added is smaller than the expected
EVA the market value can decrease even through the EVA is higher.
This does not imply that increasing EVA is bad from a corporate finance stand
point. In fact, given a choice between delivering a “below- expectation” EVA and no
EVA at oil, the firm should deliver the “below- expectation” EVA. It does suggest that
the correlation between increasing year-to-year EVA and market value will be weaker
for firms with high anticipated growth [and excess returns] than for firms with low or no
anticipated growth. It does suggest also that “investment strategies” based upon EVA

21
 have to be carefully constructed, especially for firms where there is an expectation built
into prices of “high” surplus returns.
LONG QUESTIONS
1. Explain IND AS and its Objectives
2. Discuss the comparison between IFRS and IND AS.
3. What are International Accounting Standards (IAS)?
4. What is IFRS? Explain in brief.
5. Discuss various needs of Corporate Reporting.
6. Define Financial Reporting and explain its significance.
7. Discuss 7F essential qualities of good financial reporting.
8. Define corporate financial reporting and explain its characteristics.
9. Discuss significance of corporate report.
10. Explain statutory requirements of financial reporting.

SHORT NOTES
1. Value Added Statement
2. Economic Value Added
3. Market Value Added
4. Shareholders Value Added

MULTIPLE CHOICE QUESTIONS

1) Accounting Standard Board was set up in the year_________
(a) 1977 (b) 1967 (c) 1980 (d) 1987

2) Accounting Standard board of India was set up by _______

(a) Government (b) ICS (c) ICAI (d) Private companies

3) How many mandatory AS were in 2020?

(a) 25 (b) 30 (c) 29 (d) 39

4) Which of the following AS is not mandatory?

(a)AS – 30 (b) AS – 31 (c) AS – 32 (d) All of above

5) The aim of AS in India is ______

(a) make financial statement more comparable (b) Ensure uniformity in accounting policies
(c) guide the judgment of accountants (d) All of above

6) As per Indian GAAP financial statements are prepared at________

22
(a)Market value (b) fair value (c) Cost (d) None

7) Which is not considered as selection of accounting policies

(a) Prudence (b) Substance over form (c) Materiality (d) Full disclosure

8) Total number of IFRS are ______-

(a) 15 (b) 16 (c) 17 (d) 18

9) International Accounting Board ( IASB) was established in the year _______

(a) 2001 (b) 2002 (c) 2003 (d) 2000

10) Total number of Ind AS as of now are _______

(a) 31 (b) 41 (c) 51 (d) 61
11) AS are mandatory for _____
(a) Firms (b) Individuals (c) Companies (d) HUF

12) of raising funds means invitation is given to general public to buy securities
of the company.
(a) External Source (b)Internal Source (c)No source (d) None
13) The are one of the significant sources of finance
(a) Competitors (b)Potential investor (c)Employees (d)None
14) Significance of corporate report is for
(a) The company (b) The shareholders (c)Government (d) All of the above

15) Accounting principles include __________

(a) Accounting concepts (b) accounting convention (c) Fundamental assumptions (d) All

16) The sources of regulation which comprise the regulatory framework for financial
reporting include:
(a) Legislation (b) Accounting standards (c) Stock exchange regulations (d) All of the above

17) "Accounting standards set out the broad rules which govern financial reporting
but do not lay down the detailed accounting treatments of transactions and other
items". True or False? - True

18)Standards issued by the International Accounting Standards Board (IASB)

are known as:
(a) Financial Reporting Standards (FRSs)
(b) International Accounting Standards (IASs)
(c) International Financial Reporting Standards (IFRSs)
(d) International Financial Standards (IFSs)

19) The body to which the International Accounting Standards Board is responsible is:
(a) The IFRS Advisory Council (b) The IFRS Interpretations Committee
(c) The IFRS Foundation (d) The Monitoring Board

20) One of the main advantages of standardisation in financial reporting is:

(a) Comparability between accounting periods and between entities

23
(b) The production of prudent financial statements
(c) Increased flexibility in financial reporting
(d) The use of creative accounting practices

21) IFRS1 First-time Adoption of International Financial Reporting Standards

defines the date of transition to IFRS as:
(a) The date at the end of the first IFRS reporting period
(b) The date at the start of the earliest period for which comparatives are provided in
the first IFRS financial statements
(c) The date at the end of the earliest period for which comparatives are provided
in the first IFRS financial statements
(d)The beginning of business on 1st January

22) An entity which adopts international financial reporting standards must always
adhere to the requirements of every standard, no matter what the
circumstances". True or False? – True

23) The role of the IFRS Advisory Council is to:

(a) Chair the meetings of the IASB
(b) Interpret the application of international standards
(c) Appoint members to the IASB
(d) advising the Board on agenda decisions and priorities in the Board's work.

24) The word "entity" as used by the IASB refers to:

(a)Profit-oriented organisations only (b) Companies only
(c) Not-for-profit organisations only (d) Corporations only

25) A conceptual framework for financial reporting is:

(a) A set of items which make up an entity's financial statements
(b)A set of regulations which govern financial reporting
(c) A set of principles which underpin financial reporting
(d) sets out the fundamental concepts for financial reporting that guide the Board in
developing IFRS Standards.

26) The IASB conceptual framework is being developed jointly with:

(a) The UK Accounting Standards Board
(b) Accounting standards boards throughout the world
(c) The European Union
(d) The US Financial Accounting Standards Board

27) The primary users of general purpose financial reports are:

(a) Investors and employees (b) Investors and lenders (c) Employees and lenders
(d) Investors and customers

28) According to the IASB Framework, the main purpose of financial reporting is to:
(a) Enable investors to make economic decisions (b) Calculate taxable income
(c) Determine distributable profit (d) None of the above is correct
29) A conceptual framework sets out the detailed accounting treatment of transactions
and other items. – True
30) Which of the following is a purpose of a financial reporting conceptual framework?

24
(a) Development of new reporting practices
(b) Evaluation of existing reporting practices Financial & Physical capital
(c) Enforcement of existing reporting practice
(d) All of above

31) The financial soundness and of any business organisation can

be explained as per information disclosed in annual accounts.
(a) Profitability (b) Per unit cost (𝑐) Number of employees working (d) None
32) The main function of a corporate report is to tie an effective medium of
(a)Speech (b) Meeting (c) Communication (d) None
33) can be defined as pouring our viewpoints in the brains of others.
(a) Communication (b) Miscommunication (c)Paper (d)None
34) are all those individuals or groups who are directly and
indirectly associated with the business of the organisation / company.
(a) Stakeholders (b)Mechanic (c) Service providers (d) None
35) disclosure would be essentially objective oriented.
(a) Full Disclosure (b) Fit Disclosure (c)Fair Disclosure (d) None
36) Disclosure communicates all those details which are mandatory
(a) voluntary. (b)Fair Disclosure (c)Full Disclosure (d)Fit Disclosure (e) None
37) In the corporate world full disclosure is the basic philosophy of
(a) Accounting (b) Auditing (c)Transparency (d) None
38) Fit Disclosure relates to its
(a) Accounting (b) Adequacy (c)Auditing (d)None
39) Adequate disclosure = provision of related legislation + voluntary disclosure by entity +

(a) Irrelevant information (b)No information (c)Needs of users (d)None

40) Apart from existing and potential shareholders, other parties are also concerned with

(a)Irrelevant information (b) Disclosure (c) no information (d) None

41) Fruitful Disclosure provides information in such a way that it should not lose
(a) Utility (b) relevant information (c) no information (d) None
42) Fruitful Disclosure provides information in such a way that it should not lose
(a) Sustainability (b)relevant information (c)no information (d)None
43) Investors who have willingness and ability to invest are known as
investors
(a)Potential (b) Not real (c) Genuine (d) None

44) means board of directors inclusive of managing director and chairman.

(a) Public (b)Management (c)Shareholders (d) None
45) The government requires financial information of any company for the purpose of

(a) Investment (b)Taxation policy (c)Supply of goods (d)None

46) An investor requires financial information of any company for the purpose of ____.

25
(a) Taxation policy (b) Investment (C) Supply of goods (d) None

47) The suppliers requires financial information of any company for the purpose of

(a) Taxation policy (b) Investment (c) Supply of goods (d) None
48) The shareholders requires financial information of any company for the purpose of

(a) Financial data (b)Taxation policy (c)Supply of goods (d)None

49) The Debenture holders requires financial information of any company for the purpose of

(a)Financial data (b)Taxation policy (c)Supply of goods (d)None

50) is a body from where all investors can undertake the activity of buying and
selling of securities.
(a) Commodity exchange (b) Stock exchange (c)Bullion market (d) None
51) is a person who checks and verifies the books of accounts

(a) Accountant (b)Auditor (c) Manager (d)None

52) is a person who helps an investor in buying and selling of shares
(a) Share Broker (b)Academicians (c)Researchers (d) None
53) Which of the following are elements of Balance sheet
(a) Assets (b) Liability (c)Equity (d)All of the above
54) is a body from where all investors can undertake the activity
of buying and selling of securities.
(a) Stock Broker (b)Stock Exchange (c)Commodity Market (d)None
55) communicates financial information of an enterprise to the
external world i.e. to different stakeholders.
(a) Corporate Financial Reporting (b)Profit and loss account (c)Balance sheet (d)None
56) The mandatory disclosure of corporate report is always
(a) Different (b)Identical (c)Changes (d)None
57) Shifting information from private domain to public domain is one significant features of

(a) Financial Marketing (b)Corporate Financial Reporting (c)Production Marketing (d)None

58) In corporate financial reporting information is included
(a) Only Mandatory (b)Only Voluntary (c)Mandatory and Voluntary both (d)None
59) In corporate financial reporting, information is made available for all stakeholders, it is
being provided in
(a) Hard copy (b)Soft copy (c)Both hard copy and soft copy both (d)None
60) Corporate financial report is treated as
(a) Tool of communication (b)Tool of transportation (c)Tool of Publication (d)None
61) Profit and loss statement gives information about the
(a) Earning efficiency of the entity (b))Financial status of the company
(c)Cash inflow and cash outflow. (d)None
62) Balance sheet gives information about the
(a) Earning efficiency of the entity (b) Financial status of the company

26
(c)Cash inflow and cash outflow. (d)None
63) Cash Flow statement gives information about the
(a) Earning efficiency of the entity (b) Financial status of the company
(c) Cash inflow and cash outflow (d) None
64) When management and ownership are separate, the protection of the interest of the
is of great importance
(a) Shareholders (b)Debenture holders (c) Competitor (d)None
65) To protect the interest of it is important for the company to
provide financial information in a prescribed format.
(a) General Public (b)Competitor (c)Researchers (d)None
66) The presentation of accounts is considered as a key factor to create in
the mind of users
(a) Positive image (b)Negative image (c)Same image (d)None
67)The preparation of corporate report makes feasible with the reports of
the competitors
(a) Comparison (b) Speech (c)Communication (d)None
68) helps to know the status of profitability and financial
soundness amongst other equal competent competitors
(a) Inter firm comparison (b)Communication (c)Speech (d)None
69) Debt equity ratio has relation with financial status
(a) Inverse (b) Direct (c) Indirect (d) None
70) The needs of funds can be met through sources of funds
(a) External source (b)Internal source (c)Both External and internal source (d)None

27
PRACTICE SUMS:
SUM-1 The following figures for a period were called out from the books of Krishna
Corporation. Prepare statement of value Added and Statement of Distribution of Value
Added.
Particulars Rs.
Sales 37,20,000
Purchase of Raw Material 15,00,000
Agent’s Commission 30,000
Consumable Stores 37,500
Packing Material 15,000
Stationery 15,000
Audit Fees 6,000
Staff Welfare Expenses 2,37,000
Insurance 39,000
Rent, Rates and Taxes 24,000
Managing Directors Remuneration 1,26,000
Travelling Expenses 31,500
Fuel & Oil 13,500
Electricity 7,500
Material used in repairs:
- To plant & Machinery 36,000
- To Building 15,000
Advertisement 37,500
Salaries & Wages 9,45,000
Postage & Telegrams 21,000
PF Contribution 90,000
Director’s Sitting fees and Travelling Expenses 60,000
Subscription paid 3,000
Carriage 33,000
Interest on loan taken 27,000
Dividend to Shareholders 45,000
Depreciation Provided 82,500
Income Tax Provided 1,50,000
P & L A/C (Retained Earning) 1,87,500
Opening Stock:
- Raw Material 1,27,500
- Finished Goods 3,00,000
Closing Stock:
- Raw Material 1,62,000
- Finished Goods 3,60,000

28
Sum-2 The following figures for a period were called out from the books of Amrit
Corporation. Prepare statement of value Added and Statement of Distribution of Value
Added.
Particulars Rs.
Sales 24,80,000
Purchase of Raw Material 10,00,000
Agent’s Commission 20,000
Consumable Stores 25,000
Packing Material 10,000
Stationery 10,000
Audit Fees 4,000
Staff Welfare Expenses 1,58,000
Insurance 26,000
Rent, Rates and Taxes 16,000
Managing Directors Remuneration 84,000
Travelling Expenses 21,000
Fuel & Oil 9,000
Electricity 5,000
Material used in repairs:
- To plant & Machinery 24,000
- To Building 10,000
Advertisement 25,000
Salaries & Wages 6,30,000
Postage & Telegrams 14,000
PF Contribution 60,000
Director’s Sitting fees and Travelling Expenses 40,000
Subscription paid 2,000
Carriage 22,000
Interest on loan taken 18,000
Dividend to Shareholders 30,000
Depreciation Provided 55,000
Income Tax Provided 1,00,000
P & L A/C (Retained Earning) 1,25,000
Opening Stock:
- Raw Material 85,000
- Finished Goods 2,00,000
Closing Stock:
- Raw Material 1,08,000
- Finished Goods 2,40,000

29
Sum-3 The following figures for a period were extracted from the books Ram Ltd.
Prepare Statement Value Added Statement and Statement of Distribution of Value
Added.
Particulars Rs.
Sales 71,42,400
Commission on sales 57,600
Purchase of Raw Materials 28,80,000
Stock of Raw Material
- Opening 2,44,800
- Closing 3,11,040
Other Material(net) 2,67,840
Finished Stock
- Opening 5,76,000
- Closing 6,91,200
Staff Welfare Exp. 4,55,040
Insurance 78,880
Rent and Taxes 46,080
Managing Director’s Remuneration 2,41,920
Carriage outward 63,360
Director’s sitting fees 1,15,200
Interest on Bank loan 51,840
Dividend to Shareholders 86,400
Retained Earnings 3,60,000
Depreciations 1,54,400
Income-tax Provided 2,88,000
Audit Fees 11,520
Travelling Exp. 60,480
Advertisement 72,000
Postage and Telegrams 40,320
Salaries and wages 18,14,400
P.F. Contribution 1,72,800
Subscription 5,760

30
Sum-4 The following figures for a period were called out from the books of Krishna
Corporation. Prepare statement of value Added and Statement of Distribution of Value
Added.
Particulars Rs.
Sales 37,20,000
Purchase of Raw Material 15,00,000
Agent’s Commission 30,000
Consumable Stores 37,500
Packing Material 15,000
Stationery 15,000
Audit Fees 6,000
Staff Welfare Expenses 2,37,000
Insurance 39,000
Rent, Rates and Taxes 24,000
Managing Directors Remuneration 1,26,000
Travelling Expenses 31,500
Fuel & Oil 13,500
Electricity 7,500
Material used in repairs:
- To plant & Machinery 36,000
- To Building 15,000
Advertisement 37,500
Salaries & Wages 9,45,000
Postage & Telegrams 21,000
PF Contribution 90,000
Director’s Sitting fees 60,000
Subscription paid 3,000
Carriage 33,000
Interest on loan taken 27,000
Dividend to Shareholders 45,000
Depreciation Provided 82,500
Income Tax Provided 1,50,000
P & L A/C (Retained Earning) 1,87,500
Opening Stock:
- Raw Material 1,27,500
- Finished Goods 3,00,000
Closing Stock:
- Raw Material 1,62,000
- Finished Goods 3,60,000

31
Sum-5 The following figures for a period were called out from the books of Shiv
Corporation. Prepare Statement of Value Added and Statement of Distribution of
Value Added.
Particulars Rs.
Sales 12,40,000
Purchase of Raw Material 5,00,000
Agent’s Commission 10,000
Consumable Stores 12,500
Packing Material 5,000
Stationery 5,000
Audit Fees 2,000
Staff Welfare Expenses 79,000
Insurance 13,000
Rent, Rates and Taxes 8,000
Managing Directors Remuneration 42,000
Travelling Expenses 10,500
Fuel & Oil 4,500
Electricity 2,500
Material used in repairs:
- To plant & Machinery 12,000
- To Building 5,000
Advertisement 12,500
Salaries & Wages 3,15,000
Postage & Telegrams 7,000
PF Contribution 30,000
Director’s Sitting fees 20,000
Subscription paid 1,000
Carriage 11,000
Interest on loan taken 9,000
Dividend to Shareholders 15,000
Depreciation Provided 27,500
Income Tax Provided 50,000
P & L A/C (Retained Earning) 62,500
Opening Stock:
- Raw Material 42,500
- Finished Goods 1,00,000
Closing Stock:
- Raw Material 54,000
- Finished Goods 1,20,000

32
Sum-6The following figures for a period were extracted from the books Shyam Ltd.
Prepare Statement Value Added Statement and Statement of Distribution of Value
Added.
Particulars Rs.
Sales 27,60,000
Loss on sale of machine 90,000
Depreciation on Plant and Machinery 2,40,000
Printing and Stationary 26,400
Audit Fees 33,600
Retained Profit opening balance 11,92,800
Raw material purchase 7,50,000
Interest on borrowing 48,000
Wages and Salaries 3,92,400
Provident Fund Contribution 33,600
Retained Profit for the year 3,45,600
Dividends to shareholders 1,75,200
Rent, rates and taxes 1,98,000
Stock of Materials:
Opening Stock 1,92,000
Closing stock 2,40,000
Income-tax 3,31,200
Employee’s State Insurance 42,000
Other expenses 1,02,000

REFERENCES BOOKS

No. AUTHORS PUBLICATION

1 PROF. JAWAHARLAL TAXMANN
2 BARRY ELLIOT AND JAMIE ELLIOT PEARSON
3 CA PARVEEN SHARMA TAXMANN
4 ANDREW HIGSON SAGE
5 ICAI – STUDY MATERIAL ICAI

33
 FACULTY OF COMMERCE
SEMESTER 4

SUBJECT: CORPORATE FINANCIAL

REPORTING

UNIT-2 : INDIAN ACCOUNTING

STANDARDS

COMPILED BY
Dr. Bhavin Bhatt Dr. Gaurang Prajapati
Dr. Nidhip Shah

STUDY MATERIAL FOR REFERENCE

 Faculty of Commerce
Semester – IV
Corporate Financial Reporting
UNIT – II
Indian Accounting Standards (IND AS)

INDEX
SR NO TOPIC
1 IND-AS-1 PRESENTATION OF FINANCIAL STATEMENTS
2 OBJECTIVES OF FINANCIAL STATEMENTS
3 SCOPE OF FINANCIAL STATEMENTS
4 DEFINITIONS OF FINANCIAL STATEMENTS
5 PURPOSE OF FINANCIAL STATEMENTS
6 DISCLOSURE REQUIREMENTS
7 IND AS – 107 FINANCIAL STATEMENTS – DISCLOSURES
8 INTEGRATED REPORTING
9 SHORT QUESTIONS
10 LONG QUESTIONS
11 MULTIPLE CHOICE QUESTIONS

1|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 Ind AS – 1 Presentation of Financial Statements

Objective

This Standard prescribes the basis for presentation of general-purpose financial statements to
ensure comparability both with the entity’s financial statements of previous periods and with
the financial statements of other entities. It sets out overall requirements for the presentation
of financial statements, guidelines for their structure and minimum requirements for their
content.
Scope

1 An entity shall apply this Standard in preparing and presenting general purpose
financial statements in accordance with Indian Accounting Standards (Ind ASs).

2 Other Ind ASs set out the recognition, measurement and disclosure requirements for
specific transactions and other events.

3 This Standard does not apply to the structure and content of condensed interim
financial statements prepared in accordance with Ind AS 34, Interim Financial
Reporting. However, paragraphs 15–35 apply to such financial statements. This
Standard applies equally to all entities, including those that present consolidated
financial statements in accordance with Ind AS 110, Consolidated Financial
Statements, and those that present separate financial statements in accordance with
Ind AS 27, Separate Financial Statements.

4 This Standard uses terminology that is suitable for profit-oriented entities, including
public sector business entities. If entities with not-for-profit activities in the private
sector or the public sector apply this Standard, they may need to amend the
descriptions used for particular line items in the financial statements and for the
financial statements themselves.

5 Similarly, entities whose share capital is not equity may need to adapt the financial
statement presentation of members’ interests.

Definitions

The following terms are used in this Standard with the meaningsspecified:
General purpose financial statements (referred to as ‘financial statements’)are those
intended to meet the needs of users who are not in a position to require an entity to
prepare reports tailored to their particular information needs.

Impracticable Applying a requirement is impracticable when the entity cannot apply

it after making every reasonable effort to do so.

2|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 Indian Accounting Standards (Ind ASs) are Standards prescribed under Section 133
of the Companies Act, 2013.

Material Omissions or misstatements of items are material if they could,

individually or collectively, influence the economic decisions that users make on
the basis of the financial statements. Materiality depends on the size and nature of
the omission or misstatement judged in the surrounding circumstances. The size or
nature of the item, or a combination of both, could be the determining factor.

Assessing whether an omission or misstatement could influence economic decisions

of users, and so be material, requires consideration of the characteristics of those
users. The Framework for the Preparation and Presentation of Financial
Statements issued by the Institute of Chartered Accountants of India states in
paragraph 25 that ‘users are assumed to have a reasonable knowledge of business
and economic activities and accounting and a willingness to study the information
with reasonable diligence.’ Therefore, the assessment needs to take into account
how users with such attributes could reasonably be expected to be influenced in
making economic decisions.

Notes contain information in addition to that presented in the balance sheet ),

statement of profit and loss, statement of changes in equity and statement of cash
flows. Notes provide narrative descriptions or disaggregations of items presented in
those statements and information about items that do not qualify for recognition in
those statements.

Other comprehensive income comprises items of income and expense (including

reclassification adjustments) that are not recognised in profit or loss as required or
permitted by other Ind ASs.

Financial statements

Purpose of financial statements

Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information
about the financial position, financial performance and cash flows of an entity that is useful
to a wide range of users in making economic decisions. Financial statements also show the
results of the management’s stewardship of the resources entrusted to it. To meet this
objective, financial statements provide information about an entity’s:
(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;

3|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 (e) contributions by and distributions to owners in their capacity asowners;
and
(f) cash flows.

This information, along with other information in the notes, assists users of financial
statements in predicting the entity’s future cash flows and, in particular, their timing
and certainty.

Complete set of financial statements

A complete set of financial statements comprises:

(g) a balance sheet as at the end of the period ;
(h) a statement of profit and loss for the period;
(i) Statement of changes in equity for the period;
(j) a statement of cash flows for the period;
(k) notes, comprising a summary of significant accounting policies andother
explanatory information; and
(ea) comparative information in respect of the preceding period as specified in
paragraphs 38 and 38A; and
(l) a balance sheet as at the beginning of the preceding period when an entity
applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items
in its financial statements in accordance with paragraphs 40A–40D.

An entity shall present a single statement of profit and loss, with profit or loss and other
comprehensive income presented in two sections. The sections shall be presented
together, with the profit or loss section presented first followed directly by the other
comprehensive income section.
Financial statements shall present a true and fair view of the financial position, financial
performance and cash flows of an entity. Presentation of true and fair view requires the
faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses set out in the Framework. The application of Ind ASs, withadditional disclosure
when necessary, is presumed to result in financial statements that present a true and fair
view.

An entity whose financial statements comply with Ind ASs shall make an explicit and
unreserved statement of such compliance in the notes. An entity shall not describe financial
statements as complying with Ind ASs unless they comply with all the requirements of Ind
ASs.
In the extremely rare circumstances in which management concludes that compliance with a
requirement in an Ind AS would be so misleading thatit would conflict with the objective of
financial statements set out in the Framework, the entity shall depart from that requirement in

4|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
the manner set out in paragraph 20 if the relevant regulatory framework requires, or
otherwise does not prohibit, such a departure.

In the extremely rare circumstances in which management concludes that compliance with
a requirement in an Ind AS would be so misleading thatit would conflict with the objective
of financial statements set out in the Framework, but the relevant regulatory framework
prohibits departure from the requirement, the entity shall, to the maximum extent possible,
reduce the perceived misleading aspects of compliance by disclosing:

(a) the title of the Ind AS in question, the nature of the requirement, and the
reason why management has concluded that complying with that
requirement is so misleading in the circumstances that it conflicts with the
objective of financial statements set out in the Framework; and
(b) for each period presented, the adjustments to each item in the financial statements that
management has concluded would be necessary to present a true and fair view.
When preparing financial statements, management shall make anassessment of an entity’s
ability to continue as a going concern. An entity shall prepare financial statements on a going
concern basis unless management either intends to liquidate the entity or to cease trading, or
has no realistic alternative but to do so. When management is aware, in making its
assessment, of material uncertainties related to events or conditions that may cast significant
doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those
uncertainties. When an entity does not prepare financial statements on a going concern basis,
it shall disclose that fact, together with the basis on which it prepared the financial statements
and the reason why the entity is not regarded as a going concern.
An entity shall prepare its financial statements, except for cash flow information, using the
accrual basis of accounting.
An entity shall present separately each material class of similar items. An entity shall
present separately items of a dissimilar nature or function unless they are immaterial except
when required by law.
Except when Ind ASs permit or require otherwise, an entity shall present comparative
information in respect of the preceding period for all amounts reported in the current
period’s financial statements. An entity shall include comparative information for narrative
and descriptive information if it is relevant to understanding the current period’s financial
statements.
An entity shall present a third balance sheet as at the beginning of the preceding period in
addition to the minimum comparative financial statements required in paragraph
38A if:

(a) it applies an accounting policy retrospectively, makes a retrospective

restatement of items in its financial statements or reclassifies items in its
financial statements; and

5|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 (b) the retrospective application, retrospective restatement or the reclassification
has a material effect on the information in thebalance sheet at the beginning of the preceding
period.
If an entity changes the presentation or classification of items in its financial statements, it
shall reclassify comparative amounts unless reclassification is impracticable. When an
entity reclassifies comparative amounts, it shall disclose (including as at the beginning of
the preceding period):
(a) the nature of the reclassification;
(b) the amount of each item or class of items that is reclassified; and
(c) the reason for the reclassification.

An entity shall clearly identify each financial statement and the notes. In addition, an entity
shall display the following information prominently, and repeat it when necessary for the
information presented to be understandable:
(d) the name of the reporting entity or other means of identification, and any
change in that information from the end of the preceding reporting period;

(e) whether the financial statements are of an individual entity or a group of

entities;

(f) the date of the end of the reporting period or the period covered bythe set of
financial statements or notes;

(g) the presentation currency, as defined in Ind AS 21; and

(h) the level of rounding used in presenting amounts in the financial statements.
As a minimum, the balance sheet shall include line items that present thefollowing
amounts:
(i) property, plant and equipment;
(j) investment property;
(k) intangible assets;
(l) financial assets (excluding amounts shown under (e), (h) and (i));
(m) investments accounted for using the equity method;
(n) biological assets within the scope of Ind AS 41 Agriculture;
(o) inventories;
(p) trade and other receivables;
(q) cash and cash equivalents;
(r) the total of assets classified as held for sale and assets included in disposal
groups classified as held for sale in accordance with Ind AS 105, Non-
current Assets Held for Sale and Discontinued Operations;
(s) trade and other payables;

6|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 (t) provisions;
(u) financial liabilities (excluding amounts shown under (k) and (l));
(v) liabilities and assets for current tax, as defined in Ind AS 12,
Income Taxes;
(w) deferred tax liabilities and deferred tax assets, as defined in Ind AS12;
(x) liabilities included in disposal groups classified as held for sale in
accordance with Ind AS 105;
(y) non-controlling interests, presented within equity; and
(z) issued capital and reserves attributable to owners of the parent.

Current assets

An entity shall classify an asset as current when:

(aa) it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
(bb) it holds the asset primarily for the purpose of trading;
(cc) it expects to realise the asset within twelve months after the reporting period;
or
(dd) the asset is cash or a cash equivalent (as defined in Ind AS 7) unless the
asset is restricted from being exchanged or used to settle a liability for at
least twelve months after the reporting period.

An entity shall classify a liability as current when:

(ee) it expects to settle the liability in its normal operating cycle;
(ff) it holds the liability primarily for the purpose of trading;
(gg) the liability is due to be settled within twelve months after the reporting
period; or
(hh) it does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period (see paragraph 73). Terms
of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equityinstruments do
not affect its classification.

An entity shall classify all other liabilities as non-current.

An entity shall disclose the following, either in the balance sheet or thestatement of
changes in equity, or in the notes:
(ii) for each class of share capital:
(i) the number of shares authorised;
(ii) the number of shares issued and fully paid, and issued butnot fully

7|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 paid;
(iii) par value per share, or that the shares have no par value;
(iv) a reconciliation of the number of shares outstanding at the beginning
and at the end of the period;
(v) the rights, preferences and restrictions attaching to that class
including restrictions on the distribution of dividends and the
repayment of capital;
(vi) shares in the entity held by the entity or by its subsidiaries or
associates; and
(vii) shares reserved for issue under options and contracts forthe sale
of shares, including terms and amounts; and
(jj) a description of the nature and purpose of each reserve within equity.

If an entity has reclassified

(a) a puttable financial instrument classified as an equity instrument, or
(b) an instrument that imposes on the entity an obligation to deliver to another
party a pro rata share of the net assets of the entity only on liquidation and
is classified as an equity instrument
between financial liabilities and equity, it shall disclose the amount reclassified into
and out of each category (financial liabilities or equity), and the timing and reason
for that reclassification.

An entity shall present the following items, in addition to the profit or loss and other
comprehensive income sections, as allocation of profit or loss and other
comprehensive income for the period:

(a) profit or loss for the period attributable to:

(i) non-controlling interests, and

(b) owners of the parent.

(c) comprehensive income for the period attributable to:

(i) non-controlling interests, and

(ii) owners of the parent.

Disclosure of accounting policies

An entity shall disclose in the summary of significant accounting policies:

8|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
 (a) the measurement basis (or bases) used in preparing the financial
statements, and
(b) the other accounting policies used that are relevant to anunderstanding
of the financial statements.

Indian Accounting Standard (Ind AS) 107

Financial Instruments: Disclosures
IND AS 107, also known as “Financial Instruments: Disclosures “, is an essential accounting
standard that provides comprehensive guidelines for fair value measurements of financial
instruments. This article aims to explore the intricacies of IND AS 107, shedding light on its
significance and implications for businesses. Additionally, we will cross-reference relevant
IND AS standards to provide a holistic understanding of financial reporting.

1. Objective:
IND AS 107 applies to entities that prepare financial statements in accordance with the Indian
Accounting Standards (IND AS). It is particularly relevant for entities dealing with financial
instruments like- debt, equity, derivatives, and other investment instruments. The main
objective of this standard is to enhance transparency and comparability in financial reporting.
It achieves its objective by providing a standardized framework for disclosing information
about the fair value of financial instruments.
The objective of this Indian Accounting Standard (Ind AS) is to require entities to provide
disclosures in their financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position and
performance; and
(b) the nature and extent of risks arising from financial instruments to which the entity is
exposed during the period and at the end of the reporting period, and how the entity
manages those risks.
The principles in this Ind AS complement the principles for recognising, measuring and
presenting financial assets and financial liabilities in Ind AS 32, Financial Instruments:
Presentation, and Ind AS 109, Financial Instruments.

2. Scope: This Standard shall be applied by all entities to all types of financial instruments
except those specified in the standard:
Interests in subsidiaries, associates and joint ventures
Leasing commitments
Employee benefits
Financial instruments resulting in business combination
Insurance contracts

3. Disclosure:
A. An entity shall disclose information that enables users of its financial statements to
evaluate the significance of financial instruments for its financial position and
performance.
B. The carrying amounts of each of the following categories, as specified in Ind AS 109,
shall be disclosed either in the balance sheet or in the notes:
(a) financial assets and liabilities measured at fair value through profit or loss, showing
separately

9|U N I T- 2 I N D I A N A C C O U N T I N G S TA N D A R D S ( I N D A S )
(i) those designated as such upon initial recognition or subsequently in
accordance with Ind AS 109 and
(ii) those mandatorily measured at fair value through profit or loss in accordance
with Ind AS 109.
(b) financial assets and liabilities measured at amortised cost.
(c) financial assets measured at fair value through other comprehensive income,
showing separately
(i) financial assets that are measured at fair value through other comprehensive
income in accordance with Ind AS 109; and
(ii) investments in equity instruments designated as such upon initial recognition
in accordance with Ind AS 109.

Fair Value Measurement:

IND AS 107 emphasizes fair value as the principal measurement basis for financial
instruments, encouraging entities to determine the value of their instruments based on market
prices.
Fair value represents the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants.

Disclosure Objectives:
IND AS 107 aims to provide users of financial statements with detailed information about the
methods and inputs used in fair value measurements.
It also emphasizes the importance of disclosing the significant judgments, assumptions, and
uncertainties inherent in fair value measurements.

Level of Fair Value Hierarchy:

One of the key aspects of IND AS 107 is the categorization of fair value measurements into
different levels, known as the fair value hierarchy. This hierarchy provides users of financial
statements with valuable insights into the reliability and inputs used in fair value
measurements. Let’s discuss each level in detail:

Level 1: Quoted Prices in Active Markets

At the top of the fair value hierarchy is Level 1. This level represents fair value measurements
based on quoted prices in active markets for identical instruments. These quoted prices are
readily available in the market, allowing entities to determine the fair value of their financial
instruments with a high degree of accuracy. Level 1 measurements provide transparency and
objectivity, as they are based on observable market prices.

Level 2: Observable Inputs

Level 2 fair value measurements rely on observable inputs other than quoted prices in active
markets. These inputs might include market data such as benchmark yields, interest rates, or
other valuation models that utilize observable market data. While not as direct as Level 1
measurements, Level 2 still provides a reliable basis for fair value assessments. Entities using
Level 2 inputs need to exercise judgment and expertise in selecting appropriate valuation
techniques and inputs.

Level 3: Unobservable Inputs

At the bottom of the fair value hierarchy is Level 3, which encompasses fair value
measurements based on unobservable inputs. These inputs are derived from the entity’s own
assumptions, as they are not readily available from external markets. Level 3 measurements

10 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
require significant judgment and involve complex valuation techniques, like- discounted cash
flow models or option pricing models. Entities must disclose the key assumptions and factors
used in Level 3 measurements, as they are subject to more uncertainty and potential
variability.

Significance of the Fair Value Hierarchy:

The fair value hierarchy holds great importance in understanding the reliability and inputs
used in fair value measurements. It helps stakeholders assess the quality of information
provided and the level of judgment involved in determining fair values. This hierarchy
ensures comparability between different entities by providing a consistent framework for
classifying fair value measurements.
Moreover, the fair value hierarchy assists regulators, auditors, and analysts in evaluating the
financial health and risk profile of entities. It promotes transparency and enables stakeholders
to make well-informed decisions based on disclosed fair value information.

Disclosures Required:
IND AS 107 mandates entities to disclose both quantitative and qualitative information about
fair value measurements in their financial statements.
In addition, entities should disclose the valuation techniques and key assumptions applied at
each level for fair value measurements. This disclosure offers further clarity on the methods
used to determine fair values and allows stakeholders to assess the reasonableness of these
measurements.
This includes information on the valuation techniques used, key inputs applied, sensitivity
analysis, and changes in fair value measurements over time.

Cross-Referencing Relevant IND AS Standards:

To gain a comprehensive understanding of financial reporting, it is beneficial to cross-
reference IND AS 107 with other relevant IND AS standards:
IND AS 32 and IND AS 109 provide guidance on recognizing, measuring, and presenting
financial instruments, complementing the fair value measurement aspects outlined in IND AS
107.
IND AS 112 focuses on measuring and disclosing the fair value of investments in associates
and joint ventures.
IND AS 109 and IND AS 113 can be cross-referenced to understand fair value disclosures
related to financial instruments, investments in associates, and joint ventures, respectively.

Conclusion:
IND AS 107, “Financial Instruments: Disclosures”, is a crucial accounting standard that
promotes transparency and comparability in financial reporting. By following this standard,
entities can provide stakeholders with comprehensive information about the fair value of
financial instruments, which enables them to better decision-making and risk management.
To gain a deeper understanding of financial reporting, it is essential to cross-reference IND
AS 107 with relevant IND AS standards such as IND AS 32, IND AS 109, and IND AS 113.
This holistic approach ensures compliance with all applicable accounting standards and
enhances the quality and transparency of financial reporting.

What is Integrated Reporting?

Integrated reporting is an important tool in improving the understanding of the relationship
between financial and non-financial factors that determine a company’s performance and
how a company creates sustainable value in the long term.

11 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
When organizations lack clear expectations for performance, they are more likely to lose
focus on long-term objectives. This is one of the reasons why it’s important that companies
report on sustainability – not just their financials, but also how they’re managing risks and
opportunities in environmental, social, and governance (ESG) issues.

Integrated reporting helps businesses tell a complete story about what drives their success by
addressing both company performance metrics as well as ESG factors. It provides investors
with a clearer understanding of how ESGs contribute to business value creation over time.
Most importantly, integrated reporting can help drive better decision-making for companies
by identifying which strategies will be most successful based on ESG considerations in their
Reporting.

What are the benefits of integrated reporting?

Companies receive substantial benefits in integrating sustainability into their organization’s
approach. Part of that advantage is in the quality of information companies receive when they
report on all aspects of performance, not just financials. Oftentimes, organizations are able to
identify gaps between company goals and compare them with actual accomplishments.

Integrated reporting can provide valuable insights for organizations of all sizes. It is
important, however, to make sure that companies are prepared to conduct an effective
analysis of how ESG factors contribute to financial success.

Overall, integrated reporting helps your organization better understand its business practices
and identify opportunities for future growth. You should consider whether or not it’s worth
the effort to adopt this process for your company.

What are the challenges of an integrated report?

The challenges of implementing an integrated reporting program include developing the
appropriate reporting framework, identifying materiality thresholds, understanding the
information needs of different stakeholders, and gaining stakeholder support.

Integrated reporting can provide valuable insights for organizations of all sizes. It is
important, however, to make sure that companies are prepared to conduct an extensive and
effective analysis of how ESG factors contribute to financial success.

What does integrated corporate reporting include?

If your organization is considering adopting Integrated Reporting, you should consider the
following:
• How will your company integrate ESG factors into reporting?

• What kind of analysis will be performed to identify where value is created in your
business?
• Will your organization need any specific training for this process?
All these factors play a role in determining what steps to take when reporting on ESG issues.

12 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
What is the main purpose of integrated reporting?

The main purpose of integrated reporting is to provide a more in-depth look at the
relationship between financial and non-financial factors that determine a company’s
performance. Integrated reporting helps businesses tell a complete story about what drives
their success by addressing both company performance metrics as well as ESG factors. It
provides investors with a clearer understanding of how ESGs contribute to business value
creation over time. And most importantly, integrated reporting can help drive better decision-
making for companies by identifying which strategies will be most successful based on ESG
considerations.

What is the difference between Integrated Reporting and Materiality?

Not every company needs to conduct an in-depth analysis of sustainability factors as part of
its business reporting process. If your company has been transparent about its reporting on
ESG issues in the past, it may be able to stick with existing reporting practices. That’s where
materiality assessments come in. In order to make decisions around what is and isn’t included
in your company’s Integrated Report, you will need a clear understanding of your business
goals and how ESGs affect those goals.

What is the difference between Integrated Reporting and sustainability reporting?

Integrated reporting provides a more in-depth look at how all material issues affect your
business’ performance, such as ESG factors. Sustainability reporting is the basic process of
assessing how your company’s practices align with key industry standards and expectations,
such as what is outlined in the Global Reporting Initiative.

What are some guidelines for conducting an Integrated Reporting process?

The guidelines provided by the International Integrated Reporting Council can help any
organization begin its own reporting assessment. It’s a good idea to consider what your
company will need in order to conduct a successful analysis, including:

• How will your company determine your organization’s key stakeholders?

• What steps will your company take to identify the relationships between business
performance metrics and ESGs?
• How can your company use public engagement opportunities to get valuable feedback
on how ESG factors affect your bottom line?
All these guidelines play a role in determining what kind of analysis you should perform
when reporting on your company’s performance. Remember, you can also consider whether
or not to use Integrated Reporting for your business based on how it fits with your current
reporting practices.

Some of the key elements of Integrated Reporting are linkages, transparency and disclosure.

What are the 6 capitals of integrated reporting?

13 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
The 6 capitals of integrated reporting are finance, people, planet, customer, innovation, and
that capital which is usually forgotten – governance. This 6th capital represents the systems
used to create value in society. The 6 capitals collectively, are linked through the triple
bottom line (people+planet+profit).

What are some key elements of Integrated Reporting?

Some of the key elements of Integrated Reporting are linkages, transparency, and disclosure.
Integrated reporting should provide information on how a company impacts the world around
them and how it makes sure that they create value for its “stakeholders”.

If an integrated report is a success, it should be a tool that shows you can see patterns of
behavior over time e.g. climate change has been shown to impact coffee prices.

What does the future of Integrated Reporting look like?

Integrated reports can be seen as a “communications tool” and therefore the amount of
required information is likely to evolve over time. The general focus for companies however
will always be on creating long-term value in addition to occupying a responsible social role
in society.

What is integrated reporting in financial accounting?

Integrated reporting with regard to financial accounting is the combination of two core
financial statements: a traditional income statement and a balance sheet. This is because,
under generally accepted accounting principles (GAAP), a company needs to provide a
“statement of financial position” as well as a “statement of operations.” It’s often called the
statement of comprehensive income or the statement of changes in equity.

What is the integrated reporting framework?

The integrated reporting framework is a framework developed by the International Integrated

Reporting Council (IIRC) to help businesses create reports that are focused on creating long-
term value. It includes 6 “capitals” which are linked via the triple bottom line, these capitals
are finance, people, planet, customer, innovation & governance. It is based on 3 pillars of
sustainability reporting – economic value-added (EVA), social capital, and environmental
capital.

Integrated reports are seen as one way to see how a company’s performance is changing over
time, allow organizations to understand the risks associated with their operations, and provide
more transparency on how they operate (i.e. using language that is understandable for
stakeholders). Integrated reports can include all types of businesses, however, they are most
suited for companies who want to communicate directly with their stakeholders e.g.
companies that trade in financial markets or that operate in industries that rely on long-term
stability (e.g. mining).

What is the triple bottom line?

14 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
The triple bottom line (abbreviated to TBL or 3BL) is a framework for understanding
sustainability, which was coined by John Elkington in 1994 and describes social equity,
environment, and financial performance as three pillars of sustainable development. The
triple bottom line is often used in reporting to show how a company’s activities and processes
affect society and the environment.

What does “stakeholders” mean?

Stakeholders are generally defined as people who have an interest in the performance of an
organization, whether it is positive or negative, voluntary or involuntary. Stakeholders can
include owners, managers and employees, directors and regulators as well as customers,
suppliers, and local communities.

What is the connection between Integrated Reporting and sustainability?

Integrated reporting can be seen as a tool to help companies understand the risks associated
with their operations (including those related to climate change), as well as provide
transparency of how they function internally. Sustainability, which is part of the triple bottom
line, means that companies should not only look at their immediate profits but also consider
the environmental and social impacts of their decisions in order to protect stakeholders’
interests in the future.

What are “non-financial” factors?

Non-financial factors are outcomes or impacts on a company’s performance that are not
recorded as transactions but still have an effect on the company. These factors include social
and environmental factors that affect how society can interact with the business (e.g.
employee relations or ethical conduct of the business).

Having this level of trust means that shareholders are more likely to view them as
“investment worthy.”

What is sustainable development?

Sustainable development is generally understood as “development that meets the needs of the
present without compromising the ability of future generations to meet their own needs”.
Sustainable development is closely tied to social and environmental factors because they are
not reflected in financial statements. Social sustainability refers to how a business affects its
employees, local communities, and stakeholders while environmental sustainability refers to
how it affects the environment.

What is manufactured capital in integrated reporting?

Manufactured capital is a term used by the International Integrated Reporting Council to refer
to a business’ collective investment in physical assets (buildings, equipment, vehicles) and
intangible capital (patents, or brand equity).

15 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
What is sustainability or CSR in integrated reporting?

Sustainability is the responsible use of natural resources without compromising the needs of
future generations. CSR is the concept that business decisions should be based not only on
financial gain but also on consideration for the social good.

What are the characteristics of an integrated report?

An integrated report describes how a company creates sustainable value through its return on
invested capital and cash flow generation as well as its ability to sustain and enhance its
brands, intellectual capital, and other intangible assets.

What is a framework for integrated reporting?

A framework for integrated reporting provides a general purpose structure to develop

individual reports and, if relevant, particular messages tailored to meet stakeholder
information needs.

Why is corporate disclosure important?

The main function of disclosures in corporate governance is to provide information about a

company’s activities, financial position, and prospects to allow stakeholders to make
informed decisions.
Disclosures also play a role in increasing transparency and honesty. If companies disclose
their actions truthfully, they will gain the public’s trust. Having this level of trust means that
shareholders are more likely to view them as “investment worthy.”
The legal framework of disclosures varies by country. For example, in the United States,
there is only one law specifying mandatory obligations for companies to disclose certain
types of information – SOX. This means that some countries have more detailed disclosure
requirements than others.

In conclusion on international integrated reporting framework

In conclusion, we have learned about the term and definition of integrated reporting and how
it has to do with several factors that determine a business’s performance. These include non-
financial, social, and environmental factors to make sure businesses benefit not only at the
present time but also in sustainable ways for future generations. We learned about how
society looks upon these three types of determinants to make sure businesses stay afloat at all
times and how integrated reporting makes sure we get a better understanding of all three
categories. Lastly, we learned about the main functions and legal framework of corporate
disclosures and how they could shape our future through sustainable and responsible business
practices.

Caveats, disclaimers & international integrated reporting council

We have covered many topics in this article and want to be clear that any reference to, or
mention of council iirc, external, international, committee, model, value, certified,

16 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
professional, thinking, statements, foundation, concise communication, benefits, partners,
key, ir, landscape, overview, not for profit, future, stability, globally accepted, public interest,
commentary, global network, natural capital, registered office, narrative reporting, private
sector, non-financial, independent entities, relevant coalition, competitive advantage,
federation, listed interested, decision-useful concepts, member draft, Deloitte Touche
Tohmatsu limited, new legally separate, published or challenges facing in the context of this
article is purely for informational purposes and not to be misconstrued with investment
advice or personal opinion. Thank you for reading, We hope that you found this article useful
in your quest to understand ESG.

Short Questions

1. State the purpose of financial statements under Ind AS-1

2. State the complete list of financial statements under Ind AS-1
3. Discuss the conditions when an entity should classify an asset as current asset.
4. List down the items which is mandatory for the entities to disclose either in balance
sheet or as a part of notes to accounts.
5. Discuss about the Fair value hierarchy under Ind AS 107
6. What is Integrated Reporting?
7. What are the benefits of Integrated Reporting?
8. What is Triple bottom Line?
9. What is Sustainable development?

Long Questions

1. Discuss ahout the scope of Financial statements under IND AS-1

2. Discuss about the levels of fair value of hierarchy
3. Define Integrated Reporting. State the challenges under Integrated Reporting.
4. What is Integrated Reporting Framework? Explain the difference between Integrated
Reporting and Sustainability Reporting.
5. ‘Corporate disclosure is important’. Explain.

Multiple Choice questions

1. Which among the following have to mandatorily implement IND AS in Phase II 1st Apr
2017:
a) Unlisted companies having net worth of`150 crore or more but less than rupees five
hundred crore
b) Unlisted companies having net worth of`250 crore or more but less than rupees five
hundred crore
c) Unlisted companies having net worth of`50 crore or more but less than rupees five
hundred crore
d) none of the above

17 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
2. Title of Ind AS 101
a) First Time Adoption of Indian Accounting Standards
b) Share based payments
c) Business Combinations
d) None of the above

3. A retail chain acquired a competitor in March, 20X1 and accounted for the business
combination under Ind AS 103 on a provisional basis in its 31st March, 20X1 annual
financial statements. The business combination accounting was finalised in 20X1-20X2 and
the provisional fair values were updated. As a result, the 20X0-20X1 comparatives were
adjusted in the 20X1-20X2 annual financial statements. Does the restatement require an
opening statement of financial position (that is, an additional statement of financial position)
as of 1st April, 20X0?
a) Yes
b) No
c) Either Yes or No
d) None of the above

4. X Ltd. provides you the following information:

Raw material stock holding period: 3 months
Work-in-progress holding period: 1 month
Finished goods holding period: 5 months
Debtors collection period: 5 months
You are requested to compute the operating cycle of X Ltd.
a) 12 months
b) 11 months
c) 14 months
d) 10 months

5. How should electricity deposits be classified?

a) Current
b) Non-Current
c) Long term liability
d) Short term liability

6. An entity shall present (in case of consolidated statement of profit and loss) the following
items as allocation of profit or loss and other comprehensive income for the period:
a) profit or loss for the period attributable to: (i)non-controlling interests, and
(ii)owners of the parent
b) comprehensive income for the period attributable to: (i) non-controlling interests,
and (ii)owners of the parent
c) both a & b
d) none of the above

7. Which among the following have to mandatorily implement IND AS in Phase II 1st Apr
2017:

18 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 a) Unlisted companies having net worth of`150 crore or more but less than rupees
five hundred crore
b) Unlisted companies having net worth of`250 crore or more but less than rupees
five hundred crore
c) Unlisted companies having net worth of`50 crore or more but less than rupees five
hundred crore
d) none of the above

8. Title of Ind AS 101

a) First Time Adoption of Indian Accounting Standards
b) Share based payments
c) Business Combinations
d) None of the above

9. A retail chain acquired a competitor in March, 20X1 and accounted for the business
combination under Ind AS 103 on a provisional basis in its 31st March, 20X1 annual
financial statements.The business combination accounting was finalised in 20X1-20X2 and
the provisional fair values were updated. As a result, the 20X0-20X1 comparatives were
adjusted in the 20X1-20X2 annual financial statements.Does the restatement require an
opening statement of financial position (that is, an additional statement of financial position)
as of 1st April, 20X0?
a) Yes
b) No
c) Either yes or no
d) None of the above

10. X Ltd. provides you the following information:

Raw material stock holding period: 3 months
Work-in-progress holding period: 1 month
Finished goods holding period: 5 months
Debtors collection period: 5 months
You are requested to compute the operating cycle of X Ltd.
a) 12 months
b) 11 months
c) 14 months
d) 10 months

11. How should Term deposits be classified,

a) Current
b) Non-Current
c) Short term
d) Provisions

12. An entity shall present (in case of consolidated statement of profit and loss) the following
items as allocation of profit or loss and other comprehensive income for the period:
a) profit or loss for the period attributable to: (i)non-controlling interests, and
(ii)owners of the parent
b) comprehensive income for the period attributable to: (i) non-controlling interests,
and (ii)owners of the parent
c) both a & b

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 d) none of the above

13. Ind AS 1 sets out overall requirements for the presentation of both consolidated
and separate
financial statements, guidelines for their structure and
a) minimum requirements for their content.
b) maximum requirements for their content.
c) Both A&B
d) None of the given

14. Pick the incorrect one

a) For entities that operate in sectors such as banking, insurance, electricity, etc., specific
formats may be prescribed under relevant regulations for presentation of financial
statements and Ind AS 1 may not be applicable to that extent.
b) The entity is to claim that its financial statements are, for example, 'materially' in
compliance with Ind AS, or that it has complied with 'substantially all' requirements of
Ind AS.
c) The usefulness of financial information is enhanced by its comparability, verifiability,
timeliness and understandability. The overriding requirement of Ind AS is for the
financial statements to give a true and fair view
d) None of the given

15. A complete set of financial statements comprises

i. A balance sheet ii. A statement of profit and loss
iii. A statement of changes in equity iv. Notes, including accounting policies
v. Director’s Report
a) i, ii, iv and v
b) i, ii and iii
c) i, ii, iii and iv
d) All of the above

16. In terms of Ind AS 1 financial statements are prepared on

a) a modified historical cost basis
b) a fair value basis
c) a fair value basis with a growing emphasis on modified historical cost basis
d) a modified historical cost basis with a growing emphasis on fair value

17. Pick the correct one

a) A statement of changes in equity (and related notes) reconciles opening to closing
amounts for each component of equity.

20 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 b) All owner- related changes in equity are presented in the statement of changes in equity
separately from non-owner changes in equity.
c) Entities that have no equity as defined in Ind AS may need to adopt the financial
statement presentation of members ‘or unit holders’ interests.
d) All of the above

18. The entity presents separately in the statements of changes in equity except
a) The total adjustment resulting from changes in accounting policies
b) The total adjustment resulting from the correction of errors.
c) The total adjustment resulting from the combination of business.
d) None of the given

19. Current assets include EXCEPT

a) asset is expected to be realised in the normal operating cycle or within 12 months
b) asset is held for trading
c) cash or a cash equivalent.
d) None of the given

20. Current liability include EXCEPT

a) a liability expected to be settled in the normal operating cycle
b) it is due within 12 months
c) there are unconditional rights to defer its settlement for at least 12 months.
d) None of the given

21. State whether true or false

A liability that is payable on demand because certain conditions are breached is
classified as current if the lender has agreed, after the reporting date but before the
financial statements are authorised for issue, not to demand repayment.
a) True
b) False

22. The presentation of alternative earnings measures in the statement of profit and
loss and Other Comprehensive Income (OCI) is not generally prohibited i.e.
a) Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)
b) Earnings After Interest, Tax, Depreciation and Amortisation (EAITDA)
c) Both A&B
d) Presentation method other than A and B

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23. The Schedule to the Companies Act, 2013 (2013 Act) that provides general instructions
for preparation
of financial statements is
a) Schedule I
b) Schedule IV
c) Schedule II
d) Schedule III

24. Schedule III is divided into

a) two parts i.e. Division I and II
b) four parts i.e. Division I to IV
c) three parts i.e. Division I, II and III
d) five parts i.e. Division I to V

25. Pick the incorrect regarding the provision given there in different division of Schedule III
a) Division I-Lays down the format for preparation of the financial statement by the
companies that are required to comply with Companies (Accounting Standard) Rule
2006 and has been amended by the MCA in October 2018
b) Division II is applicable to a company whose financial statements are drawn up in
compliance with Ind AS
c) Division III is applicable to a Non-Banking Financial Company (NBFC) whose
financial statements are drawn up in compliance with Ind AS
d) None of the given

26. Division within the Schedule III that provides instructions for the preparation of financial
statements and additional disclosure requirements for companies is
a) Division II
b) Division III
c) Division I
d) All of the above

27. Pick the correct about materiality

a) Item is considered material if it could, individually or collectively, influence the
economic decisions that user make on the basis of financial statements.
b) The definition of what is material is similar to that given in Ind AS 8, Accounting
Policies, Changes in Accounting Estimates and Errors
c) Both A&B
d) None of the given

22 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
28. In addition to the consideration of materiality, while preparing the statement of profit
and loss, it specifies that a company should disclose a note for any item of income or
expenditure as given in Schedule III to Companies Act 2013
a) which exceeds 1 per cent of the revenue from operations or INR1,00,000, whichever is
higher
b) which exceeds 1 per cent of the revenue from operations or INR1,000,000, whichever
is higher
c) which exceeds 10 per cent of the revenue from operations or INR1,00,000, whichever
is higher
d) which exceeds 10 per cent of the revenue from operations or INR1,000,000, whichever
is higher

29. In situations where compliance with the requirements of the 2013 Act including Ind AS
requires any change in treatment or disclosure in the formats given in Schedule III, then
a) Schedule III permits such changes to be made and the requirements of Schedule III
would stand modified accordingly.
b) Ind AS permits such changes to be made and the requirements of Ind AS would stand
modified accordingly.
c) it will at the discretion of the entity to modify either the requirements given in
Companies Act 2013 or those given under Ind AS with a specific disclosure in financial
statement.
d) disclosure required under Schedule III of Companies Act 2013 as well as those required
under Ind AS shall be made separately duly cross referred.

30. Pick the correct one

a) The disclosure requirements specified in Schedule III would be in addition to and not
in substitution of the disclosure requirements specified in Ind AS
b) Companies would be required to make additional disclosures specified in Ind AS either
in the notes or by way of additional statement(s) unless required to be disclosed on
the face of financial statements
c) Schedule III sets out the minimum requirements for disclosure on the face of the
financial statements. Cash flow statement should be prepared, where applicable, in
accordance with the requirements of the relevant Ind AS.
d) All of the above

31. Pick the correct regarding the revised definition of materiality by the ICAI in 2019
a) It broadens the threshold for deciding whether information is material by making a
reference to ‘could reasonably be expected to influence’ as against the previous
reference ‘could influence’ the users of financial statements
b) It clarifies that the users to whom the definition refers are the primary users of the
financial statements
c) It proposes to add ‘obscuring’ to the definition, alongside the existing references to

23 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 'omitting' and ‘misstating
d) All of the above

32. Pick the incorrect one

a) Ind AS 1 does not include any illustrative format for the presentation of financial
statements whereas Section 129 of the 2013 Act requires companies to present the
financial statements in the form prescribed in Schedule III to the 2013 Act.
b) In case of any conflicts between the requirements of Ind AS and Schedule III to
the 2013 Act, Schedule III to the 2013 Act shall prevail
c) Both A&B
d) None of the given

33. Pick the correct in terms of provision given in Ind AS 1

a) Ind AS 1 requires the entity to present complete set of financial statements at least
annually, unless the entity changes the reporting period and presents financial
statements for a period longer or shorter than one year where appropriate disclosures
shall be made by such the entity.
b) The 2013 Act requires companies to generally have a financial year ending on 31 March
every year.
c) Both A&B
d) None of the given

34. Ind AS 1 allows classification of expenses by

a) only nature-wise
b) only function wise
c) only context wise
d) All of the above

35. State whether true or false

International Accounting Standard (IAS) 1 permits the periodicity, for example, of 52
weeks for preparation of financial statements whereas Ind AS 1 does not permit the same.
a) True
b) False

36. Which of the following statements regarding Ind AS 107 is correct?

a) Ind AS 107 only requires disclosure of financial instruments recognized on the balance
sheet.
b) Ind AS 107 primarily focuses on the recognition criteria for financial instruments.
c) Ind AS 107 mandates disclosure of both recognized and unrecognized financial
instruments.

24 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 d) Ind AS 107 does not apply to financial instruments measured at fair value through profit
or loss.

37. Which of the following disclosures is required under Ind AS 107, Financial Instruments:
Disclosures?

a) Detailed breakdown of revenue from financial instruments.

b) Analysis of the company's market share in financial markets.
c) Information about the company's hedging strategies.
d) Disclosure of the fair value of financial instruments, including those not recognized in
the balance sheet.

38. Which of the following best describes the objective of disclosures required under Ind AS
107, Financial Instruments: Disclosures?

a) To provide information about the company's overall financial performance.

b) To facilitate comparability between financial statements of different entities.
c) To satisfy regulatory requirements imposed by specific jurisdictions.
d) To enable users to evaluate the significance of financial instruments for the company's
financial position and performance.

39. Which standard mandates disclosures to enable users to evaluate the significance of
financial instruments for a company's financial position and performance?
a) Ind AS 101
b) Ind AS 102
c) Ind AS 107
d) Ind AS 108

40. Which accounting standard focuses on disclosures related to financial instruments to aid
users in assessing their impact on a company's financial position and performance?
a) Ind AS 109
b) Ind AS 106
c) Ind AS 107
d) Ind AS 113

41.What Ind AS standard requires disclosure of both recognized and unrecognized

financial instruments to facilitate assessment of their impact on a company's financial
position?
a) Ind AS 103
b) Ind AS 107
c) Ind AS 110

25 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 d) Ind AS 111

42.Which standard outlines the disclosure requirements for financial instruments, aiming to
provide users with information about their nature, risks, and the significance to a company's
financial position and performance?
a) Ind AS 103
b) Ind AS 107
c) Ind AS 109
d) Ind AS 111

43. Which of the following is a key objective of Ind AS 107, Financial Instruments:
Disclosures?
a) To provide guidelines for recognizing financial instruments on the balance sheet.
b) To specify the fair value measurement techniques for financial instruments.
c) To enhance transparency by requiring comprehensive disclosures about financial
instruments.
d) To establish principles for accounting treatment of financial instruments.

44.What is the primary focus of Ind AS 107, Financial Instruments: Disclosures?

e) Recognition criteria for financial instruments.

f) Measurement techniques for financial instruments.
g) Disclosure requirements for financial instruments.
h) Treatment of financial instruments in the income statement.

45.What is the primary focus of Ind AS 107, Financial Instruments: Disclosures?

a) Recognition criteria for financial instruments.
b) Measurement techniques for financial instruments.
c) Disclosure requirements for financial instruments.
d) Treatment of financial instruments in the income statement.

46.Which of the following statements best describes the purpose of Ind AS 107, Financial
Instruments: Disclosures?
a) To provide guidelines for recognizing financial instruments on the balance sheet.
b) To determine the fair value measurement techniques for financial instruments.
c) To ensure consistent treatment of financial instruments in the income statement.
d) To enhance transparency by requiring comprehensive disclosures about financial
instruments.

47.What is the main objective of Ind AS 107, Financial Instruments: Disclosures?

a) To establish principles for the recognition of financial instruments.

26 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 b) To provide guidelines for the measurement of financial instruments.
c) To require disclosures that enable users to evaluate the significance of financial
instruments for the entity's financial position and performance.
d) To specify the treatment of financial instruments in the cash flow statement.

48.What is the primary aim of integrated reporting?

a) To solely focus on financial performance.
b) To provide a holistic view of an organization's strategy, governance, performance, and
prospects.
c) To comply with legal reporting requirements.
d) To minimize reporting costs for the organization.

49. What is the fundamental principle behind integrated reporting?

a) Providing a narrow focus solely on financial performance.
b) Incorporating financial and non-financial information to provide a comprehensive view
of an organization's performance and prospects.
c) Adhering strictly to regulatory reporting requirements.
d) Minimizing the disclosure of information to stakeholders.

50.What is the main objective of integrated reporting?

a) Focusing solely on financial metrics.
b) Providing a comprehensive view of an organization's performance and prospects.
c) Minimizing disclosure to stakeholders.
d) Complying with regulatory requirements.

51.Which is not considered as part of Triple Bottom Limes?

a) Profit
b) Product
c) Planet
d) People

52. IND-AS 107 is particularly relevant for entities dealing with financial instruments like:
a. debt
b. equity
c. derivatives and other investment instruments
d. All of the above

53. __________ represents the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants.

27 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
a. Fair Value
b. Market Value
c. Intrinsic Value
d. Face Value

54. IND AS 107 aims to provide users of financial statements with detailed information about
the _______ used in fair value measurements.
a. judgements
b. assumptions
c. uncertainties
d. methods
55. Categorization of fair value measurements into different levels is known as:
a. fair value hierarchy
b. fair value level
c. fair value diversification
d. all of the above
56. Level – 1 in fair value hierarchy is based on
a. quoted prices in active markets
b. observable inputs
c. unobservable inputs
d. unquoted price in active markets
57. Level – 2 in fair value hierarchy is based on
a. quoted prices in active markets
b. observable inputs
c. unobservable inputs
d. unquoted price in active markets
58. Level – 3 in fair value hierarchy is based on
a. quoted prices in active markets
b. observable inputs
c. unobservable inputs
d. unquoted price in active markets
59. IND AS 107 mandates entities to disclose:
a. quantitative information
b. qualitative information
c. both a and b
d. None of the above

28 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
60. _________ is a crucial accounting standard that promotes transparency and comparability
in financial reporting.
a) Ind AS 103
b) Ind AS 107
c) Ind AS 109
d) Ind AS 111

61. What are the principal objectives of Ind AS 107?

a. To provide presentation and disclosure requirements for financial instruments.
b. To require disclosures about the significance of financial instruments for an entity’s
financial position and financial performance and qualitative and quantitative information
about exposure to risks arising from financial instruments.
c. To set out specified balance sheet and income statement formats for financial entities.
d. To require disclosures about an entity’s exposure to off–balance-sheet instruments and
other complex transactions.

62. Which of the following types of information does Ind AS 107 not require to be disclosed
about the significance of financial instruments?
a. Carrying amounts of categories of financial instruments.
b. Fair values of financial instruments.
c. Information about the use of hedge accounting.
d. Information about financial instruments, contracts, and obligations under share-based
payment transactions.

63. What is Liquidity risk?

a) The risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities
b) The risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation.
c) The risk that the fair value or future cash flows of a financial instrument will fluctuate due
to changes in currency liquidity
d) All the above

64. The main function of disclosures in corporate governance is

a. to provide information about company’s activities

b. to provide information about financial position
c. to allow stakeholders to make decisions
d. all of the above

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65. __________ is a framework for understanding sustainability, which was coined by John
Elkington in 1994
a. Double Bottom Line
b. Triple Bottom Line
c. Single Bottom line
d. Multiple Bottom line

66. The integrated reporting framework is a framework developed by

a. International Integrated Reporting Council
b. Insurance Development and Regulatory Authority
c. Ministry of Corporate Affairs
d. International Financial Reporting Council

67. Integrated Reporting Framework is based on

a. EVA
b. Social Capital
c. Environmental Capital
d. All of the above

68. ___________ is an important tool in improving the understanding of the relationship

between financial and non-financial factors that determine a company’s performance and
how a company creates sustainable value in the long term.

a. Financial reporting
b. Social reporting
c. Integrated Reporting
d. Structured Reporting

69. ____________ encompasses fair value measurements based on unobservable inputs.

a. Level – 1
b. Level – 2
c. Level – 3

30 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
d. All of the above

70. ___________ fair value measurements rely on observable inputs other than quoted prices
in active markets.
a. Level – 1
b. Level – 2
c. Level – 3
d. All of the above

REFERENCES

B.D Chatterjee & Jinender Jain Taxmann’s Illustrated Guide to Ind AS

CA Parveen Sharma & CA Kapileshwar Taxmann’s Financial Reporting
Bhalla
CA Kamal Garg Bharat’s Practical Guide to Ind AS & IFRS

31 | U N I T - 2 I N D I A N A C C O U N T I N G S T A N D A R D S ( I N D A S )
 FACULTY OF COMMERCE

2023 – 24
SEMESTER 4

SUBJECT: CORPORATE FINANCIAL

REPORTING

UNIT : 3
Corporate Restructuring -1

COMPILED BY :
Dr. Bhavna Parwani Prof. Saurin Patel

STUDY MATERIAL FOR REFERENCE ONLY

 UNIT 3 CORPORATE RESTRUCTURING -1

[Amalgamation in Nature of Purchase ]

SR. TOPICS
NO
1 INTRODUCTION
2 ACCOUNTING STANDARD 14- MERGER
AND PURCHASE
3 PURCHASE CONSIDERATION
4 INTRINSIC VALUE OF SHARES
5 INTER-COMPANY TRANSACTIONS
6 AMALGAMATION ADJUSTMENT ACCOUNT
7 COMPREHENSIVE ILLUSTRATION - 1 &2
8 SECTION –A[ Theory Questions]
9 SECTION –B [MCQs]
10 SECTION –C [Short Questions]
11 SECTION –D [Long Sums]
12 SECTION –E [Home Work]

1|Pa g e
1 INTRODUCTION

In modern world, production is seen on large scale and giant industrial units are
there. Since last many decades a trend towards corporate restructuring is seen
because

- To avoid cut-throat competition at national and international level

- Two or more units combine to form a large sized company in order to get
the benefits of economies of scale

- Corporate Restructuring can take place in form of amalgamation,

absorption or reconstruction [Internal or External]

- All these transactions are governed by AS-14 – Accounting for

Amalgamation which is mandatory from 1-4-1995

AMALGAMATION

- When two or more companies carrying on similar business decide to

combine, a new company is formed to take over their business. This
process is known as Amalgamation. The existing companies go into
liquidation.

- A+B = C

ABSORPTION

- When one of the existing companies takes over business of another

company or companies, it is known as Absorption. The company whose
business is taken over, goes into liquidation. Here the intention is to
remove unhealthy competition. One company continues its existence and
the other companies merge into it.

- A + B = A or B

2|Pa g e
RECONSTRUCTION

- Reconstruction has an altogether different purpose. It is undertaken with a

view to writing off past losses or reorganise the capital structure

- Internal Reconstruction – the existing company continues to carry on

business in the same name but it reduces its capital and from the balance
available it writes off accumulated past losses.

- External Reconstruction – takes place when a new company is formed to

take over the business of an existing company which goes into
liquidation. With change in the name, a new company is formed with
same shareholders to carry on the same business. Its purpose is also to
wipe off the past losses and to obtain additional working capital

- A = New A or B

POINTS TO REMEMBER

1. The word AMALGAMATION includes Amalgamation, Absorption and

Reconstruction

2. Purchase Consideration as per AS-14 means amount given to

shareholders [Equity + Preference] in the form of shares, security or cash.

3. Vendor Company = Transferor company or Amalgamated Company

4. Purchasing Company = Transferee company or Amalgamating Company

3|Pa g e
2 ACCOUNTING STANDARD 14- MERGER AND PURCHASE

AS-14 divides Amalgamation into two parts:-

[1] Amalgamation in the nature of Purchase

This is a type of amalgamation where there is genuine pooling of the

shareholders’interest and of the business of these companies. So, it is not merely
combining or pooling of the assets and liabilities of the amalgamating
companies. The accounting treatment of such amalgamation is such that the
resultant figures of assets, liabilities, capital and reserves are almost the same as
in the old companies

An amalgamation is classified as merger, if all the following conditions are

satisfied :

[i] Assets and liabilities of the old company must be transferred in the new
company at the same figures

[ii] Shareholders holding 90% of the face value of old company’s shares must
become the shareholders of the new company

[iii] The equity shareholders of the old company must be paid in the form of
shares of new company

[iv] The intention must be to continue the business of the old company after
amalgamation

[v] No changes in values of assets and liabilities of the old company must be
made in the new company.

[2] Amalgamation in the nature of Merger

An amalgamation which does not satisfy any one or more of the above
conditions falls in the category of ‘Amalgamation in the nature of Purchase’.

4|Pa g e
3 PURCHASE CONSIDERATION

Purchase Consideration [PC] Calculation

In amalgamation, absorption and external reconstruction, one company takes

over the business of one or more companies and hence, the question of
calculating purchase consideration arises. Purchase consideration is the price at
which the business (i.e. assets and liabilities) of the vendor company are taken
over by the purchasing company. There are two methods of calculating the
purchase consideration :

[1] Consideration Method

[2] Net Assets Method

- When amount of all considerations i.e ES, PS, Cash are given in the sum …
Consideration method is used

In case of consideration method –Goodwill or Capital Reserve [C/R] can be

calculated as a difference between PC or NA

i.e. PC – NA

If positive = Goodwill AND If Negative = Capital Reserve

In case of Net Assets Method - PC is Always = NA [PC =NA]

So NO Goodwill or C/R will be reflected here

STEPS FOR AMALGAMATION IN NATURE OF PURCHASE

STEP -1 Net Assets Calculation

STEP -2 Purchase Consideration Calculation

STEP-3 Goodwill or Capital Reserve

STEP-4 Public Issue Calculation

5|Pa g e
4 INTRINSIC VALUE OF SHARES

When one company absorbs the business of another company, then while
making payment of purchase consideration, the shares are issued on the basis of
its intrinsic value. It means that it becomes necessary to ascertain the intrinsic
value of shares of both the companies. Sometimes, the debts of the purchasing
company include debts due from the vendor company of the purchasing
company include debts due from the vendor company or vice-versa. Such inter
company indebtedness or inter-company transactions will have to be eliminated
or cancelled on amalgamation of business of these two companies

Once purchase consideration is fixed, the purchasing company will issue its
shares in satisfaction of purchase price. While exchanging new shares for old
shares the intrinsic value of shares is taken into account. Intrinsic value of
shares is arrived at by dividing the value of net assets by the number of shares.

While calculating the intrinsic value of share, the following points should
be kept in mind:

[1] The assets should be valued at their realisable values ( Market value) and not
their book values. If however, the realisable values are not given then the book
values may be taken as realisable value.

[2] While calculating net assets, goodwill is generally valued and added to total
assets. If the goodwill appearing in Balance sheet is valueless, it should not be
included

[3] While calculating net assets, goodwill is generally valued and added to total
assets. E.g. profit & loss Account (Dr.Bal), preliminary expenses, Discount on
issue of shares or debentures etc.

[4] While calculating net assets, only debts payable to outsiders (third party
Liabilities) such as creditors, provision for taxation etc. should be deducted

6|Pa g e
from total assets. Even unrecorded liabilities should be considered but items
appearing under the heading of Reserves & Surplus should not be deducted
from total assets

5 INTER-COMPANY TRANSATION

[A] Debtors/creditors and Bills Receivable/Bills Payable:At the time of

amalgamation or absorption of companies, if the vendor company owes to the
purchasing company or vice versa, then such intercompany owings
(indebtedness) will have to be eliminated. E.g. A Ltd. absorbs B Ltd and BLtd
owes Rs 10,000 to A Ltd. It means Debtors of A Ltd will be reduced by Rs 10,
and creditors of B Ltd will be reduced by the same amount. The entry in the
books of A Ltd will be as follows:

Sundry Creditors (of B Ltd.) A/c Dr. 10,000

TO Sundry Debtors ( of A Ltd) 10,000

[Cancellation of internal indebtedness of absorption]

In Case of inter-company bill transactions,inter company Bills receivables

and Bills Payable will be cancelled. The amount of such bills will be reduced
only in respect of bills on hand and which are not discounted

E.g. Bills payable of A Ltd. are Rs 10,000 and Bills receivable of B Ltd are Rs
20,000. B Ltd purchases the business of A Ltd. All the bills payable of A Ltd
are drawn by B Ltd. In this case the bills payable of A Ltd and bills receivable
of B Ltd will be reduced by Rs 10,000 to eliminate inter-company owings. The
entry would be :

Bills Payable Account Dr. 10,000

To Bills Receivable Account 10,000

7|Pa g e
[B] Unrealised Profit in stock:

If the purchasing company has sold goods to the vendor company at a profit and
a certain portion or whole do the goods are still in stock of the vendor company,
then the question of eliminating unrealised profit arises. The stock of vendor
company taken over by the purchasing company includes profit charged by the
latter company itself. E.g. A Ltd is being absorbed by B Ltd and A Ltd has
purchased goods from B Ltd. Of these, goods worth Rs. 12000 are still in stock
of A Ltd. B Ltd charges 20% profit on its cost price.

Here, the profit included in the stock = 12000 x 20/ 120 = Rs. 2000

The following entry would be made in the books of Purchasing company

Goodwill [or capital reserve ]Dr.

To Stock Account

6 AMALGAMATION ADJUSTMENT ACCOUNT

In case of Amalgamation in the Nature of Purchase, the identity of the reserves

is not preserved. However, these reserves do not include Statutory Reserves.
Statutory Reserves are the reserves that are required to be maintained in order to
comply with a specific statute. The identity of such reserves need to be
preserved for a specific period as per the Act. Although, the identity of reserves
is typically not preserved in case of Amalgamation in nature of purchase, an
exception is made with regards to statutory reserves.

Accordingly, such Statutory Reserves are recorded in the financial statements of

the Transferee Company in Amalgamation Adjustment Account.

Remember -

- The Amalgamation Adjustment Account appears in the books, it is shown

under the heading of Other Non current Assets in the balance sheet.
- Amalgamation Adjustment Account appears only in the case of Amalgamation
in the nature of Purchase

8|Pa g e
- In case of amalgamation in the purchase only Statutory reserves are taken
over.
- In case of amalgamation adjustment account statutory reserves are recorded.
- Export Profit Reserve and Investment Allowance Reserve are considered as
statutory reserves
- In case of amalgamation in the nature of purchase Amalgamation Adjustment
Account will be shown with the equal amount ofstatutory reserves of transferor
company/ companies.

COMPREHENSIVE ILLUSTRATION-1 [ Amalgamation]

The following are the Balance Sheets of Shail Ltd. and Sheetal Ltd. as on 31-3-
2019.

Liabilities Shail Sheetal Assets Shail Sheetal

Ltd. Ltd. (Rs.) Ltd. Ltd.
(Rs.) (Rs.) (Rs.)
10 Preference Goodwill 4,00,000 -
Shares each of 8,00,000 4,00,000
Rs 10
Equity Shares Fixed Assets 18,00,000 10,00,000
(Each of Rs. 12,00,000 12,00,000
10)
Security - 2,00,000 Stock 6,60,000 6,00,000
Premium
General 6,00,000 - Debtors 4,80,000 3,00,000
Reserve
14% 4,00,000 2,00,000 Prepaid 40,000 60,000
Debentures Expenses
Creditors 5,00,000 4,00,000 Cash/Bank 3,60,000 4,00,000
Provident 3,00,000 2,00,000 Preliminary 60,000 40,000
Fund Exp.
Profit and - 2,00,000
Loss a/c
38,00,000 26,00,0000 38,00,000 26,00,000

It was decided to amalgamate both the companies and form the Suvas Ltd. with
50, 00, 000 Authorized Capital of Rs. 10 each.
The conditions of amalgamation were as under:

9|Pa g e
For Shail Ltd.:
1. Equity Shareholders were given 4 equity shares at Rs. 12 each of Suvas
Ltd. as against 3 equity shares.
2. Preference Shareholders were given 5 equity shares at Rs. 12 each of
Suvas Ltd. as against 4 preference share.
3. The 14% Debentures will get 15% premium by allotting debentures each
of Rs. 100 bearing interest at 10% p.a. at 8% discount.
4. The new company will give Rs. 80,000
5. The Shail Ltd. will pay the amount of Provident Fund to the workers
before amalgamation.
6. The New Company will purchase all the Assets and Liabilities of The
Shail Ltd. with following adjustments:
• The book value of Fixed Assets is 60% of its Market Value. Fixed
Assets are to be valued at Market value.
• 10% Bad Debt reserve is to be provided on Debtors.
• The other Assets and Liabilities are to be taken at Book Value.
For Sheetal Ltd.:

1. The Fixed Assets are to be valued 40% more.

2. The stock is to be valued at Rs. 5, 40, 000.
3. Other Assets and Liabilities are to be taken at Book Value.
4. Goodwill is to be taken at Rs. 2, 00, 000.
5. 10% Bad Debt Reserve is to be provided to debtors.
6. 14% Debenture holders were to be allowed such number of debentures in
the new company bearing 10% interest p.a. so that they can earn same
amount of interest.
7. The new company will issue 1, 60, 000 equity shares at Rs. 12 each and
remaining purchase price to be paid by cash.
The new company has issued the remaining equity shares to public at 20%
premium.
From the above information prepare Balance Sheet after amalgamation and
show all necessary calculations.
SOLUTION

SHAIL + SHEETAL = SUVAS ------- A + B = C [ AMALGAMATION]

10 | P a g e
STEP 1 FIND NET ASSETS

PARTICULARS SHAIL SHEETAL TOTAL

Goodwill ---- 2,00,000 2,00,000
Fixed Assets [ 60:100 :: 30,00,000 14,00,000 44,00,000
18,00,000: ?] [+ 40%]
Stock 6,60,000 5,40,000 12,00,000
Debtors [-10% BDR] 4,32,000 2,70,000 7,02,000
Prepaid Expenses 40,000 60,000 1,00,000
Cash / Bank[3,60,000 – 60,000 4,00,000 4,60,000
3,00,000 PF]
41,92,000 28,70,000 70,62,000
[Less Liabilities]
Creditors 5,00,000 4,00,000 9,00,000
PF ---- 2,00,000 2,00,000
Debentures[WN-1] 4,60,000 2,80,000 7,40,000
32,32,000 19,90,000 52,22,000

WN-1

Shail =

Old Debenture Value = 4,00,000

+ 15% Red Premium = 60,000

Debenture Taken over = 4,60,000

No. Of Debenture = 4,60,000 ÷ 92 = 5,000 x 100 = 5,00,000

Less: Debenture Dis 8% =40,000

4,60,000
11 | P a g e
***Deb Discount 46,000 will be deducted from R&S

Sheetal

Conversion of Debenture = 28,000/10 x 100 = 2,80,000

STEP 2 FIND PURCHASE CONSIDERATION

Particulars Shail Sheetal Total

ESC 160000 x 10= 160000 x 10 = 32,00,000
[ 3:4 ::120000 : ?] 1600000 1600000
S.Pre 160000 x 2 = 160000 x 2 = 6,40,000
320000 320000
PSC [ 4:5 :: 80000:?] 1,00,000 x 12 = ----- 12,00,000
12,00,000
Cash 80,000 70,000 1,50,000
32,00,000 19,90,000 51,90,000

STEP 3 GOODWILL / CAPITAL RESERVE [ PC-NA]

Particulars Shail Sheetal

PC 32,00,000 19,90,000
- NA 32,32,000 19,90,000
- 32,000 [Cap Res] 0
STEP 4 PUBLIC ISSUE

Authorised Capital = 5,00,000

- Issued to Vendors = 4,20,000

Remaining shares = 80,000
Issued to Public = 80000 x 12 = 9,60,000 [Received in Bank]
[Out of which SC = 8,00,000 and SP = 160000]

12 | P a g e
BALANCESHEET IN THE BOOKS OF PURCHASING COMPANY

I Equity and Liabilities Note Amount

No.
1.Shareholders Fund
[a] Share Capital 50,00,000
[b] Res &Surplus [WN-2] 9,60,000
2. Share Application Money ------
Pending Allotment [SAMPA]
3.Non Current Liability 7,80,000
[Debenture = 5,00,000 + 2,80,000]
4.Current Liability
[a] Trade Payables [Creditors] 9,00,000
[b] PF 2,00,000
[c] Other Current Liability -----
78,40,000
II Asseets
1.Non Current Assets
[a] Fixed Assets
-Tangible Assets 44,00,000
- Intangible Assets [ GW 1,68,000
2,00,000 – CR 32,000]
[b] Non Current Investment -----
[c] Other Non Current Assets -----

2. Current Assets
[a] Inventories [stock] 12,00,000
[b] Trade Receivables [Debtors 8,02,000
& PP ep]

13 | P a g e
 [c] Cash and Cash Equipments 12,70,000
[WN-3]
78,40,000

WN-2 Reserve and Surplus

Se Premium = 6,40,000 + 2,00,000 + 1,60,000 – Deb Discount 40,000 =

9,60,000

WN-3 Cash and Cash Equipment

Balance = 4,60,000 + New Issue 9,60,000 – Paid to vendors 1,50,000 =

12,70,000

COMPREHENSIVE ILLUSTRATION-2 [Absorption]

The following are the balance sheets of Urvi Ltd. and Purvi Ltd. as on 31-3-
2019:

Liabilities: Urvi Ltd. Rs. Purvi Ltd

Rs.
Equity Share Capital 18,00,000 14,40,000
Reserves and Surplus 7,20,000 21,60,000
Secured loan 18,00,000 16,00,000
Unsecured loan 3,60,000 2,00,000
Creditors 8,00,000 6,00,000
Bills Payable 2,80,000 1,20,000
57,60,000 61,20,000
Assets:
Goodwill 10,80,000 5,40,000
Factory Shed 20,00,000 25,00,000
Guj. Govt. Loan 5,20,000 6,68,000
Stock 12,00,000 18,00,000
Debtors 6,00,000 4,00,000
Cash and Bank Balance 3,00,000 1,50,000
Bills Receivable 60,000 62,000
57,60,000 61,20,000

14 | P a g e
On 31-3-2019, Purvi Ltd. agreed to absorb Urvi Ltd. on the following
conditions:
1) Debtors of Purvi Ltd. include Rs. 25,000 due from Urvi Ltd. The bills
payable worth Rs. 20,000 of Urvi Ltd. are drawn by Purvi Ltd.
2) The shareholders of Urvi Ltd. are to be given 7 shares of Purvi Ltd. in
exchange of every 10 shares held by them on the basis of the intrinsic
value.
3) The face value of shares of Urvi Ltd. was Rs. 100 each on which Rs. 50
per share was paid up whereas the face value of shares of Purvi Ltd. was
Rs. 100 each on which Rs. 40 per share paid up.
On the basis of information given above, prepare the balance sheet after
purchasing the business.
SOLUTION

STEP -1 NET ASSETS

Particulars Urvi Purvi

Goodwill 10,80,000 5,40,000
Factory 20,00,000 25,00,000
Guj. Govt. Loan 5,20,000 6.68.000
Stock 12,00,000 18,00,000
Debtors 6,00,000 4,00,000
Cash 3,00,000 1,50,000
Bills receivable 60,000 62,000
57,60,000 61,20,000
[Less : Liabilities]
- Secured Loan 18,00,000 16,00,000
- Unsecured Loan 3,60,000 2,00,000
- Creditors 8,00,000 6,00,000
- Bills Payable 2,80,000 1,20,000
25,20,000 36,00,000

15 | P a g e
 1800000÷50 ÷ 36000
14,40,000÷40 ÷36000
70 100

STEP 2 PURCHASE CONSIDERATION [Only Urvi] [PC = NA = 25,20,000]

ESC = 10:7 :: 36000 (?) = 25,200 x 100 = 25,20,000

Here, Share cap = 25,200 x 40 = 10,08,000 and

Sh Premium = 25,200 x60 = 15,12,000

BALANCESHEET IN THE BOOKS OF PURCHASING COMPANY

I Equity and Liabilities Note Amount

No.
1.Shareholders Fund
[a] Share Capital [14,40,000 + 24,48,000
10,08,000] 36,72,000
[b] Res &Surplus
[21,60,000+15,12,000]
2. Share Application Money ------
Pending Allotment [SAMPA]
3. Non Current Liability 34,00,000
4.Current Liability
Unsecured Loan [ 360000+200000] 5,60,000
Creditors [ 8,00,000 -6,00 ,000 –ICT
25000] 13,75,000
Bills Payable 280000 + 12000-ICT 3,80,000

16 | P a g e
 20000]
1,18,35,000
II Asseets
1.Non Current Assets
[a] Fixed Assets
-Tangible Assets 56,88,000
- Intangible Assets [ GW 16,20,000
10,80,000 + 5,40,000]
[b] Non Current Investment -----
[c] Other Non Current Assets -----

2. Current Assets
[a] Inventories [stock] 30,00,000
[b] Trade Receivables
[Debtors 10,00,000 - 25000] 9,75,000
[BR 122000 – 20000] 1,02,000
[c] Cash and Cash Equipments
[3,00,000 + 1,50,000] 4,50,000
1,18,35,000

COMPREHENSIVE ILLUSTRATION-3

Balance sheets as on 31 st March, 2021 of H Ltd. and P Ltd. were as under:

Balance Sheet of H Ltd.
Liabilities Rs. Assets Rs.
Share Capital: Land and Building 3,50,000
10,000 Equity Shares of Rs. 100
each 10,00,000
General Reserve 3,00,000 Machinery 7,00,000
Workmen’s compensation fund 50,000 Furniture 50,000
Profit and loss a/c 65,000 Patents 75,000
Creditors 65,000 Stock 1,50,000
Bills Payable 10,000 Debtors 50,000

17 | P a g e
 Bills Receivable 15,000
Bank 1,00,000
14,90,000 14,90,000

Balance Sheet of P Ltd.

Liabilities Rs. Assets Rs.
Share Capital: Goodwill 35,000
2,000 Equity shares of Rs. 100 2,00,000
each
Profit and loss a/c 26,000 Land and Building 1,00,000
Creditors 15,500 Vehicles 15,000
Patents 5,000
Stock 32,000
Debtors 31,000
Bank 23,500
2,41,500 2,41,500
Directors of both companies decided that:
(1) Both companies should be wound up and a new company ’ A’ Ltd. be formed to
acquire the assets and liabilities of both the companies.
(2) Authorized share capital of ‘A’ Ltd., to be fixed at Rs. 12, 00, 000 divided into 12,000
Equity shares of Rs. 100 each.
(3) ‘H’ Ltd. to be paid Rs. 14,00,000 as Purchase Consideration. 8,860 Equity shares of
Rs. 100 value to be treated at Rs. 150 per share balance purchase consideration in
cash.
(4) ‘P’ Ltd. to be paid Rs. 1,85,000 as Purchase Consideration. 1,140 Equity shares of Rs.
100 value to be treated at Rs. 150 per share balance purchase in cash.
(5) ‘H’ Ltd. and ‘P’ Ltd. shall retain cash with Bank.
(6) ‘A’ Ltd. issued remaining Equity shares at Rs. 150 per share were fully paid.
(7) The liquidation expenses of ‘H’ Ltd. and ‘P’ ltd. amount Rs. 5,000 and Rs. 3,000
respectively.

Calculate Net Assets, Purchase Consideration, Goodwill/Capital Reserve and Shares

issued to Public.
[University exam March 2023]

SOLUTION

NA Calculation

Particulars H Ltd P Ltd Total

Land & Building 3,50,000 1,00,000 4,50,000
Machine 7,00,000 - 7,00,000
Furniture 50,000 - 50,000
Vehicles - 15,000 15,000
Patents 75,000 5,000 80,000
Stock 1,50,000 32,000 1,82,000

18 | P a g e
 Debtors 50,000 31,000 81,000
Bills Receivables 15000 -------- 15,000
13,90,000 1,83,000 15,73,000
[-] Liabilities a
Bills Payable (10,000) ----- (10,000)

Creditors (65,000) (15,500) (80,500)

13,15,000 1,67,500 14,82,500

PC Calculation
Particulars H Ltd P Ltd Total
1. ESC 8860 x 150 1140 x 150 10,000 x 150 = 15,00,000
= 13,29,000 = 1,71,000

2. Cash [?] 71,000 14,000 85,000

14,00,000 1,85,000 15,85,000
15,00,000 = ESC 10,00,000 + S.P. 5,00,000

GoodWill / Capital Reserve

[ PC- NA]
Particulars H Ltd P Ltd
PC 14,00,000 1,85,000
- NA (13,15,000) (1,67,500)
Good will 85,000 17,500
= Total GW 1,02,500

+ Liquidation Exps paid by Purchasing Co. on behalf of Vendor Co.

NIL

Balance Sheet of Purchasing Co. 1,02,500

Public Issue
Authorised Capital = 12,000
[-] Issued to H Ltd and P Ltd= 10,000
[ 8860 + 1140] 2000
Therefore [2000 x 150]
Issued to Public = 3,00,000 [ Received in Bank]
ES = 2,00,000 SP = 1,00,000

19 | P a g e
SECTION –A[ Theory Questions]
1.Write a note on Amalgamation
2.What is Absorption
3. What is reconstruction
4. Explain Intercompany Transactions
5. Discuss ‘Intrinsic value of shares’
6. Write a note on ‘Amalgamation Adjustment Account’
SECTION –B [MCQs]

1. __________ governs transactions of Amalgamation , Absorption &

Reconstruction .
(A) AS -14 (B) AS-20 (C) AS 29 (D) None

2. AS -14 is mandatory w.e.f. ________________.

(A) 1-4-95 (B) 1-4-99 (C) 1-4-05 (D) None

3. When two or more companies carrying on similar business decide to

combine, a new company is formed, it is known as ..................
(A) Amalgamation (B) Absorption (C) Internal reconstruction (D) External
reconstruction

4.When one of the existing companies take over business of another company
or companies, it is
known as ...........
(A) Amalgamation (B) Absorption (C) Internal reconstruction (D) External
reconstruction

5. AS-14 governs which transactions ?

(A) Amalgamation (B) Absorption (C) Reconstruction (D) All above

6. Shares received from the new company are recorded at -

(A) Face value (B) Average price (C) Market value (D)
None of the above
7. Which of the following statement is correct?
(A) Goodwill or Capital Reserve is found out in the books of purchasing
company only
(B) Goodwill or Capital Reserve is found out in the books of vendor company
only
(C) Goodwill = Net Assets – Purchase price (D) None

8. As per AS -14 Purchase consideration means _________________ given to

shareholders.

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(A) Equity or Preference shares (B) Securities (C) Cash (D) All of the
above

9. The Amalgamation Adjustment Account appears in the books, it is shown

under the heading of ......... in the balance sheet.
(A) Reserve and Surplus (B) Fixed Assets (C) Investments(D) Other Non
Current Assets

10. If amalgamation is in the ..............., the General Reserve or Profit and Loss
A/c balances of vendor companies will NOT be taken .
(A) Form of Merger (B) Form of purchase (C) Net assets method (D)
Consideration method

11. If the intrinsic values of shares exchanged are not equal, the difference is
paid in ...........
(A) Cash (B) Debenture (C) Pref. share (D) Assets

12. In case of .............., no new company is formed , one existing company

takes over the business of another company.
(A) Amalgamation (B) Absorption (C) Reconstruction (D) None of the
Above

13.In amalgamation of two companies

(A) Both companies lose their existence (B) New company is formed
(C)Both companies continue (D) Both (A) & (B)

14. When purchasing company pays purchase consideration, it will be debited

to
(A) Business purchase account (B) Assets account
(C) Liquidator of selling company’s account (D) Directors’ Account

15. When the purchasing company bears the liquidation expenses, it will
debited to
(A) Vendor Company’s Account (B) Bank Account (C) Goodwill
Account (D) No Entry

16. When the Net Assets are less than the Purchase Consideration, the
difference will be
(A) Goodwill (B) General Reserve (C) Capital Reserve (D) None of
these
17. While calculating Net assets ,............... of assets is to be considered.
(A) Book value (B) Book Value OR Revised valueas instructed
(C) Average price (D) Capital value
21 | P a g e
18. Net Assets minus Capital Reserve is _________
(A) Goodwill (B) Total assets (C) Purchase consideration (D) None of
these

19. Net Assets / No. of shares = ____________.

(A) Fair Value (B) Face Value (C) Intrinsic Value (D) Yield
Value

20. For deciding price of the shares to be given for Purchase Consideration at
the time of absorption, ............ of the share is to be determined
(A) Fair Value (B) Face Value (C) Intrinsic Value (D) Yield
Value

21. If Net Assets ₹ 4,00,000& Purchase consideration ₹ 5,50,000 ,Calculate

Goodwill or Capital Reserve :
(A) ₹ 1,50,000 Goodwill (B) ₹ 1,50,000 Capital
Reserve
(C) ₹ 1,50,000 General Reserve (D) None

22. A Ltd. Purchased the business of B Ltd. worth ₹ 25,00,000 for ₹ 28,50,000 .
A Ltd. also paid liquidation expenses on behalf of B Ltd. ₹ 50,000. Calculate
amount of Goodwill or Capital Reserve :
(A) ₹ 3,50,000 Goodwill (B) ₹ 4,00,000 Goodwill (C) ₹ 3,50,000 Capital
Reserve (D) None

23. A Ltd. Purchased the business of B Ltd. worth ₹ 25,00,000 for ₹ 22,50,000 .
A Ltd. also paid liquidation expenses on behalf of B Ltd. ₹ 50,000. Calculate
amount of Goodwill or Capital Reserve :
(A) ₹ 2,50,000 Goodwill (B) ₹ 4,00,000 Goodwill (C) ₹ 2,00,000 Capital
Reserve (D) None

24. X Ltd. take over 10% debentures of Y Ltd. of ₹ 1,00,000 at 10% premium
by issuing its new debentures of 12% of the same value . Calculate debenture
liability taken over by X Ltd.
(A) ₹ 1,00,000 (B) ₹ 1,10,000 (C) ₹ 1,20,000 (D) None

25. In case of inter company transactions under absorption , if creditors of

purchasing company includes ₹ 24,000 due to vendor company what will be the
effect while preparing Balance sheet after absorption .
(A) ₹ 24,000 reduced from creditors of Purchasing company
(B) ₹ 24,000 reduced from creditors of Vendor company
22 | P a g e
(C) ₹ 24,000 reduced from Debtors of Vendor company
(D) Both (A) & (C)

26. In case of inter company transactions under absorption , if Bills Payables of

Vendor company includes ₹ 42,000 due to Purchasing company what will be
the effect while preparing Balance sheet after absorption .
(A) ₹ 42,000 reduced from Bills Payables of Purchasing company
(B) ₹ 42,000 reduced from Bills Payables of Vendor company
(C) ₹ 42,000 reduced from Bills Receivables of Purchasing company
(D) Both (B) & (C)

27. Amalgamation Adjustment Account appears only in the case of

Amalgamation in the nature of ___________________.
(A) Purchase (B) Merger (C) Both (D) None

28. If any one condition of all five conditions as per AS-14 is not satisfied its
Amalgamation in the nature of ___________.
(A) Merger(B) Purchase (C) Both (D) None

29. Purchasing Company is also known as ______________ company

(A) Transferee (B) Transferor (C) Seller (D) None

30. In case of Amalgamation company which is formed to take of business is

called :
(A) Amalgamating co.(B) Amalgamated Co. (C) Amalgamator Co. (D)
None

31. Vendor Company is also known as ______________ company

(A) Transferee (B) Transferor (C) Seller (D) None

32. In case of Amalgamation companies which lose their existence are called :
(A) Amalgamating co.(B) Amalgamated Co. (C) Amalgamator Co. (D)
None

33. Amalgamation is classified in to _______ types as per AS-14.

(A) Two (B) Three (C) Four (D) None

34. If all of the five conditions are satisfied , Amalgamation can be classified as
amalgamation in the nature of ____________ .
(A) Merger (B) Purchase (C) Takeover (D) None

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35. Under Purchase Method Equity shareholders can be given consideration in
the form of _____ (A) Shares (B) Securities (C) Cash (D) All
of the above

36. For merger shareholders holding not less than ________% of face value of
transferor company should be the share holders in transferee company.
(A) 90% (B) 95% (C) 80% (D) None

37. In case of Amalgamation in the nature of Purchase, _____________

method is used.
(A) Purchase(B) Pooling of Interest (C) Net Asset (D) None

38. Net Assets + Goodwill = _______________.

(A) Purchase consideration (B) Total Assets (C) Goodwill (D)
None

39. Purchase Consideration + Capital Reserve = _______________.

(A) Net Assets (B) Total Assets (C) Goodwill (D) None

40. A Ltd. Purchased the business of B Ltd. worth ₹ 50,00,000 for ₹ 57,00,000
. B Ltd. paid liquidation expenses of ₹ 1,00,000. Calculate amount of Goodwill
or Capital Reserve :
(A) ₹ 7,00,000 Goodwill(B) ₹ 8,00,000 Goodwill (C) ₹ 7,00,000 Capital
Reserve (D) None

41. Fixed Assets of K ltd. in books were of 32,00,000 which were 20% less than
market value, Calculate market value :
(A) ₹ 25,60,000 (B) ₹ 40,00,000 (C) ₹ 38,40,000 (D) None

42. In case of amalgamation in the purchase only _________________ reserves

are taken over.
(A) Statutory (B) Capital (C) General (D) None

43. In case of inter company transactions under absorption , if Bills Receivables

of Vendor company includes ₹ 64,000 due from Purchasing company what will
be the effect while preparing Balance sheet after absorption .
(A) ₹ 64,000 reduced from Bills Payables of Purchasing company
(B) ₹ 64,000 reduced from Bills Receivables of Vendor company
(C) ₹ 64,000 reduced from Bills Receivables of Purchasing company
(D) Both (A) & (B)

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44. In case of inter company transactions under absorption , if creditors of
Vendor company includes ₹ 83,500 due to Purchasing company what will be
the effect while preparing Balance sheet after absorption .
(A) ₹ 83,500 reduced from creditors of Purchasing company
(B) ₹ 83,500 reduced from creditors of Vendor company
(C) ₹ 83,500 reduced from debtors of purchasing company
(D) Both (B) & (C)

45. Net Assets = _______________.

(A) Assets taken over – Liabilities accepted (C) Goodwill
(B) Total Assets +Total Liabilities (D) None

46. Purchase Consideration – Goodwill = _______________.

(A) Net Assets (B) Total Assets (C) Capital Reserve (D) None

47. In case of amalgamation adjustment account ________________ reserves

are recorded.
(A) Statutory (B) Capital (C) General (D) None

48. Debtors of Vendor company are of ₹ 1,84,000 which was overvalued by

15% ,Calculate value of debtors for net assets :
(A) ₹ 1,56,400 (B) ₹ 1,60,000 (C) ₹ 2,11,600 (D) None

49. Current assets of A Ltd. was worth ₹ 11,00,000 . 25% of which consist of
stock which was over valued by 10 %. Calculate value of current assets.
(A) ₹ 10,75,000 (B) ₹ 11,00,000 (C) ₹ 13,50,000 (D)
None

50. 10% Debenture holders of ABC Ltd. of ₹ 5,40,000 are to be paid 10%
premium by issuing 12% debentures in XYZ Ltd. at 10% discount. Calculate
the value of debenture shown in Balance sheet of purchasing company as
liability :
(A) ₹ 6,60,000 (B) ₹ 5,94,000 (C) ₹ 6,00,000 (D) None

51. 10% Debenture holders of ABC Ltd. of ₹ 5,40,000 are to be paid 10%
premium by issuing 12% debentures in XYZ Ltd. at 10% discount. Calculate
the value of debenture discount shown in Balance sheet of purchasing company
(A) ₹ 66,000 (B) ₹ 54,000 (C) ₹ 60,000 (D) None

52. O Ltd. was absorbed by P Ltd. Purchase consideration to be paid on the

basis of intrinsic value of shares of both the companies. Net assets of P Ltd. ₹
3,00,000& O Ltd. ₹ 2,40,000.

25 | P a g e
Number of equity shares in both the companies were 10,000. Calculate
exchange ratio of shares of vendor company to purchasing company on the
basis of intrinsic value .
(A) 4:3 (B) 3: 2 (C) 4:5 (D) None

53. Which are considered as statutory reserves ?

(A) Export Profit Reserve (B) Investment Allowance
Reserve
(C) Both (A) & (B) (D) None

54. Write the entry for reversal of statutory reserve ,when they are no longer
required to maintain
(A) Statutory Reserves a/c Dr. To, Amalgamation Adjustment a/c
(B) Amalgamation Adjustment a/c Dr. To, Statutory Reserve a/c
(C) Statutory reserve a/c Dr. To, General reserve a/c
(D) None

55. Goodwill arising due to amalgamation in the nature of purchase should be

written off within a maximum period of _________ years.
(A) 5 (B) 10 (C) 15 (D) None

56. write journal entry for writing off goodwill & capital reserve:
(A) Capital Reserve a/c Dr. To Goodwill a/c [ With lower amount of the
two]
(B) Capital Reserve a/c Dr. To Goodwill a/c [ With higher amount of the
two]
(C) Goodwill a/c Dr. To Capital Reserve a/c [ With lower amount
of the two]
(D) None of the above

57. Goodwill on amalgamation can be explained as per AS-14

(A) It represents a payment made in anticipation of future income ,appropriate
to treat as an asset
(B) It should be amortised to P/L a/c on a systematic basis over its useful life
(C) the amortization period should not exceeding five years or any other
justifiable period
(D) All of the above

58. In case of Purchase Method the difference between the purchase

consideration and Net Assets of transferor company is adjusted against :
(A) Reserve or Profit/Loss a/c (B) Goodwill or Capital Reserve (C) Cash
(D) None
26 | P a g e
59. In case of amalgamation in the nature of purchase Amalgamation
Adjustment Account will be shown with the equal amount of _____________
reserves of transferor company/ companies.
(A) Statutory (B) Capital (C) General (D) None

60. While closing books of vendor company under purchase method , reserves
& balance of profit & loss a/c shown in balance sheet to be handed over to
___________ shareholders .
(A) Preference (B) Equity (C) Both (A) & (B) (D) None

61. Authorised capital of transferee company was 12,000 equity shares of ₹ 10

each. Company issued 3,400 shares to A Ltd. & 5,600 shares to B Ltd. as a part
of purchase consideration. How many shares transferee company can issue to
public ?
(A) 3,000 shares (B) 6,400 shares (C) 8,600 shares (D) None

62. From the following details calculate goodwill / capital reserve amount to be
shown in the books of Purchasing company:
Particulars A Ltd. B Ltd.
Net Assets 5,00,000 4,70,000
Purchase consideration 6,00,000 2,00,000
Liquidation expenses paid on behalf of vendor 10,000 5,000
company
(A) ₹ 1,70,000 Goodwill (B) ₹ 1,55,000 Capital Reserve (C) ₹ 2,70,000
goodwill (D) None

63. Shares to be issued to vendor company as purchased consideration can be

calculated by which formula :
(A) Net Assets of Vendor Company/ Intrinsic value of Purchasing company
(B) Net Assets of Vendor Company/ Intrinsic value of Vendor company
(C) Net Assets of Purchasing Company/ Intrinsic value of Vendor company
(D) None

64. If debentures of transferor company are exchanged with the debentures of

transferee company having higher rate of interest in such a way that same inters
income continues , the value of debenture liability taken for Net Assets
calculation will :
(A) Increase (B) Decrease (C) remain same (D)None

27 | P a g e
65. If debentures of transferor company are exchanged with the debentures of
transferee company having lower rate of interest in such a way that same inters
income continues , the value of debenture liability taken for Net Assets
calculation will :
(A) Increase(B) Decrease (C) remain same (D)None

66. If debentures of transferor company are exchanged with the debentures of

transferee company having different rate of interest in such a way that same
inters income continues , the value of debenture liability taken for Net Assets
calculation will be calculate by which formula:
(A) Old Interest of Debentures / New rate of Debenture
(B) New Interest of Debentures / Old rate of Debenture
(C) Old Interest of Debentures / Old rate of Debenture (D) None

67 K Co.’s Balance Sheet shows Fixed Asset ₹ 2,46,500 , which is 15% less
than the market value, then market value of such fixed assets is ............
(A) ₹ 2,83,475 (B) ₹ 2,09,525 (C) ₹ 2,90,000 (D) None of these

68. Net Assets of Y Co. for Purchase Consideration was worth ₹ 2,00,000. At
the time of absorption, If the Purchasing company has paid 16,000 equity shares
each of ₹ 10 each at 10% premium, then remaining cash to be paid as purchase
consideration will be -
(A) ₹ 24,000 (B) ₹ 42,000 (C) ₹ 40,000 (D) ₹ 60,000

69. In case of inter company transactions under absorption, if Stock of

purchasing company includes stock purchased from vendor company at 10,000
,having 25% profit on sales , what amount will be eliminated from stock while
preparing Balance sheet after absorption .
(A) ₹ 2,500 (B) ₹10,000 (C) ₹ 2,000 (D) None

70. In case of inter company transactions under absorption , if Stock of

purchasing company includes stock purchased from vendor company at 10,000
,having 25% profit on Cost, what amount will be eliminated from stock while
preparing Balance sheet after absorption .
(A) ₹ 2,500 (B) ₹ 10,000 (C) ₹ 2,000 (D) None

SECTION –C [Short Questions]

[1] The 14% debenture holders of ₹ 4,00,000 O Ltd. will get 15% premium by
allotting debentures of P Ltd. of ₹ 100 bearing interest @ 10%p.a. at 8%
discount. Calculate amount of debenture liability taken over for Net Assets
calculation :

28 | P a g e
(Ans) ₹ 4,60,000

[2] M Ltd. absorbed N Ltd. on 31-3-18. As per balance sheet , stock of N Ltd.
includes goods valued at ₹ 72,000 purchased from M Ltd. ,goods were sold so
as to realise 25% profit on sales.
Which is the journal entry for above transaction in the books of M Ltd.

(Ans) Goodwill a/c Dr. 18,000

To , Stock a/c 18,000

[3] A Ltd. Purchased the business of B Ltd. worth ₹ 25,00,000 for ₹ 22,50,000
. B Ltd. paid liquidation expenses of ₹ 50,000. Calculate amount of Goodwill or
Capital Reserve

(Ans) ₹ 2,50,000 Capital Reserve

[4] Net Assets of Y Co. for Purchase Consideration was worth ₹ 5,00,000. At
the time of absorption, the Purchasing company has paid 20,000 equity shares
each of ₹ 10 each at 10% premium, 12%, 2,000 Preference Shares of ₹ 100
each at 12% premium & then remaining cash to be paid as purchase
consideration will be ?
(Ans) ₹ 56,000

[5]10% Debenture holders of ABC Ltd. of ₹ 5,40,000 are to be paid 10%

premium by issuing 12% debentures in XYZ Ltd. at 10% discount. Calculate
the value of debenture liability taken over in Net assets.
(Ans) ₹ 5,94,000

[6]From the following details calculate goodwill / capital reserve amount to be

shown in the books of Purchasing company:
Particulars A Ltd. B Ltd.
Net Assets 5,00,000 4,70,000
Purchase consideration 8,00,000 2,00,000
Liquidation expenses paid on behalf of vendor 10,000 5,000
company
(Ans)₹ 45,000 goodwill
[7]Authorised capital of transferee company was 12,000 equity shares of ₹ 10
each. Company issued 3,400 shares to A Ltd. & 5,600 shares to B Ltd. as a part
of purchase consideration. How many shares transferee company can issue to
public & calculate amount received from public issue if shares are issued
at10% premium
(Ans) 3,000 shares & ₹ 3,30,000
29 | P a g e
SECTION –D

Sum 1. Balance sheets as on 31st March, 2022 of Harshad Ltd. and Pravin Ltd.
were as under:
Balance Sheet of Harshad Ltd.
Liabilities Rs. Assets Rs.
Share Capital: Land and Building 3,50,000
10,000 Equity Shares of
Rs. 100 each 10,00,000
General Reserve 3,00,000 Machinery 7,00,000
Workmen’s compensation 50,000 Furniture 50,000
fund
Profit and loss a/c 65,000 Patents 75,000
Creditors 65,000 Stock 1,50,000
Bills Payable 10,000 Debtors 50,000
Bills Receivable 15,000
Bank 1,00,000
14,90,000 14,90,000

Balance Sheet of Pravin Ltd.

Liabilities Rs. Assets Rs.
Share Capital: Goodwill 35,000
2,000 Equity shares of Rs. 2,00,000
100 each
Profit and loss a/c 26,000 Land and Building 1,00,000
Creditors 15,500 Vehicles 15,000
Patents 5,000
Stock 32,000
Debtors 31,000
Bank 23,500
2,41,500 2,41,500
Directors of both companies decided that:

[1] Both companies should be wound up and a new company Anand Ltd. be
formed to acquire the assets and liabilities of both the companies.

30 | P a g e
 [2] Authorized share capital of Anand Ltd., to be fixed at Rs. 12, 00, 000
divided into 12,000 Equity shares of Rs. 100 each.
[3] Harshad Ltd. to be paid Rs. 14,00,000 as Purchase Consideration. 8,860
Equity shares of Rs. 100 value to be treated at Rs. 150 per share balance
purchase consideration in cash.
[4] Pravin Ltd. to be paid Rs. 1,85,000 at Purchase Consideration. 1,140
Equity shares of Rs. 100 value to be treated at Rs. 150 per share balance
purchase in cash.
[5] Harshad Ltd. and Pravin Ltd. shall retain cash with Bank.
[6] Anand Ltd. issued remaining Equity shares at Rs. 150 per share were
fully paid.
[7] The liquidation expenses of Harshad Ltd. and Pravin ltd. amount Rs. 5,000
and Rs. 3,000 respectively.
WRITE JOURNAL ENTRIES IN THE BOOKS OF PURCHASING
COMPANY AND SHOW ALL THE CALCULATIONS
Sum 2 The Balance Sheets of Gebi Ltd. and Jagnath Ltd. as on 31-03-22 were
as under:
Balance Sheet of Gebi Ltd.

Liabilities Rs. Assets Rs

Share capital 30,000 Land and Building 1,16,000
shares of Rs. 10 each 3,00,000
8% Debentures 50,000 Plants 64,000
Creditors 60,000 Stock 90,000
Bills Payable 15,000 Debtors 56,000
Less BDR 2,800 53,200
Profit and Loss A/c 1,01,800
4,25,000 4,25,000
Balance Sheet of Jagnath Ltd.
Liabilities Rs. Assets Rs.
Share capital 80,000 Goodwill 60,000
equity shares of Rs. 10 8,00,000
each
Profit and Loss A/c 30,000 Building 2,40,000
General Reserve 80,000 Plant 1,80,000

31 | P a g e
7% Debentures 2,00,000 Stock 3,20,000
Creditors 40,000 Debtors 1,60,000
Bills Payable 10,000 Bills Receivable 1,20,000
Bank Balance 80,000
11,60,000 11,60,000
The two companies decides to amalgamate on 1-4-2022 and a new company
Mahadev Ltd. was formed with and authorized capital of Rs. 2,00,000 divided
in shares of Rs. 10 each.
The new company agreed to take over all assets and liabilities at book values
of old companies. The purchase consideration were agreed as follows:
Gebi Ltd:
(1) 4 shares of Rs. 10 each fully paid in the new company in exchange of 5
shares of Gebi Ltd.
(2) The debenture-holders of Gebi Ltd. were to be allotted such debentures in
new company bearing interest at 10% p.a. as would bring them same
amount of interest.
(3) Rs. 6,000 to be paid in cash to Gebi.
Jagnath Ltd:
(1) 6 shares of Rs. 10 each fully paid in the new company in exchange of 5
shares of Jagnath Ltd.
(2) The debenture holders of Jagnath Ltd. were to be allotted such debentures
in the new company bearing interest at 10 % p.a. as would bring them the
amount of interest.
(3) Rs. 10 in cash for every 5 shares of Jagnath Ltd.
The expenses of winding up of Gebi Ltd. Rs 2,000 and Jagnath Ltd. Rs 4,000
were paid by Mahadev Ltd.
Remaining shares were issued to public at a premium of Rs. 2 per share for
cash, which have been fully paid up. Show all the calculations and prepare
new Balance Sheet.

Sum 3 The Balance Sheets of Hira and Moti Company as on 31-3-2022 are
given below:
Hira Limited
Liabilities Rs. Assets Rs.
Paid up capital: Land and Building 40,000
Fully paid shares of Rs 10 50,000
each
General Reserve 10,000 Machinery 20,000
Workmen’s Compensation 2,000 Stock 10,000
Fund
Profit and Loss Account 5,000 Debtors
5,000 4,600

32 | P a g e
 Less BDR
400
12% Debentures 10,000 Investment 5,000
Creditors 8,000 Cash 2,000
Preliminary Expenses 3,400
85,000 85,000
Moti Limited

Liabilities Rs. Assets Rs.

Fully paid Equity shares of 20,000 Building 15,000
Rs. 10 each
General Reserve 5,000 Machinery 10,000
Provident Fund 5,000 Stock 8,000
Creditors 15,000 Debtors 5,000
Cash 6,000
Profit and Loss Account 1,000
45,000 45,000
It was decided to establish a new Company Hira-Moti Limited on 1-4-2022 to
carry out amalgamation of both the above companies. Main conditions of
amalgamation were as under:
For Hira Limited
(1) Goodwill of the company was to be calculated at twice the total profit of
the past three years. Average profit of the last three years was Rs. 2,500.
(2) Book-value of land and building is 20% less than the market value. Land
and building were to be taken up at the market price.
(3) Investments except that of Rs. 1,500 and cash are not to be taken.
(4) Debtors require a provision of 10% as bad debt reserve.
(5) A claim of Rs. 500 is accepted by the company against workmen’s
compensation fund, which will be paid by Hira-Moti Ltd. in future.
(6) Purchase consideration will be discharged as follows:
(i) Equal number of new Company’s equity shares of Rs. 10 each at a
price of rs. 16 per share
(ii) 10 % new Company’s debentures to the debenture holders of the
old do not sustain any interest loss in future.
(iii) Balance amount in cash.
For Moti Limited
(1) Machinery to be valued 10% more. All other assets and liabilities to be
taken at their book-value.
(2) Purchase consideration to be discharged in to form of 1,500 shares of Rs.
10 each of the Hira-Moti Company at a market price of Rs. 16 and the
balance in cash.
Prepare balance sheet and Show your calculations.
33 | P a g e
Sum 4 Balance Sheet of Dev. Co. Ltd and Anand Co. Ltd as on 31-3-22 are
as under:
Liabilities Dev. Co. Anand Assets Dev Co. Anand
Rs. Co. Rs. Rs. Co. Rs
Equity Share Land- 4,00,000 5,50,000
Capital Rs. Building
25 each fully 4,00,000 7,00,000
paid up
Securities 40,000 - Machinery 3,00,000 2,50,000
Premium
Profit and 1,60,000 - Investments 1,00,000 50,000
Loss A/c
12% 2,00,000 3,00,000 Stock 80,000 50,000
Debentures
Creditors 2,76,000 64,000 Debtors 1,20,000 1,50,000
Bank - 1,00,000 Bank A/c 75,000 -
Debenture 24,000 36,000 Cash 25,000 20,000
Interest
unpaid
Share - 30,000
Discount
Losses - 1,00,000
11,00,000 12,00,000 11,00,000 12,00,000
Devanand Company Ltd. is formed to amalgamate the two companies with
1, 25, 000 equity shares of Rs. 10 each. The business of the two companies
(except investment of Dev. Co. Ltd. and Bank overdraft of Anand Co. Ltd) is
to be taken over. Assets and Liabilities are to be valued at book value.
The total purchase consideration of two companies is fixed at Rs. 10, 00,
000. The purchase consideration of Dev. Co. Ltd is so fixed that Rs.
1,00,000 is to be paid to Dev. Co. as goodwill; Rs. 40,000 and Rs, 8,000 will
be will be paid in cash respectively for purchase consideration and for the
balance the shares of Devanand Co. of Rs. 10 each at 12% premium will be
given.
The two companies had paid Rs. 3,000 and Rs. 2,000 respectively as
liquidation expenses, which was to be borne and paid by Devanand Co.
Devanand Co. paid these amounts. Company formation expenses Rs. 15,000
are paid by the new Co. 25% from the remaining shares were issued to
public at 12% premium these shares were subscribed for and were fully paid
up. Use Capital Reserve to write off goodwill.
Pass necessary journal entries in the books of Devanand Co. and also prepare
its balance sheet.

34 | P a g e
Sum-5 14% debenture holders of ₹ 2,00,000 of ABC Ltd. were to be
allotted such numbers of debentures of P Ltd. of 10% in such a way that
debenture holders of ABC Ltd. gets same amount of interest. Calculate
amount of debenture liability taken over
Sum-6 X Ltd. Purchased the business of Y Ltd. worth ₹ 50,00,000 for
₹ 54,00,000 . X Ltd. also paid liquidation expenses on behalf of Y Ltd.
₹ 1,00,000. Calculate amount of Goodwill or Capital Reserve :
Sum-7 Current Assets of Vendor company are of ₹ 92,000 which was
over valued by 15% ,Calculate value of current assets for net assets
Sum-8 Fixed assets of P Ltd. were worth ₹ 6,00,000. It includes Land &
Building and Machinery in the proportion of 3 : 1 . The value of Land &
Building as shown in the books is 10% less than market value while
market value of Machine is 10% less . Calculate value of Fixed Assets
for Net Assets
Sum-9 Equity Shareholders of A Ltd. are entitled to ₹ 16 per share in
cash & allotment of one 14% Preference shares of ₹ 10 each & 6 Equity
shares of ₹ 10 each fully paid for every 4 shares in A Ltd. The number
of shares of A Ltd. are 2,00,000 of ₹ 10 each full paid. Compute the
Purchase consideration
Sum-10 Y Ltd.’s Fixed Assets were worth ₹ 15,00,000 , which includes
goodwill of ₹ 1,00,000 being Worthless. The market value of remaining
assets is 20% more. Calculate value of Fixed Assets for Net Assets
Sum-11 A Ltd. agreed on following conditions in the process of
amalgamation :
[1] 1,68,000 equity shares of ₹ 10 fully paid to Equity Shareholders of
vendor Co.
[2] 8,976 , 14% Preference shares of ₹ 100 to Preference share holders
of vendor co.
[3] 15% debentures to old debenture holders of 2,00,000 in such a way
that they get10% premium. Calculate Purchase consideration.

Sum-12 Fixed Assets of Prashant Ltd and Anuvi Ltd in the balance
sheet is Rs. 6,00,000 and 2,40,000 respectively.
The fixed assets of both the companies include Land and Building and
Machinery in the proportion 3:1. The value of Land and Building as
shown in the books is 10% less than the market value, whereas the
market value of Machinery is 10% less. Calculate revised value.

35 | P a g e
Sum-13 S Ltd. absorbed business of K Ltd. It was agreed that S Ltd.
will give its 4 equity shares of ₹ 100 at a price of ₹120 against 5 equity
shares of K Ltd. and ₹ 5 in cash for each share of K Ltd. Share Capital
in K Ltd. was ₹ 2,50,000 of ₹ 100 each. Calculate Purchase
consideration .
Sum-14 Balance Sheet of Komal Ltd. as on 31-3-2022:
Liabilities Rs. Assets Rs.
Subscribed and paid up Goodwill 40,000
Equity share capital:
2500 equity shares of Rs. 2,50,000
100 each
General Reserve 50,000 Fixed Assets 3,00,000
10% Debentures 1,00,000 Current Assets 1,00,000
Creditors 40,000
4,40,000 4,40,000
On and from 1-4-2022, Shital Ltd. absorbs Komal Ltd. on the following terms
and conditions:
1) Shital Ltd. agrees to take fixed assets (except furniture of Rs.20, 000) at
15% less than the book value.
2) Shital Ltd. accepts current assets (except cash balance Rs.10, 000) at 5%
less than the book value. New company does not take cash.
3) Shital Ltd. agrees to take liabilities of Komal Ltd. at book value
4) 4 equity shares of Shital Ltd. each of Rs. 100 each at a price of Rs. 120
will be given against 5 equity shares of Komal Ltd.
5) Rs. 5 in cash will be given for each equity share of Komal Ltd.
6) Debenture holders will be given 8% Debentures of new company in such
amount, so as to maintain their current income of interest.
7) Komal Ltd. sold furniture for Rs. 30,000.
8) Liquidation charges of Rs. 5,000 were paid by Komal Ltd.
From the information, given above:
a) Prepare in the books of Komal Ltd:
i) Realization A/c
ii) Equity Shareholders A/c
iii) Cash A/c
iv) Shital Ltd A/c
Sum 15 The following are the Balance Sheets of Jagat Co. Ltd. and Rangat Co.
Ltd. as on 31-3-2022:

Liabilities Jagat Co Rangat Assets Jagat Co Rangat

Ltd Rs. Co Ltd Ltd Rs. Co Ltd
Rs Rs
30,000 equity Fixed Assets 32,00,000 10,24,000

36 | P a g e
shares of Rs.
100 each fully 30,00,000 -
paid up
16,000 equity Investments 8,00,000 2,00,000
shares of Rs.
100 each, Rs - 8,00,000
50 paid up
General 18,00,000 4,06,000 Current Assets 16,00,000 5,76,000
Reserve
10% Profit and Loss - 2,00,000
Debentures of 8,00,000 6,00,000 A/c
Rs. 100 each
Creditors 4,00,000 1,94,000 Preliminary 4,00,000 -
exp.
60,00,000 20,00,000 60,00,000 20,00,000
On 1-4-2022, Jagat Co. Ltd. agreed to absorb Rangat Co. Ltd on the following
conditions:
1) The fixed assets of Jagat Co. Ltd. as shown in the books are 20% less
than the market value, whereas the current assets of Rangat Co. Ltd.
includes stock worth Rs. 1,76,000 which is overvalued by 10%.
2) Market value of investments of both companies are 25% more than its
books value.
3) The purchase consideration was to be satisfied by the issue of three fully
paid equity shares of Jagat Co. Ltd., in exchange of ten equity shares of
Rangat Co. Ltd. on the basis of intrinsic value of their shares and
balance amount in cash.
From the above information, prepare following Ledger Accounts in the
books of Rangat Co. Ltd.:
1) Realization A/c
2) Jagat Co. Ltd.’s Account
3) Jagat Co. Ltd.’s Equity Shares Account
4) Equity Shareholders Account
5) Cash/Bank Account
Pass necessary entries in the books of Jagat Co. Ltd.
Sum-16 The following are the Balance Sheets Of Timir Ltd. and Tej Ltd. as on
31-3-2022:
Liabilities Timir Tej Ltd. Assets Timir Tej Ltd.
Ltd. Rs. Rs. Ltd. Rs. Rs.
Equity Share 4,00,000 3,20,000 Goodwill 2,00,000 1,00,000
Capital
General 1,00,000 3,00,000 Plant & 5,00,000 6,00,000

37 | P a g e
Reserve Machines
Profit and Loss 60,000 1,80,000 Investments 1,00,000 1,24,000
A/c
10% 4,80,000 4,00,000 Stock 80,000 1,50,000
Debentures
Creditors 2,00,000 1,00,000 Debtors 2,50,000 2,00,000
Bills Payable 40,000 60,000 Bills 70,000 76,000
Receivable
Cash-Bank 80,000 1,10,000
12,80,000 13,60,000 12,80,000 13,60,000
On 1-4-2022, Tej Ltd. entered into a contract to absorb the business of Timir
Ltd. As per this contract, Tej Ltd. has to issue equity shares to Timir Ltd. in
such a manner that intrinsic value of shares of both the companies happens to be
equal. The face value of Timir Ltd. was Rs. 100 per share, on which Rs. 50 per
share were paid up. The face value of shares of Tej Ltd. was Rs. 100 per share,
on which Rs 40 were paid up.
Stock of Tej Ltd. includes Rs. 75,000 due from Timir Ltd. Half of the Bills
payable of Timir Ltd. were drawn by Tej Ltd.
From the above information, prepare
1) Calculations of Purchase price of Timir Ltd.
2) Balance Sheet of Tej Ltd. after the absorption of Timir Ltd.

Sum - 17 A Ltd. was absorbed by K Ltd. Purchase consideration to be paid on

the basis of intrinsic value of shares of both the companies. Net assets of K Ltd.
₹ 2,00,000& A Ltd. ₹ 1,40,000.
Share Capital of A Ltd. ₹ 1,00,000 consisting of shares of face value ₹10 on
which ₹ 5 was paid up . Share Capital of K Ltd. ₹ 80,000 consisting of shares of
nominal value ₹10 on which ₹ 4 was paid up .Calculate number of shares to be
issued as purchase consideration to A Ltd. on the basis of intrinsic value.

Sum-18 From the following details Find [1] Amount of Share capital in
purchase consideration
[2] Amount of Securities Premium [3] Amount of Cash given in Purchase
Consideration:
Particulars O Ltd. P Ltd.
Net Assets 9,80,000 6,00,000
Share Capital 7,00,000 5,00,000
Paid up value per share ₹ 50 ₹ 50
Face value ₹ 100 ₹ 100
The purchase consideration was to be satisfied by issue of 4 fully paid equity
shares of O Ltd. in exchange of 10 equity shares of P Ltd. on the basis of
intrinsic value & balance in cash.

38 | P a g e
Sum -19 The 14% debenture holders of ₹ 4,00,000 O Ltd. will get 15%
premium by allotting debentures of P Ltd. of ₹ 100 bearing interest @ 10%p.a.
at 8% discount. Calculate amount of debenture amount shown in Balance Sheet
of Purchasing Co. :

Sum -20 The 14% debenture holders of ₹ 4,00,000 O Ltd. will get 15%
premium by allotting debentures of P Ltd. of ₹ 100 bearing interest @ 10% p.a.
at 8% discount. Calculate amount of Debenture Discount

SECTION –E [Home Work]

Sum -1

The following was the Balance Sheet of Bhagyashri Ltd. and Khushbu Ltd.
as on 31st March,2019:

Liabilities Bhagyashri Khushbu AssetsBhagyashr Khushbu

Ltd. Rs Ltd. Rs. i Ltd. Rs Ltd. Rs.
Paid up Goodw 2,00,000 -
Capital : ill
Equity 20,00,000 10,00,000
Shares of
Rs. 100
each fully
paid
6% Pref. 10,00,000 - Land- 6,00,000 2,00,000
Shares of Buildin
Rs. 100 g
each fully
paid
General - 2,40,000 Plant- 12,00,000 6,00,000
Reserve Machin
ery
Bank Loan 3,00,000 - Invest 2,00,000 40,000
ments
10% 4,00,000 - Stock 5,00,000 3,00,000
Debenture
s
Worker’s - 1,60,000 Debtors 6,00,000 4,00,000
Accident

39 | P a g e
Comp.
Fund
Creditors 3,00,000 2,00,000 Cash 3,40,000 60,000
and
Bank
Prelimi 60,000 -
nary
exp.
P&L 3,00,000 -
A/c
40,00,000 16,00,000 40,00,000 16,00,00
0

On the above date, both the companies decided to amalgamate and form a
new company Priyanka Ltd. with an authorized capital of Rs. 50, 00, 000
divided into 40,000 Equity shares and 10,000 105 pref. shares of Rs. 100
each. Assets and liabilities of both the companies are to be taken over except
investments of Bhagyashri Ltd. and cash balance of Rs. 20,000 of Khushbu
ltd.
The market value of fixed assets of both the companies to be taken at 20%
more than the book value. Payment terms are as follows:
1) The equity shares of both the companies will be given 6 fully paid equity
shares of Priyanka Ltd. for every 5 equity shares held by them at a
premium of 10%.
2) The pref. shares holders of Bhagyashri Ltd. will be given 4 fully paid
preference shares of Priyanka Ltd. at a discount of 10% of discharge their
liabilities at 8% premium.
3) The debenture holders of Bhagyashri Ltd. will be given 12% debentures
of rs. 100 each of Priyanka Ltd. at a discount of 10% of discharge their
liabilities at 8% premium.
4) Rs. 28,000 cash to Bhagyashri Ltd.

Priyanka Ltd. issued to remaining equity shares to the public at a

premium of Rs. 20 per share, which were fully paid up. Preliminary
expenses amounted to 20,000.

Pass necessary journal entries in the books of Priyanka Ltd. and prepare
its Balance Sheet.

40 | P a g e
[Bhagyashri Ltd: Net Assets 25,68,000, Goodwill 10,00,000,
Khushbu Ltd : Net Assets 15,40,000, Capital Reserve 2,20,000.
Total of Balancesheet 64,52,000]

Sum-2

The Balance Sheet of The MadhavLtd.&The Mira Ltd. as on 31-3-2019 are as

under:
Liabilities Madhav Mira Assets Madhav Mira
Ltd. Rs. Ltd. Rs. Ltd. Rs. Ltd. Rs.
Paid up Equity Goodwill 4,00,000 2,00,000
Capital (Each
of Rs. 10 Rs. 8 8,00,000 -
paid up per
share)
Equity Shares Fixed Assets 14,00,000 10,00,000
(each of Rs. 10
Rs.5 paid up - 10,00,000
per share)
General 6,00,000 - Stock 6,00,000 2,00,000
Reserve
Profit & Loss 4,00,000 - Debtors 3,00,000 2,40,000
a/c
Workers’ - 2,00,000 Cash and Bank 60,000 1,60,000
Profit Sharing
Fund
10% 4,00,000 6,00,000 Preliminary 40,000 1,00,000
Debentures Exp.
Creditors 6,00,000 4,00,000 Profit & Loss - 3,00,000
a/c
28,00,000 22,00,000 28,00,000 22,00,000

The Madhav Ltd. absorbed The Mira Ltd. on the following conditions:
1) The fixed assets of The Mira Ltd. are to be valued at Rs. 14, 00,00. The
value of stock is to be reduced to Rs. 1, 20,000. The goodwill does not
fetch any value.

2) The debtors of ofMadhav Ltd. include due from The Mira Ltd. Rs 40,000.

41 | P a g e
 3) Madhav Ltd. will pay purchase consideration to Mira Ltd. by issuing
equity shares at instrinsic value. For this the value of goodwill and Fixed
Assets of Madhav ltd. will be considered as Rs. 8, 00,000 and Rs. 16,
40,000 respectively.

From the above information, pass journal entries in the books of the
Madhav Ltd. and prepare Balance Sheet after absorption.
[ Intrinsic Value of Eq share: Madhav Ltd =Rs. 24, Mira Ltd = Rs
3.60, Total of Balance sheet = Rs 46,80,000}

Sum-3
The following are the Balance Sheets of Prashant Ltd. and Anuvi Ltd. as on 31-
3-2019

Liabilities Prashant Anuvi Assets Prashant Anuvi

Ltd. Rs. Ltd. Rs. Ltd. Rs. Ltd. Rs.
Paid up Fixed Assets 6,00,000 2,40,000
Capital : 4,00,00 3,00,000
Equity Share
Capital
General 2,00,000 - Investments 50,000
Reserve (MV Rs.
66,000)
10% 3,00,000 2,00,000 Current 4,85,000 1,50,000
Debentures Assets
Creditors 2,00,000 1,00,000 Disc. on Deb. 15,000 10,000
Profit & Loss - 1,50,000
a/c
11,00,000 6,00,000 11,00,000 6,00,000

On 1-4-2019, Prashant Ltd. agreed to absorb Anuvi Ltd. on the following

conditions:
1) The fixed assets of both the Companies include Land and Building and
Machinery in the proportion 3:1. The value of Land and Building as
shown in the books is 10% less than market value, whereas the market
value of Machinery is 10% less.

2) The Market Value of Current Assets are Rs. 4,65,000 and Rs. 1,00,000
respectively.

42 | P a g e
 3) The Equity Shares of both the Companies are of rs. 100 each, paid up to
the extent of Rs. 80 and Rs. 50 per share respectively.

4) The purchase consideration is to be satisfied by issuing necessary shares

of Prashant Ltd. in exchange of shares of Anuvi Ltd. on the basis of
intrinsic value of their shares.

Prepare necessary ledger accounts in the books of Anuvi Ltd. and

Balance Sheet of Prashant Ltd. after absorption.
[ Prashant Ltd : Net Assets = Rs 6,00,000, AnuviTld : Net Assets = Rs
1,20,000. Total of Balance sheet = Rs 15,20,000]
Sum -4
Following are the Balance Sheets of Naziya Ltd. amdMahera Ltd. as on 31-3-
19:
Liabilities Naziya Mahera Assets Naziya Mahera
Ltd. Rs. Ltd. rs. Ltd. Rs. Ltd. rs.
Equity Share 3,20,000 4,00,000 Goodwill 1,00,000 2,00,000
Capital
General 3,00,000 1,00,000 P&M 6,00,000 5,00,000
Reserve
P&L A/c 1,80,000 60,000 Investments 1,24,000 1,00,000
10% 4,00,000 4,80,000 Stock 1,50,000 80,000
Debentures
Creditors 1,00,000 2,00,000Debtors 2,00,000 2,50,000
Bills Payable 60,000 40,000 Bills 76,000 70,000
Receivable
Cash and Bank 1,10,000 80,000
13,60,000 12,80,000 13,60,000 12,80,000

On 1st April 2019, Naziya Ltd. entered into a contract to absorb the business of
Mahera Ltd. As per this contract, Naziya Ltd. has to issue equity
sharestoMahera Ltd. in such a manner that the intrinsic value of both the
companies happen to be equal.
The face value of shares of Mahera Ltd. is Rs. 10 per share on which Rs. 4 per
share was paid up. Stock of Mahera Ltd. includes goods worth Rs. 5,000
purchased from Naziya Ltd., wherein Naziya Ltd. added a profit of 20% on
selling price.

43 | P a g e
From the above information prepare:
a) Calculation of purchase consideration of business of Mahera Ltd.
b) Balance Sheet of Naziya Ltd. after absorption of Mahera Ltd.
[ Naziya Ltd : Net Assets Rs 8,00,000, IV = Rs 10, Mehra Ltd : Net
Assets = Rs 5,60,000, IV = Rs 7, Total of Balance shett 26,40,000]

44 | P a g e
 REFERENCES

Note : The above materials has been compile from the below
mention reference book

Reference Books:
Author/s Name of the Book Publisher
1 P.C. TULSIAN Advanced Pearson
Accounting
2 S.N. Advanced Accounting Vikas
MAHESHWARI
3 S.C.GUPTA Advanced Accounting Sultan
Chand
4 SHUKLA Advanced Sultan
M.C/ Accounting Chand
GAREWAL
T.S. & GUPTA
S.C
5 M Hanif/ A Advanced McGraw
Mukherji Accounting Hill
Education
6 Ravi Kishore Advanced Taxman
Accounting Publicatio
n

45 | P a g e
 FACULTY OF COMMERCE

2023 – 24
SEMESTER 4

SUBJECT: CORPORATE FINANCIAL

REPORTING

UNIT : 4
Corporate Restructuring -2

COMPILED BY :
Dr. Bhavna Parwani Prof. Meghavi Thaker

STUDY MATERIAL FOR REFERENCE ONLY

 UNIT 4 CORPORATE RESTRUCTURING -2

[Amalgamation in Nature of Merger ]

SR. TOPICS
NO
1 INTRODUCTION
2 ACCOUNTING STANDARD 14: MERGER AND
PURCHASE
3 DIFFERENCE BETWEEN POOLING OF
INTEREST METHOD AND PURCHASE
METHOD
4 COMPREHENSIVE ILLUSTRATION [1,2,3 &4]
5 SECTION –A[ Theory Questions]
6 SECTION –B [MCQs]
7 SECTION –C [Short Questions]
8 SECTION –D [Long Sums]
9 SECTION –E [Home Work]

1
1) INTRODUCTION

Merger and Acquisition are the most popular form of corporate expansion in
today’s era. Till the beginning of millennium year, the concept of Merger &
Acquisition was not much popular. In current scenario, merger is considered
as the best option for resurrecting the corporate giants.
Laws in India use the term Amalgamation for merger. Accounting for such
transactions are strictly governed in accordance with AS-14 “Accounting for
Amalgamation”.

2) ACCOUNTING STANDARD 14: MERGER AND PURCHASE

Institute of Chartered Accountants of India issued Accounting Standards 14

in October, 1994 titled “Accounting for Amalgamation”. This Standard has
come into effect in respect of accounting periods commencing on or after 1-
4-95 and id mandatory (compulsory) in nature. The “Guidance Note on
Accounting Treatments of Reserves in Amalgamation” issued by the
Institute in 1983 will stand withdrawn from the aforesaid date.

The important provisions of this standard as follows:

1. This statement deals with accounting for amalgamation and treatment of
any resultant goodwill or reserves.

2. The amalgamations described in this standard are of two types:

i) Amalgamation in the nature of ‘Merger’.
ii) Amalgamation in the nature of ‘Purchase’.

3. Amalgamation in the nature of Merger:

This is a type of amalgamation where there is genuine pooling of
shareholders’ interest and of business of these companies. So it is not
merely combining or pooling of the assets and liabilities of the
amalgamation companies. The accounting treatment of su ch
amalgamation is such that the resultant figures of assets, liabilities,
capital and reserves are almost the same as in the old companies.

2
 Thus, the following five conditions are necessary for merger:
i) Assets and liabilities of the old company must be transferred in the
new company.
ii) Shareholders holding 90% of the face value of old company’s
shares must become the shareholders of the new company.
iii) The equity shareholders of the old company must be paid in the
form of shares of new company.
iv) The intention must be to continue the business of the old company
after amalgamation.
v) No changes in values of assets and liabilities of the old company
must be made in the new company.

3) DIFFERENCE BETWEEN POOLING OF INTEREST METHOD AND

PURCHASE METHOD
Pooling of Interest Method Purchase Method
1. This method is used in case 1. This method is used in case of
of amalgamation in the nature amalgamation in the nature of
of ‘Merger’. ‘Purchase’.
2. All the balances of transferor 2. Only those assets and
company are incorporated in liabilities are incorporated in
the books of the transferee the books of the transferee
company (all assets, company, which it has taken
liabilities, reserves, P&L A/c over; Reserves and P&L A/c
etc.) are not transferred.
3. The balances of reserves and 3. All the balances of the
P&L A/c are aggregated transferor company are not
(totaled) in the new balance aggregated in the B/S of the
sheet. transferee company.
4. The assets and liabilities of 4. The assets and liabilities are
the transferor company are transferred at their market
transferred in the books of values or fair values. Thus,
the transferee company at the the values are changed, if
same values and in the same necessary.
form.

3
5. Under this method, the Net 5. Under this method, the Net
Assets means assets minus Assets means assets minus
liabilities minus reserves and liabilities only
P&L A/c.
6. The difference between the 6. The difference between the
amount of share capital of Net Assets and purchase
transferor co. and value of consideration is transferred
shares issued is transferred to Goodwill or Capital
to General Reserve and not Reserve.
to Goodwill or Capital
Reserve.
7. All the balance of Reserve 7. Only Statutory reserves of
and surplus is added transferor company are
transferred and retained for
specified period. They are
transferred by debiting
“Amalgamation Adjustment
A/c” and crediting respective
reserve accounts.
8. The face value of shares of 8. The market value of shares of
transferee company are purchasing company are
considered while paying considered (Premium of
purchase consideration. Discount is recorded).
9. As no goodwill is recorded, it 9. Goodwill has to be written off
is not to be written off. As over a period of five years,
value of assets are not to be and depreciation is charged
increased, so more on increased values of assets,
depreciation is not provided. so profit will be less.
Thus, the profit is more.

4
COMPREHENSIVE ILLUSTRATION [1]
Kunj Ltd. and Krisha Ltd. were amalgamated on 1-4-2019. A new company KK
Ltd. was formed to take over the business of the existing companies. The Balance
Sheets of Kunj Ltd. and Krisha Ltd. as on 31-3-2019 are as under :
Liabilities Kunj Krisha Assets Kunj Krisha
Equity Shares ₹ 10 each 17,00,00 14,50,000 Fixed Assets 17,20,00 10,70,000
0 0
12% Preference Shares ₹ 6,40,000 3,50,000 Current 20,80,00 15,80,000
100 Assets 0
General Reserve 7,30,000 4,80,000
Investment Allow. 1,00,000 60,000
Reserve 1,50,000 1,04,000
Profit & Loss A/c
12% Debentures ₹ 100 1,00,000 56,000
each
Creditors 3,80,000 1,50,000
38,00,00 26,50,000 38,00,00 26,50,000
0 0
Other informations :
(1) KK Ltd. will issue 2 equity shares for each 5 equity shares of Kunj Ltd. and 3
equity shares for each 10 equity shares of Krisha Ltd. The shares are to be
issued at ₹ 38 each, having face value of ₹ 10 each.
(2) Preference shareholders of two companies are issued equivalent number of
14% preference shares of KK Ltd. at a price of ₹ 130 per share, Face value ₹
100 per share.
(3) Debenture holders of Kunj Ltd. and Krisha Ltd. are discharged by KK Ltd. by
issuing such number of its 10% debentures of ₹ 100 each so as to maintain the
same amount of interest.
(4) Investment allowance reserve is to be maintained for two more years.
(5) From the above information, you are required to prepare the ONLY Balance
Sheet of KK Ltd. as on 1-4-2019 after the Amalgamation in the nature of
Merger.

5
SOLUTION
Kunj + Krisha = KK Ltd. , Amalgamation in the nature of Merger
Step :1 PC Calculation :
Particulars Kunj Krisha Total
Equity Shares Old : New Old : New 1,11,500 Shares
5 : 2 10 : 3 *38 ₹
1,70,000 : ? 1,45,000 : ? = ₹ 42,37,000
68,000Shares 43,500 Shares
*38 ₹ *38 ₹ ESC= ₹ 11,15,000
= ₹ 25,84,000 = ₹ 16,53,000 SP= ₹ 31,22,000
14% Pref. Shares Old : New Old : New 9,900 shares
1 : 1 1 : 1 *130 ₹
6,400 : ? 3,500 : ? = 12,87,000₹
= 6,400 shares = 3,500 shares
* 130 ₹ * 130 ₹ PSC = 9,90,000 ₹
= ₹ 8,32,000 = ₹ 4,55,000 SP = 2,97,000 ₹
Total 34,16,000 21,08,000 55,24,000

Step : 2 Adjustment of Excess OR Shortfall of Share Capital & Debentures

Particulars Amount
General Reserve [7,30,000 + 4,80,000] 12,10,000
Profit / Loss Account [ 1,50,000 + 1,04,000] 2,54,000
Total 14,64,000
Adjustments :
ESC [O-N] Kunj: [17,00,000 - 25,84,000] (8,84,000)
Krisha : [14,50,000 – 16,53,000] (2,03,000)
PSC [O-N] Kunj : [6,40,000 – 8,32,000] (1,92,000)
Krisha : [3,50,000 – 4,55,000] (1,05,000)
Debentures [O – N ] Kunj : [1,00,000 – 1,20,000] (20,000)
Krisha : [56,000 – 67,200] (11,200)
(14,15,200)
P/L a/c 48,800

6
Balance sheet of KK Ltd. [As Per Merger Method ] after amalgamation
PARTICULARS NOTE AMOUNT
NO.
I EQUITY AND LIABILITTIES
1. Shareholders’ funds
(a) Share Capital 1 21,05,000
(b) Reserves and Surplus 2 36,27,800
[ 31,22,000 + 2,97,000 + 1,60,000 + 48,800]
2. Share application money pending allotment
3. Non Current Liabilities
(a) Long-term borrowings 1,87,200
(b) Other Long Term Liabilities
4. Current Liabilities 5,30,000
TOTAL 64,50,000
II ASSETS
1. Non Current Assets
(a) Fixed Assets
(i) Tangible Assets 27,90,000
(ii) Intangible Assets
(b) Non Current Investments -
(c) Other Non Current Assets -
2. Current Assets 36,60,000
TOTAL 64,50,000

COMPREHENSIVE ILLUSTRATION [2]

Balance sheet of Y Ltd. was as under as on 31-3-18, which was taken over by X
Ltd. as per Pooling of Interest method.
Liabilities Amount Assets Amount
Equity share 100 Fixed Assets 150
Capital
General Reserve 50 Current assets 100
Profit & Loss a/c 30
Statutory Reserve 20
Current Liabilities 50
250 250

7
[A] Use above Balance sheet and find the adjustment in reserve if Purchase
Consideration paid to Equity shareholders is ₹ 175.
[B] Use above Balance sheet and find the adjustment in reserve if Purchase
Consideration paid to Equity shareholders is ₹ 275 , Balance of General Reserve &
Profit /Loss a/c balance in Purchasing co. was ₹ 80 and ₹ 50 respectively.

SOLUTION
[A] Purchase consideration = ES 175
ES taken over = 100
Therefore adjustment in reserve = 175 -100 = 75
[B] In General Reserve of Vendor Co.₹ 50 & In P/L a/c of Vendor Co. ₹ 30 and In
General Reserve of Purchasing Co.₹ 80 & In P/L a/c of Purchasing Co.₹ 15

COMPREHENSIVE ILLUSTRATION [3]

[A] Purchasing company issued 14% Preference shares of ₹ 100 each at par to
discharge the preference shareholders of Vendor company at 10% premium.
Balance sheet of vendor company has 13% Preference share Capital of ₹ 17,00,000
divided into shares of ₹ 100 each.
Find the difference to be adjusted into reserve
(Ans) Amount of Preference shares given in PC = 17000 x 110 = 18,70,000 Less
PSC of Vendor co. 17,00,000, therefore difference adjusted into reserve = ₹
1,70,000

[B] 14% debenture holders of ₹ 1,00,000 O Ltd. were to be allotted such numbers
of debentures of P Ltd. of 10% in such a way that debenture holders of O Ltd. gets
same amount of interest. Calculate amount of debenture liability taken over :

(Ans) Old int / New rate x 100 = 14,000 / 10 x 100 = ₹ 1,40,000

COMPREHENSIVE ILLUSTRATION [4]

D Ltd and V Ltd decided to amalgamate as on 31-3-2021, for which D Ltd takes
over the business of V Ltd. Their Balance Sheet on that date were as follows:

8
 Balance Sheet
Particulars Note D Ltd Rs V Ltd Rs.
I. Equity and Liabilities:
Shareholders’ Funds:
Share Capital:
Equity shares of Rs 10 each 3,00,000 1,80,000
11% Pref shares of Rs 100 each 1,32,000 1,02,000
Reserves and Surplus
General Reserve 30,000 15,000
Export Profit Reserve 18,000 12,000
Investment Allowance - 6,000
Reserve
Profit & Loss A/c 45,000 30,000
Non-Current Liabilities
Long-term borrowings:
14% Debentures (Rs 100 30,000 21,000
each)
Current Liabilities
a) Trade Payables: Creditors 27,000 21,000
b) Other Current Liabilities 12,000 9,000

5,94,000 3,96,000
II. Assets:
Non- Current Assets:
a) Fixed Assets 3,79,500 2,16,000
b) Non-Current Investments 42,000 30,000
Current Assets
a) Inventories: Stock 67,500 72,000
b) Trade Receivables: Debtors 75,000 57,000
c) Cash and Cash Equivalent:
Cash and Bank Balance 30,000 21,000
TOTAL 5,94,000 3,96,000

D Ltd took over the business of V Ltd on 1st April, 2021. D Ltd paid the purchase
price as follows:
a) 21,000 Equity Shares of RS 10 each fully paid to equity shareholders of V
Ltd.
b) 14% Preference shares of Rs 100 each to make payment to preference
shareholders of V Ltd at a premium of 10%.
9
 c) Debentures of V Ltd were converted into equal number of debentures of D
Ltd.
d) The Statutory reserves of V Ltd are still to be retained for two more years.
If the amalgamation is in the nature of merger, prepare Balance Sheet of D
Ltd.
[Uni March 2023]

SOLUTION
Purchase Consideration [ Share Capital Issued by D Ltd.]
1. ESC = 21000 x 10 = 2,10,000
2. PSC =1020 x 110 = CAPITAL= 1,02,000
PREMIUM = 10,200
Total Payment = 3,22,200
Total Sh Cap Taken over
[180000 + 102000] = 2,82,000
Transfer to G. Reserve = 40,200

Balance sheet of D Ltd as on 31-3 2021

I EQUITY AND LIABILITIES NOTE AMOUNT
NO.
1. Shareholder’s Fund 7,44,000
a. Share Capital 1,26,000
b. Res & Surplus
2. Share Application Money Pending Allotment ------
[SAMPA]
3. Non Current Liability 51,000
Debentures
4. Current Liability 48,000
a. Creditors & Bills Payable 21,000
b. Other current Liab
9,90,000

II ASSETS NOTE NO. AMOUNT

1. Non Current Assets
a. Fixed Assets

10
 - Tangible 5,95,500
- Intangible 72,000
b. Non Current Investment -----
c. Other Non Current Assets
2. Current Assets
a. Inventories [ Stock] 1,39,500
b. Trade Receivables [ Debtors] 1,32,000
c. Cash & Cash Equipments 51,000
9,90,000

WN -1 Share Cap
ESC = 3,00,000 + 2,10,000 = 5,10,000
PSC = 1,32,000 + 1,02,000= 2,34,000= 7,44,000
WN -2 Reserve and Surplus
Gen Reserve = 30,000+ 15,000 – 40,200 = 4,800
EPR = 18000+12000 = 30,000
I.A.R. = 6,000
P&L = 45,000+ 30,000 = 75,000
S. PREMIUM = 10,200
1,26,000

SECTION –A[ Theory Questions]

1.Write difference between Amalgamation in the nature of purchase and

Amalgamation in the nature of merger
2. Write five conditions of Merger
3.Write a short note on ‘Pooling of interest method’

SECTION –B [MCQs]

1. Transactions of Amalgamation ,Absorption & Reconstruction are governed by

____.
(A) AS -14 (B) AS-20 (C) AS 29 (D) AS-10
2. AS-14 divides Amalgamation in to _______ types.
(A) Two (B) Three (C) Four (D) Six

11
3. If all _________ conditions as per AS-14 are satisfied it is Amalgamation in the
nature of Merger.
(A) Five (B) Three (C) Ten (D) Six
4. Under Merger Equity shareholders should be given consideration only in the
form of _____________, except cash for fractional value of shares.
(A) Preference Shares (B) Equity Shares
(C) Debentures (D) Assets
5. For merger shareholders holding not less than ________% of face value of
transferor company should be the shareholders in transferee company.
(A) 90% (B) 95% (C) 80% (D) 50%
6. In case of merger ______________________________method is used.
(A) Purchase (B) Pooling of Interest
(C) Net Asset (D) Consideration
7. All assets and liabilities of transferor companies should be taken over at
____________by transferee company except for the change in order to have
uniform accounting policy in Merger.
(A) Market Value (B) Book Value
(C) Realisable Value (D) No Value
8. Goodwill will not arise in case of amalgamation in the nature of ____________.
(A) Purchase (B) Merger (C) Takeover (D) Conversion
9. Five conditions of merger do not include:
(A) All assets & Liabilities to be taken over by transferee company at book value
(except for the change in value to maintain uniform accounting policies)
(B) Business of transferor company should not be continued by transferee
company
(C) Shareholders having not less than 90% of face value of transferor company
should be shareholders in transferee company
(D) Consideration to equity shareholders can only be given in the form of equity
shares of transferee company (except cash for fractional value of shares)

10. In case of Merger the difference between the purchase consideration and share
capital of transferor company is adjusted against :
(A) Reserve or Profit/Loss a/c (B) Goodwill (C) Cash (D) Assets
11. Liquidation expenses paid by purchasing company on behalf of Vendor
company will be debited to ______________.
(A) General Reserve (B) Goodwill
(C) Capital Reserve (D) Profit
12. Amalgamation can be classified as ____________ if all five conditions are
satisfied.
(A) Merger (B) Purchase (C) Takeover (D) Conversiom
12
13. Under Merger _________________should be given consideration only in the
form of equity shares , except cash for fractional value of shares.
(A) Preference Shareholders (B) Equity Shareholders
(C) Debenture holders (D) Assets
14. In case of Merger transferee co. should continue __________ business of
transferor co.
(A) Different (B) Same (C) Any (D) Opposite
15. Amalgamation adjustment account is not to be prepared in case of
___________.
(A) Purchase method (B) Pooling of Interest method
(C) Both (D) Conversion
16. Assets acquired by the transferee company may include inter company stock at
profit.
What entry will be passed for the same in the books of Transferor company
(A) Goodwill a/c Dr. To , Stock a/c
(B) Reserve a/c Dr. To , Stock a/c
(C) Stock of Transferor Co. a/c Dr. To, Stock of Transferee co. a/c
(D) No entry required
17. As per AS-14 Payment to debenture holders _________________________.
(A) Forms a part of Purchase Consideration
(B) Do not form a part of Purchase Consideration
(C) May be or May not be a part of Purchase consideration
(D) Do not form NA

18. Conditions of merger include:

(A) All assets & Liabilities to be taken over by transferee company at book value
(except for the change in value to maintain uniform accounting policies)
&Business of transferor company should be continued by transferee company
(B) Shareholders having not less than 90% of face value of transferor company
should be shareholders in transferee company
(C) Consideration to equity shareholders can only be given in the form of equity
shares of transferee company (except cash for fractional value of shares)
(D) All of the above

19. As -14 is applicable to amalgamation of ____________.

(A) Companies (B) Firm (C) Proprietary Concerns (D) Joint Venture

20. If debentures of transferor company are exchanged with the debentures of

transferee company having higher rate of interest in such a way that same inters
13
income continues , the value of debenture liability taken for Net Assets calculation
will :
(A) Increase (B) Decrease (C) remain same (D) Double

21. If debentures of transferor company are exchanged with the debentures of

transferee company having lower rate of interest in such a way that same inters
income continues , the value of debenture liability taken for Net Assets calculation
will :
(A) Increase (B) Decrease (C) remain same (D)Double

22. If debentures of transferor company are exchanged with the debentures of

transferee company having different rate of interest in such a way that same inters
income continues , the value of debenture liability taken for Net Assets calculation
will be calculate by which formula:
(A) Old Interest of Debentures / New rate of Debenture
(B) New Interest of Debentures / Old rate of Debenture
(C) Old Interest of Debentures / Old rate of Debenture
(D) No Interest / Debenture rate
23. In case of inter company transactions , if creditors of purchasing company
includes ₹ 24,000 due to vendor company what will be the effect while preparing
Balance sheet after absorption .
(A) ₹ 24,000 reduced from creditors of Purchasing company
(B) ₹ 24,000 reduced from creditors of Vendor company
(C) ₹ 24,000 reduced from Debtors of Vendor company
(D) Both (A) & (C)
24. If Debtors of purchasing company includes ₹ 45,000 due from vendor company
what will be the effect while preparing Balance sheet after absorption .
(A) ₹ 45,000 reduced from creditors of Purchasing company
(B) ₹ 45,000 reduced from creditors of Vendor company
(C) ₹ 45,000 reduced from Debtors of Purchasing company
(D) Both (B) & (C)
25. In case of inter company transactions under , all Bills Payables of Vendor
company of ₹ 42,000 due to Purchasing company what will be the effect while
preparing Balance sheet after absorption .
(A) ₹ 42,000 reduced from Bills Receivables of Purchasing company
(B) ₹ 42,000 reduced from Bills Payables of Vendor company
(C) ₹ 42,000 reduced from Bills Payables of Purchasing company
(D) Both (A) & (B)
26. Write journal entry for amalgamation expenses paid by Purchasing Company :
(A) Preliminary Expenses a/c Dr. To, Cash/Bank a/c
14
(B) Bank a/c Dr. To, Preliminary Expenses a/c
(C) Goodwill a/c Dr. To, Preliminary Expenses a/c
(D) Cash a/c Dr, To Preliminary Expenses a/c

27. Write journal entry for inter company debts in the books of Purchasing
Company
(A) Sundry Creditors a/c Dr. To, Sundry Debtors a/c
(B) Sundry Debtors a/c Dr. To, Sundry Creditors a/c
(C) Goodwill a/c Dr. To, Sundry Debtors a/c
(D) Cash a/c Dr, To Debtors a/c

28. Write journal entry for mutual acceptance in case absorption in the books of
purchasing co.
(A) Bills Payables a/c Dr. To, Bills Receivables a/c
(B) Bills Receivables a/c Dr. To, Bills Payables a/c
(C) Bills Payables a/c Dr. To, Goodwill a/c
(D) Cash a/c Dr, To Goodwill a/c

29. In case of Merger , If purchasing company agrees to pay liquidation expenses

on behalf of vendor co , it will be debited to _______.
(A) Goodwill a/c (B) Reserve a/c or P/L (C) Transferor co. a/c (D) Assets a/

30. In case of Purchase consideration to be decided on the basis of Intrinsic Value ,

shares issued to vendor co as purchase consideration will be given at _______.
(A) Intrinsic Value of Purchasing Co. (B) Intrinsic Value of Vendor Co.
(B) Average Intrinsic Value (D) Double Intrinsic Value

31. Formation expenses of New company in case of merger will be debited to

_________
(A) Goodwill a/c (B) P/L or Reserve a/c (C) Transferee co. a/c (D) Assets a/c

32. In case of Amalgamation in the nature of merger Reserves are __________.

(A) Not taken over (B) taken over
(C) taken as per conditions of amalgamation (D) Left
33. Difference in issue of amount of debenture issued by purchasing company to
the debenture holders of vendor company will be adjusted in
(A) Goodwill a/c (B) Reserve or P/L a/c
(C) Transferee co. a/c (D) Assets a/c
34. Equity share Capital of vendor Co. was ₹ 6,00,000 , divided into equity shares
of ₹ 100 each .Purchasing company issued 2 shares in exchange of old 3 shares at a
15
market value of ₹ 120 to the share holders of vendor co. Calculate the value of
equity shares in purchase consideration.
(A) ₹ 4,80,000 (B) ₹ 4,00,000 (C) ₹ 6,00,000 (D) 2,00,000

35. Equity share Capital of vendor Co. was ₹ 5,00,000 , divided into equity shares
of ₹ 100 each .Purchasing company issued same number of shares in exchange of
old shares at a market value of ₹ 120 to the share holders of vendor co. Calculate
the value of equity shares in purchase consideration.
(A) ₹ 4,80,000 (B) ₹ 4,00,000 (C) ₹ 6,00,000 (D) 5,00,000

36. If statutory reserve of vendor companies A Ltd. ₹ 1,20,000 & B Ltd. ₹ 1,50,000
are to be recorded in the books of Purchasing company , find the balance to be
sown in Amalgamation adjustment a/c will be _________.
(A) ₹ 4,80,000 (B) ₹ 4,00,000 (C) ₹ 6,00,000 (D) None
37. As -14 is applicable only in case where__________
(A) Acquired company is dissolved and separate entity ceased to exist
(B) Acquired company is not dissolved
(C) New Company is not formed
(D) Partners
38. Purchase consideration is paid by _________________ Co. to _____________
Co.
(A) Transferee , Transferor (B) Transferor , Transferee
(C) Transferor , vendor (D) Buyer, sellor
39. Amalgamation is similar to Acquisition of shares of another company
(A) True (B) False (C) as per conditions of amalgamation (D) Can’t Say

40. No adjustments is made in the book values of the assets and liabilities of the
transferor company by way of revaluation or otherwise except ___________
(A) the adjustments to ensure uniformity of accounting polices
(B) the adjustments needed as per contract of amalgamation
(C) the adjustments required as per law (D) Debtors
41. In preparing balance sheet of transferee company after amalgamation line by
line addition of respective assets & liabilities of transferor and transferee company
should be made except _____________________.
(A) Share Capital (B) Reserves (C) Debentures (D) Creditors
42. Amalgamation will be considered in the nature of purchase if ___________ of
the conditions regarding amalgamation in the nature of merger is not satisfied.
(A) Any (B) Any two (C) Any three (D) Any four

16
43. Equity share capital of transferor company was 14,40,000 divided into shares
of ₹ 10 each , for consideration transferee company gave 16,80,000 equity shares
of ₹ 10 each fully paid , find the difference to be adjusted into reserve ?
(A) ₹ 2,40,000 (B) ₹ 1,44,000 (C) ₹ 1,68,000 (D) 1,00,000
44. In first financial statement of transferee company the following disclosures for
all amalgamation should be made :
(A) Names and general business of amalgamating companies
(B) Method of accounting used
(C) Particulars of scheme sanctioned under a statute
(D) All of the above
45. _________________will not appear in the case of Amalgamation in the nature
of merger.
(A) Amalgamation Adjustment Account
(B) Amalgamation Reserve Account
(C) Amalgamation Balance Account
(D) Amalgamation Assets Accounts
46. As -14 prescribes accounting treatment for _______________ Company
(A) Selling Company (B) Purchasing company
(C) Both (A) & (B) (D) Shareholders
47. Applicability of As -14 is only when any company is ______________ after
amalgamation.
(A) Continued (B) Liquidated (C) Separated (D) Assets
48. Which disclosure requirements for merger in case of first financial statement
after merger.
(A) Description and number of shares issued
(B) % of each co.’s equity shares exchanged
(C) Difference of consideration & the value of the net identifiable assets acquired
& its treatment
(D) All of the above

49. For treating amalgamation as merger minimum 90% of equity share holder’s of
selling company should become equity share holders of the purchasing company ,
for calculating 90% the following number of equity shares are excluded :
(A) Equity shares held by Purchasing company
(B) Equity shares held by Purchasing company’s subsidiaries
(C) Equity shares held by Purchasing company’s nominees
(D) All of the above
50. If in case of amalgamation transferee company takes over all assets &
liabilities of transferor company at book value but does not intend to carry on the
business of transferor company can this be considered as merger ?
17
 (A) Yes (B) No (C) May as per Conditions of amalgamation (D) None
51. If in case of amalgamation transferee company takes over all assets &
liabilities of transferor company at book value but does not intend to carry on the
business of transferor company can Profit & Loss account of transferor company
be aggregated with Profit & Loss account of transferee company ?
(A) Yes (B) No
(C) May as per Conditions of amalgamation (D) None
52. If in case of amalgamation transferee company takes over all assets &
liabilities of transferor company at book value but does not intend to carry on the
business of transferor company, can identity of Investment Allowance Reserve
account of transferor company be preserved in the books of transferee company ?
(A) Yes (B) No
(C) May as per Conditions of amalgamation (D) None
53. If in case of amalgamation transferee company takes over all assets &
liabilities of transferor company at book value but does not intend to carry on the
business of transferor company can Statutory Reserves of transferor company be
recorded in the books of transferee company ?
(A) Yes (B) No
(C) May as per Conditions of amalgamation (D) None
54. If statutory reserve of Purchasing company C Ltd. was ₹ 2,30,000 and statutory
reserves of vendor companies A Ltd. & B Ltd. were ₹ 1,20,000 & ₹ 1,50,000
respectively . Find the amount to be recorded in the books of Purchasing company
, in Amalgamation adjustment a/c _______if amalgamation is in the nature of
Purchase.
(A) ₹ 1,50,000 (B) ₹ 5,00,000 (C) ₹ 2,70,000 (D) 1,00,000
55. Accounting for amalgamation in the books of Vendor Company is _________.
(A) Same in all types of amalgamation
(B) Different in all types of amalgamation
(C) Partially same for all types of amalgamation
(D) Absorption
56. In amalgamation as a merger all the assets and liabilities of vendor company
become assets and liabilities of ____________
(A) Transferee Company (B) Subsidiary Company
(C) Holding Company (D) Public Company
57. If transferee company issues 20,000 equity shares of ₹ 10 each at a price of ₹
16 per share , find the amount to be recorded as share capital in the balance sheet
of transferee company ?
(A) ₹ 2,00,000 (B) ₹ 3,20,000 (C) ₹ 1,20,000 (D) 1,00,000

18
58. If transferee company issues 20,000 equity shares of ₹ 10 each at a price of ₹
16 per share , find the amount to be recorded as Securities Premium in the balance
sheet of transferee company
(A) ₹ 2,00,000 (B) ₹ 3,20,000 (C) ₹ 1,20,000 (D) 1,00,000
59. If statutory reserve of Purchasing company O Ltd. was ₹ 3,20,000 and statutory
reserves of vendor companies P Ltd. & Q Ltd. were ₹ 2,20,000 & ₹ 1,60,000
respectively . Find the amount to be recorded in the books of Purchasing company
,as reserve if amalgamation is not in the nature of Purchase.
(A) ₹ 1,50,000 (B) ₹ 7,00,000
(B) (C) ₹ 2,70,000 (D) 1,00,000
60. Debentures of 10% of ₹ 1,00,000 of transferor company are exchanged by
purchasing company by issuing its 12% debentures of same value, find the amount
to be adjusted in reserve of Vendor company ?
(A) ₹ 10,000 (B) ₹ 20,000 (C) ₹ NIL (D) 50,000
61. If Company A Ltd. acquires 55% shares of company B Ltd. and B Ltd. is still
in existence its a relation of________________ company.
(A) Holding – Subsidiary (B) Transferor –Transferee
(C) Major-Minor (D) Proper
62.Debentures of 13% of ₹ 2,00,000 of transferor company are exchanged by
purchasing company by issuing its 10% debentures of ₹1,60,000 value ,find the
amount of difference to be added in reserve ?
(A) ₹ 10,000 (B) ₹ 30,000 (C) ₹ 40,000 (D) None
63. AS-14 is _________________ in nature.
(A) Voluntary (B) Mandatory (C) Recommended (D) Actual
64. If the two companies have different accounting policies in respect of the same
item, then they make necessary changes to adopt .............. accounting policies.
(A) LIFO method (B) FIFO method
(C) Weighted Average method (D) Uniform
65. Debentures of 13% of ₹ 1,00,000 of transferor company are exchanged by
purchasing company by issuing its 10% debentures of such value that debenture
holders do not sustain any interest loss ,find the amount of difference to be
adjusted in reserve ?
(A) ₹ 10,000 (B) ₹ 30,000 (C) ₹ NIL (D) 1,00,000
66. AS 14 is applicable in case of Amalgamation in nature of purchase and
amalgamation in nature of merger both?
(A) True (B) False (C) Cant Say (D) None
67 Amalgamation Adjustment account is parepared in case of Amalgamation in
nature of purchase and amalgamation in nature of merger both?
(A) True (B) False (C) Cant Say (D) None

19
68 There is no difference between ‘Pooling of Interest method’ and ‘Purchase
Method’
(A) True (B) False (C) Cant Say (D) None
69 Authorised capital of transferee company was 1,20,000 equity shares of ₹10
each. Company issued 34,000 shares to A Ltd. & 56,000 shares to B Ltd. as a part
of purchase consideration. If transferee company issued 50% of remaining shares
to public, how many shares are issued ?
(A) 30,000 shares (B) 64,000 shares (C) 15,000 shares(D) 10,000 shares

70 Authorised capital of transferee company was 1,00,000 equity shares of ₹10

each. Company issued 30,000 shares to A Ltd. & 50,000 shares to B Ltd. as a part
of purchase consideration. How many shares transferee company can issue to
public now ?
(A) 20,000 shares (B) 60,000 shares (C) 80,000 shares(D) 10,000 shares

SECTION –C [Short Questions]

1) In case of inter company transactions under absorption as per merger method , if

Stock of purchasing company includes stock purchased from vendor company at
20,000 ,having 25% profit on sales , what amount will be eliminated from stock
while preparing Balance sheet after absorption .

2)In case of inter company transactions under absorption as per merger method , if
Stock of purchasing company includes stock purchased from vendor company at
20,000 , having 25% profit on Cost, what amount will be eliminated from stock
while preparing Balance sheet after absorption .

3)14% debenture holders of ₹ 1,00,000 O Ltd. were to be allotted such numbers of

debentures of P Ltd. of 10% in such a way that debenture holders of O Ltd. gets
same amount of interest. Calculate amount of debenture liability taken over :

4)Balance sheet of Y Ltd. was as under as on 31-3-18, which was taken over by X
Ltd. as per Pooling of Interest method.
Liabilities Amount Assets Amount
Equity share 100 Fixed Assets 150
Capital
General Reserve 50 Current assets 100
Profit & Loss a/c 30
Statutory Reserve 20
Current Liabilities 50
20
 250 250
[A]Use above Balance sheet and find the adjustment in reserve if Purchase
Consideration paid to Equity shareholders is ₹ 100.

[B] Use above Balance sheet and find the adjustment in reserve if Purchase
Consideration paid to Equity shareholders is ₹ 175.

[C] Use above Balance sheet and find the adjustment in reserve if Purchase
Consideration paid to Equity shareholders is ₹ 275 , Balance of General Reserve &
Profit /Loss a/c balance in Purchasing co. was ₹ 80 and ₹ 50 respectively.
(Ans) In General Reserve of Vendor Co.₹ 50 & In P/L a/c of Vendor Co. ₹ 30 and
In General Reserve of Purchasing Co.₹ 80 & In P/L a/c of Purchasing Co.₹ 15
[D] Use above Balance sheet and find the adjustment in reserve as per Expert
Advisory Committee’s [EAC] opinion , if Purchase Consideration paid to Equity
shareholders is ₹ 80

SECTION –D [Long Sums]

Sum 1: The Balance Sheet of A Ltd. and B Ltd. as on 31-3-2022 are as under:
Particulars Note A Ltd. B Ltd. Rs.
Rs.
I. Equity and Liabilities:
1) Shareholders’ Funds
a) Share Capital:
Equity share capital of Rs. 10
each fully paid 16,00,000 6,00,000
12% Pref. share of Rs 10 each - 2,00,000
b) Reserves and Surplus:
General Reserve 9,22,000 1,96,000
Investment Rebate Reserve 78,000 25,000
Profit and Loss A/c 1,12,600 71,000
2) Non-current Liabilities:
a) Long-term Borrowing:
12% Debentures - 50,000
3) Current Liabilities:
a) Trade Payables:
Creditors 2,00,000 1,40,000
Bills Payable 87,400 58,000

21
 30,00,000 13,40,000
II. Assets:
1) Non-Current Assets:
a) Fixed Assets 22,00,000 9,46,000
2) Current Assets:
a) Inventories: Stock 5,00,000 1,94,000
b) Trade Receivables: Debtors 2,50,000 1,20,000
c) Cash and cash equivalents:
Bank Balance 50,000 80,000

30,00,000 13,40,000

A Ltd. has decided to absorb the business of B Ltd. on 1-4-2022 with the following
conditions:
1) The equity shareholders of B Ltd. will be given fully paid up 70,000 equity
shares of A Ltd of Rs. 10 each.
2) The preference shareholders of B Ltd. will be given 12% 22,000 preference
shares of A Ltd.
3) Debenture holders of B Ltd. will be given 15% new debentures of A Ltd.
that company can receive the same interest as per last year.
4) Investment Rebate Reserve is to be kept for another two years.
Prepare Balance Sheet after amalgamation.
Amalgamation is in the nature of the merger.
Sum 2: Rekha Ltd. and Radha Ltd. were amalgamated on and from 1 st April, 2022.
A new company Krita Ltd. was formed to take over the business of existing
companies.
Following are the Balance Sheets of both the companies as on 31 st March, 2022.

Particulars Note Rekha Ltd Radha Ltd

Rs. Rs.
I. Equity and Liabilities:
1) Shareholders’ Funds:
a) Share Capital:
Equity shares of Rs 100 each 25,00,000 20,00,000
fully paid
b) Reserves and Surplus:
22
 Revaluation Reserve 2,00,000 1,00,000
General Reserve 5,00,000 4,50,000
Investment Allowance 80,000 20,000
Reserve
Profit and Loss A/c 1,00,000 1,50,000
2) Non-Current Liabilities
a) Long-term Borrowings:
15% Debentures 4,00,000 2,00,000
3) Current Liabilities:
a) Trade Payables:
Creditors 2,00,000 70,000
Bills Payable 20,000 10,000

TOTAL 40,00,000 30,00,000

II. Assets:
1) Non-Current Assets:
a) Fixed Assets:
i) Tangible Assets
Land and Building 20,00,000 15,00,000
Plant & Machinery 8,00,000 5,00,000
b) Non-Current Investments 2,00,000 1,00,000
2) Current Assets
a) Inventories: Stock 1,50,000 90,000
b) Trade Receivables:
Debtors 2,20,000 1,00,000
Bills Receivable 30,000 10,000
c) Cash and Cash Equivalent:
Cash and Bank Balance 6,00,000 7,00,000

TOTAL 40,00,000 30,00,000

Additional Information:
1) 15% Debenture holders of Rekha Ltd and Radha Ltd are discharged by
Krita Ltd, issuing such number of its 10% debentures of Rs 100 each so
as to maintain the same amount of interest.
2) Krita Ltd will issue 4 equity shares for each equity share of Rekha Ltd
and radha Ltd. The shares are to be issued at Rs 30 each, having face
value of Rs 10 per share.

23
 3) Investment allowance reserve is to be maintained for 2 more years.
Assuming that the amalgamation is in the following forms, prepare
Balance Sheet of Krita Ltd .
The amalgamation is in the form of merger.
Sum 3: Devanshi Ltd and Vedanshi Ltd decided to amalgamate as on 31-3-2022
for which Devanshi Ltd takes over the business of Vedanshi Ltd. their Balance
Sheet on that date were as follows:
Balance Sheet
Particulars Note Devanshi Ltd Vedanshi Ltd
Rs Rs.
III. Equity and Liabilities:
1) Shareholders’ Funds:
a) Share Capital:
Equity shares of Rs 10 each 3,00,000 1,80,000
11% Pref shares of Rs 100 each 1,32,000 1,02,000
b) Reserves and Surplus
General Reserve
Export Profit Reserve 30,000 15,000
Investment Allowance Reserve 18,000 12,000
Profit & Loss A/c - 6,000
2) Non-Current Liabilities
a) Long-term borrowings: 45,000 30,000
14% Debentures (Rs 100 each)
3) Current Liabilities
c) Trade Payables: Creditors 30,000 21,000
d) Other Current Liabilities

27,000 21,000
IV. Assets: 12,000 9,000
1) Non- Current Assets:
c) Fixed Assets 5,94,000 3,96,000
d) Non-Current Investments
2) Current Assets
d) Inventories: Stock 3,79,500 2,16,000
e) Trade Receivables: Debtors 42,000 30,000
f) Cash and Cash Equivalent:
Cash and Bank Balance 67,500 72,000
TOTAL 75,000 57,000

30,000 21,000
5,94,000 3,96,000

24
Devanshi Ltd took over the business of Vedanshi Ltd on 1st April, 2022. Devanshi
Ltd paid the purchase price as follows:
- 21,000 Equity Shares of RS 10 each fully paid to equity shareholders of
Vedanshi Ltd.
- 14% Preference shares of Rs 100 each to make payment to preference
shareholders of Vedanshi Ltd at a premium of 10%.
- Debentures of Vedanshi Ltd were converted into equal number of
debentures of Devanshi Ltd.
- The Statutory reserves of Vedanshi Ltd are still to be retained for two more
years.
If the amalgamation is in the nature of merger, prepare Balance Sheet of
Devanshi Ltd.
Sum 4: The following is the Balance Sheet of P Ltd and Q Ltd as on 31-3-2022:
Balance Sheet
Particulars Note P Ltd Rs. Q Ltd Rs.
I. Equity and Liabilties:
1) Shareholders’ Funds
a) Share Capital
Equity shares of Rs 10 each 5,00,000 4,00,000
10% Pref shares of Rs 100 4,00,000 2,00,000
each
b) Reserves and Surplus:
General Reserve 1,20,000 -
Securities Premium 30,000 20,000
Profit & Loss A/c 80,000 50,000
2) Non-Current Liabilities
a) Long-term Borrowings:
10% Debentures 90,000 60,000
3) Current Liabilities:
a) Trade Payables: Creditors 60,000 30,000

TOTAL 12,80,000 7,60,000

II.
III. Asstes:
1) Non-Current Assets:

25
 a) Fixed Assets:
i) Tangible Assets:
Land & Building 4,80,000 2,80,000
Plant & Machinery 3,00,000 1,07,000
Furniture 1,00,000 60,000
ii) Intangibles Assets:
Goodwill 1,00,000 20,000
b) Non-Current Investments 1,00,000 1,00,000
c) Other Non-Current Assets:
Discount on Issue of - 3,000
Debentures
2) Current Assets:
a) Inventories: Stock 1,00,000 80,000
b) Trade Receivables: Debtors 80,000 70,000
c) Cash and Cash Equivalent:
Bank Balance 20,000 40,000

TOTAL 12,80,000 7,60,000

A new company PQ Ltd was formed on 1st April, 2022, to acquire the business of P
Ltd and Q Ltd with an authorized capital of Rs 15,000,000 divided in equity shares
of Rs 10 each. The terms and conditions of acquisition were as under:
1) The business of P Ltd was considered of Rs 11,50,000 and was discharged
by issuing 57,500 equity shares at Rs 20 each.
2) The business of Q Ltd was considered worth Rs 5,50,000 and was
discharged by issuing 27,500 equity shares at Rs 20 each.
3) Liquidation expenses of P Ltd amounting to RS 10,000 were paid by PQ
Ltd.
4) 12,000 equity shares in PQ Ltd were issued to the public at Rs 20 per share.
prepare balance sheet by following AS-14 in the nature of merger.

SECTION –E [Home Work]

26
Sum 1: Jay Ltd and Vijay Ltd were amalgamated on and from 1-4-2022. A new
company Ajay Ltd was formed to take over the business of existing companies.
Following are the Balance Sheet of both the companies as on 31-3-2022:
Balance Sheet
Particulars Note Jay Ltd Vijay Ltd
Rs. Rs
I. Equity & Liabilities:
1) Shareholders’ Funds:
a) Share Capital:
Equity Share capital of Rs 100 12,50,000 10,00,000
each fully paid
b) Reserves and Surplus
General Reserve 2,50,000 2,25,000
Revaluation Reserve 1,00,000 50,000
Investment Allowance 40,000 10,000
Reserve 50,000 75,000
Profit and Loss A/c
2) Non-Current Liabilites
a) Long-term Borrowings:
15% Debentures of Rs 100 2,00,000 1,00,000
each
3) Current Liabilities 1,10,000 40,000
a) Trade Payables: Creditors
20,00,000 15,00,000
TOTAL

II. Assets:
1) Non-Current Assets: 15,00,000 10,50,000
a) Fixed Assets 5,00,000 4,50,000
2) Current Assets
20,00,000 15,00,000
TOTAL

Additional Information:

27
 1) 15% Debenture holders of Jay Ltd and Vijay Ltd are discharged by Ajay
Ltd issuing such number of its 10% its Debentures of Rs 100 each so as
to maintain the same amount of interest.
2) Ajay Ltd will issue 4 equity shares for each equity share of Jay Ltd and
Vijay Ltd. The shares are to be issued at Rs 30 each and having a face
value of Rs 10 per equity share.
3) Investment Allowance Reserve is to be maintained for 2 more years.
Assuming that the amalgamation is in the following two forms, prepare
Balnce Sheet of jay Ltd
The amalgamation is in the form of merger.
Sum 2: Shankar Ltd and Parvati Ltd were amalgamated on and from 1-4-2022. AN
new company Ganesh Ltd was formed to take over the business of the existing
companies.
Liabilities Shankar Parvati Ltd Assets Shankar Parvati
Ltd Rs. Rs Ltd Rs Ltd Rs.
Equity shares of Land & Buil 15,00,000 9,00,000
Rs 100 each Plant & 9,00,000 6,00,000
fully paid up 18,00,000 15,00,000 Mach
12% pref sh of Investments 6,00,000 3,00,000
Rs 100 each 6,00,000 4,50,000 Stock 3,90,000 2,10,000
fully paid up Debtors 3,00,000 4,50,000
General Reserve Cash &Bank 1,95,000 3,76,500
Investment 4,50,000 3,00,000
Allowance
Reserve 1,50,000 90,000
Export Profit
Reserve 2,40,000 1,20,000
Profit & Loss
A/c 1,80,000 1,21,500
12% Debentures
Creditors 1,50,000 1,05,000
Bills Payable 2,70,000 1,20,000
45,000 30,000

38,85,500 28,36,500 38,85,000 28,36,500

Additional Information:

28
 1) 12% Debentures of Shankar Ltd and Parvati Ltd are discharged by Ganesh
Ltd by issuing such number of its 15% debentures of rs 100 each so as to
maintain the same amount of interest.
2) Ganesh Ltd will issue 4 equity shares for each 3 equity shares of Shankar
Ltd and 3 equity shares of Shankar Ltd and 3 equity shares for each 4 equity
shared of Parvati Ltd. The shares are to be issued at Rs 110 each, having
face value of Rs 100 each.
3) Preference shareholder of the two companies are issued equivalent number
of of 15% Preference shared of Ganesh Ltd each of Rs 100 at a price of Rs
120 per share.
4) Statutory reserves are to be maintained for 3 more years.

You are required to prepare the Balance Sheet of Ganesh Ltd after the
amalgamation has been earned out on the basis of the following
assumptions: Amalgamation is in the nature of merger.
SUM 3
12% Debentures of S Ltd. of ₹ 50,000 are discharged by V Ltd. by issuing its 15%
Debentures of ₹ 100 each in such a way to maintain same amount of interest. Find
the amount of Debentures issued by V Ltd.
SUM4
10% Debentures of S Ltd. of ₹ 1,00,000 are discharged by V Ltd. by issuing its
20% Debentures of ₹ 100 each in such a way to maintain same amount of interest.
Find the amount of Debentures issued by V Ltd.
SUM 5
Purchasing company issued 14% Preference shares of ₹ 100 each at par to
discharge the preference shareholders of Vendor company at 10% premium .
Balance sheet of vendor company has 13% Preference share Capital of ₹
17,00,000 divided into shares of ₹ 100 each.
Find consideration to be given to preference shareholders.
SUM 6
Purchasing company issued 14% Preference shares of ₹ 100 each at par to
discharge the preference shareholders of Vendor company at 10% premium.
Balance sheet of vendor company has 13% Preference share Capital of ₹ 17,00,000
divided into shares of ₹ 100 each.
Find the difference to be adjusted into reserve

29
 REFERENCES

Note : The above materials has been compile from the below mention
reference book

Reference Books:
Author/s Name of the Publisher
Book
1 P.C. TULSIAN Advanced Pearson
Accounting
2 S.N. Advanced Vikas
MAHESHWRI Accounting

3 S.C.GUPTA Advanced Sultan

Accounting Chand
4 SHUKLA M.C/ Advanced Sultan
GAREWAL Accounting Chand
T.S. & GUPTA
S.C
5 M Hanif/ A Advanced McGraw
Mukherji Accounting Hill
Education
6 Ravi Kishore Advanced Taxman
Accounting Publication

30
 FACULTY OF COMMERCE
B. COM.

SEMESTER 4

SUBJECT: ADVANCED CORPORATE

ACCOUNTING - II

UNIT 4: NON - BANKING FINANCIAL

COMPANIES

COMPILED BY
Dr. Shimoni Trivedi Prof. Nidhip Shah
STUDY MATERIAL FOR REFERENCE

1|Page
 UNIT- 4 NON-BANKING FINANCIAL COMPANIES
Topics covered
1.Introduction
2. Definition of NBFC
3. Meaning of conducting financial activity as “principal business”
4. Difference between banks & NBFCs
5. Importance of Non-Banking Financial Companies

6. Regulation of NBFCs? (Whether every NBFC should be registered

with RBI?)
A. NBFC Companies exempted from registration under RBI

B. Entities Regulated by RBI and applicable regulations

7. Requirements for registration with RBI
8. What are systemically important NBFCs?
9. Residuary Non-Banking Companies (RNBCs)
10. Authorization to NBFCs for accepting deposits.
11.Lliquid assets requirement for the deposit taking NBFCs
12. Rating of deposit taking NBFCs for acceptance of deposit.
13 ‘Owned fund’ and ‘net owned fund’ in relation to NBFCs
14. Some Important Concepts

1) Asset Classification
2) Provisioning requirement
3) Capital Risk Adequacy Ratio
4) Risk Weighted Assets
5) Leverage Ratio

There are five sections (parts) in these notes as follows :

SECTION A: THEORY & COMPREHENSIVE ILLUSTRATION
SECTION B : MULTIPLE CHOICE QUESTIONS
SECTION C : THEORY SHORT & LONG QUESTIONS
SECTION D : SUMS
SECTION E: HOMEWORK (SUMS)

2|Page
 UNIT: NON-BANKING FINANCIAL COMPANIES

SECTION A: THEORY & COMPREHENSIVE ILLUSTRATION

1. Introduction:

Non-Banking Financial Companies (NBFC) is vital for widening the access to

financial services and expand financial sector. At the times of financial distress,
NBFCs help in balancing the banking system. They offer better rates of return on
deposits and simple procedures for sanctioning loans as compared to normal
banks.

2. Definition of NBFC

A Non-Banking Financial Company is a company registered under the Companies

Act 1956/ 2013,engaged in the business of loans and advances, acquisition of
shares, debentures and other securities, leasing , hire-purchase, insurance business
and chit business.

The term NBFC does not include any institution whose principal business is that of
agriculture activity, industrial activity or sale of any good (other than securities) or
providing any services and sale/purchase/construction of any immovable property.

3. Meaning for conducting financial activity as “principal business”

Financial activity as principal business is when

(i) a company’s financial assets constitute more than 50 per cent of the
total assets and
(ii) income from financial assets constitute more than 50 per cent of the
gross income.

A company which fulfils both these criteria will be registered as NBFC by RBI. The
term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve
Bank has defined it so as to ensure that only companies predominantly engaged in
financial activity get registered with it and are regulated and supervised by it. Hence
if there are companies engaged in agricultural operations, industrial activity,
purchase and sale of goods, providing services or purchase, sale or construction of
immovable property as their principal business and are doing some financial
business in a small way, they will not be regulated by the Reserve Bank.

3|Page
 Interestingly, this test is popularly known as 50-50 test and is applied to determine
whether or not a company is into financial business.

4. Difference between banks & NBFCs

NBFCs lend and make investments and hence their activities are similar to that of
banks; however there are a few differences as given below:

i. NBFC are registered under Companies Act 1956 /2013 and not under
Banking regulation Act.
ii. NBFC are not required to obtain license.
iii. NBFC cannot accept demand deposits;
iv. NBFCs do not form part of the payment and settlement system and cannot
issue cheques drawn on itself;
v. Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks.
vi. An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
vii. Foreign investment is allowed upto 100% in NBFCs.

5. Importance of Non-Banking Financial Companies

India’s financial services sector is huge. It is not just comprised of commercial
banks, but also non-banking financial companies (NBFCs). These firms offer a
wide array of financial services like loans, chit-funds, and are different from
banks. NBFCs are often small players that largely go unnoticed. However, they
are still important to the economy, especially in a developing country like
India where 70% of the population lives in rural areas.

• Size of sector:
The NBFC sector has grown considerably in the last few years despite the
slowdown in the economy. As of March 2013, it accounted for 12.5% of the
country’s Gross Domestic Product (GDP) – a measure of the size of the economy.
• Growth:
In terms of year-over-year growth rate, the NBFC sector beat the banking sector in
most years between 2006 and 2013. On an average, it grew 22% every year.
• Profitability:
NBFCs are more profitable than the banking sector because of lower costs. This
helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth –
the increase in the amount of money being lent to customers – is higher than that
of the banking sector.
• Infrastructure Lending:

4|Page
 NBFCs contribute largely to the economy by lending to infrastructure projects,
which are very important to a developing country like India. But they require large
amount of funds, and earn profits only over a longer time-frame. As a result, these
are riskier projects. This deters a lot of banks from lending to infrastructure
projects. In the last few years, NBFCs have contributed more to infrastructure
lending than banks.
• Promoting inclusive growth:
NBFCs cater to a wide variety of customers – both in urban and rural areas. They
finance projects of small-scale companies, which is important for the growth in
rural areas. They also provide small-ticket loans for affordable housing projects. All
these help promote inclusive growth in the country.

6. Regulation of NBFCs? (Whether every NBFC should be registered with RBI?)

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company
can commence or carry on business of a non-banking financial institution without a)
obtaining a certificate of registration from the Bank and without having a Net Owned
Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in terms of the powers
given to the Bank, to obviate dual regulation, certain categories of NBFCs which are
regulated by other regulators are exempted from the requirement of registration
with RBI

A. NBFC Companies exempted from registration under RBI

• Housing Finance Companies : regulated by National Housing Bank

• Merchant Banking Companies: regulated by SEBI
• Stock Exchanges: regulated by SEBI
• Companies engaged in the business of stock-broking/sub-broking: :
regulated by SEBI
• Venture Capital Fund Companies: regulated by SEBI
• Nidhi Companies: regulated by Ministry of Corporate Affairs, Government
of India
• Insurance companies: : regulated by IRDA
• Chit Fund Companies: regulated by State Government

It may also be mentioned that Mortgage Guarantee Companies have been notified
as Non-Banking Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934.
Core Investment Companies with asset size of less than ₹ 100 crore, and those with
asset size of ₹ 100 crore and above but not accessing public funds are exempted
from registration with the RBI.

5|Page
 B. Entities Regulated by RBI and applicable regulations

Different types/categories of NBFCs registered with RBI?

NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-
Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically
important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
c) by the kind of activity they conduct. Within this broad categorization the different
types of NBFCs are as follows:

I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution

carrying on as its principal business the financing of physical assets supporting
productive/economic activity, such as automobiles, tractors, lathe machines,
generator sets, earth moving and material handling equipments, moving on own
power and general purpose industrial machines. Principal business for this purpose
6|Page
 is defined as aggregate of financing real/physical assets supporting economic
activity and income arising therefrom is not less than 60% of its total assets and total
income respectively.

II. Investment Company (IC) : IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities,

III. Loan Company (LC): LC means any company which is a financial institution
carrying on as its principal business the providing of finance whether by making
loans or advances or otherwise for any activity other than its own but does not
include an Asset Finance Company.

IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a)

which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a
minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or
equivalent d) and a CRAR of 15%.

V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an

NBFC carrying on the business of acquisition of shares and securities which satisfies
the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity
shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily

convertible into equity shares within a period not exceeding 10 years from the date
of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies
except through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and
45I(f) of the RBI act, 1934 except investment in bank deposits, money market
instruments, government securities, loans to and investments in debt issuances of
group companies or guarantees issued on behalf of group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

VI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-
NBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar

7|Page
 denominated bonds of minimum 5 year maturity. Only Infrastructure Finance
Companies (IFC) can sponsor IDF-NBFCs.

VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-

MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature
of qualifying assets which satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual

income not exceeding ₹ 1,00,000 or urban and semi-urban household income not
exceeding ₹ 1,60,000;

b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in
subsequent cycles;

c. total indebtedness of the borrower does not exceed ₹ 1,00,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹
15,000 with prepayment without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 50 per
cent of the total loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of

the borrower

VIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-

deposit taking NBFC engaged in the principal business of factoring. The financial
assets in the factoring business should constitute at least 50 percent of its total
assets and its income derived from factoring business should not be less than 50
percent of its gross income.

IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which
at least 90% of the business turnover is mortgage guarantee business or at least 90%
of the gross income is from mortgage guarantee business and net owned fund is ₹
100 crore.

X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution

through which promoter / promoter groups will be permitted to set up a new bank
.It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will
hold the bank as well as all other financial services companies regulated by RBI or

8|Page
 other financial sector regulators, to the extent permissible under the applicable
regulatory prescriptions.

7. Requirements for registration with RBI

A company incorporated under the Companies Act, 1956 and desirous of

commencing business of non-banking financial institution as defined under Section
45 I(a) of the RBI Act, 1934 should comply with the following:

i. it should be a company registered under Section 3 of the companies Act, 1956

ii. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net owned
fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is
indicated separately in the FAQs on specialized NBFCs)

8. What are systemically important NBFCs?

NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are
considered as systemically important NBFCs. The rationale for such classification is
that the activities of such NBFCs will have a bearing on the financial stability of the
overall economy.

9. Residuary Non-Banking Companies (RNBCs)

Residuary Non-Banking Company is a class of NBFC which is a company and has as

its principal business the receiving of deposits, under any scheme or arrangement
or in any other manner and not being Investment, Asset Financing, Loan Company.
These companies are required to maintain investments as per directions of RBI, in
addition to liquid assets.

The functioning of these companies is different from those of NBFCs in terms of

method of mobilization of deposits and requirement of deployment of depositors'
funds as per Directions. Besides, Prudential Norms Directions are applicable to these
companies also.

It is true that there is no ceiling on raising of deposits by RNBCs. However, every

RNBC has to ensure that the amounts deposited with it are fully invested in
approved investments. In other words, in order to secure the interests of depositor,
such companies are required to invest 100 per cent of their deposit liability into
highly liquid and secure instruments, namely,

RNBC : Rate of interest paid on deposits and maturity period of deposits taken by
them

9|Page
 The minimum interest an RNBC should pay on deposits should be 5% (to be
compounded annually) on the amount deposited in lump sum or at monthly or
longer intervals; and 3.5% (to be compounded annually) on the amount deposited
under daily deposit scheme. Interest here includes premium, bonus or any other
advantage that an RNBC promises to the depositor by way of return. An RNBC can
accept deposits for a minimum period of 12 months and maximum period of 84
months from the date of receipt of such deposit. They cannot accept deposits
repayable on demand. However, at present, the only RNBCs in existence (Peerless)
has been directed by the Reserve Bank to stop collecting deposits, repay thedeposits
to the depositor and wind up their RNBC business as their business model is
inherently unviable.

10. Authorisation to NBFCs for accepting deposits.

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the
Bank had given a specific authorisation and have an investment grade rating are
allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned
Funds.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months. They cannot accept deposits repayable
on demand.

11. Lliquid assets requirement for the deposit taking NBFCs

In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid assets to
be maintained. by NBFCs is 15 per cent of public deposits outstanding as on the last
working day of the second preceding quarter. Of the 15%, NBFCs are required to
invest not less than ten percent in approved securities and the remaining 5% can be
in unencumbered term deposits with any scheduled commercial bank. Thus, the
liquid assets may consist of Government securities, Government guaranteed bonds
and term deposits with any scheduled commercial bank.

The investment in Government securities should be in dematerialised form which

can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account with
a scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited
(SHICL). In case of Government guaranteed bonds the same may be kept in
dematerialised form with SCB/SHCIL or in a dematerialised account with
depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services
(India) Ltd. (CDSL)] through a depository participant registered with Securities &
Exchange Board of India (SEBI). However in case there are Government bonds which
are in physical form the same may be kept in safe custody of SCB/SHCIL.

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 NBFCs have been directed to maintain the mandated liquid asset securities in a
dematerialised form with the entities stated above at a place where the registered
office of the company is situated. However, if an NBFC intends to entrust the
securities at a place other than the place at which its registered office is located, it
may do so after obtaining the permission of RBI in writing. It may be noted that liquid
assets in approved securities will have to be maintained in dematerialised form only. The
liquid assets maintained as above are to be utilised for payment of claims of
depositors. However, deposits being unsecured in nature, depositors do not have
direct claim on liquid assets.

12. Rating of deposit taking NBFCs for acceptance of deposit.

NBFCs may get itself rated by any of the six rating agencies namely, CRISIL, CARE,
ICRA, FITCH Ratings India Pvt. Ltd, Brickwork Ratings India Pvt. Ltd. and SMERA.

The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating Nomenclature of

agencies minimum investment
grade credit rating
(MIGR)
CRISIL FA- (FA MINUS)
ICRA MA- (MA MINUS)
CARE CARE BBB (FD)
FITCH Ratings India Pvt. tA-(ind)(FD)
Ltd. SMERA A
SMERA
Brickwork Ratings India BWR FBBB
Pvt. Ltd.

It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA-
is not equivalent to AAA.

However, if rating of an NBFC is downgraded to below minimum investment grade

rating, it has to stop accepting public deposits, report the position within fifteen
working days to the RBI and bring within three years from the date of such
downgrading of credit rating, the amount of public deposit to nil. With the
introduction of revised regulatory framework in November 2014 deposit taking
NBFCs have to mandatorily get investment grade credit rating for being eligible to
accept public deposits.

13 ‘Owned fund’ and ‘net owned fund’ in relation to NBFCs

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 ‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares
which are compulsorily convertible into equity, free reserves, balance in share
premium account and capital reserves representing surplus arising out of sale
proceeds of asset, excluding reserves created by revaluation of asset, after
deducting therefrom accumulated balance of loss, deferred revenue expenditure
and other intangible assets.

'Net Owned Fund' is the amount as arrived at above, minus the amount of
investments of such company in shares of its subsidiaries, companies in the same
group and all other NBFCs and the book value of debentures, bonds, outstanding
loans and advances including hire purchase and lease finance made to and deposits
with subsidiaries and companies in the same group, to the extent it exceeds 10% of
the owned fund.

14. Some Important Concepts

1) Asset Classification

Standard Assets:
No default in repayment of principal or interest and does not disclose any problem
or carry more than normal risk attached to the business.

Sub-standard Assets:
Asset has been classified as non-performing asset for a period of not exceeding 18
months* or an asset where the terms of the agreement regarding interest and/ or
principal have been renegotiated or rescheduled or restructured after
commencement of operations, until the expiry of one year of satisfactory
performance under the renegotiated or rescheduled or restructured terms.

Doubtful Assets:
Term loan, lease asset, hire purchase asset or any other asset remaining sub-
standard for a period exceeding 18 months or such shorter period*.

Loss Assets:
Identified by the Company/ external or internal auditor/ RBI or an asset which is
adversely affected by a potential threat of non-recoverability due to either erosion
in the value of security or non-availability of security or due to any fraudulent act
or omission on the part of the borrower.

* The period of 18 months shall be reduced to 16 months for the FY ended March
31, 2016; 14 months for the FY ended March 31, 2017 and 12 months for the FY
ended March 31, 2018.
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 2) Provisioning requirement

Asset NBFC-ND-NSI NBFC-ND-SI

Classification
Standard Asset 0.25 per cent as on March
31, 15 0.25 per cent as on March
31, 15
0.30 per cent as on March
31, 16
0.35 per cent as on March
31, 17
0.40 per cent as on March
31, 18

Sub-standard 10 per cent of total 10 per cent of total

Asset outstanding outstanding
Doubtful Asset
100 per cent provision to 100 per cent provision to
the extent to which the the extent to which the
advance is not covered by advance is not covered by the
the realisable value of the realisable value of the
security to which the NBFC security to which the NBFC
has a valid recourse shall be has a valid recourse shall be
made. The realisable value made. The realisable value is
is to be estimated on a to be estimated on a realistic
realistic basis; basis;
In addition to item (a) In addition to item (a)
above, depending upon the above, depending upon the
period for which the asset period for which the asset as
as remained doubtful, remained doubtful, provision
provision shall be made on shall be made on the
the following basis : following basis :
o 20 per cent up to one o 20 per cent up to one year;
year; o 30 per cent from one year
o 30 per cent from one year to third year;
to third year; o 50 per cent from forth year
o 50 per cent from forth onwards.
year onwards.

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 Loss Asset The entire asset shall be The entire asset shall be
written off. If the assets are written off. If the assets are
permitted to remain in the permitted to remain in the
books for any reason, 100 books for any reason, 100 per
per cent of the outstanding cent of the outstanding

3) Capital Risk Adequacy Ratio

Every NBFC-ND-SI, NBFC-D, NBFC-MFI*, NBFC-IFC** shall maintain a minimum

CRAR of 15 percent.
CRAR = Tier I + Tier II Capital

Aggregate Risk Weighted Assets

The total Tier I capital, at any point of time shall not be less than 8.5 per cent by
March 31, 2016 and 10 per cent by March 31, 2017.

NBFCs primarily engaged in lending against gold jewellery (such loans comprising
50 percent or more of their financial assets) shall maintain a minimum Tier l capital
of 12 percent.

* The total Tier II Capital for NBFC-MFIs, at any point of time, shall not exceed 100
percent of Tier I Capital.
** The Tier I capital of an IFC, at any point of time, shall not be less than 10%

Tier I
“Tier I capital” means owned fund as reduced by investment in shares of other
NBFC and in shares, debentures, bonds, outstanding loans and advances including
hire purchase and lease finance made to and deposits with subsidiaries and
companies in the same group exceeding, in aggregate, ten per cent of the owned
fund; and perpetual debt instruments issued by a non-deposit taking non-banking
financial company in each year to the extent it does not exceed 15% of the
aggregate Tier I Capital of such company as on March 31 of the previous
accounting year;
“owned fund” means paid up equity capital, preference shares which are
compulsorily convertible into equity, free reserves, balance in share premium
account and capital reserves representing surplus arising out of sale proceeds of
asset, excluding reserves created by revaluation of asset, as reduced by
accumulated loss balance, book value of intangible assets and deferred revenue
expenditure, if any.

Tier II
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 “Tier II capital” includes the following:
preference shares other than those which are compulsorily convertible into
equity;
revaluation reserves at discounted rate of fifty five per cent;
general provisions (including that for standard assets) and loss reserves to the
extent these are not attributable to actual diminution in value or identifiable
potential loss in any specific asset and are available to meet unexpected losses, to
the extent of one and one fourth per cent of risk weighted assets;
hybrid debt capital instruments;
subordinated debt; and
perpetual debt instruments issued by a non-deposit taking non-banking financial
company which is in excess of what qualifies for Tier I Capital, to the extent the
aggregate does not exceed Tier I capital.

4) Risk Weighted Assets

Degrees of credit risk expressed as percentage weightages have been assigned to

balance sheet assets in the prudential norms.

Eg. Cash and bank balance, FDs – 0

Inter corporate loans/ deposits – 100
Loans to Staff – 0
Fixed Assets (net of depreciation) - 100

Risk Weighted Assets = the value of each asset/ item X the relevant risk
weights

For off-balance sheet items - the notional amount of the transaction is

converted into a credit equivalent amount

Risk Weighted Assets = credit equivalent amount X risk weight applicable.

5) Leverage Ratio
The NBFC-ND-SI (except NBFC-MFI and NBFC-CIC) shall maintain a leverage ratio of
not more than 7 at any point of time, w.e.f 27th March, 2015. The CIC-ND-SI shall
maintain a leverage ratio of not more than 2.5 at any point of time.

Leverage Ratio = Total Outside Liabilities / Owned Funds

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 “Outside Liabilities” means total liabilities as appearing on the liabilities side of the
balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments
compulsorily convertible into equity shares within a period not exceeding 5 years
from the date of issue but including all forms of debt and obligations having the
characteristics of debt, whether created by issue of hybrid instruments or
otherwise, and value of guarantees issued, whether appearing on the balance
sheet or not.

Statement for computing Net Owned Fund

Step -1 Owned Funds

Paid up Share Capital
+ convertible preference share capital
+ Free Reserves
+Securities Premium
+ Capital Reserve [except profit from revaluation of fixed
assets]

Less: Deferred Expenditure [intangible assets]

OWNED FUNDS A
Step -2 Investments
In shares of subsidiaries and group companies
In debentures of subsidiaries and group companies
TOTAL INVESTMENTS B
Step -3 10% of Owned Fund =10% of A C
Step -4 Excess of Investments over 10% of Investments = B-C D
Step -5 Net Owned Funds = A-D

Comprehensive Illustration

Illustration:1 ABC Ltd. is a Non- banking Finance Company. Balance-sheet is given

below:

Liabilities Rs. Assets Rs.

(‘000) (‘000)
Paid up Equity Capital 1000 Leased out assets 8000
Free Reserves 5000 Investment:
Loans 4000 In shares of subsidiaries & 1000
group cos.

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 Deposits 4000 In debentures of subsidiaries 1000
and group cos.
Cash and bank balances 2000
Deferred expenditure 2000
14,000 14,000
Compute Net Owned Fund of ABC Ltd. –NBFC.

Solution: Statement for computing Net Owned Fund

Step -1 Owned Funds

Paid up Share Capital 1000
+ convertible preference share capital
+ Free Reserves 5000
+Securities Premium
+ Capital Reserve [except profit from revaluation of
fixed assets]
6000
Less: Deferred Expenditure [intangible assets] 2000
OWNED FUNDS A 4000
Step -2 Investments
In shares of subsidiaries and group companies 1000
In debentures of subsidiaries and group companies 1000
TOTAL INVESTMENTS B 2000
Step -3 10% of Owned Fund =10% of A = 10% of 4,000 C 400
Step -4 Excess of Investments over 10% of Investments = B-C D 1600
= 2000 - 400
Step -5 Net Owned Funds = A-D = 4000 -1600------ ------------- --------------- -----
------------------- --- 2400

Illustration :2 The classified Advances of an NBFC on 31st March, 2018 are given
below:

Rs.in
lakhs
Standard assets 44,500
Sub-standard assets 2500
Secured portions of doubtful debts
- Upto one year 600
- One year to three years 150
- More than three years 80

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 Unsecured portions of doubtful debts 180
Loss assets 76

Calculate the amount of provision, which must be made against the advances as
per

(i) The Non-Banking Financial Company – Non- Systematically Important

Non-Deposit taking Company (RBI) Directions, 2016: and
(ii) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.

Solution :

(i) Calculation of provision required on advances as on 31st March, 2018 as

per The Non-Banking Financial Company – Non- Systematically
Important Non-Deposit taking Company (RBI) Directions, 2016 (NBFC-ND-
NSI)
Rs.in Lakhs % of Provision
Provision Rs.in
lakhs
Standard assets 44,500 0.25 111.25
Sub-standard assets 2500 10 250
Secured portions of doubtful debts
- Upto one year 600 20 120
- One year to three years 150 30 45
- More than three years 80 50 40
Unsecured portions of doubtful 180 100 180
debts
Loss assets 76 100 76
Total Provision 822.25

(ii) Calculation of provision required on advances as on 31st March, 2018 as

per The Non-Banking Financial Company – Systematically Important
Non-Deposit taking Company and Deposit taking (RBI) Directions, 2016
(NBFC-ND-SI and NBFC -D-SI)
Rs.in Lakhs % of Provision
Provision Rs.in
lakhs

18 | P a g e
 Standard assets 44,500 0.40 178
Sub-standard assets 2500 10 250
Secured portions of doubtful debts
- Upto one year 600 20 120
- One year to three years 150 30 45
- More than three years 80 50 40
Unsecured portions of doubtful 180 100 180
debts
Loss assets 76 100 76
Total Provision 889

SECTION:B MULTIPLE CHOICE QUESTIONS:

1) test is applied to determine whether a company is into financial

business.
a) 40-60 test
b) 50-50 test
c) 60-40 test
d) 70-30 test
2) The term NBFC include any institution whose principal business is :
a) Agriculture activity
b) Industrial activity
c) Financial activity
d) Construction of immovable property
3) Financial activity as principal business means:
a) 50% of total assets are financial assets
b) 50% of gross income is generated from financial assets
c) Both a and b
d) none
4) NBFC is different from a bank because
a) NBFC can accept demand deposits but banks cannot
b) NBFC can issue cheques drawn on itself but banks cannot
c) Banks can accept demand deposits but NBFC cannot
d) None of the above
5) NBFC is different from a bank because

19 | P a g e
 a) NBFC can accept demand deposits but banks cannot
b) NBFC can issue cheques drawn on itself but banks cannot
c) NBFC cannot issue cheques drawn on itself but a bank can
d) None of the above
6) NBFC is different from a bank because
a) NBFC is a part of the payment and settlement system but bank is not
b) NBFC is not a part of the payment and settlement system but bank is
c) Banks do not maintain reserve ratios like CRR but NBFC does.
d) None of the above
7) NBFC is a financial company like a bank but-
a) NBFC create credit but bank is not allowed
b) Banks create credit but NBFC is not allowed
c) NBFC provides overdraft facility to customers
d) Banks does not provide overdraft facility
8) NBFC is a financial company like a bank but-
a) NBFC can create credit
b) Banks cannot create credit
c) NBFC cannot provide overdraft facility to customers
d) Banks do not provide overdraft facility to customers
9) NBFC is a financial institution which is a company registered under-
a) The Indian Companies Act 1956
b) Banking Regulation Act, 1949
c) RBI Amendment Act, 1997
d) None
10) Foreign investments upto is allowed in NBFC
a) 65%
b) 74%
c) 100%
d) 50%
11) NBFC which is not required to be registered with RBI
a) Asset finance Company (AFC)
b) Investment Company (IC)
c) Insurance Company
d) Core Investment Company (CIC)
12) NBFC which is not required to be registered with RBI
a) Mutual Fund Companies

20 | P a g e
 b) Infrastructure Finance Company (IFC)
c) Mortgage Guarantee Companies (MGC)
d) Loan Company
13) NBFC which is not required to be registered with RBI
a) Loan Company
b) Nidhi Companies
c) NBFC-Micro Finance Institution (NBFC-MFI)
d) Asset Finance Company (AFC)
14) NBFC which is not required to be registered with RBI
a) Core Investment Company (CIC)
b) Stock Broking Companies
c) Mortgage Guarantee Companies (MGC)
d) Asset Finance Company (AFC)
15) The main business of Asset Finance Company (AFC) is –
a) Acquisition of securities
b) Financing physical assets
c) Accept demand deposits
d) Collecting money on other’s behalf
16) The main business of Investment Company (IC) is –
a) Acquisition of securities
b) Financing physical assets
c) Accept demand deposits
d) Collecting money on other’s behalf
17) The main business of NBFC-Factors is –
a) Acquisition of securities
b) Financing physical assets
c) Accept demand deposits
d) Collecting money on other’s behalf
18) Insurance companies are regulated by
a) Securities and Exchange Board of India
b) Insurance Regulatory and Development Authority
c) Reserve Bank of India
d) National Housing Bank
19) Venture Capital Fund Companies are regulated by
a) Securities and Exchange Board of India
b) Insurance Regulatory and Development Authority

21 | P a g e
 c) Reserve Bank of India
d) National Housing Bank
20) Merchant Banking Companies are regulated by
a) Securities and Exchange Board of India
b) Insurance Regulatory and Development Authority
c) Reserve Bank of India
d) National Housing Bank
21) Nidhi Companies are regulated by
a) Securities and Exchange Board of India
b) National Housing Bank
c) State Government
d) Ministry of Corporate Affairs, Government of India
22) Chit fund companies are regulated by
a) Securities and Exchange Board of India
b) National Housing Bank
c) State Government
d) Ministry of Corporate Affairs, Government of India
23) Which NBFC is not regulated by SEBI?
a) Merchant Banking Companies
b) Venture Capital Fund Companies
c) Nidhi Companies
d) Stock Exchanges
24) Which of the following NBFCs is regulated by RBI?
a) Insurance Companies
b) Loan Companies
c) Housing Finance Companies
d) Mutual Benefit Companies.
25) Which of the following is true for Infrastructure Finance Company(IFC)?
a) 50% or more of its total assets should be deployed in Infrastructure loans
b) 60% or more of its total assets should be deployed in Infrastructure loans
c) 75% or more of its total assets should be deployed in Infrastructure loans
d) 80% or more of its total assets should be deployed in Infrastructure loans
26) Which of the following is true for Core Investment Company (CIC)?
% or more of its total assets should be invested in equity shares,
preference shares, debt or loans in group companies.

22 | P a g e
 a) 50%
b) 70%
c) 80%
d) 90%
27) NBFC should maintain minimum level of liquid assets which is –
a) 20% of total deposits
b) 15% of Public deposits
c) 30% of total investments
d) 35 % of total assets
28) Equity capital and reserves less intangible assets and revaluation
reserves, divided by number of equity shares is:
a) Earning value
b) Break-up value
c) Fair value
d) Net book value
29) Capitalised value (@ 8%, 10%, 12%) of (average PAT less preference
dividend divided by no. of equity shares) is
a) Earning value
b) Break-up value
c) Fair value
d) Net book value
30) Which of the following is true?
a) Fair value means the mean of the earning value and the break-up value
b) Earning value means the mean of the fair value and the break-up value
c) Break-up value means the mean of the earning value and the fair value
d) Net book value means the mean of the earning value and the fair value
31)For NBFC- Systematically Important Non-Deposit taking companySub-
standard asset would mean an asset that has been classified as NPA

a) NPA for a period not exceeding 14 months for financial year ending
March 31, 2017.
b) NPA for a period not exceeding 12 months for financial year ending
March 31, 2018 and thereafter
c) NPA for a period not exceeding 18 months.
d) Both a and b

23 | P a g e
 32) For NBFC- Non-Systematically Important Non-Deposit taking companySub-
standard asset would mean an asset that has been classified as

a) NPA for a period not exceeding 14 months for financial year ending
March 31, 2017.
b) NPA for a period not exceeding 12 months for financial year ending
March 31, 2018 and thereafter
c) NPA for a period not exceeding 18 months.
d) Both a and b
33) For NBFC- Systematically Important Non-Deposit taking company Doubtful
asset would mean an asset that has been classified as
a) Sub-standard for a period not exceeding 14 months for financial year
ending March 31, 2017.
b) Sub-standard for a period not exceeding 12 months for financial year
ending March 31, 2018 and thereafter
c) Sub-standard for a period not exceeding 18 months.
d) Both a and b
34) For NBFC- Non-Systematically Important Non-Deposit taking company
Doubtful asset would mean an asset that has been classified as
a) Sub-standard for a period not exceeding 14 months for financial year
ending March 31, 2017.
b) Sub-standard for a period not exceeding 12 months for financial year
ending March 31, 2018 and thereafter
c) Sub-standard for a period not exceeding 18 months.
d) Both a and b
35) NBFC has to make provision on Loss assets ata)
70%
b) 80%
c) 90%
d) 100%
36) For an NBFC, provision on Doubtful assets should be made as follows:
1. 100% provision on the advance not covered by realisable value of the
security
2. 20% on assets considered doubtful for less than a year
3. 30% on assets considered doubtful for a period more than 1 year but
less than 3 years

24 | P a g e
 4. 50% on assets considered doubtful for more than 3 years
a) Only 2 and 3
b) Only 3 & 4
c) Only 1, 3 & 4
d) all
37) For an NBFC, provision on Sub-Standard assets should be made as
follows:
a) 10%
b) 20%
c) 15%
d) 25%
38) In an NBFC-Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
39)In an NBFC- Systematically important Non-Deposit taking company, (fora
financial year ending March 31, 2017), a Non-Performing Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
40)In an NBFC- Systematically important Non-Deposit taking company, (fora
financial year ending March 31, 2018 and thereafter), a Non-Performing
Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
41) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is A term loan inclusive of unpaid interest
1. when the instalment is overdue for a six months or more
2. when the instalment is overdue for a four months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a four months or more

25 | P a g e
 a) 1 and 4
b) 1 or 3
c) 2 and 3
d) 2 or 4
42) In an NBFC-Systematically important Non-Deposit taking company, (for a
financial year ending March 31, 2017), a Non-Performing Asset is A term
loan inclusive of unpaid interest
1. when the instalment is overdue for a six months or more
2. when the instalment is overdue for a four months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a four months or more
a) 1 and 4
b) 1 or 3
c) 2 and 3
d) 2 or 4
43) In an NBFC -Systematically important Non-Deposit taking company, (fora
financial year ending March 31, 2018 and thereafter), a Non-Performing
Asset is A term loan inclusive of unpaid interest
1. when the instalment is overdue for a three months or more
2. when the instalment is overdue for a four months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a three months or more
a) 1 or 4
b) 1 or 3
c) 2 and 3
d) 2 or 4
44) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is a demand or call loan
1. Which remained overdue for six months or more from the date of call
2. Which remained overdue for three months or more from the date of
call
3. On which interest amount remained overdue for six months or more
4. On which interest amount remained overdue for three months or
more
a) 1 and 3
b) 1 or 3

26 | P a g e
 c) 2 and 3
d) 2 or 3
45) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
46)In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is a short term loan or advance
a) Which remained overdue for one month or more
b) Which remained overdue for two months or more
c) Which remained overdue for four months or more
d) Which remained overdue for six months or more
47) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is
a) Dues on account of sale of assets, overdue for 6 months or more
b) Dues on account of services rendered, overdue for 6 months or more
c) Reimbursement of expenses incurred, overdue for 6 months or more
d) All of the above
48) In an NBFC-Systematically important Non-Deposit taking company for a
financial year ending March 31, 2017, a Non-Performing Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
49)In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is A term loan inclusive of unpaid interest
1. when the instalment is overdue for a six months or more
2. when the instalment is overdue for a three months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a three months or more
a) 1 and 4
b) 1 or 3
c) 2 and 3

27 | P a g e
 d) 2 or 4
50. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is a demand or call loan
1. Which remained overdue for six months or more from the date of
call
2. Which remained overdue for three months or more from the date
of call
3. On which interest amount remained overdue for six months or
more
4. On which interest amount remained overdue for three months or
more
a) 1 and 3
b) 1 or 3
c) 2 and 3
d) 2 or 3
51. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017, a Non-Performing Asset is a demand
or call loan
1. Which remained overdue for six months or more from the date of
call
2. Which remained overdue for four months or more from the date
of call
3. On which interest amount remained overdue for four months or
more
4. On which interest amount remained overdue for three months or
more
a) 1 and 3
b) 1 or 3
c) 2 and 3
d) 2 or 3
52. In an NBFC- Systematically important Non-Deposit taking company, , for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is a demand or call loan
1. Which remained overdue for six months or more from the date of call
2. Which remained overdue for three months or more from the date of
call

28 | P a g e
 3. On which interest amount remained overdue for six months or more
4. On which interest amount remained overdue for three months or
more
a) 1 and 4
b) 2 or 4
c) 2 and 3
d) 2 or 3
53. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
54.In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017 a Non-Performing Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
55.In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
56.In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is
a) Interest on loans and advances under Current Assets outstanding for at
least six months or more
b) Interest on loans and advances under Current Assets outstanding for at
least seven months or more
c) Interest on loans and advances under Current Assets outstanding for at
least eight months or more
d) Interest on loans and advances under Current Assets outstanding for at
least nine months or more

29 | P a g e
 57. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017 a Non-Performing Asset is
a) Interest on loans and advances under Current Assets outstanding for at
least six months or more
b) Interest on loans and advances under Current Assets outstanding for at
least five months or more
c) Interest on loans and advances under Current Assets outstanding for at
least four months or more
d) Interest on loans and advances under Current Assets outstanding for at
least three months or more
58. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is
a) Interest on loans and advances under Current Assets outstanding for at
least nine months or more
b) Interest on loans and advances under Current Assets outstanding for at
least seven months or more
c) Interest on loans and advances under Current Assets outstanding for at
least five months or more
d) Interest on loans and advances under Current Assets outstanding for at
least three months or more
59. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is a short term loan or advance
a) Which remained overdue for one month or more
b) Which remained overdue for two months or more
c) Which remained overdue for four months or more
d) Which remained overdue for six months or more
60. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is
a) Dues on account of sale of assets, overdue for 6 months or more
b) Dues on account of services rendered, overdue for 6 months or more
c) Reimbursement of expenses incurred, overdue for 6 months or more
d) All of the above
61. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017 a Non-Performing Asset is
a) Dues on account of sale of assets, overdue for 4 months or more

30 | P a g e
 b) Dues on account of services rendered, overdue for 4 months or more
c) Reimbursement of services rendered, overdue for 4 months or more
d) All of the above
62. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is
a) Dues on account of sale of assets, overdue for 3 months or more
b) Dues on account of services rendered, overdue for 3 months or more
c) Reimbursement of services rendered, overdue for 3 months or more
d) All of the above
63. Which of the following statements is true regarding Ombudsman Scheme for
NBFC?
a) Section 45L of the RBI Act, 1934 confers powers on RBI to notify such
scheme.
b) NBFCs having customer interface, with assets size of one billion rupees or
above are eligible to be
c) The scheme is initially being introduced at the four metro centres
d) All of the above.
64. Which among the following NBFC is not excluded from the Ombudsman
scheme for NBFC?
a) Deposit accepting NBFCs
b) NBFC-IFC
c) Core Investment Company (CIC)
d) IDF-NBFC
65. Which of the following is true regarding NBFC?
a) NBFC provides banking services to people without holding bank license
b) NBFC can accept demand deposits
c) NBFC is a part of payment and settlement
d) NBFC can issue checks drawn on itself
66. How much percentage of foreign investment is allowed for NBFC?
a) 50%
b) 0%
c) 25%
d) 100%
67. Which of the following is the principle business carried out by NBFC?
a) Hire purchase finance

31 | P a g e
 b) Housing finance
c) Investment and loan
d) All of the above
68. NBFC-Factor is related to which of the following businesses?
a) Insurance
b) Deposit
c) Non-deposit
d) None of the above
69. The financial assets in the NBFC factoring business should constitute what
percent of its total assets?
a) 25%
b) 50%
c) 75%
d) 100%
70. Which of the following is related to factoring in NBFC-Factor?
a) Money Market
b) Financial transaction
c) Financial inclusion
d) None of the above

SECTION C Theory Questions :

SHORT QUESTIONS
1) Define NBFC.
2) Define Standard Asset as per asset classification for NBFC.
3) Give names of two types of NBFC required to be registered with RBI
4) Explain the meaning of 50-50 test
5) What are systemically important NBFCs?
6) Provisioning requirement
7) Capital Risk Adequacy Ratio
LONG QUESTIONS
1) NBFC companies exempted from registration with RBI
2) Difference between banks and NBFC
3) Importance of NBFC
4) What are systemically important NBFCs?
5) Asset Classification

32 | P a g e
 SECTION D SUMS

Sum:1 XYZ Ltd. is an NBFC . Balance-sheet is given below:

Liabilities Rs. (in Assets Rs. (in
‘000 ) ‘000)
Paid up Equity Capital 500 Leased out assets 2000
Free Reserves 3000 Investment:
Loans 1000 In shares of subsidiaries & group 1500
cos.
Deposits 1500 In debentures of subsidiaries 600
and group cos.
Cash and bank balances 900
Deferred expenditure 1000
6000 6000
Compute Net Owned Fund of XYZ Ltd. –NBFC.

Sum: 2 Following is the Balance-sheet of Kush Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 300 Leased out assets 2700
Convertible Preference 100 Investment:
share capital
Free Reserves 1200 In shares of subsidiaries & group 400
cos.
Securities Premium 200 In debentures of subsidiaries 200
and group cos.
Capital Reserve 200 Cash and bank balances 600
Loans 1300 Deferred expenditure 500
Deposits 1100
4400 4400
Capital reserves include profit of Rs.1,50,000 on revaluation of fixed assets.
Compute Net Owned Fund of Kush Ltd. –NBFC.

Sum:3 The classified Advances of an NBFC on 31st March, 2017 are given below:

Rs.in
lakhs
Standard assets 33,600
Sub-standard assets 2680

33 | P a g e
 Secured portions of doubtful debts
- Upto one year 640
- One year to three years 160
- More than three years 60
Unsecured portions of doubtful debts 195
Loss assets 87
Calculate the amount of provision, which must be made against the advances as
per

(i) The Non-Banking Financial Company – Non- Systematically Important

Non-Deposit taking Company (RBI) Directions, 2016: and
(ii) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.

Sum:4 The classified Advances of an NBFC on 31st March, 2017 are given below:

Rs.in
lakhs
Standard assets 57,000
Sub-standard assets 3490
Secured portions of doubtful debts
- Upto one year 730
- One year to three years 540
- More than three years 220
Unsecured portions of doubtful debts 88
Loss assets 65
Calculate the amount of provision, which must be made against the advances as
per

(1) The Non-Banking Financial Company – Non- Systematically Important Non-

Deposit taking Company (RBI) Directions, 2016: and
(2) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.

Sum: 5 The classified Advances of an NBFC on 31st March, 2018 are given below:

Rs.in
lakhs
Standard assets 49,000
Sub-standard assets 8,390
Secured portions of doubtful debts

34 | P a g e
 - Upto one year 1080
- One year to three years 290
- More than three years 200
Unsecured portions of doubtful debts 87
Loss assets 38
Calculate the amount of provision, which must be made against the advances as
per

(a) The Non-Banking Financial Company – Non- Systematically Important Non-

Deposit taking Company (RBI) Directions, 2016 (NBFC-ND-NSI): and
(b) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016 (NBFC-
ND-SI and NBFC-D-SI)

SECTION E HOMEWORK

Sum: 1 Following is the Balance-sheet of Gaurav Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 600 Leased out assets 3000
Free Reserves 1500 Investment:
Loans 250 In shares of subsidiaries & group 500
cos.
Deposits 350 In debentures of subsidiaries 600
and group cos.
Cash and bank balances 1100
Deferred expenditure 800
2800 6000
Compute Net Owned Fund of Gaurav Ltd. –NBFC.

{ans: A=owned fund = 1300 ; B= Invt = 1100 ; C=10% 0f A = 130 ; D = B-C = 970 ;
Net Owned Fund = A-D = 330}

Sum: 2 Following is the Balance-sheet of Harsh Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 1800 Leased out assets 2500
Free Reserves 4200 Investment:
Loans 1200 In shares of subsidiaries & group 1400
cos.

35 | P a g e
 Deposits 800 In debentures of subsidiaries 1600
and group cos.
Cash and bank balances 1500
Deferred expenditure 1000
8000 8000
Compute Net Owned Fund of Harsh Ltd. –NBFC.

{ans: A=owned fund = 5000 ; B= Invt = 3000 ; C=10% 0f A=500 ; D = B-C = 2500 ;
Net Owned Fund = A-D = 2500}

Sum: 3 Following is the Balance-sheet of Kalyan Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 800 Leased out assets 2800
Convertible Preference 400 Investment:
share capital
Free Reserves 3200 In shares of subsidiaries & group 1800
cos.
Securities Premium 1500 In debentures of subsidiaries 2200
and group cos.
Capital Reserve 400 Cash and bank balances 1000
Loans 1100 Deferred expenditure 2000
Deposits 2400
9800 9800
Capital reserves include profit of Rs.3,00,000 on revaluation of fixed assets.
Compute Net Owned Fund of Kalyan Ltd. –NBFC.

{ans: A=owned fund =4 000 ; B= Invt = 4000 ; C=10% 0f A=400 ; D = B-C = 3600 ;
Net Owned Fund = A-D = 400}

Sum: 4 Following is the Balance-sheet of Falcon Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 400 Leased out assets 1200
Convertible Preference 200 Investment:
share capital
Free Reserves 800 In shares of subsidiaries & group 300
cos.
Securities Premium 150 In debentures of subsidiaries 400
and group cos.

36 | P a g e
 Capital Reserve (including 450 Cash and bank balances 1000
revaluation profit of
Rs.200)
Loans 500 Deferred expenditure 400
Deposits 800
3300
Compute Net Owned Fund of Falcon Ltd. –NBFC.

{ans: A=owned fund =1400 ; B= Invt = 700 ; C=10% 0f A=140 ; D = B-C = 560 ; Net
Owned Fund = A-D = 840}

Sum:5 The classified Advances of an NBFC on 31st March, 2018 are given below:

Rs.in
lakhs
Standard assets 22,500
Sub-standard assets 3,500
Secured portions of doubtful debts
- Upto one year 800
- One year to three years 250
- More than three years 80
Unsecured portions of doubtful debts 240
Loss assets 85
Calculate the amount of provision, which must be made against the advances as
per

(iii) The Non-Banking Financial Company – Non- Systematically Important

Non-Deposit taking Company (RBI) Directions, 2016: and
(iv) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.
(iii) Calculation of provision required on advances as on 31st March, 2018 as
per The Non-Banking Financial Company – Systematically Important
Non-Deposit taking Company and Deposit taking (RBI) Directions, 2016
(NBFC-ND-SI and NBFC -D-SI)

Sum: 6 The classified Advances of an NBFC on 31st March, 2017 are given below:

Rs.in
lakhs
Standard assets 75,000
Sub-standard assets 9340

37 | P a g e
 Secured portions of doubtful debts
- Upto one year 480
- One year to three years 730
- More than three years 360
Unsecured portions of doubtful debts 109
Loss assets 62

Calculate the amount of provision, which must be made against the advances as
per

(c) The Non-Banking Financial Company – Non- Systematically Important Non-

Deposit taking Company (RBI) Directions, 2016 (NBFC-ND-NSI): and
(d) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016 (NBFC-
ND-SI and NBFC-D-SI)

REFERENCES

Note : The above materials has been compiled from the below mention
reference book and official ICAI & ICSI Website

Reference Books:
Author/s Name of the Book Publisher
1 P.C. TULSIAN Advanced Pearson
Accounting
2 S.N. Advanced Vikas
MAHESHWARI Accounting Publishing
house
3 S. N. Accounting For Vikas
MAHESHWARI Management Publishing
S. house
K.MAHESHWARI

38 | P a g e
 4 S.C.GUPTA Advanced Sultan
Accounting Chand
5 SHUKLA M.C Advanced Sultan
GAREWAL T.S. & Accounting Chand
GUPTA S.C
6 M HANIF Advanced Mc Graw
A MUKHERJI Accounting Hill
Education
7 RAVI KISHORE Advanced Taxman
Accounting Publication
8 MICHAEL J. Valuation for Wiley
MARD Financial
JAMES R. Reporting
HITCHNER

39 | P a g e
 FACULTY OF COMMERCE

2023 - 24

SEMESTER 4

SUBJECT: CORPORATE FINANCIAL

REPORTING

UNIT : 5 – HOLDING COMPANIES

COMPILED BY :
CA Dr. SNEHA MASTER Dr. GAURANG PRAJAPATI

STUDY MATERIAL FOR REFERENCE

 GLS UNIVERSITY

FACULTY OF COMMERCE

SEM – 4

SUBJECT: CORPORATE FINANACIAL REPORTING

UNIT : 5 - HOLDING COMPANIES

SR. No. TOPICS COVERED

1 Meaning of Holding & Subsidiary company
2 Advantages & Disadvantages of a Holding Company
3 Applicability of AS 21, Comparison with Ind AS 110
4 Various Terms : Capital Profits , Revenue Profit ,
Cost of Control , Minority Interest
5 Steps to solve sums
8 Consolidated Financial Statements [Balance sheet]
7 Inter Company Transactions or Mutual indebtedness
8 Treatment of Dividend & Revaluation of Assets
9 Comprehensive Illustration
10 Section A – Theory Questions
11 Section B – Multiple Choice Questions
12 Section C – Short Questions
13 Section D – Long Questions
14 Section E – Home Work

1|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

[1] MEANING :
• Holding Company :

Section 2(46) of the Companies Act, 2013 defines Holding Company. “Holding
company”, in relation to one or more other companies, means a company of which such
companies are subsidiary companies.
It may be defined as one, which has one or more subsidiary companies and enjoys
control over them. Legally a holding company and its subsidiaries are distinct and
separate entities. However, in substance holding and subsidiary companies work as a
group. Accordingly, users of holding company’s accounts need financial information of
subsidiaries also to understand the performance and financial position of the group (i.e.
holding company and subsidiaries on a combined basis)
The company is said to be the holding company if that particular company holds/owns
MORE THAN 50% of the other companies SHARE CAPITAL and has the authority to make
management decisions, influences and controls the company's board of directors
• Subsidiary Company :
Section 2(87) of the Companies Act, 2013 defines the Subsidiary Company.
The subsidiary company is the company that is controlled by the holding or
parent company. It is defined as a company/body corporate where the
holding company controls the composition of the Board of Directors.

[2] ADVANTAGES & DISADVANTAGES OF A HOLDING COMPANY :

• The following are the advantages/merits of Holding Companies:

1. Ease of formation
It is quite easy to form a holding company. The promoters can buy the shares in the open
market. The consent of the shareholders of the subsidiary company is not required.

2. Large capital
The financial resources of the holding and subsidiary companies can be pooled together.
The company can undertake large scale projects to increase its profitability.

2|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

3. Avoidance of competition
Competition between holding and subsidiary companies can be avoided if they are in the
same line of business.

4. Economies of large scale operations

The buying and selling of the holding company and the subsidiaries can be centralized. It
can enjoy the advantage of quantity discount and better credit terms because of bulk
purchases. It can also get better terms from buyers in case of sales.
5. Secrecy maintained
Secrecy can be maintained as the authority and decision making are centralized. It can
protect itself from adverse publicity.

6. Risks avoided
In case the subsidiaries undertake risky business and fail, the loss does not affect the
holding company. It can sell its stakes in the subsidiary company.

• The following are the limitations/demerits of Holding Companies:

1. Over capitalization
Since capital of holding company and its subsidiaries may be pooled together it may
result in over capitalization. Shareholders would get not get a fair return on their
invested capital.

2. Misuse of power
The financial liability of the members of a holding company is insignificant in comparison
to their financial power. It may lead to irresponsibility and misuse of power.

3. Exploitation of subsidiaries
The holding company may exploit the subsidiary companies. The subsidiaries may be
compelled to buy goods from the holding at high prices. They might be forced to sell
their produce to the holding company as very low prices.

4. Manipulation
Information about subsidiaries may be used for personal gains. For example information
of the financial performance of subsidiary companies may be misused to indulge in
speculative activities.

3|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

5. Concentration of economic power

There is concentration of economic power in the hands of those who manage the holding
company. Such concentration of economic power is harmful to the general economic
welfare.

6. Secret monopoly
It may lead to the creation of secret monopolies. These secret monopolies may try to
eliminate competitors and prevent entry of new firms. They may exploit consumers by
charging unreasonable prices.

[3] APPLICABILITY OF AS 21 CONSOLIDATED FINANCIAL STATEMENTS

AS 21 Consolidated Financial Statements should be applied in preparing and presenting
consolidated financial statements for a group of enterprises under the sole control of a
parent enterprise. This standard must be applied when accounting for investment in
subsidiaries in a separate financial statement of the parent. It is to be noted that while
preparing a consolidated financial statement, other standards also stay relevant in a
similar manner as for standalone statements.

This accounting standard doesn’t deal with:

• accounting methods for amalgamations and effects on consolidation, which

includes goodwill which arises on amalgamation
• accounting for investments in JVs (joint ventures)
• accounting for investments in associates

Major Differences between AS 21 and Ind AS 110

Particulars Ind AS 110 AS 21

Preparation of Ind AS makes preparation of AS 21 doesn’t mandate

Consolidated Consolidated Financial preparation of Consolidated
Financial Statements compulsory for Financial Statements by the
Statements the parent company parent company

4|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

Accounting for Ind AS provides guidance for AS 21 doesn’t deal with the same
investments in accounting for investments in
subsidiaries the subsidiaries, associates
and jointly controlled entities
in preparing separate
financial statements

Exclusion from Ind AS 27 doesn’t give any AS 21 excludes subsidiaries from

Consolidation such exemption from consolidation when the control is
consolidation of financial intended to be transitory or
statements when the subsidiaries operate
under severe restrictions which
are of long-term nature

Control Ind AS defines control as the AS 21 requires ownership, either

principle-based, that states directly or indirectly through the
that control, is power to subsidiary, of more than half of
govern the operating and voting power of the enterprise;
financial policies of the entity or control of composition of BoD
for obtaining the benefits
from its activities

Share Ownership As per Ind AS 27, the As per AS 11, for considering
existence and effect of ownership, the potential equity
prospective voting rights shares of investee held by the
which are presently investor aren’t taken into
convertible or exercisable are account
considered while assessing
whether the company has
control over such subsidiary

Presentation of According to Ind AS 27 non- According to AS 21 minority

minority interest controlling interests should interest must be showed in the
be presented in consolidated consolidated balance sheet

5|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 balance sheet within the distinctly from equity and
equity distinctly from parent liabilities of the parent company
shareholders’ equity

Ind AS 27 doesn’t deal with AS 21 offers guidance with

Accounting for the same respect to accounting for taxes
Income Tax on income in consolidated
financial statement

Uniform Ind AS 27 doesn’t recognize AS 21 explicitly states that in

Accounting the situation of impracticality case its impracticable to employ
Policies uniform accounting policies in
presenting the consolidated
financial statements, such fact
must be disclosed along with the
share of the items in a
consolidated financial statement
to which such different
accounting policies are applied

Consolidation of Ind AS 27 (Appendix A) offers AS 21 doesn’t offer guidance on

Special Purpose guidance on consolidation the consolidation of SPEs (Special
Entities (SPEs) SPEs (Special Purpose Purpose Entities)
Entities)

The inclusion of Ind AS 27 doesn’t offer any AS 21 offers clarification with

notes which clarification with respect to respect to inclusion of notes
appears in the this which appears in separate
separate financial statements of parent
financial company and the subsidiary in
statement consolidated financial statement

6|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

[4] VARIOUS TERMS : CAPITAL PROFITS , REVENUE PROFITS , COST OF
CONTROL , MINORITY INTEREST

[1] Capital Profits : Profit/Loss and the Balance of Reserve on the date of acquisition of
shares in Subsidiary Company by Holding Company is treated as Capital Profits. It is also
known as Pre Acquisition Profits. It becomes a part of Intrinsic Value [Holding Co.’s Share
in Share Capital & Capital Profits of Subsidiary Company] for finding Cost of Control.

[2] Revenue Profit : Profit/Loss and Balance of Reserve earned after acquisition of shares
in Subsidiary Company by Holding Company is treated as Revenue profits. It is also
known as Post Acquisition Profits. It is reflected under the head Reserves & Surplus of
Consolidated Balance Sheet.

[3] Cost of Control : Cost of Acquisition of shares of Subsidiary Company by Holding

Company may be more or less than Intrinsic Value [Holding Co.’s Share in Share Capital
& Capital Profits of Subsidiary Company] of shares acquired. If Cost of Acquisition is
More than Intrinsic Value it is treated as Goodwill shown under the head Intangible
Assets. If Intrinsic Value is less than Acquisition Cost it is treated as Capital Reserve
shown under the head Reserve and Surplus.

[4] Minority Interest : Shares of Subsidiary Company held by group/s other than Holding
company is known as Minority Shareholders. Minority Interest includes their holdings in
the foam of Face Value of Shares and their right in Pre and Post acquisition
Profits/Reserves of Subsidiary Company.

[5] STEPS TO SOLVE SUMS

Note : [1] Acquisition Date [ in the Beginning or Middle or End of the year]
[2] Consolidation Date
[3] Statement showing Analysis of Subsidiary Co.’s Profit & Loss a/c & reserve
balance on the dates for splitting them into Pre Acquisition[Capital profits]
& Post Acquisition [Revenue Profits] Period

7|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

Sr. Particulars Amount Answer
No. /Details
1 Name of Holding Co.
2 Name of Subsidiary Co.
3 Date of Acquisition of Shares By Holding co. in subsidiary Co.
4 No. of shares acquired by Holding Co. in Subsidiary Co. Shares
5 Holding in percentage %
Shares acquired /Total shares of subsidiary Co. *100
6 Minority Interest [Remaining shares ] Shares %
= Total Shares of Subsidiary Co. – Shares held by Holding [100 -
co.] Holding %]
Analysis Of Subsidiary Company’s Profits
1 Capital Profits [Pre Acquisition Profits] -
– Balance On the date of Acquisition
General Reserve [Cr.]
P/L Bal. [Cr. Or Dr.]
2 Revenue Profits [Post Acquisition Profits] –
Bal. on Consolidation Date LESS Bal. on Acquisition Date
General Reserve [Cr.]
P/L Bal. [Cr. Or Dr. ]
3 Cost of Control [G/W OR C/R] If Positive
Cost of Acquisition /Purchase of Shares of Subsidiary Co. by Goodwill ,
Holding Co. If negative
Less : [a] FV of Shares acquired by H in S Capital
[Total SC of Subsidiary Co. * % of holding] OR Reserve
[No. of shares acquired * FV]
Less : [b] Share in Capital Profits [Total CP * % of holding]
4 Minority Interest [%]
[a] FV of Share Capital [SC of Subsidiary Co. * % of MI
OR [No. of shares remaining * FV]
Add : [b] Share in Capital Profits [Total CP *% of MI]
Add : [c] Share in Revenue Profit [Total RP * % of MI]
Note No : 1 Consolidated Reserves & Surplus [To be shown in Consolidated B/S]
Holding Companies Reserve
+ Share of Reserve of Subsidiary Co. in Revenue profits [RP *Holding %]
Holding Companies Profit & Loss
+ Share of Profit & loss of Subsidiary Co. in Revenue profits [RP *Holding %]
8|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES
[6] CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standard 21, ‘Consolidated Financial Statements’ should be applied in the
preparation and presentation of consolidated financial statements for a group of
enterprises under the control of a parent.
As per AS 21, consolidated financial statements normally include
• Consolidated Balance Sheet
• Consolidated Statement of Profit and Loss Account
• Consolidated Cash Flow Statement (in case parent presents cash flow statement)
• Notes and statements and explanatory schedules that form the integral part
thereof.
The consolidated financial statements are presented to the extent possible in the
same format as that adopted by the parent for its separate financial statements.
All the notes appearing in the separate financial statements of the parent enterprise
and its subsidiaries need not be included in the notes to the consolidated financial
statement. Rule 6 of the Companies (Accounts) Rules, 2014 states that the manner
of consolidation of financial statements of the company shall be in accordance with
the provisions of Schedule III of the Act and the applicable accounting standards. AS
21, lays down the procedure for consolidation of financial statements of the
companies within the group.
- When preparing consolidated financial statements, the individual balances of
the parent and its subsidiaries are aggregated on a line-by-line basis, and then
certain consolidation adjustments are made.
For example, the cash, trade receivables and prepayments of the parent and each
subsidiary are added together to arrive at the cash, trade receivables and
prepayments of the group, before consolidation adjustments are made.
- The objective is that the consolidated financial statements should present the
information contained in the consolidated financial statements of a parent
and its subsidiaries as if they were the financial statements of a single
economic entity.

9|Pag e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 In order that the consolidated financial statements present financial information
about the group as that of a single enterprise, the following steps are then taken:
1. the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary are eliminated. In case cost of acquisition
exceeds or is less than the acquirer’s interest, goodwill or capital reserve is
calculated retrospectively.
2. intragroup transactions, including sales, expenses and dividends, are eliminated, in
full;
3. unrealised profits resulting from intragroup transactions that are included in the
carrying amount of assets, such as inventory and fixed assets, are eliminated in full;
4. unrealised losses resulting from intragroup transactions that are deducted in arriving
at the carrying amount of assets are also eliminated unless cost cannot be
recovered;
5. minority interest in the net income of consolidated subsidiaries for the reporting
period are identified and adjusted against the income of the group in order to arrive
at the net income attributable to the owners of the parent; and
6. minority interests in the net assets of consolidated subsidiaries are identified and
presented in the consolidated balance sheet separately from liabilities and the
parent shareholders’ equity.

[7] INTER COMPANY TRANSACTIONS OR MUTUAL INDEBTEDNESS

While Preparing Consolidated Balance Sheet besides share capital of Subsidiary
company and Investment of Holding Co. in the shares of Subsidiary Co. few othe
inter company transactions are also to be eliminated.
[1] Advances/Borrowings or Inter Group balances
Elimination from both sides of Consolidated Balance sheet
[2] Book Debts or Debtors/Creditors
Elimination from both sides of Consolidated Balance sheet

10 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

[3] Bills Receivables/Bills Payables
Elimination from both sides of Consolidated Balance sheet if not discounted.
In Case When some of the bills are discounted , it can not be eliminated directly. It
is cancelled from Contingent liability.

[4] unrealized profit in Stock

When Holding Co. sold goods to Subsidiary Co. or vice versa and Purchasing Co. still
has such goods in Stock , then Profit charged by Selling co. on such stock is
considered as Unrealized profit which should be eliminated as per following :
- To be deducted from Stock of Purchasing co.
- To be deducted from Profits of Selling Co. to the extent of Holding Co’s share

[8] TREATMENT OF DIVIDEND & REVALUATION OF ASSETS

• Dividend received from Subsidiary Company

The holding company, when it receives a dividend from a subsidiary company, must
distinguish between the part received out of capital profits and that out of revenue
profits - the former is credited to Investment Account, it being a capital receipt, and
the later is adjusted as revenue income for being credited to the Profit & Loss
Account. It must be understood that the term ‘capital profit’, in this context, apart
from the generic meaning of the term, connotes profit earned by the subsidiary
company till the date of acquisition. As a result, profits which may be of revenue
nature for the subsidiary company may be capital profits so far as the holding
company is concerned. If the controlling interest was acquired during the course of a
year, profit for that year must be apportioned into the pre-acquisition and post-
acquisition portions, on the basis of time in the absence of information on the point.

11 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 • Revaluation of Assets of Subsidiary Company
- At the time of Acquisition of Shares if Assets/Liabilities of Subsidiary are revalued
Profit or loss on revaluation of fixed assets of subsidiary should also be treated as
Capital Profit/ Loss.
- But if the fall in the value of the asset occurs after the date of acquisition, the
loss should be treated as revenue loss. Adjustment for depreciation would be made in
the profit and loss account of the subsidiary.
- Depreciation on changed value of the assets shall be given effect to. Depreciation on
revalued assets will be taken as capital or revenue depending on the period for which the
depreciation belongs.

[9] COMPREHENSIVE ILLUSTRATION

SUM 1 : Calculate following from the below given details
• Capital Profits
• Revenue Profits
• Cost of Control
• Minority Interest
• Balance of Reserve & Surplus in a Consolidated balance sheet assuming Balance of
Holding Company Reserves & P/L is ₹ 4,00,000 in each case.

Sr. Name of % of Cost of Share P/L on P/L on

No. Subsidiary Holding Acquisition of Capital of Acquisition Consolidation
shares of Sub. Subsidiary 1/4/22 date 31/3/23
Co. by Holding Company
Co.
1 A 90% 2,80,000 2,00,000 1,00,000 1,40,000
2 B 85% 2,08,000 2,00,000 60,000 40,000
3 C 80% 1,12,000 1,00,000 40,000 40,000
4 D 100% 2,00,000 1,00,000 80,000 1,10,000
5 E 80% 6,60,000 12,00,000 (4,80,000) (3,00,000)

12 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

ANS [1]

Particulars A B C D E
FV of Share Capital Acquired 1,80,000 1,70,000 80,000 1,00,000 9,60,000
[2,00,000 [2,00,000 [1,00,000 [1,00,000 [12,00,000
* 90%] * 85%] * 80%] * 100%] * 80%]
MI [FV of Shares] 10% 15% 20% 0% 20%
20,000 30,000 20,000 0 2,40,000
Capital Profits 1,00,000 60,000 40,000 80,000 (4,80,000)
On the date of Acquisition
Revenue profits 40,000 (20,000) NIL 30,000 1,80,000
Bal. on Consolidation date [1,40,000 [40,000 [40,000 [1,10,000 [(3,00,000)
Less : Less Less : Less : Less : Less :
Bal. on Acquisition Date :1,00,000] 60,000] 40,000] 80,000] (4,80,000)
Cost of Control [G/W or 10,000 (13,000) NIL 20,000 84,000
C/R] G/W C/R G/W G/W

Cost of Acquisition of Shares [2,80,000 [2,08,000 [1,12,000 [2,00,000 [6,60,000

Less :FV of shares acquired Less : Less : Less : Less : Less :
by Holding Co. 1,80,000 1,70,000 80,000 1,00,000 9,60,000
Less : Holding Co.’s Share in Less Less Less : Less : Less :
Capital Profits [CP * % :90,000*] :51,000*] 32,000*] 80,000*] (3,84,000)
Holding]
Minority Interest 34,000 36,000 28,000 NIL 1,80,000
FV of Remaining shares + MI [20,000 + [30,000 + [20,000 + [NIL as [2,40,000 +
share in Capital Profits + MI 10,000 + 9,000 + 8,000 + 100% (96,000) +
share in Revenue Profits 4,000] (3,000)] NIL] Holding ] 36,000]
Balance of Reserve & 4,36,000 3,96,000 4,00,000 4,30,000 5,44,000
Surplus of consolidated B/S [Bal. of [Bal. of [Bal. of [Bal. of [Bal. of
Holding Holding Holding Holding Holding Co.
Co. Co. Co. Co. 4,00,000
4,00,000 4,00,000 4,00,000 4,00,000 +1,44,000]
+ 36,000] +(17,000) +NIL] +30,000]
+13,000

13 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 SUM 2 The Balance Sheets of Virat Ltd. & Dhoni Ltd. as on 31-3-23 are as follows :

Liabilities Virat Ltd Dhoni Ltd Assets Virat Ltd Dhoni Ltd.
Share Capital of 1,50,000 15,000 Fixed Assets 1,40,000
₹ 10 each
General reserve 75,000 7,500 Plant & machines 20,000 8,000
Profit & Loss a/c 25,000 20,000 1,200 shares of 30,000 -
Dhoni ltd.
Creditors 45,000 4,500 Other Investments 45,000 20,000
Bills payables 5,000 6,000 Debtors 35,000 17,000
Bills Receivables 4,000 -
Bank balance 26,000 8,000
3,00,000 53,000 3,00,000 53,000
• Contingent liabilities of ₹ 2,000 for Bills discounted by Virat Ltd. not matured.
Other Information :
[1] Virat Ltd. acquired shares of Dhoni Ltd. on 1-7-22.
[2] Books of Dhoni Ltd. disclosed a Reserve of ₹ 2,500 and credit balance of Profit & loss
a/c of ₹ 8,000 on 1-4-22.
[3] All the Bills accepted by Dhoni were drawn by Virat Ltd. of which Virat ltd. discounted
a bill of ₹ 2,000. The debtor of Virat ltd. includes ₹ 3,000 receivable from Dhoni Ltd.
[4] The monthly profit was evenly accrued during the year.
[5] Prepare consolidated balance Sheet as on 31-3-23.

Note : [1] Acquisition Date – 1/7/22 [ in the Middle of the year]

[2] Consolidation Date – 31/3/23
[3] Statement showing Analysis of Subsidiary Co.’s Profit & Loss a/c & reserve
balance on the dates for splitting them into Pre Acquisition[Capital profits]
& Post Acquisition [Revenue Profits] Period
Sr. Particulars Amount Answer
No. /Details
1 Name of Holding Co. Virat Ltd.
2 Name of Subsidiary Co. Dhoni Ltd.
3 Date of Acquisition of Shares By Holding co. in subsi. Co. 1/7/22
4 No. of shares acquired by Holding Co. in Subsidiary Co. 1,200Shares
5 Holding in percentage 1,200/1500
Shares acquired /Total shares of subsidiary Co. *100 *100 80 %

14 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

6 Minority Interest [Remaining shares ] 300 Shares 20 %
= Total Shares of Subsidiary Co. – Shares held by Holding [100 – 80
co.] Holding %]
Analysis Of Subsidiary Company’s Profits
1 Capital Profits [Pre Acquisition Profits] -
– Balance On the date of Acquisition
GR [Cr.] [Op. 2,500 + upto 1/7 1,250 ( 5,000*3/12)] 3,750 14,750
P/L[Cr.] [Op. 8,000 + upto 1/7 3,000 ( 12,000 *3/12)] 11,000
2 Revenue Profits [Post Acquisition Profits] –
Bal. on Consolidation Date LESS Bal. on Acquisition Date
General Reserve [Cr.] [7,500 – 3,750] 3,750 12,750
P/L Bal. [Cr. Or Dr. ] [20,000- 11,000] 9,000
3 Cost of Control [G/W OR C/R]
Cost of Acquisition /Purchase of Shares of Subsidiary Co.
by Holding Co. 30,000
Less : [a] FV of Shares acquired by H in S ₹ 6,200
[Total SC of Subsidiary Co. 15,000 *80 % of holding] (12,000) Goodwill
OR [No. of shares acquired 1200* FV 10 ]
Less : [b] Share in Capital Profits
[Total CP 14,750 * 80% of holding] (11,800)
4 Minority Interest [20 %]
[a] FV of Share Capital
[SC of Subsidiary Co.15,000 * 20% of MI 3,000 ₹ 8,500
OR [No. of shares remaining 300 * FV 10 ]
Add : [b] Share in Capital Profits 2,950
[Total CP 14,750 * 20 % of MI]
Add : [c] Share in Revenue Profit [Total RP * % of MI] 2,550

Note No. 1 Reserve & Surplus

General Reserve 75,000 + 3,000 = 78,000

Profit & Loss A/c 25,000 + 7,200 = 32,200
Total 1,10,,200

15 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

Consolidated Balance sheet of Virat Ltd. & its Subsidiary Dhoni ltd. as on 31-3-23

PARTICULARS NOTE NO. AMOUNT

I EQUITY AND LIABILITTIES
(1) Shareholders’ funds
(a) Share Capital 1,50,000
(b) Reserves and Surplus 1 1,10,200
(2) Minority Interest 8,500
(3) Non Current Liabilities
(4) Current Liabilities
(a) Trade Payables 53,500
Crs. [45,000 + 4,500 – 3,000 Inter Co. Trans.]
B/P [ 5,000 + 6,000* – 4,000 Inter Co. Trans.]
*Out of 6,000 Bills Payables of Dhoni drawn by
Virat Bills discounted 2,000 will not be deducted
TOTAL 3,22,200
II ASSETS
(1) Non Current Assets
(a) Fixed Assets
(i) Tangible Assets 1,68,000
(ii) Intangible Assets 6,200
(b) Non Current Investments 65,000
(c) Other Non Current Assets
(2) Current Assets
(a) Trade Receivables 49,000
Drs. [35,000 + 17,000 – 3,000 Inter Co. Trans.]
B/R [ 4,000 + Nil – 4,000 Inter Co. Trans.]
(b) Cash & Cash Equivalents 34,000
TOTAL 3,22,200

16 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

[10] SECTION A – THEORY QUESTIONS
1. Explain meaning of Holding & Subsidiary company .
2. Write Benefits and Limitations of Holding Company
3. Define the following in short :
[1] Capital profits [2] Revenue Profits [3] Cost of Control [ 4] Minority Interest

[11] SECTION B – MULTIPLE CHOICE QUESTIONS

1. The company is said to be the holding company as per Section 2(46) of the Companies
Act, 2013
(A) if that particular company holds/owns MORE THAN 50% of other companies SHARE
CAPITAL
(B) has the authority to make management decisions, influences and controls the
Company's board of directors
(C) Both (A) & (B) (D) None of the Above

2. Section 2(87) of the Companies Act, 2013 defines the Subsidiary Company as
(A) the company that is controlled by the holding or parent company.
(B) as a company/body corporate where the holding company controls the composition
of the Board of Directors.
(C) Both (A) & (B) (D) None of the Above

3. Legally a Holding company and its Subsidiaries are distinct and ________entities.
(A) Separate (B) One (C) Amalgamated (D) None

4. In substance a Parent (Holding ) Company and all its subsidiaries work as a _______.
(A) Firm (B) Vendor (C) Association (D) Group

5. Consolidated statements are prepared by

(A) Minority share Holders (B) Subsidiary company
(C) Holding Company (D) Listed subsidiary Co.

6. Preparation of Consolidated Balance Sheet of Holding Co. and its subsidiary company
should be as per
(A) AS 11 (B) AS 22 (C) AS 21 (D) AS 23

17 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

7. While preparing consolidated financial statements, the individual balances of the
parent and its subsidiaries are aggregated on a ____________and then certain
consolidation adjustments are made.
(A) line-by-line basis (B) Only Liabilities basis
(C) Only Assets are basis (D) None of the Above

8. As per AS 21, consolidated financial statements normally include

(A) Consolidated Balance Sheet & Consolidated Statement of Profit and Loss Account
(B) Consolidated Cash Flow Statement (in case parent presents cash flow statement)
(C) Notes and statements and explanatory schedules that form the integral part
thereof.
(D) All of the Above

9. As per AS 21, consolidated financial statements doesn’t deal with:

(A) accounting methods for amalgamations and effects on consolidation, which includes
goodwill which arises on amalgamation
(B) accounting for investments in JVs (joint ventures)
(C) accounting for investments in associates
(D) All of the Above

10. One of the common ways of acquiring a controlling interest is to purchase more than
_____ in nominal value of the equity shares of another company
(A) forty percent (B) fifty percent (C) forty five percent (D) forty nine percent

11. Holding company can acquire control over the subsidiary by

I. Holding more than half of the shares in the subsidiary company having voting power.
II. Holding half of the debentures in the subsidiary company.
III. Controlling the composition of the board of directors of the subsidiary company.
IV. Controlling a holding company, which controls the subsidiary company.
(A) Only (I) above (B) (I), (III) and (IV) above
(C) Only (III) above (D) Both (I) and (II) above

12. Shares acquired by a Holding company in the Subsidiary company are shown by
Holding co. as
(A) Investment on the assets side of the Balance Sheet of the holding company
(B) Investment on the assets side of the Balance Sheet of the subsidiary company
18 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES
(C) Share capital on the liability side of the Balance Sheet of the holding company
(D) None of the above

13. Shares acquired by a Holding company in the Subsidiary company are shown by
Subsidiary co. as
(A) Issued capital on the liability side (B) Reserves on the liability side
(C) Investments on the asset side (D) None of the above

14. The shares of Subsidiary Co. owned by Group other than Holding co. is known as
(A) Unpaid Capital (B) Authorized Capital
(C) Controlling Interest (D) Minority Interest

15. A___________ company is a company in which the _________Company controls the

composition of its board or directors or holds more than half in nominal value of its
equity share capital.
(A) Holding , Subsidiary (B)subsidiary , Holding (C) Vendor ,Buyer (D) Buyer ,Vendor

16. Profit earned before acquisition of share is treated as

(A) Capital profit (B) Revenue profit (C) General Reserve (D) Revaluation Loss

17. Profit earned after acquisition of share is treated as

(A) Capital profit (B) Revenue profit (C) General Reserve (D) Revaluation Loss

18. Pre-acquisition profits in subsidiary company is considered as :

(A) Revenue profit (B) Capital profit (C) Goodwill (D) None of the above

19. Post -acquisition profit in subsidiary company is considered as :

(A) Revenue profit (B) Capital profit (C) Goodwill (D) None of the above

20. The Time interval between the date of acquisition of shares in subsidiary company
and date of Consolidated Balance Sheet prepared by Holding Company is known as :
(A) Pre-acquisition period (B) Post-acquisition period
(C) Pre-commencement period (D) Pre-incorporation period.

19 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

21. Which of the following statement is correct?
(A) The Profit and Loss of the subsidiary company prior to the date of acquisition are
Revenue in nature while post dated profits are capital in nature.
(B) The Profit and Loss of the subsidiary company prior to the date of acquisition are
capital in nature while post dated profits are revenue in nature.
(C) The Profit and Loss of the subsidiary company prior to the date of acquisition are
Revenue in nature and post dated profits are also revenue in nature.
(D) The Profit and Loss of the subsidiary company prior to the date of acquisition are
capital in nature and post dated profits are also capital in nature.

22. Intrinsic value with reference to shares acquired by Holding co. in Subsidiary co.
includes
(A) Face Value of Shares Acquired by Holding Co. in Subsidiary Co.
(B) Share in Capital profits of Subsidiary Company
(C) Share in Revenue Profits of Subsidiary Company
(D) Both (A) & (B)

23. Excess of cost of investment over Intrinsic Value of the shares of subsidiary
company’s considered as
(A) Goodwill (B) Capital Reserve (C) Minority Interest (D) None of above

24. Excess of Intrinsic Value of the shares over investment cost is considered as
(A) Goodwill (B) Capital Reserve (C) Minority Interest (D) None of above

25. Which of the following statement is correct with reference to Shares Acquired by
Holding co. in subsidiary co,
(A) When Cost of Acquisition > Intrinsic Value ; it is treated as Goodwill
(B) When Cost of Acquisition > Intrinsic Value , it is treated as Capital Reserve
(C) When Cost of Acquisition < Intrinsic Value ; it is treated as Goodwill
(D) When Intrinsic Value > Cost of Acquisition: it is treated as Goodwill

26. Holding Co. share in Capital Profits of subsidiary company is adjusted in

(A) Cost of control (B) Shown on Assets side of Balance sheet
(C) Revenue profit (D) None of above

27. Holding Co. share in Revenue Profits of subsidiary company is adjusted in

(A) Cost of control (B) Shown on Assets side of consolidated Balance sheet
(C) Profit and loss account of Consolidated Balance Sheet (D) None of above

20 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

28. Minority Interest includes :
(A) Share in Share Capital of Subsidiary Co. (B) Share in Capital profit of Subsidiary Co.
(C) Share in Revenue profit of Subsidiary Co. (D) Above ALL

29. In the Consolidated Balance Sheet of a Holding Company, the value of minority
interest consists of the proportionate share of minority shareholders in the
I. Nominal value of share capital of subsidiary company
II. Reserves of the holding company
III. Reserves and profits of the subsidiary company at the time of acquisition by the
holding company
IV. Income of the holding company after its acquisition
V. Income of the subsidiary company after its acquisition by the holding company.
(A) Only (I) above (B) Both (I) and (II) above
(C) Both (I) and (IV) above (D) (I), (III) and (V) above

30. Minority Interest should be presented in the Consolidated Balance Sheet

(A) As a part of External Liabilities
(B) As a part of Equity of Parent’s Shareholders
(C) Separately from Equity of Parent’s Shareholders on Liability Side
(D) As a part of Assets

31. Which one of the following accounts would not appear on the consolidated financial
statement ?
(A) Goodwill (B) Equipment
(C) Investment in Subsidiary by Holding (D) Additional Paid-In Capital

32. Which of the following statements is true?

(A) A company will be deemed to be a holding company of another if, it holds more than
50 percent of both equity and preference share capital
(B) The financial year of the holding company and its subsidiary company must end on
the same date
(C) The share capital of the subsidiary company does not appear in the Consolidated
Balance Sheet
(D) The inter company owing will be shown in the Consolidated Balance Sheet

33. In which of the following situations, a holding company need not prepare the
consolidated financial statements?

21 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

I. Where the holding company is a subsidiary of another company.
II. Where the control in the subsidiary company is intended to be temporary.
III. Where the subsidiary company operates under severe long-term restrictions, which
significantly impair its ability to transfer funds to the parent.
(A) Only (I) above (B)Only (II) above (C) Only (III) above (D) All (I), (II) and (III) above.

34. Advantages of Consolidated Financial Statements Can include :

(A) Provides Overall & true picture of Financial health of Holding Co. & its subsidiaries
(B) Intrinsic Value of Shares can be easily found out
(C) Minority Interest shown separately in consolidated statements gives useful data
(D) All of the Above

35. Limitations of Holding Company includes

(A) Possibility of exploitation of Subsidiary companies
(B) Holding Company with number of Subsidiaries may develop secrete monopoly
(C) Manipulation of accounts in case of different reporting dates of Holding & Subsidiary
companies
(D) All of the Above

36. In Consolidation of B/S of Holding & Subsidiary Comp[any____ is eliminated in full.

(A) Current Liabilities of Subsidiary Company
(B) Reserves & Surplus of Both Holding & Subsidiary Company
(C) Mutual Indebtedness (D) Assets of Subsidiary company

37. The reduction in the value of fixed assets of subsidiary company as on the date of
acquisition by holding company must be
(A) Debited to capital reserve (B)Debited to goodwill
(C) Credited to capital reserve (D) Debited to profit and loss account

38. At the time of consolidation of accounts of the holding company, which of the
following is/are to be considered while calculating the cost of control?
I. Value of shares acquired. II. Pre-acquisition profits/losses.
III. Profits/losses on revaluation of assets. IV. Profits/losses on revaluation of
liabilities.
V. Post-acquisition profits/losses.
(A) Only (I) above (B) Both (I) and (II) above
(C) (I), (II) and (III) above (D) (I), (II), (III) and (IV) above

22 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

39. X Limited paid ₹ 1,20,000 for 70% of Y Limited. At the date of acquisition Y Limited
had Share capital of ₹ 1,00,000 and Retained earnings of ₹ 50,000. Find the intrinsic
value of shares acquired by X Limited amounted to-
(A) ₹ 15,000 (B) ₹ 70,000 (C) ₹ 1,05,000 (D) ₹ 1,20,000

40. X Limited paid ₹ 1,20,000 for 70% of Y Limited. At the date of acquisition Y Limited
had Share capital of ₹ 1,00,000 and Retained earnings of ₹ 50,000. Find cost of Control ?
(A) ₹ 15,000 (B) ₹ 70,000 (C) ₹ 1,05,000 (D) ₹ 1,20,000

41. On April 01, 2022, H Ltd. acquired 60% of shares in S Ltd. The creditors of H Ltd.
include ₹6,000 for purchases from S Ltd. The adjustment entry made during the
preparation of Consolidated Balance Sheet as on March 31, 2020 will
(A) Reduce debtors by ₹3,600 (B) Reduce creditors by ₹6,000
(C) Increase debtors and creditors by ₹6,000
(D) Reduce creditors and debtors by ₹6,000

42. On July 31, 2022, H Ltd. acquired 60% shares of S Ltd. for ₹8,50,000. The share capital
of S Ltd. consists of 1,00,000 shares of ₹10 each. On April 01, 2022, the Profit and loss
account and General Reserve showed balances of ₹75,000 (Dr.) and ₹3,00,000
respectively. Their balances as on March 31, 2023 are ₹2,00,000 (Cr.) and ₹3,25,000
respectively. The amount of goodwill / capital reserve shown in the Consolidated Balance
Sheet as on March 31, 2023 was
(A) ₹1,25,000 (Capital reserve) (B) ₹ 55,000 (Goodwill)
(C) ₹ 50,000 (Capital reserve) (D) ₹ 10,000 (Goodwill)

43. A ltd. acquired 3200 shares of D ltd on March 31, 2023. The share capital of D ltd.
comprises of 4000 shares each of ₹ 100. The capital profits and revenue profits of D ltd.
were ₹ 300000 and ₹ 100000 on the date of consolidation. The amount of minority
interest shown in the balance sheet is
(A) ₹ 20000 (B) ₹ 60000 (C) ₹ 80000 (D) ₹ 160000.

44. H ltd. acquired 80% shares of S ltd on 31-3-2023 at ₹ 320000. Find Cost of Control.
The capital of S Ltd is 30000 shares of ₹10 each. If the share of H ltd. in the capital profits
( pre acquisition ) and revenue profits of S ltd. are ₹ 104000 and ₹ 150000 resp.
(A) ₹ 66000 ( goodwill) (B) ₹ 70000 ( capital reserve)
(C) ₹ 24000 ( capital reserve) (D) ₹ 174000 ( capital reserve)

23 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

45. On December 01, 2022 H Ltd. acquired 60% shares in S Ltd. The balance of profit and
loss account of S Ltd. on April 01, 2022 and March 31, 2023 was ₹ 90,000 and ₹ 1,50,000,
respectively. The profit is earned evenly throughout the year. The share of capital profit
of H Ltd. in the profits of the subsidiary as on March 31, 2023 is
(A) ₹ 36,000 (B) ₹ 60,000 (C) ₹ 72,000 (D) ₹ 78,000

46. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2023:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share Capital @ ₹10 Shares in S. Ltd. 800
each 20,000 10,000 Shares 8,000 –
Other Liabilities 10,000 5,000 Other Assets 22,000 15,000
30,000 15,000 30,000 15,000
H Ltd. has acquired the shares on the closing date of the Balance Sheet. The minority
interest shown in the Consolidated Balance Sheet as on March 31, 2023 is
(A) ₹2,000 (B) ₹2,500 (C) ₹5,000 (D) ₹3,000

47. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2023: H Ltd. has
acquired the shares on the closing date of the Balance Sheet. The amount of goodwill
shown in the Consolidated Balance Sheet as on March 31, 2023 is:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share Capital @ ₹10 Shares in S. Ltd. 800
each 20,000 10,000 Shares 8,800 –
Other Liabilities 10,800 5,000 Other Assets 22,000 15,000
30,800 15,000 30,800 15,000
(A) ₹8,000 (B) ₹ 800 (C) ₹8,000 (D) Nil

48. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2023:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share Capital @ ₹10 Shares in S. Ltd. 800
each 20,000 10,000 Shares 7,800 –
Other Liabilities 10,800 5,000 Other Assets 23,000 15,000
30,800 15,000 30,800 15,000
H Ltd. has acquired the shares on the closing date of the Balance Sheet. The amount of
capital reserve shown in the Consolidated Balance Sheet as on March 31, 2023 is
(A) ₹2,200 (B) ₹ 200 (C) ₹ 7,800 (D) Nil

24 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

49. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2023:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share Capital @ ₹10 Shares in S. Ltd. 800
each 20,000 10,000 Shares 8,000 –
Other Liabilities 10,800 5,000 Other Assets 22,800 15,000
30,800 15,000 30,800 15,000
H Ltd. has acquired the shares on the closing date of the Balance Sheet. The amount of
capital reserve shown in the Consolidated Balance Sheet as on March 31, 2023 is
(A) ₹2,200 (B) ₹ 200 (C) ₹ 7,800 (D) Nil

50. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023. H Ltd. acquired the shares of S Ltd on 31-3-2023.
Find the value of Goodwill
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital 4,00,000 2,00,000 Fixed assets 2,60,000 2,40,000
each of 10
Profit and loss 80,000 20,000 Investments : 20,000 3,00,000
account shares in S Ltd
General reserve 40,000 16,000
Current liabilities 40,000 4,000
5,60,000 2,40,000 5,60,000 2,40,000
(A) ₹ 1,00,000 (B) ₹ 64,000 (C) ₹ 80,000 (D) ₹ 66,000

51. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023. H Ltd. acquired the shares of S Ltd on 31-3-2023.
Find the value of Minority interest
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital each 4,00,000 2,00,000 Fixed assets 2,60,000 2,40,000
of 10
Profit and loss 80,000 20,000 Investments : 20,000 3,00,000
account shares in S Ltd
General reserve 40,000 16,000
Current liabilities 40,000 4,000
5,60,000 2,40,000 5,60,000 2,40,000
(A) ₹ 1,00,000 (B) ₹ 64,000 (C) ₹ 80,000 (D) Nil

25 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

52. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023. H Ltd. acquired the shares of S Ltd on 31-3-2023.
Find the value of Goodwill
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital each 4,00,000 2,00,000 Fixed assets 2,60,000 2,40,000
of 10
Profit and loss 80,000 20,000 Investments : 16,000 3,00,000
account shares in S Ltd
General reserve 40,000 16,000
Current liabilities 40,000 4,000
5,60,000 2,40,000 5,60,000 2,40,000
(A) ₹ 47,200 (B) ₹ 64,000 (C) ₹ 1,11,200 (D) ₹ 81,200

53. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital each of 10 4,00,000 2,00,000 Fixed assets 2,60,000 2,40,000
Profit and loss account 80,000 20,000 Investments :16,000 3,00,000
shares in S Ltd
General reserve 40,000 16,000
Current liabilities 40,000 4,000
5,60,000 2,40,000 5,60,000 2,40,000
H Ltd. acquired the shares of S Ltd on 31-3-2023. Find the value of Minority Interest
(A) ₹ 47,200 (B) ₹ 64,000 (C) ₹ 1,11,200 (D) ₹81,200

54. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023.
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital of Re 1 72,000 30,000 Fixed assets 96,000 48,000
each
Creditors 48,000 18,000 Investments : 24,000 shares 24,000
in S Ltd
1,20,000 48,000 1,20,000 48,000
H Ltd. acquired the shares of S Ltd on 31-3-2023. Find the value of Goodwill
(A) ₹ 24,000 (B) ₹ 6,000 (C) Nil (D) ₹ 4,800

26 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

55. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital of 72,000 30,000 Fixed assets 96,000 48,000
Re 1
Creditors 48,000 18,000 Investments : 24,000 24,000
shares in S Ltd
1,20,000 48,000 1,20,000 48,000
H Ltd. acquired the shares of S Ltd on 31-3-2023. Find the value of Minority Interest
(A) ₹ 24,000 (B) ₹ 6,000 (C) ₹4,800 (D) Nil

56. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital 24,00,000 12,00,000 Fixed assets 14,40,000 15,12,000
each of 10
Profit and loss 2,40,000 96,000 Investments : 96,000 15,60,000
shares in S Ltd
General reserve 2,40,000 1,20,000
Creditors 1,20,000 96,000
30,00,000 15,12,000 30,00,000 15,12,000
H Ltd acquired shares in S Ltd on 1-4-2022, On that date the profit and loss account had a
credit balance of 24,000 and in General reserve balance was 72,000. Find goodwill.
(A) ₹ 5,23,200 (B) ₹ 5,04,000 (C) ₹ 2,83,200 (D) ₹ 2,40,000

57. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital 24,00,000 12,00,000 Fixed assets 14,40,000 15,12,000
each of 10
Profit and loss 2,40,000 96,000 Investments : 96,000 15,60,000
shares in S Ltd
General reserve 2,40,000 1,20,000
Creditors 1,20,000 96,000
30,00,000 15,12,000 30,00,000 15,12,000
H Ltd acquired shares in S Ltd on 1-4-2022, On that date the profit and loss account had a
credit balance of 24,000 and in General reserve balance was 72,000.Find value of
minority interest
27 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES
(A) ₹ 5,23,200 (B) ₹ 5,04,000 (C) ₹ 2,83,200 (D) ₹ 2,40,000

58. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023. H Ltd. acquired the shares of S Ltd on 31-3-2023.
Find the total of consolidated balance sheet of H Ltd
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital of Re 1 72,000 30,000 Fixed assets 96,000 50,000
each
Creditors 48,000 20,000 Investments : 24,000 shares 24,000
in S Ltd
1,20,000 50,000 1,20,000 50,000
(A) ₹ 1,70,000 (B) ₹ 1,46,000 (C) ₹ 48,000 (D) ₹ 1,20,000

59. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023. H Ltd. acquired the shares of S Ltd on 31-3-2023.
Find the total of consolidated balance sheet of H Ltd

Liabilities H Ltd S Ltd Assets H Ltd S Ltd

Share capital of Re 1 72,000 30,000 Fixed assets 96,000 50,000
each
Creditors 52,000 20,000 Investments : 28,000 28,000
shares in S Ltd
1,24,000 50,000 1,24,000 50,000
(A) ₹ 1,74,000 (B) ₹ 1,46,000 (C) ₹ 50,000 (D) ₹ 1,24,000

60. The following are the liabilities and assets of the holding company H Ltd. and its
subsidiary S Ltd. as on 31st March 2023. H Ltd. acquired the shares of S Ltd on 31-3-2023.
Find the total of consolidated balance sheet of H Ltd
Liabilities H Ltd S Ltd Assets H Ltd S Ltd
Share capital of Re 1 72,000 30,000 Fixed assets 96,000 50,000
each
Creditors 56,000 20,000 Investments : 30,000 shares 32,000
in S Ltd
1,28,000 50,000 1,28,000 50,000
(A) ₹ 1,78,000 (B) ₹ 1,48,000 (C) ₹ 50,000 (D) ₹ 1,28,000

28 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

61. A Parent Company reports net profit of ₹ 5,00,000 and Equity Capital of
₹20,00,000. Its’ subsidiary Company reports post-acquisition profit of ₹1,00,000 and
Equity Capital of ₹ 5,00,000. The Parent Company owns 80% of the Subsidiary company’s
Share Capital. The Consolidated Balance Sheet will report P/L Balance of ?
(A) Net profit of ₹6,00,000 (B) Net profit of ₹5,80,000
(C) Share Capital of ₹25,00,000 (D) Share Capital of ₹24,00,000

62.The balance of Profit and Loss account of S Ltd. as on March 31, 2023 and as on April
01, 2022 was ₹1,60,000 and ₹70,000 respectively. On July 01, 2022, H Ltd acquired 80%
of the shares of S Ltd. Assuming that the profit is accrued evenly throughout the year,
the amount considered as capital profit while preparing Consolidated Balance Sheet as
on March 31, 2023 was ?
(A) ₹ 70,000 (B) ₹ 90,000 (C) ₹ 92,500 (D) ₹ 1,60,00

63. On July 31, 2022, H Ltd. acquired 60% shares of S Ltd. for ₹6,50,000. The share capital
of S Ltd. consists of 1,00,000 shares of ₹10 each. On April 01, 2022, the Profit and loss
account showed balances of ₹70,000 (Dr.) . Their balances as on March 31, 2023 are
₹2,00,000 (Cr.). The amount of goodwill / capital reserve shown in the Consolidated
Balance Sheet as on March 31, 2023 was
(A) ₹ 1,25,000 (Capital reserve) (B)₹ 38,000 (Goodwill)
(C) ₹ 25,000 (Capital reserve) (D) ₹ 10,000 (Goodwill)

64. On July 31, 2022, H Ltd. acquired 60% shares of S Ltd. for ₹8,50,000. The share capital
of S Ltd. consists of 1,00,000 shares of ₹10 each. On April 01, 2022, the Profit and loss
account and General Reserve showed balances of ₹75,000 (Cr.) and ₹3,00,000
respectively. Their balances as on March 31, 2023 are ₹2,00,000 (Cr.) and ₹3,25,000
respectively. The amount of goodwill / capital reserve shown in the Consolidated Balance
Sheet as on March 31, 2023 was
(A) ₹ 1,25,000 (Capital reserve) (B)₹ 55,000 (Goodwill)
(C) ₹ 5,000 (Capital reserve) (D) ₹ 10,000 (Goodwill)

29 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

65. A ltd. acquired 3200 shares of D ltd on March 31, 2023 at cost of ₹ 7,00,000. The
share capital of D ltd. comprises of 4000 shares each of Rs 100. The capital profits and
revenue profits of D ltd. were ₹ 300000 and ₹ 100000 on the date of consolidation. The
amount of Goodwill shown in the balance sheet is
(A)₹ 140000 (B) ₹ 60000 (C) ₹ 80000 (D) ₹ 160000.

66. H ltd. acquired 80% shares of S ltd on April 1, 2022 at ₹ 420000.

The capital of S ltd is 30000 shares of ₹ 10 each. The capital profits and revenue profits
of S ltd. are ₹ 104000 and ₹ 150000 resp. Then the cost of control is
(A)₹ 96800 ( goodwill) (B)₹ 70000 ( capital reserve)
(C) ₹ 24000 ( capital reserve) (D) ₹ 174000 ( capital reserve)

67. H ltd. acquired 80% shares of S ltd on April 1, 2022 at ₹ 420000.

The capital of S ltd. is 30000 shares of ₹ 10 each.
The capital profits and revenue profits of S ltd. are ₹ 104000 and ₹ 150000 resp. Then
the minority interest
(A) ₹ 110800 (B) ₹ 140000 (C) ₹ 15000 (D)₹ 60000

68. On December 01, 2022 H Ltd. acquired 60% shares in S Ltd. The balance of profit and
loss account of S Ltd. on April 01, 2022 and March 31, 2023 was ( Dr. balance ) ₹90,000
and ( Cr. Balance) ₹1,50,000, respectively. The profit is earned evenly throughout the
year. The share of capital profit of H Ltd. in the profits of the subsidiary as on March 31,
2023 is
(A) ₹36,000 (B) ₹60,000 (C)₹ 42,000 (D) ₹78,000

69. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2023:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share Capital @ Shares in S. Ltd.
₹10 each 20,000 10,000 800 Shares 8,000 –
Other Liabilities 10,000 5,000 Other Assets 22,000 15,000
30,000 15,000 30,000 15,000
H Ltd. has acquired the shares on the closing date of the Balance Sheet. The total of the
Consolidated Balance Sheet as on March 31, 2023 is
(A) ₹37,000 (B) ₹45,000 (C) ₹30,000 (D) ₹29,000

30 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

70. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2023. H Ltd. has
acquired the shares on the closing date of the Balance Sheet. The total of the
Consolidated Balance Sheet as on March 31, 2023 is ?
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share Capital @ Shares in S. Ltd.
₹10 each 20,000 10,000 800 Shares 7,800 –
Other Liabilities 10,800 5,000 Other Assets 23,000 15,000
30,800 15,000 30,800 15,000
(A) ₹ 30,800 (B) ₹ 38,000 (C) ₹ 38,200 (D) ₹ 45,800

[12] SECTION C – SHORT QUESTIONS

[1] A Ltd. acquired all shares of B Ltd. on 1-4-22 for ₹ 1,10,000. On the acquisition the
Profit & loss account of B ltd. showed a credit balance of ₹ 6,000. Following details are
available on 31-3-23 from standalone balance sheets of both the companies .

Particulars A Ltd. B Ltd.

Shares Capital [₹ 10 each] 1,00,000 60,000
General Reserve [1-4-22] 50,000 30,000
Profit & Loss account 50,000 20,000
Calculate [1] Capital profits [2] Revenue Profits [3] Cost of Control [4] Minority Interest

[2] X Co. acquired 4,500 shares of ₹ 10 each of Y Ltd. on 1-4-22 at a cost of ₹ 80,000. On
the date of acquisition Y Ltd. had General Reserve of ₹ 20,000 and ₹ 12,000 credit
balance in profit & Loss a/c. Following details are available on 31-3-23 from standalone
balance sheets of both the companies .
Particulars X Ltd. Y Ltd.
Shares Capital 1,00,000 60,000
General Reserve 50,000 30,000
Profit & Loss account 50,000 20,000
Calculate [1] Capital profits [2] Revenue Profits [3] Cost of Control [4] Minority Interest

31 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

[3] O Ltd. acquired 1,200 shares of ₹ 10 each in P Ltd. at cost of ₹ 30,000 on 1-7-22.
Books of P Ltd. disclosed a reserve of ₹ 2,500 and credit balance of ₹ 8,000 in P/L a/c on
1-4-22. The monthly profit has occurred evenly during the year. Following details are
available on 31-3-23 from standalone balance sheets of both the companies .

Particulars O Ltd. P Ltd.

Shares Capital 1,50,000 15,000
General Reserve 75,000 7,500
Profit & Loss account 25,000 20,000
Calculate [1] Capital profits [2] Revenue Profits [3] Cost of Control [4] Minority Interest

[4] Q Ltd. acquired 6,000 shares of ₹ 10 each in R Ltd. on 1-4-22 at a price of ₹ 1,02,000.
When shares were acquired the books of R Ltd. showed Profit & loss a/c credit balance of
₹ 8,000 and General Reserve of ₹ 7,200. Following details are available on 31-3-23 from
standalone balance sheets of both the companies .

Particulars Q Ltd. R Ltd.

Shares Capital 2,40,000 75,000
General Reserve 60,000 7,200
Profit & Loss account 78,000 18,000
Calculate [1] Capital profits [2] Revenue Profits [3] Cost of Control [4] Minority Interest

[5] K Ltd. acquired 48,000 shares of ₹ 10 each in M Ltd. as on 1-4-22 at a cost of ₹

3,30,000,when the debit balance of Profit & Loss account of Subsidiary Co. was ₹
2,40,000 . Following details are available on 31-3-23 from standalone balance sheets of
both the companies .
Particulars K Ltd. M Ltd.
Shares Capital 10,80,000 6,00,000
Profit & Loss account 2,10,000 (1,50,000)
Calculate [1] Capital profits [2] Revenue Profits [3] Cost of Control [4] Minority Interest

32 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

[13] SECTION D – LONG QUESTIONS
SUM 1
Beta Ltd acquired 900 Shares in Gama Ltd on 1-4-22.
Balance sheets of Beta Ltd. and Gama Ltd. as on 31-3-23:
Liabilities B Ltd G Ltd Assets B Ltd G Ltd
Share capital
200,000 100,000
(₹ 100 each) Land & Building 100,000 75,000
Reserves 30,000 20,000 Stock 40,000 60,000
Profit and loss 20,000 15,000 Shares in G Ltd 1,10,000 -
Creditors 30,000 20,000 Debtors 30,000 20,000
2,80,000 1,55,000 2,80,000 1,55,000

On 1-4-22 Profit and Loss A/c and Reserves of Gama Ltd showed credit balance of ₹
12,000 and ₹ 5,000 respectively. In the debtors of Beta Ltd ₹ 5,000 due from Gama Ltd.
Prepare a consolidated balance sheet as on 31-3-23.

SUM 2
Bunty Ltd. acquired all shares of ₹ 10 each in Bubly Ltd. at ₹ 20 per share on 1-10-22.
Balance sheets of Bunty and Bubly Ltd as on 31-3-’23:
Liabilities Bunty Bubly Assets Bunty Bubly
Share Capital 2,00,000 60,000 Fixed Assets 1,50,000 30,000
General Reserve Share in Bubly
50,000 6,000
(1-4-22) Ltd 1,20,000 -
Creditor 20,000 15,000 Stock 20,000 26,000
Profit and Loss (1-4-22) 25,000 3,000 Debtors 35,000 32,000
Profit for the year 40,000 12,000 Bank 10,000 8,000
3,35,000 96,000 3,35,000 96,000
Prepare a consolidated balance sheet as on 31-3-23.

SUM 3
Balance sheets of Sun and Moon Ltd as on 31-3-23:
Liabilities Sun Moon Assets Sun Moon
Share Capital (10
2,40,000 60,000
each) Land and Building 140,000 50,000
General Reserve (1- Plant and
50,000 12,000
4-22) Machinery 64,000 20,000
33 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES
 Investments
(Including 5000
60,000 5,000
Shares of Moon
Profit and Loss 24,000 18,000 Ltd)
Creditors 40,000 15,000 Stock 36,000 6,000
Debtors 44,000 14,000
Bank 10,000 10,000
3,54,000 105,000 354,000 105,000
th
Sun Ltd acquired 5,000 shares of Moon Ltd at 50,000 at 30 September 2022.
Profit and Loss of Moon Ltd stood at 3,000 credit on 1-4-22.
Prepare a consolidated balance sheet as on 31-3-23.

SUM 4
Balance sheets of A and B Ltd as on 31-03-23:
Liabilities A Ltd B Ltd Assets A Ltd B Ltd
Share Capital (₹ 1
1,80,000 1,00,000
each) Sundry Assets 1,90,000 80,000
80,000
Profit and Loss A/c 35,000 - Shares of B 55,000 -
Creditors 80,000 30,000 Debtors 50,000 25,000
Profit and
Loss A/c - 25,000
2,95,000 1,30,000 2,95,000 1,30,000
Debtors of A Ltd Include 10,000 due from B. A Ltd acquired shares of B Ltd on 1-4-22
when debit balance of Profit and Loss of subsidiary company was ₹ 40,000.
Prepare a consolidated balance sheet as on 31-3-23.

SUM 5
Following are the Balance Sheets of Alpha ltd. & Delta Ltd. as on 31-3-23.
Liabilities Alpha Delta Assets Alpha Delta
Share Capital ₹ 100 10,00,000 4,00,000 Fixed Assets 9,00,000 2,50,000
each
General Reserve 2,00,000 Furniture 10,000 20,000
Profit & Loss a/c 1,20,000 - Stock 2,00,000 40,000
Creditors 1,80,000 1,00,000 Debtors 40,000 20,000
3,000 Shares of 2,40,000 -
Delta Ltd. at ₹ 80
34 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES
 Bank Balance 1,10,000 18,000
Profit & Loss a/c - 1,52,000
15,00,000 5,00,000 15,00,000 5,00,000
Other Information :
[1] Alpha ltd. acquired shares in Delta Ltd. on 1st July 2022.
[2] Books of Delta Ltd. showed Debit balance of Profit & Loss a/c of ₹ 2,00,000 on 1-4-22.
[3] Creditors of Delta Ltd. includes ₹ 20,000 due from Alpha Ltd. for goods purchased
from it.
[4] From the above information prepare consolidated balance sheet as on 31-3-23.

SUM 6
From the below given Balance Sheets of A ltd. & B Ltd. and other information prepare
Consolidated Balance Sheet as on 31-3-23.
Balance sheet of A and B Ltd as on 31-3-23:
Liabilities A Ltd B Ltd Assets A Ltd B Ltd
Share Capital
3,00,000 2,00,000
(₹ 100 each) Sundry Assets 2,44,000 3,10,000
Profit and Loss A/c 80,000 10,000 90% Shares of B 2,00,000 -
General Reserve [1-4-19] 60,000 40,000 Bills Receivables 10,000 15,000
Bills payables drawn by
- BLtd. 6,000 -
Drawn by Others 4,000 9,000 Current a/c of B Ltd. 6,000
Creditors 10,000 61,000
Current a/c of A Ltd. - 5,000
2,95,000 1,30,000 2,95,000 1,30,000
Other Information :
[1] A Ltd acquired shares of B Ltd on 1-10-22.
[2] Current Year’s Profit and Loss of subsidiary company was ₹ 15,000. Prepare a
consolidated balance sheet.
[3] B Ltd. sent ₹ 1,000 to A Ltd. on 31-3-23 but A Ltd. has not received till 31-3-23.
[4] Contingent liability
Bills Discounted A Ltd. B Ltd.
Bills accepted by A ltd. 2,000
Bills accepted by others 2,000 3,000

35 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

SUM 7
Following are summarized Balance sheets of AB Ltd. & XY Ltd. as on 31-3-23
PARTICULARS NOTE NO. AB Ltd. XY Ltd.
I EQUITY AND LIABILITTIES
(1) Shareholders’ funds
(a) Share Capital ₹ 10 each 4,00,000 2,00,000
(b) Reserves and Surplus
Profit & loss a/c 1,20,000 36,000
(2) Share Application Money pending Allotment
(3) Non Current Liabilities
(4) Current Liabilities
(a) Trade Payables – Creditors 40,000 4,000
TOTAL 5,60,000 2,40,000
II ASSETS
(1) Non Current Assets
(a) Fixed Assets
(i) Tangible Assets
Land 2,60,000 2,40,000
(ii) Intangible Assets
(b) Non Current Investments 20,000 Shares in 3,00,000
XY Ltd.
(c) Other Non Current Assets
(2) Current Assets
TOTAL 5,60,000 2,40,000
AB Ltd. acquired shares in XYZ Ltd. on 31-3-23. Prepare Consolidated Balance Sheet as
on 31-3-23.

SUM 8
Following are the Balance Sheets of North Ltd. and south Ltd. as on 31-3-23.
Liabilities North South Assets North South
Ltd. ₹ Ltd. ₹ Ltd.₹ Ltd.₹
Share Capital of ₹ 4,80,000 1,50,000 Plant & machinery 3,60,000 1,36,000
10 each
Profit & Loss a/c 1,56,000 36,000 Investments 2,04,000
General Reserve 1,20,000 14,400 12,000 shares in
South Ltd.
Shares of West Ltd. 60,000 14,000

36 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

Creditors 36,000 32,000 Stock 1,20,000 46,400
Debtors 48,000 36,000
7,92,000 2,32,400 7,92,000 2,32,400
Prepare Consolidated Balance Sheet as on 31-3-23 after considering following other
details
[1] When North Purchased Shares of South Ltd. on 1-4-22 the books of South Ltd.
showed profit & Loss a/c Credit Balance of ₹ 16,000 and General reserve ₹ 14,400.
[2] Out of the goods purchased by South Ltd. from North ltd. goods of ₹ 24,000 are still in
stock. North ltd. sold goods at 20% on cost.
[3] Debtors of North ltd. includes ₹ 10,000 due from South ltd.

[14] SECTION – E HOMEWORK QUESTIONS

SUM 1 : Calculate following from the below given details

• Capital Profits
• Revenue Profits
• Cost of Control
• Minority Interest
• Balance of Reserve & Surplus in a Consolidated balance sheet assuming Balance of
Holding Company Reserves & P/L is ₹ 8,00,00 in each case.

Sr. Name of % of Acquisition Share P/L on P/L on

No. Subsidiary Holding Cost of shares Capital of Acquisition Consolidation
of Sub. Co. by Subsidiary 1/4/22 date 31/3/23
Holding Co. Company
1 O 90% 5,60,000 4,00,000 2,00,000 2,80,000
2 P 85% 4,16,000 4,00,000 1,20,000 80,000
3 Q 80% 2,24,000 2,00,000 80,000 80,000
4 R 100% 4,00,000 2,00,000 1,60,000 2,20,000
5 S 80% 13,20,000 24,00,000 (9,60,000) (6,00,000)

37 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

SUM 2 The Balance Sheets of Chahal Ltd. & Shikhar Ltd. as on 31-3-23 are as follows :

Liabilities Chahal Shikhar Ltd Assets Chahal Shikhar

Ltd Ltd Ltd.
Share Capital of 3,00,000 30,000 Fixed Assets 2,80,000
₹ 10 each
General reserve 1,50,000 15,000 Plant & machines 40,000 16,000
Profit & Loss a/c 50,000 40,000 2,400 shares of 60,000 -
Shikhar ltd.
Creditors 90,000 9,000 Other Investments 90,000 40,000
Bills payables 10,000 12,000 Debtors 70,000 34,000
Bills Receivables 8,000 -
Bank balance 52,000 16,000
6,00,000 1,06,000 6,00,000 1,06,000
• Contingent liabilities of ₹ 4,000 for Bills discounted by Chahal Ltd. not matured.

Other Information :
[1] Chahal Ltd. acquired shares of Shikhar Ltd. on 1-7-22.
[2] Books of Shikhar Ltd. disclosed a Reserve of ₹ 5,000 and credit balance of Profit & loss
a/c of ₹ 16,000 on 1-4-22.
[3] All the Bills accepted by Shikhar were drawn by Chahal Ltd. From which Chahal ltd.
discounted a bill of ₹ 4,000. The debtor of Chahal ltd. includes ₹ 6,000 receivable from
Shikhar Ltd.
[4] The monthly profit was evenly accrued during the year.
[5] Prepare consolidated balance Sheet as on 31-3-23.

SUM 3 X Ltd. acquired all shares of Y Ltd. on 1-4-22. The balance Sheets of Both the
Companies as on 31-3-23 are as under ;
Liabilities X Ltd Y Ltd Assets X Ltd Y Ltd.
Share Capital 2,00,000 1,20,000 Fixed Assets 2,40,000 2,60,000
General Reserves 1,00,000 60,000 Shares of Y Ltd. 2,20,000 -
[1/4/19]
Profit & loss a/c 1,00,000 40,000
Creditors 60,000 40,000
4,60,000 2,60,000 4,60,000 2,60,000

38 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

On 1/4/19 the Profit & loss a/c of Y Ltd. showed a credit balance of ₹ 12,000 . Prepare
Consolidated Balance as on 31-3-23.

SUM 4
P Co. acquired 13,500 shares of ₹ 10 each of Q Ltd. as on 1-4-22. The Balance Sheets of both
the companies as on 31-3-23 are as follows.
Liabilities P Ltd Q Ltd Assets P Ltd Q Ltd.
Share Capital ₹ 10 3,00,000 1,80,000 Fixed Assets 3,60,000 3,30,000
each
General Reserves 1,50,000 90,000 Shares of Q Ltd. 2,40,000 -
Profit & loss a/c 1,50,000 60,000 Stock 90,000 60,000
Creditors 90,000 60,000
6,90,000 3,90,000 6,90,000 3,90,000
When shares were acquired by P Co. in Q Co. on 1-4-22 , Q Co. had ₹ 60,000 in GR and ₹
36,000 Cr. Balance in Profit & Loss a/c. From the above information prepare consolidated
Balance Sheet.

SUM 5
Following are summarized Balance sheets of ABC Ltd. & XYZ Ltd. as on 31-3-23.
PARTICULARS NOTE NO. ABC Ltd. XYZ Ltd.
I EQUITY AND LIABILITTIES
(5) Shareholders’ funds
(c) Share Capital ₹ 10 each 20,00,000 4,00,000
(d) Reserves and Surplus
Profit & loss a/c 2,20,000 1,60,000
(6) Share Application Money pending Allotment
(7) Non Current Liabilities
(8) Current Liabilities
(a) Trade Payables – Creditors 80,000 1,40,000
TOTAL 23,00,000 7,00,000
II ASSETS
(3) Non Current Assets
(d) Fixed Assets
(i) Tangible Assets
Land 4,00,000 1,60,000
Buildings 4,00,000 2,00,000

39 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 (ii) Intangible Assets
(e) Non Current Investments 32,000 Shares in 5,00,000
XYZ Ltd.
(f) Other Non Current Assets
(4) Current Assets
(a) Trade Receivables - Debtors 1,60,000 1,20,000
(b) Inventories 3,60,000 1,20,000
(c) Cash & Cash Equivalents 4,80,000 1,00,000
TOTAL 23,00,000 7,00,000
ABC Ltd. acquired shares in XYZ Ltd. on 1-4-22 when XYZ Ltd. has ₹ 1,00,000 in Profit &
Loss a/c. ABC Ltd. sold goods worth ₹ 40,000 to XYZ Ltd. included in above Balance Sheet.
Prepare Consolidated Balance Sheet as on 31-3-23.

SUM 6 Balance sheets of X Ltd. & Y Ltd. Ltd. as on 31-3-23.

Liabilities X Ltd. ₹ Y Ltd. ₹ Assets X Ltd.₹ Y Ltd.₹
Share Capital of ₹ 6,00,000 3,60,000 Fixed Assets 7,20,000 6,60,000
10 each
Profit & Loss a/c 3,00,000 1,20,000 Investments:27,000 4,80,000
General Reserve 3,00,000 1,80,000 shares in Y Ltd.
Creditors 1,80,000 1,20,000 Debtors 1,80,000 1,20,000
Profit & Loss a/c - 25,000
13,80,000 7,80,000 2,95,000 1,30,000
X Ltd. Ltd. acquired shares in Y Ltd. Ltd. as on 1-4-22 , when Y Ltd. had Credit balance of
Profit & Loss account ₹ 72,000 and General Reserve of ₹ 1,20,000. Prepare Consolidated
Balance Sheet.

40 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 Above work is a compilation form various Reference Books on Accounting , Online
sources/Websites and Study Materials prepared by Professional Exam conducting
Institutes.
List of References :
Author/ Study Material Source Publication
Shekhar & Prasath Paduka’s – Wolters Kluwer
Sharma & Bhalla Taxman
P. C. Tulsian S. Chand
Study Material of ICAI ICAI

41 | P a g e SEM 4 CFR UNIT 5 HOLDING COMPANIES

 FACULTY OF COMMERCE
B. COM.

SEMESTER 4

SUBJECT: CORPORATE FINANCIAL

REPORTING

UNIT 6: NON - BANKING FINANCIAL

COMPANIES

COMPILED BY
Dr. Shimoni Trivedi Prof. Nidhip Shah
STUDY MATERIAL FOR REFERENCE

1|P age
 UNIT- 6 NON-BANKING FINANCIAL COMPANIES
Topics covered
1.Introduction
2. Definition of NBFC
3. Meaning of conducting financial activity as “principal business”
4. Difference between banks & NBFCs
5. Importance of Non-Banking Financial Companies

6. Regulation of NBFCs? (Whether every NBFC should be registered

with RBI?)
A. NBFC Companies exempted from registration under RBI

B. Entities Regulated by RBI and applicable regulations

7. Requirements for registration with RBI
8. What are systemically important NBFCs?
9. Residuary Non-Banking Companies (RNBCs)
10. Authorization to NBFCs for accepting deposits.
11.Lliquid assets requirement for the deposit taking NBFCs
12. Rating of deposit taking NBFCs for acceptance of deposit.
13 ‘Owned fund’ and ‘net owned fund’ in relation to NBFCs
14. Some Important Concepts

1) Asset Classification
2) Provisioning requirement
3) Capital Risk Adequacy Ratio
4) Risk Weighted Assets
5) Leverage Ratio

There are five sections (parts) in these notes as follows :

SECTION A: THEORY & COMPREHENSIVE ILLUSTRATION
SECTION B : MULTIPLE CHOICE QUESTIONS
SECTION C : THEORY SHORT & LONG QUESTIONS
SECTION D : SUMS
SECTION E: HOMEWORK (SUMS)

2|Page
 UNIT: 6 NON-BANKING FINANCIAL COMPANIES

SECTION A: THEORY & COMPREHENSIVE ILLUSTRATION

1. Introduction:

Non-Banking Financial Companies (NBFC) is vital for widening the access to

financial services and expand financial sector. At the times of financial distress,
NBFCs help in balancing the banking system. They offer better rates of return on
deposits and simple procedures for sanctioning loans as compared to normal
banks.

2. Definition of NBFC

A Non-Banking Financial Company is a company registered under the Companies

Act 1956/ 2013,engaged in the business of loans and advances, acquisition of
shares, debentures and other securities, leasing , hire-purchase, insurance business
and chit business.

The term NBFC does not include any institution whose principal business is that of
agriculture activity, industrial activity or sale of any good (other than securities) or
providing any services and sale/purchase/construction of any immovable property.

3. Meaning for conducting financial activity as “principal business”

Financial activity as principal business is when

(i) a company’s financial assets constitute more than 50 per cent of the
total assets and
(ii) income from financial assets constitute more than 50 per cent of the
gross income.

A company which fulfils both these criteria will be registered as NBFC by RBI. The
term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve
Bank has defined it so as to ensure that only companies predominantly engaged in
financial activity get registered with it and are regulated and supervised by it. Hence
if there are companies engaged in agricultural operations, industrial activity,
purchase and sale of goods, providing services or purchase, sale or construction of
immovable property as their principal business and are doing some financial business
in a small way, they will not be regulated by the Reserve Bank.

3|Page
 Interestingly, this test is popularly known as 50-50 test and is applied to determine
whether or not a company is into financial business.

4. Difference between banks & NBFCs

NBFCs lend and make investments and hence their activities are similar to that of
banks; however there are a few differences as given below:

i. NBFC are registered under Companies Act 1956 /2013 and not under
Banking regulation Act.
ii. NBFC are not required to obtain license.
iii. NBFC cannot accept demand deposits;
iv. NBFCs do not form part of the payment and settlement system and cannot
issue cheques drawn on itself;
v. Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks.
vi. An NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.)
vii. Foreign investment is allowed upto 100% in NBFCs.

5. Importance of Non-Banking Financial Companies

India’s financial services sector is huge. It is not just comprised of commercial
banks, but also non-banking financial companies (NBFCs). These firms offer a
wide array of financial services like loans, chit-funds, and are different from
banks. NBFCs are often small players that largely go unnoticed. However, they
are still important to the economy, especially in a developing country like India
where 70% of the population lives in rural areas.

• Size of sector:
The NBFC sector has grown considerably in the last few years despite the
slowdown in the economy. As of March 2013, it accounted for 12.5% of the
country’s Gross Domestic Product (GDP) – a measure of the size of the economy.
• Growth:
In terms of year-over-year growth rate, the NBFC sector beat the banking sector in
most years between 2006 and 2013. On an average, it grew 22% every year.
• Profitability:
NBFCs are more profitable than the banking sector because of lower costs. This
helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth –
the increase in the amount of money being lent to customers – is higher than that
of the banking sector.
• Infrastructure Lending:

4|Page
 NBFCs contribute largely to the economy by lending to infrastructure projects,
which are very important to a developing country like India. But they require large
amount of funds, and earn profits only over a longer time-frame. As a result, these
are riskier projects. This deters a lot of banks from lending to infrastructure
projects. In the last few years, NBFCs have contributed more to infrastructure
lending than banks.
• Promoting inclusive growth:
NBFCs cater to a wide variety of customers – both in urban and rural areas. They
finance projects of small-scale companies, which is important for the growth in
rural areas. They also provide small-ticket loans for affordable housing projects. All
these help promote inclusive growth in the country.

6. Regulation of NBFCs? (Whether every NBFC should be registered with RBI?)

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company
can commence or carry on business of a non-banking financial institution without a)
obtaining a certificate of registration from the Bank and without having a Net Owned
Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in terms of the powers
given to the Bank, to obviate dual regulation, certain categories of NBFCs which are
regulated by other regulators are exempted from the requirement of registration
with RBI

A. NBFC Companies exempted from registration under RBI

• Housing Finance Companies : regulated by National Housing Bank

• Merchant Banking Companies: regulated by SEBI
• Stock Exchanges: regulated by SEBI
• Companies engaged in the business of stock-broking/sub-broking: :
regulated by SEBI
• Venture Capital Fund Companies: regulated by SEBI
• Nidhi Companies: regulated by Ministry of Corporate Affairs, Government
of India
• Insurance companies: : regulated by IRDA
• Chit Fund Companies: regulated by State Government

It may also be mentioned that Mortgage Guarantee Companies have been notified
as Non-Banking Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934.
Core Investment Companies with asset size of less than ₹ 100 crore, and those with
asset size of ₹ 100 crore and above but not accessing public funds are exempted
from registration with the RBI.

5|Page
 B. Entities Regulated by RBI and applicable regulations

Different types/categories of NBFCs registered with RBI?

NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-
Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically
important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
c) by the kind of activity they conduct. Within this broad categorization the different
types of NBFCs are as follows:

I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution

carrying on as its principal business the financing of physical assets supporting
productive/economic activity, such as automobiles, tractors, lathe machines,
generator sets, earth moving and material handling equipments, moving on own
power and general purpose industrial machines. Principal business for this purpose
6|Page
 is defined as aggregate of financing real/physical assets supporting economic activity
and income arising therefrom is not less than 60% of its total assets and total income
respectively.

II. Investment Company (IC) : IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities,

III. Loan Company (LC): LC means any company which is a financial institution
carrying on as its principal business the providing of finance whether by making loans
or advances or otherwise for any activity other than its own but does not include an
Asset Finance Company.

IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a)

which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a
minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or
equivalent d) and a CRAR of 15%.

V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an

NBFC carrying on the business of acquisition of shares and securities which satisfies
the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity
shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily

convertible into equity shares within a period not exceeding 10 years from the date
of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies
except through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and
45I(f) of the RBI act, 1934 except investment in bank deposits, money market
instruments, government securities, loans to and investments in debt issuances of
group companies or guarantees issued on behalf of group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

VI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-
NBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar

7|Page
 denominated bonds of minimum 5 year maturity. Only Infrastructure Finance
Companies (IFC) can sponsor IDF-NBFCs.

VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-

MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature
of qualifying assets which satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual

income not exceeding ₹ 1,00,000 or urban and semi-urban household income not
exceeding ₹ 1,60,000;

b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in
subsequent cycles;

c. total indebtedness of the borrower does not exceed ₹ 1,00,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹
15,000 with prepayment without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 50 per
cent of the total loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of

the borrower

VIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-

deposit taking NBFC engaged in the principal business of factoring. The financial
assets in the factoring business should constitute at least 50 percent of its total
assets and its income derived from factoring business should not be less than 50
percent of its gross income.

IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which
at least 90% of the business turnover is mortgage guarantee business or at least 90%
of the gross income is from mortgage guarantee business and net owned fund is ₹
100 crore.

X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution

through which promoter / promoter groups will be permitted to set up a new bank
.It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will
hold the bank as well as all other financial services companies regulated by RBI or

8|Page
 other financial sector regulators, to the extent permissible under the applicable
regulatory prescriptions.

7. Requirements for registration with RBI

A company incorporated under the Companies Act, 1956 and desirous of

commencing business of non-banking financial institution as defined under Section
45 I(a) of the RBI Act, 1934 should comply with the following:

i. it should be a company registered under Section 3 of the companies Act, 1956

ii. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net owned
fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is
indicated separately in the FAQs on specialized NBFCs)

8. What are systemically important NBFCs?

NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are
considered as systemically important NBFCs. The rationale for such classification is
that the activities of such NBFCs will have a bearing on the financial stability of the
overall economy.

9. Residuary Non-Banking Companies (RNBCs)

Residuary Non-Banking Company is a class of NBFC which is a company and has as

its principal business the receiving of deposits, under any scheme or arrangement or
in any other manner and not being Investment, Asset Financing, Loan Company.
These companies are required to maintain investments as per directions of RBI, in
addition to liquid assets.

The functioning of these companies is different from those of NBFCs in terms of

method of mobilization of deposits and requirement of deployment of depositors'
funds as per Directions. Besides, Prudential Norms Directions are applicable to these
companies also.

It is true that there is no ceiling on raising of deposits by RNBCs. However, every

RNBC has to ensure that the amounts deposited with it are fully invested in approved
investments. In other words, in order to secure the interests of depositor, such
companies are required to invest 100 per cent of their deposit liability into highly
liquid and secure instruments, namely,

RNBC : Rate of interest paid on deposits and maturity period of deposits taken by
them

9|Page
 The minimum interest an RNBC should pay on deposits should be 5% (to be
compounded annually) on the amount deposited in lump sum or at monthly or
longer intervals; and 3.5% (to be compounded annually) on the amount deposited
under daily deposit scheme. Interest here includes premium, bonus or any other
advantage that an RNBC promises to the depositor by way of return. An RNBC can
accept deposits for a minimum period of 12 months and maximum period of 84
months from the date of receipt of such deposit. They cannot accept deposits
repayable on demand. However, at present, the only RNBCs in existence (Peerless)
has been directed by the Reserve Bank to stop collecting deposits, repay thedeposits
to the depositor and wind up their RNBC business as their business model is
inherently unviable.

10. Authorisation to NBFCs for accepting deposits.

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the
Bank had given a specific authorisation and have an investment grade rating are
allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months. They cannot accept deposits repayable
on demand.

11. Lliquid assets requirement for the deposit taking NBFCs

In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid assets to
be maintained. by NBFCs is 15 per cent of public deposits outstanding as on the last
working day of the second preceding quarter. Of the 15%, NBFCs are required to
invest not less than ten percent in approved securities and the remaining 5% can be
in unencumbered term deposits with any scheduled commercial bank. Thus, the
liquid assets may consist of Government securities, Government guaranteed bonds
and term deposits with any scheduled commercial bank.

The investment in Government securities should be in dematerialised form which

can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account with a
scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited
(SHICL). In case of Government guaranteed bonds the same may be kept in
dematerialised form with SCB/SHCIL or in a dematerialised account with depositories
[National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd.
(CDSL)] through a depository participant registered with Securities & Exchange Board
of India (SEBI). However in case there are Government bonds which are in physical
form the same may be kept in safe custody of SCB/SHCIL.

10 | P a g e
 NBFCs have been directed to maintain the mandated liquid asset securities in a
dematerialised form with the entities stated above at a place where the registered
office of the company is situated. However, if an NBFC intends to entrust the
securities at a place other than the place at which its registered office is located, it
may do so after obtaining the permission of RBI in writing. It may be noted that liquid
assets in approved securities will have to be maintained in dematerialised form only. The
liquid assets maintained as above are to be utilised for payment of claims of
depositors. However, deposits being unsecured in nature, depositors do not have
direct claim on liquid assets.

12. Rating of deposit taking NBFCs for acceptance of deposit.

NBFCs may get itself rated by any of the six rating agencies namely, CRISIL, CARE,
ICRA, FITCH Ratings India Pvt. Ltd, Brickwork Ratings India Pvt. Ltd. and SMERA.

The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating Nomenclature of

agencies minimum investment
grade credit rating
(MIGR)
CRISIL FA- (FA MINUS)
ICRA MA- (MA MINUS)
CARE CARE BBB (FD)
FITCH Ratings India Pvt. tA-(ind)(FD)
Ltd. SMERA A
SMERA
Brickwork Ratings India BWR FBBB
Pvt. Ltd.

It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA-
is not equivalent to AAA.

However, if rating of an NBFC is downgraded to below minimum investment grade

rating, it has to stop accepting public deposits, report the position within fifteen
working days to the RBI and bring within three years from the date of such
downgrading of credit rating, the amount of public deposit to nil. With the
introduction of revised regulatory framework in November 2014 deposit taking
NBFCs have to mandatorily get investment grade credit rating for being eligible to
accept public deposits.

13 ‘Owned fund’ and ‘net owned fund’ in relation to NBFCs

11 | P a g e
 ‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares
which are compulsorily convertible into equity, free reserves, balance in share
premium account and capital reserves representing surplus arising out of sale
proceeds of asset, excluding reserves created by revaluation of asset, after deducting
therefrom accumulated balance of loss, deferred revenue expenditure and other
intangible assets.

'Net Owned Fund' is the amount as arrived at above, minus the amount of
investments of such company in shares of its subsidiaries, companies in the same
group and all other NBFCs and the book value of debentures, bonds, outstanding
loans and advances including hire purchase and lease finance made to and deposits
with subsidiaries and companies in the same group, to the extent it exceeds 10% of
the owned fund.

14. Some Important Concepts

1) Asset Classification

Standard Assets:
No default in repayment of principal or interest and does not disclose any problem
or carry more than normal risk attached to the business.

Sub-standard Assets:
Asset has been classified as non-performing asset for a period of not exceeding 18
months* or an asset where the terms of the agreement regarding interest and/ or
principal have been renegotiated or rescheduled or restructured after
commencement of operations, until the expiry of one year of satisfactory
performance under the renegotiated or rescheduled or restructured terms.

Doubtful Assets:
Term loan, lease asset, hire purchase asset or any other asset remaining sub-
standard for a period exceeding 18 months or such shorter period*.

Loss Assets:
Identified by the Company/ external or internal auditor/ RBI or an asset which is
adversely affected by a potential threat of non-recoverability due to either erosion
in the value of security or non-availability of security or due to any fraudulent act
or omission on the part of the borrower.

* The period of 18 months shall be reduced to 16 months for the FY ended March
31, 2016; 14 months for the FY ended March 31, 2017 and 12 months for the FY
ended March 31, 2018.
12 | P a g e
 2) Provisioning requirement

Asset NBFC-ND-NSI NBFC-ND-SI

Classification
Standard Asset 0.25 per cent as on March
31, 15 0.25 per cent as on March
31, 15
0.30 per cent as on March
31, 16
0.35 per cent as on March
31, 17
0.40 per cent as on March
31, 18

Sub-standard 10 per cent of total 10 per cent of total

Asset outstanding outstanding
Doubtful Asset
100 per cent provision to 100 per cent provision to
the extent to which the the extent to which the
advance is not covered by advance is not covered by the
the realisable value of the realisable value of the
security to which the NBFC security to which the NBFC
has a valid recourse shall be has a valid recourse shall be
made. The realisable value made. The realisable value is
is to be estimated on a to be estimated on a realistic
realistic basis; basis;
In addition to item (a) In addition to item (a)
above, depending upon the above, depending upon the
period for which the asset period for which the asset as
as remained doubtful, remained doubtful, provision
provision shall be made on shall be made on the
the following basis : following basis :
o 20 per cent up to one o 20 per cent up to one year;
year; o 30 per cent from one year
o 30 per cent from one year to third year;
to third year; o 50 per cent from forth year
o 50 per cent from forth onwards.
year onwards.

13 | P a g e
 Loss Asset The entire asset shall be The entire asset shall be
written off. If the assets are written off. If the assets are
permitted to remain in the permitted to remain in the
books for any reason, 100 books for any reason, 100 per
per cent of the outstanding cent of the outstanding

3) Capital Risk Adequacy Ratio

Every NBFC-ND-SI, NBFC-D, NBFC-MFI*, NBFC-IFC** shall maintain a minimum

CRAR of 15 percent.
CRAR = Tier I + Tier II Capital

Aggregate Risk Weighted Assets

The total Tier I capital, at any point of time shall not be less than 8.5 per cent by
March 31, 2016 and 10 per cent by March 31, 2017.

NBFCs primarily engaged in lending against gold jewellery (such loans comprising
50 percent or more of their financial assets) shall maintain a minimum Tier l capital
of 12 percent.

* The total Tier II Capital for NBFC-MFIs, at any point of time, shall not exceed 100
percent of Tier I Capital.
** The Tier I capital of an IFC, at any point of time, shall not be less than 10%

Tier I
“Tier I capital” means owned fund as reduced by investment in shares of other
NBFC and in shares, debentures, bonds, outstanding loans and advances including
hire purchase and lease finance made to and deposits with subsidiaries and
companies in the same group exceeding, in aggregate, ten per cent of the owned
fund; and perpetual debt instruments issued by a non-deposit taking non-banking
financial company in each year to the extent it does not exceed 15% of the
aggregate Tier I Capital of such company as on March 31 of the previous
accounting year;
“owned fund” means paid up equity capital, preference shares which are
compulsorily convertible into equity, free reserves, balance in share premium
account and capital reserves representing surplus arising out of sale proceeds of
asset, excluding reserves created by revaluation of asset, as reduced by
accumulated loss balance, book value of intangible assets and deferred revenue
expenditure, if any.

Tier II
14 | P a g e
 “Tier II capital” includes the following:
preference shares other than those which are compulsorily convertible into
equity;
revaluation reserves at discounted rate of fifty five per cent;
general provisions (including that for standard assets) and loss reserves to the
extent these are not attributable to actual diminution in value or identifiable
potential loss in any specific asset and are available to meet unexpected losses, to
the extent of one and one fourth per cent of risk weighted assets;
hybrid debt capital instruments;
subordinated debt; and
perpetual debt instruments issued by a non-deposit taking non-banking financial
company which is in excess of what qualifies for Tier I Capital, to the extent the
aggregate does not exceed Tier I capital.

4) Risk Weighted Assets

Degrees of credit risk expressed as percentage weightages have been assigned to

balance sheet assets in the prudential norms.

Eg. Cash and bank balance, FDs – 0

Inter corporate loans/ deposits – 100
Loans to Staff – 0
Fixed Assets (net of depreciation) - 100

Risk Weighted Assets = the value of each asset/ item X the relevant risk
weights

For off-balance sheet items - the notional amount of the transaction is

converted into a credit equivalent amount

Risk Weighted Assets = credit equivalent amount X risk weight applicable.

5) Leverage Ratio
The NBFC-ND-SI (except NBFC-MFI and NBFC-CIC) shall maintain a leverage ratio of
not more than 7 at any point of time, w.e.f 27th March, 2015. The CIC-ND-SI shall
maintain a leverage ratio of not more than 2.5 at any point of time.

Leverage Ratio = Total Outside Liabilities / Owned Funds

15 | P a g e
 “Outside Liabilities” means total liabilities as appearing on the liabilities side of the
balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments
compulsorily convertible into equity shares within a period not exceeding 5 years
from the date of issue but including all forms of debt and obligations having the
characteristics of debt, whether created by issue of hybrid instruments or
otherwise, and value of guarantees issued, whether appearing on the balance
sheet or not.

Statement for computing Net Owned Fund

Step -1 Owned Funds

Paid up Share Capital
+ convertible preference share capital
+ Free Reserves
+Securities Premium
+ Capital Reserve [except profit from revaluation of fixed
assets]

Less: Deferred Expenditure [intangible assets]

OWNED FUNDS A
Step -2 Investments
In shares of subsidiaries and group companies
In debentures of subsidiaries and group companies
TOTAL INVESTMENTS B
Step -3 10% of Owned Fund =10% of A C
Step -4 Excess of Investments over 10% of Investments = B-C D
Step -5 Net Owned Funds = A-D

Comprehensive Illustration

Illustration:1 ABC Ltd. is a Non- banking Finance Company. Balance-sheet is given

below:

Liabilities Rs. Assets Rs.

(‘000) (‘000)
Paid up Equity Capital 1000 Leased out assets 8000
Free Reserves 5000 Investment:
Loans 4000 In shares of subsidiaries & 1000
group cos.

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 Deposits 4000 In debentures of subsidiaries 1000
and group cos.
Cash and bank balances 2000
Deferred expenditure 2000
14,000 14,000
Compute Net Owned Fund of ABC Ltd. –NBFC.

Solution: Statement for computing Net Owned Fund

Step -1 Owned Funds

Paid up Share Capital 1000
+ convertible preference share capital
+ Free Reserves 5000
+Securities Premium
+ Capital Reserve [except profit from revaluation of
fixed assets]
6000
Less: Deferred Expenditure [intangible assets] 2000
OWNED FUNDS A 4000
Step -2 Investments
In shares of subsidiaries and group companies 1000
In debentures of subsidiaries and group companies 1000
TOTAL INVESTMENTS B 2000
Step -3 10% of Owned Fund =10% of A = 10% of 4,000 C 400
Step -4 Excess of Investments over 10% of Investments = B-C D 1600
= 2000 - 400
Step -5 Net Owned Funds = A-D = 4000 -1600------ ------------- --------------- -----
------------------- --- 2400

Illustration :2 The classified Advances of an NBFC on 31st March, 2018 are given
below:

Rs.in
lakhs
Standard assets 44,500
Sub-standard assets 2500
Secured portions of doubtful debts
- Upto one year 600
- One year to three years 150
- More than three years 80

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 Unsecured portions of doubtful debts 180
Loss assets 76

Calculate the amount of provision, which must be made against the advances as
per

(i) The Non-Banking Financial Company – Non- Systematically Important

Non-Deposit taking Company (RBI) Directions, 2016: and
(ii) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.

Solution :

(i) Calculation of provision required on advances as on 31st March, 2018 as

per The Non-Banking Financial Company – Non- Systematically
Important Non-Deposit taking Company (RBI) Directions, 2016 (NBFC-ND-
NSI)
Rs.in Lakhs % of Provision
Provision Rs.in
lakhs
Standard assets 44,500 0.25 111.25
Sub-standard assets 2500 10 250
Secured portions of doubtful debts
- Upto one year 600 20 120
- One year to three years 150 30 45
- More than three years 80 50 40
Unsecured portions of doubtful 180 100 180
debts
Loss assets 76 100 76
Total Provision 822.25

(ii) Calculation of provision required on advances as on 31st March, 2018 as

per The Non-Banking Financial Company – Systematically Important
Non-Deposit taking Company and Deposit taking (RBI) Directions, 2016
(NBFC-ND-SI and NBFC -D-SI)
Rs.in Lakhs % of Provision
Provision Rs.in
lakhs

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 Standard assets 44,500 0.40 178
Sub-standard assets 2500 10 250
Secured portions of doubtful debts
- Upto one year 600 20 120
- One year to three years 150 30 45
- More than three years 80 50 40
Unsecured portions of doubtful 180 100 180
debts
Loss assets 76 100 76
Total Provision 889

SECTION:B MULTIPLE CHOICE QUESTIONS:

1) test is applied to determine whether a company is into financial

business.
a) 40-60 test
b) 50-50 test
c) 60-40 test
d) 70-30 test
2) The term NBFC include any institution whose principal business is :
a) Agriculture activity
b) Industrial activity
c) Financial activity
d) Construction of immovable property
3) Financial activity as principal business means:
a) 50% of total assets are financial assets
b) 50% of gross income is generated from financial assets
c) Both a and b
d) none
4) NBFC is different from a bank because
a) NBFC can accept demand deposits but banks cannot
b) NBFC can issue cheques drawn on itself but banks cannot
c) Banks can accept demand deposits but NBFC cannot
d) None of the above
5) NBFC is different from a bank because

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 a) NBFC can accept demand deposits but banks cannot
b) NBFC can issue cheques drawn on itself but banks cannot
c) NBFC cannot issue cheques drawn on itself but a bank can
d) None of the above
6) NBFC is different from a bank because
a) NBFC is a part of the payment and settlement system but bank is not
b) NBFC is not a part of the payment and settlement system but bank is
c) Banks do not maintain reserve ratios like CRR but NBFC does.
d) None of the above
7) NBFC is a financial company like a bank but-
a) NBFC create credit but bank is not allowed
b) Banks create credit but NBFC is not allowed
c) NBFC provides overdraft facility to customers
d) Banks does not provide overdraft facility
8) NBFC is a financial company like a bank but-
a) NBFC can create credit
b) Banks cannot create credit
c) NBFC cannot provide overdraft facility to customers
d) Banks do not provide overdraft facility to customers
9) NBFC is a financial institution which is a company registered under-
a) The Indian Companies Act 1956
b) Banking Regulation Act, 1949
c) RBI Amendment Act, 1997
d) None
10) Foreign investments upto is allowed in NBFC
a) 65%
b) 74%
c) 100%
d) 50%
11) NBFC which is not required to be registered with RBI
a) Asset finance Company (AFC)
b) Investment Company (IC)
c) Insurance Company
d) Core Investment Company (CIC)
12) NBFC which is not required to be registered with RBI
a) Mutual Fund Companies

20 | P a g e
 b) Infrastructure Finance Company (IFC)
c) Mortgage Guarantee Companies (MGC)
d) Loan Company
13) NBFC which is not required to be registered with RBI
a) Loan Company
b) Nidhi Companies
c) NBFC-Micro Finance Institution (NBFC-MFI)
d) Asset Finance Company (AFC)
14) NBFC which is not required to be registered with RBI
a) Core Investment Company (CIC)
b) Stock Broking Companies
c) Mortgage Guarantee Companies (MGC)
d) Asset Finance Company (AFC)
15) The main business of Asset Finance Company (AFC) is –
a) Acquisition of securities
b) Financing physical assets
c) Accept demand deposits
d) Collecting money on other’s behalf
16) The main business of Investment Company (IC) is –
a) Acquisition of securities
b) Financing physical assets
c) Accept demand deposits
d) Collecting money on other’s behalf
17) The main business of NBFC-Factors is –
a) Acquisition of securities
b) Financing physical assets
c) Accept demand deposits
d) Collecting money on other’s behalf
18) Insurance companies are regulated by
a) Securities and Exchange Board of India
b) Insurance Regulatory and Development Authority
c) Reserve Bank of India
d) National Housing Bank
19) Venture Capital Fund Companies are regulated by
a) Securities and Exchange Board of India
b) Insurance Regulatory and Development Authority

21 | P a g e
 c) Reserve Bank of India
d) National Housing Bank
20) Merchant Banking Companies are regulated by
a) Securities and Exchange Board of India
b) Insurance Regulatory and Development Authority
c) Reserve Bank of India
d) National Housing Bank
21) Nidhi Companies are regulated by
a) Securities and Exchange Board of India
b) National Housing Bank
c) State Government
d) Ministry of Corporate Affairs, Government of India
22) Chit fund companies are regulated by
a) Securities and Exchange Board of India
b) National Housing Bank
c) State Government
d) Ministry of Corporate Affairs, Government of India
23) Which NBFC is not regulated by SEBI?
a) Merchant Banking Companies
b) Venture Capital Fund Companies
c) Nidhi Companies
d) Stock Exchanges
24) Which of the following NBFCs is regulated by RBI?
a) Insurance Companies
b) Loan Companies
c) Housing Finance Companies
d) Mutual Benefit Companies.
25) Which of the following is true for Infrastructure Finance Company(IFC)?
a) 50% or more of its total assets should be deployed in Infrastructure loans
b) 60% or more of its total assets should be deployed in Infrastructure loans
c) 75% or more of its total assets should be deployed in Infrastructure loans
d) 80% or more of its total assets should be deployed in Infrastructure loans
26) Which of the following is true for Core Investment Company (CIC)?
% or more of its total assets should be invested in equity shares,
preference shares, debt or loans in group companies.

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 a) 50%
b) 70%
c) 80%
d) 90%
27) NBFC should maintain minimum level of liquid assets which is –
a) 20% of total deposits
b) 15% of Public deposits
c) 30% of total investments
d) 35 % of total assets
28) Equity capital and reserves less intangible assets and revaluation
reserves, divided by number of equity shares is:
a) Earning value
b) Break-up value
c) Fair value
d) Net book value
29) Capitalised value (@ 8%, 10%, 12%) of (average PAT less preference
dividend divided by no. of equity shares) is
a) Earning value
b) Break-up value
c) Fair value
d) Net book value
30) Which of the following is true?
a) Fair value means the mean of the earning value and the break-up value
b) Earning value means the mean of the fair value and the break-up value
c) Break-up value means the mean of the earning value and the fair value
d) Net book value means the mean of the earning value and the fair value
31) For NBFC- Systematically Important Non-Deposit taking companySub-
standard asset would mean an asset that has been classified as NPA

a) NPA for a period not exceeding 14 months for financial year ending
March 31, 2017.
b) NPA for a period not exceeding 12 months for financial year ending
March 31, 2018 and thereafter
c) NPA for a period not exceeding 18 months.
d) Both a and b

23 | P a g e
 32) For NBFC- Non-Systematically Important Non-Deposit taking companySub-
standard asset would mean an asset that has been classified as

a) NPA for a period not exceeding 14 months for financial year ending
March 31, 2017.
b) NPA for a period not exceeding 12 months for financial year ending
March 31, 2018 and thereafter
c) NPA for a period not exceeding 18 months.
d) Both a and b
33) For NBFC- Systematically Important Non-Deposit taking company Doubtful
asset would mean an asset that has been classified as
a) Sub-standard for a period not exceeding 14 months for financial year
ending March 31, 2017.
b) Sub-standard for a period not exceeding 12 months for financial year
ending March 31, 2018 and thereafter
c) Sub-standard for a period not exceeding 18 months.
d) Both a and b
34) For NBFC- Non-Systematically Important Non-Deposit taking company
Doubtful asset would mean an asset that has been classified as
a) Sub-standard for a period not exceeding 14 months for financial year
ending March 31, 2017.
b) Sub-standard for a period not exceeding 12 months for financial year
ending March 31, 2018 and thereafter
c) Sub-standard for a period not exceeding 18 months.
d) Both a and b
35) NBFC has to make provision on Loss assets ata)
70%
b) 80%
c) 90%
d) 100%
36) For an NBFC, provision on Doubtful assets should be made as follows:
1. 100% provision on the advance not covered by realisable value of the
security
2. 20% on assets considered doubtful for less than a year
3. 30% on assets considered doubtful for a period more than 1 year but
less than 3 years

24 | P a g e
 4. 50% on assets considered doubtful for more than 3 years
a) Only 2 and 3
b) Only 3 & 4
c) Only 1, 3 & 4
d) all
37) For an NBFC, provision on Sub-Standard assets should be made as
follows:
a) 10%
b) 20%
c) 15%
d) 25%
38) In an NBFC-Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
39) In an NBFC- Systematically important Non-Deposit taking company, (fora
financial year ending March 31, 2017), a Non-Performing Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
40) In an NBFC- Systematically important Non-Deposit taking company, (fora
financial year ending March 31, 2018 and thereafter), a Non-Performing
Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
41) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is A term loan inclusive of unpaid interest
1. when the instalment is overdue for a six months or more
2. when the instalment is overdue for a four months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a four months or more

25 | P a g e
 a) 1 and 4
b) 1 or 3
c) 2 and 3
d) 2 or 4
42) In an NBFC-Systematically important Non-Deposit taking company, (for a
financial year ending March 31, 2017), a Non-Performing Asset is A term
loan inclusive of unpaid interest
1. when the instalment is overdue for a six months or more
2. when the instalment is overdue for a four months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a four months or more
a) 1 and 4
b) 1 or 3
c) 2 and 3
d) 2 or 4
43) In an NBFC -Systematically important Non-Deposit taking company, (fora
financial year ending March 31, 2018 and thereafter), a Non-Performing
Asset is A term loan inclusive of unpaid interest
1. when the instalment is overdue for a three months or more
2. when the instalment is overdue for a four months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a three months or more
a) 1 or 4
b) 1 or 3
c) 2 and 3
d) 2 or 4
44) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is a demand or call loan
1. Which remained overdue for six months or more from the date of call
2. Which remained overdue for three months or more from the date of
call
3. On which interest amount remained overdue for six months or more
4. On which interest amount remained overdue for three months or
more
a) 1 and 3
b) 1 or 3

26 | P a g e
 c) 2 and 3
d) 2 or 3
45) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
46) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is a short term loan or advance
a) Which remained overdue for one month or more
b) Which remained overdue for two months or more
c) Which remained overdue for four months or more
d) Which remained overdue for six months or more
47) In an NBFC- Non-Systematically important Non-Deposit taking company,a
Non-Performing Asset is
a) Dues on account of sale of assets, overdue for 6 months or more
b) Dues on account of services rendered, overdue for 6 months or more
c) Reimbursement of expenses incurred, overdue for 6 months or more
d) All of the above
48) In an NBFC-Systematically important Non-Deposit taking company for a
financial year ending March 31, 2017, a Non-Performing Asset is
a) An asset on which interest is outstanding for two months or more
b) An asset on which interest is outstanding for three months or more
c) An asset on which interest is outstanding for four months or more
d) An asset on which interest is outstanding for six months or more
49) In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is A term loan inclusive of unpaid interest
1. when the instalment is overdue for a six months or more
2. when the instalment is overdue for a three months or more
3. when the interest is overdue for a six months or more
4. when the interest is overdue for a three months or more
a) 1 and 4
b) 1 or 3
c) 2 and 3

27 | P a g e
 d) 2 or 4
50. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is a demand or call loan
1. Which remained overdue for six months or more from the date of
call
2. Which remained overdue for three months or more from the date
of call
3. On which interest amount remained overdue for six months or
more
4. On which interest amount remained overdue for three months or
more
a) 1 and 3
b) 1 or 3
c) 2 and 3
d) 2 or 3
51. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017, a Non-Performing Asset is a demand
or call loan
1. Which remained overdue for six months or more from the date of
call
2. Which remained overdue for four months or more from the date
of call
3. On which interest amount remained overdue for four months or
more
4. On which interest amount remained overdue for three months or
more
a) 1 and 3
b) 1 or 3
c) 2 and 3
d) 2 or 3
52. In an NBFC- Systematically important Non-Deposit taking company, , for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is a demand or call loan
1. Which remained overdue for six months or more from the date of call
2. Which remained overdue for three months or more from the date of
call

28 | P a g e
 3. On which interest amount remained overdue for six months or more
4. On which interest amount remained overdue for three months or
more
a) 1 and 4
b) 2 or 4
c) 2 and 3
d) 2 or 3
53. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
54. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017 a Non-Performing Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
55. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is
a) A bill which remains overdue for a period of two months or more
b) A bill which remains overdue for a period of four months or more
c) A bill which remains overdue for a period of six months or more
d) A bill which remains overdue for a period of three months or more
56. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is
a) Interest on loans and advances under Current Assets outstanding for at
least six months or more
b) Interest on loans and advances under Current Assets outstanding for at
least seven months or more
c) Interest on loans and advances under Current Assets outstanding for at
least eight months or more
d) Interest on loans and advances under Current Assets outstanding for at
least nine months or more

29 | P a g e
 57. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017 a Non-Performing Asset is
a) Interest on loans and advances under Current Assets outstanding for at
least six months or more
b) Interest on loans and advances under Current Assets outstanding for at
least five months or more
c) Interest on loans and advances under Current Assets outstanding for at
least four months or more
d) Interest on loans and advances under Current Assets outstanding for at
least three months or more
58. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is
a) Interest on loans and advances under Current Assets outstanding for at
least nine months or more
b) Interest on loans and advances under Current Assets outstanding for at
least seven months or more
c) Interest on loans and advances under Current Assets outstanding for at
least five months or more
d) Interest on loans and advances under Current Assets outstanding for at
least three months or more
59. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is a short term loan or advance
a) Which remained overdue for one month or more
b) Which remained overdue for two months or more
c) Which remained overdue for four months or more
d) Which remained overdue for six months or more
60. In an NBFC- Non-Systematically important Non-Deposit taking company, a
Non-Performing Asset is
a) Dues on account of sale of assets, overdue for 6 months or more
b) Dues on account of services rendered, overdue for 6 months or more
c) Reimbursement of expenses incurred, overdue for 6 months or more
d) All of the above
61. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2017 a Non-Performing Asset is
a) Dues on account of sale of assets, overdue for 4 months or more

30 | P a g e
 b) Dues on account of services rendered, overdue for 4 months or more
c) Reimbursement of services rendered, overdue for 4 months or more
d) All of the above
62. In an NBFC-Systematically important Non-Deposit taking company, for a
financial year ending March 31, 2018 and thereafter, a Non-Performing
Asset is
a) Dues on account of sale of assets, overdue for 3 months or more
b) Dues on account of services rendered, overdue for 3 months or more
c) Reimbursement of services rendered, overdue for 3 months or more
d) All of the above
63. Which of the following statements is true regarding Ombudsman Scheme for
NBFC?
a) Section 45L of the RBI Act, 1934 confers powers on RBI to notify such
scheme.
b) NBFCs having customer interface, with assets size of one billion rupees or
above are eligible to be
c) The scheme is initially being introduced at the four metro centres
d) All of the above.
64. Which among the following NBFC is not excluded from the Ombudsman
scheme for NBFC?
a) Deposit accepting NBFCs
b) NBFC-IFC
c) Core Investment Company (CIC)
d) IDF-NBFC
65. Which of the following is true regarding NBFC?
a) NBFC provides banking services to people without holding bank license
b) NBFC can accept demand deposits
c) NBFC is a part of payment and settlement
d) NBFC can issue checks drawn on itself
66. How much percentage of foreign investment is allowed for NBFC?
a) 50%
b) 0%
c) 25%
d) 100%
67. Which of the following is the principle business carried out by NBFC?
a) Hire purchase finance

31 | P a g e
 b) Housing finance
c) Investment and loan
d) All of the above
68. NBFC-Factor is related to which of the following businesses?
a) Insurance
b) Deposit
c) Non-deposit
d) None of the above
69. The financial assets in the NBFC factoring business should constitute what
percent of its total assets?
a) 25%
b) 50%
c) 75%
d) 100%
70. Which of the following is related to factoring in NBFC-Factor?
a) Money Market
b) Financial transaction
c) Financial inclusion
d) None of the above

SECTION C Theory Questions :

SHORT QUESTIONS
1) Define NBFC.
2) Define Standard Asset as per asset classification for NBFC.
3) Give names of two types of NBFC required to be registered with RBI
4) Explain the meaning of 50-50 test
5) What are systemically important NBFCs?
6) Provisioning requirement
7) Capital Risk Adequacy Ratio
LONG QUESTIONS
1) NBFC companies exempted from registration with RBI
2) Difference between banks and NBFC
3) Importance of NBFC
4) What are systemically important NBFCs?
5) Asset Classification

32 | P a g e
 SECTION D SUMS

Sum:1 XYZ Ltd. is an NBFC . Balance-sheet is given below:

Liabilities Rs. (in Assets Rs. (in
‘000 ) ‘000)
Paid up Equity Capital 500 Leased out assets 2000
Free Reserves 3000 Investment:
Loans 1000 In shares of subsidiaries & group 1500
cos.
Deposits 1500 In debentures of subsidiaries 600
and group cos.
Cash and bank balances 900
Deferred expenditure 1000
6000 6000
Compute Net Owned Fund of XYZ Ltd. –NBFC.

Sum: 2 Following is the Balance-sheet of Kush Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 300 Leased out assets 2700
Convertible Preference 100 Investment:
share capital
Free Reserves 1200 In shares of subsidiaries & group 400
cos.
Securities Premium 200 In debentures of subsidiaries 200
and group cos.
Capital Reserve 200 Cash and bank balances 600
Loans 1300 Deferred expenditure 500
Deposits 1100
4400 4400
Capital reserves include profit of Rs.1,50,000 on revaluation of fixed assets.
Compute Net Owned Fund of Kush Ltd. –NBFC.

Sum:3 The classified Advances of an NBFC on 31st March, 2017 are given below:

Rs.in
lakhs
Standard assets 33,600
Sub-standard assets 2680

33 | P a g e
 Secured portions of doubtful debts
- Upto one year 640
- One year to three years 160
- More than three years 60
Unsecured portions of doubtful debts 195
Loss assets 87
Calculate the amount of provision, which must be made against the advances as
per

(i) The Non-Banking Financial Company – Non- Systematically Important

Non-Deposit taking Company (RBI) Directions, 2016: and
(ii) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.

Sum:4 The classified Advances of an NBFC on 31st March, 2017 are given below:

Rs.in
lakhs
Standard assets 57,000
Sub-standard assets 3490
Secured portions of doubtful debts
- Upto one year 730
- One year to three years 540
- More than three years 220
Unsecured portions of doubtful debts 88
Loss assets 65
Calculate the amount of provision, which must be made against the advances as
per

(1) The Non-Banking Financial Company – Non- Systematically Important Non-

Deposit taking Company (RBI) Directions, 2016: and
(2) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.

Sum: 5 The classified Advances of an NBFC on 31st March, 2018 are given below:

Rs.in
lakhs
Standard assets 49,000
Sub-standard assets 8,390
Secured portions of doubtful debts

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 - Upto one year 1080
- One year to three years 290
- More than three years 200
Unsecured portions of doubtful debts 87
Loss assets 38
Calculate the amount of provision, which must be made against the advances as
per

(a) The Non-Banking Financial Company – Non- Systematically Important Non-

Deposit taking Company (RBI) Directions, 2016 (NBFC-ND-NSI): and
(b) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016 (NBFC-
ND-SI and NBFC-D-SI)

SECTION E HOMEWORK

Sum: 1 Following is the Balance-sheet of Gaurav Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 600 Leased out assets 3000
Free Reserves 1500 Investment:
Loans 250 In shares of subsidiaries & group 500
cos.
Deposits 350 In debentures of subsidiaries 600
and group cos.
Cash and bank balances 1100
Deferred expenditure 800
2800 6000
Compute Net Owned Fund of Gaurav Ltd. –NBFC.

{ans: A=owned fund = 1300 ; B= Invt = 1100 ; C=10% 0f A = 130 ; D = B-C = 970 ;
Net Owned Fund = A-D = 330}

Sum: 2 Following is the Balance-sheet of Harsh Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 1800 Leased out assets 2500
Free Reserves 4200 Investment:
Loans 1200 In shares of subsidiaries & group 1400
cos.

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 Deposits 800 In debentures of subsidiaries 1600
and group cos.
Cash and bank balances 1500
Deferred expenditure 1000
8000 8000
Compute Net Owned Fund of Harsh Ltd. –NBFC.

{ans: A=owned fund = 5000 ; B= Invt = 3000 ; C=10% 0f A=500 ; D = B-C = 2500 ;
Net Owned Fund = A-D = 2500}

Sum: 3 Following is the Balance-sheet of Kalyan Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 800 Leased out assets 2800
Convertible Preference 400 Investment:
share capital
Free Reserves 3200 In shares of subsidiaries & group 1800
cos.
Securities Premium 1500 In debentures of subsidiaries 2200
and group cos.
Capital Reserve 400 Cash and bank balances 1000
Loans 1100 Deferred expenditure 2000
Deposits 2400
9800 9800
Capital reserves include profit of Rs.3,00,000 on revaluation of fixed assets.
Compute Net Owned Fund of Kalyan Ltd. –NBFC.

{ans: A=owned fund =4 000 ; B= Invt = 4000 ; C=10% 0f A=400 ; D = B-C = 3600 ;
Net Owned Fund = A-D = 400}

Sum: 4 Following is the Balance-sheet of Falcon Ltd.- NBFC .

Liabilities Rs. (in Assets Rs. (in

‘000 ) ‘000)
Paid up Equity Capital 400 Leased out assets 1200
Convertible Preference 200 Investment:
share capital
Free Reserves 800 In shares of subsidiaries & group 300
cos.
Securities Premium 150 In debentures of subsidiaries 400
and group cos.

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 Capital Reserve (including 450 Cash and bank balances 1000
revaluation profit of
Rs.200)
Loans 500 Deferred expenditure 400
Deposits 800
3300
Compute Net Owned Fund of Falcon Ltd. –NBFC.

{ans: A=owned fund =1400 ; B= Invt = 700 ; C=10% 0f A=140 ; D = B-C = 560 ; Net
Owned Fund = A-D = 840}

Sum:5 The classified Advances of an NBFC on 31st March, 2018 are given below:

Rs.in
lakhs
Standard assets 22,500
Sub-standard assets 3,500
Secured portions of doubtful debts
- Upto one year 800
- One year to three years 250
- More than three years 80
Unsecured portions of doubtful debts 240
Loss assets 85
Calculate the amount of provision, which must be made against the advances as
per

(iii) The Non-Banking Financial Company – Non- Systematically Important

Non-Deposit taking Company (RBI) Directions, 2016: and
(iv) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016.
(iii) Calculation of provision required on advances as on 31st March, 2018 as
per The Non-Banking Financial Company – Systematically Important
Non-Deposit taking Company and Deposit taking (RBI) Directions, 2016
(NBFC-ND-SI and NBFC -D-SI)

Sum: 6 The classified Advances of an NBFC on 31st March, 2017 are given below:

Rs.in
lakhs
Standard assets 75,000
Sub-standard assets 9340

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 Secured portions of doubtful debts
- Upto one year 480
- One year to three years 730
- More than three years 360
Unsecured portions of doubtful debts 109
Loss assets 62

Calculate the amount of provision, which must be made against the advances as
per

(c) The Non-Banking Financial Company – Non- Systematically Important Non-

Deposit taking Company (RBI) Directions, 2016 (NBFC-ND-NSI): and
(d) The Non-Banking Financial Company – Systematically Important Non-
Deposit taking Company and Deposit taking (RBI) Directions, 2016 (NBFC-
ND-SI and NBFC-D-SI)

REFERENCES

Note : The above materials has been compiled from the below mention
reference book and official ICAI & ICSI Website

Reference Books:
Author/s Name of the Book Publisher
1 P.C. TULSIAN Advanced Pearson
Accounting
2 S.N. Advanced Vikas
MAHESHWARI Accounting Publishing
house
3 S. N. Accounting For Vikas
MAHESHWARI Management Publishing
S. house
K.MAHESHWARI

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 4 S.C.GUPTA Advanced Sultan
Accounting Chand
5 SHUKLA M.C Advanced Sultan
GAREWAL T.S. & Accounting Chand
GUPTA S.C
6 M HANIF Advanced Mc Graw
A MUKHERJI Accounting Hill
Education
7 RAVI KISHORE Advanced Taxman
Accounting Publication
8 MICHAEL J. Valuation for Wiley
MARD Financial
JAMES R. Reporting
HITCHNER

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