Saturday, May 11, 2019

Dibrugarh University B.Com 6th Sem: Financial Statement Analysis Solved Papers (May' 2018)



2018 (May)
COMMERCE (Speciality)
Course: 602 (Financial Statement Analysis)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80/Pass Marks: 24
1. (a) State whether the following statements are True or False:                                               1x5=5

a)      Financial statements are the end product of financial accounting process.                     True
b)      Liquidity ratios indicate the firm’s ability to pay its current liability.    True
c)       Financial statements also disclose such facts which are not recorded in accounting books.     True
d)      IFRS-4 is associated with insurance contracts.             True
e)      Corporate social responsibility reporting is not mandatory for any business in India.                                 False
(b) Fill in the blanks with appropriate word(s):                                    1x3=3
a)      Financial statement analysis helps to measure _____. (operating efficiency/management efficiency/employees efficiency).
b)      Quick assets are current assets less _____ and _____ expenses (stock, prepaid/debtor, outstanding/bank overdraft, prepaid).
c)       Compliance of Corporate Governance was made mandatory by SEBI as listing requirement vide _____ (Clause 49/Clause 32).
2. Write short notes on the following (any four):             4x4=16
a) Objectives of financial statement analysis: Financial analysis serves the following purposes and that brings out the significance of such analysis:
a)      To judge the financial health of the company: The main objective of the financial analysis is to determine the financial health of the company. It is done by properly establishing the relationship between the items of balance sheet and profit and loss account.
b)      To judge the earnings performance of the company: Potential investors are primarily interested in earning efficiency of the company and its dividend paying capacity. The analysis and interpretation is done with a view to ascertain the company’s position in this regard.
c)       To judge the Managerial efficiency: The financial analysis helps to pinpoint the areas wherein the managers have shown better efficiency and the areas of inefficiency. Any favourable and unfavourable variations can be identified and reasons thereof can be ascertained to pinpoint weak areas.
d)      To judge the Short-term and Long-term solvency of the undertaking:  On the basis of financial analysis, Long-term as well as short-term solvency of the concern can be judged. Trade creditors or suppliers are mainly interested in assessing the liquidity position for which they look into the following:
Ø  Whether the current assets are sufficient to pay off the current liabilities.
Ø  The proportion of liquid assets to current assets.
e)      Indicating the trend of Achievements: Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged.
f)       Inter-firm Comparison: Inter-firm comparison becomes easy with the help of financial analysis. It helps in assessing own performance as well as that of others.
b) Common size statements: These are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as a percentage of that common item. The percentage thus calculated can be easily compared with the results of corresponding percentages of the previous year or of some other firms, as the numbers are brought to common base. Such statements also allow an analyst to compare the operating and financing characteristics of two companies of different sizes in the same industry. Thus, common size statements are useful, both, in intra-firm comparisons over different years and also in making inter-firm comparisons for the same year or for several years. This analysis is also known as ‘Vertical analysis’.
Merits of Common Size Statements:
a)      A common size statement facilitates both types of analysis, horizontal as well as vertical. It allows both comparisons across the years and also each individual item as shown in financial statements.
b)      Comparison of the performance and financial condition in respect of different units of the same industry can also be done.
c)       These statements help the management in making forecasts for the future.
Demerits of Common Size Statements:
a)      If there is no identical head of accounts, then inter-firm comparison will be difficult.
b)      Inter-firm comparison may be misleading if the firms are not of the same age and size, follow different accounting policies.
c)       Inter-period comparison will also be misleading if there is frequent changes in accounting policies.
c) Liquid ratio: Liquid Ratio: Liquid ratio shows short-term solvency of a business. It is also called acid-test ratio and quick ratio. It is calculated in order to know whether or not current liabilities can be paid with the help of quick assets quickly. Quick assets mean those assets, which are quickly convertible into cash.
Liquid Ratio = Liquid Assets/Current Liabilities
Liquid assets includes Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Short-term investments etc. In other words, all current assets are liquid assets except stock and prepaid expenses.
Current liabilities includes Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.
Objective and Significance: Liquid ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is supposed to be 1:1. In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in case, it is more than 1:1, it shows a better short-term financial position.
d) Corporate Financial Reporting: Basically, corporate financial reporting is the process of preparing, presenting and circulating the financial information in various forms to the users which helps in making vigilant planning and decision making by users. The core objective of corporate financial reporting is to present financial information of the business entity which will help in decision making about the resources provided to the reporting entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided. Corporate Financial reporting is of two types – Internal reporting and external reporting. The financial report made to the management is generally known as internal reporting and the financial report made to the shareholders and creditors is generally known as external reporting. The internal reporting is a part of management information system and they uses MIS reporting for the purpose of analysis and as an aid in decision making process.
 The components of corporate financial reporting are:
a)      The financial statements – Balance Sheet, Profit & loss account, Cash flow statement & Statement of changes in stock holder’s equity
b)      The notes to financial statements
c)       Quarterly & Annual reports (in case of listed companies)
d)      Prospectus (In case of companies going for IPOs)
e)      Management Discussion & Analysis (In case of public companies)
e) RBI guidelines regarding financial reporting by banks: There are various types of users of the financial statements of banks who need information about the financial position and performance of the banks. The financial statements are required to provide the information about the financial position and performance of the bank in making economic decisions by the users. The important information sought by these users are, about bank’s Liquidity and solvency and the risks related to the assets and liabilities recognized on its balance sheet and to its off balance sheet items. This useful information can be provided by way of ‘Notes’ to the financial statements, hence notes become an integral part of the financial statements of banks. The users can make use of these notes and supplementary information to arrive at a meaningful decision. Some of the specific disclosure requirements in Bank’s financial statement are given below:
a) Presentation: Summary of Significant Accounting Policies’ and ‘Notes to Accounts’ may be shown under Schedule 17 and Schedule 18 respectively, to maintain uniformity.
b) Minimum Disclosures: While complying with the requirements of Minimum disclosures, banks should ensure to furnish all the required information in ‘Notes to Accounts’. In addition to the minimum disclosures, banks are also encouraged to make more comprehensive disclosures to assist in understanding of the financial position and performance of the bank.
c) Summary of Significant Accounting Policies: Banks should disclose the accounting policies regarding key areas of operations at one place (under Schedule 17) along with Notes to Accounts in their financial statements. The list includes – Basis of Accounting, Transactions involving Foreign Exchange, Investments – Classification, Valuation etc, Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc.
d) Disclosure Requirements: In order to encourage market discipline, Reserve Bank has over the years developed a set of disclosure requirements which allow the market participants to assess key pieces of information on capital adequacy, risk exposures, risk assessment processes and key business parameters which provide a consistent and understandable disclosure framework that enhances comparability. Banks are also required to comply with the Accounting Standard 1 (AS 1) on Disclosure of Accounting Policies issued by the Institute of Chartered Accountants of India (ICAI). The enhanced disclosures have been achieved through revision of Balance Sheet and Profit & Loss Account of banks and enlarging the scope of disclosures to be made in “Notes to Accounts”.
f) Trend Analysis: It is a technique of studying the operational results and financial position over a series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data. The trend percentage is the percentage relationship, in which each item of different years bear to the same item in the base year. Trend analysis is important because, with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may find whether the ratio is falling, rising or remaining relatively constant. From this observation, a problem is detected or the sign of good or poor management is detected.
Merits of Trend analysis:
a)      Trend percentages can be presented in the form of Index Numbers showing relative change in the financial statements during a certain period.
b)      Trend analysis will exhibit the direction to which the concern is proceeding.
c)       The trend ratio may be compared with the industry, in order to know the strong or weak points of a concern.
Demerits of Common Size Statements:
a)      These are calculated only for major items instead of calculating for all items in the financial statements.
b)      Trend values will also be misleading if there is frequent changes in accounting policies.
3. (a) What are the constituents of Financial Statements? Give a brief note on each of them.                    14
Ans: Meaning of Financial Statements
Financial statements are the summarized statements of accounting data produced at the end of accounting process by an enterprise through which accounting information are communicated to the internal and external users.
The American Institute of Certified Public Accountants states the nature of financial statements as “Financial Statements are prepared for the purpose of presenting a periodical review of report on progress by the management and deal with the status of investment in the business and the results achieved during the period under review. They reflect a combination of recorded facts, accounting principles and personal judgments.”
In the words of Myer,” The financial statements provide a summary of accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and income statement showing the result of operations during a certain period”.
Types of Financial statements
A set of financial statements includes (Types):
a)      Profit and loss account or Income statements
b)      Balance sheet or Position statements
c)       Cash flow statements
d)      Funds flow statements or
e)      Schedules and notes to accounts.
a) Profit and loss account or income statement: Income statement is one of the financial statements of business enterprises which shows the revenues, expenses, and profits or losses of business enterprises for a particular period of time. Its main aim to show the operating efficiency of the enterprises. Income Statement is sometime called the statement of financial performance because this statement let the users to assess and measure the financial performance of entity from period to period of the same entity or with competitors. 
b) Balance sheet or Position statement: Balance Sheet is sometime called statement of financial position. It shows the balance of assets, liabilities and equity at the end of the period of time. Balance sheet is sometime called statement of financial position since it shows the values of net worth of entity. The net worth of the entity can be obtained by deducting liabilities from total assets. It is different from income statement since balance sheet report account’s balance as on a particular date while income statement report that the account’s transactions during a particular period of time.
c) Cash flow statement: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored. A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash. Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.
d) Funds flow statement: The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. Financial statements are not helpful in analysing such situation. Therefore, a statement of the sources and applications of funds is prepared which indicates the utilisation of working capital during an accounting period. This statement is called Funds Flow statement.
According to R.N. Anthony, “Fund Flow is a statement prepared to indicate the increase in cash resources and the utilization of such resources of a business during the accounting period.”
According to Smith Brown, “Fund Flow is prepared in summary form to indicate changes occurring in items of financial condition between two different balance sheet dates.”
From the above discussion, it is clear that the fund flow statement is statement summarising the significant financial change which have occurred between the beginning and the end of a company’s accounting period.
e) Schedule and notes to account: The notes to the financial statements are integral part of a company's external financial statements. They are necessary because not all relevant financial information can be communicated through the amounts shown (or not shown) on the face of the financial statements. Generally, the notes are the main method for complying with the full disclosure principle and are also referred to footnote disclosures. The first note to the financial statements is usually a summary of the company's significant accounting policies for the use of estimates, revenue recognition, inventories, property and equipment, goodwill and other intangible assets, fair value measurement, discontinued operations, foreign currency translation, recently issued accounting pronouncements, and others.
The first note is followed by many additional notes that contain the details (including schedules of amounts) for items such as inventories, accrued liabilities, income taxes, employee benefit plans, leases, business segment information, fair value measurements, derivative instruments and hedging, stock options, commitments and contingencies, and more. Each external financial statement should also include a reference (usually as footer) which states that the accompanying notes are an integral part of the financial statements.
Or
(b) What are the different techniques used for the analysis and interpretation of Financial Statements? Explain in brief.                 14
Ans: Tools and techniques of Analysis of Financial Statements: The most commonly used techniques of financial analysis are as follows:
1. Comparative Statements: These are the statements showing the profitability and financial position of a firm for different periods of time in a comparative form to give an idea about the position of two or more periods. It usually applies to the two important financial statements, namely, balance sheet and statement of profit and loss prepared in a comparative form. The financial data will be comparative only when same accounting principles are used in preparing these statements. If this is not the case, the deviation in the use of accounting principles should be mentioned as a footnote. Comparative figures indicate the trend and direction of financial position and operating results. This analysis is also known as ‘horizontal analysis’.
Merits of Comparative Financial Statements:
a)      Comparison of financial statements helps to identify the size and direction of changes in financial position of an enterprise.
b)      These statements help to ascertain the weakness and soundness about liquidity, profitability and solvency of an enterprise.
c)       These statements help the management in making forecasts for the future.
Demerits of Comparative Financial Statements:
a)      Inter-firm comparison may be misleading if the firms are not of the same age and size, follow different accounting policies.
b)      Inter-period comparison will also be misleading if there is frequent changes in accounting policies.
2. Common Size Statements: These are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as a percentage of that common item. The percentage thus calculated can be easily compared with the results of corresponding percentages of the previous year or of some other firms, as the numbers are brought to common base. Such statements also allow an analyst to compare the operating and financing characteristics of two companies of different sizes in the same industry. Thus, common size statements are useful, both, in intra-firm comparisons over different years and also in making inter-firm comparisons for the same year or for several years. This analysis is also known as ‘Vertical analysis’.
Merits of Common Size Statements:
d)      A common size statement facilitates both types of analysis, horizontal as well as vertical. It allows both comparisons across the years and also each individual item as shown in financial statements.
e)      Comparison of the performance and financial condition in respect of different units of the same industry can also be done.
f)       These statements help the management in making forecasts for the future.
Demerits of Common Size Statements:
d)      If there is no identical head of accounts, then inter-firm comparison will be difficult.
e)      Inter-firm comparison may be misleading if the firms are not of the same age and size, follow different accounting policies.
f)       Inter-period comparison will also be misleading if there is frequent changes in accounting policies.
3. Trend Analysis: It is a technique of studying the operational results and financial position over a series of years. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data. The trend percentage is the percentage relationship, in which each item of different years bear to the same item in the base year. Trend analysis is important because, with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may find whether the ratio is falling, rising or remaining relatively constant. From this observation, a problem is detected or the sign of good or poor management is detected.
Merits of Trend analysis:
d)      Trend percentages can be presented in the form of Index Numbers showing relative change in the financial statements during a certain period.
e)      Trend analysis will exhibit the direction to which the concern is proceeding.
f)       The trend ratio may be compared with the industry, in order to know the strong or weak points of a concern.
Demerits of Common Size Statements:
c)       These are calculated only for major items instead of calculating for all items in the financial statements.
d)      Trend values will also be misleading if there is frequent changes in accounting policies.
4. Ratio Analysis: It describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm. As a technique of financial analysis, accounting ratios measure the comparative significance of the individual items of the income and position statements. It is possible to assess the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.
5. Funds flow statement: The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. Financial statements are not helpful in analysing such situation. Therefore, a statement of the sources and applications of funds is prepared which indicates the utilisation of working capital during an accounting period. This statement is called Funds Flow statement.
6. Cash Flow Analysis: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored. A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash. Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.
4. (a) The following information are available for a firm:                                                 14
Gross Profit Ratio – 25%
Net Profit/Sales – 20%
Stock Turnover – 10
Net Profit/Capital – 1/5
Capital/Total Liabilities – 1/2
Fixed Assets/Capital – 5/4
Fixed Assets/Current Assets – 5/7
Fixed Assets – Rs. 10,00,000
Closing Stock – Rs. 10,00,000








Find out:
a)      Cost of Sales.
b)      Gross Profit.
c)       Net Profit.
d)      Current Assets.
e)      Capital.
f)       Total Liabilities.
g)      Opening Stocks.
Or
(b) “As a technique of financial analysis, ratios must be used with great precautions.” In the light of the above statement, critically examine the importance of ratios and their limitations.                             14
Ans: A ratio is one figure expressed in terms of another figure. It is mathematical yardstick of measuring relationship of two figures or items or group of items, which are related, is each other and mutually inter-dependent. It is simply the quotient of two numbers. It can be expressed in fraction or in decimal point or in pure number. Accounting ratio is an expression relating to two figures or two accounts or two set accounting heads or group of items stated in financial statement.
Ratio analysis is the method or process of expressing relationship between items or group of items in the financial statement are computed, determined and presented. It is an attempt to draw quantitative measures or guides concerning the financial health and profitability of an enterprise. It can be used in trend and static analysis. It is the process of comparison of one figure or item or group of items with another, which make a ratio, and the appraisal of the ratios to make proper analysis of the strengths and weakness of the operations of an enterprise.
According to Myers, “Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements."
Advantages and Uses of Ratio Analysis
There are various groups of people who are interested in analysis of financial position of a company used the ratio analysis to workout a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner:
a)      To workout the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern.
b)      Helpful in analysis of financial statement: Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc.
c)       Helpful in comparative analysis of the performance: With the help of ratio analysis a company may have comparative study of its performance to the previous years. In this way company comes to know about its weak point and be able to improve them.
d)      To simplify the accounting information: Accounting ratios are very useful as they briefly summaries the result of detailed and complicated computations.
e)      To workout the operating efficiency: Ratio analysis helps to workout the operating efficiency of the company with the help of various turnover ratios. All turnover ratios are worked out to evaluate the performance of the business in utilising the resources.
f)       To workout short-term financial position: Ratio analysis helps to workout the short-term financial position of the company with the help of liquidity ratios. In case short-term financial position is not healthy efforts are made to improve it.
g)      Helpful for forecasting purposes: Accounting ratios indicate the trend of the business. The trend is useful for estimating future. With the help of previous years’ ratios, estimates for future can be made.
Limitations of Ratio Analysis
In spite of many advantages, there are certain limitations of the ratio analysis techniques. The following are the main limitations of accounting ratios:
a)      Limited Comparability: Different firms apply different accounting policies. Therefore the ratio of one firm can not always be compared with the ratio of other firm.
b)      False Results: Accounting ratios are based on data drawn from accounting records. In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct.
c)       Effect of Price Level Changes: Price level changes often make the comparison of figures difficult over a period of time. Changes in price affect the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison.
d)      Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis.
e)      Effect of window-dressing: In order to cover up their bad financial position some companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company in a better way.
f)       Costly Technique: Ratio analysis is a costly technique and can be used by big business houses. Small business units are not able to afford it.
g)      Misleading Results: In the absence of absolute data, the result may be misleading. For example, the gross profit of two firms is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales are Rs. 20,000 and profit earned by the other one is Rs. 10, 00,000 and sales are Rs. 40, 00,000. Even the profitability of the two firms is same but the magnitude of their business is quite different.
5. (a) Discuss the current status of Corporate Governance Reporting in India. How does Corporate Governance Reporting differ from Corporate Financial Reporting?                                         7+7=14
Ans: Companies Act 2013 – Current status of corporate governance in India
Despite of all the mandatory and non-mandatory requirements as per Clause 49, India was still not in a position to project itself having highest standards of corporate governance. Taking forward, the Companies Law 2013 also came up with a dedicated chapter on Corporate Governance. Under this law, various provisions were made under at least 11 heads viz. Composition of the Board, Woman Director, Independent Directors, Directors Training and Evaluation, Audit Committee, Nomination and Remuneration Committee, Subsidiary Companies, Internal Audit, SFIO, Risk Management Committee and Compliance to provide a rock-solid framework around Corporate Governance.
The key provisions in Clause 49 and 2013 act are summarized as follows:
a) Aligning Listing Agreement with the Companies Act 2013: Companies Act requirements on issuing a formal letter of appointment, performance evaluation and conducting at least one separate meeting of the independent directors each year and providing suitable training to them are now included in the revised norms of SEBI. Independent directors are not entitled to any stock option, and companies must establish a whistle-blower mechanism and disclose them on their websites.
b) Restricting Number of Independent Directorships: Per Clause 49, the maximum number of boards a person can serve as independent director is seven and three in case of individuals also serving as a full-time director in any listed company. The Companies Act sets the maximum number of directorships at 20, of which not more than 10 can be public companies. There are no specific limits prescribed for independent directors in the Companies Act.
c) Maximum Tenure of Independent Directors: Based on the Companies Act as well as the new Equity Listing Agreement, an independent director can serve a maximum of two consecutive terms of five years each (aggregate tenure of 10 years). These directors are eligible for reappointment after a cooling-off period of three years.
d) Board-Mix Criteria Redefined: Per Clause 49 of the Equity Listing Agreement, 50% of the board should be made up of independent directors if the board chair is an executive director. Otherwise, one-third of the board should consist of independent directors. Additionally, the board of directors of a listed company should have at least one female director.
e) Role of Audit Committee Enhanced: The SEBI reforms call for two-thirds of the members of audit committee to be independent directors, with an independent director serving as the committee’s chairman. While the Companies Act requires the audit committee to be formed with a majority of independent directors, SEBI has gone a step further to improve the independence of the audit committee.
f) More Stringent Rules for Related-Party Transactions: The scope of the definitions of RPTs has been broadened to include elements of the Companies Act and accounting standards:
1.       All RPTs require prior approval of the audit committee.
2.       All material RPTs must require shareholder approval through special resolution, with related parties abstaining from voting.
3.       The threshold for determining materiality has been defined as any transaction with a related party that exceeds 5% of the annual turnover or 20% of the net worth of the company based on the last audited financial statement of the company, whichever is higher.
g) Improved Disclosure Norms: In certain areas, SEBI resorts to disclosures as an enforcement tool. Listed companies are now required to disclose in their annual report granular details on director compensation (including stock options), directors’ performance evaluation metrics, and directors’ training. Independent directors’ formal letter of appointment / resignation, with their detailed profiles and the code of conduct of all board members, must now be disclosed in companies’ websites and to stock exchanges.
h) E-voting Mandatory for All Listed Companies: Until now, resolutions at shareholder meetings in listed Indian companies were usually passed by a show of hands (except for those that required postal ballot). This means votes were counted based on the physical presence of shareholders. SEBI also has changed Clause 35B of the Equity Listing Agreement to provide e-voting facility for all shareholder resolutions.
i) Enforcement: SEBI is setting up the infrastructure to assess compliance with Clause 49 to ensure effective enforcement. Companies need to buckle up and assess the impact of these reforms and step up compliance.
Difference between Corporate Governance reporting and Corporate financial reporting
Basis
Corporate governance reporting
Corporate financial reporting
Meaning
Corporate governance reporting provides annual disclosure of the company on applicability of rules, practices and processes used to direct and manage a company.
Corporate financial reporting is the process of preparing, presenting and circulating the financial information in various forms to the users which helps in making vigilant planning and decision making by users.
Objective
The main objective of Corporate governance reporting is to show that a company is holding the balance between economic and social goals and between individual and communal goals.
The core objective of financial reporting is to present financial information of the business entity which will help in decision making.
Relevance
Information provided in corporate governance are not relevant to the operating activities.
Information provided in financial reporting are considered to be relevant to the operating activities.
Nature
Corporate governance reporting is of qualitative nature.
Corporate financial reporting are of quantitative nature.
Concepts and conventions
Accounting concepts and conventions are not followed while corporate governance reporting.
Accounting concepts and conventions are followed.
Or
(b) Give a brief note on mandatory and voluntary disclosures on Corporate Social Responsibility Reporting.     14
Ans:
6. (a) Explain the recommendations of the report of the advisory groups on accounting and auditing setup by Reserve Bank of India. Distinguish between Financial Reporting by banks and NBFC.                                       8+6=14
Ans: DISCLOSURE OF ACCOUNTS AND BALANCE SHEETS OF BANKS (RBI Guidelines)
There are various types of users of the financial statements of banks who need information about the financial position and performance of the banks. The financial statements are required to provide the information about the financial position and performance of the bank in making economic decisions by the users. The important information sought by these users are, about bank’s Liquidity and solvency and the risks related to the assets and liabilities recognized on its balance sheet and to its off balance sheet items. This useful information can be provided by way of ‘Notes’ to the financial statements, hence notes become an integral part of the financial statements of banks. The users can make use of these notes and supplementary information to arrive at a meaningful decision. Some of the specific disclosure requirements in Bank’s financial statement are given below:
a) Presentation: Summary of Significant Accounting Policies’ and ‘Notes to Accounts’ may be shown under Schedule 17 and Schedule 18 respectively, to maintain uniformity.
b) Minimum Disclosures: While complying with the requirements of Minimum disclosures, banks should ensure to furnish all the required information in ‘Notes to Accounts’. In addition to the minimum disclosures, banks are also encouraged to make more comprehensive disclosures to assist in understanding of the financial position and performance of the bank.
c) Summary of Significant Accounting Policies: Banks should disclose the accounting policies regarding key areas of operations at one place (under Schedule 17) along with Notes to Accounts in their financial statements. The list includes – Basis of Accounting, Transactions involving Foreign Exchange, Investments – Classification, Valuation etc, Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc.
d) Disclosure Requirements: In order to encourage market discipline, Reserve Bank has over the years developed a set of disclosure requirements which allow the market participants to assess key pieces of information on capital adequacy, risk exposures, risk assessment processes and key business parameters which provide a consistent and understandable disclosure framework that enhances comparability. Banks are also required to comply with the Accounting Standard 1 (AS 1) on Disclosure of Accounting Policies issued by the Institute of Chartered Accountants of India (ICAI). The enhanced disclosures have been achieved through revision of Balance Sheet and Profit & Loss Account of banks and enlarging the scope of disclosures to be made in “Notes to Accounts”.
e) Additional/Supplementary Information: In addition to the 16 detailed prescribed schedules to the balance sheet, banks are required to furnish the following information in the “Notes to Accounts”. Such furnished (information should cover the current year and the previous year). “Notes to Accounts” may contain the supplementary information such as:
1.       Capital (Current & Previous Year) with breakup including CRAR – Tier I/II capital (%), % of shareholding of GOI, amount of subordinated debt raised as Tier II capital. Also it should show the total amount of subordinated debt through borrowings from Head Office for inclusion in Tier II capital etc.
2.       Investments: Total amount should be mentioned in crores, with the total amount of investments, showing the gross value and net value of investments in India and Abroad. The details should also cover the movement of provisions held towards depreciation on investments.
3.       Derivatives: Forward Rate Agreement/Interest Rates Swap: Important aspects of the disclosures would include the details relating to:
a.       The notional principal of swap agreements;
b.      Losses which would be incurred if counterparties failed to fulfill their obligations under the agreements;
c.       Collateral required by the bank upon entering into swaps;
d.      Nature and terms of the swaps including information on credit and market risk and the accounting policies adopted for recording the swaps etc.
4.       Exchange Traded Interest Rate Derivatives: As regards Exchange Traded Interest Rate Derivatives, details would include the notional principal amount undertaken:
a.       During the year (instrument-wise),
b.      Outstanding as on 31st March (instrument-wise),
c.       Outstanding and not “highly effective” (instrument-wise),
d.      Mark-to-market value of exchange traded interest rate derivatives outstanding and not “highly effective” (instrument-wise).
f) Qualitative Disclosure: Banks should discuss their risk management policies pertaining to derivatives with a specific reference to the extent to which derivatives are used, the associated risks and business purposes served. This also includes:
a.       The structure and organization for management of risk in derivatives trading,
b.      The scope and nature of risk measurement, risk reporting and risk monitoring systems,
c.       Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants, and accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation.
g) Quantitative Disclosures: Apart from qualitative disclosures, banks should also included the quantitative disclosures. The details are both Currency Derivatives and Interest rate derivatives.
h) Asset Quality: Banks’ performances are considered good based on the quality of assets held by banks. With the changing scenario and due to number of risks associated with banks like Credit, Market and Operational risks, banks are concentrating to ensure better quality assets are held by them. Hence, the disclosure needs to cover various aspects of asset quality consisting of:
a.       Non-Performing Assets, covering various details like Net NPAs, movement of NPAs (Gross)/(Net) and relevant details provisioning to different types of NPAs including Write off/write-back of excess provisions, etc., Details of Non-Performing financial assets purchased, sold, are also required to be furnished.
b.      Particulars of Accounts Restructured: The details under different types of assets such as (i) Standard advances (ii) Sub-standard advances restructured (iii) Doubtful advances restructured (iv) TOTAL with details number of borrowers, amount outstanding, sacrifice.
c.       Banks disclose the total amount outstanding in all the accounts/facilities of borrowers whose accounts have been restructured along with the restructured part or facility. This means even if only one of the facilities/accounts of a borrower has been restructured, the bank should also disclose the entire outstanding amount pertaining to all the facilities/accounts of that particular borrower.
d.      Details of financial assets sold to Securitization/Reconstruction Company for Assets Reconstruction.
e.      Provisions on Standard Assets: Provisions towards Standard Assets need not be netted from gross advances but shown separately as ‘Provisions against Standard Assets’, under ‘Other Liabilities and Provisions – Others’ in Schedule No. 5 of the balance sheet.
f.        Other Details: Business Ratios: (i) Interest Income as a percentage to Working Funds (ii) Non-interest income as a percentage to Working Funds (iii) Operating Profit as a percentage to Working Funds (iv) Return on Assets (v) Business (Deposits plus advances) per employee (vi) Profit per employee.
i) Assets Liability Management: As part of Assets Liability Management, the maturity pattern of certain items of assets and liabilities such as deposits, advances, investments, borrowings, foreign current assets, and foreign currency liabilities. Banks are required to disclose the information based on the maturity patterns covering daily, monthly and yearly basis.
j) Break up Exposures: Banks should also furnish details of exposures to certain sectors like Real Estate Sector.
Exposure to Capital Market: Capital Market exposure details should be disclosed for the current and previous year in crores. The details would include direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt and also loan raised against such securities. A bank must also disclose the risk associated with such investments. The risks are to be categorized as Insignificant, Low, Moderate, High, Very high, Restricted and Off-credit.
Apart from the above category of exposures, banks are required to disclose details relating to Single Borrower Limit (SGL)/Group Borrower Limit (GBL) exceeded by the bank, and Unsecured Advances are to be furnished. Miscellaneous items would include Amount of Provisions made for Income Tax during the year, and Disclosure of Penalties imposed by RBI, etc.
AUDIT AND INSPECTION OF BANKING COMPANY
Audit: The balance sheet and the profit and loss account of a banking company have to be audited as stipulated under Section 30 of the Banking Regulation Act. Every banking company’s account needs to be verified and certified by the Statutory Auditors as per the provisions of legal frame work. The powers, functions and duties of the auditors and other terms and conditions as applicable to auditors under the provisions of the Companies Act are applicable to auditors of the banking companies as well. The audit of banking companies books of accounts calls for additional details and certificates to be provided by the auditors.
Apart from the balance sheet audit, Reserve Bank of India is empowered by the provisions of the Banking Regulation Act to conduct/order a special audit of the accounts of any banking company. The special audit may be conducted or ordered to be conducted, in the opinion of the Reserve Bank of India that the special audit is necessary;
a.       In the public interest and/or
b.      In the interest of the banking company and/or
c.       In the interest of the depositors.
The Reserve Bank of India’s directions can order the bank to appoint the same auditor or another auditor to conduct the special audit. The special audit report should be submitted to the Reserve Bank of India with a copy to the banking company. The cost of the audit is to be borne by the banking company.
Or
(b) Discuss the IRDA guidelines regarding the Financial Reporting of Insurance Companies in India.                       14
Ans: Financial Reporting Requirements of Insurance Companies in India
To protect the interests of policyholders and to increase transparency and credibility of insurance companies there is a need to have an effective regulatory system for financial reporting of insurance companies. Reporting requirements of insurance companies are different from that of other companies, because of the concept of policyholders and shareholders’ fund, segment reporting in respect of all the funds maintained by the company, complexity of insurance contracts and insurance itself is an intangible product.
Earlier the accounts of insurance companies were governed by Insurance Act 1938, but passing of Insurance Regulatory Development Authority Act (IRDA Act) in 1999 opened a new chapter for disclosure norms of insurance companies. In the year 2002, the IRDA came up with regulations for the preparation of the financial statements of insurance companies. According to the Insurance (Amendment) Act, 2002, the first, second and third schedules prescribed for balance sheet, profit and loss account and revenue account respectively as given in Insurance Act, 1938 have been omitted. Now revenue account, profit and loss account and balance sheet are to be prepared as per the formats prescribed by IRDA. However, the statutes governing financial reporting practices of insurance companies in India are: Insurance Act 1938, IRDA Act, 1999 (including IRDA Regulations), Companies Act and Institute of Chartered Accountants of India (ICAI).
IRDA Act 1999 (Including IRDA Regulations)
Insurance Regulatory Development Authority (IRDA) has prescribed various regulations from time to time. Preparation of Financial Statements and Auditor’s Report of Insurance Companies Regulations, 2002 are one of them. These regulations are related to the financial reporting practices of insurance companies. These regulations are important constituents of the Indian regulatory regime. According to the regulations made by the authority in consultation with the Insurance Advisory Committee, accounts of insurance companies are prepared according to the prescribed formats given by the authority. Details are given as under:
a) Preparation of Financial Statements: After the commencement of Insurance Regulatory Development Authority, Regulations, 2002, all the life insurance companies shall comply with the requirements of Schedule A and general insurance companies with Schedule B of these regulations while preparing their financial statements. The auditor’s report on the financial statements of all insurance companies shall be in conformity with the requirements of Schedule C. IRDA given the list of items to be disclosed in the financial statements of insurance companies under Part II of Schedule A (for life insurance companies) and Schedule B (for general insurance companies) of the (Preparation of Financial Statements and auditor’s report of Insurance Companies) Regulations, 2002. According to these regulations, following disclosure will form part of financial statements of insurance companies:
1.       Every insurance company will disclose all significant accounting policies and accounting standards followed by them in the manner required under Accounting Standard I issued by the Institute of Chartered Accountants of India. (ICAI).
2.       All companies will separately disclose if there is any departure from the accounting policies with reasons for such departure.
3.       Disclosure of investments made in accordance with statutory requirements separately together with its amount, nature, security and any special rights in and outside India.
4.       Disclosure of performing and non-performing investments separately.
5.       Disclosure of assets to the extent required to be deposited under local laws for otherwise encumbered in or outside India.
6.       All the companies are required to show sector-wise percentage of their business.
7.       To include a summary of financial statements for the last five years in their annual report to be prepared as prescribed by the IRDA.
8.       Disclose the basis of allocation of investments and income thereon between policyholders’ account and shareholders’ account.
9.       To disclose accounting ratios as prescribed by the Insurance Regulatory and Development Authority.
Disclosure of following items is made by way of notes to balance sheet:
1.       Contingent Liabilities.
2.       Actuarial assumptions for valuation of liabilities for life policies in force.
3.       Encumbrance’s to assets of the company in and outside India.
4.       Commitments made and outstanding for loans, investments and fixed assets.
5.       Basis of amortization of debt securities.
6.       Claims settled and remaining unpaid for a period of more than six months as on the balance sheet date.
7.       Value of contracts in relation to investments, for purchases where deliveries are pending and sales where payments are overdue.
8.       Operating expenses relating to insurance business and basis of allocation of expenditure to various segments of business.
9.       Computation of managerial remuneration.
10.   Historical costs of those investments valued on fair value basis.
11.   Basis of revaluation of investment property.
b) Management Report: According to the IRDA Regulations 2002, all the insurance companies are required to attach a management report to their financial statements. The contents of the management report are given under PART IV (Schedule A and Schedule B) of these regulations and reproduced below:
1.       Confirmation regarding the continued validity of the registration granted by the IRDA.
2.       Certification that all the dues payable to the statutory authorities has been duly paid.
3.       Confirmation to the effect that the shareholding patterns and the transfer of shares during the year are in accordance with the statutory or regulatory requirements.
4.       Declaration that the management has not directly or indirectly invested outside India the funds of the policyholders.
5.       Confirmation regarding required solvency margins.
6.       Certification to the effect that no part of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investment of the life insurance funds.
7.       Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same.
8.       Operations in other countries, if any, with a separate statement giving the management’s estimate of country risk and exposure risk and the hedging strategy adopted.
9.       Ageing of claims indicating the trends in average claim settlement time during the preceding five years.
10.   Certification to the effect as to how the values, as shown in the balance sheet, of the investments and stocks and shares have been arrived at, and how the market value thereof has been ascertained for the purpose of comparison with the values so shown.
11.   Review of assets quality and performance of investment in terms of portfolio, i.e. separately in terms of real estate, loans, investments. Etc.
12.   A schedule payments, which have been made to individuals, firms, companies and organizations in which directors of the insurance company are interested.
13) A responsibility statement indicating therein that:
Ø  In the preparation of financial statements, the applicable amounting standards, principles and policies have been followed along with proper explanations relating to material departures, if any;
Ø  The management has adopted accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the operating profit or loss and of the profit or loss of the company for the year;
Ø  The management has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the applicable provisions of the Insurance Act, 1938 and Companies Act 1956 for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
Ø  The management has prepared the financial statements on a going concern basis;
Ø  The management has ensured that an internal audit system commensurate with the size and nature of the business exists and is operating effectively.

(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. (a) State whether the following statements are True or False:                                               1x5=5
a)      Financial statements accomplish only internal reporting.  False, Both Internal and External reporting
b)      Current ratio is also known as acid test ratio.               False, Working Capital Ratio
c)       Corporate financial reporting in fact is an effective communication of accounting information between the management and the user groups of the financial statements. True
d)      The new name for standard issued by the FASB is International Financial Reporting Standards (IFRS).   True
e)      The IRDA was incorporated as a statutory body in April 2000.               True
(b) Fill in the blanks with appropriate words:                                       1x3=3
a)      The basic objective of financial statements is to _____ (provide accounting information/meet legal requirement/show performance of management).
b)      GAAP stands for _____.  Generally accepted accounting principles
c)       According to IFRS, banking companies are to adopt _____ (fair value accounting/historical value accounting).
2. Write short notes on any four of the following:                             4x4=16
a)      Value-added statement.
b)      Limitation of ratio analysis.
c)       RBI guidelines regarding financial reporting of banks.
d)      IRDA.
e)      Profitability ratio.
f)       Comparative statements.
3. (a) State the significance of analysis of Financial Statements towards the stakeholder of the company. What are the limitations of Financial Statements?                                        5+6=11
Or
(b) “Analysis of Financial Statements is affected by the window dressing and bias motive of analyst.” Explain. Also explain the tools used for analysis financial statements.                                                5+6=11
4. (a) Discuss the advantages and limitations of Ratio Analysis.                    6+6=12
Or
(b) Prepare a projected Balance Sheet on the basis of the following information:                                              12
Estimates Sales – Rs. 4,50,000
Sales to Net Worth – 2.5 times
Total Debt to Net Worth – 65%
Current Liabilities to Net Worth – 25%
Current Ratio – 3.6
Sales to Inventory – 5 times
Average Collection Period – 36 days in a year of 360 days
Fixed Assets to Net Worth – 75%







5. (a) Why is the financial reporting a mandatory requirement in the annual report of a company? How is financial reporting differ from financial statements?                             6+5=11
Or
(b) Disclosure of corporate governance practices followed by Indian companies in their published annual reports is the best way to provide information to its stakeholders. Comment.                                          11
6. (a) Discuss about the convergence of Indian Accounting Standards with IFRS.                                 11
Or
(b) What are the benefits may enjoyed by a Nation’s economy if there is a single set of Global Accounting Standards? State the steps to be adopted by an entity for first-time adaptation of IFRS.
7. (a) Discuss the important provisions needed to be taken into consideration for financial reporting of Banking and Insurance Companies.                                   11
Or
(b) Discuss the guidelines of IRDA regarding disclosure of financial statements of Insurance Companies.                11

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