Group 1nov 2009

PAPER 1 : ADVANCED ACCOUNTING Answer all questions. Working Notes should form part of the answer.
. Wherever necessary, suitable assumption(s) should be made by the candidates. Question 1 The Balance Sheets of Aqua Ltd. and Baqa Ltd. as on the dates of last closing of accounts are as under: Aqua Ltd. as on 31.03.2009 Rs. Liabilities Share capital (equity shares of Rs.10 each) Accumulated Profits & Reserves 15% Rs.100 non-convertible debentures Accounts Payable Other liabilities Tax Provision Total Assets Fixed Assets at Cost Less: Depreciation Investments: 40,000 shares in Baqa Ltd. 1,000 debentures in Baqa Ltd. Current Assets: Inventories Accounts Receivable Cash & Bank Total The following information is also available: 1. 2,00,000 2,50,000 2,30,000 22,80,000 3,50,000 4,65,000 3,55,000 15,75,000 8,00,000 1,50,000 8,45,000 1,95,000 6,50,000 5,26,500 1,21,500 4,05,000 11,00,000 4,50,000 4,80,000 1,00,000 1,50,000 22,80,000 5,00,000 2,05,000 3,00,000 2,80,000 40,000 2,50,000 15,75,000 Baqa Ltd. as on 31.12.2008 Rs.
On 8th February, 2009 there was a fire at the factory of Baqa Ltd., resulting in inventory worth Rs.20,000 being destroyed. Baqa received 75 per cent of the loss as insurance.
FINAL EXAMINATION: NOVEMBER, 2009
2.
The same fire resulted in destruction of a machine having a written down value of Rs.1,00,000. The Insurance company admitted the Companys claim to the extent of 80 per cent. The machine was insured at its fair value of Rs.1,50,000. On 13th March, 2009, Aqua sold goods costing Rs.1,50,000 to Baqa at a mark-up of 20 per cent. Half of these goods were resold to Aqua who in turn was able to liquidate the entire stock of such goods before closure of accounts on 31 st March, 2009. As on 31 st March, 2009 Baqas accounts payable show Rs.60,000 due to Aqua on the two transactions. Aqua acquired the holdings in Baqa on 1 st January, 2007 when the reserves and accumulated profits of Baqa Ltd. stood at Rs.75,000. Both Companies have not provided for tax on current year profits. The current year taxable profits are Rs.33,000 and Rs.66,000 for Aqua Ltd. and Baqa Ltd. respectively. The tax rate is 33%. The incremental profits earned by Baqa Ltd. for the period January, 2009 to March 2009 over that earned in the corresponding period in 2008 was Rs.56,000. Except for the profits that resulted from the transactions with Aqua in the aforesaid period, the entire profits have been realised in cash before 31 st March, 2009.
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4. 5.
6.
You are requested to consolidate the accounts of the two companies and prepare a Consolidated Balance Sheet of Aqua Limited and its subsidiary as at 31 st March, 2009. (20 Marks) Answer Consolidated Balance Sheet of Aqua Ltd. and its Subsidiary Baqa Ltd. as on 31.03.2009 Liabilities Share Capital (equity shares of Rs.10 each) Minority Interest (W.N. 4) Accumulated Profits & Reserves (W.N. 5) 15% Rs.100 Non-Convertible Debentures (Rs.3,00,000 Rs.1,00,000) Accounts Payable (W.N. 6) Other Liabilities (Rs.1,00,000 + Rs.40,000) Tax Provision (1,50,000 + 2,50,000+21,780+10,890) Total Assets Fixed Assets at Cost (W.N. 7) Less:Depreciation (W.N. 7) 12,41,500 2,86,500 Rs. 11,00,000 1,50,844 5,67,486 2,00,000 7,60,000 1,40,000 4,32,670 33,51,000
PAPER 1 : ADVANCED ACCOUNTING
9,55,000 Goodwill (W.N. 3) Current Assets: Inventories (W.N. 8) Accounts Receivable (W.N. 6) Insurance claim Receivable Cash & Bank (2,30,000 + 3,96,000) Total Working Notes: 1. Adjustments to Balance sheet of Baqa Ltd. and its Adjusted balance Sheet Rs. (i) Inventories as on 31.12.2008 Add: Unsold Stock =
(Rs.1,50,000 120%) 2
3,90,000 6,05,000 6,55,000 1,20,000 6,26,000 33,51,000
3,50,000 90,000 4,40,000 20,000 4,20,000
Less:Cost of inventory destroyed in fire Inventories as on 31.3.2009 (ii) Incremental profits earned in January, 2009 to March, 2009 over corresponding period in 2008 Total incremental profit earned in January 2009 March, 2009 Less:Earned on transaction with Aqua Ltd. [W.N(viii)] Balance profits realised in cash (iii) Cash and Bank Balance as on 31.12.2008 Add: Insurance Claim received Incremental profits realised [W.N(ii)] Cash and Bank Balance as on 31.3.2009 (iv) Fixed assets as on 31.12.2008 Less:Written down value of machine destroyed Fixed assets as on 31.3.2009 (v) Insurance Claim Receivable = 80% of Rs.1,50,000
56,000 30,000 26,000 3,55,000 15,000 26,000 3,96,000 4,05,000 1,00,000 3,05,000 1,20,000
Before adjustments of profit/loss on destruction by fire but after including profit on sale of goods to Aqua Ltd.
(vi)
Accounts Payable as on 31.12.2008 Add: Amount payable to Aqua Ltd. Accounts Payable as on 31.3.2009
2,80,000 60,000 3,40,000 2,05,000 21,780 5,000 30,000 26,000 20,000 2,54,220 1,50,000 30,000 (A) 1,80,000 90,000 90,000 60,000 1,20,000 90,000 30,000
(vii)
Accumulated profits and Reserves as on 31.12.2008 Less:Tax Provision = 33% of Rs.66,000 Less:Goods destroyed in Fire after adjusting claim received Add: Profit on sale of goods [W.N.(viii)] Incremental profits realised in cash in Jan-March 2009 over prior period Additional amount receivable from Insurance Company over written down value for machine destroyed [1,20,000 1,00,000] Accumulated profits and Reserves as on 31.3.2009
(viii)
Profit made by Baqa Ltd. on transaction with Aqua Ltd. Cost of goods sold from Aqua to Baqa Ltd. Add: Mark up of 20% (profit of Aqua Ltd.) Purchases by Baqa payable to Aqua Ltd. Less:50% unsold Cost of goods sold back to Aqua Ltd. Balance payable to Aqua Ltd. after 50% goods were sold back (B) Sales price charged by Baqa Ltd. for selling 50% of the goods (A-B) Less:Cost of these goods to Baqa Ltd. Profit on sale of 50% goods to Aqua Ltd. Balance Sheet of Baqa Ltd. as at 31.3.2009 Rs. Liabilities Share Capital (equity shares of Rs. 10 each) Accumulated Profits and Reserves 15% Non-convertible debentures Accounts Payable Other Liabilities Tax provision (Rs.2,50,000 + Rs.21,780) 5,00,000 2,54,220 3,00,000 3,40,000 40,000 2,71,780 17,06,000
(ix)
Assets Fixed assets at cost Less: Depreciation

1,21,500 3,05,000 4,05,000
3,96,500 91,500 3,05,000
Inventories Accounts Receivable Insurance Claim receivable Cash and Bank 2. Analysis of Accumulated Profits and Reserves of Baqa Ltd. Preacquisition Rs. Profits and Reserves Share of Aqua Ltd. (80%) Minority Interest (20%) 3. Calculation of Goodwill/ Cost of Control 75,000 60,000 15,000
4,20,000 4,65,000 1,20,000 3,96,000 17,06,000 Post acquisition Rs. 1,79,220 1,43,376 35,844
Rs. Amount paid for shares in Baqa Ltd. Amount paid for 1,000 debentures Less:Nominal Value of shares acquired Nominal Value of debentures acquired 80% share in pre-acquisition profits 4. Goodwill Minority Interest Share Capital (20%) 20% of Profits and Reserves of Baqa Ltd. (15,000 + 35,844) 8,00,000 1,50,000 9,50,000 4,00,000 1,00,000 60,000 3,90,000 1,00,000 50,844 1,50,844
5.
Accumulated Profits and Reserves in the Consolidated Balance Sheet Balance as on 31.03.2009 Add: 80% Share in revenue reserves(2,54,220-75,000) of Baqa Ltd. Less:Unrealised profits on inventory Rs. 1,50,000 20% Less:Provision for taxation 33% on Rs.33,000
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4,50,000 1,43,376 15,000 10,890 5,67,486
6.
Accounts Payable and Accounts Receivable in Consolidated Balance Sheet Accounts payable as per Balance Sheet of Aqua Ltd. Accounts payable as per Balance Sheet of Baqa Ltd [W.N. 1(vi)] Less:Inter company dues set off Balance of Accounts Payable for Consolidated Balance Sheet Accounts Receivable as per Balance Sheet of Aqua Ltd. Accounts Receivable as per Balance Sheet of Baqa Ltd. [W.N. 1(ix)] Less:Inter company dues Balance of Accounts Receivable for Consolidated Balance Sheet 4,80,000 3,40,000 8,20,000 60,000 7,60,000 2,50,000 4,65,000 7,15,000 60,000 6,55,000
7.
Fixed Assets and accumulated Depreciation in Consolidated Balance Sheet WDV of Fixed Assets of Baqa Ltd. as per Balance Sheet (given in question) Accumulated depreciation % of Depreciation (1,21,500/ 4,05,000) Original Cost of Destroyed Asset (W.D.V. of Rs.1,00,000) Original Cost of Fixed Assets of Aqua Ltd. as per Balance sheet (given in question) Original Cost of Fixed Assets of Baqa Ltd. as per Balance Sheet (given in question) Less:Original Cost of Destroyed Asset of Baqa Ltd. Original Cost of Fixed Assets for Consolidated Balance Sheet 4,05,000 1,21,500 30 1,30,000 8,45,000 5,26,500 13,71,500 1,30,000 12,41,500
Accumulated Depreciation As per Balance Sheet of Aqua Ltd. (given in question) As per Balance Sheet of Baqa Ltd. (given in question) Less:Accumulated Depreciation on Destroyed asset 8. Accumulated Depreciation for Consolidated Balance Sheet Inventories As per Balance Sheet of Aqua Ltd. Balance in Baqa Ltd. Balance Sheet [W.N. 1(i)] Less:Unrealised Profits on closing inventory Balance in Consolidated Balance Sheet Question 2 Small Ltd. and Little Ltd., two Companies in the field of speciality chemicals, decided to go in for a follow on Public Offer after completion of an amalgamation of their businesses. As per agreed terms initially a new company Big Ltd. will be incorporated on 1 st January, 2010 with an authorized capital of Rs.2 crore comprised of 20 lakh equity shares of Rs.10 each. The holding company would acquire the entire shareholding of Small Ltd. & Little Ltd. and in turn would issue its shares to the outside holders of these shares. It is also agreed that the consideration would be a multiple of the average P/E ratio for the period 1st January, 2009 to 31st March, 2009 times the rectified profits of each company, subject to necessary adjustments for complying with the terms of the share issue. The following information is supplied to you: Small Ltd. Ordinary Shares of Rs.10 each (Nos.) 10% Preference shares of Rs.100 each (Nos.) 10% Preference shares of Rs.10 each (Nos.) 5% debentures of Rs.10 each (Nos.) Investments Held (a) 4 lakh ordinary shares in Small Ltd. (b) 2 lakh ordinary shares in Little Ltd. Profit before Interest & Tax (PBIT) after considering impact of Inter-company Transactions and Holdings. Average P/E ratio January, 2009 to March, 2009 Rs.20 lakhs Rs.50 lakhs 10 Rs.40 lakhs Rs.25 lakhs 8 40 lakhs 2 lakh Nil 4 lakh Little Ltd. 20 lakhs Nil 2 lakh 4 lakh 1,95,000 1,21,500 3,16,500 30,000 2,86,500 2,00,000 4,20,000 6,20,000 15,000 6,05,000
The following additional information is also furnished to you in respect of adjustments required to the profit figure as given above: 1. 2. 3. The profits of the respective companies would be adjusted for half the value of contingent liabilities as on 31st March, 2009. Debtors of Small Ltd. include an irrecoverable amount of Rs.2 lakh against which Rs.1 lakh was recovered but kept in Advance account. Little Ltd. had omitted to provide for increased FOREX liability of US$10,000 on loan availed in financial year 2005-06 for purchase of Machinery. The machinery was acquired on 1st January, 2006 and put to use in Financial year 2006-07. The additional liability arose due to change in exchange rates and is arrived at in conformity with prevailing provisions of AS 11. The exchange rate is US $ 1 = INR 50. Small Ltd. has omitted to invoice a sale that took place on 31 st March, 2009 of goods costing Rs.2,50,000 at a mark up of 15 per cent instead the goods were considered as part of closing inventory. Closing Inventory of Rs.45 lakhs of Little Ltd. as on 31st March, 2009 stands undervalued by 10 per cent. Contingent liabilities of Small Ltd. and Little Ltd. as on 31 st March, 2009 stands at Rs.5 lakhs and Rs.10 lakhs respectively. Shares in Big Ltd. will be issued at a premium of Rs.13 per share for all external shareholders of Small Ltd. The Premium will be Rs.15 per share for shares in Big Ltd. issued to all external shareholders of Little Ltd. No shares in Big Ltd. will be issued in lieu of the investments (intercompany holdings) of both companies. Instead the shares so held shall be transferred to Big Ltd. at the close of the financial year ended 31st March, 2010 at Par Value consideration payable on date of transfer.
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The terms of the share issue are as under: (i)
(ii)
(iii) Big Ltd. would in addition to the issue of shares to outside shareholders of Small Ltd. and Little Ltd. make a preferential allotment on 31st March, 2010 of 2 lakhs ordinary shares at a premium of Rs.28 per share to Virgin Capital Ltd. (VCL). These shares will not be eligible for any dividends declared or paid till that date. (iv) Big Ltd. will go in for a 18 per cent unsecured Bank overdraft facility to meet incorporation costs of Rs.16 lakhs and towards management expenses till 31st March, 2010 estimated at Rs.14 lakhs. The overdraft is expected to be availed on 1st February, 2010 and closed on 31st March, 2010 out of the proceeds of the preferential allotment. (v) It is agreed that interim dividends will be paid on 31.03.2010 for the period January, 2010 to March, 2010 by Big Ltd. at 2 per cent; Small Ltd. at 3 per cent and Little Ltd. at 2.5 per cent. Ignore Dividend Distribution tax.
(vi) The prevailing Income Tax Rate is 25 per cent. You are required to compute the number of shares to be issued to the shareholders of each of the companies and prepare the projected Profit and Loss Account for the period from 1 st January, 2010 to 31.03.2010 of Big Ltd. and its Balance Sheet as on 31st March, 2010. (20 Marks) Answer Computation of number of shares issued Calculation of Rectified Profits and Purchase consideration Rs. Small Ltd. Given profits Less:Irrecoverable Debtors 50% Contingent Liability Add: Profit on omitted sale (15% of Rs.2,50,000) Less:Debenture interest Less:Income Tax @ 25% Profits after Tax (PAT) Less:Preference Dividend (10% of Rs.2,00,00,000) Rectified Profits Average PE ratio = 10 Total consideration for all equity shareholders (Average PE ratio Profit) Less:10% thereof for shareholders of Little Ltd. Balance available for other shareholders of Small Ltd. Little Ltd. Given profits Less:Increase in FOREX liability (US$10,000 50) 50% Contingent Liability Add: Undervaluation of inventory (45,00,00010/90) 5,00,000 5,00,000 1,00,000 2,50,000 Rs. 50,00,000 3,50,000 46,50,000 37,500 46,87,500 2,00,000 44,87,500 11,21,875 33,65,625 20,00,000 13,65,625 136,56,250 13,65,625 122,90,625
25,00,000 10,00,000 15,00,000 5,00,000 20,00,000
Less:Debenture interest Less:Income Tax @ 25% Profits after Tax (PAT) Less:Preference Dividend (10% of Rs.20,00,000) Rectified Profis Average PE ratio = 8 Total consideration for all equity shareholders (Average PE ratio Profit) Less:10% thereof for shareholders of Small Ltd. Balance available for other shareholders of Little Ltd. Statement showing Disposal of Purchase Consideration Small Ltd. Rs. Number of shares [Purchase consideration/(Face Value + Securities Premium) ] Share Capital Securities Premium Purchase Consideration 5,34,375 53,43,750 69,46,875 122,90,625 Little Ltd. Rs. 3,31,200 33,12,000 49,68,000 82,80,000
2,00,000 18,00,000 4,50,000 13,50,000 2,00,000 11,50,000 92,00,000 9,20,000 82,80,000
Total Rs. 8,65,575 86,55,750 1,19,14,875 2,05,70,625
Projected Profit and Loss Account of Big Ltd. for the period 1st January, 2010 to 31st March, 2010 Rs. Dividends received from Subsidiaries (12,00,000 + 5,00,000) Less:Management expenses Interest on Bank O/D Net profit for the period Less:Proposed Dividend (2% of Rs.86,55,750) Balance of Profit and Loss Account carried forward 14,00,000 90,000 14,90,000 2,10,000 1,73,115 36,885 17,00,000
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Projected Balance Sheet of Big Ltd. as on 31st March, 2010 Liabilities Equity Share Capital Authorised 20 lakhs shares of Rs.10 each Issued & Paid up 10,65,575 shares of Rs.10 each (out of the above 8,65,575 shares have been issued for consideration other than cash) Reserves & Surplus Securities Premium (1,19,14,875 + 56,00,000) Profit and loss Account Working Notes: 1. Shares issued by Big Ltd. to Virgin capital Ltd. (VCL) Number of shares issued Face Value of Share Capital @ Rs.10 each Securities Premium @ Rs.28 each Total cash received from VCL 2. Overdraft of Big Ltd. as on 31.3.2010 Towards Incorporation expenses i.e. preliminary expenses Towards Management expenses Total Bank Overdraft availed Interest @ 18% p.a. for 2 months 3. Bank balance of Big Ltd. as on 31.3.2010 Bank Account of Big Ltd. Rs. 01.02.2010 To Overdraft 31.03.2010 To VCL 30,00,000 01.02.2010 By Incorporation expenses 76,00,000 31.03.2010 By Management expenses Rs. 16,00,000 14,00,000 2,00,000 Rs. 20,00,000 56,00,000 76,00,000 Rs. 16,00,000 14,00,000 30,00,000 90,000 1,75,14,875 36,885 2,82,07,510 282,07,510 Rs. Assets Investments Shares in Subsidiaries (W.N. 4) 2,00,00,000 Current Assets Cash at Bank (W.N. 3) 1,06,55,750 Miscellaneous Expenditure Preliminary expenses 36,885 16,00,000 2,65,70,625 Rs.
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31.03.2010 To Dividend Small Little
31.03.2010 By Interest on Overdraft 12,00,0001 31.03.2010 By Overdraft 5,00,0002 31.03.2010 By Dividend paid 31.03.2010 By Shares in Small Ltd. bought from Little Ltd. 31.03.2010 By Shares in Little Ltd. bought from Small Ltd. By Balance c/d (Balancing figure) 123,00,000
90,000 30,00,000 1,73,1153 40,00,000 20,00,000
36,885 123,00,000 Rs. 122,90,625 82,80,000 20,00,000 40,00,000 2,65,70,625
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Investments of Big Ltd. in Projected Balance Sheet Purchase consideration paid for acquiring shares of outside holders of Small Ltd Little Ltd. Consideration paid in cash for acquiring cross holdings From Small Ltd. (shares of Little Ltd.) From Little Ltd. (shares of Small Ltd.)
Question 3 (a) Timby Ltd. is in the business of making sports equipment. The Company operates from Thailand. To globalise its operations Timby has identified Fine Toys Ltd. an Indian Company, as a potential take over candidate. After due diligence of Fine Toys Ltd. the following information is available: (a) Cash Flow Forecasts (Rs. in crore): Year Fine Toys Ltd. Timby Ltd. 10 24 108 9 21 70 8 15 55 7 16 60 6 15 52 5 12 44 4 10 32 3 8 30 2 6 20 1 3 16
(40,00,000 x 10) x 3% = 12,00,000. (20,00,000 x 10) x 2.5% = 5,00,000. 3 [(5,34,375 + 3,31,200) x 10] x 2% = 1,73,115.
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(b) The net worth of Fine Toys Ltd. (in lakh Rs.) after considering certain adjustments suggested by the due diligence team reads as under: Tangible Inventories Receivables Less: Creditors Bank Loans Represented by equity shares of Rs. 1000 each Talks for take over have crystalized on the following: 1. 2. 3. Timby Ltd. will not be able to use Machinery worth Rs.75 lakhs which will be disposed of by them subsequent to take over. The expected realization will be Rs.50 lakhs. The inventories and receivables are agreed for takeover at values of Rs.100 and Rs.50 lakhs respectively which is the price they will realize on disposal. The liabilities of Fine Toys Ltd. will be discharged in full on take over alongwith an employee settlement of Rs.90 lakhs for the employees who are not interested in continuing under the new management. Timby Ltd. will invest a sum of Rs.150 lakhs for upgrading the Plant of Fine Toys Ltd. on takeover. A further sum of Rs.50 lakhs will also be incurred in the second year to revamp the machine shop floor of Fine Toys Ltd. The Anticipated Cash Flows (in Rs. crore) post takeover are as follows: Year 1 18 2 24 3 36 4 44 5 60 6 80 7 8 9 140 10 200 96 100 165 250 (415) 555 750 145 75 970
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5.
You are required to advise the management the maximum price which they can pay per share of Fine Toys Ltd. if a discount factor of 20 per cent is considered appropriate. (b) Investors Mutual Fund is registered with SEBI and having its registered office at Pune. The fund is in the process of finalising the annual statement of accounts of one of its open ended mutual fund schemes. From the information furnished below you are required to prepare a statement showing the movement of unit holders funds for the financial year ended 31st March, 2009. Rs.000 Opening Balance of net assets Net Income for the year (Audited) 12,00,000 85,000
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8,50,200 units issued during 2008-09 7,52,300 units redeemed during 2008-09 The par value per unit is Rs100
96,500 71,320 (10+4 = 14 Marks)
Answer (a) Calculation of Maximum Price that can be quoted for take over of Fine Toys Ltd. Rs. in lakhs Present (Discounted) value of incremental cash flows (Refer Working Note) Add: Proceeds from disposal of fixed assets Proceeds from disposal of inventories Receipts from debtors Less:Settlement of creditors Bank Loans Employee settlement Renovation of Plant Revamp of machine shop floor (Rs. 50 lakhs 0.6944) Maximum value that can be offered Working Note: Present Value of Incremental Cash Flows Year 1 2 3 4 5 6 7 Cash flow after takeover 1,800 2,400 3,600 4,400 6,000 8,000 9,600 Cash flows before takeover 1600 2000 3000 3200 4400 5200 6000 Incremental Cash flows 200 400 600 1200 1600 2800 3600 Discount factor@20% 0.8333 0.6944 0.5787 0.4823 0.4019 0.3349 0.2791 (Rs. in lakhs) Discounted Cash flows 166.66 277.76 347.22 578.76 643.04 937.72 1,004.76 50.00 100.00 50.00 165.00 250.00 90.00 150.00 34.72 689.72 7,355.30 200.00 8,045.02 Rs. in lakhs 7,845.02
Maximum price per share of Fine Toys Ltd. (Rs.7,355.30 lakhs / 55,500shares) = Rs. 13,252.79
Discount factor of year 2 @20% .
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8 9 10
10,000 14,000 20,000
5500 7000 10800
4500 7000 9200
0.2326 0.1938 0.1615
1,046.70 1,356.60 1,485.80 7,845.02
(b) Statement showing the Movement of Unit Holders Funds for the year ended 31st March, 2009 (Rs.000) Opening balance of net assets Add: Par value of units issued (8,50,200 Rs.100) Net Income for the year Transfer from Reserve/Equalisation fund (Refer working Note) Less: Par value of units redeemed (7,52,300 Rs.100) Closing balance of net assets (as on 31st March, 2009) Working Note: Particulars Units Par value Sale proceeds/Redemption value Profit transferred to Reserve /Equalisation Fund Balance in Reserve/Equalisation Fund Question 4 (a) Pankaj Ltd. is a company engaged in manufacture of Nuclear Power Stations. The Company usually resorts to long term Foreign Currency borrowings for its fund requirements. The Company had on 1st April, 2005 borrowed U.S. $100 million from Global Fund Consortium based in Washington, USA. The funds were used by Pankaj Ltd. for purposes OTHER THAN acquiring Depreciable Capital Assets. The loan carries an interest rate of 3 per cent on reducing balance and is repayable in two instalments, the first one due on 1 st April, 2010 and the next on 1st April, 2012. The interest due on the loan has been paid in full on 31st March of each year. The exchange rate on the date of borrowing was 1 U.S. $ = INR 40. The accounting treatment followed by the Company for the subsequent three years with exchange rates prevailing on those dates were as under: Issued 8,50,200 Rs.000 85,020 96,500 11,480 15,390 Redeemed 7,52,300 Rs.000 75,230 71,320 3,910 12,00,000 85,020 85,000 15,390 13,85,410 75,230 13,10,180
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Year ended 31st March, 2006
Exchange Rate 1 US $ = 41
Accounting Treatment Forex Loss of Rs.10 crore charged to Profit and Loss account; Forex gain of Rs.20 crore recognised in Profit and Loss Account;
31st March, 2007
1 US $ = 39
31st March, 2008
Forex Loss of Rs.90 crore charged to Profit and Loss account; Note: Interest payment were charged to Profit and Loss account of each year at transaction value on payment dates. Pankaj Ltd. is in the process of finalising its accounts for the year ended 31st March, 2009 and understands that AS 11 has been amended and opts to follow the Companies (Accounting Standards) Amendment Rules, 2009. (i) You are required to show treatment of the Forex Losses/gains in the light of the above amendment to AS 11 for the years 2005-06; 06-07; 07-08 & 08-09. The exchange rate to 1 US Dollar on 31st March, 2009 is Rs.50. Assuming that the rates of Exchange on 31st March, 2010 and 31st March, 2011 will be Rs.51 and Rs.52 respectively the accounting for the Forex Losses/gains may also be shown for these years also. What are the disclosure requirements to be complied with by Pankaj Ltd. as a result of having opted to follow the amendment in the Companies (Accounting Standard) Rules, 2006.
1 US $ = 48
(ii)
(iii) Would your answer to (i) above be different if Pankaj Ltd. was not a Company and were a Co-operative Society. (b) As on 1st April, 2008 the fair value of plan assets was Rs.1,00,000 in respect of a pension plan of Zeleous Ltd. On 30th September, 2008 the plan paid out benefits of Rs.19,000 and received inward contributions of Rs.49,000. On 31st March, 2009 the fair value of plan assets was Rs.1,50,000 and present value of the defined benefit obligation was Rs.1,47,920. Acturial losses on the obligations for the year 2008-09 were Rs.600. On 1st April, 2008 the company made the following estimates, based on its market studies, understanding and prevailing prices. % Interest & dividend income, after tax payable by the fund Realised and unrealised gains on plan assets (after tax) Fund administrative costs 9.25 2.00 (1.00)
Expected Rate of Return 10.25 You are required to find the expected and actual returns on plan assets.(10+4= 14 Marks)
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Answer (a) Central Govt. in consultation with National advisory Committee on Accounting Standards made an amendment to AS 11 The Effects of Changes in Foreign Exchange Rates vide Notification No. G.S.R.225(E), dated 31 st March, 09 in the form of Companies (Accounting Standards) Amendment Rules, 2009. According to the Notification, any exchange gain or loss resulting from the translation of foreign currency monetary items not attributable to a depreciable asset should be accumulated in the Foreign Currency Monetary Item Translation Difference (FCMITD) Account and should be written off over the useful life of the assets but not beyond 31 st March, 2011. The treatment availed at the option of the company shall be irrevocable and shall be exercised till 31 st March, 2011. Any difference pertaining to accounting periods which commenced on or after 7th December, 2006, previously, recognised in the profit and loss account before the exercise of the option shall be reversed in case of non-depreciable asset by transfer to Foreign Currency Monetary Item Translation Difference (FCMITD) Account, and by debit or credit, as the case may be, to the general reserve. (i) Table showing the Treatment of Forex Losses/gains as per amendment to AS 11
Year ended Opening Balance in FCMITD A/c (Rs. in crores) 31st March, 06 31st March, 07 31st March, 08 31st March, 09 31st March, 10 31st March, 11 Nil NIL NIL (67.50) (58.33) (34.16) Exchange Gain/ (Loss) (Rs. in crores) (10) 20 (90 ) (20) (10) (10) (87.50) (68.33) (44.16) Total (Rs. in crores) Amount Recognised in P&L A/c (Rs. in crores) (10) (10) 20 (22.50)1 (29.17)2 (34.17)3 (44.16)4 Closing Balance in FCMITD A/c (Rs. in crores) NIL NIL (67.50) (58.33) (34.16) NIL
(ii) Disclosure Requirements: 1. 2. 3.
The company has chosen to avail the option provided by way of amendment in the Companies (AS) Amendment Rules, 2009. According to AS 1 Disclosure of Accounting Policies, Exercise of option due to amendment in AS 11 is a change in accounting policy. The amount amortized to profit and loss account and the amount carried forwarded in each year till 31 st March, 2011 should be disclosed.
Total loss of Rs.90 crores will be amortised over 4 years till 2011. The amount of Rs.67.50 crores would be credited to General reserve and debited to FCMITD Account in the year 2008-09. 2 Amount written off in 2008-09 is 29.17 crores [1/4 of Rs. 90 crores + 1/3 of Rs. 20 crores] 3 Amount written off in 2009-10 is 34.17 crores [1/4 of Rs. 90 crores + 1/3 of Rs. 20 crores + of Rs. 10 crores] 4 Entire balance including exchange loss of current year is fully amortized.
1
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(iii) Notification No. G.S.R.225(E) is relevant only for companies. If Pankaj Ltd., is a cooperative society, then the said notification would not be applicable. In that case, option to amortise FOREX losses over the period till 31.03.2011 will not be available to it. The amounts charged to Profit and loss account would be same as shown in the column carrying the heading Exchange gain/Loss in the table given under (i). (b) Computation of Expected and Actual Returns on Plan Assets Rs. Return on Rs. 1,00,000 held for 12 months at 10.25% Return on Rs. 30,000 (49,000-19,000) held for six months at 5% (equivalent to 10.25% annually, compounded every six months) Expected return on plan assets for 2008-09 Fair value of plan assets as on 31 March, 2009 Less: Fair value of plan assets as on 1 April,2008 Contributions received Add: Benefits paid Actual return on plan assets Question 5 (a) Global Health Foundation furnishes the following information with regard to its Development Fund for the year 2009: Rs. UN Grant received for building construction in Afganisthan Development Grant from Prize Foundation Grants from private charities for acquiring land at Afganisthan Interest received on Fixed Deposits invested in Trust Bank @ 10 per cent per annum on 1st July, 2009 Cost of land purchased for setting up Rehabilitation Centre at Afganisthan Transfers from unrestricted fund for purchasing moveable assets Advance payment for acquiring balance land at Afganisthan Furniture purchased for Rehabilitation Project Cost of 5 Desert Deuller Jeeps 50,00,000 40,00,000 30,00,000 2,00,000 12,25,000 45,00,000 7,00,000 3,00,000 35,00,000 1,00,000 49,000 10,250 1,500 11,750 1,50,000 1,49,000 1,000 19,000 20,000
Amount settled to builders for construction of Rehabilitation Centre 12,50,000 Building at Afganisthan based on percentage of work completed Prepare a statement of Changes in Development Fund and a Balance Sheet of the Fund at the year end.
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(b) AS Ltd. Leased a machine to SB Ltd. on the following terms: (Rs. In lakhs) Fair value of the machine Lease term Lease Rental Per annum Guaranteed Residual value 4.00 5 years 1.00 0.20
Expected Residual value 0.40 Internal Rate of Return 15% Depreciation is provided on straight line method at 10 per cent per annum. Ascertain Unearned Financial Income. Necessary Journal entries in the books of the Lessee in first year may be shown. (8+8= 16 Marks) Answer (a) Statement of Changes in Development Fund for the year 2009 Particulars Receipts/Transfers UN Grant Grant - Prize Foundation Private grants Fixed deposit Interest Transfer from unrestricted funds Payments/Transfers Land purchase- Afganisthan Furniture purchased Vehicles purchased Balance as on 31.12.09 Balance sheet of the Development Fund of Global Heath Foundation as on 31st December, 2009 Liabilities Fund balance Amount Assets Rs. 116,75,000 Capital work in progress Land advance- Afghanistan Fixed deposit at Trust Bank Amount Rs. 12,50,000 7,00,000 12,25,000 3,00,000 35,00,000 50,25,000 1,16,75,000 50,00,000 40,00,000 30,00,000 2,00,000 45,00,000 1,67,00,000 Rs. Rs.
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(2,00,000 x 100/10x 2) Bank balance (Refer working note) 116,75,000 Working Note: Bank Account Rs. To UN Grants To Grant - Prize Foundation To Private grants To Interest on fixed deposit To Transfers from unrestricted funds 50,00,000 By Fixed deposits 40,00,000 By Land purchased 30,00,000 By Land advance 2,00,000 By Furniture purchased By Vehicles purchased 45,00,000 By Payment to builders ____ 167,00,000 By Balance c/d
40,00,000 57,25,000 116,75,000
Rs. 40,00,000 12,25,000 7,00,000 3,00,000 35,00,000 12,50,000 57,25,000 167,00,000
Note: Land costing Rs.12.25 lakhs, Furniture Rs.3 lakhs and Vehicles Rs.35 lakhs will be shown in the General balance sheet of Global Heath Foundation. (b) As per AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in the lease and (b) the present value of minimum lease payments under a finance lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease. where : (a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the lessor and (ii) any unguaranteed residual value accruing to the lessor. Gross investment = Minimum lease payments + Unguaranteed residual value = [Total lease rent + Guaranteed residual value(GRV)] + Unguaranteed residual value (URV) = [(Rs. 1,00,000 = Rs. 5,40,000 (a) 5 years) + Rs. 20,000] + Rs. 20,000
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(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value (URV). Year 1 2 3 4 5 M.L.P. inclusive of URV Rs. 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 20,000 (GRV) 5,20,000 20,000 (URV) 5,40,000 Unearned Finance Income = (a) (b) 0.4972 (i) + (ii) Internal rate of return ( Discount factor @ 15%) 0.8696 0.7561 0.6575 0.5718 0.4972 0.4972 Present Value Rs. 86,960 75,610 65,750 57,180 49,720 9,944 3,45,164 (i) 9,944 (ii) 3,55,108 (b)
= Rs. 5,40,000 Rs. 3,55,108 = Rs. 1,84,892 Journal Entries in the books of SB Ltd. Rs. At the inception of lease Machinery account To AS Ltd.s account (Being lease of machinery recorded at present value of minimum lease payments) At the end of the first year of lease Finance charges account (Refer Working Note) Dr. 51,775 Dr. 3,45,164 3,45,164* Rs.
As per para 11 of AS 19, the lessee should recognize the lease as an asset and a liability at an amount equal to the fair value of the leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the present value of minimum lease payments from the standpoint of lessee, the amount recorded should be the present value of these minimum lease payments. Therefore, in this case, as the fair value of Rs. 4,00,000 is more than the present value amounting Rs. 3,45,164, the machinery has been recorded at Rs. 3,45,164 in the books of SB Ltd. (the lessee) at the inception of the lease. According to para 13 of the standard, at the inception of the lease, the asset and liability for the future lease payments are recognised in the balance sheet at the same amounts.
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To AS Ltd.s account (Being the finance charges for first year due) AS Ltd.s account To Bank account (Being the lease rent paid to the lessor which includes outstanding liability of Rs. 48,225 and finance charge of Rs. 51,775) Depreciation account To Machinery account (Being the depreciation provided @ 10% p.a. on straight line method) Profit and loss account To Depreciation account To Finance charges account (Being the depreciation and finance charges transferred to profit and loss account) Working Note: Dr. 86,291 Dr. 34,516 Dr. 1,00,000
51,775
1,00,000
34,516
34,516 51,775
Table showing apportionment of lease payments by SB Ltd. between the finance charges and the reduction of outstanding liability Year Outstanding liability (opening balance) Rs. 1 2 3 4 5 3,45,164 2,96,939 2,41,480 1,77,702 1,04,357 Minimum lease payments Rs. 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 Finance charges Reduction in principal amount Rs. 48,225 55,459 63,778 73,345 84,346 Outstanding liability (closing balance Rs. 2,96,939 2,41,480 1,77,702 1,04,357 20,011
Rs. 51,775 44,541 36,222 26,655 15,654
Depreciation has been provided on the basis that the machine has been leased at the beginning of the year. The difference between this figure and guaranteed residual value (Rs. 20,000) is due to approximation in computing the interest rate implicit in the lease.
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Question 6 In preparing the Financial Statements of Santhanam Ltd. for the year ended 31st March, 2009, you come across the following features. State with reasons, how you would deal with them in the Financial Statements: (i) An unquoted long term investment is carried in the books at its cost of Rs.5 lakhs. The Published Accounts of the unlisted company received in May, 2009 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than Rs.80,000. The Company invested Rs.560 lakhs in April, 2009 in the acquisition of another company doing similar business, the negotiations for which had started during the current financial year.
(ii)
(iii) There was a major theft of stores valued at Rs.46 lakhs in the preceding year which was detected only during the current financial year. (5+5+6= 16 Marks) Answer As it is stated in the question that financial statements for the year ended 31.3.2009 are under preparation, the views given are on the basis that the financial statements are yet to be approved by the Board of Directors. Para 3.2 of AS 4 (Revised)"Contingencies and Events occurring after the Balance Sheet Date" defines "Events occurring after the balance sheet date" as those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company. (i) Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Para 17 of AS 13 Accounting for Investments states that indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. On this basis, the facts of the given case clearly suggest that the provision for diminution should be made to reduce the carrying amount of long term investment to Rs. 80,000 in the financial statements for the year ended 31st March, 2009.
(ii) The acquisition of another company is an event occurring after the balance sheet date. However, no adjustment to assets and liabilities is required as the event does not affect the determination and the condition of the amounts stated in the financial statements for the year ended 31st March, 2009. Applying Para 15 of AS 4 (Revised), which clearly states that disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise, the investment of Rs. 560
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lakhs in April, 2009 in the acquisition of another company should be disclosed in the report of the Board of Directors to enable users of financial statements to make proper evaluations and decisions. (iii) Due to major theft of stores in the preceding year (2007-08) which was detected only during the current financial year (2008-09), there was overstatement of closing stock of stores in the preceding year. This must have also resulted in the overstatement of profits of previous year, brought forward to the current year. The adjustments are required to be made in the current year as 'Prior Period Items' as per AS 5 (Revised) Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Accordingly, the adjustments relating to both opening stock of the current year and profit brought forward from the previous year should be separately disclosed in the statement of profit and loss together with their nature and amount in a manner that their impact on the current profit or loss can be perceived. The disclosure as to the theft and the resulting loss is required in the notes to the accounts for the current year i.e, year ended 31st March, 2009.
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PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS Answer all questions. Working notes should form part of the answer. Question 1 (a) From the following details relating to a project, analyse the sensitivity of the project to changes in initial project cost, annual cash inflow and cost of capital: Initial Project Cost (Rs.) Annual Cash Inflow (Rs.) Project Life (Years) Cost of Capital 1,20,000 45,000 4 10%
To which of the three factors, the project is most sensitive? (Use annuity factors: for 10% 3.169 and 11% ... 3.109). (10 Marks) (b) ABC Company is considering acquisition of XYZ Ltd. which has 1.5 crores shares outstanding and issued. The market price per share is Rs. 400 at present. ABC's average cost of capital is 12%.Available information from XYZ indicates its expected cash accruals for the next 3 years as follows: Year 1 2 Rs. Cr. 250 300
3 400 Calculate the range of valuation that ABC has to consider. (PV factors at 12% for years 1 to 3 respectively: 0.893, 0.797 and 0.712). (4 Marks) (c) Describe the interface of financial policy with corporate strategic management. (6 Marks) Answer (a) CALCULATION OF NPV Rs. PV of cash inflows (Rs. 45,000 x 3.169 ) Initial Project Cost NPV If initial project cost is varied adversely by 10%* NPV (Revised) (Rs. 1,42,605 - Rs. 1,32,000 ) Change in NPV (Rs. 22,605 Rs. 10,605)/ Rs. 22,605 i.e Rs. 10,605 53.08 % 1,42,605 1,20,000 22,605
If annual cash inflow is varied adversely by 10%* Revised annual inflow NPV (Revised) (Rs. 40,500 x 3.169) (Rs. 1,20,000) Change in NPV (Rs. 22,605 Rs. 8,345) / Rs. 22,605 If cost of capital is varied adversely by 10%* NPV ( Revised ) ( Rs. 45,000 x 3.109 ) Rs. 1,20,000 Change in NPV (Rs. 22,605 Rs. 19,905 ) / Rs. 22,605 Conclusion: Project is most sensitive to annual cash inflow. *Note: Students may please note that they may assume any other percentage rate other than 10 % say 15% , 20 % 25 % etc. (b) VALUATION BASED ON MARKET PRICE Market Price per share Thus value of total business is (Rs. 400 x 1.5 Cr.) VALUATION BASED ON DISCOUNTED CASH FLOW Present Value of cash flows (Rs. 250 cr x 0.893) + (Rs. 300 cr. X 0.797) + ( Rs. 400 cr. X 0.712 ) = Rs. 747.15 Cr. Value of per share (Rs. 747.15 Cr. / 1.5 Cr) RANGE OF VALUATION Per Share Rs. Minimum Maximum 400.00 498.10 Total Rs. Cr. 600.00 747.15 Rs. 498.10 per share Rs. 400 Rs. 600 Cr. (+) Rs. 19,905 11.94 % Rs. 40,500 (+) Rs. 8,345 63.08 %
(c) INTERFACE OF FINANCIAL POLICY AND STRATEGIC MANAGEMENT Financial policy required the resource deployments such as materials, labour etc., whereas strategic management considers all markets such as material, labour and capital as imperfect and changing. Strategies are developed to manage the business firm in uncertain and imperfect market conditions and environment, for forecasting planning and formulation of financial policies, for generation and allocation of resources, the finance manager is required to analyse changing market conditions and environment. The strategy focuses on how to compete in a particular product-market segment or industry. For framing strategy it is considered that the shareholders are not the only interested group in the unit. There are many other influential constituents such as lenders, employees, customers, suppliers etc. The success of a company depends on its ability to service in the product market environment which is possible only when the company considers to maintain and improve its product market positions.
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PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS
The strategic management is multi-dimensional. It focuses on growth profitability and flow of funds rather than only on the maximization of market value of shares. This focus helps the management to create enough corporate wealth for achieving market dominance and the ultimate successful survival of the company. Hence, the financial policy of a company is closed linked with its corporate strategy. The corporate strategy establishes an efficient and effective match between its competences and opportunities and environmental risks. Financial policies of a company should be developed in the context of its corporate strategy. Within the overall framework of a companys strategy, there should be consistency between financial policies- investment, debt and dividend. Question 2 (a) New Projects Ltd. is evaluating 3 projects, P-I, P-II, P-III. Following information is available in respect of these projects: Cost Inflows-Year 1 Year 2 Year 3 Year 4 P-I Rs. 15,00,000 6,00,000 6,00,000 6,00,000 6,00,000 P-II Rs. 11,00,000 6,00,000 4,00,000 5,00,000 2,00,000 P-III Rs. 19,00,000 4,00,000 6,00,000 8,00,000 12,00,000
Risk Index 1.80 1.00 0.60 Minimum required rate of return of the firm is 15% and applicable tax rate is 40%. The risk free interest rate is 10%. Required: (i) Find out the risk-adjusted discount rate (RADR) for these projects. (10 Marks) Rs. 1,800 Rs. 1,950 (ii) Which project is the best? (b) The following data relate to Anand Ltd.'s share price: Current price per share 6 months future's price/share
Assuming it is possible to borrow money in the market for transactions in securities at 12% per annum, you are required: (i) to calculate the theoretical minimum price of a 6-months forward purchase; and (6 Marks) (ii) to explain arbitrating opportunity.
(c) Saranam Ltd. has issued convertible debentures with coupon rate 12%. Each debenture has an option to convert to 20 equity shares at any time until the date of maturity. Debentures will be redeemed at Rs. 100 on maturity of 5 years. An investor generally
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requires a rate of return of 8% p.a. on a 5-year security. As an investor when will you exercise conversion for given market prices of the equity share of (i) Rs. 4, (ii) Rs. 5 and (iii) Rs. 6. Cumulative PV factor for 8% for 5 years PV factor for 8% for year 5 Answer (a) (i) The risk free rate of interest and risk factor for each of the projects are given. The risk adjusted discount rate (RADR) for different projects can be found on the basis of CAPM as follows: Required Rate of Return = I Rf + (ke-IRF ) Risk Factor For P-I : RADR For P-II : RADR For P-III : RADR = 0.10 + (0.15 0.10 ) 1.80 = 19% = 0.10 + (0.15 0.10 ) 1 = 15 % = 0.10 + (0.15 0.10) 0.60 = 13 % (ii) The three projects can now be evaluated at 19%, 15% and 13% discount rate as follows: Project P-I Annual Inflows PVAF (19 %, 4) PV of Inflows (Rs. 6,00,000 x 2.639 ) Less: Cost of Investment Net Present Value Project P-II Year 1 2 3 4 Total Present Value Less: Cost of Investment Net Present Value Cash Inflow (Rs.) 6,00,000 4,00,000 5,00,000 2,00,000 PVF (15%,n) 0.870 0.756 0.658 0.572 PV (Rs.) 5,22,000 3,02,400 3,29,000 1,14,400 12,67,800 11,00,000 1,67,800 Rs. 6,00,000 2.639 Rs. 15,83,400 Rs. 15,00,000 Rs. 83,400 : : 3.993 0.681 (4 Marks)
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Project P-III Year 1 2 3 4 Total Present Value Less: Cost of Investment Net Present Value Project P-III has highest NPV. So, it should be accepted by the firm (b) (i) Anand Ltd Calculation of theoretical minimum price of a 6 months forward contractTheoretical minimum price = Rs. 1,800 + (Rs. 1,800 x 12/100x 6/12) (ii) Arbitrage OpportunityThe arbitrageur can borrow money @ 12 % for 6 months and buy the shares at Rs. 1,800. At the same time he can sell the shares in the futures market at Rs. 1,950. On the expiry date 6 months later, he could deliver the share and collect Rs. 1,950 pay off Rs. 1,908 and record a profit of Rs. 42 (Rs. 1,950 Rs. 1,908) (c) If Debentures are not converted its value is as under: PVF @ 8 % Interest @ Rs. 12 % for 5 years Redemption Rs. 100 in 5th year Value of equity shares:Market Price Rs. 4 Rs. 5 No. 20 20 Total Rs. 80 Rs. 100 3.993 0.681 Rs. 47.916 68.100 116.016 Rs. 1,908 Cash Inflow (Rs.) 4,00,000 6,00,000 8,00,000 12,00,000 PVF (13%,n) 0.885 0.7831 0.693 0.613 PV (Rs.) 3,54,000 4,69,860 5,54,400 7,35,600 21,13,860 19,00,000 2,13,860
Rs. 6 20 Rs. 120 Hence, unless the market price is Rs. 6 conversion should not be exercised. Question 3 (a) Mr. Sinha has invested in three Mutual fund schemes as per details below: Scheme X Date of Investment 01.12.2008 Scheme Y 01.01.2009 Scheme Z 01.03.2009
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Amount of Investment Net Asset Value at entry date Dividend received upto 31.03.2009
Rs. 5,00,000 Rs. 10.50 Rs. 9,500
Rs. 1,00,000 Rs. 10.00 Rs. 1,500
Rs. 50,000 Rs. 10.00 Nil
NAV as at 31.3.2009 Rs. 10.40 Rs. 10.10 Rs. 9.80 You are required to calculate the effective yield on per annum basis in respect of each of the three schemes to Mr. Sinha upto 31.03.2009. (6 Marks) (b) Classic Finance, a Leasing Company, has been approached by a prospective customer intending to acquire a machine whose cash down price is Rs. 6 crores. The customer, in order to leverage his tax position, has requested a quote for a three year lease with rentals payable at the end of each year but in a diminishing manner such that they are in the ratio of 3 : 2 : 1. Depreciation can be assumed to be on WDV basis at 25% and Classic Finance's marginal tax rate is 35%. The target rate of return for Classic Finance on the transaction is 10%. You are required to calculate the lease rents to be quoted for the lease for three years. (8 Marks) (c) Explain briefly the capital Asset pricing model used in the context of valuation of securities. (6 Marks) Answer (a) Calculation of effective yield on per annum basis in respect of three mutual fund schemes to Mr. Sinha up to 31-03-2009: PARTICULARS (a) Investments (b) No. of units (c) Unit NAV ON 31-3-2009 (d) Total NAV on 31-3-2009 ( b x c) (e) Increase / Decrease of NAV ( a-d) ((f) Dividend Received (g) Total yield (h) Number of Days (i) (b) Effective yield p.a. ( g/a x 365/h x 100) (e + f) MFX Rs. 5,00,000 47,619.05 Rs. 10.40 Rs . 4,95,238.12 (Rs. 4,761.88) Rs. 9,500 Rs. 4,738.12 121 2.859% Calculation of depreciation tax shield (Rs. Lakhs) Year Cost / WDV Dep. @ 25 % Tax shield @ 0.35 1 2 600.00 450.00 150.00 112.50 52.50 39.38 PVF 0.909 0.826 PV of dep. tax shield 47.72 32.53 MFY Rs. 1,00,000 10,000 Rs. 10.10 Rs. 1,01,000 Rs. 1,000 Rs. 1,500 Rs. 2,500 90 10.139% MFZ Rs. 50,000 5,000 Rs. 9.80 Rs. 49,000 (Rs. 1000) Nil (Rs. 1,000) 31 (-) 23.55%
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337.50
84.38
29.53
0.751 (Rs. Lakhs ) 600.00 102.43 497.57
22.18 102.43
Capital sum to be placed on lease Cash down price Less: PV of depreciation tax shield To be placed on lease Let the normal annual lease rent were to be x then Year 1 2 3 Post tax 3 x (1-0.35 ) or 1.95 x 2x (1-0.35 ) or 1.30x 1x ( 1-0.35 ) or 0.65x PVF 0.909 0.826 0.751
PV of cash flow 1.773 x 1.074x 0.488x 3.335 x Rs. 149.196 lakhs Rs.lakhs 447.59 298.39 149.20
Value of x = Rs. 497.57 lakhs / 3.335 i.e Year wise lease rental will be Year 1 Year 2 Year 3 (c) Capital Asset Pricing Model (CAPM) 3X 149.196 2X 149.196 1X 149.196
Capital Asset Pricing Model was developed by Sharpe, Mossin and Lintner in 1960s. The model explains the relationship between the expected return, non-diversifiable risk and the valuation of securities. It considers the required rate of return of a security on the basis of its contribution to the total risk. It is based on the premise that the diversifiable risk of a security is eliminated when more and more securities are added to the portfolio. However, the systematic risk cannot be diversified and is correlated with that of the market portfolio. All securities do not have same level of systematic risk. Therefore, the required rate of return goes with the level of systematic risk. The systematic risk can be measured by beta, . Under CAPM, the expected return from a security or portfolio can be expressed as: Expected return on security (Er) = R f + (Rm Rf) Where, Rf = Risk-free rate of return = Beta of security or portfolio (Rm Rf) = Risk premium Rm = Market return
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The model shows that the expected return of a security or a portfolio consists of the riskfree rate of interest plus a risk premium. If the expected return does not meet the required return, then the investment should not be undertaken. The CAPM, when plotted on a graph, is known as the Security Market Line (SML). A major implication of CAPM is that not only every security but all portfolios too must plot on SML. This implies that in an efficient market, all securities are expected to yield returns commensurate with their riskiness, measured by . CAPM is based on following assumptions: (i) The Investors objective is to maximise the utility of terminal wealth. (ii) Investors make choices on the basis of risk and return. (iii) Investors have homogenous expectations of risk and return. (iv) Investors have identical time horizon. (v) Information is freely and simultaneously available to investors. (vi) There is a risk-free asset, and investors can borrow and lend unlimited amounts at the risk-free rate. (vii) There are no taxes, transaction costs, restrictions on short rates, or other market imperfections. (viii) Total asset quantity is fixed, and all assets are marketable and divisible. Thus, CAPM provides a conceptual frame work for evaluating any investment decision where capital is committed with a goal of producing future returns. However, there are certain limitations of the theory. Some of these limitations are as follows: (i) Reliability of Beta: Statistically reliable Beta might not exist for shares of many firms. It may not be possible to determine the cost of equity of all firms using CAPM. All shortcomings that apply to Beta value apply to CAPM too.
(ii) Other Risks: It emphasis only on systematic risk while unsystematic risks are also important to share holders who do not possess a diversified portfolio. (iii) Information Available: It is extremely difficult to obtain important information on risk- free interest rate and expected return on market portfolio as there are multiple risk- free rates for one while for another, markets being volatile it varies over time period. Question 4 (a) B Ltd. is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth in earnings and dividends is reflected in its PE ratio of 17. The Board of Directors of B Ltd. has been advised that if it were to take over firms with a lower PE ratio than it own, using a share-for-share exchange, then it could increase its reported earnings per share. C Ltd. has been suggested as a possible target for a
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takeover, which has a PE ratio of 10 and 1,00,000 shares in issue with a share price of Rs. 15. B Ltd. has 5,00,000 shares in issue with a share price of Rs. 12. Calculate the change in earnings per share of B Ltd. if it acquires the whole of C Ltd. by issuing shares at its market price of Rs.12. Assume the price of B Ltd. shares remains constant. (8 Marks) (b) An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three months. Exchange rates in London are: Spot Rate 3-Month Forward Rate Rate of Interest in Money Market: Deposit $ 7% 5% Loan 9% 8% ($/) 1.5865 - 1.5905 ($/) 1.6100 - 1.6140
Compute and show how a money-market hedge can be put in place. Compare and contrast the outcome with a forward contract. (7 Marks) (c) Explain the importance of the budget and the revised budget to public sector undertakings. (5 Marks) Answer (a) Total market value of C Ltd is = 1,00,000 x Rs. 15 PE ratio (given) Therefore , earnings Total market value of B Ltd. is = 5,00,000 x Rs. 12 PE ratio ( given) Therefore, earnings The number of shares to be issued by B Ltd. Rs. 15,00,000 12 Total number of shares of B Ltd The EPS of the new firm is = 1,25,000 = 5,00,000 + 1,25,000 = 6,25,000 = (Rs. 3,52,941+1,50,000)/6,25,000 = Re. 0.80 = Rs. 15,00,000 = 10 = Rs. 15,00,000 /10 = Rs. 1,50,000 = 60,00,000 = 17 = Rs. 60,00,000/17 = Rs. 3,52,941
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The present EPS of B Ltd is
= Rs. 3,52,941 /5,00,000 = Re. 0.71
So the EPS affirm B will increase from Re. 0.71 to Rs. 0.80 as a result of merger. (b) Identify: Foreign Currency is an asset. Amount $ 3,50,000. Create: $ Liability. Borrow: In $. The borrowing rate is 9 % per annum or 2.25 % per quarter. Amount to be borrowed $ 3,50,000/ 1.0225 = $ 3,42,298.29 Convert: Sell $ and buy . The relevant rate is the Ask rate, namely, $ 1.5905 per , (Note: This is an indirect quote). Amount of s received on conversion is 2,15,214.27 [ 3,42,298.29 / 1.5905] Invest: 2,15,214.27 will be invested at 5 % for 3 months to get 2,17,904.45. Settle: The liability of $ 3,42,298.29 at interest of 2.25 per cent per quarter matures to $ 3,50,000/-. This will be settled with the amount of $ 3,50,000 received from customer. Using forward rate, amount received is = 3,50,000 / 1.6140 = 2,16,852.54 Amount received through money market hedge = 2,17,904.45 Gain = 2,17,904.45 - 2,16,852.54 = 1,051.91 So, money market hedge is beneficial for the exporter. (c) Importance of Budget and Revised Budget to Public Sector Undertakings (PSUs) The budget exercise in public sector undertakings is an annual exercise. All revenue and expenditure, (including capital expenditures) and sources and application of funds are budgeted prior to the commencement of financial year. The budget is very important exercise in the public sector undertakings. The budget is important to the PSUs due to the following reasons: (i) There is a separate Budget Section of the Accounts and Finance Department responsible for coordinating the budget exercise, collecting data from all departments/divisions concerned and finalising the budget for presentation to the Board of Directors.
(ii) The budget is prepared on the basis of 'Zero based budgeting' i.e. revenue and expenditure are estimated from scratch or afresh based only on targets set to be achieved during the ensuing year as broadly determined by the Board of Directors or the Management Committee. (iii) The budget approved by the Board of Directors forms the basis for all expenditure and yardstick for revenue earning.
(iv) The works of budgeting- estimating revenue and expenditure is meticulously done and the sanctioned budget becomes a sort of bible for the operating departments. No expenditure can be incurred unless it has been included in the budget. Items of
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expenditure are screened for prior sanction under the budget. (v) The revenue target set in the budget needs to be achieved. (vi) To keep the expenditure trend balanced with revenue, a fortnightly or monthly reporting of budgeted and actuals is done to all departmental heads. (vii) Budget variance report is to be regularly submitted to the top management for its review, decision and corrective directions, where and when necessary. Revised Budget : In public sector units, there is a also convention of preparing a revised budget ,if required, after expiry of the first two quarters or three quarters of the financial year depending upon exigencies. The revised budget is important to the PSUs due to the following reasons: (i) It helps in recognizing developments after the initial budget preparation exercise and in coordinating action plans for the balance part of the year.
(ii) It also takes into consideration any material change taking place which could not have been envisaged at the time of preparation of the original budget and which is bound to affect the budgeted estimates and actual performance. Thus, the original budget is revised accordingly. Example of significant happenings could be change in exchange rate, new levy of substantial Direct and Indirect taxes and duties, etc. (iii) Same level of exercise is carried out in preparation of revised budget as in the case of original budget. It is, however, very important to keep in mind that the practice of preparing the Revised Budget be strictly followed only when the situation compels such an exercise and should not be liberally pursued. Question 5 (a) XYZ established the following spread on the Delta Corporation's stock: (i) Purchased one 3-month call option for 100 Nos. with a premium of Rs. 30 and an exercise price of Rs. 550.
(ii) Purchased one 3-month put option for 100 Nos. with a premium of Rs. 5 and an exercise price of Rs. 450. The current price of Delta Corporation's stock is Rs. 500. Determine XYZ profit or loss if the price of Delta Corporation: (i) Stays at Rs. 500 after 3 months. (6 Marks) (ii) Falls to Rs. 350 after 3 months. (iii) Rises to Rs. 600. (b) Subhash & Co. earns Rs. 8 per share having capitalisation rate of 10 per cent and has a return on investment at the rate of 20 per cent. According to Walter's model, what should
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be the price per share at 25 per cent dividend payout ratio? Is this the optimum payout ratio as per Walter? (6 Marks) (c) A stock costing Rs. 120 pays no dividends. The possible prices that the stock might sell for at the end of the year with the respective probabilities are: Price 115 120 125 130 135 140 Required: (i) Answer (a) (i) Total premium paid on purchasing a call and put option = = ( Rs. 30 per share x 100 ) + ( Rs. 5 per share x 100 ). Rs. 3,000 + Rs. 500 = Rs. 3,500 Calculate the expected return. (8 Marks) (ii) Calculate the Standard deviation of returns. Probability 0.1 0.1 0.2 0.3 0.2 0.1
In this case, XYZ exercises neither the call option nor the put option as both will result in a loss for her. Ending value i.e. Net loss = = = -Rs. 3,500 + Zero gain -Rs. 3,500 Rs. 3,500
(ii) Since the price of the stock is below the exercise price of the call , the call will not be exercised. Only put is valuable and is exercised. Total premium paid = Ending value i.e. Net gain = = = Rs. 3,500 -Rs.3,500 + Rs. [(450 350 ) x 100] - Rs. 3,500 + Rs. 10,000 = Rs. 6,500 Rs. 6,500
(iii) In this situation, the put is worthless, since the price of the stock exceeds the puts exercise price. Only call option is valuable and is exercised. Total premium paid = Rs 3,500
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Ending value Net Gain
= =
Rs. 3,500 + Rs.[(600-550 ) x 100] Rs. 3,500 + Rs. 5,000 = Rs. 1,500
R R
(b) Walter Model is as follows:D+ Ve =

a
(E -D )
c
Vc = market value of the share Ra = Re = E= D= Return on retained earnings Capitalisation rate Earnings per share Dividend per share
Hence, if Walter model is appliedMarket value of the share

VC Rs.2.00
0.20 Rs.8.00 Rs.2.00 0.10 0.10 0.20 Rs.6.00 0.10 0.10
or
VC Rs.2.00
Rs.2.00 Rs.12.00 Rs.14.00 Rs.140 0.10 0.10 This is not the optimum payout ratio because R a> Rc and therefore Ve can further group if payout ratio is reduced. VC
or
(c) Here, the probable returns have to be calculated using the formula
D P0
P1
P0
P0
Calculation of Probable Returns Possible prices (P1) Rs. 115 120 125 P1-P0 Rs. -5 0 5 [(P1-P0)/ P0 ] x 100 Return (per cent ) -4.17 0.00 4.17
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130 135 140 Possible return Xi -4.17 0.00 4.17 8.33 12.50 16.67 Expected return X = 7.08 per
10 15 20 Calculation of Expected Returns Probability p( Xi) 0.1 0.1 0.2 0.3 0.2 0.1
8.33 12.50 16.67 Product X1-p(Xi) -0.417 0.000 0.834 2.499 2.500 1.667 X = 7.083
Calculation of Standard Deviation of Returns Probable return Xi -4.17 0.00 4.17 8.33 12.50 16.67 Probability p(Xi) 0.1 0.1 0.2 0.3 0.2 0.1 Deviation (Xi X) -11.25 -7.083 -2.913 1.247 5.417 9.587 Deviation squared ( Xi X) 126.56 50.17 8.49 1.56 29.34 91.91 Product ( Xi X)p(Xi) 12.66 5.017 1.698 0.467 5.869 9.191 = 34.902
Variance, = 34.902 per cent Standard deviation, = 34.902 = 5.908 per cent
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PAPER 3: ADVANCED AUDITING

Answer all questions. Question 1 As an auditor, how would you deal with the following: (a) During the audit of ABC Pvt. Ltd. for the year ended 31st March, 2009, it is noticed that the company has not maintained proper books of account and the final accounts were drawn up from the bank summaries. The number of transactions in the entire year for the company were only 30. (5 Marks) (b) PQR Ltd. had acquired a Brand from another company for Rs.100 lakhs. PQR Ltd. contends that since the said brand is a very popular and famous brand, no depreciation or amortisation needs to be provided. (4 Marks) (c) XY Ltd. had entered into derivative transactions in foreign currency which were based on probable export orders. As at the year end on 31st March, 2009, the mark-to-market (MTM) loss on the said derivatives was Rs.250 lakhs. The company contends that since the MTM loss is notional and likely to be recouped in the next year, the same need not be provided for. (5 Marks)
(d) The statutory auditor of the Holding Company demands for the working papers of the auditors of the subsidiary company, of which you are the auditor. (4 Marks) Answer (a) Non maintenance of Books of Accounts by Private Limited Company: Section 209 of the Companies Act, 1956 provides for keeping of proper books of account by a company and the auditor is specifically required to report under section 227. Accordingly, auditors are required to state as to whether proper books of account, as required by law , have been maintained by the company so far as it appears from the examination of the books. In the instant case, though the members of transactions are small and the final accounts properly drawn up from the bank summaries, the books of account, as required by Section 209 can not be said to have been maintained by ABC Pvt. Ltd., Auditors, therefore, have to state disclaimer of opinion in the audit report. (b) Amortization or Depreciation of Brand: AS 26 Intangible Assets provides that an intangible asset should be measured initially at cost. After initial recognition, an intangible asset should be carried at cost less any accumulated amortization and any accumulated impairment losses. The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. The auditor should satisfy himself that the value of brand is amortized in accordance with AS 26 , as brand is considered to be an intangible asset.
The contention of PQR Ltd., that Brand is very popular and famous, no depreciation or amortization needs to be provided, is wrong in view of the above and hence, the auditor will have to qualify in this report this matter and quantify, the amount of non-amortisation. (c) Derivative transactions (MTM) Loss The ICAI has issued an announcement Accounting for Derivatives in March, 2008 to clarify the best practice treatment to be followed for all derivatives. According to this announcement, the entity is required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market, keeping in view the principle of prudence as enunciated in AS 1 Disclose of Accounting Policies. The Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options (2003) and AS 11(Revised 2003) Effects of Changes in Foreign Exchange Rates. The auditors should consider making appropriate disclosures in their reports if the aforesaid accounting treatment and disclosures are not made. In the given case, XY Ltd. should provide for mark to-market (MTM) losses amounting Rs. 250 Lakhs also provide for the similar treatment. The auditor will have to make necessary disclosures and quantify the amount of MTM losses. (d) Access to Working Paper As per SA 230, Audit Documentation working papers are the property of the auditor. The auditor may, at his discretion, make portion of or extracts of his working papers available to his client. SA 600 Using the Work of Another Auditors also states that an auditor should respect the confidentiality of information acquired during the course of his audit work and should not disclose such information unless there is a legal or professional duty to disclose. Part I of the Second Schedule to the Chartered Accountants Act, 1949 also provides that a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he Discloses information acquired in the course of his professional engagement to any person other than his client, without the consent of his client, or otherwise than as required by any law for the time being in force. The ICAI has clarified that except to the extent stated above, the auditor is not required to provide the client or the other auditors of the same enterprise or its related enterprises such as a parent or a subsidiary, access to his audit working papers. The statutory auditor of an enterprise do not have right of access to the audit working papers of the branch auditor. An auditor can rely on the work of another auditor, without having any right of access to the audit working papers of other auditor. In view of the above guidelines, issued by the Council of ICAI, the statutory auditor of Holding company can not have access to audit working papers of the subsidiary companys auditor. He can however, ask the auditor to answer certain questions about
The said guidance note and paragraph 36 to 39 (under the heading forward exchange contracts) of AS 11 (Revised) stand withdrawn from the date AS 30 Financial Instruments: Recognition and Measurement, became recommendatory in nature, i.e. 1-4-2009. AS 30 will be mandatory in respect of accounting periods commencing on or after 1st April, 2011.
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the manner in which the audit is conducted and certain other clarifications regarding audit. Question 2 Comment on the following with reference to the Chartered Accountants Act, 1949 as amended by the Chartered Accountants (Amendment) Act, 2006 and Schedules thereto: (a) M/s MN & Co., a firm of Chartered Accountants prepared and signed the forecast of a company's earnings contingent upon future transactions without mentioning the basis on which the said estimates were prepared. A bank granted a loan to the said company based on the above forecast signed by M/s MN & Co. When the company defaulted in repayment of the loan, the bank filed a complaint against M/s MN & Co. (5 Marks) (b) Mr. P, a Chartered Accountant, did not maintain any books of account on the ground that his income did not exceed the limits prescribed u/s 44AA of the Income-tax Act, 1961. (4 Marks) (c) M/s ABC, a Kolkata based firm of Chartered Accountants having 5 partners accepts the statutory audit of D Pvt. Ltd for 2008-09 at an audit fee of Rs.5,000. D Pvt. Ltd was incorporated on 1st October, 2005. (5 Marks) (d) An auditor of a cooperative society has agreed to charge fees @ 5% of the profits of the society. (4 Marks) Answer (a) Forecast of a companys earning Clause (3) of the Second Schedule of Chartered Accountants Act, 1949 provides that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he permits his name or the name of the firm to be used in connection with the estimates of earnings, contingent upon future transactions, in a manner which may lead to the belief that he vouches for the accuracy of the forecast. The Council has issued a guidance note wherein they have considered the implications of the above clause. After consideration of the various factors, council has taken the view that the above clause does not preclude a chartered accountant from associating his name with forecasts. He can participate in the preparation of profit or financial forecasts and also can review them provided he indicates clearly in his report: (i) the sources of information (ii) the basis of forecasts and (iii) the major assumptions made in arriving at such forecasts so long as he does not vouch for the accuracy of the forecasts. The Council recognises that all forecasts are estimates, based on certain assumptions,
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duly evaluated on a consideration of various relevant factors and as such not capable of being ascertained with accuracy. In the instant case, the Chartered Accountant can prepare and sign financial forecasts and also can review them, but he must indicate clearly in his report the basis of forecasts etc. as discussed earlier. In the given case, he has not mentioned in his report the bases on which the estimated earnings of the company is ascertained. This made the bank to believe that he had vouched the accuracy of the forecast and advanced the loan, thereby suffering losses. The Chartered Accountant is guilty of professional misconduct under the above clause. The bank is justified in making a complaint to the Institute against M/s. MN & Co. (b) Non-maintenance of books of account by a chartered accountant: In exercise of the powers conferred by clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute has specified that a member of the Institute in practice, shall be deemed to be guilty of professional misconduct, if he or the firm of chartered accountants of which he is a partner, fails to maintain and keep in respect of his/its professional practice, proper books of account whether the income exceeds the limit prescribed under section 44AA of the Income Tax Act, 1961 or not. The books of account required mainly are: (i) a cash book and (ii) a ledger. In view of the above clause, Mr. P, a chartered accountant will be guilty of professional misconduct. (c) Minimum audit fees in respect of audit: According to ICAI guideline, it is specified by the Council that a member of the Institute in practice shall not, on behalf of the firm of chartered accountants in which he is a partner, accept or carry out any audit work involving receipt of audit fees (excluding reimbursement of expenses, if any for such work of an amount less than what is specified hereunder; (a) Consisting of 5 or more partners but less than 10 partners with at least one partner holding a certificate of practice for five years or more; or (b) Consisting of 10 or more partners with at least one partner holding certificate of practice for five years or more.
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Practicing firm having 5 or more partners but less than 10 partners (i) In cities with population of 3 million and above Rs.6000/- p.a. Rs.3500/- p.a.
Practicing firm having 10 or more partners Rs.12000/- p.a. Rs.8000/- p.a.
(ii) In cities/towns having population of less than 3 million
In view of the above, audit fees charged by M/s. ABC Rs.5000/- is less than the prescribed limit of rs.6000/-. Thus member of the Institute in practice M/s. ABC shall be deemed to be guilty of professional misconduct. (d) Charging Fees on Percentage Basis. As per the above clause Chartered Accountant in practice shall charge or offer to charge, accept or offer to accept in respect of any professional work, fees which are based on a percentage of profits or which are contingent upon the findings or result of work, provided that: (i) In case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets.
(ii) In the case of an audit of a co-operative society, the fees may be based on a percentage of the paid up capital or the working capital or the gross or net income or profits, and (iii) In the case of a valuer, for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of property valued. As the co-operative society is included in the above exception, the auditor is not guilty of any professional misconduct. Question 3 (a) What are the procedures to be followed by a Statutory Auditor in the audit of opening balances if the financial statements for the preceding year were audited by another auditor? (8 Marks) (b) Give an illustration of an Audit Report containing 'Emphasis of Matter' for a significant uncertainty. (8 Marks)
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Answer (a) Audit Procedures for Opening Balances (SA 510) The sufficiency and appropriateness of the audit evidence, the auditor will need to obtain regarding opening balances, would depend on the following matters: The accounting polices followed by the entity. Whether the auditors report contained an unqualified opinion, a qualified opinion, adverse opinion or disclaimer of opinion where the financial statements of the preceding period were audited. The nature of the opening balances, including the risk of their misstatement in the financial statements for the current period. The materiality of the opening balances relating to the financial statements for the current period.
The auditor will need to consider whether the accounting polices followed in the preceding period as per which the opening balances have been arrived at, were appropriate and that those policies are consistently applied in the financial statements for the current period and where such accounting policies are inappropriate, the same have been changed in the current period and adequately disclosed. When the financial statements for the proceeding period were audited by another auditor the current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing the copies of the audited financial statements. Ordinarily, the current auditor can place reliance on the closing balances contained in the financial statements for the preceding period, except when during the performance of audit procedures for the current period, the possibility of misstatements in opening balances is indicated. When the financial statements of the preceding period were not audited or the auditor is not satisfied by using the procedures described above, the auditor will need to perform other procedures discussed as under: 1. For current assets and liabilities, some audit evidence can ordinarily be obtained as part of the audit procedures preformed during the current period. For example, the collection / payment of opening accounts receivable / accounts payable during the current period will provide some audit evidence as to their existence, right and obligations, completeness and valuation at the beginning of the period. For other assets and liabilities, such as fixed assets, investments and long-term debt, the auditor will ordinarily examine the records underlying the opening balances. In certain cases, the auditor may be able to obtain confirmation of opening balances from third parties, for example, for long-term debt and investments.
2.
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(b) An Illustration of an Audit Report containing emphasis of matter paragraph for a significant uncertainty. 1. An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditors report is as follows: Without qualifying our opinion, we draw attention to Note X of Schedule . to the financial statements. The entity is the defendant in a lawsuit alleging infringements of certain patent rights and claiming royalties and punitive damages. The entity has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability, that may result, has been made in the financials statements. In our opinion In our opinion and to the best of our information and according to the explanation given to us, the financial statements give a true and fair view in conformity with the accounting principles generally accepted in India: (a) in the case of the balance sheet, of the State of affairs of -------------- as on 31st March 2xxxx and (b) in the case of the profit and loss account, of the profit/loss for the year ended on that date. 2 The addition of a paragraph, emphasising a going concern problem or significant uncertainty is ordinarily adequate to meet the auditors reporting responsibilities regarding such matters. However, in extreme cases, such as situations involving multiple uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph.
Question 4 (a) In the context of Audit of Banks, how will you verify the following: (i) Contingent liabilities. (4 Marks) (4 Marks) (ii) Inter office adjustments.
(b) Discuss the reporting requirements in Form 3CD of the Tax Audit Report U/S 44AB of the Income-tax Act, 1961 for the following: (i) Tax on distributed profits. (4 Marks) (4 Marks) (ii) Brought forward loss or depreciation allowance.
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Answer 4 (a) (i) Verification of contingent liabilities in the context of Bank audit In respect of contingent liabilities, the auditor is primarily concerned with seeking reasonable assurance that all contingent liabilities are identified and property valued. Auditor should generally follow the audit procedures given below: (1) Ascertain whether there are adequate internal controls to ensure that transactions giving rise to contingent liabilities are executed only by persons authorised to do so and in accordance with the laid down procedures. (2) Ascertain whether the accounting system of the bank provides for maintenance of adequate records in respect of such obligations and whether the internal controls insures that contingent liabilities are properly identified and recorded. (3) Perform substantive audit tests to establish the completeness of the recorded obligations. Such tests include confirmation procedures as well as examination of relevant records in appropriate cases. (4) Review the reasonableness of the year end amount of contingent liabilities in the light of previous experience and knowledge of the current years activities. (5) Obtain representation from the management that all contingent liabilities have been disclosed and that the disclosed contingent liabilities do not include any contingencies which are likely to result in a loss and which, therefore, require adjustments of assets or liabilities. (6) To verify that the provisions of AS 29, Provisions, contingent liabilities and contingent assets have been complied with. (ii) Verification of Inter-office Adjustments in Bank audit: Inter-office Adjustments represent the balance of all inter-branch transactions of the bank. The same are to be disclosed NET. If the inter-office adjustment (Net) is a debit, it is to be shown under other assets and if it is a credit, it is shown under other Liabilities and Provisions. These can be subdivided into segments like DD paid, Inter-branch remittances, Head Office Account, etc. The auditor should pay special attention to the following points: (i) The origin and validity of old outstanding unmatched entries, particularly debit entries. The auditor may also seek confirmation of transactions relating to outstanding.
(ii) Whether there are any reversal entries indicating the possibilities of irregular payments or frauds. (iii) Whether the balances include any items in the nature of cash-in-transit, which remain pending for more than a reasonable period. This is because such items are not expected to remain outstanding beyond a very small period during which they are in transit.
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(iv) Whether transactions, other than those relating to inter-branch transactions have been included in inter-branch accounts. (v) Any unusual items put through inter-branch accounts as well as old or large entries outstanding in inter-branch accounts should be carefully looked into. The auditor may also seek explanations from the management in this regard. (b) Reporting requirements in Form 3 CD of the Income Tax Report u/s.44AB of Income Tax Act, 1961 (i) Tax on distributed profits Section 115-O provides for a special levy at the prescribed rate, on the amount of dividend declared, distributed or paid by domestic company whether such dividend is out of current profit or accumulated profits. The tax auditor has to report on profit distributed during the financial year and therefore the amount of tax paid on such distributed profit at the prescribed rate plus surcharge at the applicable rate on tax and education cess thereon, the dates of payment with amount, has to be reported in this clause. (ii) Brought forwards loss or Depreciation allowances: The manner of reporting: S.No Ass. Year Nature of Amount as loss/allowance returned (in (in rupees) rupees) Amount as assessed Remark
For giving the above information, the auditors should verify the assessment records i.e., Income tax return filed. Assessment orders Appellate orders Rectification / revision orders of the earlier years and ascertain if the figures given in the above clause are correct. Question 5 (a) As a Statutory Auditor, how do you verify the existence of Related Parties and disclosure of Related Party Transactions? (8 Marks) (b) Draft an illustrative engagement letter for an engagement to compile financial statements of DEF Ltd. (8 Marks)
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Answer (a) SA 550 Related Parties: Its Existence and Disclosure SA 550 Related Parties establishes standard on the auditors responsibilities and audit procedures regarding related parties and transactions with such parties. It requires that the auditor should perform audit procedures designed to obtained sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the related party transactions that are material to the financial statements. The auditor should review information provided by the management of the entity, identifying the names of all known related parties and should perform the following procedures in respect of the completeness of this information: (a) review the working papers for the prior years for names of known related parties; (b) review the entitys procedures for identification of related parties; (c) inquire as to the affiliation of directors and key management personnel, officers with other entities; (d) review shareholders records to determine the names of principal shareholders or, if appropriate, obtain a list of principal shareholders from the share register; (e) review memorandum and articles of association, minutes of the meetings of shareholders and the board of directors and its committees and other relevant statutory records such as the register of directors interest; (f) inquire of other auditors (Internal auditor, special auditors appointed under any statute, cost auditors and concurrent auditors) of the entity as to their knowledge of additional related parties and review the report of the predecessor auditors;
(g) review the entitys income tax returns and other information supplied to regulatory agencies; and (h) review the joint venture and other relevant agreements entered into by the entity. If, in the auditors judgment, the risk of significant related parties remaining undetected is low, these procedures may be reduced or modified as per the circumstances. Where the financial reporting framework requires disclosure of related party relationships, the auditor should satisfy himself that disclosure is adequate. Finally, if the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or conclude that their disclosure in the financial statements is not adequate, the auditor should express a qualified opinion or a disclaimer of opinion in the report, as may be appropriate.
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(b) As per SRS 4410 Engagements to compile Financial Information an illustration report of an Engagement Letter for a Compilation of financial statements is given below: (Date) To the Board of Directors (or other appropriate representatives of senior management): You have, vide your letter dated ________ requested that we compile the balance sheet of __________(name of the company) as at ______________(date) and the related profit and loss account and the cash flow statement for the year ended on that date. We are pleased to confirm our acceptance and understanding of the engagement by means of this letter. As no audit or review engagement procedures would be carried out, no opinion on the financial statements will be expressed. Further, our engagement cannot be relied upon to disclose whether frauds or defalcations, or illegal acts exist. However, we will inform you of any such matters which might come to our attention in the course of the engagement. As management, you are responsible for: (a) the accuracy and completeness of the information supplied to us, including maintenance of adequate accounting records and internal controls and selection and application of appropriate accounting policies. (b) preparation and presentation of the financial statements of the entity, in accordance with the applicable laws and regulations, if any. (c) safeguarding the assets of the entity and also establishing appropriate controls designed to prevent and detect fraud and other irregularities. (d) ensuring that the activities of the entity are carried in accordance with applicable laws and regulations and that it institutes appropriate controls to prevent and detect any non-compliance. You will confirm that events and transactions are recorded in accordance with the applicable Accounting Standard(s), issued by the Institute of Chartered Accountants of India and other recognised accounting principles and practices and inform us of any departures therefrom. As part of our normal procedures, we may request you to provide written confirmation of any information or explanations given to us orally during the course of our work. We understand that the intended use and distribution of the information we have compiled is _________________ (specify).
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We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information requested in connection with our engagement. Our fees will be billed as the work progresses. Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our compilation of your financial statements. XYZ & Co. Chartered Accountants Signature Question 6 Write short notes on the following: (a) Register of Claims for General Insurance Companies (b) Current Period Consolidation Adjustments (c) External Confirmations in Audit (d) Propriety elements in CARO, 2003. Answer (a) Register of claims for General Insurance Companies The following register and records are generally prepared in respect of claims by the General Insurance Companies: (i) Claims intimation register. (ii) Claims paid register. (iii) Claims Disbursement bank book. (iv) Claims Dockets, normally containing the following records: Claim intimation, claim forms, particulars of policy, survey report, photograph showing damage, Repairers bills, letter of subrogation, police report, fire service report, claim settlement note, claim satisfaction note, salvage report, salvage disposal note, claims discharge voucher etc. (v) Report of quality assurance team and (vi) Salvage register. (4x4=16 Marks)
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(b) Current Period Consolidation Adjustment These are those adjustments made in the accounting period for which consolidated financial statements are prepared. Current period consolidation adjustments primarily relate to elimination of intra-group transactions and account balances including: (a) intra-group interest paid and received or management fees, etc; (b) unrealised intra-group profits on assets acquired from other subsidiaries; (c) intra-group indebtedness; (d) adjustments relating to harmonising the different accounting policies being followed by the parent enterprise and its subsidiaries; (e) adjustments made for effects of significant transactions or other events that occur between the date of the financial statements of the parent and one or more of the components, if the financial statements to be used for consolidation are not drawn upto the same reporting date; and (f) determination of movement in equity attributable to the minorities since the date of acquisition of the subsidiary.
(c) SA 505 External Confirmations in Audit SA 505 External Confirmations establishes standards on the auditors use of external confirmations as a means of obtaining audit evidence. According to SA, the auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level for the applicable financial statement assertions. The auditor should employ external confirmation procedures in consultation with the management. SA 500 indicates that, in general, audit evidence obtained from external sources is more reliable than audit evidence generated internally, and that written (documentary) audit evidence is more reliable than audit evidence in oral form. Accordingly, audit evidence in the form of written responses to confirmation request received directly by the auditor from third parties who are not related to the entity being audited, when considered individually or cumulatively with audit evidence from other procedures, may assist in reducing audit risk for the related financial statement assertions to an acceptably low level. Situations where external confirmations may be used include the following: Bank Balances and other information from bankers Accounts receivable balances Stocks held by third parties Property title deeds held by third parties Investments purchased but delivery not taken
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Loans from lenders Accounts payable balances Long outstanding share application money.
(d) Propriety elements in CARO, 2003 Propriety audit stands for verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct. The following are the propriety elements of CARO, 2003: (a) If the company has given or taken loans, secured or unsecured to/from companies, firms or other parties listed in the register maintained under Section 301 of the Companies Act, whether the rate of interest and other terms and conditions of such loans are prima-facie prejudicial to the interests of the company. (b) If overdue amount of loan the given to or taken from companies firms or other parties listed in the register maintained under Section 301 of the Companies Act, is more than Rupees one lakh, whether reasonable steps have been taken by the company for recovery/payment of principal and interest. (c) Whether particulars of contracts or arrangements referred to in Section 301 of the Act have been entered in the register required to be maintained. (d) Is the company regular in depositing undistributed statutory dues like Provident fund, Employee State Insurance, Income Tax, Sales Tax, Service Tax etc. with the appropriate authorities. (e) Whether the company has made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Companies Act, 1956 and if so whether the price at which the shares have been issued is prejudicial to the interest of the company.
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PAPER 4 : CORPORATE LAWS AND SECRETARIAL PRACTICE
Answer all questions.

Question 1 (a) A stock exchange desirous of taking over another stock exchange, seeks your advice on corporatisation. Examining the provisions of the Securities Contracts (Regulation) Act, 1956 and the meaning of the terms corporatisaton and demutualisation, advise the stock exchange about the steps to be taken to give effect to the scheme of corporatisation. (5 Marks) (b) Mr. Veer a newly entered investor in the field of securities business seeks your advice on the investments to be made in securities of large Companies for long term purposes. With this object in view, he wants to know the meaning of the following terms commonly used in any stock exchange. (i) Derivative (ii) Option in securities (iii) Spot delivery contract Advise suitably. Answer (a) CORPORATISATION & DEMUTUALISATION OF STOCK EXCHANGES Corporatisation means the succession of a recognized stock exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860, by another stock exchange, being a Company incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities carried on by such individuals or society. Demutualisation means the segregation of ownership and management from the trading rights of the members of a recognized stock exchange in accordance with a scheme approved by the SEBI. Steps for Corporatisation & Demutualisation. [Section 4B-Securities Contracts (Regulations) Act,1956] In accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, as contained in Section 4B: 1. All recognized stock exchanges referred to in Section 4A shall, within such time as may be specified by the SEBI submit a scheme for corporatisation and demutualization for its approval. On receipt of the scheme, the SEBI may, after making such enquiry as may be necessary in this behalf and obtaining such further information, if any, as it may require and if it is satisfied that it would be in the interest of the trade and also in the public interest, approve the scheme with or without modification. (5 Marks)
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No scheme shall be approved by the SEBI if the issue of shares for a lawful consideration or provision of trading rights in lieu of membership card of the members of a recognized stock exchange or payment of dividends to members have been proposed out of any reserves or assets of that stock exchange. Where the scheme is approved, the scheme so approved shall be published immediately by(a) The SEBI in the Official Gazette (b) The recoginised Stock Exchange in such two daily newspapers circulating in India, as may be specified by the SEBI, and upon such publication, notwithstanding anything to the contrary contained in this Act or any other law for the time being in force or any agreement, award, judgment, decree or other instrument for the time being in force, the scheme shall have effect and be binding on all persons and authorities including all members, creditors, depositors and employees of the recognized stock exchange and on all persons having any contract, right, power, obligation or liability with, against, over, to, or in connection with, the recognized stock exchange or its members.
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Where the SEBI is satisfied that it would not be in the interest of the trade and also in the public interest to approve the scheme, it may, by an order, reject the scheme and such order of rejection shall be published by it in the Official Gazette. SEBI shall give a reasonable opportunity of being heard to all the persons concerned and the recognized stock exchange concerned before passing an order rejecting the scheme. SEBI may, while approving the scheme by an order in writing, restrict (a) the voting rights of the shareholders who are stock brokers of the recognized stock exchange. (b) the right of shareholders or a stock broker of the recognized stock exchange to appoint the representatives on the governing board or the stock exchange.
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The order made by SEBI shall be published in the Official Gazette and on the publication thereof, the order, notwithstanding anything to the contrary contained in the Companies Act,1956. or any other law for the time being in force, have full effect. Every recognized stock exchange, in respect of which the scheme for corporatisation or demutualization has been approved shall either by fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by SEBI, ensure that at least 51% of its equity share capital is held, within 12 months from the date of publication of the order by the public other than shareholders having trading rights. The SEBI may, on sufficient cause being shown to it and in the public interest, extend the said period by another 12 months.
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(b) Mr. Veer, a new investor, desirous of entering investments business in any Stock Exchange, on different terms commonly used in any Stock Exchange as follows:
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(i)
Derivative: Derivative includes (a) a security derived from a debt instrument, share, loan whether secured or unsecured risk instrument or contract for differences or any other form of security. (b) a contract, which derives its value from the prices or index of prices, of underlying securities.[Section 2 (ac) of the Securities Contracts (Regulation) Act, 1956].
(ii) Option in Securities: Option in Securities means a contract for the purchase or sale of a right to buy or sell or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call securities. [Section 2(d) of the Securities Contracts (Regulation) Act, 1956]. (iii) Spot Delivery Contract Spot delivery contract means a contract which provides for: (i) actual delivery or securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality; transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository. [Section 2(i) of the Securities Contracts (Regulation) Act, 1956].
(ii)
Question 2 (a) (i) Mr. Ruchi resided for a period of 170 days in India during the financial year 2008-09 and thereafter went abroad. He came back to India on 1 st April,2009 as an employee of a business organization. What would be his residential status during financial year 2009-10 under the Foreign Exchange Management Act,1999.
(ii) Pamtop is a London based Company having several business units all over the world. It has manufacturing unit called Laptop with headquarters in Bengaluru. It has a branch in Seoul, South Korea which is controlled by the headquarters in Bengaluru. What would be the residential status under the FEMA, 1999 of Laptop in Bengaluru and that of Seoul branch? (7 Marks) (b) Referring to the provisions of the Foreign Exchange Management Act, 1999, examine whether V, an exporter is bound to make declaration of the following goods exported from India to United Kingdom: ( 7 Marks) (i) Exports software valuing Rs.50,000. (ii) V gifts certain items of jewellery valued at Rs.20,000 to his friend in Australia. (iii) V exports certain goods valuing US $ 5,000 to Myanmar under Barter Trade Agreement.
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Answer (a) (i) Residential status of an individual for a particular financial year is determined with reference to his residence in India in the immediately preceding financial year. In the given problem Mr. Ruchi resided in India for less than 183 days in the financial year 2008-09. Therefore for the financial year 2009-10 he is a person resident out side India. Unless a person resides in India for more than 182 days in the preceding financial year, he can in no case be termed as a person resident in India. [Section 2(v) FEMA, 1999].
(ii) Pamptop being a London based Company would be a person resident outside India Section 2 (u) of the FEMA, 1999 defines person Under clause (vii) thereof person would include any agency office or branch owned or controlled by such person. The term such person appears to refer to person who is included in clauses (i) to (vi). Accordingly, a laptop unit in Bengaluru, being a branch of a Company, would be a person. Section 2(v) defines person resident in India, under clause (iii) thereof person resident in India, would include an office, branch or agency in India owned or controlled by a person resident outside India. Laptop unit in Bengaluru is owned or controlled by a person resident outside India Hence, it would be a person resident in India. However Seoul branch though not owned is controlled by Laptop unit in Bengaluru which is a person resident in India. Hence, prima-facie, it may be possible to hold a view that the Seoul branch is also a person resident in India. (b) In accordance with provisions of the FEMA, 1999 as contained in Section 7read with Section 8, it imposes on an exporter to make appropriate declaration of the value of the goods being exported and he is also required to repatriate the foreign exchange due to India in respect of such exports to India in the manner within the time as may be prescribed. Under Section 8, the exporter is under an obligation to realise and repatriate to India such foreign exchange. However, if there is an delay in the receipt of export, it will not be a violation which shall be punishable. Section 8 applies to a resident who shall take all the reasonable steps, depending upon the individual case. There are certain categories of export for which declaration need not be made. These are: (a) Export of goods/software no exceeding Rs.25,000 in value. (b) Export by way of gift not exceeding Rs.1 lac in value. (c) Export of goods not under exceeding US $ 1000 or its equivalent per transaction to Myanmar under Barter Trade Agreement. Taking into consideration the above: (i) In the first case since the value is exceeding Rs.25,000 in value, therefore, declaration has to be completed.
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(ii) In the second case since the value of gift of jewellery to Vs friend in Australia is less than Rs.1 lac in value, the gift does not need any declaration to be completed. (iii) In the third case since the value is more than U.S.$ 1,000,therefore, the declaration has to be completed. Note : In the question, it has been stated that goods are exported from India to United Kingdom which has no relevance when subsequently, it has been stated that goods are exported to different countries such as Australia, Myanmar. There is no relevance of mentioning the name of the Country i.e. UK in the question. This perhaps might have confused the students while writing the answer Question 3 (a) AVD Limited was incorporated on 1 st April,2006. The Company got its shares listed at Bombay Stock Exchange on 30 th September, 2007. The Company at an Extra-Ordinary General Meeting held on 31 st October,2009, decided to go for public issue of equity shares to an extent of Rs.300 crores. The net worth of the Company as per the audited Balance sheets in the financial years 2007-08 and 2008-09 was Rs.50 crores and 60 crores respectively. During the financial year 2008-09 the Company had already issued equity shares amounting to Rs.20 crores. There is no change in the name of the Company or its business activities during the financial year 2008-09. Referring to the guidelines issued by Securities and Exchange Board of India, advise the Company on the following: (8 Marks) (i) Whether the Company can go ahead with the public issue of equity shares as stated above.
(ii) What would by your advice in case the net worth of the Company as per audited balance sheets in the financial years 2007-08 and 2008-09 was Rs.20 crores and 30 crores respectively? (iii) What would be the position in case the Company in question changed its name to AJD Limited during the year 2008-09, three months before filing the offer document and the revenue due to change of business activity suggested by the new name during the financial year 2008-09 was 40% less than the total revenue for the financial year 2007-08 reckoned from the date of filing the offer document? (b) (i) An arrangement has been made among the cotton producers that the cotton produced by them will not be sold to mills below a certain price. The arrangement is in writing but it is not intended to be enforced by legal proceeding. Examine whether the said arrangement can be considered as an agreement within the meaning of Section 2(b) of the Competition Act,2002.
(ii) The orange producers of Nagpur have formed an association to control the production of oranges. Examine whether it will be considered as a cartel within the meaning of Section 2(c)of the Competition Act,2002. ( 8 Marks)
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Answer (a) PUBLIC ISSUE OF SHARES BY A LISTED COMPANY: As per the SEBI (DIP) Guidelines 2000 a listed Company shall be eligible to make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date provided that the aggregate of the proposed issue and all the previous issues made in the same financial year in terms of the size (i.e. offer through offer document + allotment + promoters contribution through the offer document), issue size not exceed 5 times its pre-issue net worth as per the audited balance sheet of the last financial year. It is further provided that in case there is a change in the name of the issuer Company within the last 1 year (reckoned from the date of filing of the offer document), the revenue accounted for by the activity suggested by the new name is not less than 50% of its total revenue in the preceding 1 full year period). Applying the above guidelines, the questions as asked in the problem can be answered as under: 1. There are two conditions in the guidelines as stated above viz.i) that the aggregate issue i.e. proposed + proposed + all the previous issues made in the same financial year should not exceed 5 times the net worth of the Company; ii) there is no change in the name of the issuer Company within the last 1 year. In the question the proposed issue of Rs.300 crores + Previous issue in the same financial year is Rs.20 crores, making an aggregate of Rs.320. Since the aggregate of the issue is more than 5 times of Net Worth, i.e. more than Rs.300 crores , the proposed offer is not within the limit, Company cannot proceed ahead with in the proposed issue of Rs.300 crores. In the second case the net worth is only Rs.30 crores. 5 times of the net worth comes to Rs.150 crores only. Since the aggregate of the proposed issue and the previous issue during the same financial year is Rs.320 crores, which is exceeding the limits of Rs.150 crores, as calculated above, the Company cannot proceed with the public issue of shares as proposed in the second case. In the third case the offer cannot be made since the current year revenue is less than 50% of the total revenue of the previous year. As per Section 2(b) of the Competition Act, 2002 an Agreement includes any arrangement or understanding or action in concert:(i) whether or not, such arrangement, understanding or action is formal or in writing; or
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(ii) whether or not, such arrangement, or understanding or action is intended to be enforceable by legal proceedings. In the given case the understanding reached among the cotton producers not to sell below a certain price shall amount to an agreement as defined under Section 2(b) notwithstanding the fact that through the arrangement is in writing but not intended to be enforced by legal proceeding.
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(ii)
As per Section 2(c) of the Competition Act, 2002 the term cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services. The term cartel has an inclusive meaning. Thus an association formed to control the production of oranges is within the aforesaid definition of a cartel. Hence the association of orange producers of Nagpur will be considered as a cartel under the provisions of the Act.
Question 4 (a) (i) Many a time a proviso is added to a Section of the enactment. Explain the function of such a proviso while carrying out the interpretation? (8 Marks)
(ii) Discuss the rules of interpretation of deeds and documents.
(b) PQR Limited held three board meetings till 31st December, 2008 during the financial year 2008-09. The next board meeting was due to be held on 27 th March,2009, but for want of quorum the meeting could not be held. A group of shareholders complained that the Company has violated the provisions of Section 285 of the Companies Act, 1956 in not holding the required board meeting. Further, Mr. P and Mr. Q who are the directors of the Company informed the Company their inability to attend the meeting because the notice of the meeting was not served on them. Discuss whether there is any default on the part of the Company and the consequences thereof. What will be the quorum in the given situation ? ( 7 Marks) Answer (a) (i) The normal function of a provisio is to except something out of the enactment or to qualify something stated in the enactment which would be within its purview if the proviso were not there. The effect of the proviso is to qualify the preceding enactment which is expressed in terms which are too general. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment. Ordinarily a proviso is not interpreted as it stating a general rule. It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the provision to which it has been enacted as a proviso and not to the other. (Ram Narain Sons Ltd. Vs. Assistant Commissioner of Sales Tax.,A.I.R,1995 SC 765) An explanation is at times appended to a Section to explain the meaning of the text of the section. An explanation may be added to include something within the Section or to exclude something from it. An explanation should normally be so read as to harmonise with and clear up any ambiguity in the main section. It should not be so construed as to widen the ambit of the section. (ii) The rules regarding interpretation of deeds and documents are as follows: First and the foremost point that has to be borne in mind is that one has to find out
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what a reasonable man, who has taken care to inform himself of the surrounding circumstances of a deed or a document, and of its scope and intendments, would understand by the words used in that deed or document. It is inexpedient to construe the terms of one deed by reference to the terms of another. Further, it is well established that the same word cannot have two different meanings in the same document, unless the context compels the adoption of such a rule. The Golden Rule is to ascertain the intention of the parties to the instrument after considering all the words in the document/deed concerned in their ordinary natural sense. For this purpose, the relevant portions of the document have to be considered as a whole. The circumstances in which the particular words have been used have also to be taken into account. Very often, the status and training of the parties using the words have also to be taken into account as the same words may be used by a ordinary person in one sense and by a trained person or a specialist in quite another sense and a special sense. It has also to be considered that very many words are used in more than one sense. It may happen that the same word understood in one sense will give effect to all the clauses in the deed while taken in another sense might render one or more of the clauses ineffective. In such a case the word should be understood in the former and not in the latter sense. It may also happen that there is conflict between two or more clauses of the same document. An effort must be made to resolve the conflict by interpreting the clauses so that all the clauses are given effect to. If, however, it is not possible to give effect to all of them,then it is the earlier clause that will over ride the latter one. Similarly, if one part of the document is in conflict with another part, an attempt should always be made to read the two parts of the documents harmoniously, if possible. If that is not possible, then the earlier part will prevail over the latter one which, therefore, be disregarded. (b) Section 285 of the Companies Act, 1956 requires Board of Directors to meet at least once in every three months, respective of whether it is the board of a public Company or a private Company and at least four such meetings must be held in every year. However, the Central Government may, by notification in the Official Gazette, direct that these provisions will not apply in relation to any class of Companies or will apply in relation thereto subject to such exceptions, modifications or conditions as may be specified in the notification As per Section 288 of the Act(1) if a meeting of the board could not be held for want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.
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(2) The provisions of Section 285 shall not be deemed to have been contravened merely by reason of the fact that a meeting of the board which had been called in compliance with the terms of that Section could not be held for want of a quorum. (3) As the meeting could not be held for want of quorum, it cannot be said that PQR Ltd has violated the provisions of Section 285 of the act. Notice of every meeting has to be served in writing on each director for the time being in India, and at his usual address in India to every other director(Section 286). Every officer of the Company whose duty is to serve the notice as aforesaid and who fails to do so shall be punishable with fine extending to Rs.1000 (Section 286). As no notice, was served on officer of the Company who is responsible for the default shall be punishable with fine to the extent of one thousand rupees. The Supreme Court, in case of Parmeshwari Prasad Vs. Union of India.(1974) has held that the resolutions passed in the board meeting shall not be valid, since notice to all the Directors was not given in writing. Notice must be given to each Director in writing. Hence, even though the directors concerned knew about the meeting, the meeting shall not be valid and resolutions passed at the meeting also shall not be valid. In relation to board meeting quorum implies fully qualified and disinterested directors who must be present at the meeting, so as to enable the board of which they are the constituents to legally transact the business thereat. According to Section 287 the quorum of board meeting is one third of the total strength of board (any fraction contained in the said one third being rounded of as one) or two directors whichever is higher. The total strengths is to be derived after deducting the number of directors whose offices are vacant. Question 5 (a) Mr. Weldon was appointed as a director of Esquire Engineering Ltd. with effect from 1 st October,2008. Since the Company wanted to take full advantage of the wisdom and experience of Mr. Weldon, it offered him attractive remuneration payable on monthly basis and made an application to the Central Government for approval to pay such remuneration. Anticipating the approval of the Central Government. Esquire Engineering Ltd. started paying such remuneration from the date of appointment and continued to do so till 31st March, 2009. The Central Government did not fully approve the remuneration proposed by the Company and restricted the same to a lower amount. On scrutiny of accounts, the Company noticed that till 31 st March, 2009 it has paid to Mr. Weldon a total sum of Rs.5.50 lakhs in excess of the remuneration sanctioned by the Central Government. Explain the relevant provisions of the Companies Act, 1956, in respect of recovery and waiver of recovery of the excess remuneration so paid. Draft a resolution for recovery/waiver of recovery of the excess remuneration paid by the Company. (8 Marks)
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(b) SKD an employee of M/s Moreh Ltd. met with an accident and died. The accident occurred when SKD was on Companys duty. He held one hundred Shares partly paid. Normally the Company has a first and paramount lien on the shares. The Board of Directors, however, relaxed the said provision with regard to the hundred shares held by SKD as a goodwill gesture on the part of the Company. Is the action of the Company valid? State the reasons. Also state whether the Companys lien can be extended to dividend payable on such shares. (7 Marks) Answer (a) A director who is not a Managing Director or Whole Time Director can draw remuneration by way of monthly, quarterly or annual payment only if so authorized by the Central Government (Section 309). The Central Government may while sanctioning the payment of remuneration under Section 309, fix remuneration at such amount as it may deem fit (Section 637AA). If any director draws any remuneration in excess of the remuneration sanctioned by the Central Government, he shall refund such excess remuneration to the Company. Until such excess remuneration is refunded he shall hold it in trust for the Company. The Company shall not waive the recovery of any sum refundable to it unless permitted by the Central Government. In the present case, Mr. Weldon cannot keep remuneration drawn by him which is in excess of the remuneration sanctioned by the Central Government. Accordingly he shall refund to the Company Rs.5.50 lakhs. Until such refund is made he shall hold the excess amount in trust for the Company. Further the Company cannot waive the recovery of excess remuneration. However, if on an application made to the Central Government, the Central Government may permit, the waiver of recovery of excess remuneration. The Company can waive the recovery of excess remuneration and then Mr. Weldon shall have a right to retain the excess remuneration drawn by him. For recovery of the excess remuneration paid to Mr. Weldon, there is no need to pass any resolution. However, for waiver of recovery a resolution is required to be passed by the Company in a general meeting and approval of the Central Government in necessary. Resolution Resolved that subject to the approval of the Central Government, consent of the Company be and is hereby given waiving the recovery of an amount of Rs.5.50 lakhs paid to Mr. Weldon, the director of the Company, during the period 1 st October, 2008 to 31st march 2009 being in excess of the remuneration sanctioned by the Central Government vide letter no date . Resolved further that an application to be made to the Central Government and the Company Secretary be and is here by authorized to take the necessary steps in this regard. (b) A Company cannot have lien on shares unless provided in the Articles of Association. Therefore provision to this effect should be in the articles. As per Regulation 9 of Table A
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of the Companies Act,1956 the Company has first and paramount lien on every share which has not been fully paid up for all monies (whether presently payable or not) called or payable at a fixed time in respect of that share and on all shares which are not fully paid up standing registered in the name of a single person, for all moneys presently payable by him or his estate to the Company. The Board of Directors may, however, at any time declare any share to be wholly or in part exempt from the said provision. Hence the decision of the Board of Directors of M/s Moreh Ltd to relax the provisions of lien in respect of shares held by SKD is in order and valid (Vide Regulation 9 of Table A). Further the Companys lien is extended to all dividends payable on such shares as per regulation 9(2) of Table A to the Companies Act,1956. Question 6 (a) MDV Ltd. is an infra-structure Company with paid up capital and free reserves of Rs.two crores and one crore respectively. The Board of Directors granted a loan of Rs.50 lakhs to ABC Ltd., and also gave a guarantee to IDBI for giving a loan of Rs.one crore to RMA Co. MDV Ltd., has not given any other loan or guarantee to any one. A group of shareholders of MDV Ltd. objected to the above deals on the ground that they are violative of the provisions of the Companies Act, 1956. Applying that provisions of the said enactment relating to inter-corporate loans and investments in the given case, decide: (7 Marks) (i) Whether the objection raised by the shareholders is tenable? (ii) Would your answer be the same in case the amount of loan granted is Rs.one crore and the guarantee given is for an amount of Rs.one and half crores? (iii) What would be your answer in case MDV Ltd .is a Private Company not being the subsidiary of any Public Limited Company? (b) (i) The Comptroller and Auditor General of India has appointed KOL & Co. to conduct a supplementary audit of XYZ Ltd., a subsidiary of a Government Company. XYZ Ltd, however, is of the opinion that the Comptroller and Auditor General has no power to authorize such audit, it being merely a subsidiary of the Government Company. Is the argument correct? Discuss.
(ii) CRE Ltd., a Government Company wants to appoint Parasnath & Co. as its auditors for the period 2009-10. State with reference to the provisions applicable to Government Companies, the procedure to appoint the auditors. (7 Marks) Answer (a) Problem as asked in the question is based on the provisions, as contained in Section 372A (1) and (8) of the Companies Act, 1956. The Section provides for the ceiling on loans, guarantees, investments etc. Accordingly no Company shall, directly or indirectly (a) make any loan to any other body corporate;
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(b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and (c) acquire, by way of subscription, purchaser or otherwise the securities of any other body corporate, exceeding 60% of its paid-up share capital and free reserves, or 100% of its free reserves, whichever is more. Where the aggregate of the above exceeds the aforesaid limit, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a special resolution passed in a general meeting. Thus applying the above provisions in the given case the answers to the questions shall be as under: 1. The objection raised by the shareholders of MDV Ltd. is not tenable because Section 372A does not apply, if the investment is made by a Company of providing infrastructural facilities. Making loan by the Company in this case is in order and is valid since the provisions of Section 372A do not apply in this case [Sub-Section (8) of Section 372A]. In the second case also the answer remains the same as the Company is exempted from the provisions of Section 372, being infrastructural facilities providing Company. Even in the third case the provisions of Section 372A do not apply to a private Company, unless it is a subsidiary of a Public Company. Thus in case MDV Ltd. is a Private Company not being a subsidiary of a Public Company. It can grant loans or provide guarantees without complying with the restrictions stated in Section 372A. The guarantee given by a holding Company in respect of loan made to the wholly owned subsidiary Company is valid since the provisions of Section,372A do not apply in this case also. [Sub-Section (8) Clause (d) of Section 372A]. As per Section 617 of the Companies Act, 1956 Government Company means any Company in which not less than fifty-one percent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a Company which is a subsidiary of a Government Company as thus defined. As such a Government Company includes subsidiary to a Government Company. So the contention of XYZ Ltd that they are mere subsidiary of the Government Company and as such is not covered by the directions of Comptroller and Auditor General of India is not correct. The Company as such cannot avoid supplementary audit by KOL& Co. (ii) Appointment of auditor of a Government Company is as per section 619(2) of the Companies Act,1956. As per this Section, the auditor of a Government Company shall be appointed or reappointed by the Comptroller and Auditor General of India
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(b) (i)
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provided that the limits specified in Section 224 (1B) and (1C) of the Companies Act, 1956 shall apply in relation to the appointment or reappointment of an auditor under the said Section. Therefore the Company cannot appoint Parsnath & Company as its auditor of the Company, unless they are appointed by Comptroller and Auditor General of India. Procedure for appointment of auditor of a Government Company: Under Section 619 read with Section 224(5) of the Companies Act,1956 the first auditors of a Government Company should be appointed by the Comptroller and Auditor General of India within one month of the date of registration of the Company. Practically, there is no difference in the procedure of appointment of first auditor and the subsequent auditors as in all cases the auditor is to be appointed by the Comptroller and Auditor General of India. The Ministry of Corporate affairs has advised that in order to obviate the delays in the appointment of auditors in Government Companies, the particulars of the Company like name, location of registered office, capital structure, period of financial year, etc; should be sent to Comptroller and Auditor General immediately on registration. In the case of public limited Government Companies, the date on which the Company become entitled to commence business and the certificate of commencement of business was granted should also preferable be furnished along with aforesaid particulars. This timely information will facilitate early appointment of auditors and will be before the statutory meeting, under Section 165 (circular no 20/30/letter no 15/17/73 e.g. date 23rd July, 1973). For subsequent appointment of auditors again the Government Company shall write to the Comptroller and Auditor General of India immediately after the annual general meeting is held for recommending the appointment of auditor. The statutory auditors are appointed for a period of one year and are usually reappointed for not more than two consecutive years. Question 7 (a) X Ltd. had gone into liquidation and a liquidator was appointed to administer the assets and liabilities of the Company. The liquidator of the Company finds that the assets of the Company are not sufficient to meet out the liabilities. He therefore, calls on the contributories including the pat members as per List B to contribute towards the assets. The past members objects to the liquidators act on the ground that since they are no more members of the Company, they are not liable to contribute. Referring to the provisions of the Companies Act, 1956 decide: (i) Whether the contention of the past member is tenable and can they be exempted from the liability to contribute?
(ii) What would be your answer in case the members in question are the present members? ( 8 Marks)
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(b) A group of shareholders holding more than 15% of the issued capital of M/S Defraud Ltd. have filed a petition before the Company Law Board alleging various acts of illegal, invalid and irregular transactions entered into in the name of the Company. Examine the merits of the petition in the light of the judicial pronouncements made in this regard. ( 7 Marks) Answer (a) In accordance with the Section 426 of the Companies Act, 1956, in the event of a Company being wound up every present and past member shall be liable to contribute to the assets of the Company to an amount sufficient (a) for payment of (i) its debts and liabilities, and (ii) costs, charges and expenses of the winding up, and (b) for the adjustment of the rights of the contributories among themselves. The liability of the present member i.e. as per List A shall be limited (i) in case of a Company limited by shares , to the amount remaining unpaid on the shares; and
(ii) in case of a Company limited by guarantee, to the amount undertaken to be contributed by him to the assets of the Company in the event of its being wound up. However, in the winding up of a Company limited guarantee, which has a share capital, every member of the Company shall be liable, to contribute not only the amount undertaken to be contributed by him in the event of winding up but also tocontribute to the extent of any sum unpaid on any shares held by him as if the company were a company limited by shares. Liability of Past Members : (List B) A past member shall not be liable to contribute: (i) if he has ceased to be a member for 1 year or more before the commencement of the winding up;
(ii) in respect of any debt or liability of the Company contracted after he ceased to be a member; (iii) if it appears to the Court that the present members will be able to satisfy the contributions required to be made by them. The past members can be called upon only after the Court has called upon the contributories in List A to pay and their contributions are found insufficient. In the case of a Company limited by shares a past member shall not be liable to contribute more than the amount unpaid on the shares in respect of which he is liable as such member: Thus examining the above provisions, answer to the given questions shall be: 1. The past members contention shall be tenable only:
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(i)
Whey they have ceased to be a member for 1 year or more before the commencement of the winding up of the Company.
(ii) If the liability of the Company was contracted after he ceased to be a member. (iii) If it appears to the court that the present members will be able to satisfy the contributions required to made by them. 2. In the second case, the present members shall be liable to the extent of the amount remaining unpaid on the shares in case of a Company limited by shares. In case of a Company limited by guarantee, to the amount undertaken to be contributed by him to the assets of the Company.
(b) A group of shareholders of M/s Defraud Ltd. must hold more than 15% of the issued share capital of the Company or satisfy other requirements under Section 399(1) of the Companies Act,1956 .Since the group holds 15% of the issue capital they are entitled to file a petition before the Company Law Board under sections 397 and 398 of the Companies Act,1956 by alleging that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members of the Company. There are however, several judicial pronouncements according to which mere illegal, invalid or irregular acts by themselves do not constitute a ground for invoking the provisions of Section 397 unless it is proved that they are oppressive to any shareholder or prejudicial to the interest of the Company or to the public interest. [ Sheth Mohanlal Ganpatram Vs Shri savaji Jubilee Cotton and Jute Mills Company Ltd.] Thus in the present case, the petition filed by the group of shareholders will fail unless they can prove to the satisfaction of the Company Law Board that the acts Complained of in the petition are oppressive and prejudicial to the interest of the Company and the public interest. And that to wind up the Company would unfairly prejudice such member or members, but that otherwise that facts would justify the making of a winding up order on the ground that it was just and equitable that the Company should be wound up.
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SUMMARY OF EXAMINERS COMMENTS ON THE PERFORMANCE OF CANDIDATES PAPER 1 : ADVANCED ACCOUNTING General Comments The overall performance of the candidates, as commented by the examiners, was not satisfactory. The answers of the candidates showed lack of knowledge and understanding of the subject, particularly the accounting standards and guidance notes. The candidates are advised to brush up their skills regarding practical problems based on application of accounting standards. A thorough practice and lots of reading of the subject is required to maintain the level of knowledge expected from the students of Final Level. The candidates must present their answers in organized manner and solutions to practical problems should be given in prescribed formats along with suitable working notes. Specific Comments Question 1. Large number of candidates erred in calculation of (i) incremental profit earned by Baqa Ltd. during three months ended 31.3.09, (ii) analysis of accumulated profits and reserves of Baqa Ltd. between capital (pre-acquisition) and revenue (post-acquisition), (iii) computation of goodwill and minority interest. Few among them did not prepare the consolidated balance sheet of Aqua Ltd. and its subsidiary Baqa Ltd. as per the format given under the Companies Act. Few candidates showed inadequate knowledge of AS 21 Consolidated Financial Statements in their answers. Question 2. The candidates have performed badly in this question. Hardly few candidates could ascertain the correct amount of rectified profits and purchase consideration of Small Ltd. and Little Ltd. respectively. They could not calculate the required number of shares issued to the shareholders of each of the two companies. They also erred in calculation of investments in subsidiaries to be shown in the projected balance sheet of Big Ltd. Projected profit and loss account of Big Ltd. was also not correctly prepared by some of the candidates. Question 3.(a) Few candidates failed to provide the present value of incremental cash flows and consequently, could not calculate the maximum price that can be quoted for take over of Fine Toys Ltd. (b) The candidates exhibited poor knowledge on topic of Mutual Funds. Majority of the candidates could not prepare the statement showing the movement of unit holders funds for the year ended 31st March, 2009. They failed to arrive at the correct amounts of closing balance of net assets and balance in equalization fund. Question 4.(a) Almost all the candidates were not able to give the required answer in line with amendment to AS 11 vide Companies (Accounting Standards) Amendment Rules, 2009. (b) Most of the candidates were not able to find the expected and actual returns on plan assets.
SUMMARY OF EXAMINERS COMMENTS
Question 5.(a) Few candidates made small mistakes while preparing the statement of changes in development fund and the balance sheet. (b) Some candidates did not prepare the table showing apportionment of lease payments between finance charges and reduction of outstanding liability. Few among them could not ascertain the correct amount of unearned finance income and did not give the required journal entries. Question 6 Some candidates could not apply the relevant provisions of the AS 4, AS 5 and AS 13 in the required manner. Even if the conclusions were correct in few cases, reasoning was not accurate. PAPER General Comments The performance in general is satisfactory. However, following errors have been observed in answering the questions, which candidates are required to make note for the improvement. (a) The conceptual knowledge of the candidates was not adequate considering the expected standard level. (b) Answers have exhibited lack of systematic and logical approach, clear presentation, proper and adequate conceptual and analytical explanation. (c) Candidates have shown poor knowledge of the concepts and also lacked of adequate practice to solve diverse range of questions. (d) It has also observed that many candidates did not prepare the subject in depth and make selective study. (e) In many cases candidates not answered the questions serially/completely in one sequence. Different parts of the answers to a particular question were scattered over different pages, which should normally be avoided. (f) Candidates have shown lack of knowledge in answering the theoretical questions, even though they were simple. Therefore candidates should answer theoretical questions correctly, lucidly and precisely. 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS
(g) Where solution involves making of assumptions it should be clearly stated. Specific Comments Question 1.(a) In this question the average performance was shown by most of candidates, as calculation of NPV was usually found correct but sensitivity has not been calculated properly indicating that they have not properly understood the concept of sensitivity. (b) This part of question was answered fairly in general. However, most of students either given minimum price or maximum price per share (total also) but not total range.
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(c) In this theoretical part of question the performance of candidates was not upto the mark as it appears that candidates did not apprehend the question and the answer expected from them. Majority of candidates proceeded to described Financial Management (FM) aspects. Question 2.(a) In this theoretical part of question the performance of candidates was not satisfactory as most of the candidates could get few steps rights, but failed to calculate RADR and consequently NPV of projects. Many candidates have answered without evaluating RADR as desired so DCF also varied due to basic present value factor, tax effect an cash flow etc. (b) In this part of question performance of candidates was fairly good. (c) Being the easy question the performance of majority of candidates was above average level. Question 3.(a) Being a straight forward question on mutual fund. The performance of majority of candidates was good. However, some candidates made error in describing the total yield v/s effective % yield p.a. (b) In this question of calculation of lease rentals, the performance of majority of candidates was poor because of following reasons: (i) It appears that the question was not property understood by many candidates. (ii) Not calculated lease rent in expected way. (iii) Most of candidates ignored the PV of the depreciation tax shield. (c) In this theoretical question the performance was overall satisfactory. However, few candidates gave correct formula of CAPM but, were not able define the concept properly. Question 4.(a) In this question of mergers and acquisition the performance of candidates was average as following errors in their answers were noted: (i) Error in calculation of number of shares given to C Ltd. by B Ltd. (ii) Errors in calculation of earnings of merged firm and consequently EPS of the merged firm. (b) In this question of foreign exchange risk management the performance was candidate was not satisfactory as majority of candidates were unable to appreciate the currency quotes, its significances and impact on proposed transactions. Lack of conceptual knowledge in respect of Ask Rate & Bid Rate was observed in many cases. Further most candidates could not compute the amount of money market hedge correctly. Therefore, failed to compare with the amount of forward contract. (c) In this theoretical question the performance of majority of candidates was poor as they have shown an unsystematic approach in answering the question writing unnecessary and irrelevant details. Some students confused PSU Budgeting with Central Government Budgeting. Some students explained budget and revised budget which was not asked for.
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Question 5.(a) Though few candidates innovated their own ways to solve the question. The overall performance was satisfactory in the question requiring the comparison of Call and Put option. (b) In this question the overall performance of candidates was satisfactory. However, it has been found that most of examinees succeeded to calculate the market price of the share as per Walter Model, but failed to describe properly about whether dividend payout is optimum or not. (c) In this question the performance of candidates was average. As some candidates even shown the lack of knowledge of ordinary concept of average? Many candidates failed to calculate the value of S.D. due to lack of knowledge of the concept. PAPER 3 : ADVANCED AUDITING General Comments It was also observed that there appears to be a tendency of quoting/referring various irrelevant accounting standards for all questions which needs re look and self correction by students. It should be made clear to students that such tactics would not give extra weightage to their answers. Many students had written their answers in general and failed to address the specific issues in the practical questions. Those examinees who completed theirs answers within main book only obtained better marks than students who attempted to fill up more additional answer books. It was observed that majority of the students presented relevant subject matter but could not apply the same for the practical issues posed questions. Specific Comments Question 1.(a) Many candidates have wrongly interpreted income tax provisions regarding maintenance of books u/s. 44AA rather than provisions of Companies Act . (b) Overall performance of the students was poor. (c) A few students have answered well. students was poor. However the over all performance of the
(d) Majority of the candidates did not understand the question correctly. Question 2.(a) Many students have performed well. answered wrongly. (b) (c) However, a few students have
Poor performance of the students could be found in this part of the question. Many candidates wrote wrong answers to this part of the question.
(d) Many students did not understand the audit of Co-operative Societies well.
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Question 3.(a) Most of the students answers were in general. (b) Average performance of the candidates could be witnessed in this part of the question. Question 4.(a) Many of the students did not perform this part of the question well. (b)(i) A few candidates gave answer correctly. However, a few students were confused over TDS requirement and remittance and dividend distribution tax. (ii) The performance of the students was satisfactory. Question 5.(a) Many of the candidates have answered the verification of the existence of Related Parties. (b) Poor performance of the students could be seen in this part of the question. Question 6.(a) Majority of the students failed to answer to the point. (b) Performance of the candidates were found satisfactory. (c) Many students have written their answers correctly, while a few students answers were given in general. (d) Overall performance of the students was satisfactory. PAPER 4 : CORPORATE LAWS AND SECRETARIAL PRACTICE General Comments The performance in general was average. Candidates are required to make note of the following improvements: (a) Arriving at conclusions/interpretation of the answer to the question based specific section/Important case laws, if any. (b) Writing answers in a sequence and logical manner. (c) Drafting of resolution to be specific by mentioning relevant section of the concerned law. (d) Avoid writing answers in general. (e) Study of allied laws requires attention. Specific Comments Question 1 In respect of second part of the question relating to explanation of the terms Option in Securities, Spot Delivery Contract and Derivatives used in stock exchange, could not be explained by most of the candidates as per the Securities Contracts(Regulations)Act,1956 . Answer was given in general. Question 2 In respect to determination of residential status of an individual for a particular financial year, many candidates were confused relating to numbers of days .Instead of more than 182 days, some students used 182 days, not less than182 days,182 days or more
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which are all incorrect. Whereas in respect to second part of the question relating to making of declaration of the goods for an export ,most of the candidates failed to mention the provision given in the Foreign Exchange Management Act,1999. Question 3 Based on the language used in the question and with reference to interpretation of question based on SEBI(DIP) Guidelines 2000, there is a possibility of alternate answers to the question. Some of the candidates have stated that the proposed offer is within the limit, while some others have mentioned that the proposed offer is not within the limit. Candidates may refer to the alternate answers given in the suggested answers. In respect to part (i) of the second part of the question relating to meaning of Agreement given in the section 2(b) of the Competition Act,2002, most of the candidates have not conceptually understood the terminology in reference to the Competition Act,2002 and so were unable to give, answer satisfactorily. Question 4 In respect to second part of the question, reference to section 285 of the Companies Act, 1956 was not applied appropriately .Most of the candidates were confused regarding the holding of four meetings on 27 th March 2009 in the given question. Even students were not clear about the difference in the Financial year and the Calendar year, so this laid to the confusion among the candidates about the total number of meetings held by the Board in the calendar year 2008. Question 5 In respect of question relating to recovery and waiver of recovery of the excess remuneration paid by the company, the relevant section 309 and 637AA were not clear to most of the candidates. As regard the drafting of the resolution for recover/waiver of recovery of the excess remuneration was not upto the mark. It was mostly drafted on recovering of the excess remuneration but not on the waiver of recovery of the excess remuneration . In respect to second part of the question no conceptual clarity relating to the rule of lien as per the Regulation 9 of Table A of the Companies Act,1956. Question 6 In relation to question of objection raised by the shareholders in respect to giving of intercorporate loans and investments ,the reference of Section 372(1) and 372(8) has not been satisfactorily given by most of the candidates. Exemption available to infrastructure company was mostly lacking in the answer of the most of the candidates. In relation to subpart (ii) of the second part of the question, the provision relating to the procedure for appointment of auditor of a Government Company given under section 619 and 224(5) of the Companies Act,1956 not given generally by most of the candidates. Question 7 In respect to question relating to liability of past members and of the present members to contribute in the assets of the company in the case of winding up given under the section 426 of the Companies Act,1956 has not been appropriately laid down as is expected from the final year students. In the second part of the question relating to filing of the petition alleging illegal, invalid and irregular transactions entered into the name of the company by the group of shareholders ,mostly candidates have given general answer rather than mentioning the requirements given under section 399(1) of the Companies Act,1956.
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PAPER 1 : ADVANCED ACCOUNTING Answer all questions. Working Notes should form part of the answer.

FINAL EXAMINATION: NOVEMBER, 2009

PAPER 1 : ADVANCED ACCOUNTING

3,90,000 6,05,000 6,55,000 1,20,000 6,26,000 33,51,000

3,50,000 90,000 4,40,000 20,000 4,20,000

FINAL EXAMINATION: NOVEMBER, 2009

PAPER 1 : ADVANCED ACCOUNTING

Assets Fixed assets at cost Less: Depreciation

3,96,500 91,500 3,05,000

FINAL EXAMINATION: NOVEMBER, 2009

4,50,000 1,43,376 15,000 10,890 5,67,486

PAPER 1 : ADVANCED ACCOUNTING

FINAL EXAMINATION: NOVEMBER, 2009

The terms of the share issue are as under: (i)

PAPER 1 : ADVANCED ACCOUNTING

25,00,000 10,00,000 15,00,000 5,00,000 20,00,000

FINAL EXAMINATION: NOVEMBER, 2009

2,00,000 18,00,000 4,50,000 13,50,000 2,00,000 11,50,000 92,00,000 9,20,000 82,80,000

Total Rs. 8,65,575 86,55,750 1,19,14,875 2,05,70,625

PAPER 1 : ADVANCED ACCOUNTING

FINAL EXAMINATION: NOVEMBER, 2009

31.03.2010 To Dividend Small Little

90,000 30,00,000 1,73,1153 40,00,000 20,00,000

36,885 123,00,000 Rs. 122,90,625 82,80,000 20,00,000 40,00,000 2,65,70,625

PAPER 1 : ADVANCED ACCOUNTING

FINAL EXAMINATION: NOVEMBER, 2009

96,500 71,320 (10+4 = 14 Marks)

Discount factor of year 2 @20% .

PAPER 1 : ADVANCED ACCOUNTING

10,000 14,000 20,000

5500 7000 10800

4500 7000 9200

0.2326 0.1938 0.1615

1,046.70 1,356.60 1,485.80 7,845.02

FINAL EXAMINATION: NOVEMBER, 2009

Year ended 31st March, 2006

31st March, 2007

31st March, 2008

PAPER 1 : ADVANCED ACCOUNTING

(ii) Disclosure Requirements: 1. 2. 3.

FINAL EXAMINATION: NOVEMBER, 2009

PAPER 1 : ADVANCED ACCOUNTING

FINAL EXAMINATION: NOVEMBER, 2009

40,00,000 57,25,000 116,75,000

Rs. 40,00,000 12,25,000 7,00,000 3,00,000 35,00,000 12,50,000 57,25,000 167,00,000

PAPER 1 : ADVANCED ACCOUNTING

FINAL EXAMINATION: NOVEMBER, 2009

Rs. 51,775 44,541 36,222 26,655 15,654

PAPER 1 : ADVANCED ACCOUNTING

FINAL EXAMINATION: NOVEMBER, 2009

FINAL EXAMINATION: NOVEMBER, 2009

PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS

FINAL EXAMINATION: NOVEMBER, 2009

PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS

FINAL EXAMINATION: NOVEMBER, 2009

Rs. 5,00,000 Rs. 10.50 Rs. 9,500

Rs. 1,00,000 Rs. 10.00 Rs. 1,500

Rs. 50,000 Rs. 10.00 Nil

PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS

0.751 (Rs. Lakhs ) 600.00 102.43 497.57

FINAL EXAMINATION: NOVEMBER, 2009

PAPER 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS

FINAL EXAMINATION: NOVEMBER, 2009