1. 1
SYDENHAM COLLEGE OF COMMERCE & ECONOMICS
2015-16
Program under faculty of commerce
MASTER OF COMMERCE (EVENING)
Project Title:
FINANCIAL ACCOUNTING
IN PARTIAL FULLFILMENT OF THE REQUIRNMENT UNDER SEMESTER
BASED ON
CREDIT & GRADING SYSTEM FOR POST GRADJUATION SEMESTER – I
SUBMITTED BY:
CHINTAN CHIMANBHAI KANABAR
Roll no. 27 (Div – A)
PROJECT GUIDE:
Dr. Paras Jain
2. 2
DECLARATION
I, CHINTAN CHIMANBHAI KANABAR of Sydenham College of
commerce & economics ‘B’Road, Church gate, Mumbai – 400020 currently
studying in M.com –I (Evening), Hereby declare that I have completed this
project on FINANCIAL ACCOUNTING for semester –I of the academic
year 2015-16. The information given under the project is true and fair to the
best of my knowledge.
Signature of Student:
.
CHINTAN C KANABAR
Roll No. 27 (DIV-A)
3. 3
CERTIFICATE
This is to certify that MR. CHINTAN CHIMANBHAI KANABAR of the M.COM – I
(Evening) Semester-I has successfully completed project on FINANCIAL
ACCOUNTING under the Guidance of Dr. Paras Jain
1. ProjectGuide. : Dr. Paras Jain
2. Internal Examiner :
3. External Examiner :
Date :
Time :
4. 4
INDEX
CHAPTER I CORPORATE FINANCIAL ACCOUNTING
CHAPTER II CONSOLIDATION OF FINANCIAL
STATEMENTS
CHAPTER III ACCOUNTING OF BANKING COMPANIES
CHAPTER IV FOREIGN BRANCH
REFERENCE& BIBLIOGRAPHY
5. 5 FINANCIALACCOUNTING
AKNOWLEDGMENT
I would firstly like to thank “UNIVECITY OF MUMBAI” For giving us the liberty to
select the topic which will benefit to us in the future. I would like to thanks to the
principle of Sydenham College of commerce & economics Dr. Annasaheb Khemnar for
giving me an opportunity to study in the esteemed college and doing the course of
accounting. I would like to express my sincere gratitude and thanks to professor Dr.
Paras Jain who is my project guide , as he has been guiding light on this project and
also provided me with the best of his knowledge, advice and encouragement which
helps in the successful completion of my project.
My colleague and specially my parent who has also supported and encourages me the
success of this project to the large extant is also dedicated to them.
I would like to thanks all those who helped me but I forgotten to mention in this space.
Signature of Student:
.
CHINTAN C KANABAR
Roll No. 27 (DIV-A)
6. 6 FINANCIALACCOUNTING
CHAPTER I
What is Corporate Finance?
Every decision made in a business has financial implications, and any decision that
involves the use of money is a corporate financial decision. Defined broadly, everything
that a business does fits under the rubric of corporate finance. It is, in fact, unfortunate
that we even call the subject corporate finance, because it suggests to many observers a
focus on how large corporations make financial decisions and seems to exclude small
and private businesses from its purview.
A more appropriate title for this discipline would be Business Finance, because the basic
principles remain the same, whether one looks at large, publicly traded company or
small, privately run businesses. All businesses have to invest their resources wisely, find
the right kind and mix of financing to fund these investments, and return cash to the
owners if there are not enough good investments.
In this introduction, we will lay the foundation for this discussion by listing the three
fundamental principles that underlie corporate finance - the investment, financing, and
dividend principles - and the objective of company value maximization that is at the
heart of corporate financial theory.
The Company: Structural Set-Up :
In corporate finance, we will use company generically to refer to any business, large or
small, manufacturing or service, private or public. Thus, a corner grocery store and
Microsoft are both company. The company investments are generically termed assets.
Although assets are often categorized by accountants into fixed assets, which are long-
lived, and current assets, which are short-term, we prefer a different categorization. The
assets that the company has already invested in are called assets in place, whereas those
assets that the company is expected to invest in the future are called growth assets.
7. 7 FINANCIALACCOUNTING
To finance these assets, the company can raise money from two sources. It can raise
funds from investors or financial institutions by promising investors a fixed claim on the
cash flows generated by the assets, with a limited or no role in the day-to-day running of
the business. We categorize this type of financing to be debt.
Alternatively, it can offer a residual claim on the cash flows and a much greater role in
the operation of the business. We call this equity. Note that these definitions are general
enough to cover both private company, where debt may take the form of bank loans and
equity is the owner’s own money, as well as publicly traded companies, where the
company may issue bonds and common stock.
Thus, at this stage, we can lay out the financial balance sheet of a company as follows:
Note the contrast between this balance sheet and a conventional accounting balance
sheet.
8. 8 FINANCIALACCOUNTING
An accounting balance sheet is primarily a listing of assets in place, though there are
some circumstances where growth assets may find their place in it; in an acquisition,
what gets recorded as goodwill is a conglomeration of growth assets in the target
Company, synergies and overpayment.
First Principle :
Every discipline has first principles that govern and guide everything that gets done
within it. All of corporate finance is built on three principles, which we will call, rather
unimaginatively, the investment principle, the financing principle, and the dividend
principle. The investment principle determines where businesses invest their resources,
the financing principle governs the mix of funding used to fund these investments, and
the dividend principle answers the question of how much earnings should be reinvested
back into the business and how much returned to the owners of the business. These core
corporate finance principles can be stated as follows:
The Investment Principle:
Invest in assets and projects that yield a return greater than the minimum acceptable
hurdle rate. The hurdle rate should be higher for riskier projects and should reflect
the financing mix used - owner’s funds (equity) or borrowed money (debt). Returns on
projects should be measured based on cash flows generated and the timing of these cash
flows; they should also consider both positive and negative side effects of these projects.
The Financing Principle:
Choose a financing mix (debt and equity) that maximizes the value of the investments
made and match the financing to nature of the assets being financed.
The Dividend Principle:
9. 9 FINANCIALACCOUNTING
If there are not enough investments that earn the hurdle rate, return the cash to the
owners of the business. In the case of a publicly traded company, the form of the return -
dividends or stock buybacks - will depend on what stockholders prefer.
When making investment, financing and dividend decisions, corporate finance is single-
minded about the ultimate objective, which is assumed to be maximizing the value of
the business. These first principles provide the basis from which we will extract the
numerous models and theories that comprise modern corporate finance, but they are also
commonsense principles.
It is incredible conceit on our part to assume that until corporate finance was developed
as a coherent discipline starting just a few decades ago, people who ran businesses made
decisions randomly with no principles to govern their thinking. Good businesspeople
through the ages have always recognized the importance of these first principles and
adhered to them, albeit in intuitive ways.
In fact, one of the ironies of recent times is that many managers at large and presumably
sophisticated company with access to the latest corporate finance technology have lost
sight of these basic principles.
The Objective of the Company:
No discipline can develop cohesively over time without a unifying objective. The
growth of corporate financial theory can be traced to its choice of a single objective and
the development of models built around this objective. The objective in conventional
corporate financial theory when making decisions is to maximize the value of the
business or company.
Consequently, any decision (investment, financial, or dividend) that increases the value
of a business is considered a good one, whereas one that reduces company value is
considered a poor one. Although the choice of a singular objective has provided
corporate finance with a unifying theme and internal consistency, it comes at a cost.
10. 10 FINANCIALACCOUNTING
To the degree that one buys into this objective, much of what corporate financial theory
suggests makes sense. To the degree that this objective is flawed, however, it can be
argued that the theory built on it is flawed as well.
Many of the disagreements between corporate financial theorists and others (academics
as well as practitioners) can be traced to fundamentally different views about the correct
objective for a business.
For instance, there are some critics of corporate finance who argue that company should
have multiple objectives where a variety of interests (stockholders, labor, customers) are
met, and there are others who would have company focus on what they view as simpler
and more direct objectives, such as market share or profitability.
Given the significance of this objective for both the development and the applicability of
corporate financial theory, it is important that we examine it much more carefully and
address some of the very real concerns and criticisms it has garnered: It assumes that
what stockholders do in their own self-interest is also in the best interests of the
company, it is sometimes dependent on the existence of efficient markets, and it is often
blind to the social costs associated with value maximization.
Corporate Financial Decisions, Company Value, and Equity Value:
If the objective function in corporate finance is to maximize company value, it follows
that company value must be linked to the three corporate finance decisions outlined
investment, financing, and dividend decisions. The link between these decisions and
company value can be made by recognizing that the value of a company is the present
value of its expected cash flows, discounted back at a rate that reflects both the riskiness
of the projects of the company and the financing mix used to finance them.
Investors form expectations about future cash flows based on observed current cash
flows and expected future growth, which in turn depend on the quality of the company
projects (its investment decisions) and the amount reinvested back into the business (its
dividend decisions). The financing decisions affect the value of a company through both
the discount rate and potentially through the expected cash flows.
11. 11 FINANCIALACCOUNTING
Chapter - II
Consolidated Financial Statements
Meaning
Financial Information presentation in which the assets, equity, liabilities, and operating
accounts of a firm and its subsidiaries are combined (after the eliminating all inter-firm
transactions) and shown as belonging to a single reporting entity. Also called combined
financial statement or consolidated accounts.
How it works/Example:
Let's assume Company XYZ is a holding company that owns four other companies:
Company A, Company B, Company C, and Company D. Each of the four companies
pays royalties and other fees to Company XYZ.
At the end of the year, Company XYZ's income statement reflects a large amount of
royalties and fees with very few expenses -- because they are recorded on the subsidiary
income statements. An investor looking solely at Company XYZ's holding company
financial statements could easily get a misleading view of the entity's performance.
However, if Company XYZ consolidates its financial statements -- "adding" the income
statements, balance sheets, and cash flow statements of XYZ and the four subsidiaries
together -- the results give a more complete picture of the whole Company XYZ
enterprise.
In Figure 1 below, Company XYZ's assets are only $1 million, but the consolidated
number shows that the entity as a whole controls $213 million in assets.
12. 12 FINANCIALACCOUNTING
In the real world, generally accepted accounting principles (GAAP) require companies
to eliminate intercompany transactions from their consolidated statements. This means
they must exclude movements of cash, revenue, assets, or liabilities from one entity to
another in order to avoid double counting them. Some examples include interest one
subsidiary earns from a loan made to another subsidiary, "management fees" that a
subsidiary pays the parent company, and sales and purchases among subsidiaries.
Applicable Accounting Standard
Ordinarily, following accounting standards are applicable for the preparation of
consolidated financial statement.
As-21 – Consolidated Financial Statements.
AS-23 – Accounting for Investment in Associates in Consolidated financial
Statement
As-24 – Financial reporting of Interests in Joint venture
Meanings of Holding Company
Subsidiaries
Subsidiary is one which is “controlled” by a parent – (Need not be a company an
Subsidiary can be any type of organization)
13. 13 FINANCIALACCOUNTING
Control – Ownership, directly or indirectly through one or more subsidiaries, of more
than half of voting power of an enterprise more than half of voting power of an
enterprise,
OR
Controlling composition of board of directors in case of a company or governing council
so as to obtain economic benefits from the enterprise
Analysis of definition of control
Deliberately set so as to avoid conflict with Companies Act definition
• Subsidiaries under Companies Act –
These are the examples of subsidiaries.
• A controls B
• A controls B, B controls C
• A controls B and C. B and C together controls D
Principles for consolidation
Exceptions to consolidation
There are two exceptions –
1. Where control is temporary Where control is temporary –
2. Subsidiary operates under long term restrictions which significantly impair
its ability to transfer funds to parent
What if activities of the subsidiary are totally different from the parent?
Different from the parent? Not a valid ground for not doing consolidation
14. 14 FINANCIALACCOUNTING
Consolidation procedures:
Line by line consolidation of assets/liabilities/incomes and expenses of the subsidiary.
Investment of the parent in the capital of the subsidiary (A), and parent’s potion of the
equity of the subsidiary (B) should be eliminated
If is A is more than B, A-B is goodwill
If B is more than A, B-A is capital reserve
This determination is done on the date of investment in the subsidiary –
Minority interest in the net income of the subsidiary should be adjusted against
group income – Minority interest in the net assets should be identified and reflected
separately from the liabilities and equity of the parent.
Intra-group balances and intra group transactions, and any unrealized profits should
be eliminated completely.
Unrealized losses are also eliminated, but may reflect impairment - Financial
statements are drawn unto the same date.
However, if it is not practical to prepare on the same date, a gap of not more than 6
months is permissible.
Uniform accounting Policy.
De-Subscription
From the date on which the holding and subsidiary relationship ceases, the difference
between the proceeds of investment, and the carrying amount of net asset on the balance
sheet of the parent, is recognized as profit / loss.
Example:
How to Consolidate ?
Let’s be more practical today and learn some advanced accounting techniques. After
summaries of standards related to consolidation and group accounts, I’d like to show
you how to prepare consolidated financial statements step by step. I’ll do it on a case
study, with explaining what I do and why. If you don’t like reading, you can skip to the
15. 15 FINANCIALACCOUNTING
end of this article and watch my video. If you’d like to revise a theory first, then please
read my summary AS-21 Consolidated Financial Statements,
What’s the situation?
Here’s the question: Mommy Corp has owned 80% shares of Baby Ltd since Baby’s
incorporation.
Below there are statements of financial positions of both Mommy and Baby at 31
December 2014.
Prepare consolidated statement of financial position of Mommy Group as at 31
December 20X4. Measure NCI at its proportionate share of Baby’s net assets.
16. 16 FINANCIALACCOUNTING
Please note here that in the above statements of financial position, all assets are with
“+” and all liabilities are with “-“. I use it this way because for me it’s easier to verify
and identify mistakes, but it’s up to you.
Step 1: Combine
After you make sure that all subsidiary’s assets and liabilities are stated at fair values
and all the other conditions are met, you can combine, or add up like items.
It’s very easy when a parent (Mommy) and a subsidiary (Baby) use the same format of
the statement of financial position – you just add Mommy’s PPE and Baby’s PPE,
Mommy’s cash and Baby’s cash balance, etc. In reality, companies use their own format
for presenting their financial position and therefore it can be difficult to combine. That’s
exactly WHY so many groups use their “consolidation packages” and subsidiaries’
accountants must fill them up along with preparing own financial statements.
Therefore, when a group controller calls you every five minutes to remind you the
consolidation package, you’ll know why!
In our case study, combined numbers looks as follows:
17. 17 FINANCIALACCOUNTING
Of course, there are some strange and redundant numbers, for example both Mommy’s
and Baby’s share capital, but we haven’t finished yet!
Step 2: Eliminate
After combining like items, we need to offset (eliminate):
the carrying amount of the parent’s investment in each subsidiary; and
the parent’s portion of equity of each subsidiary;
and of course, recognize any non-controlling interest and goodwill.
So let’s proceed. The first two items are easy – just remove Mommy’s investment into
Baby (CU – 70 000), and remove Baby’s share capital in full (CU + 80 000).
As there is some non-controlling interest of 20% (please see below), you need to
remove its share in Baby’s post-acquisition retained earnings of CU 9 000 (20%*CU 45
000).
18. 18 FINANCIALACCOUNTING
Wait a second – how do we know that all Baby’s reserves (retained earnings) of CU 45
000 are post-acquisition?
Well, the question says that Mommy has owned Baby’s shares since its incorporation;
therefore full Baby’s retained earnings are post-acquisition.
Be careful here, because you absolutely need to differentiate pre-acquisition retained
earnings from post-acquisition retained earnings, but here, we’re not going to complicate
the things.
Then we need to recognize any non-controlling interest and goodwill.
Non-controlling interest at 31 December 20X4
Mommy has owned 80% of Baby’s share and therefore, non-controlling interest
owns remaining 20% of Baby’s net assets.
The question asks to measure non-controlling interest at proportionate share on Baby’s
net assets, so here’s how it looks like at the end of the reporting period:
Baby’s net assets are CU 125 000 as at 31 December 20X4, including Baby’s share
capital of CU 80 000 and Baby’s post-acquisition reserves of CU 45 000.
Non-controlling interest at 31 December 20X4 is 20% of Baby’s net assets of CU 125
000, which is CU 25 000. Recognize it with minus, as we are crediting equity with non-
controlling interest.
Initial recognition of goodwill
There might be some goodwill arisen on initial recognition. If you’d like to learn more
about goodwill, please refer to the article about.
Let’s calculate it. Please don’t forget that we calculate goodwill based on numbers on
acquisition, not on 31 December 20X4.
The goodwill is calculated as:
19. 19 FINANCIALACCOUNTING
Fair value of consideration transferred: in this case, we simply take Mommy’s
investment in Baby of CU 70 000;
Add any non-controlling interest at acquisition: here, we’re not adding the non-
controlling interest calculated above, as it’s the measurement on 31 December
20X4. At acquisition, the value of non-controlling interest is 20% of Baby’s net
assets on its incorporation of CU 80 000 (share capital only). It equals CU 16 000.
When a business combination was achieved in stages, you would need to add the
acquisition-date fair value of the acquirer’s previously-held equity interest in the
acquiree, but in this example, it’s not applicable,
Deduct Baby’s net assets at acquisition: CU – 80 000.
Goodwill acquired in a business combination comes to CU 6 000 (70 000 + 16 000
– 80 000).
The elimination entry looks as follows (sign “+” indicates a debit entry; sign “-“
indicates a credit entry):
Description Amount Debit Credit
Remove Mommy’s investment
in Baby -70 000
FP – Investment in
Baby
Remove Baby’s share capital
in full +80 000
FP – Baby’s share
capital
Remove 20% (NCI) of Baby’s
post-acquisition retained
earnings +9 000
FP – Retained
earnings
Recognize non-controlling
interest on 31 December 20X4 -25 000
FP - Non-
controlling interest
Recognize goodwill acquired
in a business combination +6 000
FP – Intangible
assets (goodwill)
Check 0
20. 20 FINANCIALACCOUNTING
I have transferred this journal entry into our consolidation worksheet and it looks as
follows:
Eliminate Intragroup Transactions
Parents and subsidiaries trade with each other very often. However, when you look at
both parent and subsidiary as at 1 company, which is the purpose of consolidation, then
you find out that there’s no transaction at all. In other words, group has not performed
any transaction from the view of some external user.
Therefore you need to eliminate all transactions happening within the group, between a
parent and its subsidiaries. Looking to above individual statements of financial position
of Mommy and Baby you see that Mommy has a receivable to Baby of CU 8
000 and Baby has a payable to Mommy of CU 8 000. Perhaps these 2 items relate to the
same transaction between them and we need to eliminate them, by debiting payables and
crediting receivables:
21. 21 FINANCIALACCOUNTING
Final steps
After we have completed all steps or consolidation procedures, we can add up all the
combined numbers with our adjustments and thus we arrive at consolidated statement of
financial position.
You can revise all the steps and formulas in Excel file that you can download at the end
of this article.
Here’s how it looks like:
22. 22 FINANCIALACCOUNTING
Please note the following facts:
Consolidated numbers are simply sum of Mommy’s balance, Baby’s balance and
all adjustments or entries (Steps 1-3).
Mommy’s investment in Baby’s shares is 0 as we eliminated it in the step 2. The
same applies for Baby’s share capital and consolidated statement of financial
position shows only a share capital of Mommy (parent)
Consolidated retained earnings are CU 98 000 and they consist of:
Mommy’s retained earnings of CU 62 000 in full, and
Mommy’s share (80%) on Baby’s post-acquisition retained earnings of CU 45 000,
that is CU 36 000.
23. 23 FINANCIALACCOUNTING
Chapter - III
Accounts of Bank
Just like a nonfinancial service company, a bank has to manage the trade-off between its
profits and risks. However, two distinct characteristics for banks pose challenges in
analyzing their financial statements. The first relates to defining debt and reinvestment
needs for banks, making it difficult to calculate cash flows for investment analysis. The
second difficulty has to do with regulation, which became especially burdensome after
the 2009 financial crisis.
In the financial statement analysis for a typical nonfinancial service company, capital is
calculated as the sum of debt and equity. The company borrows funds and issues equity
to invest in property, plant and equipment.
With banks, the capital definition becomes blurrier. For banks, debt is like a raw
material that is turned into other more profitable financial products. For example, a bank
raises funds from bondholders and invests these proceeds into foreign bonds with a yield
above its borrowing rate. For this reason, the definition of banks' capital used by
regulatory and investment professionals focuses on banks' equity.
The problem of defining debt for banks is especially evident when considering
customers' deposits in checking and savings accounts. Since banks pay interest on
savings accounts, such deposits should be considered debt and all interest expenses must
be excluded in
Calculating free cash flow to the firm. However, this poses a problem since interest
expense is one of the largest components on banks' financial statements. In some sense,
interest expense to banks is similar to a cost of goods sold to nonfinancial service
companies.
24. 24 FINANCIALACCOUNTING
Another problem that financial institutions' business nature poses is how to measure
banks' reinvestment needs. For a manufacturing company such as Boeing, the
reinvestment need can be easily calculated by taking capital expenditures, subtracting
depreciation and adding back changes in working capital.
Consider one of the largest U.S. commercial banks, Wells Fargo. Other than leasing
buildings, Wells Fargo does not have to invest in property and its fixed assets are a very
small fraction of its total assets.
A quick look at the cash flow statement for Wells Fargo shows very small capital
expenditures and depreciation that bear very little relation to its profitability. On the
other hand, Wells Fargo heavily invests in its brand name and its employees, who are
one of its most valuable assets.
Consider changes in working capital for Wells Fargo. Working capital is ordinarily
defined as the difference between current assets and current liabilities. Looking at Wells
Fargo's recent balance sheet reveals it does not break down its assets and liabilities by
their maturity or expected use.
If an investment analyst still categorizes Wells Fargo's assets and liabilities, most of
them fall into one or the other category, and calculated changes in working capital have
little relationship with reinvestment needs.
Finally, consider the regulatory burden. Regulatory requirements have a profound effect
on banks' financial statements in the form of higher capital requirements, smaller
payouts, additional expenses and other constraints.
For example, due to the inability to pass stress tests conducted by the Federal Reserve,
banks such as Citibank and Deutsche Bank were constrained in their ability to pay out
dividends and repurchase their stocks. Regulation also imposes high compliance
costs for the banks, reducing their profitability.
25. 25 FINANCIALACCOUNTING
Format of Financial Statement
It has two part A- Balance sheet and Part B Profit and loss account. Format of both is as
under :
Form of Balance Sheet
Balance Sheet of __(here enter name of the Banking Company)
Balance Sheet as on 31st March (Year)
Schedule
As on 31.3__
(current year)
As on 31.3__
(previous year)
Capital & Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5
Total
Assets
Cash and Balances with Reserve
Bank of India
6
Balances with banks and money at
call and short notice
7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities Bills for
Collection
12
26. 26 FINANCIALACCOUNTING
Schedule I
Capital
As on 31.3__
(current year)
As on 31.3__
(previous year)
I. For Nationalised Banks
Capital (Fully owned by Central
Government)
II. For Banks Incorporated Outside India
Capital (The amount brought in by banks by
way of start-up capital as prescribed by RBI
should be shown under this head.)
Amount of deposit kept with RBI under
section 11(2) of the Banking Regulation Act,
1949
Total
III. For Other Banks
Authorised Capital
(@@@. shares of Rs@ each)
Issued Capital
(@@@. shares of Rs@ each)
Subscribed Capital
(@@@. shares of Rs@ each)
Called-up Capital
(@@@. shares of Rs@ each)
Less: Calls unpaid
Add: Forfeited shares
Total
27. 27 FINANCIALACCOUNTING
Schedule 2
Reserves & Surplus
As on 31.3__
(current year)
As on 31.3__
(previous year)
I. Statutory Reserves Opening Balances
Additions during the year Deductions
during the year
II. Capital Reserves Opening Balances
Additions during the year Deductions
during the year
III. Share Premium Opening Balances
Additions during the year Deductions
during the year
IV. Revenue and Other Reserves Opening
Balance Additions during the year
Deductions during the year
V. Balance in Profit and Loss Account
Total (I, II, III, IV and V)
Schedule 3
Deposits
(current year) (previous year)
A. I. Demand Deposits
(i) From banks
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
(i) From banks
(ii) From others
28. 28 FINANCIALACCOUNTING
Case study
Balance Sheet of Yes Bank ------------------- in Rs. Cr. -------------------
Mar '15 Mar '14 Mar '13 Mar '12 Mar '11
Capital and Liabilities:
Total Share Capital 417.74 360.63 358.62 352.99 347.15
Equity Share Capital 417.74 360.63 358.62 352.99 347.15
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 11,262.25 6,761.11 5,449.05 4,323.65 3,446.93
Net Worth 11,679.99 7,121.74 5,807.67 4,676.64 3,794.08
Deposits 91,175.85 74,192.02 66,955.59 49,151.71 45,938.93
Borrowings 26,220.40 21,314.29 20,922.15 14,156.49 6,690.91
Total Debt 117,396.25 95,506.31 87,877.74 63,308.20 52,629.84
Other Liabilities & Provisions 7,094.18 6,387.75 5,418.72 5,677.28 2,583.07
Total Liabilities 136,170.42 109,015.80 99,104.13 73,662.12 59,006.99
29. 29 FINANCIALACCOUNTING
Assets Mar '15 Mar '14 Mar '13 Mar '12 Mar '11
Cash & Balances with RBI 5,240.65 4,541.57 3,338.76 2,332.54 3,076.02
Balance with Banks, Money at
Call
2,316.50 1,350.10 727.00 1,253.00 419.96
Advances 75,549.82 55,632.96 46,999.57 37,988.64 34,363.64
Investments 46,605.24 40,950.36 42,976.04 27,757.35 18,828.84
Gross Block 318.97 273.29 218.45 169.06 129.52
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Accumulated Depreciation 0.00 0.00 0.00 0.00 0.00
Net Block 318.97 273.29 218.45 169.06 129.52
Capital Work In Progress 0.00 20.18 11.09 8.04 2.91
Other Assets 6,139.24 6,247.33 4,833.21 4,153.48 2,186.11
Total Assets 136,170.42 109,015.79 99,104.12 73,662.11 59,007.00
Contingent Liabilities 338,673.20 202,013.89 481,023.19 161,829.13 136,395.52
Bills for collection 0.00 0.00 0.00 0.00 0.00
Book Value (Rs) 279.60 197.48 161.94 132.49 109.29
30. 30 FINANCIALACCOUNTING
CHAPTER IV
ACCOUNTING FOREIGN BRANCHES
Foreign Branches:-
Whenever any entity has operation outside country, such operations are called foreign
operation. It can be in the form of Branch, Subsidiary, Associate and Joint Venture.
The foreign operation should be classified as-
(i) Integral Foreign Operation (IFO)
(ii) Non- Integral foreign Operation (NIFO)
Item Exchange Rate
Revenue Items Date of transaction rate / Average rate
Opening Stock Opening Rate
Closing Rate Closing Rate
Fixed Assets Translated at the original rate. If there is a change in the
value of the Foreign Currency Liabilities, adjustment
should be made to cost of fixed assets in rupees.
Depreciation Rate Used for translation of value of fixed assets
Current Assets & Current
Liab.
Closing Rate
Long Term Liabilities Closing Rate
Items related to HO Balances in the books of head Office
31. 31 FINANCIALACCOUNTING
Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the
reporting enterprise. The business of IFO is carried on as if it were an extension of the
reporting enterprise’s operations. Generally, IFO carries on business in a single foreign
currency, i.e. of the country where it is located. For example- sale of goods imported
from the reporting enterprise and remittance of proceesa to the reporting enterprise.
NIFO is other than IFO.
Non-Integral Foreign Operation (NIFO):-
It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO
is carried on in a substantially independent way by accumulating cash and other
monetary items, incurring expenses generating income and arranging borrowing in its
local currency. An NFO may also enter into transactions in foreign currencies, including
transactions in the reporting currency. An example of NFO may be production in a
foreign currency out of the resources available in such country independent of the
reporting enterprise.
Applicable exchange rates- IFO
Imp. Note: Any difference in converted TB is transferred to P&L
Applicable exchange rates-NIFO
Item Exchange
All Assets / All Liabilities Closing Rate
Pre acquisition Profit Rate when such profit were earned
Items related to HO Balance in the books of Head Office
Share Capital Earliest Rate given
32. 32 FINANCIALACCOUNTING
Accounting in respect of Foreign Branches:
Accounting in respect of foreign branches is done in the books of the branch as well as
in the books of the Head Office.
Accounting at Branch:
As the foreign branch is an independent branch, it keeps a complete set of books on the
double entry system, prepares all the necessary accounts including the account of the
Head Office, prepares its own trial balance, Trading and Profit and Loss Account and
Balance Sheet. In short, the accounting procedure adopted at a foreign branch is exactly
the same as that adopted at an independent domestic branch.
Accounting at the Head Office:
The trial balance received by the Head Office from the foreign branch is in foreign
currency. Therefore, before incorporating the items in the trial balance of the foreign
branch, the Head Office is required to convert the various items in the trial balance into
the currency of the Head Office. Thereafter, it has to incorporate the items in the
Converted Branch Trial Balance in its books, prepare the Branch Trading and Profit and
Loss account and Balance Sheet and Branch Account.
Rates at which the items in the trial balance of a foreign branch should be converted:
It is true that the items in the trial balance of a foreign branch should be converted into
the currency of th e Head Office. But the question is at what rates the various items in
the trial balance of a foreign branch should be converted.
33. 33 FINANCIALACCOUNTING
The following points should be borne in mind while converting the items in the Trial
Balance of a foreign branch :
1. If the rate of exchange is not subject to wide and frequent fluctuations, all the items
in the trial balance (other than remittances and Head Office Account) can be
converted at a fixed rate of exchange.
2. If the rate of exchange is subject to wide and frequent fluctuations, then, different
rates should be adopted for different items. They are :
Opening stock should be converted at the opening rate of exchange (i.e, the rate
of exchange prevailing at the beginning of the accounting year).
Closing stock should be converted at the closing rate of exchange (i.e., the rate
of exchange prevailing on the last day of the accounting year).
All the other revenue items (i.e., expenses and incomes, except depreciation on
fixed assets and reserve for bad debts, should be converted at the average rate for
the year. (In this context, it may be noted that according to the recommendation
of the Institute of Chartered Accountants, in the year in which the local currency
is devalued, the revenue items should be converted at the closing rate, and not at
the average rate.)
Depreciation on fixed assets should be converted at the same rate at which
the converted fixed asset is converted. Fixed assets should be taken at the same
figure at which they (i.e., branch fixed asset) appear in the books of Head Office.
If that figure is not given, the fixed assets should be converted at the rate of
exchange prevailing on the date on which the fixed assets were acquired. If that
rate is not given, then, the fixed assets should be converted at the opening rate of
exchange.
If additions to fixed assets are made on various dates, average date of exchange
for the period should be adopted. Fixed liabilities should be converted at the rate
of exchange prevailing on the date on which they were contracted. If that rate is
not given, then, they should be converted at the opening rate of exchange.
34. 34 FINANCIALACCOUNTING
All current assets and current liabilities should be converted at the closing rate of
exchange.
Remittances appearing in the branch trial balance are converted at the actual
rates at which they were affected. If they are not given, they should be
converted, i.e., taken, at the samme figure at which they appear in the Head
Office books.i. Head Office account is converted, i.e., taken at the same figure at
which Branch Account appears in the Head Office books,
Goods received from Head Office should be converted, i.e., taken, at the same
figure at which goods sent to branch appear in the head office books. If that
figure is not given, then, the goods received from Head Office should be
converted at the average rate of exchange, as it is a revenue item.
However, it should be noted that the converted Trial Balance, generally, does not tally.
This is because the different items in the branch trial balance are converted at different
rates. The difference in tial balance is taken as Difference in Exchange and is entered in
the Profit and Loss Account, either on the debit side or on the credit side.depending
upon its nature, if the difference is small. On the other hand, if the difference is fairly
large, it is taken as Exchange Fluctuations Account or Exchange Suspense Account and
is shown in the Balance Sheet either as an asset or as a liability, depending upon the
nature, and is carried forward to be set off against future differences.
After having converted the Branch Trial Balance into head office currency, the Head
Office will incorporte the items in the branch trial balance in its books and prepare the
Branch Trading and Profit and Loss Account and Balance Sheet and the Combined
Trading and Profit and Loss Account and the Balance Sheet, as required.
EXAMPLES WE HAVE TAKEN FOR BETTER UNDERSTANDING OF
ACCOUNTING TREATMENT OF THE BRANCH/H.O ACCOUNT SITUATED
AT OUTSIDE INDIA
35. 35 FINANCIALACCOUNTING
IF H.O SITUATED OUTSIDE INDIA
M/s Carlin has head office at New York (U.S.A.) and branch at Mumbai (India).
Mumbai branch is an integral foreign operation of Carlin & Co.
Mumbai branch furnishes you with its trial balance as on 31st March, 2013 and the
additional information given thereafter:
Dr. Cr.
Rupees in thousands
Stock on 1st April, 2012 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240
Bank balance 420 –
New York office a/c – 1,620
TOTAL 3,360 3,360
Additional information:
Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers. Depreciate computers at 60% for the year.
Unsold stock of Mumbai branch was worth ` 4,20,000 on 31st March, 2013.
The rates of exchange may be taken as follows: on 1.4.2012 @ ` 40 per US $
on 31.3.2013 @ ` 42 per US $
average exchange rate for the year @ ` 41 per US $
36. 36 FINANCIALACCOUNTING
conversion in $ shall be made upto two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st
March, 2013 and the balance sheet as on that date of Mumbai branch as would appear in
the books of New York head office of Carlin & Co. You are informed that Mumbai
branch account showed a debit balance of US $ 39609.18 on 31.3.2013 in New York
books and there were no items pending reconciliation.
Solution :
M/s Carlin
Mumbai Branch Trial Balance in (US $)
as on 31st March, 2013
Conversion Dr. Cr.
US $ US $
Stock on 1.4.12 40 7,500.00 –
Purchases and sales 41 19,512.20 29,268.29
Sundry debtors and creditors 42 9,523.81 7,142.86
Bills of exchange 42 2,857.14 5,714.29
Wages and salaries 41 13,658.54 –
Rent, rates and taxes 41 8,780.49 –
Sundry charges 41 3,902.44 –
Computers – 6,000.00 –
Bank balance 42 10,000.00 –
New York office A/c – – 39,609.18
TOTAL 81,734.62 81,734.62
37. 37 FINANCIALACCOUNTING
Trading and Profit & Loss Account
for the year ended 31st March, 2013
US $ US $
To Opening Stock 7,500.00 29,268.29
To Purchases 19,512.20 By Closing stock 10,000.00
To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45
40,670.74 40,670.74
To Gross Loss b/d 1,402.45 17,685.38
To Rent, rates and taxes 8,780.49
To Sundry charges 3,902.44
To Depreciation on
computers 3,600.00
(US $ 6,000 × 0.6)
17,685.38 17,685.38
38. 38 FINANCIALACCOUNTING
Balance Sheet of Mumbai Branch
as on 31st March, 2013
Liabilities US $ US $ Assets US $ US $
New York Office 39,609.18 Computers 6,000
A/c
Less : Net Loss (17,685.38) 21,923.80 Less:
Depreciation (3,600) 2,400
Sundry creditors 7,142.86 Closing stock 10,000
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000
Bills receivable 2,857.14
34,780.95 34,780.95
(II) IF BRANCH SITUATED OUTSIDE INDIA
S & M Ltd., Bombay, have a branch in Sydney, Australia. Sydney branch is an integral
foreign operation of S & M Ltd.
At the end of 31st March, 2013, the following ledger balances have been extracted from
the books of the Bombay Office and the Sydney Office:
40. 40 FINANCIALACCOUNTING
The following information is also available:
(1) Stock as at 31.3.2013:
Bombay ` 1,50,000
Sydney A $ 3,125
You are required to convert the Sydney Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ = 20
Closing rate A $ = 24
Average rate A $ = 22
For Fixed Assets A $ = 18.
Solution :
Sydney Branch Trial Balance (in Rupees)
As on 31st March, 2013
Conversion rate per A$ Dr. Cr.
Plant & Machinery (cost) 18 36,00
Plant & Machinery Dep. Reserve 18 23,40
Debtors / Creditors 24 14,40 7,20
Stock (1.4.2012) 20 4,00
Cash & Bank Balances 24 2,40
Purchase / Sales 22 4,40 27,06
Goods received from H.O. – 1,00
Wages & Salaries 22 9,90
Rent 22 2,64
Office expenses 22 3,96
Commission Receipts 22 22,00
H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
TOTAL 80,86 80,86
41. 41 FINANCIALACCOUNTING
Reference & Bibliography
- The ICAI study material
- www.wikipidia.com
- www.caclubindia.com
- www.topfirms.com
- www.accountingexplained.com
- Dion Global Solutions Limited