6

Balance Sheet

6.1 INTRODUCTION

To ensure uniformity in the presentation of the balance sheet, the format for the same has been prescribed in the Schedule III of the Companies Act, 2013. The information is presented in a vertical format—assets followed by equities and liabilities. The balance sheet, in simple terms, is a statement of assets and liabilities of a business enterprise on the last day of the accounting period. The balance sheet may also be viewed as a statement of sources and uses of funds. A business enterprise raises funds either from the owners (called capital) or from creditors or lenders (called liabilities). These funds are then used to acquire various types of assets to be used in the business. The total funds raised by the business (capital + liabilities) therefore are always equal to the assets. To that extent the balance sheet represents the financial position of the business enterprise at the end of the accounting period.

 

6.1.1 GAAP Revisited

The relevant accounting principles, discussed earlier in Chapter 2, having a direct bearing on the balance sheets are summarized as follows:

1. Separate entity principle: For the purpose of the balance sheet, owner and business are treated separately. Owners’ contribution to the business is called capital, and is shown on the liabilities side or sources side of the balance sheet.
2. Money measurement principle: All the assets and liabilities are shown in the reporting currency as a common unit of measurement. Assets held or obligations in a currency other than the reporting currency are converted in the reporting currency for incorporating in the balance sheet.
3. Going concern principle: It is assumed than the business will continue to operate indefinitely. There is neither the need nor the intent to liquidate the assets in the near future.
4. Cost concepts: The non-current assets are usually shown at their cost of acquisition less accumulated depreciation. However, if there is a fall in the value of the assets which is non-temporary, the assets value is impaired.
5. Conservatism: It is preferable to understate the assets rather that overstating them. Likewise in case of doubt, it is better to overstate the obligations rather than understate them.
6. Dual aspect: Every accounting transaction affects atleast two accounts in such a way that the fundamental accounting equation, i.e., Assets = Owners’ Capital + Liabilities, is always true. The equation suggests that the funds for acquiring assets have either been raised from the owners (called capital) or from creditors (called liabilities). Thus, at any point of time the total of what an enterprise owns will be equal to the claims of various suppliers of funds, i.e., owners and creditors. Due to the dual aspect concept, both sides of the balance sheet will always be equal.

6.1.2 Fair Value Measurement

An asset or liability may be recognized either at its historical cost or at its fair value. Ind AS 113 states that ‘fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement value.’ The fair value may be determined by using:

1. Market approach—using prices and other relevant information from market transactions involving comparable assets or liabilities.
2. Cost approach—amount that would be needed to replace an asset.
3. Income approach—finding the present value of future cash flows of income and expenses.

When an asset or liability is measured at its fair value, the difference between the carrying amount and its fair value is recorded in profit or loss, or other comprehensive income. Ind AS 113 does not stipulate when fair value should be used. It addresses how to measure the fair value and requires the following disclosures to be made:

1. The extent of usage of fair value in valuation of assets and liabilities.
2. Valuation techniques, inputs and assumptions used in measuring fair value.
3. The impact of fair value measurements on profit and loss or other comprehensive income.

6.2 FORMAT OF BALANCE SHEET

The format for the balance sheet has been prescribed in the schedule III of the Companies Act, 2013. The format of the balance sheet is reproduced in Table 6.1 and related disclosures have been given in Appendix-I to the chapter.

 

A brief snapshot of the information given in the balance sheet of Biocon Limited as on 31st March 2017 is given below in Table 6.2:

 

Before the contents of the balance sheet are discussed in detail, some quick observations can be made. The above balance sheet represents the financial position of Biocon Limited, the reporting entity at the end of the accounting period, i.e., 31st March 2017 compared with the previous year. This represents the cumulative assets and liabilities on that particular date since inception of the company. The reporting currency is Indian Rupee and the figures have been presented in rupees million.

The balance sheet has two sides—on one side, all the assets (uses of funds) are presented and, on the other side, the equity and liabilities (sources of funds) are shown. Because of the dual aspect concept, the totals of both the sides are equal. The assets side represents the resources owned by the enterprise, whereas the equities and liabilities represent the funds supplied by owners and creditors, respectively and their respective claims on the assets of the business.

The asset side represents resources owned by the enterprise at the end of the accounting period. The assets owned are classified into current and non-current based upon their intended use. Cash and assets which are intended to be converted into cash shortly, i.e., usually within 12 months are classified as current assets. The current assets include cash in hand, bank balance, inventories, debtors, short–term loans and advances and current investments. On the other hand, assets intended to be used over a long period of time are called non-current assets (or fixed assets). This category includes assets like plant and machinery, land and building, furniture, computer system, etc. Non-current assets without any physical substance are also included in this category. Such assets are called intangible assets and include copyrights, patents, software licenses and similar rights controlled by the enterprise. Investments which are meant to be held over a long period of time are also classified as non-current.

The liabilities side has three major headings—shareholders’ funds, non-current liabilities and current liabilities. The shareholders’ funds (also called equity) represent the funds supplied by the owners of the business. Liabilities, on the other hand, represent the obligation of the enterprise to external parties, i.e., amount it owes to supplier of goods and services, banks and financial institutions, debenture holders, employees, etc. Liabilities which are expected to be met shortly (usually within 12 months) are called current liabilities whereas other obligations (maturing after 12 months) are classified as non-current liabilities.

A quick look at the balance sheet of Biocon Limited reveals that as on 31st March 2017, the company owns total assets amounting to ₹ 74,689 million out of which ₹ 23,785 million are current assets and the balance ₹ 50,904 million are non-current assets. On the liabilities sides, the equity (shareholders’ funds) amount to ₹ 65,411 million whereas claims of external parties amounted to ₹ 9,278 million out of which ₹ 7,052 million is expected to mature shortly (current liabilities) and liabilities amounting to ₹ 2,226 million are of long–term nature (non-current liabilities). Both sides of the balance sheet, of course are, equal as per double entry book keeping system.

Various components of the balance sheet are depicted in Figure 6.1.

 

6.3 ASSETS

The expression ‘asset’ generally denotes something which the enterprise own. The funds raised by an enterprise through shareholders’ funds and borrowed funds are used to acquire various assets needed for the operations of the business. Though ownership is often viewed as a criterion for recognizing an asset, it may not always be a necessary condition. The expression asset may be defined as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.’¹ Accordingly, for an asset to be recognized the following conditions must be satisfied:

 

1. It must represent a resource from which future economic benefits are expected—The future benefit from an asset may be derived in a number of possible ways. For example, it may be used in production of goods and services by the enterprise or for settling a liability or for simply acquiring any other asset. The asset may be in the form of cash or cash equivalent or has the potential to contribute to the cash flow of the enterprise in future.
2. It must be controlled by the enterprise—The control normally is associated with the ownership but it may not always be true. For example, a machine obtained on a finance lease basis where the lease period covers almost the entire useful life of the machine will be recognized as an asset in the books of the lessee. Though the legal ownership of the asset is with the lessor, the lessee has the control over it.
3. The control is because of past event—The assets are acquired as a result of transaction that has already taken place. Assets which are expected to be controlled in future are not recognized.

An asset may or may not have a physical form or existence. Assets in physical form, e.g., machinery, furniture, vehicle, etc., are called tangible assets. Assets representing certain rights from which future economic benefits can be derived but not having a physical form, e.g., patent rights, copyrights, software licenses, etc., are called intangible assets.

Assets controlled by an entity are classified as current assets and non-current assets based upon their liquidity. Assets which are intended to be converted into cash in short period of time, usually 12 months or in the normal operating cycle of the business are classified as current assets. Cash and cash equivalents, inventories held by the enterprise, trade receivables, etc., are examples of current assets.

Current assets are short-term assets, i.e., assets which are in the form of cash or are intended to be converted into cash in the normal operating cycle of the business. The Schedule III of the Companies Act, 2013, provides that ‘an asset shall be classified as current when it satisfies any of the following criteria:

1. It is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle.
2. It is held primarily for the purpose of being traded.
3. It is expected to be realized within twelve months after the reporting date; or
4. It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

Usually a cut-off of 12 months is used to distinguish current assets from non-current assets, however, in businesses where operating cycle is longer than 12 months a current asset may have conversion period exceeding 12 months. For example, for an enterprise engaged in construction business, the operating cycle may well exceed 12 months due to long time period needed to complete the project. The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. The operating cycle of a business is presented in Figure 6.2.

A business enterprise needs to maintain sufficient cash and bank balance to fund its day-to-day operations. These funds are used to procure raw material, components and other consumable stores to be used for producing goods and services. It must keep sufficient quantities of these items to ensure continuous and uninterrupted supply for the production purposes. Raw material and other supplies are injected in the production cycle where other expenses are incurred at the work-in-progress stage. Once the production cycle is over, the enterprise obtains finished goods. To meet the requirements of its customers, sufficient quantities of finished goods are kept in the store to be sold in the ordinary course of business. These finished goods when sold on credit get converted into debtors or receivables. Upon collection the operating cycle is complete and the enterprise again has access to cash.

When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve months. When an entity is engaged in multiple businesses with different operating cycles, the classification of assets into current and non-current would be done depending upon the operating cycles of respective businesses.

 

All other assets (other than current assets) will be classified as non-current. Assets intended to be used within the business over a long period of time, exceeding 12 months, are classified as non-current assets. Plant and machinery, furniture, vehicles, patent rights are some of the examples of non-current assets.

6.4 NON-CURRENT ASSETS

Any asset that is intended to be used in the business over a long period of time (exceeding 12 months or the normal operating cycle of the business) is classified as a non-current asset. Such assets have been acquired by the enterprise to be used for production of goods and services and not for the purpose of resale in the ordinary course of its business. It is not the nature of asset but its intended use that determine whether it is a current asset or a non-current asset. For example, furniture purchased for the purpose of resale and lying in inventory is a current asset, but the same furniture if purchased for the purpose of use in the office will be shown as a non-current asset. The non-current asset are required to be classified into the following sub-headings

1. Property, plant and equipment
2. Capital work-in-progress
3. Investment property
4. Goodwill
5. Other intangible assets
6. Intangible assets under development
7. Biological assets other than bearer plants
8. Financial assets
   1. Investments
   2. Trade receivables
   3. Loans
   4. Other
9. Deferred tax assets (net)
10. Other non-current assets

6.4.1 Property, Plant and Equipment

These are the assets acquired or controlled by an enterprise to be used for the production of goods and services over a long period of time. As these assets are expected to benefit the entity over a long period of time, the cost of acquisition of these assets is appropriated over their useful life by charging depreciation. The depreciated value of property, plant and equipment (PPE) is depicted in the balance sheet.

Schedule III of the companies act requires these assets to be classified as:

1. Land
2. Buildings
3. Plant and equipment
4. Furniture and fixtures
5. Vehicles
6. Office equipment
7. Bearer plants
8. Others (specify nature)

Assets under lease are required to be disclosed separately under each category. Assets given on an operating lease (short-term lease) are shown in the balance sheet of the lessor, whereas assets taken on a finance lease (long-term lease) are shown in the balance sheet of the lessee. In either case, these assets are required to be shown separately.

A reconciliation of the gross and net carrying amounts of each class of assets—at the beginning and end of the reporting period—showing additions, disposals, acquisitions through business combinations and other adjustments and the related depreciation and impairment losses/reversals are required to be disclosed separately. PPE are disclosed in the balance sheet at their depreciated value. The reconciliation as aforesaid is given in the notes to accounts.

PPE are initially recognized at cost. Subsequently, an entity may present the PPE as cost less accumulated depreciation and impairment losses or alternatively at revalued amount less the accumulated depreciation and accumulated impairment loss. Accounting, depreciation and valuation of PPE have been discussed in detail in Chapter 9.

The details of property, plant and equipment as appearing in the balance sheet of Biocon Limited are given in Table 6.3. The balance sheet shows the PPE at ₹ 8,649 million. The reconciliation for the same is provided in the notes to account.

The break-up amount property, plant and equipment of ₹ 8,649 million as on 31 March 2017 is presented below:

	(₹ in Million)
Gross carrying amount	20,116
Accumulated depreciation	11,467
Net carrying amount	8,649

From Table 6.3, it can be observed that the gross carrying amount of PPE has gone up from ₹ 18,674 million to ₹ 20,116 million. Major portion of the PPE is blocked in plant and equipment followed by building. The accumulated depreciation accounts for about 55% of the gross carrying amount implying that 55% of the cost of the assets being used has already been depreciated.

 

6.4.2 Capital Work-in-Progress

The capital work-in-progress represents the expenditure incurred on acquiring or constructing tangible assets which are not yet ready for intended use. It may be noted that advances given to the supplier for acquisition of fixed assets are not included under this heading. Once the asset is ready for its intended use, the amount accumulated under this head is transferred to the carrying amount of the PPE.

6.4.3 Investment Property

Ind AS 40 defines investment property as land or building or both which is held to earn rentals or capital appreciation or both. If the property is being held for use in production or supply of goods or services or for administrative purposes or for sale in the ordinary course of business, it will not be classified as investment property. Initial recognition of investment property is at cost, i.e., purchase price plus transaction cost and any other directly attributable expenditure. Investment property is carried in the balance sheet at cost less accumulated depreciation and any impairment losses.

A reconciliation of the gross and net carrying amounts of each class of property needs to be presented at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related depreciation and impairment losses or reversals.

6.4.4 Goodwill

Goodwill is required to be presented as a separate line item on the face of the balance sheet apart from ‘Other Intangible Assets’. Like PPE, a reconciliation of the gross and net carrying amount of goodwill at the beginning and end of the reporting period showing additions, impairments, disposals and other adjustments is also required to be given in the notes to accounts.

6.4.5 Other Intangible Assets

Intangible assets are generally in the nature of rights. The following break up of intangible assets is required to be disclosed:

1. Brands /trademarks
2. Computer software
3. Mastheads and publishing titles
4. Mining rights
5. Copyrights, patents and other intellectual property rights, services and operating rights
6. Recipes, formulae, models, designs and prototypes
7. Licenses and franchise
8. Others (specify nature)

As these intangible assets are expected to generate economic benefits over a period of time, the cost of acquiring or developing these assets is apportioned over their useful lives. Apportioning the cost of an intangible asset over its useful life is called amrotization. Intangible assets are initially recognized at cost. They are carried in the balance sheet at cost less accumulated amortization and any impairment losses. Alternatively, they may be carried in the balance sheet at the revalued amount less accumulated amortization and subsequent accumulated impairment losses.

A reconciliation of the gross and net carrying amounts of each class of asset needs to be presented at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related amortization and impairment losses or reversals.

6.4.6 Intangible Assets Under Development

Expenditure incurred on development of intangible assets which are yet to be finished are accumulated and reported separately under this heading. Once the development of an intangible asset is completed, the amount accumulated under this head is transferred to gross carrying amount of the relevant intangible asset.

The details of intangible assets as appearing in the balance sheet of Biocon Limited are given in Table 6.4.

 

The recognition and valuation of tangible assets (plant, property and equipment) and intangible assets can have a significant impact on the financial position of the enterprise depicted in the balance sheet. The principles governing initial recognition of these assets, their depreciation and amortization and subsequent revaluation has been covered in detail in Chapter 9.

6.4.7 Biological Assets Other than Bearer Plants

A biological asset is defined in Ind AS 41 as a living animal or plant. Examples of biological assets, as given in Ind AS 41, include sheep, trees in a timber plantation, dairy cattle, cotton plants, sugar cane, tea bushes, oil palms, fruit trees, rubber trees, etc. Some plants, for example, cotton plants, tea bushes, oil palms, fruit trees, grape vines, usually meet the definition of a bearer plant, and therefore, are excluded from this heading. However, the produce growing on bearer plants, viz., cotton, tea leaves, oil palm fruit, fruits, grapes, etc., are biological assets.

A reconciliation of changes in the carrying amount of biological assets between the beginning and the end of the current period is required to be presented in the notes to accounts.

6.4.8 Financial Assets

Financial assets generally mean cash, financial instruments of another entity (equity instruments, debt instruments) and a contractual right to receive cash or other financial assets. Accordingly, this heading includes:

1. Non-current investments
2. Non-current trade receivables
3. Non-current loans
4. Other non-current financial assets

Non-current Investments

A business enterprise may invest its resources in acquiring the securities issued by another enterprise. Such an investment may be made either for controlling the other enterprise or simply for making a return either as periodical returns or by capital gains. Where the intention is to hold such investments for a long period of time (usually exceeding 12 months), they are classified as non-current investments.

Investments are required to be classified as:

1. Investments in equity instruments
2. Investment in preference shares
3. Investments in government or trust securities
4. Investments in debentures or bonds
5. Investments in mutual funds
6. Investments in partnership firms
7. Other investments (specify nature)

Under each classification, names of the bodies corporate that are subsidiaries, associates, joint ventures, or structured entities, in which investments have been made are required to be disclosed. The nature and extent of the investment so made in each such body corporate showing separately investments which are partly-paid is also required to be disclosed in the notes to accounts.

Investments in partnership firms showing names of the firms, their partners, total capital and the shares of each partner is required to be disclosed separately.

In addition, aggregate amount of quoted investments and market value thereof, aggregate amount of unquoted investments and aggregate amount of impairment in value of investments is required to be disclosed.

The details of non-current investments of Biocon Limited as on 31st March 2017 are given in Table 6.5.

 

The non-current investments of the company have increased from ₹ 32,106 million to ₹ 33,635 million as on 31st March 2017. Majority of these investments are strategic in nature—in joint ventures, associate and subsidiary companies. The company has recognized impairment loss to the extent of ₹ 359 towards decline in the value of these investments which is non-temporary in nature. The quoted investments have been recognized in the books at ₹ 27,591 million as against the market value of these investments is ₹ 75,622 million.

Investments are initially recognized at cost. The cost includes acquisition charges, like brokerage and fees & taxes duties. The subsequent measurement may be either at historical cost (amortized cost) or at fair value. The impact of fair value measurement may be recognized either through profit or loss (fair value through profit or loss) or through other comprehensive income (fair value through other comprehensive income). The requirements of Ind AS 109 in this regards have been discussed in detail in Chapter 10.

Non-current Trade Receivables

Amount outstanding to be received from the customers on the balance sheet date towards goods sold or services rendered is classified as trade receivables. Trade receivables which are expected to be realized after 12 months from the balance sheet date are classifies as non-current. It needs to be classified as:

1. Secured—considered good
2. Unsecured—considered good
3. Doubtful

Provision made towards bad and doubtful debts shall be disclosed under the relevant heads separately. Amounts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member is separately stated.

Non-current Loans

Loans represent the money extended by an enterprise to another as loan which is repayable in future. Loans expected to be realized after 12 months are classified as non-current loans. This also includes security deposits given by the enterprise for various purposes during the ordinary course of business. Loans to related parties are required to be disclosed separately. Loans are accordingly classified as:

1. Security deposits
2. Loans to related parties (giving details thereof)
3. Other loans (specify nature)

Likewise a loan or an advance may be secured against some collateral given by the borrower or unsecured. Accordingly the aggregate value of loans and advances is broken down in three sub-headings:

1. Secured—considered good
2. Unsecured—considered good
3. Doubtful

The loans and advances are shown at their gross value less provision for bad and doubtful loans made. The above breakup is provided in the relevant notes to the balance sheet.

Other Non-current Financial Assets

Non-current financial assets other than investments, trade receivables and loans are classified under this heading. Any financial asset which is non-current is nature and has not been classified in the earlier sub-headings will get disclosed under this heading. For example, amounts due under contractual rights, dues in respect of insurance claims, receivables on account of sale of property, plant and equipment, contractually reimbursable expenses, etc. are classified as other non-current financial assets if they are realizable after 12 months. Likewise, bank deposits with more than 12 months maturity and non-current portion of finance lease receivables are also classified under this heading.

6.4.9 Deferred Tax Assets

Deferred tax assets are recognized due to timing differences between the taxable income and the reported income. If due to such timing difference an enterprise has paid higher taxes in the current accounting period which will get reversed and result in lowering of tax liability in the future accounting period, the same is recognized as deferred tax asset. If the aggregate of deferred tax asset on the balance sheet date exceeds the aggregate of deferred tax liabilities, the net amount is shown under non-current assets as deferred tax asset (net). The deferred tax asset usually arises when certain expenses or provisions are recognized for the purpose of reported profit on accrual basis but for tax computation, the same are permitted as deduction on payment basis. For example, provision for doubtful debts reduces the reported profit for the period when the provision is made but the same is allowable for tax computation only when the bad debts are actually written off.

6.4.10 Other Non-current Assets

This is the residual category for non-current asset. Any asset which is non-current and non-finance is nature and has not been classified in the above sub-headings will get disclosed under this heading. Capital advances and other advances which are not in the nature of loans are classified here. Other non-current assets are classified as:

1. Capital advances
2. Advances other than capital advances
3. Others (specify nature)

Advances other than capital advances are further classified as

1. Security deposits
2. Advances to related parties (giving details thereof)
3. Other advances (specify nature).

Advances to directors or other officers of the company or any of them either severally or jointly with any other persons or advances to firms or private companies respectively in which any director is a partner or a director or a member are separately stated.

6.5 CURRENT ASSETS

As discussed earlier, current assets include cash, cash equivalents, assets intended for sale or consumption or expected to be realized in cash within 12 months or in the company’s normal operating cycle and held primarily for the purpose of being traded. Current assets are more liquid than the non-current assets. Current asset are required to be classified into the following sub-headings:

1. Inventories
2. Financial assets
   1. Investments
   2. Trade receivables
   3. Cash and cash equivalents
   4. Bank balances other than (iii) above
   5. Loans
   6. Others (to be specified)
3. Current tax assets (net)
4. Other current assets

6.5.1 Inventories

The expression ‘inventories’ include goods held by an enterprise for the purpose of consumption in the production process or which are currently in the production cycle or are being held for sale in the ordinary course of business. Inventories are classified as:

1. Raw materials
2. Work-in-progress
3. Finished goods
4. Stock-in-trade
5. Stores and spares
6. Loose tools
7. Others (specify nature)

Goods in transit are disclosed under the relevant heading of inventories. Inventories are initially recognized at cost. The cost for this purpose includes the cost of acquiring the inventory and appropriate conversion cost.

After initial recognition at cost, inventories are carried in the balance sheet at ‘the lower of cost or net realizable value’ following conservatism principle. The valuation of inventories can have a significant impact on the balance sheet as well as the statement of profit and loss. The inventory valuation is the subject matter of Ind AS 2 and has been covered in detail in Chapter 8. Appropriate disclosure regarding the mode of valuation used should be made. The details of inventories held by Biocon Limited are depicted in Table 6.6.

 

As on 31st March 2017, total inventories held by Biocon Limited were ₹ 5,396 million (previous year ₹ 5,046 million). Major portion of inventories is represented by work-in-progress followed by finished goods. The inventories have been valued at ‘lower of cost and net realizable value’ and the resultant loss has been charged to the statement of profit and loss.

6.5.2 Current Financial Assets

As discussed earlier, financial assets generally mean cash, financial instruments of another entity (equity instruments, debt instruments) and a contractual right to receive cash or other financial assets. Financial assets of current nature are included under this heading. Accordingly, this heading includes:

1. Current investments
2. Current trade receivables
3. Current loans
4. Other current financial assets

Current Investments

An enterprise instead of keeping its short-term cash surpluses in bank accounts may invest the same in financial instruments to generate higher returns. Such investments are usually made in instruments which are highly liquid and convertible into cash quickly. Current investments are intended by the company to be sold within twelve months or within the company’s operating cycle. They also include investments which have a remaining maturity of less than twelve months or within the company’s operating cycle. Current Investments are required to be classified as:

1. Investments in equity instruments
2. Investment in preference shares
3. Investments in government or trust securities
4. Investments in debentures or bonds
5. Investments in mutual Funds
6. Investments in partnership firms; or
7. Other investments (specify nature)

Under each classification, names of the bodies corporate that are subsidiaries, associates, joint ventures, or structured entities, in which investments have been made are required to be disclosed. The nature and extent of the investment so made in each such body corporate, showing separately investments which are partly-paid, is also required to be disclosed in the notes to accounts.

Investments in partnership firms, showing names of the firms, their partners, total capital and the shares of each partner, are required to be disclosed separately.

In addition, aggregate amount of quoted investments and market value thereof, aggregate amount of unquoted investments and aggregate amount of impairment in value of investments is required to be disclosed.

Investments are initially recognized at cost. The cost includes acquisition charges, like brokerage and fees taxes and duties. The subsequent measurement may be either at historical cost (amortized cost) or at fair value. The impact of fair value measurement may be recognized either through profit or loss (fair value through profit or loss) or through other comprehensive income (fair value through other comprehensive income). The requirements of Ind AS 109 in this regards have been discussed in detail in Chapter 10.

The details of current investments of Biocon Limited as on 31st March 2017 are given in Table 6.7.

 

The current investments of Biocon Limited have declined from ₹ 5,983 million in the previous year to ₹ 5,247 million as on 31st March 2017. The company is keeping its short-term surplus cash in mutual funds and inter-corporate deposits, which are highly liquid and have low risk.

Current Trade Receivables

Trade receivables which are expected to be realized within 12 months from the balance sheet date or within the normal operating cycle are classifies as current trade receivables. The amount of receivables needs to be classified as:

1. Secured—considered good
2. Unsecured—considered good
3. Doubtful

Provision made towards bad and doubtful debts shall be disclosed under the relevant heads separately. Amounts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member is separately stated. The accounting for receivables and doubtful debts has been discussed at length in Chapter 7.

The details of trade receivables of Biocon Limited as on 31st March 2017 are given in Table 6.8.

 

The trade receivables for Biocon Limited has gone up to ₹ 7,982 million as on 31st March 2017 compared to ₹ 5,038 million in the previous year. The company has a provision of ₹ 58 million (previous year ₹ 42 million) towards credit loss expected on account of non-recovery of receivables.

Cash and Bank Balances

Cash and bank balances are classified into two sub-heading:

1. Cash and cash equivalents
2. Bank balances other than cash and cash equivalents

As per Ind AS-7, cash and cash equivalents include cash in hand and demand deposits with banks. Cash equivalents are defined as short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. An investment would normally qualify as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition. This would include term deposits with banks that have an original maturity of three months or less. Cash and equivalents are further classified as:

1. Balances with banks (of the nature of cash and cash equivalents)
2. Cheques and drafts on hand
3. Cash on hand
4. Others (specify nature)

Bank balances, other than cash and cash equivalents as above, are required to be disclosed below cash and cash equivalents on the face of the balance sheet. The following additional disclosures are required to be made with regard to cash and bank balances:

1. Earmarked balances with banks (for example, for unpaid dividend).
2. Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments, etc.
3. Repatriation restrictions, if any, in respect of cash and bank balances.

It may be noted that deposits with maturity period exceeding twelve months should not be shown under this heading rather is should be shown under other non-current financial assets.

The cash and bank balances of Biocon Limited as on 31st March 2017 is shown in Table 6.9:

 

As on 31st March 2017, total cash and bank balance of the company stood at ₹ 3,829 million (previous year ₹ 6,430 million). The major portion (₹ 3,416 million) is represented by cash and cash equivalents. It may be noted that bank deposits exceeding 12 months maturity are not included under this heading.

Current Loans

Loans expected to be realized within 12 months of the date of the balance sheet are classified as current loans. This also includes security deposits given by the enterprise for various purposes during the ordinary course of business. Loans to related parties are required to be disclosed separately. Accordingly, loans are classified as:

1. Security deposits
2. Loans to related parties (giving details thereof)
3. Other loans (specify nature)

Likewise, a loan or an advance may be secured against some collateral given by the borrower or unsecured. Accordingly, the aggregate value of loans and advances is broken down in three sub-headings:

1. Secured; considered good
2. Unsecured; considered good
3. Doubtful

The loans and advances are shown at their gross value less provision for bad and doubtful loans made. The above breakup is provided in the relevant notes to the balance sheet.

6.6 CURRENT TAX ASSETS (NET)

Companies are required to pay advance tax on the estimated taxable income for the year. It may happen that the amount of tax already paid in respect of current and prior periods exceeds the amount of tax due for those periods. The excess tax so paid is recognized as an asset. The excess tax paid is computed for each assessment period separately.

6.7 OTHER CURRENT ASSETS

This is the residual category for the current asset. Any asset which is current is nature and has not been classified in the above sub-headings will get disclosed under this heading. Other current assets are further classified as advances other than capital advances and others.

Advances other than capital advances are further broken into security deposits, advances to related parties (giving details thereof) and other advances.

Advances to directors or other officers of the company or any of them either severally or jointly with any other persons or advances to firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. Other current assets will also include prepaid expenses and income received in advance.

6.7.1 Pre-paid Expenses

An enterprise may incur certain expenses in one accounting period a portion of which pertains to the next accounting period. The unexpired portion of expenses incurred in an accounting period is referred to as prepaid expense and is shown as a current asset. To illustrate annual maintenance charges paid amounting to ₹ 600,000 for a period covering 12 months out of which say 3 months fall in the next accounting period. Three-fourth of the expenses incurred (for 9 months) will be expensed in the current accounting period whereas the unexpired portion (for three months) amounting to ₹ 150,000 will be shown in the balance sheet as prepaid expenses. Similarly, other expenses incurred are analysed to ensure proper matching of expenses.

6.7.2 Income Earned but not Received

An enterprise might earn certain income in one accounting period which is actually received in the subsequent accounting period. The income is recognized following accrual principle in the period when earned and at the same time it is recorded as a current asset. To illustrate, an enterprise placed a fixed deposit of ₹ 10 million for one year on 1st December 2016. The deposit earns interest @ 12% per annum and will mature on 30th November 2017. Interest for the period of 4 months (from 1st December 2016 to 31st March 2017) amounting to ₹ 400,000 will be recognized as an income in the statement of profit and loss for the period ended 31st March 2017. At the same time, interest earned but not received for the same amount will be recorded in the Balance Sheet as on 31st March 2017 as other current asset.

6.8 EQUITY AND LIABILITIES

The second part of the balance sheet—Equity and Liabilities—reflects what the company owes to the providers of capital. Liabilities are the present obligations of the entity arising from the past events which is expected to result in outflow on settlement. Equity represents the claim of the owners i.e. the residual interest in the assets of the entity after settlement of all liabilities.

6.9 EQUITY

Equity represents the claim of the shareholders over the assets owned by the company. As the shareholders are the owner of the business their ‘claim’ is not of the same nature as that of external suppliers of funds. They are perpetual in nature and are not expected to be repaid except in case of liquidation of the company and that too after paying all other obligations. Equity, therefore, ‘is the residual interest in the assets of the entity after deducting all its liabilities’. To that extent, the accounting equation may be represented as Equity = Assets – Liabilities. The equity is further broken down in two sub-headings—share capital and other equity. Schedule III requires a separate ‘statement of change in equity’ to be presented comprising equity share capital and other equity. Other equity includes all items other than equity shares that are attributable to the holders of equity instruments of an entity. The statement of change in equity provides a reconciliation of equity, showing balances in the beginning of the year, changes during the year and balances at the end of the year.

6.9.1 Share Capital

The total capital of a company is divided into small units called shares. Each share has a ‘face value’ or ‘par value’. The share capital represents the amount raised by the company by issuance of shares at the stated face value. A company being an artificial person is managed in accordance with its constitution called memorandum of association. The memorandum of association amongst other things also define the maximum amount that the company is authorized to raise by way of issue of shares. The upper limit so defined is called the authorized share capital. Each share represents a part ownership of the company. The shares issued by the company may be either preference shares or equity shares. As the rights associated with the preference shares capital and equity shares capital are different, they are shown separately in the balance sheet.

Preference Shares

Preference shares carry a fixed rate of dividend and have a preference over equity in the payment of dividend as well as repayment of principle in case of liquidation of the company. Preference shares have a face value and a stated rate of dividend. For example, 10% preference share of ₹ 100 each means that the face value per share is ₹ 100 on which dividend at a fixed rate of 10% will be paid. Though they are entitled to a fixed rate of dividend, it is payable only if the company has adequate profits. In case the company is unable to pay dividend on the preference shares due to inadequacy of profit, the same gets accumulated and has to be paid once the company starts making profits provided that the preference shares were cumulative in nature. In case of non-cumulative preference shares, the dividend once skipped does not accumulate. They normally do not have any voting rights. However, in case of non-payment of dividend they do get limited voting rights.

 

Preference shares further may be redeemable or irredeemable. Redeemable preference shares are issued for a fixed maturity. On maturity the shares are redeemed, that is, the principal amount is repaid to the holders. Irredeemable preference shares, on the other hand, are perpetual in nature. The Companies Act, 2013, permits issuance of only redeemable preference shares with maturity not exceeding 20 years.² The preference shares may also be convertible into equity shares. Preference shares with convertibility clause are called convertible preference shares.

Equity Shares

Equity shares also called common shares or ordinary shares represent the ownership of the company. They have the last preference in getting dividend and repayment of principle. The dividend in not fixed—it is declared at the discretion of the board of directors of the company. Dividend, if any, on equity shares is paid only after paying the dividend on preference shares. Similarly, in case of liquidation of the company they have the last claim over the assets of the company. Equity shares are issued with a par value also called the face value per share.

 

When a company raises funds by issue of equity shares its bank balance increases and at the same time the share capital representing claim of the owners also goes up. The following entry is passed:

Bank Account	Dr.
To Equity Share Capital Account

Share Premium

An existing and profit-making company may issue its equity shares to new shareholders at a price higher than the face value of the shares. The excess of the issue price over and above the face value of share is called premium. The amount of securities premium is not included in the share capital but is shown separately as securities premium account. It may be noted that securities premium is in the nature of a capital profit and therefore not taken to the profit and loss statement. It is credited to the securities premium account which is an example of capital reserve and is included in other equity. Securities premium account cannot be used to pay dividends to the shareholders but is permitted to be used for issuing fully paid up bonus shares.⁴

■ Illustration 6.1

Blue Bell Limited issued 20 million equity shares of the face value of ₹ 10 each at an issue price of ₹ 50 each for cash. How will this transaction be recorded?

The issue price of ₹ 50 per share is made up of two components—₹ 10 towards face value and ₹ 40 towards premium. Accordingly, the transaction will be recorded as follows:

Bank Account	Dr.	₹ 1,000 million	(20 million × ₹ 50 per share)
To Equity Share Capital Account			₹ 200 million (20 million × ₹ 10 per share)
To Securities Premium Account			₹ 800 million (20 million × ₹ 40 per share)

Only the amount of ₹ 200 million will be shown as share capital. The securities premium account at ₹ 800 million will appear as a separate heading under other equity.

Issued, Subscribed and Paid-up Capital

The authorized share capital is the maximum amount that the company may raise by the issue of shares. This is also called the nominal capital because this amount has not actually been raised by the company. A part of the authorized capital that is actually offered by the company for subscription to investors is called the issued capital. The issued capital cannot exceed the authorized capital. The part of issued capital that is actually taken up and allotted to the investors is called the subscribed capital. The subscribed capital cannot exceed the issued capital. The issuing company may not call the entire face value per share in one go rather decide to call the amount in instalments. The part of subscribed capital in respect of which calls have been made on the shareholders by the company for payment is known as the called-up capital. If the shareholders fail to pay a part of the amount called up, the same is termed as calls in arrear. The calls in arrear amount is deducted from the called up capital to arrive at the paid up capital. The paid up capital is the real capital of the company which is taken in the amount column in the balance sheet.

 

■ Illustration 6.2

Kay Kay Limited has an authorized capital of 60 million equity shares of the face value ₹ 10 each and one million preference shares of the face value ₹ 100 each carrying dividend at 10%. The company offered 20 million equity shares at par for subscription and on which ₹ 8 has been called up. All shareholders paid the amount called except holder of 500,000 shares who failed to pay call amount of ₹ 4 each. How will this information appear in the balance sheet of the company?

The information will be shown as follows:

Balance Sheet of Kay Kay Limited as on………….

The paid up capital of ₹ 158 million will be shown in the balance sheet as the share capital. All other details are provided in the schedule to the balance sheet. Usually the issued, subscribed, called up and paid up capital is the same for most of the companies.

Share Application Money

The issue of share capital may be a three step process—the company invites the prospective investors to apply for the shares of the company, the investors apply for the shares paying application money with the application and the company accepts the application by way of making an allotment. It may be noted that the share capital comes into existence only when the company accepts the application by way of making the allotment. Accordingly, money received on application is shown separately till the allotment is made. Upon allotment, the application money is transferred to share capital.

■ Illustration 6.3

Readwell Book Store Limited, with an authorized share capital of ₹ 40 million (four million equity shares of ₹ 10 each), has a paid up capital of ₹ 10 million (one million shares of ₹ 10 each). It further offered two million equity shares of ₹ 10 each at par for subscription on 28th February 2017. The company received applications for three million equity shares with application money amounted to ₹ 30 million. The company made allotment of two million shares and refunded the excess application money on 25th April 2017. How will the necessary entries be passed? How will it appear in the balance sheet as on 31st March 2017?

The necessary journal entries will be as follows:

On receiving the application money:

Bank Account	Dr.	₹ 30 million
To Share Application Money Account		₹ 30 million

At the time of allotment:

Share Application Money Account	Dr.	₹ 20 million
To Equity Share Capital Account		₹ 20 million

For making the refund:

Share Application Money Account	Dr.	₹ 10 million
To Bank Account		₹ 10 million

As on 31st March 2017, the allotment is yet to be made, the application money received will not be included in the equity share capital. The application money in respect of the two million shares will be shown funds separately. The excess application money to be refunded shortly will be shown in the current liabilities. The share capital in the balance sheet as on 31st March 2017 will appear as follows:

 

Share Forfeiture Account

If the shareholder to whom the shares have been allotted fails to pay the amount due on call, the company by giving due notice to the defaulting shareholder has a right to forfeit the shares issued. The forfeiture involves forfeiting the amount already paid, writing-off the calls in arrear and reducing the paid up capital to that extent. The amount forfeited is shown separately in the balance sheet. The shares forfeited for non-payment can be subsequently reissued by the company. At that stage, the balance available in the share forfeiture account is transferred to capital reserves and shown in the reserves and surplus.

■ Illustration 6.4

Assume that Kay Kay Limited (Illustration 6.2) decides to forfeit the 500,000 equity shares on which the call money has not been paid after giving due notice to the defaulting shareholders. What will be the accounting entry for the forfeiture? How will it be shown in the balance sheet?

In respect of 500,000 equity shares, ₹ 8 per share has been called up. Out of which, ₹ 4 per share has been paid up and the balance ₹ 4 is call in arrears. The following entry will be passed to record the forfeiture:

Equity Share Capital Account	₹ 4,000,000	(500,000 shares at ₹ 8 each called up)
To Share Forfeited Account		₹ 2,000,000 (500,000 shares at ₹ 4 each paid)
To Calls in Arrear Account		₹ 2,000,000 (500,000 shares at ₹ 4 each in arrear)

After forfeiture the paid up capital will be shown in the balance sheet as follows:

	( ₹ in Million)
19.5 million equity shares of ₹ 10 each, ₹ 8 called up	156
Add: Share Forfeited Account	2
	158

Issue of Warrants

A warrant is an instrument that gives the holder a right to buy the specified number of shares at a predetermined price. It may be noted that issue of warrants by a company does not lead to an increase in the share capital. The warrant holder has a right to apply for and purchase equity shares of the company at a predetermined price some time in future. At the time when the warrant is exercised, the holder will pay the agreed price and the company will issue the new shares. The necessary entries for issue of share capital will be passed when the warrant is exercised. If the company has received some amount from the warrant holders as a precondition for issue of warrant, the same will be shown separately in the balance sheet and will be adjusted when shares are issued in lieu of the warrants.

 

Stock Splits

A company may decide to split its shares into share of lower face value. Stock split essentially involves substituting equity shares with larger face value by equity shares of smaller face value in such a way that the total paid up capital of the company and the proportionate ownership of the company remain unaltered. As a result of stock split, the number of shares goes up but with proportionately lowers face value. Consequently, the share capital of the company remains unaffected.

■ Illustration 6.5

The paid up capital of the company consists of 25 million equity shares of ₹ 10 each and the management decides to split each share into five shares of face value ₹ 2 each. How will the share capital appear before and after the split?

Before the split the share capital of the company will appear as follows:

Equity share capital (25 million shares of ₹ 10 each) ₹ 250 million

After split of five for one the share capital will be shown as follows:

Equity share capital (125 million shares of ₹ 2 each) ₹ 250 million

It may be observed that the paid up capital of the company has remained unaltered though the number of equity shares outstanding have gone up five times due to five for one split.

Bonus Share

Bonus refers to the issue of new shares to the existing shareholders in proportion of their existing shareholding without consideration. A company may decide to issue new shares to its existing shareholders without any consideration. Such an issue of shares is called bonus shares or stock dividend. As the shares are issued without consideration there is no change in the cash position of the company. The paid up share capital of the company though go up by the face value of the new shares, there is no change in the shareholders’ funds. The bonus shares are issued by capitalization of reserves. The reserves and surplus of the company is reduced to the extent of the face value of the new shares issued. Consequent upon the issue of bonus shares, the paid up capital of the company increases proportionately though the shareholders’ funds remain unaltered.

■ Illustration 6.6

The shareholders’ funds of Dee Jay Limited as on 31st March 2017 are given as follows:

	(₹ in Million)
Equity Share Capital (30 million shares of ₹ 10 each)	300
General Reserves Account	900
Securities Premium Account	450
Total	1,650

The company decided to issue bonus shares to its shareholders in the ratio of 2:1 (i.e., two new equity shares for each share held). For this purpose, it decided to capitalize securities premium account and general reserves account. Pass the necessary accounting entries and show how the equity will be shown in the balance sheet after the bonus issue.

Journal Entry

Securities Premium Account	Dr.	₹ 450 million
General Reserves Account	Dr.	₹ 150 million
To Equity Share Capital Account		₹ 600 million

Equity after the Bonus Issue:

	( ₹ in Million)
Equity Share Capital (90 million shares of ₹ 10 each)	900
General Reserves Account	750
Total	1,650

Share Buy-back

Share buy-back in Indian context essentially means buying the shares from the market and cancelling them. If the management feels that the company is overcapitalized and has surplus cash, it may decide to buy-back the shares for the purpose of cancellation. This is also called share repurchase. The Companies Act, 2013, lays down the necessary conditions for the buy-back of shares.³

Share buy-back is exactly opposite of issue of shares. In case of buy-back, the paid up share capital of the company goes down due to cancellation of shares repurchased. At the same time, the surplus cash of the company gets utilized towards payment to the shareholders. If the shares are bought back at a price higher than the face value of the share, the excess is adjusted from the accumulated reserves of the company.

■ Illustration 6.7

The current share capital of the company is 50 million equity shares of ₹ 5 each and the company has reserves and surplus of ₹ 800 million. The company decides to repurchase five million shares from the existing shareholders for cancellation at ₹ 60 each. The excess will be adjusted from the general reserve of the company. Pass the necessary journal entry. How will the transaction affect the balance sheet of the company?

The following journal entry will be passed:

Equity Share Capital Account	Dr.	₹ 25 million	(5 million × ₹ 5 face value)
General Reserves Account	Dr.	₹ 275 million	(5 million × ( ₹ 60 – ₹ 5))
To Bank Account		₹ 300 million	(5 million × ₹ 60)

As a consequence of the buy-back, the number of shares outstanding will go down by five million. The paid up capital post buy-back will stand at ₹ 225 million with reserves and surplus at ₹ 525 million. At the same time, the cash balance will also be reduced by ₹ 300 million.

Employee Stock Option Plan (ESOP)

As discussed in Chapter 5, a number of companies are offering stock options to their employees. An option is like a warrant that gives the holder a right to buy a certain number of shares at a predetermined price (called the strike price) after a defined period of time (vesting period). The shares are issued only when the option is exercised and therefore share capital does not increase at the time when the options are issued. The value attached to such options is treated as another form of employee compensation in the financial statements of the company. The option value is taken as the fair value using option pricing method. The option value is amortized over the vesting period.

■ Illustration 6.8

On 1st April 2015, Nav Bharat Hitech Limited granted 100,000 stock options to its employees. The employees have a right to exercise the options after three years at an exercise price of ₹ 100 each. The fair value per option at the time of granting the option is ₹ 60. On 31st March 2018, all the options are exercised by the employees. Pass the necessary journal entries and show the impact on the balance sheet.

The total fair value of the options granted is ₹ 6,000,000. The fair value will be treated as a deferred expense with simultaneous credit to employee stock option account. The deferred expenses will be amortized over the vesting period of three years on a straight line basis. Accordingly, each year ₹ 2,000,000 will be included in employees cost in the statement of profit and loss. The amount standing to the credit of employee stock option account will be adjusted at the time of exercise of the option. The following entries will be passed:

1st April 2015

ESOP Deferred Expenses Account	Dr.	₹ 6,000,000
To Employee Stock Option Outstanding Account		₹ 6,000,000

31st March 2016

Employee Cost Account	Dr.	₹ 2,000,000 (1/3rd of ₹ 6,000,000)
To ESOP Deferred Expenses Account		₹ 2,000,000

The same entry will be repeated on 31st March 2017 and 31st March 2018 as well. The option value of ₹ 6,000,000 will get amortized over the vesting period.

31st March 2018

At the time of exercise the employee have to make payment for the shares @ ₹ 100 per share, i.e., the exercise price, and they will be allotted shares. The allotment price will be taken at ₹ 160 per share. The following entry will be passed

Bank Account	Dr.	₹ 10,000,000
Employee Stock Option Outstanding Account	Dr.	₹ 6,000,000
To Equity Share Capital Account		₹ 1,000,000
To Equity Share Premium Account		₹ 15,000,000

In the balance sheet of the company, the employee stock option account − ESOP deferred expenses account will be shown separately under reserves and surplus.

Disclosure as per Schedule III

The following disclosures are required to be made relating to the share capital of the company. As noted earlier, in the main body of the balance sheet only the paid up capital is shown, the related disclosures are made in the relevant schedule to the balance sheet which constitutes an integral part of the same. A company shall disclose the following in the notes to accounts for each class of share capital (different classes of preference shares to be treated separately):

• The number and amount of shares authorized.
• The number of shares issued, subscribed and fully paid, and subscribed but not fully paid.
• Per value per share.
• A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period.
• The rights, preferences and restrictions attached to each class of shares including restrictions on the distribution of dividends and the repayment of capital.
• Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate.
• Shares in the company held by each shareholder holding more than 5% shares specifying the number of shares held.
• Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts.
• For the period of five years immediately preceding the date as at which the balance sheet is prepared:
  • Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment being received in cash.
  • Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
  • Aggregate number and class of shares bought back.
• Terms of any securities convertible into equity/preference shares issued along with the earliest date of conversion in descending order starting from the farthest such date.
• Calls unpaid (showing aggregate value of calls unpaid by directors and officers)

The information as required by the Schedule III is given in the notes to the balance sheet and is useful in understanding the composition and changes in the share capital of the company during the year. The details of share capital of Biocon Limited are given in Table 6.10.

The paid up capital of the Biocon Limited has remained unchanged at ₹ 1,000 million against authorized capital of ₹ 1,100 million signifying the fact that no new shares have been issued during the year. The face value per share is ₹ 5 each.

 

The paid up capital of the Biocon Limited has remained unchanged at ₹ 1,000 million against authorized capital of ₹ 1,100 million signifying the fact that no new shares have been issued during the year. The face value per share is ₹ 5 each. The company further stated that it has only one class of equity shares having a par value of ₹ 5 per share. Each holder of equity shares is entitled to one vote per share. The company declares and pays dividends in Indian rupees. The dividend proposed by the board of directors is subject to the approval of the shareholders in the ensuing annual general meeting. In the event of liquidation of the company, the holders of equity shares will be entitled to receive remaining assets of the company, after distribution of all preferential amounts, if any. The distribution will be in proportion to the number of equity shares held by the shareholders. There were two shareholders with holding in excess of 5% each. Kiran Mazumdar-Shaw held 79,287,564 equity shares (39.64%) and Glentec International Limited held 39,535,194 equity shares (19.77%)

6.9.2 Other Equity

Other equity includes all items other than equity shares that are attributable to the holders of equity instruments of an entity. The followings are disclosed as other equity:

• Share application money pending allotment
• Equity component of compound financial instrument
• Reserves and surplus
• Debt instruments through other comprehensive income
• Equity instruments through other comprehensive income
• Effective portion of cash flow hedges
• Revaluation surplus
• Exchange difference on translating the financial statements of a foreign corporation
• Other items of other comprehensive income
• Money received against share warrants

Share Application Money Pending Allotment

Application money received from the applicants is a part of other equity as a separate line item. It may be noted that only share application money, to the extent of not refundable, shall be shown in this line item. Share application money, to the extent of refundable, is separately shown under ‘other financial liabilities’.

Equity Component of Compound Financial Instruments

An entity might have issued instruments that have both, equity as well as liability component. Such compound instruments are required to be split into two components—debt and equity. The ‘equity component of compound financial instrument’ is required to be presented as a part of ‘other equity’. The ‘liability component of compound financial instrument’ is required to be presented as a part of ‘borrowings’. For example, convertible debentures issued by the company would be split as ‘other equity’ and borrowings.

Reserves and Surplus

Reserves and surplus is an important component of shareholders’ funds. In respect of profit making companies with long existence, this heading may be much larger than the share capital. These shall be further bifurcated as:

• Capital reserves
• Securities premium reserve
• Other reserves (specify nature)
• Retained earnings

Capital Reserves: A capital reserve is defined as a reserve of an enterprise which is not available for distribution as dividend. These reserves are not created out of the profits earned in the usual course of business. For example, profit on reissue of forfeited shares is in the nature of capital reserve and therefore is required to be disclosed separately.

Securities Premium Reserve: As discussed in the earlier paragraphs, the Securities premium reserve representing excess of issues price over the face value of the securities issues is shown separately as a part of reserves and surplus.

Other Reserves: Any other reserve not covered above is shown under this heading. Nature, purpose and amount of each of such reserve are required to be stated separately.

Retained Earnings

As discussed earlier, dividend on equity shares is a discretionary payment—based upon the profits made and future funds requirements of the enterprise, the board of directors recommends the dividend to be paid. Conversely, part of profit is retained within the business and ploughed back in the business. The retained earnings of the business since inception, i.e., profits made since beginning less the dividends paid both of preference shares and equity shares are accumulated in the reserves and surplus. After providing for dividend and transferring profits to specific reserves, any balance left in the profit and loss statement is called ‘surplus’ and is a part of retained earnings. As retained earnings keep on accumulating year after year, companies with long track record of profitability will have large amounts in reserves and surplus. The retained earnings are also dependent upon the dividend policy being pursued by the company. A company distributing large part of its profits as dividends will be adding lower amounts to retained earnings, whereas a company with lower dividend payments will be retaining more and therefore will have larger reserves and surplus.

The credit balance of retained earnings is shown separately under the heading reserves and surplus. If the net balance in the statement of profit and loss is a loss (or a debit balance), the same is shown as a negative balance. A company with huge accumulated losses may have a negative figure in retained earnings.

Debt Instruments through Other Comprehensive Income

Any fair value gain or loss on debt instruments which are measured at fair value through other comprehensive income (FVOCI) is presented as a part of other equity. Ind AS 109 requires subsequent measurement of investments at FVOCI based on the company’s business model for managing the portfolio of debt instruments and contractual cash flow characteristics.

Equity Instruments through Other Comprehensive Income

As per Ind AS 109, companies have an option to designate investments in equity instruments to be measured at FVOCI. For such instruments, the cumulative fair value gain or loss is presented as a part of other equity under this heading.

Effective Portion of Cash Flow Hedges

For all qualifying cash flow hedges, this component of other equity associated with the hedged item (i.e., cash flow hedge reserve) is adjusted to the lower of the cumulative change in the fair value of the hedging instrument and the cumulative change in the fair value of the hedged item attributable to the hedged risk. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (i.e., the portion that is offset by the change in the cash flow hedge reserve) is recognized in other comprehensive income. Also, Ind AS 109 requires that exchange differences on monetary items that qualify as hedging instruments in a cash flow hedge are recognized initially in other comprehensive income to the extent that the hedge is effective.

Revaluation Surplus

An enterprise may decide to revalue its assets to show them at their current realizable value. Reserves created out of the gain on revaluation of assets are called revaluation reserves. When the carrying amount of an asset is increased, the increase is recognized in the other comprehensive income and is accumulated as revaluation surplus under ‘Other Equity’.

Exchange Differences on Translating the Financial Statements of a Foreign Operation

An entity with foreign operations is required to translate the financial statements of foreign operations to the presentation currency. As per Ind AS 21 ‘The effects of changes in foreign exchange rates requires that the exchange differences arising on translation of the financial statements of foreign operation from functional currency to presentation currency should be recognized in the OCI. The accumulated amount of the exchange difference is presented in other equity.

Other Items of Other Comprehensive Income (specify nature)

Any other items that need to be presented in OCI as per the relevant Ind AS shall be included under other equity.

Money Received Against Share Warrants

An entity may issue warrants which give the holders a right to acquire equity shares of the entity sometime in future. The holder of the warrant is required to pay money as a consideration. The money paid against warrants would be finally adjusted when the shares are issued against warrants in future. Since shares are yet to be allotted against the same, these are not reflected as part of share capital but as a separate line item—money received against share warrants.

It may be noted that a balance in the reserves and surplus does not mean that the amount is lying with the company in cash. However, if the amount standing to the credit of a reserve is represented by specific earmarked investments, it should be separately disclosed. For example, an entity may decide to create a reserve for the repayment of a loan by transferring a certain amount from the statement of profit and loss annually. The amount transferred to the reserve account is simultaneously invested in identified investments to generate sufficient cash for the repayment of loan on maturity. The fact that the reserve is backed by earmarked investments shall be disclosed.

The addition and deduction since last balance sheet is also required to be disclosed under each of the specified heads.

The details of other equity of Biocon Limited are given in Table 6.11.

 

On 31st March 2017, the other equity of the company stood at ₹ 64,411 million which is largely made up of balance in the retained earnings at ₹ 58,244 million, securities premium of ₹ 2,908 million and general reserves of ₹ 3,458 million.

6.10 STATEMENT OF CHANGE IN EQUITY

In addition to the presentation of balance sheet at the end of the accounting period, an entity is also required to separately present a statement of change in equity. The statement of change in equity essentially provides a reconciliation of equity share capital and all items of other equity. The statement is broken into two parts. The part of equity share capital provides details regarding balance at the beginning of the period, changes in equity shares capital during the year and balance at the end of the reporting period. Likewise, the part for Other Equity provides a reconciliation during a particular reporting period, as a part of one single statement, of all items other than equity share capital, that are attributable to the holders of equity instruments of an entity. The statement is prepared in columnar form with the following details:

• Share application money pending allotment
• Equity component of compound financial instruments
• Reserves and surplus
  • Capital reserve
  • Securities premium reserve
  • Other reserves (specify nature)
  • Retained earnings
• Debt instruments at fair value through other comprehensive income
• Equity instruments at fair value through other comprehensive income
• Effective portion of cash flow hedges
• Revaluation surplus
• Exchange differences on translating the financial statements of a foreign operation
• Other items of other comprehensive income (specify nature)
• Money received against share warrants

The statement of change in equity provides a comprehensive view of changes in equity during the accounting period.

The statement of change in Equity of Biocon Limited for the year ended 31st March 2017 is given in Table 6.12

 

6.11 LIABILITIES

The equity represent the obligation of the business to the owner of the business. The expression liability, on the other hand, refers to the obligation to external parties. ‘A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’.⁴ The obligation to an external party arising due to past event may be in the form of making payment or transfer some other assets or perform certain services. For example, the obligation to maintain the goods sold consequent upon a warranty given by the seller also gives rise to a liability.

 

A liability is measured as the amount that will be needed to satisfy the obligation to a third party. In certain cases, the amount of liability may not be readily ascertainable and have to be estimated. Such liabilities are referred to as provisions. A provision satisfies the other conditions, for example, present obligation due to past event but the amount needs to be estimated. For example, an enterprise has an obligation to pay certain retirement benefits to its employees. There is an obligation due to past events but the amount of obligation needs to be estimated. The enterprise will have to make a provision towards retirement benefits.

The liabilities are classified and reported as non-current and current liabilities. Non-current liabilities are long-term in nature usually maturing after 12 months whereas current liabilities are short-term in nature. Schedule III of the Companies Act, 2013 provides that ‘a liability shall be classified as current when it satisfies any of the following criteria:

 

• It is expected to be settled in the company’s normal operating cycle.
• It is held primarily for the purpose of being traded.
• It is due to be settled within 12 months after the reporting date.
• The company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.’

Liabilities or obligations that are not classified as current are called non-current liabilities or long-term debts. The classification of liabilities in the balance sheet have been depicted in Figure 6.3.

6.12 NON-CURRENT LIABILITIES

As already discussed, liabilities other than the current liabilities are classified as non-current liabilities. These liabilities are expected to be settled after 12 months from the date of the balance sheet. Noncurrent liabilities are classified under the following headings:

1. Non-current financial liabilities
2. Non-current provisions
3. Deferred tax liabilities
4. Other non-current liabilities

6.12.1 Non-current Financial Liabilities

As per Ind AS 32, the expression financial liabilities include:

• Contractual obligation to deliver cash or another financial asset to an entity.
• Exchange of assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.
• A contract which will be settled with entity’s own equity instruments and is
  • a derivative that will or may be settled other than by exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments; or
  • a non-derivative for which the entity is or may be obliged to receive a variable number of its own equity instruments.

In general, financial liabilities would include contractual obligations to pay, e.g., loans, deposits, borrowings, trade payables and finance lease obligations, etc. Payables which are not in the nature of contractual obligations—statutory dues, tax payable—are not included in the financial liabilities.

Non-current financial liabilities are further classified as:

• Borrowings
• Trade Payables
• Other Financial Liabilities

Non-current Borrowings

A business enterprise may borrow from banks and financial institutions for acquiring long-term assets or for financing its day-to-day operations. Borrowings usually means taking money from someone which is repaid in future with interest. The non-current borrowings are further sub-classified as:

• Bonds or debentures
• Term loans
  • from banks
  • from other parties
• Deferred payment liabilities
• Deposits
• Loans from related parties
• Long-term maturities of finance lease obligations
• Liability component of compound financial instruments
• Other loans (specify nature)

Bonds or Debentures

A debenture or a bond is a financial instrument which carries a fixed rate of interest, a fix maturity and a promise by the issuer to repay the principle on maturity. A company, instead of taking a loan from a bank or financial institution, may decide to issue debentures in the market. The amount borrowed is represented by smaller units, each unit being called a debenture. The debentures have a face value, carry a fixed rate of interest called coupon rate and have a fixed maturity. Such debentures are called coupon bearing bonds or debentures. On the other hand, an enterprise may decide to issue bonds carrying no coupon rate of interest. In such cases, the instrument is issued at a discount to the face value and is redeemed at par. The return for the holder (therefore the cost for the issuer) is implicit in the difference between issue price and the redemption price. Such bonds are called zero-coupon bond.

The debentures may be issued with convertibility clause, i.e., they are issued as debentures but have an inbuilt option to convert them into equity at a predetermined price and time. If the debentures can be partially converted into equity, it is called a partially convertible debenture. If, however, the entire face value of the debenture can be converted into equity, it is called a fully convertible debenture.

In India, the terms bonds and debentures are used interchangeably. Debentures may be secured or unsecured depending upon the creation or otherwise of collateral in favour of debenture holders. As such instruments are usually repayable over a long period of time; they are classified as long-term borrowings. At the time of issuance of the debentures, the debenture account is credited by the face value of the debentures issued. The debenture account will appear in the balance sheet as a borrowing till redemption. On redemption, the debenture account is debited to extinguish the liability.

■ Illustration 6.9

Ultra Securities Limited issued one million debentures with a face value of ₹ 100 each carrying interest at 10%. The debentures will be redeemed after seven years. Show the necessary journal entries for the issue and redemption of debentures.

At the time of issue:

Bank Account	₹ 100 million
To 10% Debentures Account	₹ 100 million

At the time of redemption:

10% Debentures Account	₹ 100 million
To Bank Account	₹ 100 million

The debentures will continue to appear on the liability side under long-term borrowings. However, when the time to maturity comes down to less than 12 months, they will be shown under current liabilities.

Bonds/debentures (along with the rate of interest and particulars of redemption or conversion, as the case may be) shall be stated in descending order of maturity or conversion, starting from farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by installments, the date of maturity for this purpose must be reckoned as the date on which the first installment becomes due.

Term Loans

Loans taken for the purpose of acquiring long-term assets are referred to as term loans and are classified as non-current borrowings. The term loans are repayable over a period of time as per the schedule agreed upon with the lender. Terms of repayment of term loans and other loans is also required to be stated. Term loans are from banks and from other parties are required to be disclosed separately.

Deferred Payment Liability

An enterprise may acquire certain capital assets from its vendor where the consideration is payable on a deferred basis, i.e., over a period of time exceeding more than a year. For example, an airline may buy aircrafts for which the purchase consideration is to be paid over say next 3–4 years’ time. Deferred payment liabilities of such nature are also part of the non-current liabilities of the enterprise. The liability initially shall be recorded at the fair value of the asset being acquired rather than the invoice value. The difference between invoice value and fair value shall be recognized as interest expense over the payment period in a systematic manner.

Deposits

A company may accept deposits from public or from its employees or other entities to meet its funds requirements. Such deposits are for a fixed duration and carry a fixed rate of interest. The duration may be short (less than 12 months) or long. The difference between a debenture and deposit is that the former is a transferrable instrument, whereas the latter is not. Such deposits are generally unsecured. They may be classified as long-term borrowing or short-term borrowing depending upon the maturity.

Loans from Related Parties

Loans from related parties are required to be disclosed separately with all the relevant disclosures.

Long-term Maturities of Finance Lease obligation

As discussed in Chapter 5, in a finance lease the lease period covers substantially the entire useful life of the asset taken on lease. The periodical lease rental is towards the principal (cost of the asset) and interest thereupon. Though the lessor is the legal owner, the asset is capitalized in the books of the lessee as the beneficial owner. A finance lease transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. At the commencement of lease period, the asset is capitalized in the books of the lessee at the fair value of the asset or at the present value of the lease installments over the lease period. At the same time, an equivalent amount is recorded as the lease obligation.

 

The payments made towards lease installment are broken into two parts—interest and principal. The interest component is treated as an expense for the period and is taken to the profit and loss statement. The principal component is deducted from the lease obligation recognized at the commencement. The lease obligation outstanding after adjusting the principal repayment is taken to the balance sheet under long-term borrowings.

■ Illustration 6.10

Critical Chemicals Company Limited obtained a machine on a finance lease basis from a non-banking finance company (NBFC). The cash down list price of the machine is ₹ 50 million. The company will pay three annual instalments of ₹ 20.82 million each at the end of the next three years. The breakup of the instalments between principal and interest is given as follows:

( ₹ in Million)
Instalment No.	Instalment Amount	Principal	Interest
1.	20.82	14.82	6.00
2.	20.82	16.60	4.22
3.	20.82	18.58	2.24

Pass the necessary journal entries for the above transaction.

At the time of taking the asset of lease:

Machinery on Lease Account	Dr.	₹ 50 million
To Finance Lease Obligation Account		₹ 50 million

At the end of the first year:

Interest on Finance Lease Account	Dr.	₹ 6.00 million
Finance Lease Obligation Account	Dr.	₹ 14.82 million
To NBFC Account		₹ 20.82 million
NBFC Account	Dr.	₹ 20.82 million
To Bank Account		₹ 20.82 million

At the end of the second year:

Interest on Finance Lease Account	Dr.	₹ 4.22 million
Finance Lease Obligation Account	Dr.	₹ 16.60 million
To NBFC Account		₹ 20.82 million
NBFC Account	Dr.	₹ 20.82 million
To Bank Account		₹ 20.82 million

At the end of the third year:

Interest on Finance Lease Account	Dr.	₹ 2.24 million
Finance Lease Obligation Account	Dr.	₹ 18.58 million
To NBFC Account		₹ 20.82 million
NBFC Account	Dr.	₹ 20.82 million
To Bank Account		₹ 20.82 million

The finance lease obligation account will be initially recorded at the fair value of the asset at the inception of the lease. With each instalment, the liability will get reduced.

Liability Component of Compound Financial Instruments

As discussed earlier, compound instruments issued by an entity are required to be split into two components—debt and equity. The liability component of compound financial instrument is disclosed as a part of borrowings. For example, convertible debentures issued by the company would be split as other equity and borrowings.

All the borrowings are further classified as secured or unsecured and the nature of security shall be specified separately in each case. If the loan is backed up by some specified assets of the borrower as collateral, the loan will be classified as secured loan. If no such collateral has been created to secure the loan amount, it will be called an unsecured loan. Term loans are usually secured by creating mortgage on the immoveable assets of the company, e.g., land, building, plant and machinery. Working capital loans are usually secured by way of hypothecation or pledge of moveable assets. In case of hypothecation, the asset in question remains in the possession of the borrower whereas in case of pledge, the possession of the assets being offered as collateral is given to the lender.

The nature of security should also cover the type of asset given as security, e.g., inventories, plant and machinery, land and building, etc. When promoters, other shareholders or any third party have given any personal security for any borrowing, such as shares or other assets held by them, disclosure should be made thereof, though such security does not result in the classification of such borrowing as secured.

Disclosure is also required to be made regarding the repayment terms including the period of maturity with respect to the balance sheet date, number and amount of instalments due, the applicable rate of interest and other significant relevant terms, if any.

Non-current Trade Payables

Trade payables are dues in respect of goods and services purchased in the normal course of business. An enterprise buying goods and services from its vendors often gets a specified period for making the payment. The amount outstanding to the suppliers of goods and services is referred to as trade payables or accounts payable or sundry creditors. Following accrual basis of accounting, the liability is recognized when the goods are supplied or services are rendered by the vendor. For example, at the time of buying goods on credit the following entry will be passed:

Purchases Account	Dr.
To Vendor Account

It may be noted that amounts due to vendors of goods and services only are included under this heading. Payables of any other nature (statutory dues, payables for purchase of capital goods, etc.) are not included under this heading. Trade payables which are non-current in nature are disclosed under this heading.

Non-current Other Financial Liabilities

Any other non-current liability which is in the nature of a financial liability is required to be disclosed under this heading.

6.12.2 Non-current Provisions

A provision is the books of accounts is made whenever there is an existing obligation due to past events but the amount of liability is uncertain and has to be estimated. For example, warranty extended by a seller of certain equipment to the buyer give rise to a contractual obligation, however, the quantum of obligation needs to be estimated. The seller will make a provision towards warranty cost based upon his past experience. The provision again may be short-term (current) or long-term (non-current) and need to be classified accordingly.

Non-current provisions are further classified into ‘provision for employee benefits’ and ‘others’ specifying the nature. Provision for employee benefits, mainly unfunded, are defined as post-employment benefits. All non-current provisions, other than those related to employee benefits, are disclosed separately based on their nature.

6.12.3 Deferred Tax Liabilities

As discussed in the Chapter 5, deferred tax liabilities and assets are recognized due to timing difference between the taxable income and reported income. A timing difference is one that is likely to be reversed in future. If due to timing difference an enterprise has paid lower taxes in the current year which will result in increased tax liability in the future years, the same is recorded as deferred tax liability. On the other hand, if higher taxes have been paid in the current year which will get reversed in future resulting in lowering of taxes, the same is recorded as deferred tax asset. The deferred tax assets and liabilities are ascertained on each balance sheet date in respect of timing differences. If the deferred tax liabilities exceed the deferred tax assets, the net amount is reported on the liabilities side of the balance sheet as a non-current liability. On the other hand, if the deferred tax assets are more than the deferred tax liabilities, the excess will be shown on the asset side of the balance sheet as a non–current asset.

6.12.4 Other non-current Liabilities

This is the residual category of non-current liabilities. Other non-current liabilities are further classified as ‘advances’ and ‘others’, specifying the nature. Amounts received against goods to be sold or services to be provided, security deposits from customers or vendors, statutory dues payable, legal claims outstanding, interest payable on unpaid amount to supplier, etc., are classified under this heading.

The details of non-current liabilities of Biocon Limited as on 31st March 2017 are given in Table 6.13.

 

From the above-mentioned details, it can be observed that Biocon Limited does not have much noncurrent liabilities especially borrowed funds. The total non-current liabilities as on 31st March 2017 stood at ₹ 2,226 million (previous year ₹ 2,389 million). These in comparison to equity at ₹ 65,411 million (previous year ₹ 59,966 million) are relatively small. The company is relying more on shareholders’ funds (equity) to meet its long-term financing requirements rather than borrowings.

6.13 CURRENT LIABILITIES

As already discussed, current liabilities are expected to be paid within 12 months from the date of the balance sheet or within the normal operating cycle of the entity. Current liabilities are classified under the following headings:

1. Current financial liabilities
2. Other current liabilities
3. Current provisions
4. Current tax liabilities

It may be noted that current liabilities have almost similar classification as non-current liabilities.

6.13.1 Current Financial Liabilities

Current financial liabilities are further classified into:

• Current borrowings
• Current trade payables
• Other current financial liabilities

Current Borrowings

Current borrowings are further classified into:

• Loans repayable on demand
  • from banks
  • from other parties
• Loans from related parties
• Deposits
• Other loans (specify nature)

Borrowings are further sub-classified as secured and unsecured specifying the nature of security in each case. Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head is required to be disclosed. If the entity has defaulted in repayment of borrowings and interest, the period and amount of default as on the balance sheet date is required to be specified separately in each case.

Current borrowings will include all loans payable within a period of 12 months from the date of the loan. Loans payable on demand should be treated as part of current borrowings.

Current Trade Payables

Trade payable due for payment within 12 months from the date of the balance sheet or within the normal operating cycle of the entity are classified here. As discussed earlier, trade payables are towards goods and services purchased by the enterprise on credit terms.

Other Current Financial Liabilities

The amounts shall be classified as:

• Current maturities of long-term debt
• Current maturities of finance lease obligations
• Interest accrued
• Unpaid dividends
• Application money received for allotment of securities to the extent of refundable and interest accrued thereon
• Unpaid matured deposits and interest accrued thereon
• Unpaid matured debentures and interest accrued thereon
• Others (specify nature)

The portion of non-current borrowings/lease obligations, which is due for payments within twelve months of the reporting date is required to be classified under other current financial liabilities, while the balance amount should be classified under non-current borrowings. Likewise, current maturities of long-term debt are also classified as other financial liabilities.

Interest accrued on financial liabilities shall form a part of its carrying amount whether it is at amortized cost (i.e., as per effective interest method) or at fair value. Accordingly, an entity may not present interest accrued separately from the related financial liability. Unpaid dividend on shares—equity as well as preference is also classified as other current financial liabilities.

Application money received for allotment of securities to the extent of refundable and interest accrued thereon is classified as other current financial liabilities. It may be noted that application money received for allotment of shares, which would be adjusted on allotment, would be classified as other equity.

Unpaid matured deposits and debentures, and interest accrued thereon would also be classified under this heading.

6.13.2 Other Current Liabilities

The amounts shall be classified as:

• Revenue received in advance
• Other advances (specify nature)
• Others (specify nature)

Others should include items, like statutory dues payable, legal claims outstanding, security deposits, etc., are classified under this heading.

6.13.3 Current Provisions

The amounts shall be classified as:

• Provision for employee benefits
• Others (specify nature)

Others would include all provisions other than provisions for employee benefits such as provision for warranties, provision for decommissioning liabilities, etc.

6.13.4 Current Tax Liabilities

Current tax liabilities are towards expected tax payable on the taxable income for the year using applicable tax rates at the balance sheet date. This also includes any adjustment to taxes in respect of previous years. Interest income/expenses and penalties, if any, related to income tax. Current tax assets (advance tax paid) may be off set against the current tax liabilities to present either as current tax asset or current tax liabilities.

The details of current liabilities of Biocon Limited as on 31st March 2017 are given in Table 6.14 below:

 

From the above details, it can be observed that the total current liabilities as on 31st March 2017 stood at ₹ 7,052 million (previous year ₹ 8,626 million). The biggest component of current liabilities for Biocon Limited is trade payable (₹ 4,505 million) followed by payable for capital goods (₹ 646 million). In the previous year, the company had ₹ 2,255 million as short-term borrowings, which had been completely repaid during the year.

6.14 CONTINGENT LIABILITIES AND COMMITMENTS

A liability which is contingent upon happening or non-happening of certain future event is called a contingent liability. A distinction need to be drawn between a liability, provision and contingent liability. A present obligation of an enterprise which has already been crystallized due to past events and the amount is readily ascertainable is called a liability. On the other hand, an existing liability in respect of which amount is not readily ascertainable but is required to be estimated is called a provision. A contingent liability is a possible future obligation due to past events which may or may not arise contingent upon certain future events not in the control of the enterprise. A present obligation may also be treated as a contingent liability if its occurrence is not probable or a reliable estimate of amount of obligation cannot be made.

 

All liabilities and provisions as aforesaid are recognized in the balance sheet; however, contingent liabilities are disclosed in notes to accounts. The expression commitment has not been defined. Commitment generally means contractual obligations in respect of capital expenditure or in respect of contracts for purchase of raw material, employee contracts, etc.

■ Illustration 6.11

Moon Limited, a subsidiary of Sun Limited, took a loan of ₹ 500 million from Sound and Safe Bank Limited. The bank insisted for a guarantee from Sun Limited as a security. How will this transaction appear in the books of Moon Limited and Sun Limited?

In the books of Moon Limited, the transaction will appear in the balance sheet as borrowed funds because it is primarily responsible for repayment of the amount borrowed. The liability of Sun Limited is secondary; it may be required to pay if Moon Limited fails to meet its obligation. As such, it has a contingent liability. This probable obligation will be disclosed in the ‘otes to accounts’ of Sun Limited.

The contingent liabilities are generally categorized as:

• Claims against the company not acknowledged as debt, For example, disputed amounts of income tax or sales tax claims against the company.
• Guarantees: Where the company has stood as a guarantor on behalf of another entity. The liability of the company is contingent upon the default by the other entity.
• Other money for which the company is contingently liable.

Likewise, commitments shall be classified as follows:

• Estimated amount of contracts remaining to be executed on capital account and not provided for.
• Uncalled liability on shares and other investments partly paid.
• Other commitments.

The above disclosures are made in notes to accounts. The contingent liabilities reported by Biocon Limited in its annual report for the year 2016–17 are shown in Table 6.15.

 

The contingent liabilities of Biocon Limited largely relate to the guarantees given by the company in respect of obligations of subsidiary/associate companies. There are contingent liabilities in respect of taxation matters which are under appeal and certain other claims against the company which are not considered probable and hence not acknowledged as debts. These liabilities may or may not arise but it does give information to the readers about the potential liability, however remote, that the company has on the date of the balance sheet.

Assignment Questions

1. ‘The balance sheet represents the financial position of an enterprise on a particular date’. Explain.
2. Define the terms asset, liability and equity.
3. How do you differentiate current liabilities from non-current liabilities?
4. How does the valuation of current assets differ from that of non-current assets?
5. Differentiate between a liability, provision and contingent liability.

Problems

1. Issue of shares at a premium: The authorized share capital of Super Growth Limited consisted of 10 million equity shares of the face value ₹ 10 each and one million 10% preference shares of the face value ₹ 100 each. Out of this, the company allotted one million equity shares at par to the promoters for cash. The company also issued five million equity shares to other investors for cash at a premium of ₹ 10 each. Pass the necessary journal entries for the above. How will the equity appear in the balance sheet of the company?
2. Call in arrears and forfeiture of shares: Pee Ess Limited with an authorized share capital of ₹ 50 million divided into five million equity shares of ₹ 10 each made a public issue of two million equity shares at par. The company called the full face value of the shares in three instalments. All the shareholders paid the amount due except the holders of 200,000 shares who failed to pay ₹ 3 per share.
   1. Show the share capital in the balance sheet of the company.
   2. The company decided to forfeit the shares on which the calls are unpaid. How will the forfeiture affect the balance sheet of the company?
3. Issue of bonus shares: In the balance sheet of High Tech Tools Limited on 31st March 2017, the equity appeared as follows:

    

   

   The company decided to issue bonus shares to the existing shareholders in the ratio of 5:1 by capitalizing the securities premium account and a part of the general reserves. For this purpose, it was also decided to increase the authorized share capital to ₹ 150 crore divided into 15 crore equity share of ₹ 10 each.

   1. Pass necessary journal entries for the issuance of bonus shares.
   2. Show the equity after the bonus issue.
4. Non-current loans: As on 31st December 2011, All Stars Limited has a loan outstanding from the State Bank of India amounted to ₹ 250 million. The loan is secured against mortgage of the land, building, plant and machinery owned by the company. The loan attracts interest at 12% per annum payable half yearly on 1st April and 1st October, respectively. The company paid the interest due on 1st April 2011 but is in default towards interest due on 1st October 2011. Out of the principle outstanding, an amount of ₹ 25 million is due for repayment within next 12 months. How will the loan and interest outstanding appear in the balance sheet of the company as at 31st December 2011?
5. Current assets and liabilities: In each of the following cases how will the transaction affect the balance sheet as on 31st March 2017:
   1. Premises taken on rent on 1st August 2016 by paying a deposit of ₹ 10 million. Quarterly rent of ₹ 300,000 paid on 1st August and 1st November each. Rent due on 1st February not paid till 31st March 2017.
   2. Salaries paid to employees during the year amounted to ₹ 60.30 million. It includes a sum of ₹ 4.85 million as advance to employees against salary.
   3. Debtors outstanding as on 31st March 2017 amounted to ₹ 305 million. Based upon the past trend, the company estimates that 2% of the debtors will default on payment.
   4. Goods bought during the year 2016–17 amounting to ₹ 12.23 million were actually paid for in the year 2017–18.
   5. Special goods were ordered on 15th December 2016 with advance payment of ₹ 3 million. The same were received and consumed during 2017–18.
6. Preparation of balance sheet: From the followings balances extracted from the books of SDTV Limited and additional information prepare the balance sheet of the company for the year ended 31st March 2017:

    

   

   Additional Information

   1. All the investments are long-term in nature. The management estimates that there is a diminution in the value of investments to the extent of ₹ 395.65 lakh which is permanent in nature.
   2. Loans and advances are long-term. Loans amounting to ₹ 400 lakh are doubtful and need to be provided for.
   3. Out of secured term, loans outstanding an amount of ₹ 794.15 lakh is falling due for repayment within the next 12 months.
   4. Make a provision of ₹ 755.71 lakh towards doubtful debts on sundry debtors. The above adjustments are to be considered only for the balance sheet and the affect to the profit & loss statement has already been taken.
7. Preparation of balance sheet: Based upon the trial balance given in Problem 3 of Chapter 5 (profit and loss statement) prepare the balance sheet of Shivam Industries Limited as on 31st March 2017.

Solutions to Problems

1. Journal Entries

   Allotment of shares to the promoters:

   Bank Account	Dr.	₹ 10,000,000
   To Equity Share Capital Account		₹ 10,000,000

   Allotment of shares to investors:

   Bank Account	Dr.	₹ 100,000,000
   To Equity Share Capital Account		₹ 50,000,00
   To Securities Premium Account		₹ 50,000,000

    

   Balance Sheet of Super Growth Limited as at………

   
2. 1. The balance sheet of Pee Ess Limited will appear as follows:

      Pee Ess Limited

       

      Balance Sheet as on …..

      
   2. The forfeiture will result in cancellation of 600,000 shares on which calls are in arrears. The call in arrears will be cancelled (200,000 × ₹ 3 per shares) and the amount already paid in respect of these shares (200,000 × ₹ 7 per share) will be forfeited. The balance sheet after forfeiture will appear as follows:

       

      
3. 1. The bonus issue in the ratio of 5:1 (5 new shares for 1 existing) will result in issuance of 10 crore new shares with a combined face value of ₹ 100 crore. For this purpose, the securities premium account (₹ 80 crore) and general reserves (₹ 20 crore) will be capitalized. The necessary journal entry will be as follows:

      Securities Premium Account	Dr.	₹ 80 crore
      General Reserves	Dr.	₹ 20 crore
      To Equity Share Capital		₹ 100 crore

   2. The equity after the bonus issue will appear as follows:

       

      
4. The loan outstanding from the State Bank of India amounting to ₹ 250 million is a secured loan and will be classified under non-current liabilities. However, the principle becoming due for repayment within the next 12 months amounting to ₹ 25 will be deducted and shown in the current liabilities.

   The company has paid interest for three months but has failed to pay interest at 12% per annum for the next six months. Interest accrued and due for six months for the period 1st April 2011 to 30th September amounting to ₹ 15 million will be shown under current liabilities. In addition, interest for the period 1st October to 31st December has also accrued though not due. Interest accrued but not due amounting to ₹ 7.5 million will also be shown separately under current liabilities.

5. 1. The deposits in respect of premises taken on rent on amounting to ₹ 10 million will be classified as long-term loans and advances under non-current asset. Rent outstanding for five months for the period 1st November 2016 to 31st March 2017 amounting to ₹ 500,000 will be shown under current liabilities.
   2. Advance of salaries paid amounting to ₹ 4.85 million will be shown as short-term loan and advances under current assets.
   3. Trade Receiveables outstanding as on 31st March 2017 amounted to ₹ 305 million will be shown under current assets deducting ₹ 6.10 million towards provisions for doubtful debts.
   4. The liability towards goods bought amounting to ₹ 12.23 million will be shown as trades payables under current liabilities.
   5. The advance payment of ₹ 3 million will be shown as short-term loans and advances under current assets.
6. The balance sheet of SDTV Limited as on 31st March 2017 is given as follows:

    

   

    

   

    

   
7. The balance sheet of Shivam Industries Limited as on 31st March 2017 is given as follows:

    

   Balance Sheet of Shivam Industries Limited as at 31st March 2017

   
   

Notes:

1. Gross block, accumulated depreciation and depreciation for the current year consist of machinery, building, motor vehicles and furniture.
2. Investments are assumed to be long-term.

Try It Yourself

1. Issue of shares: Easy Going Financial Services Limited with an authorized share capital of ₹ 100 million (10 million equity shares of ₹ 10 each) issued seven million equity shares for subscription at par. Applications were received for 6.9 million shares with application at the rate of ₹ 5 each and the company made allotment in full. The company asked for the balance money at the time of allotment. All the shareholders duly paid the allotment money except holders of 50,000 shares.
   1. How will the share capital of the company appear in the balance sheet at this stage?
   2. The management decided to forfeit the shares on which amounts are in arrears. How will the share capital appear after the forfeiture?
2. Classification in the balance sheet: How will you classify the following items in the balance sheet of a company:
   1. Goodwill
   2. Sundry creditors
   3. Provisions for doubtful debts
   4. Instalments of long-term loans due for repayment within the next 12 months
   5. Securities premium account
   6. Deferred tax assets (Net)
   7. Current investments
   8. Revaluation reserves
   9. Profit and loss account (Dr. Balance)
   10. Investment property
   11. Provisions for gratuity and employees benefits (long-term)
   12. Contingent liabilities
3. Disclosures in the Balance Sheet: How would the following transactions be disclosed in the balance sheet::
   1. The company has incurred ₹ 320 Crore on the construction of a building that is yet to be completed.
   2. An advance of ₹ 10 Crore has been given to the material supplier for which the goods are yet to be received.
   3. The Company has acquired a brand by paying a consideration of ₹ 150 Crore.
   4. A deposit of ₹ 280 Crore has been placed with the Super Bank for a period of five years.
   5. The company has a foreign currency loan of $300 million repayable after five year. The exchange rate of the date of taking the loan was ₹ 52 whereas on the date of balance sheet, the exchange rate prevailing is ₹ 55.
   6. The company issued 10 million equity shares of the face value ₹ 10 each at an issue price of ₹ 50 each.
   7. The total fixed assets of the company as on the date of the balance sheet amounted to ₹ 2520 Crore. The accumulated depreciation amounted to ₹ 980 Crore.
   8. The company has paid ₹ 200 Crore to a film star for endorsement of its products covering a period of five years.
4. Composition of shareholders’ funds: The equity of Sooper Staar Limited as per the last two balance sheets are given as follows:

    

   

   Based upon the above information identify the reasons for changes in the share capital and reserves and surplus of the company during the year 2016–17.

5. Classification of borrowed funds: As on 31st March 2017, the break-up of borrowed funds of Sabse Taza Retails Limited is as follows:

    

   

   The term loan is secured against the mortgage of company’s fixed assets, whereas the working capital loan is secured by way of hypothecation of its current assets. Public deposits are unsecured and are repayable on demand. The first instalment for repayment of term loan amounting to ₹ 25 crore is due within the next 12 months. Interest on term loan and working capital loan has accrued (but not due) for one quarter. Interest on public deposits amounting to ₹ 6 crore is due but not paid. How will the above information appear in the balance sheet of the company on 31st March 2017?

6. Valuation of investments: The details of investments of High Power Electricity Limited as on 31st March 2017 are given as follows:

    

   

   The Regular Electrical Supply Limited is a subsidiary of the company. All other investments are current is nature. The current repurchase price of the mutual funds units is ₹ 122 million. How will you show the investments in the balance sheet of High Power Electricity Limited as on 31st March 2017?

7. Current asset/Current liabilities: Muscle Power Builder Limited is engaged in the construction business. It follows proportionate completion method for booking revenue and accordingly revenue is booked according to the stage of completion. The details of the payments received from customer and the revenue booked based upon proportionate completion method in respect of two of its projects for the year 2016–17 are given as follows:

    

   

   In respect of Project XX, though the revenue has been booked for ₹ 120 million invoice has been raised only for ₹ 110 million.

   How will the above transaction appear in the balance sheet of the company as on 31st March 2017?

8. Preparation of balance sheet: The extracts from the books of account of Victoria Limited as on 31st March 2017 are given as follows. Prepare the balance sheet of the company as on 31st March 2017. Make suitable assumptions as required.

    

   

   What are your key observations based upon the balance sheet relating to compositions of the equity and liabilities and assets of the company.

9. Preparation of balance sheet from the trial balance and additional information: Based upon the trial balance of Star Limited as given in the problem 8 of Chapter 5, prepare the balance sheet of the company as on 31st March 2017. Make suitable assumptions as necessary.
10. Preparation of Balance Sheet: High Growth Fertilizers Limited is engaged in the manufacture and distribution of fertilizers in India. During the year 2016–17, the company made a profit of ₹ 693.27 Crore. The Board proposed a dividend @ 300% on the Equity Shares. The dividend attracts distribution tax @ 15% of the amount distributed. The Board also proposed transfer of ₹ 400 Crore to general reserves.

    Other balances as extracted from the books of accounts of the company are given below:

     

    
    

    You are required to prepare the balance sheet of High Growth Fertilizer Limited as on 31st March 2017.

Cases

Case 6.1: Preparation of Balance Sheet of Asian Paints Limited

In continuation of Case 5.1 given in Chapter 5, you are required to prepare the balance sheet of Asian Paints Limited for the year ended 31st March 2017. The relevant information extracted from the books of accounts of the company are stated below:

 

Case 6.2: Preparation of Balance Sheet of HCL Technology Limited

In continuation of Case 5.2 given in Chapter 5, you are required to prepare the balance sheet of HCL Technologies Limited for the year ended 31st March 2017. The relevant information extracted from the books of accounts of the company are stated below:

 

Case 6.3: Preparation of Balance Sheet of Cipla Limited Based Upon the Trial Balance and Additional Information

Use the trial balance and additional information given in Case 5.3 in Chapter 5, and prepare the balance sheet of Cipla Limited as on 31st March 2017.

Case 6.4: Preparation of Balance Sheet of HUL Limited Based Upon the Trial Balance and Additional Information

Use the trial balance and additional information given in Case 5.4 in Chapter 5 and prepare the balance sheet of HUL Limited as on 31st March 2017.

Case 6.5: Comparison of the Balance Sheets of Hero Honda Motors Limited and Tech Mahindra Limited as on 31st March 20178

In continuation of Case 5.5 given in Chapter 5, the summarized balance sheets of Hero Honda Motors Limited and Tech Mahindra Limited for the year ended 31st March 2017 are given below:

Questions for Discussion

1. Compare the composition of assets and liabilities of the two companies and identify the key differences.
2. Which of the two companies have higher level of liquidity?
3. Which of the two companies is likely to have higher level of depreciation? Why?
4. Tech Mahindra Limited has large non-current investments whereas Hero Honda Motors Limited has large current investments. What does it indicate?
5. Justify the difference between the level of trade receivables and inventories of the two companies.

Case 6.6: Engineers India Limited: Impact of Bonus Shares and Stock Split on the Shareholders’ Funds in the Balance Sheet9

Engineers India Limited (EIL) was set up in 1965 to provide engineering and related technical services for petroleum refineries and other industrial projects. Its range of services include project management consultancy (PMC), project implementation services (PMS), engineering, procurement and construction (EPC) and lump sum turnkey (LSTK) contracts. The company has an enviable track record of profitability. For the year 2009–10, EIL posted a profit after tax of ₹ 43,557 lakh on a total income of₹ 217,747 lakh. EIL does not have any borrowed funds on its balance sheet and has been rewarding its shareholders with regular cash dividends. After paying dividends any surplus in the profit and loss account is transferred to the general reserves. The share capital and reserves and surplus of EIL as on 31st March 2010 are given as follows:

 

During the year 2010–11, EIL decided to make a bonus issue to the existing shareholders in the ration of 2:1 (2 new shares for 1 held). For this purpose, it decided to utilize the entire balance available in the share premium account and the necessary amounts from the general reserves as well. At the same time it was also decided to split the shares in the ratio of 2 for 1. Accordingly, each share of face value of ₹ 10 was split into two shares of face value ₹ 5 each. The company increased the authorized share capital to ₹ 30,000 lakh divided in 6,000 lakh equity share of ₹ 5 each.

During the year 2010–11, EIL earned a profit after tax of ₹ 52,251.94 lakh and paid an interim dividend of ₹ 3,367.37 lakh. The board of directors of the company also proposed a final dividend of ₹ 13,477.46 lakh. The dividend distribution tax of ₹ 2,663.72 lakh was also paid. After these appropriations the balance amount was transferred to the general reserve account.

Required

1. How will the shareholders’ funds appear in the balance sheet of Engineers India Limited as on 31st March 2011?
2. What is the impact of bonus issue and stock split on share capital, shareholders’ funds and promoters’ stake in the company?
3. How do stock split and bonus issue affect the assets of the company?

Appendix I: General Instructions for Preparation of Balance Sheet

1. An entity shall classify an asset as current when:
   1. It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle.
   2. It holds the asset primarily for the purpose of trading.
   3. It expects to realize the asset within 12 months after the reporting period.
   4. The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

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

2. The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
3. An entity shall classify a liability as current when:
   1. It expects to settle the liability in its normal operating cycle.
   2. It holds the liability primarily for the purpose of trading.
   3. The liability is due to be settled within 12 months after the reporting period.
   4. It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. An entity shall classify all other liabilities as non-current.
4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.
5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.
6. A company shall disclose the following in the notes to accounts

1. Non-Current Assets
   1. Property, plant and equipment:
      1. Classification shall be given as:
         1. Land
         2. Buildings
         3. Plant and equipment
         4. Furniture and fixtures
         5. Vehicles
         6. Office equipment
         7. Bearer Plants
         8. Others (specify nature)
      2. Assets under lease shall be separately specified under each class of assets.
      3. A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related depreciation and impairment losses or reversals shall be disclosed separately.
   2. Investment property:

      A reconciliation of the gross and net carrying amounts of each class of property at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related depreciation and impairment losses or reversals shall be disclosed separately.

   3. Goodwill:

      A reconciliation of the gross and net carrying amount of goodwill at the beginning and end of the reporting period showing additions, impairments, disposals and other adjustments.

   4. Other intangible assets:
      1. Classification shall be given as:
         1. Brands or trademarks
         2. Computer software
         3. Mastheads and publishing titles
         4. Mining rights
         5. Copyrights, patents, other intellectual property rights, services and operating rights
         6. Recipes, formulae, models, designs and prototypes
         7. Licenses and franchises
         8. Others (specify nature)
      2. A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related amortization and impairment losses or reversals shall be disclosed separately.
   5. Biological assets other than bearer plants:

      A reconciliation of the carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments shall be disclosed separately.

   6. Investments:
      1. Investments shall be classified as:
         1. Investments in equity instruments
         2. Investments in preference shares
         3. Investments in government or trust securities
         4. Investments in debentures or bonds
         5. Investments in mutual funds
         6. Investments in partnership firms
         7. Other investments (specify nature)

         Under each classification, details shall be given of names of the bodies corporate that are:

         1. Subsidiaries
         2. Associates
         3. Joint ventures
         4. Structured entities

         In whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly-paid). Investments in partnership firms alongwith names of the firms, their partners, total capital and the shares of each partner shall be disclosed separately.

      2. The following shall also be disclosed:
         1. Aggregate amount of quoted investments and market value thereof
         2. Aggregate amount of unquoted investments
         3. Aggregate amount of impairment in value of investments
   7. Trade Receivables:
      1. Trade receivables shall be sub-classified as:
         1. Secured, considered good
         2. Unsecured considered good
         3. Doubtful
      2. Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
      3. Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies, respectively, in which any director is a partner or a director or a member should be separately stated.
   8. Loans:
      1. Loans shall be classified as:
         1. Security deposits
         2. Loans to related parties (giving details thereof)
         3. Other loans (specify nature)
      2. The above shall also be separately sub-classified as:
         1. Secured, considered good
         2. Unsecured, considered good
         3. Doubtful
      3. Allowance for bad and doubtful loans shall be disclosed under the relevant heads separately.
      4. Loans due by directors or other officers of the company or any of them either severally or jointly with any other persons or amounts due by firms or private companies, respectively, in which any director is a partner or a director or a member should be separately stated.
   9. Bank deposits with more than 12 months maturity shall be disclosed under other financial assets
   10. Other non-current assets: Other non-current assets shall be classified as:
       1. Capital advances
       2. Advances other than capital advances:
          1. Advances other than capital advances shall be classified as:
             1. Security Deposits
             2. Advances to related parties (giving details thereof)
             3. Other advances (specify nature)
          2. Advances to directors or other officers of the company or any of them either severally or jointly with any other persons or advances to firms or private companies, respectively, in which any director is a partner or a director or a member should be separately stated. In case advances are of the nature of a financial asset as per relevant Ind AS, these are to be disclosed under other financial assets separately.
       3. Others (specify nature).
2. Current Assets
   1. Inventories:
      1. Inventories shall be classified as:
         1. Raw materials
         2. Work-in-progress
         3. Finished goods
         4. Stock-in-trade (in respect of goods acquired for trading)
         5. Stores and spares
         6. Loose tools
         7. Others (specify nature)
      2. Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
      3. Mode of valuation shall be stated.
   2. Investments:
      1. Investments shall be classified as:
         1. Investments in equity instruments
         2. Investment in preference shares
         3. Investments in government or trust securities
         4. Investments in debentures or bonds
         5. Investments in mutual funds
         6. Investments in partnership firms
         7. Other investments (specify nature)

         Under each classification, details shall be given of ames of the bodies corporate that are:

         1. Subsidiaries
         2. Associates
         3. Joint ventures
         4. Structured entities

         In whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly-paid).

      2. The following shall also be disclosed:
         1. Aggregate amount of quoted investments and market value thereof
         2. Aggregate amount of unquoted investments
         3. Aggregate amount of impairment in value of investments
   3. Trade Receivables:
      1. Trade receivables shall be sub-classified as:
         1. Secured, considered good
         2. Unsecured considered good
         3. Doubtful
      2. Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
      3. Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies, respectively, in which any director is a partner or a director or a member should be separately stated.
   4. Cash and cash equivalents:

      Cash and cash equivalents shall be classified as:

      1. Balances with banks (of the nature of cash and cash equivalents)
      2. Cheques, drafts on hand
      3. Cash on hand

         Others (specify nature)

   5. Loans:
      1. Loans shall be classified as:
         1. Security deposits
         2. Loans to related parties (giving details thereof)
         3. Others (specify nature)
      2. The above shall also be sub-classified as:
         1. Secured, considered good
         2. Unsecured, considered good
         3. Doubtful
      3. Allowance for bad and doubtful loans shall be disclosed under the relevant heads separately.
      4. Loans due by directors or other officers of the company or any of them either severally or jointly with any other person or amounts due by firms or private companies, respectively, in which any director is a partner or a director or a member shall be separately stated.
   6. Other current assets (specify nature): This is an all-inclusive heading, which incorporates current assets that do not fit into any other asset categories. Other current assets shall be classified as-
      1. Advances other than capital advances
         1. Advances other than capital advances shall be classified as:
            1. Security deposits
            2. Advances to related parties (giving details thereof)
            3. Other advances (specify nature)
      2. Advances to directors or other officers of the company or any of them either severally or jointly with any other persons or advances to firms or private companies, respectively, in which any director is a partner or a director or a member should be separately stated.
      3. Others (specify nature)
3. Cash and Bank Balances

   The following disclosures with regard to cash and bank balances shall be made:

   1. Earmarked balances with banks (for example, for unpaid dividend) shall be separately stated.
   2. Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments shall be disclosed separately.
   3. Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
4. Equity
   1. Equity Share Capital: For each class of equity share capital:
      1. The number and amount of shares authorized.
      2. The number of shares issued, subscribed and fully paid, and subscribed but not fully paid.
      3. Par value per share.
      4. A reconciliation of the number of shares outstanding at the beginning and at the end of the period.
      5. The rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital.
      6. Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by subsidiaries or associates of the holding company or the ultimate holding company in aggregate.
      7. Shares in the company held by each shareholder holding more than five per cent shares specifying the number of shares held.
      8. Shares reserved for issue under options and contracts or commitments for the sale of shares or disinvestment, including the terms and amounts.
      9. For the period of five years immediately preceding the date at which the Balance Sheet is prepared:
         1. Aggregate number and class of shares allotted as fully paid up pursuant to contract without payment being received in cash.
         2. Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
         3. Aggregate number and class of shares bought back.
      10. Terms of any securities convertible into equity shares issued along with the earliest date of conversion in descending order starting from the farthest such date.
      11. Calls unpaid (showing aggregate value of calls unpaid by directors and officers).
      12. Forfeited shares (amount originally paid up).
   2. Other equity:
      1. Other reserves shall be classified in the notes as:
         1. Capital redemption reserve
         2. Debenture redemption reserve
         3. Share options outstanding account
         4. Others—(specify the nature and purpose of each reserve and the amount in respect thereof)
            (Additions and deductions since last balance sheet to be shown under each of the specified heads)
      2. Retained earnings represents surplus, i.e., balance of the relevant column in the statement of changes in equity.
      3. A reserve specifically represented by earmarked investments shall disclose the fact that it is so represented.
      4. Debit balance of statement of profit and loss shall be shown as a negative figure under the head retained earnings. Similarly, the balance of other equity, after adjusting negative balance of retained earnings, if any, shall be shown under the head other equity even if the resulting figure is in the negative.
      5. Under the sub-head other equity, disclosure shall be made for the nature and amount of each item.
5. Non-Current Liabilities
   1. Borrowings:
      1. borrowings shall be classified as:
         1. Bonds or debentures
         2. Term loans
            1. from banks
            2. from other parties
         3. Deferred payment liabilities
         4. Deposits
         5. Loans from related parties
         6. Long-term maturities of finance lease obligations
         7. Liability component of compound financial instruments
         8. Other loans (specify nature)
      2. Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.
      3. Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.
      4. Bonds or debentures (along with the rate of interest, and particulars of redemption or conversion, as the case may be) shall be stated in descending order of maturity or conversion, starting from the farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by installments, the date of maturity for this purpose must be reckoned as the date on which the first installment becomes due.
      5. Particulars of any redeemed bonds or debentures which the company has power to reissue shall be disclosed.
      6. Terms of repayment of term loans and other loans shall be stated.
      7. Period and amount of default as on the balance sheet date in repayment of borrowings and interest shall be specified separately in each case.
   1. 3. Provisions: The amounts shall be classified as:
      1. Provision for employee benefits
      2. Others (specify nature).
   2. 4. Other non-current liabilities:
      1. Advances
      2. Others (specify nature).
6. Current Liabilities
   1. Borrowings:
      1. Borrowings shall be classified as:
         1. Loans repayable on demand
            1. from banks
            2. from other parties
         2. Loans from related parties
         3. Deposits
         4. Other loans (specify nature);
      2. Borrowings shall further be sub-classified as secured and unsecured.
         Nature of security shall be specified separately in each case.
      3. Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.
      4. Period and amount of default as on the balance sheet date in repayment of borrowings and interest, shall be specified separately in each case.
   2. Other financial liabilities: Other financial liabilities shall be classified as:
      1. Current maturities of long-term debt.
      2. Current maturities of finance lease obligations.
      3. Interest accrued.
      4. Unpaid dividends.
      5. Application money received for allotment of securities to the extent refundable and interest accrued thereon.
      6. Unpaid matured deposits and interest accrued thereon.
      7. Unpaid matured debentures and interest accrued thereon.
      8. Others (specify nature).

      Long-term debt is a borrowing having a period of more than twelve months at the time of origination.

   3. Other current liabilities:

      The amounts shall be classified as:

      1. Revenue received in advance.
      2. Other advances (specify nature).
      3. Others (specify nature).
   4. Provisions: The amounts shall be classified as:
      1. Provision for employee benefits.
      2. Others (specify nature)
7. The presentation of liabilities associated with group of assets classified as held for sale and noncurrent assets classified as held for sale shall be in accordance with the relevant Indian accounting standards (Ind ASs).
8. Contingent Liabilities and Commitments

   (to the extent not provided for)

   1. Contingent liabilities shall be classified as:
      1. Claims against the company not acknowledged as debt.
      2. Guarantees excluding financial guarantees.
      3. Other money for which the company is contingently liable.
   2. Commitments shall be classified as:
      1. Estimated amount of contracts remaining to be executed on capital account and not provided for.
      2. Uncalled liability on shares and other investments partly paid.
      3. Other commitments (specify nature).
9. The amount of dividends proposed to be distributed to equity and preference shareholders for the period and the related amount per share shall be disclosed separately. Arrears of fixed cumulative dividends on irredeemable preference shares shall also be disclosed separately.
10. Where in respect of an issue of securities made for a specific purpose the whole or part of amount has not been used for the specific purpose at the balance sheet date, there shall be indicated by way of note how such unutilized amounts have been used or invested.

1. 7. When a company applies an accounting policy retrospectively or makes a restatement of items in the financial statements or when it reclassifies items in its financial statements, the company shall attach to the balance sheet, a balance sheet as at the beginning of the earliest comparative period presented.
2. 8. Share application money pending allotment shall be classified into equity or liability in accordance with relevant Indian accounting standards. Share application money to the extent of not refundable shall be shown under the head equity and share application money to the extent of refundable shall be separately shown under other financial liabilities.
3. 9. Preference shares including premium received on issue, shall be classified and presented as equity or liability in accordance with the requirements of the relevant Indian accounting standards. Accordingly, the disclosure and presentation requirements in this regard applicable to the relevant class of equity or liability shall be applicable mutatis mutandis to the preference shares. For instance, redeemable preference shares shall be classified and presented under non-current liabilities as borrowings and the disclosure requirements in this regard applicable to such borrowings shall be applicable mutatis mutandis to redeemable preference shares.
4. 10. Compound financial instruments such as convertible debentures, where split into equity and liability components as per the requirements of the relevant Indian accounting standards, shall be classified and presented under the relevant heads in equity and liabilities.
5. 11. Regulatory deferral account balances shall be presented in the balance sheet in accordance with the relevant Indian accounting standards.

Endnotes

1. Framework for, preparation and presentation of financial statements, 2011, ICAI
2. Section 55, Companies Act, 2013
3. Section 68 of the Companies Act 2013
4. Exposure draft ‘Framework for the preparation and presentation of financial statements’, ICAI, 2011
5. Ind AS 37 provisions, contingent liabilities and contingent assets