Financial Statement Analysis 2017 – SOLVED QUESTION PAPER – DIBRUGARH UNIVERSITY – Semester 6 – B.Com

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Dibrugarh University



1(a) State whether True or False: 1X5=5

i)Financial Statements disclose only monetary facts.-False

ii)The figures shown in the financial statements are on historical cost basis.-True

iii)Current Ratio is calculated to compare current assets and fixed assets.-False

iv)A decrease in stock turnover ratio indicates that business is becoming more efficient-False

v)Corporate Social Responsibility reporting is not mandatory for any business in India-True

b) Fill in the blanks with appropriate words(s) 1×5=5

i) Profit or Loss of Life Insurance business is determined by preparing Revenue Account.

ii) A banking Company Incorporate in India shall have to transfer a sum equal to 30% of Profit to a statutory Reserve.

iii) According to RBI Guidelines a Provision of 20% is required for any advance remains doubtful upto one year.

iv) Common Size Statement Analysis is known as Vertical Analysis.

v) Compliance of Corporate Governance was made mandatory by SEBI as listing requirement vide Clause 49

2. Write short notes on the following: 4×4=16

a)Economic Value Added Statement

Economic Value Added Statement is simply the operating profit after tax less a charge for the capital, equity as well as debt used in the business. EVA may be calculated as follows

EVA=NOPAT-C X Capital where,

NOPAT=Net Operating Profit after Tax

C=Weighted average cost of capital

Capital= Economic book value of the capital employed in the firm. If EVA is zero, it is treated as a sufficient achievement on the ground that shareholders earned a return that compensated the risk. There are some advantages of EVA are as follows:

i) EVA is a tool which helps to focus manager is attention on the impact of their of their decisions in increasing shareholders wealth.

ii)EVA is a good guide for investors; as on the bias of EVA, they can decide whether a particular company is worth money in or not.

iii)EVA can be used as a basis for valuation of goodwill and shares.

iv)EVA is a good controlling device device in a decentralised enterprise. Management can apply EVA to find out EVA contribution of each decentralised unit or segment of the company.

v)EVA linked compensation schemes (for both operations and managers) can be developed towards protecting (or rather improving) shareholders wealth.

b)Profitability Ratio –

Profitability ratios are the financially ratios whish talks about the profitability of a business with respect to its sales or investments. Since, the ratios measures the efficiency of operations of a business with the help of the profits, they are called probability ratios. They are quite useful tools to understand the efficiency/inefficiencies of a business and there by assist management and owners to take corrective actions.

Probability ratios are the tools for final analysis which communicate about the final goal of a business. For all the profits oriented business, the final goal is none other than profits. Profits are the life bloods of any business without which a business cannot remain a going concern. Since, the probability ratio deals with the profit, they are as important as profit.

The purpose of calculating the probability ratio is to measure the operating efficiency of a business and return which the business generates. The different stakeholders of a business are interested in the probability ratios for different purposes. The stakeholders of a business, include owners, managements, creditors, lender etc.

c) Corporate governance reporting –

corporate governance refers to the way the corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders desires. It is actually conducted by the board of the conducted by the board of the directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and society goals, as well as, economic and social goals.

There are some benefits of corporate governance are as follows :-

  • Good corporate governance ensures corporate success and economic growth.
  • It lowers the capital cost.
  • There is positive impact on the share price.
  • It helps in brand formation and developments.
  • It ensures organization in managed in a manner that fits the best interests of all.
  • Strong corporate governance maintains investors confidence, as a result of which, company can raise capital efficiently and effectively.
  • Good corporate governance also minimizes wastages, corruption, risk and mismanagements.
  • It provides proper inducement to the owners as well as managers to achieve objectives that are in interest of the shareholders and the organization.

d) Valuation of Investment of NBFC’S

For NBFCs RBI has issued certain guide lines according to which they can invest. A financial asset can be sold to the SC/RC by any bank/FI where the asset is:

  1. A NPA ,including a nin-performing bond/debenture and
  2. A standard asset where:

a)the asset is under consortium/multiple banking arrangements.

b) at least 75% by value of the asset is classified as non-performing asset in the books of other banks/FIs and

iii) at least 75% of the banks/FIs who are under the consortium/multiple banking arrangements agree to the asset to SC/RC.

e) Activity Ratio

Activity Ratio indicates the efficiency with which a a business uses its assets such as inventories, accounts receivables, and fixed assets. Activity Ratio measures how effectively a company is able to generate revenue in the form of cash and sales by using its assets, liability and capital.

Activity ratios play an active role in evaluating a company’s operating efficiency because, in addition to expressing how well a company generates revenue, activity ratios also indicates how well the company is being managed with the best utilization of all of its Balance Sheet Components.

Activity Ratios measures the relative efficiency of a firm based on its use of its assets, leverage, or other similar balances sheet and are important in determining whether a company’s management is doing a good enough job of generating revenue and cash from its resources. Activity ratios are also commonly known efficiency ratio.

The activity ratio helps investors with their investment decisions and each indicates something different about a business and these ratios efficiently measures how effectively a company utilizes its resources to generate a profit.

f)Trend Analysis

Trend Analysis is the process of comparing business data over time to identify any consistent results or Trends.

Advantages of Trend Analysis

i)Possibility of making Inter firm comparison

Trend Analysis helps the analyst to make a proper comparison between the two or more firms over a period of time. It can also be compared with industry average. That is helps to understand the strength or weakness of a particular firm in comparison with their related firm in the industry.


Trend Analysis ( in terms of percentage) is found to be more effective in comparison with the absolute figures/data on the basis of which the management can take the decisions.

iii) Useful for Comparative Analysis

Trend Analysis is very useful for comparative analysis of date in order to measure the financial performances of firm over a period of time and which helps the management to take decisions for the future i.e it helps to protect the future.

iv)Measuring Liquidity and Solvency:

Trend Analysis helps the analyst/ and the management to understand the short-term liquidity position as well as the long term solvency position of a firm over the years with the help of related financial trend ratios.

v)Measuring Profitability Position

Trend analysis also helps to measure the profitability positions of an enterprise or a firm over the years with the help of related financial trend ratios.

3a) What do you mean by financial statement? Explain the nature and objectives of financial statement. 4+10=14

Financial Statements are formal records activity of a business. These statements provide an overview of a business profitability and financial condition in both short and long term. Financial Statement records the performance of the business and helps identify the strength and weakness of the business. These statements are prepared on the basis of accounting records. For this reason financial statement are considered as the end product of accounting process.

The financial statement consists of:

  1. The profit and loss account or Income statement.
  2. The Balance Sheet or Position Statement and it may also include-
  3. Statement of Appropriation of Profit or Retained Earnings and
  4. Statement of Changes in financial position such s Fund Flow Statement, Cash flow statement.

There are the nature of the financial statement are as follows:

  1. Reporting Periods:

Financial Statements are prepared at periodic intervals usually at the end of the accounting period annually, generally one year as per the provisions of the company law.

  1. True and fair view

Financial statements are prepared by the management depicting the true and fair view of the state of affairs of the entity of the period under review. These statements are audited by the auditors of the company who certified the true and fair view depicted by the financial statements of the company. The auditors make sure that the Financial Statements depict true and fair view of affairs of the company.

  1. Summarised reports:

Financial statements are summarised reports prepared on the basis of accounting records. However, some items wise details are shown in various schedules, attached to the financial statements.

  1. Based on recorded facts:

Financial Statements are prepared on the basis of information recorded in the books of accounts. Hence, they are based on recorded facts.

  1. Basis of Preparation:

Financial Statements are prepared following the accounting conventions. Accounting convention are those financial accounting principles whose application has been sanctioned by long usage and having universal acceptance. For eg: Under money measurement concept, it is assumed that the value of maney will remain the same in different periods.

The following are some of the objectives of financial statements:

  1. To provide financial statements information to the parties interested in financial statements.
  2. To provide necessary information for taking decisions regarding renovation and expansion of the firm, make or buy decision.
  3. To provide information for financial forecasting, utilization of scarce resources.
  4. Provide necessary information to the management for internal reporting and assessing the efficiency of a firm.
  5. Provide information for legal decision making.

b) What is financial statement analysis? Explain their various techniques of analysis of financial statements.

Analysis of financial statements is basically a study of the relationship among various facts and figures stated in a set of financial

  1. Comparative Statement or Comparative Financial and Operating Statements.
  2. Common Size Statements.
  3. Trend Ratios or Trend Analysis.
  4. Average Analysis.
  5. Statement of Changes in Working Capital.
  6. Fund Flow Analysis.
  7. Cash Flow Analysis.
  8. Ratio Analysis.
  9. Cost Volume Profit Analysis

A brief explanation of the tools or techniques of financial statement analysis presented below.

Comparative Income Statement

Three important information are obtained from the Comparative Income Statement. They are Gross Profit, Operating Profit and Net Profit. The changes or the improvement in the profitability of the business concern is find out over a period of time. If the changes or improvement is not satisfactory, the management can find out the reasons for it and some corrective action can be taken.

3. Comparative Balance Sheet

The financial condition of the business concern can be find out by preparing comparative balance sheet. The various items of Balance sheet for two different periods are used. The assets are classified as current assets and fixed assets for comparison. Likewise, the liabilities are classified as current liabilities, long term liabilities and shareholders’ net worth. The term shareholders’ net worth includes Equity Share Capital, Preference Share Capital, Reserves and Surplus and the like.

4. Common Size Statements

A vertical presentation of financial information is followed for preparing common-size statements. Besides, the rupee value of financial statement contents are not taken into consideration. But, only percentage is considered for preparing common size statement. The total assets or total liabilities or sales is taken as 100 and the balance items are compared to the total assets, total liabilities or sales in terms of percentage. Thus, a common size statement shows the relation of each component to the whole. Separate common size statement is prepared for profit and loss account as Common Size Income Statement and for balance sheet as Common Size Balance Sheet.

5. Trend Analysis

The ratios of different items for various periods are find out and then compared under this analysis. The analysis of the ratios over a period of years gives an idea of whether the business concern is trending upward or downward. This analysis is otherwise called as Pyramid Method.

6. Average Analysis

Whenever, the trend ratios are calculated for a business concern, such ratios are compared with industry average. These both trends can be presented on the graph paper also in the shape of curves. This presentation of facts in the shape of pictures makes the analysis and comparison more comprehensive and impressive.

7. Statement of Changes in Working Capital

The extent of increase or decrease of working capital is identified by preparing the statement of changes in working capital. The amount of net working capital is calculated by subtracting the sum of current liabilities from the sum of current assets. It does not detail the reasons for changes in working capital.

8. Fund Flow Analysis

Fund flow analysis deals with detailed sources and application of funds of the business concern for a specific period. It indicates where funds come from and how they are used during the period under review. It highlights the changes in the financial structure of the company.

9. Cash Flow Analysis

Cash flow analysis is based on the movement of cash and bank balances. In other words, the movement of cash instead of movement of working capital would be considered in the cash flow analysis. There are two types of cash flows. They are actual cash flows and notional cash flows.

10. Ratio Analysis

Ratio analysis is an attempt of developing meaningful relationship between individual items (or group of items) in the balance sheet or profit and loss account. Ratio analysis is not only useful to internal parties of business concern but also useful to external parties. Ratio analysis highlights the liquidity, solvency, profitability and capital gearing.

11. Cost Volume Profit Analysis

This analysis discloses the prevailing relationship among sales, cost and profit. The cost is divided into two. They are fixed cost and variable cost. There is a constant relationship between sales and variable cost. Cost analysis enables the management for better profit planning.

4a) Ratio Analysis is considered better than mere comparison of figures is carrying out overall appraisal of business. “ Explain how ratio analysis is better tool for appraisal. 13

Ans: Ratio analysis is an important tool for financial analysis. It is the most widely use tool to interpret relationship between the items of income statement or balance sheet .

There are some advantages of the ratio analysis are as follows:-

1.Helpful in simplifying accounting figures:-

Accounting figures in many cases fail to provide information in a desired way. Ratios simplify, summarise and systematize accounting figures which can be easily understood by those who do not know the language of accounting. Thus ratios help in communicating and enhancing the value of the financial statements.

2.Helpful in profitability measurement:-

Profit and loss account shows the profit earned or loss incurred during a period, bit fail to convey the capacity to earn in terms of per rupee invested or per rupee of sales. Accounting ratios help measure the profitability, return on investment or capital employed net profit ratio etc. are the best measure of profitability .

3.Measurment of financial position:-

Liquidity and solvency ratios are regarded as the tools to X-ray the financial health of an organization. Various ratios, viz. debt-Equity ratio, proprietary ratio etc. give an idea of solvency position and current ratio and liquid ratio show the liquidity position of the enterprise.

4.Measurement of operating efficiency:-

Activity and turnover ratios tell us the operating efficiency of a business unit. Stock turnover, current assets turnover, asset turnover etc. are ratios calculated to measure the operating efficiency.

5.Helps in control:-

Ratio analysis helps in effective control of the business affairs. The trend ratios act as tracking signal of the estate of activities an financial position.

6. Helps in forecasting:-

Ratios are of much help in business planning and forecasting. The trend ratios are analysed and used as guide to future planning. What is to be done in the immediate future is decided, many a time, on the basis of trend ratios, i.e. ratios calculated for a number of years.

7.Facilitates inter-firm and intra-firm comparison:-

Ratio are analysis is helpful, or so to say, are the basis for comparing the efficiency of various firms in the industry and various division of a business firm. Absolute figures are not suitable for the purpose of comparison. The accounting language simplified through ratios is the best tool to compare the firm and division of the firm.

8. Helps in planning:-

It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting, Planning co-ordination, control and communications.

9.Helps in decision making:-

It helps in making decisions like management control, investment etc. by doing SWOT analysis. This analysis helps indentifying the strength (S), weakness (W), opportunity (O) and threats (T) of the business enterprise.

Thus, these are the considered to the Ratio analysis is better than mere comparison of figures in carrying of figures in carrying out overall appraisal of business. Thus, in these explanation it is prove that the ratio analysis is the better tool for appraisal.


(b) Debtors’ velocity -3 months

Creditors’ velocity – 2 months

Stock velocity -8 times

Fixed Assets Turnover Ratio -8 times

Gross Profit Ratio -25%

Gross profit in the year amounted to Rs. 80,000. There is no long term Loan and Bank Overdraft Reserve and Surplus amounted to Rs. 28,000. Liquid assets are Rs. 97,333. Closing stock is Rs. 2000 more than opening stock. Bill Receivable and payable are Rs. 5,000 and Rs. 2,000 respectively. Find out (1) Sales,(2) Sundry Debtors (3) Closing Stock (4) Sundry Creditors (5) Fixed Assets and (6) Proprietor’s Fund.

Also prepare Balance Sheet with as many details as possible.

5(a) What do you mean by financial reporting? State the various steps adopted by business to enhance transparency in financing reporting process.

Ans:- Financial reporting is the financial results of an organization that are released to the public. This reporting is a key function of the controller, who may be assisted by the investor relations officer if an organization is publicly held.

Financial reporting typically encompasses the following:

  • Financial statements, which include the income statement, balance sheet, and statement of cash flows
  • Accompanying footnote disclosures, which include more detail on certain topics, as prescribed by the relevant accounting framework
  • Any financial information that the company chooses to post about itself on its website
  • Annual reports issued to shareholders
  • Any prospectus issued to potential investors concerning the issuance of securities by the organization

Financial reporting serves two primary purposes. First, it helps management to engage in effective decision-making concerning the company’s objectives and overall strategies. The data disclosed in the reports can help management discern the strengths and weaknesses of the company, as well as its overall financial health. Second, financial reporting provides vital information about the financial health and activities of the company to its stakeholders including its shareholders, potential investors, consumers, and government regulators. It’s a means of ensuring that the company is being run appropriately. 

Ways to enhance transparency in the financial reporting

Following are the qualities that can help to enhance the transparency of financial reporting process:

  1. Relevance

Relevance is closely and directly related to the concept of useful information. Relevance implies that all those items of information should be reported, that may aid the users in making decisions and/or predictions. Relevance is the dominant criterion in making decision regarding information disclosure. It follows that relevant information must be reported.

  1. Reliability

Reliability is described as one of the two primary qualities(relevance and reliability), that make accounting information useful for decision making. Reliable information is required to form judgements about the earning potential and financial position of a business firm. Reliability is that quality which permits users of data, to depend upon it with confidence, as a representative of what it purports to represent. It has been argued that there is no conflict between relevance and reliability concepts, when applied to financial reporting.

  1. Understandability

Understandability is that quality of information that enables users to perceive irts significance. The benefits of information may be increased by making it more understandable and hence useful to a wider circler of users. Presentation of information should not only facilitate understanding, but also avoid wrong interpretation of financial statements.

  1. Timeliness

Timeliness means having information available to decision makers, before it loses its capacity to influence decisions. Timeliness is an ancillary aspect of relevance. If, information is either not available when it is needed, or becomes available after the reported events that it has no value for future actions, it lacks relevance and is of little or no use. Timeliness alone, cannot make information relevant, but a lack of timeliness, can rob information of relevance it might otherwise have had. Clearly there are degrees of timeliness. Some reports need to be prepared quickly, say in case of a takeover bid or a strike.

  1. Neutrality

Neutrality is also known as the quality of “freedom from bias” or objectivity. Neutrality means that, in formulating or implementing standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest of user.


b) What is corporate social responsibility reporting? Explain the present legal provisions of corporate social responsibility and its reporting practices in India. 4+9=13

Ans: Corporate social responsibility (CSR) Is a self- regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public. Corporate Social Responsibility means that in the normal course of business, a company is operating in ways that enhance society and the environment instead of contributing negatively to them. CSR is for the community, it is equally valuable for a company. CSR activities can forge a stronger bond between employee and corporation they can boost morale and help both employees and employers feel more connected with the world around them.

CRS is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line-Approach”), while at the same time addressing the exceptions of shareholder and stakeholders.

CSR refers to the idea that companies need to invest in socially and environmentally relevant causes in order to interact and operate with concerned parties having a stake in the company’s work. CSR is termed as “Triple-Bottom-Line-Approach”, which is meant to help the company promote its commercial interests along with the responsibilities it holds towards the society at large. CSR is different and broader from acts of charities like sponsoring or any other philanthropic activity as the latter is meant to be a superficial or surface level action as part of business strategy, but the former tries to go deep and address longstanding socio-economic and environmental issues.


CSR is responsible for generating a lot of goodwill to companies either directly or indirectly. These include-

  • Making employees more loyal and help companies retain them in the long run.
  • Make companies more legitimate and help them in accessing a greater market share.
  • Since companies act ethically, they face less legal hurdles.
  • Bolster the goodwill of companies amongst the general public and help in strengthening their “brand value”.
  • Help in the stabilization of stock markets in both the short and long run
  • Help in limiting state’s involvement in corporate affairs as companies self-regulate and act as most ethical.

CSR helps companies and their components like their shareholders to help in the development of a country’s economy on a macro-level.


The Companies Act, 2013, a successor to The Companies Act, 1956, made CSR a compulsory act. Under the notification dated 27.2.2014, under Section 135 of the new act, CSR is compulsory for all companies- government or private or otherwise, provided they meet any one or more of the following fiscal criterions:

  • The net worth of the company should be Rupees 500 crores or more
  • The annual turnover of the company should be Rupees 1000 crores or more
  • Annual net profits of the company should be at least Rupees 5 crores.

If the company meets any one of the three fiscal conditions as stated above, they are required to create a committee to enforce its CSR mandate, with at least 3 directors, one of whom should be an independent director.

The responsibilities of the above-mentioned committee will be:

  • Creation of an elaborate policy to implement its legally mandated CSR activities. CSR acts should conform to Schedule VII of the Companies Act, 2013.
  • The committee will allocate and audit the money for different CSR purposes.
  • It will be responsible for overseeing the execution of different CSR activities.
  • The committee will issue an annual report on the various CSR activities undertaken.
  • CSR policies should be placed on the company’s official website, in the form and format approved by the committee.
  • The board of directors is bound to accept and follow any CSR related suggestion put up by the aforementioned committee.
  • The aforementioned committee must regularly assess the net profits earned by the company and ensure that at least 2 percent of the same is spent on CSR related activities.
  • The committee must ensure that local issues and regions are looked into first as part of CSR activities.

Legal Provisions Regarding Corporate Social Responsibility in India

Features of CSR Laws

  • Quantum of money utilized for CSR purposes are to be compulsorily included in the annual profit-loss report released by the company.
  • The CSR rules came into force on 1st April 2014 and will include subsidiary companies, holdings and other foreign corporate organizations which are involved in business activities in India.
  • CSR has been defined in a rather broad manner in Schedule VII of Companies Act, 2013. The definition is exhaustive as it includes those specific CSR activities listed in Schedule VII and other social programmes not listed in schedule VII, whose inclusion as a CSR activity is left to the company’s discretion.

Provisions of CSR

  • Net profits are calculated on the basis of Section 198 of Companies Act, 2013. However, only domestic branches are included and dividend-related payments are left out of the final calculation of total net profits.
  • Companies are allowed to implement CSR via any of the following means possible.
  • Setting up a Trust or Society under Section 8 of the 2013 Companies act under its direct administrative control.
  • Corporate can outsource the CSR tasks to established social enterprises- institutions engaged in CSR activities for 3 years or more. These institutions are meant to engage in not for profit activities. The corporate though are supposed to monitor the social enterprises meant to enforce their CSR mandate.
  • Companies can collaborate with fellow companies and work out some arrangement based on the CSR rules.
  • CSR activities should follow the below-mentioned rules.
  • Any familial activity or act of personal charity is not to be included as part of CSR activity.
  • Any sort of contribution-fiscal or otherwise by political organizations is outside the purview of CSR activities as indicated under Section 182 of the 2013 Companies Act.
  • All CSR activities are to be conducted in Indian Territory to be considered valid.
  • Companies can utilize a maximum of 5 percent of their total expenditure to help in capacity building of their society, trust or outsourced social enterprise.
  • As stated before listed public companies are mandated to have up to 3 directors as part of their CSR committee- one of whom should always be independent. Unlisted and private companies are allowed to have at least 2 directors and no independent director.
  • CSR reports are to be compulsorily published on an annual basis. The reports have a fixed format as designed by the CSR rules, which must include details like official CSR policy, the number of funds dedicated to CSR and its detailed utilization as well as a detailed explanation for non-utilization of funds if any. The said format and its constituents must be displayed on the official website of the company.
  • CSR activities initiated by a foreign company has to be via its Indian subsidiary to be considered legitimate under Section 135 of the companies act.
  • Trusts created by companies to carry out their mandated CSR tasks, are to be compulsorily registered in some states where it is mandatory under Income Tax.
  • Companies are allowed to co-operate with their independent counterparts, provided the latter has a proper tracking and reporting system for CSR activities that may be undertaken.
  • Companies are allowed to engage in capacity building by allotting up to 5 percent of all expenses to be incurred on CSR activities to be devoted to training and equipping of personnel to carry out CSR and related activities.
  • Fiscal help rendered to political outfits is not considered as a CSR activity as well.
  • Events like the marathon, award functions, fiscal help rendered to charitable institutions, sponsoring TV shows etc that are strict “one-off”-i.e. meant to happen just once in a while are not considered CSR.
  • Companies cannot report lawful duties rendered under acts or regulation like Labour Act, Land act etc cannot be considered as CSR tasks.

6a) Discuss the important provisions need to be taken into considerations for financial reporting of Insurance Companies in India and also state disclosures requirement of their regulations. 7+7=14

Financial Reporting Requirements of Insurance Company in India

To protect the interests of policyholders and to increase transparency and credibility of insurance companies there is a need to have an effective regulatory system for financial reporting of insurance companies. Reporting requirements of insurance companies, because of the concept of policyholders’ fund, segment respect of all the funds maintained by the company, complexity of insurance contracts and insurance itself is an intangible product.

Earlier the accounts of insurance companies were governed by Insurance Act 1938, but passing of Insurance Regulatory Development Authority act (IRDA Act) in 1999 opening a new chapter for disclosure norms of insurance companies. In the year 2002, the IRDA came up with regulation for the preparation of the financial statement of insurance companies. According to the Insurance (Amendment) Act, 2002, the first, second and third schedules prescribed prescribed for balance sheet, profit and loss account and revenue account respectively as given in Insurance Act 1938 have been omitted. Now revenue account, profit and loss account and Balance sheet are to be prepared as per the formats prescribed by IRDA. However, the statues governing financial reporting particular of insurance company in India are: Insurance act 1938, IRDA Act, 1999 (including IRDA Regulations), Companies Act and Institute of Chartered Accountants of India (CAI).

IRDA regulations

Insurance Regulatory Development Authority (IRDA) has prescribed various regulations from time to time. These regulations are related to the financial reporting practices of insurance companies. These regulations are important constituents of the India regulatory regime. Accounting to the regulations made by the authority in consultation with Insurance Advisory Committee, accounts of insurance companies are prepared according to the prescribed formats given by the authority. Details are given as under.

  1. Preparation of Financial Statement:

The auditor’s report on the financial statements of all insurance companies shall be in conformity with the requirements of Schedule C. IRDA given the list of items to be discloser in the financial statement of insurance companies under part II of schedule A and schedule B of the Regulation 2002 According to these regulations, following discloser will form part of financial statements of insurance companies:

  1. Every insurance company will disclose all significant accounting policies and accounting standards following by them in the manner required under Accounting Standards is issued by the Institute of chartered Accountants of India.(ICAI)
  2. All companies will separately discloser if there is any departure from the accounting policies with reasons for such departure.
  3. Disclosure of investments made in accordance with statutory requirements separately together with its amount, nature, security and any special rights in and outside India.
  4. Disclosure of performing and non-performing investments separately.
  5. Disclosure of assets to the extent required to be deposited under local laws for otherwise encumbered in or outside India.
  6. All the company are required to show sector-wish percentage of their business.
  7. To include a summary of financial statements for the last five years in their annual report to be prepared as prescribed by the IRDA.
  8. Discloser the basis of allocation of investment and income thereon between policyholders’ account and shareholders’ account.
  9. To disclose accounting ratios as prescribed by the insurance regulatory and Development Authority.

Discloser of following items is made by way of notes to balance sheet:

  1. Contingent Liabilities.
  2. Actuarial assumptions for valuation of liabilities for life policies in force.
  3. Encumbrance’s to assets of the company in and outside India.
  4. Commitments made and outstanding for loans, investments and fixed assets.
  5. Basis of amortization of debt securities.
  6. Claims settled and remaining unpaid for a period of more than six months as on the balance sheet date.
  7. Management Report: According to the IRDA Regulations 2002, all the insurance companies are required to attach a management report to their financial statement. The contents of the management report are given under PART IV of these regulations and reproduced below:
  8. Confirmation regarding the continued validity of the regulations granted by the IRDA.
  9. Certification that all the dues payable to the statutory authorities has been duly paid.
  10. Declaration to the effect that the shareholding patterns and the transfer of shares during the year are in accordance with statutory or regulatory requirements.
  11. Declaration that the management has not directly or indirectly invested outside India the funds of the policyholders.
  12. Confirmation regarding required solvency margins.
  13. Certification to the effect that no part of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the provisions of the provisions of the Insurance Act, 1938 relating to the application and investment of the life insurance funds.
  14. Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same.
  15. Operations in other countries, if any, with a separate statement giving the management’s estimate of country risk and exposure risk and the hedging strategy adopted.
  16. Ageing of claims indicating the trends in average claim settlement time during the preceding five years.
  17. Certification to the effect as to how the values, as shown in the balance sheet, of the investments and stocks and shares have been arrived at, and how the market value thereof has been ascertained for the purpose of comparison with the value so shown.
  18. Review of assets quality and payments of investment in terms of portfolio, i.e. separately in terms of real estate, loans, investments. Etc.
  19. A schedule payments which have been made to individuals, firms, companies and organization in which directors of the insurance company are interested.


bDiscuss the suggestions made by RBI Advisory Group on Accounting and Auditing in Financial Reporting of Banks and financial institutions.

The balance sheet and the profit and loss account of a banking company have to be audited as stipulated under section 30 of the Banking Regulation Act. Every banking company’s account needs to be verified and certified by the Statutory Auditors as per the provisions of legal frame work. The powers, functions and duties of the auditors and other terms and conditions as applicable to auditors of the banking companies as well. The audit of banking companies book of accounts call for additional details and certificates to be provided by the auditors.

Apart from the balance sheet audit, Reserve Bank of India is empowered by the provisions of the Banking Regulation Act to conduct/ order a special audit of the accounts of any banking company. The special audit may be conducted or ordered to be conducted, in the opinion of the Reserve Bank of Indian that the special audit is necessary;

  1. In the public interest and/ or
  2. In the interest of the banking company and/ or
  3. In the interest of the depositors.

The Reserve Bank of India’s directors can order the bank to appoint the same auditor or another auditor to conduct the special audit. The special audit report should be submitted to the Reserve Bank of India with a copy to the banking company. The cost of the audit is to be borne by the banking company.

Regulatory Frame Work for Financial Reporting by Banking Companies in India:

The regulatory framework of financial reporting is very essential in determination of the form and contents of financial reports. Reserve Bank of India has issued certain guidelines for preparation of profit and loss account and balance sheet by banking companies conducting affairs in India.

A Banking company in India is required to prepare its balance sheet according to Form A in the Third Schedule to the Banking Act, 1949. Form A in a summary form and the details of the various items are given in the schedules.

A banking company is required to prepare its Profit and Loss Account according to Form B in the Third Schedule to the Banking Regulation Act, 1949. Form B is in a summary form and the details of the various items are given in the schedules.

Form B is given as follows:

Form B: Profit and Loss Account

Significant Accounting Policies:

1. Accounting Conventions:

The financial statements have been prepared on Historical Cost Basis following accrual basis of Accounting and conform to the Statutory Provisions and Practices prevailing in the Banking Industry in India, except as otherwise stated.

2. Investments:

In accordance with the Reserve Bank of India guidelines, Investments are categorized into “Held for Trading”, “Available for Sale” and “Held to Maturity”. Under each category the investments are further classified in six classes- Govt. Securities, Other Approved Securities, Shares, Debentures and bonds, Investments in Subsidiaries/Joint Ventures and Other Investments.

(a) Basis of classification:

Securities that are held principally for resale within 90 days from the date of purchase are classified as “Held for Trading”.

(b) Valuation:

The valuation of Investments is done in accordance with the Reserve Bank of India guidelines.

Held for Trading:

Individual Scrips in this category are marked to market at monthly Intervals, and the depreciation if any is recognized in the profit and loss account.

Held to Maturity:

These are valued at acquisition cost, unless more than the face value, in which case the premium paid on acquisition is amortized over the remaining maturity period. A provision is made for other than temporary diminution.

All advances have been classified under four categories i.e:

(a) Standard Assets,

(b) Substandard Assets,

(c) Doubtful Assets and

(d) Loss assets.

2. Provisions on Non Performing Assets (NPA’s) have been arrived on all outstanding net of interest not realized @ 100% of the outstanding.

3. Unrealized Interest of the previous year on Advances which became Non-Performing during the year has been provided for.

4. Provisions in respect of NPA’s have been deducted from Advances.

5. Provisions have been made on gross basis. Tax relief which will be available when the advance is written off will be accounted for in the year write off.

4. Fixed Assets:

(i) Fixed assets are capitalized at cost which comprises of cost of purchase, site preparation, installation cost and professional fees incurred on the asset before the same is put to use.

(ii) Depreciation is charged over the estimated useful life of the fixed asset on a Straight line basis. The rates of depreciation for certain key fixed assets used in arriving at the charge for the year are:

a. Improvement to Lease Hold Premises is charged off over the primary period of lease or useful life of the asset whichever is less.

5. Transactions Involving Foreign Exchange:

Monetary Assets and Liabilities are translated at the Closing Spot Rate of exchange prevailing at the close of the year as notified by Foreign Exchange Dealers Association of India (FEDA1). The Resulting Differences are accounted for as income/expenditure.

6. Revenue Recognition:

Income and Expenditure are accounted on Accrual basis except in the following cases:

(a) Interest on Non-Performing Assets is recognized on realization basis as per RBI guidelines.

(b) Interest which remains overdue for 90 days on securities not covered by Government Guarantee is recognized on realization basis as per RBI guidelines.

(c) Commission (other than on Deferred Payment Guarantees and Government Transactions), Exchange and Brokerage are recognized on realization basis.

(d) Interest on Overdue Bills is recognized on Realization Basis as per RBI guidelines.

(e) Interest on Overdue Term Deposits is provided as and when such Deposits are renewed.

7. Net Profits:

The Net profits have been arrived at after:

(a) Provisions of Income tax and wealth tax in accordance with the statutory requirements.

(b) Provisions on Advances

(c) Adjustments to the value of investments

(d) Other usual and necessary provisions.

8. Retirement Benefits:

(a) Contribution towards Provident Fund is accounted for as per statutory requirements.

(b) The Bank provides for Gratuity, a defined benefit retirement plan covering all employees. Liability towards gratuity is paid to a Fund maintained by ICICI Prudential Life Insurance through a separate Trust set up by the Bank. Difference between the Fund balance and the Accrued liability determined based on the Actuarial valuation, is charged to profit and loss account.

(c) Liability towards leave Encashment on Retirement or on termination of service of an employee of Bank is valued and provided for on the basis of Actuarial valuation.

9. Earnings Per Share:

The bank reports basic and diluted earnings per equity share in accordance with AS-20 issue by ICAI. Basic earnings per share is computed by dividing net income by the weighted average number of equity shares outstanding for the period. Diluted earning per equity share is computed using the weighted average number of equity shares and diluted potential equity shares outstanding during the period.

10. Income Tax:

Income tax expense (current and Deferred) is accrued in accordance with AS22-“Accounting for Taxes on Income”, issued by ICAI. Current Tax is determined as the amount of tax payable in respect of taxable income for the year. Deferred tax is recognized, subject to the consideration of prudence on timing differences, being the difference between the taxable incomes and accounting income that originate in one period and is capable of reversal in one or more subsequent years.

11. Impairment of Assets:

In accordance with the Accounting Standard-28 issued by ICAI, impairment of the assets is determined by comparing the carrying amount of the asset and the recoverable amount and if the recoverable amount is less than the carrying amount the difference is charged to profit and loss account. Recoverable amount is calculated by using the value in use method for each generating unit.

12. Accounting for Provisions, Contingent Liabilities and Contingent Assets:

As per AS-29, provisions, contingent liabilities and contingent assets, issued by the ICAI, the Bank recognize provisions only when it has a present obligations as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and when a reliable estimate of the amount of the obligation can be made.



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