Unit V
Operations
Financial Assets:
What are financial assets?
A economic asset is an asset that consequences from a contractual settlement on destiny coins flows or from proudly owning a inventory manufactured from some other entity. A economic device is a agreement that creates a economic asset in one of the events worried and a inventory commodity or economic legal responsibility in some other entity.
The essential distinction among economic belongings and PP & E belongings (generally which include land, homes and machinery) is the presence of counterparties. Financial belongings may be labelled as either modern or non-modern belongings at the employer's stability sheet.
Understand financial assets
Most belongings are categorised as bodily, economic, or intangible. Real belongings are bodily belongings that derive cost from materials and belongings which includes treasured metals, land, actual property, soybeans, wheat, oil, iron and different commodities.
Intangible belongings are precious belongings that aren't bodily in nature. They encompass patents, trademarks, and highbrow property.
Financial belongings are among the alternative belongings. Financial belongings can seem intangible (non-bodily) and most effective display the cost on paper, which includes greenback payments or lists on laptop screens. However, the paper or listing represents a declare of possession of an entity which includes a public employer, or a contractual proper to payment, which includes hobby earnings from a bond. A economic asset derives its cost from a contractual declare at the underlying asset.
This underlying asset is both actual or intangible. For example, commodities are the real underlying belongings which can be constant to economic belongings which includes commodity futures, contracts, or a few exchange-traded funds (ETFs). Similarly, actual property is a actual asset related to a inventory of a actual property funding trust (REIT). REITs are economic belongings and indexed agencies that personal actual property portfolios.
The Internal Revenue Service (IRS) calls for groups to document economic and bodily belongings collectively as tangible tax belongings. Grouping tangible belongings is become independent from intangible belongings
Measurement of economic belongings
The maximum essential accounting difficulty for economic belongings worries the way to document values at the stability sheet. Considering all economic belongings, there's no unmarried size approach appropriate for all belongings. For exceedingly low investments, the modern marketplace fee is a great indicator. However, for a employer that owns a majority stake in some other employer, the marketplace fee is inappropriate because the investor does now no longer intend to promote that stake.
In fact, a key issue with inside the presentation of economic statements is control's aim to invest. For example, the cost of making an investment with inside the inventory of 1 employer and some other employer is a giant percentage (75%) while you purchase them with the aim of maintaining them for some time after which promoting them (for example, trading). It may be displayed in a different way than whilst it is society.
However, the power and forte of diverse economic belongings does now no longer suggest that a employer can pick the approach it wants. Accounting requirements specify trendy hints for accounting for diverse economic belongings.
The first 4 banks' fairness investments constitute strategic investments. The first line suggests an funding wherein one employer sporting events manipulate of some other (that is, it generally owns 50% or greater of its vote casting rights). Appropriate accounting is to consolidate investor and subsidiary economic statements right into a unmarried economic set.
In addition, joint control on the second one and 0.33 strains refers to a contractual association among or greater agencies. For joint ventures, the right remedy is proportional integration, wherein the economic statements are edited in step with the proportion of possession. On the alternative hand, the class of joint ventures and giant influential investments observe the fairness approach.
Equity approach
The fairness approach is used for both joint ventures or giant influential investments (i.e., maintaining 20% to 50% of the vote casting rights). Increase or lower funding bills primarily based totally on earnings and dividend payments.
On January 1, 2017, XYZ Company acquired 10,000 shares of ABC Company, representing 30% of the shares of ABC, for $100,000. For the year ended December 31, 2017, ABC earns $300,000 of net income. On January 1, 2018, ABC declares and pays a dividend to XYZ company of $20,000.
January 1, 2017
DR Investment in ABC (significant influence) 100,000
CR Cash 100,000
December 31, 2017
DR Investment in ABC (significant influence) 90,000
CR Investment income 90,000
Because ABC is an associate of XYZ, XYZ can include its portion of the net income (300,000 * 30%) to its ledger.
January 1, 2018
DR Cash 20,000
CR Investment in ABC (significant influence) 20,000
When dividend payments are received, the investment account is reduced.
Fair cost because of earnings or loss
FVPL accounting is used for all economic units supposed to be positioned up for sale, now no longer to preserve possession. If those belongings are held, they may be constantly recorded at honest cost at the stability sheet, modifications in honest cost are recorded via the earnings statement, and in the end internet earnings in place of different complete earnings (OCI). Affects. All transaction charges related to the funding are straight away expensed.
Example: XYZ Company purchased an investment on November 1, 2016 for $1,000. At December 31, 2016, the fair value of the investment is $3,000. Transaction costs are 4% of purchases. What are the journal entries?
November 1, 2016
DR Investment (FVPL) 1,000
CR Cash 1,000
DR Transaction Expense 40
CR Cash 40
December 31, 2016
DR Investment (FVPL) 2,000
CR Unrealized Gain 2,000
Amortized cost method
Finally, use the amortized cost method to account for the debt product. These financial assets are intended to collect contractual cash flows until maturity. Debt securities are different from FVPL investments because FVPL is intended to be held for a period of time and then sold.
Debt certificates are recorded at acquisition cost. Premiums or discounts are amortized over the entire period of the investment using the effective interest rate method and capitalized if there are transaction costs.
Issue of Debentures
The provisions regarding bonds are stipulated in Article 71 of the Act as follows.
(1) The company may issue bonds with the option to convert such bonds.
In whole or in part at the time of redemption:
Provided, however, that the issuance of bonds with the option to convert such bonds into shares shall be approved, in whole or in part, by a special resolution passed at the General Assembly.
(2) No company shall issue corporate bonds with voting rights.
(3) Secured bonds can be issued by the company in accordance with the prescribed conditions.
(4) If a company issues corporate bonds under this section, the company shall create a corporate bond redemption reserve account from the profits of the company that can be used to pay dividends, and the amount credited to such account shall be: Redemption of bonds.
(5) The company appoints one or more bond trustees prior to the issuer's offer, issues a prospectus, or subscribes to the bond to Kosha or its members, unless conditions are set. Do not make more offers or invitations. Those governing the appointment of such trustees must be prescribed.
(6) Bond trustees must take steps to protect the interests of bondholders and correct their dissatisfaction in accordance with the prescribed rules.
(7) The provisions contained in the trust deed to secure the issuance of bonds or the provisions contained in the contract with the bondholder secured by the trust deed will be invalid as long as the trustee is exempted. Suppose. I will indemnify him for liability for the breach of trust. He did not show the degree of due diligence and attention he needed as a trustee,
Trust deed provisions that give him power, authority or discretion:
However, bond trustee liability is subject to an exemption that may be agreed by a majority of bond holders holding a value of three-quarters or more of the total bond at a meeting held for that purpose. Suppose.
(8) The Company shall pay interest and redeem the bonds in accordance with the conditions of issuance.
(9) Whenever the bond trustee comes to the conclusion that the company's assets are in short supply or may be insufficient to repay the principal, when the due date comes. Bond Trustees further liability by the company if the court and the court, after hearing the views of the company and others interested in the matter,, by order, deem the court necessary for the benefit of the bondholders. You can impose such restrictions on the occurrence of.
(10) If the company does not redeem the bonds on the maturity date, or does not pay interest on the bonds when the due date arrives, the referee will file an application for either or all of the bond holders or bond trustees. Correspondingly, after hearing the opinions of the parties concerned, the company will, by order, instruct the bonds to be redeemed immediately upon payment of principal and interest.
(11) In the event of a default pursuant to a court order under this section, all officers of the defaulting company shall be punished by imprisonment with work for a period of up to three years or a fine. It is 2 rupees, but can be expanded up to 5 rupees or both.
(12) The contract with the company to underwrite and pay the company's bonds may be enforced by certain performance laws.
(13) The central government has procedures for securing the issuance of corporate bonds, the format of corporate bond trust certificates, procedures for corporate bond holders to view trust certificates and obtain copies of them, and preparations for redemption of corporate bonds that need to be prepared. The amount of gold can be specified. And such other matters.
Issue of Equity shares - pre-issue activity, post-issue activities.
Key aspects of the 2009 SEBI (ICDR) Regulations on the issuance of shares are:
These regulations shall apply to:
(A) Public issues;
(B) A rights issue when the total amount of certain securities offered is 50 rupees or more.
(C) Priority issue.
(D) Issuance of bonus shares by a listed issuer.
(E) Placement of qualified institutions by listed issuers.
(F) Institutional Placement Program (IPP);
(G) Issuance of depositary receipts in India.
Unlisted company
An unlisted company may make an initial public offering (IPO) of a stock or other security if all of the following conditions are met: These securities may be converted or exchanged for shares at a later date.
(A) The company holds at least 3 chlores of net tangible assets over the last 3 years (12 months each), of which less than 50% are held in monetary assets.
However, if more than 50% of the net tangible assets are held in monetary assets, the issuer is committed to using such excess monetary assets in a business or project. In addition, if the public offering is made entirely through the sale, the 50% limit on monetary assets shall not apply.
(B) The company has a minimum average pre-tax operating profit of Rs 15 on a recalculated and consolidated basis in the most profitable three of the last five years.
(C) The company has a net worth of at least Rs 100 million in each of the last three years (12 months each).
(D) The sum of the size of the proposed issue and all previous issues issued in the same fiscal year does not exceed five times the pre-issue net worth on the audited balance sheet of the previous fiscal year.
(E) If the company changes its name within the last year, at least 50% of the revenue for the previous year will come from the activity proposed by the new name.
Listed companies
Listed companies are eligible for public issuance of shares or other securities at a later date. These securities are the sum of all previous issuances made at a later date in the same fiscal year as the proposed issuance. In terms of size, the issue size does not exceed five times the pre-issue net assets on the audited balance sheet for the previous fiscal year.
However, if the name of the issuing company is changed within the past year from the date of submission of the recruitment documents, the revenue from the activity proposed under the new name will be the total revenue for the past year.
In order to provide ample flexibility and ensure that real companies do not suffer due to parameter rigidity, SEBI has a problem with the book building process and publishers qualify at least 75% of the public offering. If you assign to an institutional investor and do not make the above minimum allocation to a qualified institutional investor, we promise to refund the full amount of your subscription. The issuer shall not make an allotment based on public issues if the number of members of the allottee is less than 1,000. In addition, the issuer shall not make an initial public offering if it has issued convertible securities or other rights and gives any person the option to receive shares.
Initial public offering of shares means the sale or marketing of shares for subscription by the general public by issuing a prospectus. In order to raise public funds by issuing shares, public companies must comply with the Companies Act and the Securities Contract (Regulatory) Act of 1956. Authorities, stock exchanges, SEBI, etc.
Companies can raise money from the primary market in a variety of ways.
(A) Public Issuance: When a security is issued / provided to a new investor in order to be part of the family of the issuer's shareholders, it is called a public issuance. Public offerings can be further divided into initial public offerings (IPOs) and additional public offerings (FPOs). The key features of each type of publishing issue are listed below.
- Initial Public Offering (IPO): When an unlisted company issues a new security, sells an existing security, or both are offered to the public for the first time, it is called an IPO. This paves the way for the issuer's securities to be listed and traded on the stock exchange.
- Further Public Offering (FPO) or Follow-on Offer: When a company that is already listed issues a new security or makes a public offering, it is called an FPO.
(B) Rights issue (RI): When an issuer issues a security to a shareholder who exists on a specific date (record date) set by the issuer, it is called a rights issue. Rights are provided at a specific ratio to the number of securities held as of the record date.
(C) Bonus issuance: When an issuer issues securities to existing shareholders on the record date without consideration, it is called a bonus issuance. Shares are issued from our gratis reserve or stock premium account at a specific ratio to the number of securities held on the record date.
(D) Private Placement: A security is issued to a selected group of no more than 49 issuers, which is neither a rights issue nor a public offering, is called a private placement. There are two types of private placement of shares or convertible securities by listed issuers:
i. Preferred Allocation: When a listed issuer issues shares or convertible securities to a group selected under the provisions of Chapter 7 of the SEBI (ICDR) Regulations, it is called a preferred allocation. Issuers are required to comply with various provisions, including pricing, notice disclosure, lock-in, etc., in addition to the requirements specified in the Companies Act 2013.
Ii. Qualified Institutional Placement (QIP): The listed issuer issues shares or convertible securities to the Qualified Institutional Buyer (QIB) only with respect to the provisions of Chapter VIII of the SEBI (ICDR) Regulations. If so, it is called QIP. ..
Iii. Institutional Investor Program (IPP): When a listed issuer makes a further public offering of shares, or when a listed issuer's promoter / promoter group offers to sell shares, such share offer allocation and The allocation will be made. For the purpose of achieving a minimum public offering, only for QIB with respect to Chapter VIIIA of the 2009 SEBI (ICDR) Regulations is referred to as IPP.
Key takeaways:
- An economic asset is an asset that consequences from a contractual settlement on destiny coins flows or from proudly owning a inventory manufactured from some other entity.
- Financial belongings are among the alternative belongings.
- The Internal Revenue Service (IRS) calls for groups to document economic and bodily belongings collectively as tangible tax belongings.
- The maximum essential accounting difficulty for economic belongings worries the way to document values at the stability sheet.
- The first 4 banks' fairness investments constitute strategic investments
- The fairness approach is used for both joint ventures and giant influential investments (i.e., maintaining 20% to 50% of the vote casting rights).
- Finally, use the amortized cost method to account for the debt product.
- The company may issue bonds with the option to convert such bonds.
- In whole or in part at the time of redemption
- If a company issues corporate bonds under this section, the company shall create a corporate bond redemption reserve account from the profits of the company that can be used to pay dividends, and the amount credited to such account shall be: Redemption of bonds.
- Bond trustees must take steps to protect the interests of bondholders and correct their dissatisfaction in accordance with the prescribed rules.
- The Company shall pay interest and redeem the bonds in accordance with the conditions of issuance.
- The contract with the company to underwrite and pay the company's bonds may be enforced by certain performance laws.
- A rights issue when the total amount of certain securities offered is 50 rupees or more.
- The company holds at least 3 crores of net tangible assets over the last 3 years (12 months each), of which less than 50% are held in monetary assets.
- The sum of the size of the proposed issue and all previous issues issued in the same fiscal year does not exceed five times the pre-issue net worth on the audited balance sheet of the previous fiscal year.
- Listed companies are eligible for public issuance of shares or other securities at a later date
- Initial public offering of shares means the sale or marketing of shares for subscription by the general public by issuing a prospectus.
- When an issuer issues a security to a shareholder who exists on a specific date (record date) set by the issuer, it is called a rights issue.
SEBI
The SEBI regulations on credit rating agencies (CRA) only cover securities ratings, not fixed deposits, foreign exchange, national ratings, real estate ratings, etc. CRA is promoted by public financial institutions, fixed-term commercial banks and foreign banks operating in India. A foreign credit rating agency recognized in the country of establishment and having at least 5 years of rating experience, or a company or legal entity with a continuous net value of at least 100 chlores in the last 5 years. CRA must have a minimum net worth of Rs 500 million. The CRA cannot value securities issued by its promoter. The promoter's chairman, director, or employee must not be the chairman, director, or employee of the CRA or its evaluation committee. If there is a common chairman, directors and employees between the CRA or its Rating Committee and these entities, the CRA may not rate securities issued by CRA's borrowers, subsidiaries or associate promoters. CRA is not possible
If the CRA or its Rating Committee has a chairman, director, or employee who is also a chairman, director, or employee of such an entity, it will rate the securities issued by its affiliates or subsidiaries. The CRA must carry out a regular review of the given rating during the life of the rated product. To ensure that a company provides accurate and relevant information to the CRA, a stock exchange listing agreement requires that the company cooperate with a rating agency in providing accurate and appropriate information. It will be incorporated. Issuers of bond public / rights issues must incorporate into their offer documents a promise that promises the necessary cooperation with rating agencies to provide truly relevant information.
Securities marketplace regulatory framework
Regulations at the shopping for and promoting and buying and selling of securities and inventory exchanges consisting of corporation stocks, funding agree with devices and derivatives are withinside the scope of the Indian Stock Exchange (SEBI) from the attitude of the SEBI Act of 1992. (SEBI Act) and numerous SEBI guidelines / circulation / guidelines / directives.
SEBI become hooked up on April 12, 1992, according with the provisions of the SEBI Act. SEBI's venture is to shield the pursuits of securities buyers, sell and alter the improvement of securities markets, and alter associated or incidental topics.
Currently, the 4 primary legal guidelines governing the "inventory marketplace" are:
a) SEBI Act of 1992. This offers SEBI statutory authority to (i) shield the pursuits of securities buyers, (ii) sell the improvement of the securities marketplace, and (iii) alter the securities marketplace.
b) 2013 Companies Act. It offers guidelines at the issuance, allocation, switch of securities, and associated topics withinside the public issuance of securities.
c) Securities Contract (Regulatory) Act of 1956. It regulates the popularity and law of securities transactions at the inventory exchange.
d) Deposit Law of 1996. It offers for digital preservation and switch of possession of dematted stocks.
What are securities and securities markets?
Securities are monetary merchandise issued with the aid of using agencies, establishments, etc., and feature economic cost. Securities are widely categorized as follows.
- Shares, or stocks typically called stocks, constitute a percentage of possession of a corporation. Investors who spend money on corporation inventory are known as shareholders and are entitled to all company income, along with dividends, from the income of the corporation. Investors also are entitled to vote on the corporation's preferred assembly at the corporation's decision-making process.
- Debt securities constitute the cash that a corporation / organization has to borrow from and pay off to the investor. Debt securities also are known as company bonds or bonds. Investors making an investment in debt securities are entitled to hobby bills and major repayments (that is, the cash invested). Debt securities are issued for a length of time, and then the company of the safety can redeem the safety. Debt securities may be secured (secured) or unsecured.
- Derivatives are monetary units whose cost relies upon at the cost of every other asset, consisting of a inventory or bond. The important styles of exchange-traded derivatives are futures and options.
- An funding agree with is a form of monetary product that includes a pool of cash accrued from many buyers. These price range / mutual price range spend money on securities consisting of stocks, bonds, cash marketplace merchandise and different assets.
The securities marketplace is an area wherein agencies can boost price range with the aid of using issuing securities consisting of stocks, bonds, derivatives, and funding trusts to buyers (public establishments), and buyers can boost numerous securities (stocks, bonds, etc.). When a inventory (or securities) is usually issued, the corporation ought to listing the inventory (or securities) on an permitted inventory exchange. The securities marketplace is a part of the capital marketplace.
The important feature of the securities marketplace is to permit the distribution of financial savings from buyers to people who want it. This is accomplished while an investor invests withinside the securities of a corporation / entity that desires price range. Investors have the proper to income consisting of hobby, dividends, capital valuations and bonuses. Such funding contributes to the financial improvement of the country.
The securities marketplace has interdependent and inseparable elements.
Segments cited as follows:
Primary Market: This marketplace is likewise known as a brand new issue market wherein agencies / establishments boost price range (capital) New securities (stocks, company bonds, bonds)
There are important styles of securities issuers.
An enterprise entity (corporation) that especially problems fairness merchandise (stocks) and debt merchandise (bonds, company bonds, etc.)
Governments (crucial and state) issuing debt securities (dated securities and Treasury securities). The styles of issues that arise within side the number one marketplace are:
A. Public issue: Securities are issued to all people, anyone can subscribe. Initial public imparting of stocks
It may be categorized as follows.
A preliminary public imparting (IPO) wherein the primary public imparting of stocks is made with the aid of using the corporation. The IPO has the subsequent format:
-Issuing new stocks wherein the corporation problems new stocks to public buyers. In this form of trouble, the investor's cash is going to the corporation for use for the cause wherein the trouble takes place.
-A sale when an existing shareholder or other person, such as a promoter or financial institution, goes public. In this kind of problem, the investor's money goes to the seller of such stock, not the company.
Ii. Public Offering (FPO) Follow-up: This is created by an issuer / company that has already done an IPO in the past and has a new public offering.
B. Preferential Issuance: In this issuance mode, securities are issued to a specific set of investors such as promoters, strategic investors and employees.
C. Rights Issue: When we give existing shareholders the right to subscribe for newly issued shares in proportion to their existing shareholding, it is called a rights issue.
D. Bonus Issuance: When an existing shareholder of a company issues additional free shares in proportion to its existing shareholding at no additional cost, it is called a bonus issue. In order to raise public funds, the company must submit. SEBI offer document called draft red herring
Prospectus or draft prospectus. The prospectus contains details such as company history, promoter details, business model, company financial history, business risks, funding objectives, issuance terms and other useful information. An investor who makes informed decisions about investing in the company. Securities issued in the primary market will be listed on the approved stock exchange within 6 business days of the end of issuance. The shares are then listed on the approved stock exchange, where further transactions of the shares take place.
Shares allocated by the company will be credited to Demat investor accounts managed by depository institutions through SEBI Registered Depositary Participants (DP).
Investors can sell their shares on the stock exchange.
SEBI registers a stock broker and receives money.
Secondary market: After the security is issued in the primary in the market, they are listed on the stock exchange and investors. You can buy and sell these listed securities through these stocks exchange. The stock exchange has two main segments-cash market segment and derivatives market segment.
The secondary market allows securities holders to adjust their holdings in response to changes in risk and return valuations. We also sell securities in cash to meet our liquidity needs. A price signal that includes all the information about the issuer and his business, including the associated risks that occur in the secondary market, helps the primary market allocate funds.
The secondary market basically consists of stock exchanges that provide a platform for investors to buy and sell securities. The trading platform of the stock exchange is accessible only through brokers, and trading of securities is limited to the stock exchange.
The stock or secondary market guarantees free marketability, negotiability, and price release. For these reasons, the stock market is called the center of the capital markets, reflecting economic trends and investors' wishes, aspirations and anxieties.
There are two more components to this secondary market. One is the spot market where securities are traded for immediate delivery and payment, and the other is the futures market where securities are traded for future delivery and payment. Another variant is the options market where securities are traded for conditional future deliveries. In general, there are two types of options traded in the options market. Put options allow the owner to sell securities to the option writer at a given price prior to a specific date, and call options allow the buyer to purchase securities from the option writer prior to a specific date. Allow that. Specific date.
Key takeaways:
- The SEBI regulations on credit rating agencies (CRA) only cover securities ratings, not fixed deposits, foreign exchange, national ratings, real estate ratings, etc. CRA is promoted by public financial institutions, fixed-term commercial banks and foreign banks operating in India.
- Regulations at the shopping for and promoting and buying and selling of securities and inventory exchanges consisting of corporation stocks, funding agree with devices and derivatives are withinside the scope of the Indian Stock Exchange (SEBI) from the attitude of the SEBI Act of 1992. (SEBI Act) and numerous SEBI guidelines / circulation / guidelines / directives.
- Securities are monetary merchandise issued with the aid of using agencies, establishments, etc., and feature economic cost.
- The securities marketplace is an area wherein agencies can boost price range with the aid of using issuing securities consisting of stocks, bonds, derivatives, and funding trusts to buyers (public establishments), and buyers can boost numerous securities (stocks, bonds, etc.)
- Primary Market: This marketplace is likewise known as a brand new issue market wherein agencies / establishments boost price range (capital) New securities (stocks, company bonds, bonds)
- A preliminary public imparting (IPO) wherein the primary public imparting of stocks is made with the aid of using the corporation. The IPO has the subsequent format:
- When an existing shareholder of a company issues additional free shares in proportion to its existing shareholding at no additional cost, it is called a bonus issue.
- After the security is issued in the primary in the market, they are listed on the stock exchange and investors.
- The secondary market allows securities holders to adjust their holdings in response to changes in risk and return valuations.
- There are two more components to this secondary market. One is the spot market where securities are traded for immediate delivery and payment, and the other is the futures market where securities are traded for future delivery and payment.
Reference:
- H.R Machiraju, Indian Financial Systems
- M.Y.Khan, Financial Services