UNIT 1

Specialized Accounting

Q1) Write a Short Note on International Accounting Standards and International Financial Reporting Standards.

A1)

The International Accounting Standards (IAS) are older accounting standards issued by the International Accounting Standards Board (IASB) based in London. The IAS were replaced in 2001 by International Financial Reporting Standards (IFRS).

The International Accounting Standards (IAS) were the first international accounting standards.

The goal then, as it remains today, was to make it easier to match businesses around the world, increase transparency and confidence in financial reporting, and raise global trade and investment.

International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent and comparable in all the countries around the globe. IFRS are issued by the International Accounting Standards Board (IASB). They specify how organisations must maintain and report their accounts and other events with financial impact.

IFRS were established to create a common accounting language, so that various businesses and their financial statements can be not only reliable but also consistent and comparable from one company to another and from one country to another country.

Benefits of IFRS:

-          Globally comparable accounting standards promote transparency, accountability, and efficiency in financial markets around the world.

-          Universal standards also significantly reduce reporting and regulatory costs, especially for companies with international operations and subsidiaries in multiple countries.

Q2) Write in brief about Indian Accounting Standards.

A2)

Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by the companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977. ASB is a committee formed under the Institute of Chartered Accountants of India (ICAI). The committee consists of various representatives from government department, academicians and other professional bodies.

The Ind AS are named and numbered in the same way as the International Financial Reporting Standards (IFRS). National Financial Reporting Authority (NFRA) recommends these standards to the Ministry of Corporate Affairs (MCA). MCA has to spell out the Accounting Standards applicable for companies in India.

Q3) Write in detail about the Convergence of Indian AS into IFRS.

A3)

Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by the companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977. ASB is a committee formed under the Institute of Chartered Accountants of India (ICAI). The committee consists of various representatives from government department, academicians and other professional bodies.

Convergence of Indian AS into IFRS:

IND AS standards are framed keeping in mind the economic environment and practices of India. They are made to suit the Indian companies and the disclosure requirements as per the various laws practised in India. The IFRS, on the other hand, are made keeping global standards and environment in mind.

So, convergence would mean bridging the gap between the two, i.e. the IFRS and the Indian AS. Convergence will involve alignment of these two sets of standards.

Following are the few benefits of Convergence:

1) Beneficial to the Economy

If the accounting standards are converged it will promote international business and increase the influx of foreign capital into the country. This will help India’s economy to grow and expand. International investing will also mean more capital for domestic companies as well.

2) Beneficial to Investors

Convergence is a boon for investors who wish to invest in foreign markets. It makes it much easier for them to study and compare the financial statements of foreign companies. Since the financial statements are made using the same set of standards it is also easier for the investors to understand and analyse them.

3) Beneficial to the Industry

With globally accepted standards, the industry can also move ahead. So convergence is important for the industry as well. It will allow the industry to lower the cost of foreign capital. If companies are not burdened by adopting two different sets of standards, it will allow them to enter easily into the market.

4] More Transparency

Convergence will benefit the users of the financial statements as well. It will make it easier for them to understand the financial statements. This will generate better transparency and raise the confidence of the foreign investors to invest funds.

It will be especially helpful for those companies that have subsidiaries and branches in many countries.

Some of the difficulties of convergence with the IFRS:

There are some significant challenges of converging the IFRS and the Indian AS. Some of them are as follows:

1)     Other than the Accounting Standards, India has many rules and regulations to implement them. These rules will need to be updated as well.

2)     Accounting is done via software these days, like Tally. Convergence with IFRS means this software will have to be updated which is a costlier affair.

Also, there is a lack of trained and efficient personnel. The accountants, auditors, etc. will have to undergo training and learning programmes for the updated standards.

Q4) Write a Short Note on Underwriting Commission.

A4)

Underwriting Commission:

The Underwriter provides an assurance to the company that it would be able to raise the required amount of capital and on this basis; the risk of under subscription would be avoided and the company can proceed further in its Investment programme.

In consideration of Underwriter’s services, they receive ‘Underwriting Commission’ from the company.

The Companies Act, 2013 provides the rules for the rate of commission to be paid to the underwriters.

It provides that the rate of commission can be paid only at the rate prescribed in the Articles, not exceeding 2.5% on issue price of debentures and 5% on issue price of shares.

Q5) What is Amalgamation? Explain with example.

A5)

Amalgamation is the combination of two existing companies. It is the pooling of assets and liabilities of two companies.

In other words, Amalgamation involves combination of two companies into a new entity. Amalgamation is distinct from merger because neither company involved in the process survives as a legal entity.

Usually, the two companies being amalgamated are of same size and both look out for expansion in the new market.

As said earlier, two companies amalgamate to enter in a new market, geographically or product wise. In other words, amalgamation takes place for the following reasons:

-          To diversify the activities

-          To gain financially

Example: Maruti Motors of India and Suzuki of Japan were amalgamated in 1982 to form Maruti Suzuki.

Q6) What is Absorption? Explain with example.

A6)

Absorption is takeover of one company by another. The company taken over loses its identity.

In the case of Absorption, a small company is taken over by a large company, with an intention to enter a new sector of business, may be related or unrelated to the business of the absorbing company.

The Purchasing Company absorbs an existing company to use its strength in the existing market.

Example: Myntra taken over by Flipkart in 2014.

Q7) What is Reconstruction? What are its types?

A7)

There are two types of Reconstruction. These are – a) Internal Reconstruction and                   b) External Reconstruction.

Internal Reconstruction is the process in which alterations are done to the Share Capital and some debts are waived off. In this process, the company is neither               liquidated nor is a new company formed.

External Reconstruction is the process in which a new company is formed to takeover all the assets and liabilities of the old company. In the process, the old company is liquidated and the new company is formed deliberately to buy the assets and liabilities of the old company.

Q8) Mention the points differentiating between Amalgamation and Absorption.

A8)

Q9) Define Winding up of the company. In what ways a company can be liquidated?

A9)

Meaning:

A company comes into existence through a legal process and also it comes to end by law. The legal procedure through which the existence of a company comes to an end is known as ‘Liquidation’.

Definition:

As per Sec 2(94A) of the Companies Act, 2013, winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.

A Company may be liquidated

-          Voluntarily

-          Compulsorily

A company can be voluntarily wounded

-          If the company passes a resolution in general meeting

• As the period has expired of its duration, if any, fixed by its Articles or
• On occurrence of some event and on happening of which, the Articles provide for its dissolution

-          If the company passes a special resolution for voluntarily winding up of the company.

A company can be compulsorily wounded by

-          Tribunal

-          Filing a petition

• By Contributory
• By Registrar
• By the Company

To the tribunal.