Investment Valuation in India

A brief overview of Cash Flow Statement under IFRS along with implications for Indian entities under Ind AS. Courtesy: The Institute of Computer Accountants

Here's a brief overview of IAS 1 - Presentation of Financial Statements Courtesy: The Institute of Computer Accountants.

The financial statements would include Cash Flow Statements and A Statement of Changes in Equity. Sec 2(40) of the Companies Act defines Financial Statements as follows: “ financial statement ” in relation to a company, includes— (i) a Balance Sheet as at the end of the financial year; (ii) a Profit and Loss Account, (Income and Expenditure Account for not-for-profit companies) for the financial year; (iii) Cash Flow Statement for the financial year; (iv) a Statement of Changes in Equity, if applicable; and (v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv): One Person Company, Small Company, Dormant Company are NOT required to prepaare Cash Flow Statement. Sec 2(85) defines Small Companies as: ‘‘small company’’ means a company, other than a public company,— (i) Paid-Up Share Capital does not exceed Rs 50 Lakhs   [or such higher amount as may be prescribed which shall not be more than ...

Sec 130 of the Companies Act 2013 prescribes that a company may apply to the Central Government / SEBI / Income Tax authorities or any other statutory regulatory body to re-open and re-cast the financial statements if: a) the relevant earlier accounts were prepared in fraudulent manner or b) the affairs of the company were mismanaged in the relevant period, casting a doubt on the reliability of financial statements If the competent court or tribunal passes an order to re-open and recast the financial statements, the company may do so. The accounts so revised or recast shall be final. #CompaniesAct2013

The Companies Bill has been passed by the Lok Sabha and Rajya Sabha as well. The bill is seeing light after decades of discussions and debates. All credits to the Minister of Corporate Affairs for taking the bill through the lower house soon after assuming office. Key highlights of the bill are: Class Action suits introduced for the benefit of investors One Person Company (OPC) introduced Certain class of companies are required to spend at 2% of their average Net profits on Corporate Social Responsibility. Severe punishment for fraud against investors National Financial Regulatory Authority (NFRA) to be set up - this has curbed some rights and powers of Chartered Accountants with respect to setting up of Accounting and Auditing standards. A CA can have maximum 20 companies as audit clients. Every company to have a single financial year end - 31st-March. Certain exceptions apply. A Private company can have 200 members (up from 50) Concept of Dormant company in...

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IT major Satyam Computers, after being in the news for all the bad reasons has reported a major scam which left the country shocked. The major developments: Satyam Chairman B Ramalinga Raju resigns as Chairman and issues a letter stating that he has been involved in major misrepresentations of accounts. The balance sheet carries as of September 30, 2008 a) Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5361 crore reflected in the books) b) An accured interest of Rs 376 crore which is non-existent c) An understated liability of Rs 1,230 crore on account of funds arranged by Raju d) An over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books. For 2Q 08, “reported revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenue)”. “In the last two years a net amount of Rs 1,230 crore w...

Accounting Impact From an accounting perspective, the focus in the United States has been on: • Convergence • Moving from rules-based standards to principles-based standards • Trending away from recording assets and liabilities at historical cost and moving to fair value. Convergence With the global environment in which companies operate, the FASB and the International Accounting Standards Board ("IASB") have dedicated themselves to improve financial reporting by evaluating the differences between US GAAP and IFRS and reducing those differences where possible. The two bodies are currently in the short-term phase of a longer-term convergence project. The goal of the short-term project is to reduce a variety of differences between US GAAP and IFRS. The short-term projects are those where significant differences do not exist and the Boards believe that they can reach agreement without a major overhaul of the current requirements. In addition to the convergence project, the ...

Impact of Inflation on Financial Statements Fixed Assets under historical Cost accounting – Since the fixed assets are valued at historical cost (in most countries), the assets are stated at a much lower figure than their current replacement costs. This makes the company vulnerable to takeover bids and leads to lower valuations for the shareholders. Depreciation – Since the assets are undervalued, consequently the depreciation on such assets are also undervalued. This leads to distortions in the make or buy decisions of the assets. This consequently overstates the profit of the enterprise. In case of inflation, the cost of raw materials and goods purchased for re-sale are rising. Under the cost concept only cost of purchase is taken to the Income Statement. Generally, in case of Inflation, the fair value is greater than the cost and this difference between the cost and the fair value of such goods is also taken to the Income Statement as Holding Gains. Consequently the profit is agai...