Holding & Subsidiary Accounts

Notes for Holding and Subsidiary Accounts for CS Executive.

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Drawing Conclusions from Your Final Balance Sheet

You can analyze balance sheet numbers through a series of ratio tests to draw conclusions, check your cash status, and track your debt. Because these are the types of tests financial institutions and potential investors use to determine whether or not to loan money to or invest in your company, it’s a good idea to run these tests yourself before seeking loans or investors.



Testing your cash


When you approach a bank or other financial institution for a loan, you can expect the lender to use one of two ratios to test your cash flow: the current ratio and the acid test ratio (also known as the quick ratio).


Current ratio


This ratio compares your current assets to your current liabilities. It provides a quick glimpse of your company’s ability to pay its bills.


The formula for calculating the current ratio is:


Current assets ÷ Current liabilities = Current ratio


The following is an example of a current ratio calculation:


$5,200 ÷ $2,200 = 2.36 (current ratio)


Lenders usually look for current ratios of 1.2 to 2, so any financial institution would consider a current ratio of 2.36 a good sign. A current ratio under 1 is considered a danger sign because it indicates the company doesn’t have enough cash to pay its current bills.


A current ratio over 2.0 may indicate that your company isn’t investing its assets well and may be able to make better use of its current assets. For example, if your company is holding a lot of cash, you may want to invest that money in some long-term assets, such as additional equipment, that you need to help grow the business.


Acid test (quick) ratio


The acid test ratio only uses the financial figures in your company’s Cash account, Accounts Receivable, and Marketable Securities. Although it’s similar to the current ratio in that it examines current assets and liabilities, the acid test ratio is a stricter test of a company’s ability to pay bills.


The assets part of this calculation doesn’t take inventory into account because it can’t always be converted to cash as quickly as other current assets and because, in a slow market, selling your inventory may take a while.


Many lenders prefer the acid test ratio when determining whether or not to give you a loan because of its strictness.


Calculating the acid test ratio is a two-step process:


1. Determine your quick assets.


Cash + Accounts Receivable + Marketable Securities = Quick assets


2. Calculate your quick ratio.


Quick assets ÷ Current liabilities = Quick ratio


The following is an example of an acid test ratio calculation:


$2,000 + $1,000 + $1,000 = $4,000 (quick assets)


$4,000 ÷ $2,200 = 1.8 (acid test ratio)


Lenders consider a company with an acid test ratio around 1 to be in good condition. An acid test ratio less than 1 indicates that the company may have to sell some of its marketable securities or take on additional debt until it’s able to sell more of its inventory.


Assessing your debt


Before you even consider whether or not to take on additional debt, you should always check out your debt condition. One common ratio that you can use to assess your company’s debt position is the debt to equity ratio. This ratio compares what your business owes to what your business owns.


Calculating your debt to equity ratio is a two-step process:


1. Calculate your total debt.


Current liabilities + Long-term liabilities = Total debt


2. Calculate your debt to equity ratio.


Total debt ÷ Equity = Debt to equity ratio


The following is an example of a debt to equity ratio calculation:


$2,200 + $29,150 = $31,350 (total debt)


$31,350 ÷ $9,500 = 3.3 (debt to equity ratio)


Lenders like to see a debt to equity ratio close to 1 because it indicates that the amount of debt is equal to the amount of equity. With a debt to equity ratio of 3.3, most banks probably would not loan the company in this example any more money until either its debt levels were lowered or the owners put more money into the company

Consolidated Financial Statements – Some Facts

The financial statement reflects the financial results including the details of all the assets and liabilities. After a stock purchase by the parent company, the subsidiary continues to maintain separate accounting records. But in reality, the parent company controls the subsidiary, so it no longer functions autonomously.



Because the parent concern now fully reins the subsidiary, by accounting rules, the parent company must present its subsidiary's and its own financial operations in a consolidated manner (even though the two companies may be separate legal entities).


The parent company does so by producing a consolidated financial statement, which combines the assets, liabilities, revenue, and expenses of the parent company as well as those of its associates (i.e. its subsidiaries, associates, and joint ventures).


If someone holds a minority interest in the subsidiary of a parent company, the consolidated financial statement won't give the required information that one needs to make decisions about one’s holdings. A subsidiary with minority shareholders must report its financial results separately from the parent company along with the report included in the consolidated financial statements.


When a company owns all the common stock of its subsidiaries, the company doesn't really need to publish reports about its subsidiaries' individual results for the general public to scrutinize. Shareholders need not know the results of these subsidiaries.


In preparing consolidated financial statements, the parent company must remove numerous transactions among the parent and its associates before presenting the consolidated financial statements to the public. For example, the parent company must eliminate transactions among the parent and the subsidiaries for accounts receivable and accounts payable to avoid counting revenue twice and giving the financial report reader a false impression that the consolidated entity has more profits or owes more money than it actually does. Other key transactions that a parent company must eliminate when preparing consolidated financial statements are:-


Investments in the subsidiary: The books of parent company show its investments in a subsidiary as an asset account. The subsidiary's books show the stock that the parent company holds as shareholders' equity. Rather than double-counting this type of transaction, the parent company eliminates it on the consolidated statements by writing off one transaction.


Interest revenue and expenses: Sometimes parent company loans money to a subsidiary or subsidiary loans money to a parent company; in these business transactions, one company may charge the other one interest on the loan. On the consolidated statements, any interest revenue or expenses that these loans generate must be eliminated.


Advances to subsidiary: If a parent company advances money to a subsidiary or a subsidiary advances money to its parent company, both entities carry the opposite side of this transaction on their books (that is, one entity gains money while the other one loses it, or vice versa). Again, companies avoid the double transaction on the consolidated statements by getting rid of one transaction.


Dividend revenue or expenses: If a subsidiary declares a dividend, the parent company receives some of these dividends as revenue from the subsidiary. Any time parent company records revenue from its subsidiaries on its books, the parent company must eliminate any dividend expenses that the subsidiary recorded on its books.


Management fees: Sometimes a subsidiary pays its parent company a management fee for the administrative services it provides. These fees are recorded as revenue on the parent company's books and as expenses on the subsidiary's books.


Sales and purchases: Parent companies frequently buy products or materials from their subsidiaries or their subsidiaries buy products or materials from them. In fact, most companies that buy other companies do so within the same industry as a means of getting control of a product line, a customer base, or some other aspect of that company's operations.


However, the consolidated income statements shouldn't show these sales as revenue and shouldn't show the purchases as expenses. Otherwise, the company would be double-counting the transaction. Accounting rules require that parent companies eliminate these types of transactions.


As you can see, these major transactions are all critical for determining whether a company made a profit or loss from its activities. Eliminating assets, liabilities, revenue, and expenses from public view makes determining a subsidiary's financial results nearly impossible for shareholders or creditors. But if these transactions were included, the value of the parent company's stock would be distorted, because these transactions would be counted twice. The shareholders of the parent company would not know the true value of the company's assets and liabilities; the income statement would not reflect the company's true revenues and expenses.

Buy Back of Shares (Section 77A, 77AA & 77B)

‘Buy-back’ means buying back of shares. It is in context of a company buying its own shares back from the investors in the Open Market. Buy-back is generally done to increase the promoter holding or to eliminate the threat by people trying to gain stake in the company.

According to Sec77A of Companies (Amendment) Act, 1999 – A company is allowed to buy-back from the open market however, subject to certain conditions:-

1. The buy-back should be done out of free reserves (reserves available for dividend) - When a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet.

2. Securities Premium Account.

3. Proceeds of any shares or other specified securities.

Here referring to point 2, no buy-back is done out of proceeds of fresh issue of same type of securities. For e.g. in order to buy back the Equity Shares, the company has to either issue debentures or preference shares and not equity shares.
Conditions of Buy-Back

1. The buy-back is authorized by the Articles of association of the Company.

2. A special resolution {SR} should be passed in the general meeting of the company authorizing the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. The buy-back can be made by a Board resolution if the quantity of buy-back is less than ten percent of the paid up capital and free reserves.

3. Companies are allowed to buy-back their own shares up to 25% (twenty five) of paid-up capital and free reserves. If such shares are bought at premium, then buy-back should be 25% (twenty five) of the paid-up capital + free reserves (including securities premium).

4. The ratio of the debt owed by the company should not be more than twice the capital and its free reserves after such buy-back.
5. The existing shares or other securities for buy back should be fully paid up.

6. The buy-back of the shares or other specified securities listed on any recognized stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and the buy-back in respect of shares or other specified securities of private and closely held companies should be in accordance with the guidelines as may be prescribed.

Section 77A (3) states that the notice of the meeting at which the special resolution shall be passed on buy-back shall accompany an explanatory statement:-

a) Providing complete disclosure of the material facts.

b) The need for buy-back.

c) Type/class of security to be purchased.

d) Amount invested for the buy-back purpose.

e) Time-Limit for completion of buy-back

Note: Every buy-back shall be completed within 12 months from the date of passing the SR.

Issue of further shares after Buy back
Every buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of:-

 Public issue

 Right issue up to six months from the date of completion of buy back.

Section 77AA of the act says that where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares so purchased shall be transferred to the Capital Redemption Reserve (CRR).

CRR so created under section 80(1)(d) being a free reserve can be applied by the company in paying up unissued shares of the company as fully paid up bonus shares but it cannot be utilized for the payment of Dividend.

New Schedule VI – New Balance Sheet and Profit and Loss A/c format applicable from F.Y. 2011-12

Company Law : Section 642 of the Companies Act, 1956 – Schedules, forms and rules – Power of Central Government to make rules – Amendment in Notification No. S.O. 447(E), dated 28-2-2011. NOTIFICATION [F. NO. 2/6/2008-C.L-V], DATED 30-3-2011

In exercise of the powers conferred by clause(a) of sub-section(1) of section 642 read with sub-section(1) of section 210A and sub-section (3C) of section 211 of the Companies Act,1956, (1 of 1956), the Central Government hereby makes the following amendment to paragraph 2 of the notification No.447(E) dated the 28th February, 2011:-

“The notification shall come into force for the Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after 1.4.2011″. To go to the official notification page, Click Here

Prosecution of Directors - MCA Circular Dated 25.03.2011

The Directors can also be prosecuted in case of Default committed. Section 5 of the companies act 1956 says that "Officers in Default" and "Directors" are responsible for the compliance and any default done. 

For Details, please go through the Circular published by the MCA Website.

Thanks,

CS Futurz

Admin

DIN Process Simplified - MCA Circular Dated 04.03.2011

The procedure for obtaining the DIN U/S 266B of Companies Act 1956 has been simplified. 

The same can be found under the Official Circular Notice by MCA.

CS Futurz 

Admin

Path to Company Secretaryship

A company secretary’s role starts from the very moment when the idea of formation of a Company is conceived. Although the idea of formation of a company Secretary (CS) may vary from company to company the knowledge and training acquired by company secretaries make them versatile to carry out various functions in Finance, Accounts, Legal Administration and Personnel areas in addition to their own secretarial duties and responsibilities.

Professional studies towards becoming a company secretary can commence right after completion of the plus two level of education through the foundation course. Foundation Course students are required to pass the Foundation Examination within 3 years from the day of admission. Candidates who have passed the Foundation examination or is exempted there from can seek registration as a student for the intermediate course. A registered student is admitted to the Final Course on passing the intermediate examination.

1. Foundation course

Duration of Foundation Course is 8 months. Students are required to pass the Foundation examination within 3 years from the date of their admission. Candidates who have passed senior secondary (10+2) can apply for foundation course. Registration for foundation course is open through out the year. The exams for the foundation course are held in December and June. To appear for the exams in December candidate should apply for the exam before the previous march. Similarly to appear for the June exam, candidate should apply before the previous September. i.e the Registration for each examination should be done at least nine months before the month in which the examination is held.

Subjects

• English and Business Communication (FCEBC)
• Basic Economics and Business Environment (FCBE-BE)
• Financial Accounting (FCFA)
• Elements of Business Laws and Management (FERBAM)
• Information Systems and Quantitative Techniques (FCISQT)
1. Intermediate course

Candidates who have passed the foundation course, and are not less than 17 years of age can apply for intermediate course. Graduates, post-graduates (excluding fine arts) and those who have passed final exam of ICWAI or ICAI

Subjects

Group I

• General and Commercial Laws (IGCL)
• Company Accounts and Cost & Management Accounting (ICA&CMA)
• Tax Laws (ITL)

Group II

• Company Law (ICL)
• Economic, Labour and Industrial Laws (IELIL)
• Securities Laws and Regulation of Financial Markets (ISLRFM)

A candidate can get exemption for some individual papers on the basis of qualification

9. Company Accounts and Cost & Management Accounting (ICA&CMA) - Master of Corporate Secretaryship/M.Com./M.B.A (with Accountancy as one of the subjects at B.A (C.S)/B.Com. level with full paper in Cost Accounting/Management Accounting/Financial Management at Master of Corporate Secretaryship/M.Com./M.B.A. level and must have secured fifty per cent marks in the subject concerned of a recognised university is exempted from this subject.
10. General and Commercial Laws (IGCL) - A degree in Law or Master of Corporate Secretaryship is exempted from this subject.
11. Tax Laws(ITL) - Master of Corporate Secretaryship is exempted from this subject.

A Candidate who has passed the Final examination of the ICWAI is eligible to seek exemption from the following papers of Intermediate examination under a reciprocal arrangement existing at present between the two Institutes- Company Accounts and Cost & Management Accounting (ICA&CMA), Tax Laws(ITL)in the intermediate level. Financial, Treasury and Forex Management, Direct and Indirect Taxation - Law and Practice in the final level.

3. Final course

A student is admitted to the Final examination only after a minimum period of nine months after passing intermediate examination. The examinations are conducted twice a year in June and December. Last date for enrollment applications for the final examination is 25th March (with late fee of Rs. 100, 9th April) for June examination and 25th September (with late fee of Rs. 100, 10th October) for December examination.

Subjects:

Group-I

• Advanced Company Law and Practice
  
• Secretarial Practice relating to Economic Laws and Drafting  
• Secretarial Management and Systems Audit

Group-II

• Financial, Treasury and Forex Management
  
• Corporate Restructuring – Law and Practice
  
• Banking and Insurance Law and Practice

Group-III

• World Trade Organization International Trade, Joint Ventures and Foreign Collaborations
  
• Direct and Indirect Taxation Law and Practice
  
• Human Resource Management and Industrial Relations

Qualifying Marks

A candidate is declared to have passed the Final examination, if he/she secures at one sitting a minimum of 40% marks in each paper and 50% marks in the aggregate of all subjects.

Training

The CS course is complete after students have undergone 16 months practical and modular training in order to apprise the students with the functioning of the Corporate Sector and to create a cadre of professional Company Secretaries having a sound theoretical base and practical exposure to serve trade and industry effectively, both as a part of the management team as well as independent practicing professionals. 

Job Prospects 

Those who complete the final examination for Company Secretary would have good job prospects in the corporate sector of both public and private companies. They can also be employed by banks, financial institutions and stock exchanges, and as specialists in the fields of finance, law, accounts and merchant banking. Many companies recruit young professionals to work in the CS department of the organization and move to a senior position with experience.

Those who want to join the government need to qualify in the UPSC exam for jobs in Grade I to IV in the Accounts branch of the Central Government Law Service. Company Secretaries are also eligible for recruitment on the panel of bodies such as the Bureau of Public Enterprises, and state government financial institutions.

A qualified Company Secretary can also set up practice as an independent company secretary, after obtaining a ‘Certificate of practice’ from the Institute. A CS in practice is authorized to issue certificates and attest documents under the Companies Act 1956, the SEBI Act and the Exim Policy.

Those with an inclination for academics can go in for teaching as lecturers in universities.
The globalization of the Indian industry and the advent of multinationals has been a boon for Company Secretaries. The responsibilities of Company Secretaries have been considerably extended and their status is now that of the chief functionaries of the corporate sector. They are indispensable to the efficient management of the corporate sector, particularly in cases of mergers and acquisitions, joint ventures and so on.
Moreover, with a growing legal regulatory framework, in order to ensure the protection of the interests of employees, consumers, creditors, government financial institutions, and the public at large, the role of company secretaries has become established as that of conscience-keepers of their respective companies and custodians of public interest.

Moreover, an experienced Company Secretary, by virtue of expertise and academic background is suited to become a member of the board or the governing body of any organization. Many senior members have become chairmen, managing directors, and whole-time directors in several reputed companies.

If you have a sound business sense, an interest in commerce and accounts, logical ability with a flair for numbers and good inter-personal skills this is a good career to pursue. Other attributes would include basic common sense, and an ability to negotiate with people at all levels in an organization.

Attention Students

The June 2011 Exam for CS Executive would follow Finance Act 2010 for Tax Laws

The Amendments are available under this link. Please visit the link for the amendments in Detail.

Income Tax Amendments For CS Executive June 2011 Exam

Union Budget 2011-12 Highlights

Union Budget 2011-12

• AC restaurants serving liquor & AC hospitals with beds more than 25 in the ambit of Service Tax.
• Service tax on air travel up to Rs 50 for domestic travel and Rs 250 for international travel in economy class; on higher classes, it will be 10 per cent flat.
• Customs duty on raw silk reduced from 30 to 5 per cent.
• Some legal services to be brought under service tax net; service by individual to another individual exempted.
• 20% export duty for iron ore.
• Custom duty on Pet Coke and Gypsum to minimized to 2.5%.
• No new tax exemption limit for women.
• Mandatory levy of 10 pct on branded garments.
• Budget estimates for 2011-12 projects- Rs 9,32,440 crore.
• No change in Central excise duty rate. Base rate on excise duty raised from 4% to 5%.
• Surcharge rate reduced from 7.5 percent to 5 percent for domestic companies.
• Hike in exemption IT limit from Rs 1.6 lakh to Rs 1.8 lakh.
• New series of coins with new rupee symbol expected.
• Simplify tax collection procedure.
• 1 million UID cards to be distributed per day shortly.
• Targeting to reduce deficit to 4.6% for the upcoming fiscal year.
• Plan and Non-Plan expenditure to be increased by 23%.
• BPL pension eligibility age limit reduced.
• Group formed to monitor corruption;will start implementing from 62 dept. in first phase.
• Amendment of Indian Stamp Act shortly.
• Simplified form 'Sugam' for small tax payers.
• Rs 1.64 lakh crore for Defence.
• Rs 1000 crore to build judicial infrastructure.
• Group of ministers to sort out Environmental concerns.
• 1000 crore for improvising judiciary system.
• Rs 8,000 cr to Northeast.
• 60 schemes for SC/ST to be implemented.
• Rs 100 crore for Ladakh.
• Rs 150 crore for Jammu.
• Pension amount increased for 80 years and above.
• Indira Gandhi National Old Age Pension Scheme eligibility revised from 65 to 60 years.
• Rs 200 cr grant to IIT Kharagpur.
• Rs 20 crore to IIM Calcutta.
• 50 Crore to muslim universities in different states.
• 58,000 crore for Bharat Nirman Schemes: FM
• State Innovation Council in each state to be set up.
• Remuneration of anganwadi workers raised from Rs 1,500 to Rs 3,000 a month. Helpers to get Rs 1,500 from Rs 750.
• Independent debt management office to be established.
• Rs 1.6 lakh crore to be spent on social projects.
• Current a/c gap a concern due to composition of FX flows: FM
• Establishment of national policy on psychotic drugs, narcotics.
• Tax free infra bonds worth Rs 30000 cr for PSBs proposed.
• 15 mega food parks to be set up.
• Infrastructure spending increased by 23%.
• Rs 30K crore tax free bonds to be provided for railways.
• Financial assistance to be provide to Bengaluru, Chennai, Kolkata metro projects.
• Allocation under Rashtriya Krishi Vikas Yojana to be increased to Rs 7860 crore.
• Promote organic farming.
• GDP manufacturing, targeting 16-25 % increase in next 10 years.
• Rs 300 cr to cultivate pulses in rain-fed areas;Rs 300 cr for the promotion of farm product cultivation.
• Provide Rs 6000cr for PSU bank recapitalization.
• FM: Micro finance companies to be provided with Rs 100 crore equity funds.
• Extension of NBS for urea to be analyzed.
• Home loan limit increased.
• Rs 300 cr for improving pulses production.
• Rural infrastructure development fund to be raised to 180 billion Rupees for the coming fiscal year.
• Grant 1% interest on home loans upto 50 lakhs.
• Mortage Risk Guarantee fund for rural housing to be set up.
• Rs 5,000 cr to be provided to SIDBI to meet priority lending targets.
• Rs 2000 crore for warehousing facilities.
• Rs 2,000 cr for manufacturing facilities.
• Allocation of Rs 6000 cr for some PSU banks.
• Only registered FII's to be associated with Indian MF industry.
• Rs 40,000cr to be raised via disinvestment.
• GST bill to be introduced in current session.
• Extension of NBS to cover urea under review: FM
• 500 crore proposed for empowering women.
• Micro finance institutes proposed for 100 crore.
• 300 crore to be provided to NABARD.
• FBI to regularize banking amendments.
• Ensures better delivery of urea, kerosene.
• FII allow to trade amongst themselves.
• FBI policy to be regularized.
• Public Debt Management Bill to be introduced in 2012.
• Pranab sees Budget 2011-12 as transition towards a transparent and result-oriented economic management.
• Public sector undertaking to be increased.
• Direct transfer of cash subsidy to downtrodden.
• Average inflation and current account deficit to be minimized by next year: FM
• Compensation of Rs 9 lakh to be given to defence and Central paramilitary forces for permanent disability and discharge from service.
• Govt. to reconsider ecological concerns.
• Tremendous growth in exports-29.4%.
• Food inflation down from 22.2% to 9.3 %. But still is a major concern, says FM.
• Budget to ensure more transparent economy.
• Focus on supply side issues in agriculture.
• Pranab: Work on food inflation.
• Stabilize the macro economic situation.
• Budget 2011 approved by Cabinet.
• Pranab: Impressive fiscal consolidation
• Pranab Mukherjee begins the speech.