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    IC-89 MANAGEMENT ACCOUNTING ACKNOWLEDGEMENT. This course is based on revised syllabus prepared with assistance of: Ratan C Guria A. R. Sekar We also acknowledge Get Through Guides, Pune for their contribution in preparing the study material. INSURANCE INSTITUTE OF INDIA G - Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051. CONTENTS Chapter no. Title Page no. 1 Introduction to financial management 1 3 Preparation and presentation of 4 financial statements 3 Financial statements analysis and ratio a analysis 4 Budget and budgetary control 161 5 Fund flow and cash flow statements 193 Investment of insurance companies (life 6 and non-life companies) and IRDA 27 regulations 7 Indian capital market 275 é ‘Mutual fund, venture capital, life - insurance policies and AIFS 9 Capital budgeting or capital investment 5 decisions 10 International financial management 409 "1 ‘Management information system 449 Disclosure norms for life and non-life 2 insurance companies 467, 13 Portfolio management 489 “4 Foreign exchange market and 0 management of exchange rate 15 Financial risk management and 549 derivatives CHAPTER 1 INTRODUCTION TO FINANCIAL MANAGEMENT [Chapter Introduction Financial Management {s an important managerial function concerned with planning and controlling financial resources of an enterprise with a view to maximise returns. It undertakes an integrated decision making process involving acquisition of assets, financing and managing thereof to accomplish the goals and objectives of the organisation. In this chapter we will study about concept, scope, objectives and functions of financial management. We will also analyse the difference between Financial Management and Financial Accounting. Towards the end of chapter we will discuss about financial analysis and planning, financial risk management, financial system and financial management function. Learning Outcomes Financial Management Scope and Objectives of Financial Management Financial Management Vs Financial Accounting Financial Analysis and Planning Financial Risk Management, Financial System and Financial Management Function meoe> 1C 89 MANAGEMENT ACCOUNTING 1 CHAPTER 1 FINANCIAL MANAGEMENT A. Financial Management 1, What is Financial Management? Definition Financial Management is an important managerial function concerned with planning and controlling financial resources of an enterprise with a view to maximise returns. It undertakes an integrated decision making process involving acquisition of assets, financing and managing thereof to accomplish the goals and objectives of the organisation. 2. Functions of Financial Management Financial management functions comprise of a) Acquisition of funds, b) Raising of capital, ©) Allocation of funds and capital among different projects and plans with a view to maximise the value of the enterprise. Procurement and Allocation of fund decisions Financial management deals with procurement of funds and effective utilisation of the same in the organisation. Here funds include both short-term and long- term resources. To obtain a complete understanding of financial management we should discuss here its two basic parts: a) Procurement of fund decisions and b) Allocation of funds decisions. 2 IC 89 MANAGEMENT ACCOUNTING FINANCIAL MANAGEMENT CHAPTER Diagram 1: Financial Management Financial management ——, ‘Procurement of fund Allocation of fund decisions decisions Pertinently the recent surge in globalisation with liberalisation and the massive flow of cross-border capital has intensified the significance of financial management. a) Procurement of funds Procurement of funds decision is very critical one as it requires consideration of lot many factors such as sources of funds, terms and conditions of repayment, cost of capital and control. In financial management all such aspects are to be considered carefully before the management decides the sources of funds to be acquired for the organisation. i. Equity Vs Debentures Equity shares are the best source of funding from risk point of view, but undesirable from cost and control points of view. From cost point of view, equity capital is usually most expensive source of funds, because equity shareholders are entitled to entire divisible profits. Debentures are cheaper source of funds compared to shares because of terms- fixed rate of interest (cost), and tax advantage. Interest on debentures is an admissible expenditure for computation of taxable income unlike dividend payment, which is made from taxed profits. But it is to be seen that when the business is going through hard times, debenture interest to be paid irrespective of amount of profits or no profits. Thus a finance manager has to consider risk, cost and control in all decisions on procurement of funds. ii, Cross border capital In the global and open market, the available avenues or sources of funds have increased manifold. Cross-border ised in the form GDR etc. _are two major routes for raising funds from foreign sources. — 1C 89 MANAGEMENT ACCOUNTING 3 CHAPTER 1 FINANCIAL MANAGEMENT The finance manager therefore is required to identify, analyse and decide the sources of finance, finance-mix, internal financing (ratio of retention and distribution of profits) after careful considerations of cost, control and risks of procuring funds. Example India is one of the major recipients of FDI. In 2009 India was the 8th largest recipient of FDI, but in 2010 India’s rank in FDI recipient has slipped to 14th. It has happened because FDI's flows to India dipped from $36 bn in 2009 to $25 bn in 2010. One of the reasons for such happening is that the global business environment remains uncertain. ¥ a possible widespread sovereign debt crisis, ¥ fiscal, and financial sector imbalances in some developed countries, ¥ high inflations and declining consumers’ demand, ¥ consequent low p/e ratios of companies and decline in RO! are derailing the flow of FDI and obstructing the FDI recovery after financial crisis in the advanced countries. Furthermore abnormal hike in interest rates slow down the economy growth rate and pull down the corporate profitability resulting into hike in financial risks more specifically investors’ risks. Finance manager has to consider all such possible and potential risk factors in fund procurement decisions for Projected investment decisions b) Allocation of funds Allocation of fund decisions is another important area of financial management. The financial manager is required to identify situations which require more funds or where funds remain idle or where proper use of funds is not made. The financial manager is responsible for effective use of funds in such a manner that all funds generate income more than cost of capital at which funds are procured. For this purpose, every decision on employment of funds in fixed assets, projects or plans, short-term or long-term investments requires specialised knowledge, integrated experience on capital budgeting, working capital management, liquidity and solvency management, investment analysis and portfolio-management. 4 1C 89 MANAGEMENT ACCOUNTING SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT CHAPTER 1 He should keep updating his knowledge and understanding on the issues like: i. Financial risks analysis and measurement fi, Relationship between cost of capital and RO! iii, Relationship between risk and return iv. Importance of asset allocation v. Valuation of financial assets Vi. Status and efficiency of financial markets vii. Valuation of financial derivatives viii. Liquidity preference ix. Trade off between external financing and internal financing Precisely in Financial Management the decisions taken by financial manager are broadly classified as Investment decisions, Financing decisions, Dividend Decisions. Test Yourself 1 Which of the following is a financial management function? |. Acquisition of funds Il, Raising of capital Ill, Allocation of funds and capital among different projects and plans with a view to maximise the value of the enterprise B. Scope and Objectives of Financial Management 1, Scope of Financial Management. Financial Management is all about financial decisions and financial analysis of a company. The scope of Financial Management has got widened a lot with the companies becoming multinational and with more and more use of foreign capital by companies in the open and global market. The advancement of capital market and advent of limitless financial derivatives have broadened the scope and objectives of financial management during last one decade or two. Looking at the present expansion of capital market, the scope of Financial ‘Management can be analysed under two phases: Traditional Phase and Modern Phase. TC89 MANAGEMENT ACCOUNTING 5 CHAPTER 1 SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT a) Traditional Phase Originally and traditionally Financial Management was considered necessary and important in case of financial decisions like i. Merger, fi, Amalgamation, iii. Takeovers, iv. Acquisitions, v. Expansions, vi. Liquidation, vii. Internal capital structuring and viii. Financial statement analysis b) Modern Phase In this phase for the purpose of maximisation of wealth of the shareholders, the financial management has developed many more models and methods to encompass certain more critical issues like i. Determination of size and growth rate of the enterprise, ii, Determination of Financing and Capital Structure/ Capital budgeting Decisions, fii, Procurement of funds and analysis of cost of capital, iv. Management of funds for better ROI, v. Working Capital Management, vi. Investment Decisions, vii. Dividend Decisions and so on 2. Objectives of Financial Management The scope and objectives of financial management are distinctly different from financial accounting. It has evolved as separate and specialised field covering many aspects for various financial decisions on the areas like: a) Financial Analysis and Planning b) Financing and Capital Structure/ Capital budgeting Decisions c) Procurement of funds and analysis of cost of capital d) Management of funds raised ) Working Capital Management f)_ Investment Decisions 8) Dividend Decisions h) Analysis of relationship between Return and Risk i) Merger, Amalgamation, Takeovers, Expansions, Liquidation, etc. 6 1C 69 MANAGEMENT ACCOUNTING SCOPE AND OBJECTIVES OF FINANCIAL MANAGEMENT CHAPTER 1 s indicated above precisely ‘outline the scope of financial management. The above-mentioned areas of operations make the objectives of financial management clear and specific. 3. Financial management is an integrated part of corporate management A business proposal with capital investment decision or capital budgeting raises the value of the firm only if the present value of the future stream of net cash inflow (benefits) expected from the proposed investment is greater than the initial cash outlay or investment. This requires a systematic and careful analysis of investments and inflows. Financial management provides the process, techniques and tools for such analysis and assessment. Any investment in any business proposal or project gives rise to following questions in general: a) What is expected return of investment (ROI)? b) What is the financial risk exposure? ) What is the cost of capital involved in the new business proposal or Project? d) How does the Risk-Return Trade Off influence the value of the firm? ) What could be the optimum fund to be raised for the new proposal or Project? IC. 89 MANAGEMENT ACCOUNTING 7 CHAPTER 1 FINANCIAL MANAGEMENT VS FINANCIAL ACCOUNTING 4. Role and responsibility of Financial Manager To carry out the role and responsibility as financial manager, one must have a) Thorough knowledge of financial accounting; b) Sound understanding of macro and international economics; c) Expertise and exposure in money market and capital market operations. In a large public limited company or a multinational company, the business management is completely separated from the ownership, the roles and responsibilities of financial manager is much more emerging and demanding for achieving the goal of maximising the shareholders’ wealth. Test Yourself 2 What is the ultimate objective of Financial Management? |. Financial analysis and planning Il. Working capital management 1 Wealth management for shareholders IV. Dividend decisions C. Financial Management Vs Financial Accounting 1, Financial Management Vs Financial Accounting Financial Management is an integral part of overall management and thus related to other disciplines or areas of management functions such as production, marketing, accounting, administration. It is closely related with financial accounting. Cece reer ae statements including Balance Sheet, coe Statement (Profit and Loss Account), Cash flow Statement provide basis for Financial Management and for various financial decisions to achieve the corporate goal of shareholders’ wealth maximisation. 2. Basis of Financial Accounting and Financial Management ier deals with certainties rformances while latter deals with uncertainties and probabilities. {ENT ACCOUNTING FINANCIAL MANAGEMENT VS FINANCIAL ACCOUNTING CHAPTER 1 Thus the tasks and responsibilities of the financial manager are more analytical, complex and significant than those of an accountant responsible for financial accounting. In the present open and global business environment with free flow of cross-border capital or FDI, the role and scope of financial management have become much more significant and critical. 3. Financial management is integrated with primary disciplines Data and information supplied by primary disciplines (Accounting, Marketing, Production, Quantitative and Qualitative methods) support and serve financial management in financial decisions areas of: a) Investment Analysis, b) Capital Budgeting and Structuring, ¢) Working Capital Management, d) Cash management, ) Dividend Policies, f) Determination of sources and costs of funds, 2) Analysis of risks and return for achieving the organisational goal of wealth maximisation for owners (shareholders). Precisely Financial Management and other primary disciplines are integrated and inter-woven. One cannot function independently of other to achieve the organisational goals and objectives. More specifically role and scope of Financial ‘Management cannot be thought of without the support of financial accounting. 4. Role of financial manager ‘A financial manager is to deal with any or all of the following aspects which are beyond the scope and duties of an accountant in a large business organisation: a) Financial (Statement) Analysis and Planning for growth, expansion or new project b) Corporate Finance- Cash Flow and Fund flow analysis, Risk and Return Analysis for evaluation of investments and business proposals ) Capital Budgeting and Financial Investment. d) Long-term financing - Capital Market operations e) Capital Structure and Dividend Decisions 1C 89 MANAGEMENT ACCOUNTING 9 CHAPTER 4 FINANCIAL ANALYSIS AND PLANNING f) Debt Financing relating to debentures, warrants and Hybrid instruments g) Working Capital Management h) Corporation valuation methods and models for financial decisions on mergers, acquisition, restructuring i) Corporate finance hedging, derivative instruments and their use in corporate financial risk management Test Yourself 3 Financial Management is based on which of the following principles? Choose an appropriate answer. 1 Accrual analysis i Fund flow analysis Ill. Capital budgeting IV. Cash management D. Financial Analysis and Planning Every organisation set their goals and objectives for higher growth rate, larger market share, maximisation of profits and wealth, gaining market leadership in terms of product development and use of advanced and latest technology. But it is only possible if corporate management makes financial analysis and planning and take strategic actions on regular basis. Financial analysis mainly includes Ratio Analysis for performance evaluation, financial health determination for various financial planning and decisions. Accounting Ratio analysis or financial statement analysis for Financial Analysis and Planning are discussed separately in Chapter 3 on financial management and Ratio Analysis and financial decisions. 1, Investment Decision Definition ea ee cote Funds are procured from different sources with rigorous process and with commitment to pay sufficient return (interest /dividend) and repay the principal amount of borrowings as per terms. So if the investment decisions are not proper and prudent, the company may face liquidity crunch and insolvency both for payment of return and repayment of borrowed fund. 10 1C 89 MANAGEMENT ACCOUNTING FINANCIAL ANALYSIS AND PLANNING. CHAPTER 1 Such liquidity crunch and solvency problems will dampen the image of the company and may bring decay or insolvency. So investment decisions are important keeping in view the expected return on investment and cost of capital. For the purpose of proper deployment of funds, funds procured are to be segregated into short term funds and long-term funds. a) Long term projects need to be to be financed by Long term funds only while b) Current assets or working capital requirements are satisfied with short term funds. Financial management provides techniques, methods and modules for assessment of various projects or investment in financial instruments in terms of NPV (Net Present Value), IRR (Internal Rate of Return) etc. 2. Financing Decisions Definition Here a lot of financial risk management techniques and modules are used make the assessment of new projects, investments and treatment of investments. a) For this purpose determination of time value of money, estimation of cost of capital, preparation of fund flow and Cash flow statement, evaluation of long term investments or projects, Cash management are taken care of by financial management. b) Financing decisions call for sound knowledge, skill, experience and exposure on financial risk analysis and management so that all financing decisions give optimum benefits as per corporate goal and objectives for growth with profitability and wealth maximisation. ©) Here important issues like determination of needs and sources of finance of a business, assessment of merits and demerits of various sources of finance, consideration of both regulatory aspects and technical aspects of different sources of finances especially long-term finance like Equity Capital, Preference Share Capital, Retained Earnings, Debentures or bonds, Loans from Commercial banks, Bridge finance, Venture Capital, Debt Securitisation, Lease Financing etc. are to be examined. 189 MANAGEMENT ACCOUNTING 4 CHAPTER 1 FINANCIAL ANALYSIS AND PLANNING 4) In financing decisions, management also considers important aspects of International financing, FOI, Fil, ADR, GDR, Hybrid Financial instruments etc. All these aspects have been discussed in Chapter 10, Financial ‘Management - Principles, Process and Perspectives. 3. Dividend Decisions Definition While taking decisions the management basicall(ESnSiaersnWOMepeeEs a) The portion of profits to be distributed to shareholders keeping in view of industry trend for dividend per share (DPS) and b) Retention of profit for internal financing keeping in view of projected growth and expansion or new projects. The management is to consider merits and demerits of both the options and then arrive at the correct decision. Here conflicts arise in respect of management decisions for Profit Maximisation versus Wealth maximisation. Profit maximisation can be achieved in the short term at the cost of long-term goal i.e. Wealth maximisation. An investment in any project or instruments may experience losses in the short term but yield good return in the long run. Dividend payment, no doubt, attracts the shareholders, but hampers the growth or expansion process which needs to be financed. When profits are distributed as dividends, for expansion, the company is to depend on external finance involving more costs and time-consuming. In financial management various models and method are developed for this purpose. These methods are discussed separately in another chapter. Test Yourself 4 Which of the following financial decisions determine how costly funds are allotted and committed to various projects and plans? |. Investment decisions Il, Financing decisions Il, Dividend decisions IV. Procurement decisions 12 IC 89 MANAGEMENT ACCOUNTING FINANCIAL RISK MANAGEMENT, FINANCIAL SYSTEM AND FINANCIAL MANAGEMENT FUNCTION _ CHAPTER E, Financial Risk Management, Financial System and Financial Management Function 1. Financial Risk Management-Principles, Process and Perspectives Almost all investors want risk-free financial products and demand assurance/ guarantees for good return. But as we don’t have perfect jobs and work in most of the cases, we don’t have perfect investments which are risk-free in respect of return, redemption and liquidity. Investors are required to learn how to manage financial risks properly to make their investments risk-free as far as possible. Business means taking risks for making profit. Investors, financial advisors and analysts must understand, appreciate and analyse the critical aspects of financial risk management. This chapter is aimed at imparting knowledge about financial risk-management to students and processionals. 2. Common Perceptions One of the ways to manage financial risks is to hold financial assets that are exposed to different risk factors. The entity with which we entrust our savings and investments uses the same to create assets and property for business Purpose. The ability or capacity of the entity to service and return the investments depends upon the performance of such assets created by business enterprise. Again the performance of such assets depends on multiple unknown and external factors which are generally beyond the control of the corporate management of the entity. 3. Financial Decisions and Time Value of Money Financial Decision is one of the major functions of financial management. Time value of money is one primary consideration of financial decisions. Now question arises as to how time value of money works in financial decisions. Definition Definition Hi IC 89 MANAGEMENT ACCOUNTING 13 CHAPTER 1 FINANCIAL RISK MANAGEMENT, FINANCIAL SYSTEM AND FINANCIAL MANAGEMENT FUNCTION. reasons: a) Risk / Uncertainty There is always uncertainty about receipt of money in future. b) Present Consumption In general persons or firms prefer current consumption or enjoyment of money to future one. ¢) Inflation Due to inflationary conditions a rupee today represents a greater real purchasing power than a rupee a year after. d) Liquidity Preference Both individuals and organisations prefer to have liquidity for their better use. Every financial decision involves cash flow both outflow and inflow occurring at different points of time for evaluating of investments or projects. To understand the concept and practice of the time value of money, we are required to deal with the following important aspects: i. Timing and the amount of each cash flow in a stream fi, Future value of each cash flow iii, Present value of each cash flow iv. Future value of an annuity v. Present value of an annuity vi. Intra-year compounding and discounting 14 1C 89 MANAGEMENT ACCOUNTING FINANCIAL RISK MANAGEMENT, FINANCIAL SYSTEM AND FINANCIAL MANAGEMENT FUNCTION CHAPTER 1 4, Financial Management and Financial System Financial management process and perspectives of an enterprise depend not ‘only on corporate philosophy, financial risk-management policy and practice, but also on the financial system of the country and abroad. The financial manager therefore must have clear understanding of the financial system. The Indian Financial System has undergone revolutionary changes after opening up of the Indian economy. The financial sectors have witnessed wide-ranging reforms such as: a) Introduction to security system, b) Advent of many new financial institutions like National Stock Exchange, Depositories, Custodians, SEBI, Markets for Futures, Options and host of other financial derivatives, ©) Development of Foreign Exchange markets to the international standard, d) Introduction of convertibility of rupee and acceptance of international financial instruments such as GDR (Global Depository Receipts), ADR (American Depository Receipts), IDR (Indian Depository Receipts), FCEB (Foreign Currency Exchange Bonds) FCCB (Foreign Currency Convertible Bond), Syndicated Loans, Venture Capital Investment etc. Financial Management functions including broadly acquisition and allocation of funds in a firm are closely associated with financial system which mainly consists of financial markets, financial instruments, and relevant regulatory framework. The effectiveness of financial decisions, which is the main objective of financial management, requires not only exposure, experience and expertise of principle, perspectives and tools of financial management process, but also a thorough knowledge and complete understanding of financial system and financial environment. ‘The purpose of this book is to provide the readers with both the techniques and tools of financial management process for better financial decisions and conceptual framework of financial system that impact and influence financial decisions. 1C 89 MANAGEMENT ACCOUNTING 15 CHAPTER 1 FINANCIAL RISK MANAGEMENT, FINANCIAL SYSTEM AND FINANCIAL MANAGEMENT FUNCTION. 5. Financial Management Function The financial management function in a firm is broadly divided into segments: a) Accounting and Control functions and b) Treasury Management functions For effective financial management, the said two segments or sub-functions need to be independent than to be inter-dependent in nature. Let us elaborate above two functions of financial management Accounting and Control function and Treasury Management functions are two sets of finance functions, which are depended on each other. Decisions taken by treasury manager have had implications on the tasks and decisions taken by finance and accounts controller. _ a) Treasury Functions mainly include the following tasks: i. Financial Planning Analysis fi, Fund Acquisition iii. Investment Decisions iv, Fund Allocation and Investment Financing v. Cash Management vi. Financial Risk Management i. Financial and Management Accounting ii. Budgeting and Budgetary Control iii, External Reporting iv, Tax Planning and Management v. MIS and Internal control Acquisition and allocation of funds or financial resources constitute the core of treasury management. These two basic finance functions and management thereof are carried out with the objective of optimising the risk and return and with care for risk-cost trade-offs. 16 MANAGEMENT ACCOUNTING FINANCIAL RISK MANAGEMENT, FINANCIAL SYS AND FINANCIAL MANAGEMENT FUNCTION CHAPTER 1 To achieve this objective, the finance manger must have adequate knowledge in the subject of financial management. Most of the chapters of this book, are, therefore, aimed at dealing with various critical issues concerning management of the portfolios of a firm's financial assets and liabilities. It is to be pointed out that finance function is required to assist the corporate management in the formulation of strategic goals and then to attain the goals through executing above mentioned treasury and control functions of financial management. [Test Yourself 5 _—____________ means that worth or value of a rupee received today is different from the worth of a rupee to be received in future. 1. Cash management Ii, Capital budgeting Mh ios sii management Vv. 1C 89 MANAGEMENT ACCOUNTING 7 CHAPTER 1 SUMMARY Summary a) Financial Management is an important managerial function concemed with planning and controlling financial resources of an enterprise with a view to maximise returns. b) To obtain a complete understanding of financial management we should discuss its two basic parts: i. Procurement of fund decisions and ii. Allocation of funds decisions c) Procurement of funds decision is very critical one as it requires consideration of lot many factors such as sources of funds, terms and conditions of repayment, cost of capital and control. d) Allocation of fund decisions is another important area of financial management. The financial manager is required to identify situations which require more funds or where funds remain idle or where proper use of funds is not made. The financial manager is responsible for effective use of funds in such a manner that all funds generate income more than cost of capital at which funds are procured. e) Financial accounting is mainly concerned with keeping records, books and registers for financial transactions and preparation of financial statements while financial management is concerned with financial statements analysis, risk and return analysis, business proposal and capital budgeting. ) Financial accounting is based on accrual analysis while financial management is based on Cash Flow or Fund Flow principle. The former deals with certainties and actual performances while latter deals with uncertainties and probabilities. g) Financial management functions comprise of i. Acquisition of funds, fi, Raising of capital, iti, Allocation of funds and capital among different projects and plans with a view to maximise the value of the enterprise. h) To carry out the role and responsibility as financial manager, one must have i. Thorough knowledge of financial accounting; i, Sound understanding of macro and international economics; iii, Expertise and exposure in money market and capital market operations. 18 1C 89 MANAGEMENT ACCOUNTING SUMMARY CHAPTER 1 i) Financial analysis mainly includes Ratio Analysis for performance evaluation, financial health determination for various financial planning and decisions such as Investement, Financing and Dividend decisions. i. Investment decisions determine how costly funds are allotted and committed to various projects and plans. ii, Financing decisions relate to acquiring optimum fund to finance various fixed assets and working capital keeping in view the expected returns and required solvency, liquidity, profitability and growth. iii, Dividend decisions determine as to when and how much profits of the organisation can be distributed as dividend to shareholders. 3) Financial Decision is one of the major functions of financial management. Time value of money is one primary consideration of these financial decisions k)_ Time value of money means that worth or value of a rupee received today is different from the worth of a rupee to be received in future. 0) The preference of money at present as compared to future money is known as time preference for money. m) A rupee today is more valuable than a rupee after one year for the following reasons: i. Risk/Uncertainty fi. Present consumption iii, Inflation iv. Liquidity preference 1) Financial management process and perspectives of an enterprise depend not ‘only on corporate philosophy, financial risk-management policy and practice, but also on the financial system of the country and abroad. The financial manager therefore must have clear understanding of the financial system. ©) The financial management function in a firm is broadly divided into segments: i. Accounting and Control functions and Treasury Management functions. 1C.89 MANAGEMENT ACCOUNTING 19 CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS. Answers to Test Yourself Answer 1 The correct option is IV. Financial management functions comprise of Acquisition of funds, Raising of capital and Allocation of funds and capital among different projects and plans with a view to maximise the value of the enterprise. Answer 2 The correct option is III. Wealth management for shareholders is the ultimate objective of financial management. Answer 3 The correct option is Il. Financial Management is based on principle of fund flow analysis. ‘Answer 4 The correct option fs |. Investment decisions determine how costly funds are allotted and committed to various projects and plans. Answer 5 The correct option is IV. Time value of money means that worth or value of a rupee received today is different from the worth of a rupee to be received in future. 20 1C 89 MANAGEMENT ACCOUNTING PRACTICE QUESTIONS AND ANSWERS CHAPTER 1 Self-Examination Questions Question 1 Which of the following is an important route for raising funds from foreign sources? 1 e” q Ill, Debentures IV. Commercial borrowing Question 2 Which of the following financial decisions relate to acquiring optimum fund to finance various fixed assets and working capital keeping in view the expected retums and required solvency, liquidity, profitability and growth? ‘inancing decisions Ill, Dividend decisions IV. Procurement decisions Question 3 Which of the following is an example of task carried out under Treasury functions? |. Tax planning and management I Budgetary control Ill, External reporting IY. Fund acquisition iC 89 MANAGEMENT ACCOUNTING 24 CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS ‘Answers to Self-Examination Questions Answer 1 The correct option is I. FDI is an important route for raising funds from foreign sources. Answer 2 The correct option is |. Investment decisions relate to acquiring optimum fund to finance various fixed assets and working capital keeping in view the expected returns and required solvency, liquidity, profitability and growth. Answer 3 The correct option is IV. Fund acquisition is an example of task carried out under Treasury function: 22 1C 89 MANAGEMENT ACCOUNTING CHAPTER 2 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Chapter Introduction In this chapter we will learn about the significance of financial statements and application of IAS and IFRS. We will also learn how to prepare financial statements of a company, life insurance company, non-life insurance company and mutual fund company. Learning Outcomes re Significance of financial statements with reference to the Companies Act, 2013 Financial statements of companies with reference to Schedule II! of the Act Financial statements of life insurance companies w.r.t. IRDA regulations Financial statements of non-life insurance companies w.r.t. IRDA regulations Financial statements of mutual fund companies w.r.t. relevant regulations mone 1C.89 MANAGEMENT ACCOUNTING 23 CHAPTER 2 _ SIGNIFICANCE OF FINANCIAL STATEMENTS WITH REFERENCE TO THE COMPANIES ACT, 2013 A, Significance of financial statements with reference to the Companies Act, 2013 1, Companies Act, 2013 and financial statements of companies (GideriSeetion NB TotthelICompanies!ACEZOIS) “Every company shall prepare and keep at its registered office books of account and ot ‘ks and apers and financial statement for every financial year AER MSAD caieveivorte state ofthe afalsOrARNCOMPpARYVoclucing tat of ts branch office or offices, if any, and explain th registered office and its branches and Provided that all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place: Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed. ......” 2. Provisions of Section 129 Section 129 of the Act 2013 states that (1) The financial statements shall give a with the accounting standards. Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company: Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose— {a) In the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999; 24 1C 89 MANAGEMENT ACCOUNTING SIGNIFICANCE OF FINANCIAL STATEMENTS WITH REFERENCE TO THE COMPANIES ACT, 2013 CHAPTER 2 (b) In the case of a banking company, any matters which are not required to. be disclosed by the Banking Regulation Act, 1949; (©) In the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003; (4) In the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law. (2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year. (3) om cial statement under Sub-section (2): Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed: Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed Explanation: for the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture. (Note: The Companies Act 1956 with reference to requirements under the Companies Act 2013 on financial statements of companies: Section 210 of the Companies Act, 1956 requiring the preparation and presentation of the Board (of Directors of the company shal lay at every annual general meeting of the company: ‘A Balance Sheet as at the end of the period ‘A Profit and Loss Account for the period Incase of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its general meeting instead of profit and loss account. According to Section 211 of the Companies Act, 1956: Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as atthe end of the financial year and shall be in the form set out in Part 1 of Schedule Vior as near thereto as circumstances permit. Every Profit & Loss Account shall also give a true and fair view of profit or loss of the company {or the financial year and shall comply with the requirements and in the form set out in Part Il of the Schedule V1 to the Companies Act. The requirement of Schedule Vis not applicable to Banking or insurance Company. Banking or an insurance company for which the forms and regulatory requirements are specified in the ‘Accounting Regulations issued by the RBI and the IRDA respectively and in the relevant enactments namely the Banking Regulation Act, 1949 and the Insurance Act, 1938 is not required to follow the form and requirements of Schedule Vi to the Companies Act 1956.) 1C 89 MANAGEMENT ACCOUNTING 25 CHAPTER 2 _ SIGNIFICANCE OF FINANCIAL STATEMENTS WITH REFERENCE TO THE COMPANIES ACT, 2013 3. Statements prepared in accordance with Reporting. Financial Statements and Application of IAS & IFRS a) Compliance with IAS The International Accounting Standard (IAS) | on “Preparation of Financial Statements” issued in 2003 and revised in 2009, sha The following are the basic requirement of IAS 1: i. A statement of financial position (balance sheet) at the end of the period fi. A statement of comparative income for the period (or an income statement and a statement of comparative income) ji, A statement of changes in equity for the period iv. Notes comprising a summary of accounting policies and other explanatory notes 26 1C 89 MANAGEMENT ACCOUNTING SIGNIFICANCE OF FINANCIAL STATEMENTS WITH REFERENCE TO THE COMPANIES ACT, 2013 CHAPTER 2 b) Compliance with IFRS IAS 1 requires that: i. Entities whose financial statements comply with IFRS make an explicit statement of such compliance in the notes. Financial statements shall not be described as complying with IFRS unless they comply with all the requirements of IFRSs (including interpretations). ii An entity may use the financial statements for other reports and information than those stated above. The reports that are presented outside the scope of the financial statements are financial reviews by the management, environmental reports and any value added statements. fi, The financial statements must present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions other events and conditions in accordance with the definitions and recognition principles, standards and benchmarks of assets, liabilities set out in the financial statements. ‘v. The application of IFRSs with the additional disclosure, when necessary, 1s presumed to result in financial statements IAS 1.112: In terms of IAS 1,112 the notes to the financial statement must; i. Present information about the basis of preparation of the financial statements and the specific accounting policies used ii, Disclose any information required by IFRS that is not presented elsewhere in the financial statements and ii, Provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them v. Notes should be cross-verified from the face of the financial statements to the relevant note as required IAS 1.113 IC 89 MANAGEMENT ACCOUNTING 27 CHAPTER 2__ SIGNIFICANCE OF FINANCIAL STATEMENTS WITH REFERENCE TO THE COMPANIES ACT, 2013 IAS 1.114 suggests that the notes should be presented in the following order; A statement of compliance with IFRS (as and when it will be implemented) i, Asummary of significant accounting policies applied including; (a) The measurement basis (or bases) used in preparing financial statements (b) Other accounting policies used that are relevant to an understanding of the financial statements ii, Supporting information for items presented on the face of the statement of financial statement (balance sheet), statement of comprehensive income (and income statement if presented), statement of changes in equity and statement cash follows, in the order in which each statement and each item is presented. jv. Other disclosures including (a) Contingent liabilities and unrecognised contractual commitments (b) Non-financial disclosures- such as the entity’s financial risk management objectives and policies (c) Disclosures of judgments (d) Disclosure of key sources of estimation uncertainty Test Yourself 1 As per Section 129 of the Companies Act, 2013, at every annual general meeting of a company, the of the company shall lay before such meeting financial statements for the financial year. Ill Managing Director (MD) IV. Chief Executive Officer (CEO) 28 TC 89 MANAGEMENT ACCOUNTING FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE I OF THE ACT CHAPTER 2 B. Financial statements of companies with reference to Schedule III of the Act Schedule Ill: (Extract of SCHEDULE Il to the Act 2013) ‘SCHEDULE III (See Section 129) General instructions for preparation of Balance Sheet and Statement of Profit and Loss of a company Where compliance with the requirements of the Act including Accounting Standards as applicable to the companies require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head or sub-head or any changes, inter se, in the financial statements or statements forming part thereof, the same shall be made and the requirements of this Schedule shall stand modified accordingly. 2. The disclosure requirements specified in this Schedule are in addition to and Rot in substitution of the disclosure requirements specified in the Accounting Standards prescribed under the Companies Act, 2013. Additional disclosures specified in the Accounting Standards shall be made in the notes to accounts or by way of additional statement unless required to be disclosed on the face of the Financial Statements. Similarly, all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in this Schedule. {i) Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required (a) narrative descriptions or disaggregation of items recognised in those statements; and (b) information about items that do not qualify for recognition in those statements. (ii) Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notes to accounts. In preparing the Financial Statements including the notes to accounts, a balance shall be maintained between providing excessive detail that may not assist users of financial statements and not providing important information as a result of too much aggregation. 1C 89 MANAGEMENT ACCOUNTING 29 CHAPTER 2 FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE Il OF THE ACT 4, (i) Depending upon the turnover of the company, the figures appearing in the Financial Statements may be rounded off as given below: Turnover Rounding off Less than one hundred crore|To the nearest hundreds, thousands, rupees lakhs or millions, or decimals thereof ‘One hundred crore rupees or | To the nearest lakhs, millions or crores, more or decimals thereof (ii) Once a unit of measurement is used, it shall be used uniformly in the Financial Statements. 5. Except in the case of the first Financial Statements laid before the Company (after its incorporation) the corresponding amounts (comparatives) for the immediately preceding reporting period for all items shown in the Financial Statements including notes shall also be given. For the purpose of this Schedule, the terms used herein shall be as per the applicable Accounting Standards. Note: This part of Schedule sets out the minimum requirements for disclosure on the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as “Financial Statements” for the purpose of this Schedule) and Notes. Line items, sub-line items and sub-totals shall be presented as an addition or substitution on the face of the Financial Statements when such presentation is relevant to an understanding of the company’s financial position or performance or to cater to industry / sector- specific disclosure requirements or when required for compliance with the amendments to the Companies Act or under the Accounting Standards. 30 IC 89 MANAGEMENT ACCOUNTING FINANCIAL STATEMENTS OF COMPANIES WITH RE PART | — FORM OF BALANCE SHEET Name of the company. Balance Sheet as at.. RENCE TO SCHEDULE tt OF THE ACT CHAPTER 2 (Rupees i Particulars Note | Figures as at | Figures as at No. the end of the |the end of the current previous reporting | reporting period period 1 2 3 4 1. EQUITY AND LIABILITIES 11) Shareholders’ Funds la) Share capital (b) Reserves and surplus (c) Money received against share warrants 2) Share Application money pending| llotment '3) Non-current liabilities a) Long-term borrowings |b) Deferred tax liabilities (Net) lc) Other tong term liabilities (d) Long-term provisions (4) [Current liabilities la) Short term borrowings |b) Trade payables (c) Other current liabilities (d) Short-term provisions TOTAL UW, [Assets 11) Non-current assets la) Fixed Assets li) Tangible assets |i) Intangible Assets | iif) Capital work-in-progress liv) Intangible assets under development 1C.89 MANAGEMENT ACCOUNTING 31 CHAPTER 2 FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE Il OF THE ACT b) Non-current Investments (c) Deferred tax assets (net) (d) Long-term Loan and Advances (e) Other Non-current assets (2) (Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets froTaL GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET 1, Current asset and non-current asset Current asset: An asset shall be classified as current when it satisfies any of the following criteria: a) INSU P b) it is held primarily for the purpose of being traded: ° > pete aairteaaaemetneters Non-current asset: All other assets shall be classified as non-current. 2. Operating Cycle duration of 32 IC 89 MANAGEMENT ACCOUNTING FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE Ill OF THE ACT CHAPTER 2 3. Current liability and non-current liability Current liability: A liability shall be classified as current when it satisfies any of the following criteri +1 WU evpetes toe sete nth congas mal petting ce b) ° 5 OF d) Non-current liability: All other liabilities shall be classified as non-current. 4. Trade Receivable A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business. 5. Trade Payable A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business. 6. Notes to accounts A-company shall disclose the following in the notes to accounts: A. Share Capital For each class of share capital (different classes of preference shares to be treated separately): a) the number and amount of shares authorised b) the number of shares issued, subscribed and fully paid, and subscribed but not fully paid; ¢) par value per share; 4) a reconciliation of the number of shares outstanding at the beginning and at the end of the period; IC 89 MANAGEMENT ACCOUNTING 33 CHAPTER 2 FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE Il OF THE ACT ) the rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital; f) shares in the company held by its holding company or its ultimate holding company or by its subsidiaries or associates; 8) shares in the company held by any shareholder holding more than 5 percent shares; h) shares reserved for issue under options and contracts/commitments for the sale of shares / disinvestment, including the terms and amounts; i) Separate particulars for a period of five years following the year in which the shares have been allotted/bought back, in respect of: i. Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment being received in cash. fi, Aggregate number and class of shares allotted as fully paid up by way of bonus shares (Specify the source from which bonus shares are issued). fi, Aggregate number and class of shares bought back. 3) Terms of any security issued along with the earliest date of conversion in descending order starting from the farthest such date. k) Calls unpaid (showing aggregate value of calls unpaid by directors and officers) l)_ Forfeited shares (amount originally paid-up) B. Reserves and Surplus a) Reserves and Surplus shall be classified as: i. Capital Reserves; fi Capital Redemption Reserves; fi, Securities Premium Reserve; 'v. Debenture Redemption Reserve; v. Revaluation Reserve; 34 1C 89 MANAGEMENT ACCOUNTING FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE I OF THE ACT CHAPTER 2 VL Other Reserves - (specify the nature of each reserve and the amount in respect thereof); vi. Surplus i.e. balance in statement of Profit & Loss disclosing allocations and appropriations such as dividend paid, bonus shares and transfer to/from reserves. vil. Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and appropriations such as dividend, bonus shares and transfer to/from reserves etc. (Additions and deductions since last balance sheet to be shown under each of the specified heads) b) A reserve specifically represented by earmarked investments shall be termed as a ‘fund’, €) Debit balance of Statement of Profit and Loss shall be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative. C. Long-term Borrowings a) Long-term borrowings shall be classified as: {. Bonds/debentures fi, Term toans (a) from banks (b) from other parties fi, Deferred payment liabilities Wv. Deposits Vv. Loans and advances from related parties i. Long-term maturities of finance lease obligations vi. Other loans and advances (specify nature) b) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case. 1C.89 MANAGEMENT ACCOUNTING 35 CHAPTER 2 FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE ill OF THE ACT ) Where loans have been guaranteed by directors or others, a mention thereof shall be made and also the aggregate amount of such loans under each head. 4) Bonds/debentures (along with the rate of interest and particulars of redemption or conversion, as the case may be) stated in descending order of maturity or conversion, starting from farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by installments, the date of maturity for this purpose must be reckoned as the date on which the first installment becomes due. ) Particulars of any redeemed bonds/debentures which the company has Power to reissue. f) Terms of repayment of term loans and other loans. 8) Period and amount of default in repayment of dues, providing break-up of principal and interest shalll be specified separately in each case. D. Other Long-term Liabilities Other long-term liabilities shall be classified as: a) Trade payables b) Others E. Long-term Provisions The amounts shall be classified as: a) Provision for employee benefits. b) Others (specify nature). F, Short-term Borrowings a) Short-term borrowings shall be classified as: i. Loans repayable on demand (a) from banks (b) from other parties i, Loans and advances from subsidiaries / holding company / associates / business ventures fi, Deposits 'v. Other loans and advances (specify nature) 36 1C 69 MANAGEMENT ACCOUNTING FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE Il OF THE ACT CHAPTER 2 b) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case. ©) Where loans have been guaranteed by directors or others, a mention thereof shall be made and also the aggregate amount of loans under each head 4) Period and amount of default in repayment of dues, providing break-up of principal and interest shall be specified separately in each case. G. Other Current Liabilities ‘The amounts shall be classified as: a) Current maturities of long-term debt; b) Current maturities of finance lease obligations; ©) Income received in advance; d) Interest accrued but not due on borrowings; €) Interest accrued and due on borrowings; f) Unpaid dividends; 8) Application money received for allotment of securities and due for refund and interest accrued thereon. Share application money includes advances towards allotment of share capital. The terms & conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted shall be disclosed. It shall also be disclosed whether the company has sufficient authorized capital to cover the share capital amount resulting from allotment of shares out of such share application money. Further, the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed. Share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and share application money to the extent refundable i.e., the amount in excess of subscription or in case the requirements of minimum subscription are not met, shall be separately shown under ‘Other current liabilities’; h) Unpaid matured deposits and interest accrued thereon; i) Unpaid matured debentures and interest accrued thereon; IC 89 MANAGEMENT ACCOUNTING 37 CHAPTER 2 FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE i OF THE ACT j) Other payables (specify nature); H. Short-term Provisions The amounts shall be classified as: a) Provision for employee benefits. b) Others (specify nature). 1. Tangible Assets a) Classification shall be given as: i Land Buildings Plant and Equipment Furniture and Fixtures Vehicles Office equipment |. Others (specify nature) SS< 2m b) Assets under lease shall be separately specified under each class of asset. ) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions and other movements and the related depreciation and impairment losses/reversals shall be disclosed separately. d) Where sums have been written off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date therefore for the first five years subsequent to the date of such reduction or increase. J. Intangible Assets a) Classification shall be given as: i Goodwill i. Brands /trademarks fi, Computer software iv. Mastheads and publishing titles v. Mining rights 38 TC 89 ANAGEMENT ACCOUNTING FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE OF THE ACT CHAPTER 2 Wi Copyrights, and patents and other intellectual property rights, services and operating rights vi. Recipes, formulae, models, designs and prototypes viii, Licences and franchise ix Others (specify nature) b) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions and other movements and the related amortization and impairment losses/reversals shall be disclosed separately. ) Where sums have been written off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date thereof for the first five years subsequent to the date of such reduction or increase. K. Non-current Investments a) Non-current investments shall be classified as trade investments and other investments and further classified as: Investment property; Investments in Equity Instruments; Investments in Preference Shares; Investments in Government or Trust Securities; Investments in Units, Debentures or Bonds; Investments in Mutual Funds; vil. Investments in Partnership Firm; vii. Other non-current investments (specify nature) SS zmBr Under each classification, details shall be given of names of the bodies corporate (indicating separately whether such bodies are (i) subsidiaries, (if) associates, (iii) joint ventures, or (iv) controlled special purpose entities) in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid). In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given. b) Investments carried at other than at cost should be separately stated specifying the basis for valuation thereof. 1C.89 MANAGEMENT ACCOUNTING 39 CHAPTER 2 FINANCIAL STATEMENTS OF COMPANIES WITH REFERENCE TO SCHEDULE Ill OF THE ACT c) The following shall also be disclosed: ‘Aggregate amount of quoted investments and market value thereof; ‘Aggregate amount of unquoted investments; Aggregate provision for diminution in value of investments; Aggregate amount of partly paid-up investments; The names of bodies corporate (indicating separately the names of subsidiaries, associates and other business ventures) in whose securities, investments have been made and the nature and extent of the investments so made in each such body corporate. 4, Accounting Standard 13:Accounting for Investment shall not be ene 1C 89 MANAGEMENT ACCOUNTING 61 CHAPTER 2 FINANCIAL STATEMENTS OF LIFE INSURANCE COMPANIES W.R.T. IRDA REGULATIONS Section 2(C) of the Regulation provides that all words and expressions used herein and not defined in the Insurance Act, 1938 or in the IRDA Act, 1999or in the Companies Act, 1956 shall have the meanings respectively assigned to those Acts. However regulatory provisions prescribed the IRDA and the specific and relevant Accounting Standards promulgated by the Institute of Charted Accountants of India are being separately discussed in detail in subsequent chapters. Financial Statements of insurance companies comprise of the following as stated earlier Balance Sheet, Revenue Accounts, ii, Profit and Loss Account and iv. Receipts and Payments Account Besides above financial statements, the Annual Reports of an insurance company also contain the following statutory documents for the review and analysis of the various interested groups including shareholders, policyholders, regulators, reinsurers, employees, co-insurers etc. Report of the Board of Directors Management Report Auditors Report Segment Reporting Significant Accounting Policies Notes and Disclosures forming part of accounts s

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