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III Semester M.Com. Degree Examination, December 2015
COMMERCE
PAPER 3.2: CORPORATE FINANCIAL REPORTING
Time: 3 Hours Max. Marks: 70
SECTION – A
1. Answer any seven of the following sub – questions in about 3-4 lines each. Each sub-questions caries
two marks. (7x2=14)
a. What do you mean by Corporate Financial Reporting?
Financial reporting is the communication of financial information of an enterprise to the external
world. Corporate financial reporting is a series of activities that allows companies to record
operating data and report accurate accounting statements at the end of each month, quarter and
year.
b. What do you mean by Shareholders Value Added?
Shareholder Value Added (SVA) represents the economic profits generated by a business above
and beyond the minimum return required by all providers of capital. The SVA approach is a
methodology which recognizes that equity holders as well as debt financiers need to be
compensated for the bearing of investment risk in Government businesses.
c. State the meaning of Forward Contract under Derivatives.
A forward contract is a private agreement between two parties giving the buyer an obligation to
purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in
time.
d. What is meant by Hedge Accounting?
Hedge accounting is a method of presentation that may be voluntarily applied to hedging
transactions. The objective of hedge accounting is to ensure that the gain or loss on the hedging
instrument is recognized in the statement of profit and loss in the same period when the item that
is being hedged affects profit or loss.
e. What do you mean by Human Resource Reporting?
Human resource reporting is an attempt to identify, quantify and report investments made in human
resources of an organization that are not presently accounted for under conventional accounting
practice.
f. What is Sustainable Reporting?
A sustainability report is an organizational report that gives information about economic,
environmental, social and governance performance. For companies and organizations,
sustainability – the capacity to endure, or be maintained – is based on performance in these four
key areas.

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g. State any four examples for Financial Assets.
Cash, Deposits in other entities, Receivables, Loans to other entities, Investments in bonds and
other debt instruments and Investment in shares and other equity instruments issued by other
entities
h. What are Performance Indicators under GRI?
A set of quantifiable measures that a company or industry uses to gauge or compare performance
in terms of meeting their strategic and operational goals. KPIs vary between companies and
industries, depending on their priorities or performance criteria.
i. What are NBFCs?
A Non- Banking Financial Company (NBFC) is a Company registered under the Companies Act,
1956 and is engaged in the business of – Loans and advances, Acquisition of shares / stock / bonds
/ debentures / securities issued by Government or local authority or other securities of like
marketable nature, Leasing, Hire – purchase, Insurance business and Chit business But does not
include any institution whose principal business is that of agriculture activity, industrial activity,
sale / purchase / construction of immovable property
j. Differentiate between EVA and MVA.
i. EVA and MVA tend to go in the same direction. However, MVA depends on stock
prices/future expectations of investors.
ii. EVA reflects performance over a year, while MVA reflects performance over the
company’s whole life.
iii. EVA is used for managerial assessment more than MVA.

SECTION – B
Answer any four of the following question. Each Question caries five marks (4x5=20)

2. Explain the Requirements to be fulfilled by a Merchant Banker for registration with SEBI.
Requirements to be fulfilled by a Merchant Banker for registration with SEBI: The applicant should
comply with the following requirements for applying certificate of Registration for to act as a Merchant
Banker:

1. Body Corporate
2. Infrastructure
3. Expertise
4. Bar on Registration
5. Capital Adequacy requirements

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6. Litigations
7. Economic offence
8. Professional Qualification
9. Fit and Proper
10. Investor’s interest
3. What are the similarities and differences between IFRS and USGAAP?
Similarities / differences between IFRS and US GAAP:
CONCEPTS IFRS US GAAP
Similar to IFRS, certain
Accounting Transactions are recorded on
financial instruments can be
Framework Historical cost basis;
carried at fair value.
For US Companies and SEC
Statement of Financial Position,
Registrants (Public
Statement of Profit and Loss and
Companies) – Balance Sheet,
other Comprehensive Income,
Income Statement, Cash Flow
Constituents of Statement of changes in equity,
Statement, Statement of
Financial Statements Cash Flow Statement, Notes to
Changes in Equity,
Financial Statements and
Accounting Policies and
Accounting Policies as part
thereof.

Comparatives are not required

One year of comparatives is (except SEC requirements
required (except in certain which require 1 year
circumstances where more than 1 comparatives for balance
Comparatives year comparative disclosures are sheet and 2 years
required.) comparatives for other
statements.)
US GAAP also does not
IFRS does not prescribe any
prescribe any format, but rule
format, but stipulates minimum
S-X of SEC stipulated for
line of items like investment,
Balance Sheet listed companies minimum
property, financial assets,
line items to be disclosed
biological assets, intangible assets,
either on the face of balance
inventory and receivables. The
sheet or note to accounts. The

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items are presented in increasing assets and liabilities are
order of liquidity. presented in decreasing order
of liquidity.
Disclosure for three years may
Disclosure for two years. Primary
be shown as a part of notes to
statement shows capital
accounts and show capital
transactions with owners,
transactions with owners,
Statement of Changes movement in accumulated profits
movement in accumulated
in Equity and reconciliation of equity. This is
profits and reconciliation of
linked to other comprehensive
equity. Other comprehensive
income, which is a part of income
income may be shown as a
statement.
part of it.
Limited exemptions for
No exemptions for any type of certain investment entities.
business. Both direct and indirect Both direct and indirect
Cash Flow Statement methods are allowed to prepare methods are allowed to
cash flow statement. The period to prepare cash flow statement.
be presented is two years. The period to be presented is
three years.
Retrospective effect of change in
accounting policy is accounted and
Changes in Accounting Similar to IFRS from the date
comparative figures restated. Prior
Policies and of adoption of FAS 154.
period errors are to be corrected
Accounting Estimates Similar to IFRS in case of
retrospectively and the opening
and Errors. prior period items.
balances of assets, liabilities and
equity are restated.
Financial statement are adjusted
for events after the reporting date,
providing evidence of conditions at
Events occurring after
balance sheet date and materially Similar to IFRS.
the reporting date
affecting amounts in financial
statements. Non-adjusting events
should be disclosed in statements.

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4. What do you mean by Ind AS? State the significance of Indian Accounting Standards (Ind AS).
Indian Accounting Standards (abbreviated as India AS) are a set of accounting standards notified by the
Ministry of Corporate Affairs which are converged with International Financial Reporting Standards
(IFRS).
Globalization and liberalization have brought about significant changes in the attitudes and perceptions of
the corporate world. The whole world is a market with global customers and global investors i.e. now
everything has become “Glocal” (Global + Local). Companies are getting listed at stock-exchanges
located in different countries. They are also raising capital or making investments abroad. A basic
understanding, analysis and interpretation of financial statements of those companies are pre-requisite
before making such foreign investments, raising capital abroad etc. But financial statements of those
companies abroad will be primarily based on the accounting principles and practices of the respective
country. As it is said “Accounting is the language of business”, it would be wise and helpful if there is a
common language for the whole world to understand the financial statements in an unambiguous and
friendly manner.
Conversion (with IFRS) brings a one-time opportunity to comprehensively reassess financial reporting.
Few of them are as follows:

- It has wide application on a company’s processes, IT systems, internal financial controls, income taxes
payout, remuneration policies and also contractual arrangements. Hence management has to be aware of
IND AS thoroughly while implementing.
- Change in reporting brings loads of changes in the areas of revenue recognition, provisioning,
capitalisation, depreciation etc. This may widely affect the profitability and net worth of the organization.
Hence, not only management but also the users of financial statements like banks, creditors, employees,
investors, government etc. should be aware of it.

5. Entity A is considering the following statements. You are required to classify the following
statements into financial assets and Financial liability:
a. An accounts receivables that is not held for trading: Financial assets – loans and receivables.

b. Investment in shares and other equity instruments issued by other entities: Financial Assets

c. Investments in bonds and other debt instruments: Financial Assets

d. Bonds and other debt instruments issued by the entity: Financial Liability
e. Deposits in other entities: Financial Assets.

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6. What is USGAAP? Explain the organizations which influenced the development of USGAAP.

Following are the organizations which influenced the development of GAAP.

1. United States Securities and Exchange Commission (SEC) the SEC was created as a result of the Great
Depression. At that time there was no structure setting accounting standards. The SEC encouraged the
establishment of private standard-setting bodies through the AICPA and later the FASB, believing that
the private sector had the proper knowledge, resources, and talents. The SEC works closely with various
private organizations setting GAAP, but does not set GAAP itself.
2. American Institute of Certified Public Accountants (AICPA) in 1939, urged by the SEC, the AICPA
appointed the Committee on Accounting Procedure (CAP). During the years 1939 to 1959 CAP issued
51 Accounting Research Bulletins that dealt with a variety of timely accounting problems. However, this
problem-by-problem approach failed to develop the much needed structured body of accounting
principles. Thus, in 1959, the AICPA created the Accounting Principles Board (APB), whose mission it
was to develop an overall conceptual framework. It issued 31 opinions and was dissolved in 1973 for lack
of productivity and failure to act promptly. After the creation of the FASB, the AICPA established the
Accounting Standards Executive Committee (AcSEC). It publishes: Audit and Accounting
Guidelines, Statements of Position and Practice Bulletins.
3. Financial Accounting Standards Board (FASB) Realizing the need to reform the APB, leaders in the
accounting profession appointed a Study Group on the Establishment of Accounting Principles
(commonly known as the Wheat Committee for its chair Francis Wheat). This group determined that the
APB must be dissolved and a new standard-setting structure be created. FASB has 4 major types of
publications: Statements of Financial Accounting Standards, Statements of Financial Accounting
Concepts, Interpretations and Technical Bulletins. In 1984 the FASB created the Emerging Issues
Task Force (EITF) which deals with new and unusual financial transactions that have the potential to
become common (e.g. accounting for Internet based companies).
4. Governmental Accounting Standards Board (GASB) Created in 1984, the GASB addresses state and
local government reporting issues. Its structure is similar to that of the FASB's.
5. Other influential organizations (e.g., American Accounting Association, Institute of Management
Accountants, Financial Executives Institute).
6. Other influential organizations The Government Finance Officers Association (GFOA) also influence
financial policies for governments. Disagreements between the GFOA and GASB are rare, but can
continue for many years.

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7. Briefly explain the Issues and Problems with special reference to Published Financial Statements.
Indian Companies are facing many issues and problems in publishing the annual reports which are as
follows:

1. Globalization
2. Influence of management
3. External market pressures
4. The informational perspective of the financial statements
5. The debate about financial performance
6. Advances in technology
7. The development of knowledge economy
8. The rise of corporate governance
9. Independence:
10. Fraud
SECTION – C
Answer any three of the following. Each Question caries twelve marks (3x12=36)

8. “The Triple Bottom Line Reporting (TBL) is made up of Social, Economic and Environment
Dimensions”. Discuss.

TBL reporting is defined as corporate communication with stakeholders that describes the company's approach
to managing one or more of the economic, environmental and/ or social dimensions of its activities and through
providing information on these dimensions. Consideration of these three dimensions of company management
and performance is sometimes referred to as sustainability or sustainable development. However, the term
TBL is used throughout this booklet. In its purest sense, the concept of TBL reporting refers to the publication
of economic, environmental and social information in an integrated manner that reflects activities and
outcomes across these three dimensions of a company's performance.

Economic information goes beyond the traditional measures contained within statutory financial reporting that
is directed primarily towards shareholders and management. In a TBL context, economic information is
provided to illustrate the economic relationships and impacts, both direct and indirect, that the company has
with its stakeholders and the communities in which it operates. The concept of TBL does not mean that
companies are required to maximize returns across three dimensions of performance - in terms of corporate
performance, it is recognized that financial performance is the primary consideration in assessing its business
success.

The Triple Bottom Line is made up of "Social, Economic and Environmental" "People, Planet, Profit”

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The trend towards greater transparency and accountability in public reporting and communication is reflected
in a progression towards more comprehensive disclosure of corporate performance to include the
environmental, social and economic dimensions of an entity’s activities. Reporting information on any one or
more of these three elements is referred to as TBL (Triple Bottom Line) Reporting. This trend is being largely
driven by stakeholders, who are increasingly demanding information on the approach and performance of
companies in managing the environmental and social/community impact of their activities and obtaining a
broader perspective of their economic impact.

Many organizations have adopted the TBL framework to evaluate their performance.

a. Economic: Generally Accepted Accounting Principles, Customers, Suppliers and Employees

b. Social: Bribery and corruption, Political contributions, Child labor, Security practices, Indigenous
rights, Training
c. Environment: Energy, Water, Biodiversity, Emissions, effluents and waste.
THE REPORTING PROCESS: The major steps involved in undertaking the reporting process are:

1. Planning for Reporting:

a. Understand the national, international and industry sector trends in TBL reporting,
b. Identify key stakeholders,
c. Establish the 'business case' and set high-level objectives for TBL reporting,
d. Secure support from the Board and senior executives,
e. Identify resource requirements and determine budget
2. Setting the Direction for TBL Reporting:
a. Engage with stakeholders to understand their requirements,
b. Prioritize stakeholder requirements and concerns,
c. Set overall objectives for TBL reporting,
d. Review current approach and assess capability to deliver on reporting objectives,
e. Identify gaps and barriers associated with current approach, and prioritize risks associated with
overall reporting objective,
f. Review of associated legal implications,
g. Develop TBL reporting strategy,
h. Determine performance indicators for inclusion in report,
i. Establish appropriate structure and content of the report
3. Implementation of TBL Reporting Strategy:
a. Implementation of TBL reporting strategy (including required data collection and review
processes),

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b. Clarify relationship to statutory financial reporting
4. Publication of TBL Report:
a. Prepare draft report,
b. Review content and structure of report internally, and modify accordingly,
c. Obtain independent assurance - external verification,
d. Publish TBL report,
e. Seek feedback from stakeholders and incorporate into planning for the next period's reporting.

9. Solution for Question No 9: Value Added Statement of Dakshineshwar Ltd, for the year ended
31.01.2015

Particulars Rs. Lakhs Rs. Lakhs %

Sales 610
Less: Cost of Bought in Materials and Services:
Production & Operational Expenses
(112 + 185 + 22 + 94) 413
Administration Expenses ( 19 - 5) 14
Interest on Working Capital Loans 8 435
Value Added by Manufacturing & Trading Activities 175
Add: Other Income 25
TOTAL VALUE ADDED - 200

Application of Value Added: Rs. Lakhs Rs. Lakhs %

1. To Pay Employees: Salaries, Wages, Bonus and Other Benefits 41 20.50

2. To Pay Directors: Salaries and Commission 5 2.50

3. To Pay Government:
Cess & Local Taxes 11
Income Tax 16 27 13.50
4.To Pay providers of Capital:
Interest on Debentures 7
Interest on Fixed Loans 12
Dividend 11 30 15.00
5. To provide for maintenance and expansion of the company
Depreciation 14
General Reserve 60
Retained Profit (30 - 7) 23 97 48.50
TOTAL APPLICATION 200 100.00
Reconciliation between Total Value Added and Profit before Taxation
Particulars Rs. Lakhs Rs. Lakhs
Profit Before Tax 110
Add back: Depreciation 14
Salaries, wages, bonus and other benefits 41
Directors Remuneration 5
Cess and Local Taxes 11
Interest on Debentures 7
Interest on Fixed Loans 12 90
TOTAL VALUE ADDED 200

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10. What do you mean by Financial Instruments? Briefly explain the Recognition and Measurement of
Financial Instruments.
Financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability
or equity instrument of other entity.

INITIAL RECOGNITION OF FINANCIAL INSTRUMENTS: An entity should recognize a financial

asset or a financial liability on its balance sheet when, and only when, the entity becomes a party to the
contractual provisions of the instrument. (See paragraphs 38-42 of AS 30 with respect to regular way
purchases of financial assets.)

DE-RECOGNITION OF FINANCIAL ASSETS AND LIABILITIES: A financial asset is

derecognized, i.e. removed from the balance sheet, when, and only when, either the contractual rights to
the asset’s cash flows expire, or the asset is transferred and the transfer qualifies for derecognition.

The decision whether a transfer qualifies for derecognition is made by applying a combination of risks
and rewards and control tests. The risks and rewards tests seek to establish whether, having transferred a
financial asset, the entity continues to be exposed to the risks of ownership of that asset and/or continues
to enjoy the benefits that is generates. The control tests are designed with a view to understand which
entity controls the asset, i.e. which entity can direct how the benefits of that asset are realized.

MEASUREMENT: INITIAL MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL

LIABILITIES

a. A financial asset or financial liability at fair value through profit or loss should be measured at fair value
on the date of acquisition or issue.
b. Short-term receivables and payables with no stated interest rate should be measured at original invoice
amount if the effect of discounting is immaterial.
c. Other financial assets or financial liabilities should be measured at fair value plus/ minus transaction costs
that are directly attributable to the acquisition or issue of the financial asset or financial liability.

When an entity uses settlement date accounting for an asset that is subsequently measured at cost or
amortized cost, the asset is recognized initially at its fair value on the trade date (see paragraphs 38–42 of
AS 30). Often it will be obvious whether the effect of discounting of short-term receivables and payables
would be material or immaterial and there would be no need to make detailed calculations. In other cases,
it will be necessary to make detailed calculations.

SUBSEQUENT MEASUREMENT OF FINANCIAL ASSETS: For the purpose of measuring a financial asset
after initial recognition, this Standard classifies financial assets into the following four Categories defined in
paragraphs 8.2 to 8.5 of AS 30:

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(a) Financial assets at fair value through profit or loss;
(b) Held-to-maturity investments;
(c) Loans and receivables; and
(d) Available-for-sale financial assets.

Financial Assets at Fair Value through Profit or Loss: Assets falling within this category, which includes
those classified as held for trading and derivative assets that are not designated as effective hedging instruments,
are measured at fair value. Gains and losses that arise on changes in fair value are recognized in the statement of
profit and loss. Gains and losses that arise between the last balance sheet date and the date an instrument is
derecognized do not constitute a separate ‘profit/loss on disposal’. Such gains and losses will have arisen prior to
disposal, while the item is still being held as at fair value through profit or loss, and should be recognized in the
statement of profit and loss as they occur. Transaction costs that might be incurred upon future disposal are not
deducted from fair value in determining the carrying amount. Some argue that this is inconsistent with the use of
exit prices (i.e. fair value) for measurement purposes, but the Standard is clear that such costs are viewed as being
related to the act of disposal and, therefore, are recognized only in the period of disposal itself.

Held-to-maturity investments: Held-to-maturity investments are measured at amortized cost using the ‘effective
interest method’. This method is discussed in detail below.

Loans and receivables: Loans and receivables are also measured at amortized cost using the effective interest
method, as discussed below.

Available-for-sale financial assets: Assets classified as available-for-sale are measured at fair value. As with
financial assets at fair value through profit or loss, no deduction is made for transaction costs that might be
incurred upon future disposal. Section 7.5 below contains guidance on the appropriate determination of fair value.
Gains and losses that arise on changes in fair value are recognized in equity, with three exceptions:

i. Interest, calculated using the effective interest method, is recognized in the statement of profit and loss;
ii. Impairment losses are recognized in the statement of profit and loss; and
iii. Foreign exchange gains and losses on monetary financial assets

SUBSEQUENT MEASUREMENT OF FINANCIAL LIABILITIES: After initial recognition, an entity

should measure all financial liabilities at amortized cost using the effective interest method, except for:

a. Financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are
liabilities, should be measured at fair value other than a derivative liability that is linked to and must be
settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured, which
should be measured at cost.
b. Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or
when the continuing involvement approach applies. Paragraphs 29 and 31 of AS 30 apply to the
measurement of such financial liabilities.
c. Short-term payables with no stated interest rate should be measured at the original invoice amount if the
effect of discounting is immaterial.

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11. Solution for Question 11:
Profit and Loss Account for the year ended 31-12-2014

Unadjusted Factor Adjusted to CPP basis

Sales 500 118/114 517.6
Opening Stock 80 118/108 87.4
Purchases 420 118/114 434.7
500 522.1
Less: Closing stock 70 430 118/116 71.2 450.9
Gross Profit 70 66.7
Depreciation (buildings) 5
118/60 9.8
Administration 25 30 118/114 25.9 35.7
Net profit 40 31

Balance Sheet as at 31st December 2014

Unadjusted Factor Adjusted to CPP basis
Share capital 200 118/60 393.3
Reserves 200 Consequential Figure** 17.7
400 411.0
Building 200 118/60 393.3
Less: Depreciation 45 155 118/60 88.5 304.8
Stock 70 118/116 71.2
Debtors 40 No Change 40
Cash 30 No Change 30
140 141.2
Less: Creditors 35 105 No Change (35) 106.2
260 411.0
** - Balancing figure is considered as Reserves.

12. “The International Accounting Standards Board (IASB) is the independent, accounting standard
setting body of the IFRS Foundation”. Explain the structure and Governance of IASB.
Introduction: Being founded on February 6, 2001, as an independent accounting standard setter, the
IASB is a London-based organization which seeks out to set and enforce standards for accounting
procedures. At present, more than 140 countries require or permit companies to comply with IASB
standards. Moreover, IASB is also responsible for maintaining the IFRS (International Financial
Reporting Standards). The organization was preceded by the IASC (International Accounting Standards
Committee) being the parent entity.
History of IASB: In 1973, the International Accounting Standards Committee (IASC) was established to
develop and issue accounting standards that should guide the preparation and presentation of financial
statements, globally. The IAS was in existence until 2001 by which time it had issued 41 International

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Accounting Standards (IASs). Because of differences interpreting the accounting standards issued by
IASC, a new body called Standards Interpretations Committee (SIC) was established by the IASC in 1997.
As at 2001, the SIC had issued 32 interpretations, some of which are still applicable to financial statements
issued today. In 2001, there was fundamental change in global standard setting body which resulted in the
establishment of a new body called International Accounting Standards Board (IASB), to take over the
responsibilities of the IASC with effect from 1st April, 2001. The IASB now issues International Financial
Reporting Standards (IFRS) in the place of International Accounting Standards (IAS) issued by IASC.

Structure of IASB:

a. The IASB replaced the IASC Board of the International Accounting Standards Committee (IASC) with
effect from this date. The IASC was formed in 1973.
b. Until 31 March 2010, the IFRS Interpretations Committee was named the International Financial
Reporting Interpretations Committee (IFRIC). IFRIC replaced the Standards Interpretations Committee
(SIC) of the IASC with effect from 1 April 2001. The SIC was part of the original IASC structure formed
in 1973.
c. Until 31 March 2010, the IFRS Advisory Council was named the Standards Advisory Council (SAC).
d. Formerly the Analyst Representative Group (ARG).

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