Month: December 2021

Accounting ethics is an important topic because, as accountants, we are the key personnel who access the financial information of individuals and entities. Such power also involves the potential and possibilities for abuse of information or manipulation of numbers to enhance company perceptions or enforce earnings management. Ethics is also absolutely required in the course of an audit. Without meeting the requirements of auditing and accounting ethics, an audit must instantly be paused.

Ethics and the Code of the Conduct

Ethics and ethical behavior refer more to general principles such as honesty, integrity, and morals. The code of professional conduct, however, is a specific set of rules set by the governing bodies of certified public accountants. Although the rules set out by different bodies around the world are unique, some rules are universal. Let’s take a closer look at some of these important rules.

Rules and Guidance

One of the key rules set out by professional accounting bodies in North America is the idea of independence. This is the idea that, as an auditor, you must be totally objective and must be without ties to or relationships with the client since that could potentially impair your judgment and impair the overall course of the audit work.

There are two forms of independence:

• Independent in fact
• Independent in appearance

Independence in fact refers to any factual information such as whether you, as an auditor, own any shares or other investments in the client firm. These facts are usually easy to determine.

Independence in appearance, however, is more subjective. Let’s say, for example, that as an auditor you were invited to a year-end party at the client firm. The party turns out to be extremely luxurious and you also receive a nice watch as a gift. In appearance, would the auditor, who was invited to the party and who also received a gift, be able to maintain independence in the audit? In order to solve a potential conflict of interest, a reasonable observer’s test is used  i.e., what would a reasonable observer say about the situation?

Threats to Independence

There are always threats and situations that can reduce the level of independence. Let’s take a look at some of these threats:

• Familiarity Threat: If the auditor has a long relationship with the client or they are close friends/relatives
• Intimidation Threat: If the auditor changes the financial statements, the client threatens to switch auditors
• Self-Interest Threat: If the auditor has a direct financial interest through shares or a large fee outstanding from the client
• Self-Review Threat: If the auditor performs both audit and bookkeeping services, it is a review of the auditor’s own work

Rules outlined by professional accounting bodies include the following:

• Contingent fees are not allowed: For example, audit fees that are based on a percentage of the net income figure or a percentage of a bank loan received
• Integrity and due care: Audit work must be done thoroughly, diligently, and in a timely manner.
• Professional competence: Auditors must be competent, which means he/she must have both the necessary academic knowledge and experience in the relevant industry.
• Duty to report a breach of rules: This rule is commonly referred to as the whistleblower rule. If a CPA observes a fellow CPA violating any of these rules, he/she has a responsibility to report it.
• Confidentiality: Auditors must not disclose any information regarding the client to outsiders.

The International Federation of Accountants (IFAC) is a global organization representing the accounting profession. IFAC establishes and promotes international standards, and speaks for the profession on public policy issues. According to the IFAC website, the group serves the public interest through advocacy, development, and support for our member organizations and the more than 3 million accountants who are crucial to our global economy.

Many elements of this work program are still relevant today.

• Develop statements which serve as guidelines for international and auditing guidelines
• Establish the basic principles which should be included in the code of ethics of any member body of IFAC and to refine or elaborate on such principles as deemed appropriate
• Determine the requirements and develop programs or the professional education and training of accountant
• Collect, analyze, research, and disseminated information on the management of public accounting practices to assist practitioners in more effectively conducting their practices
• Evaluate, develop, and report on financial management and other management techniques and procedures
• Undertake other studies of value to accountants, such as a possible study on the legal liabilities of auditors
• Foster closer relationships with users of financial statements including preparers, trade unions, financial institutions, industry, governments, and others
• Maintain good relations with regional organizations and explore the potential for establishing other regional organizations, as well as assisting in their organizations and development
• Establish regular communications among the members of IFAC and other interested organizations, principally through an IFAC Newsletter
• Organize and promote the exchange of technical information, educational materials and professional publications, and other literature emanating from member bodies
• Organize and conduct an international congress of accountants approximately every five years
• Seek to expand the membership of IFAC

Confidentiality of Information

Accountants see the good, the bad and the ugly of a company or a person’s financial situation. Clients have a right to know that this information is kept in the strictest of confidentiality and is only shared with other professionals if consultation is required to address a specific problem. Failure to keep information confidential could result in bad publicity and possible defamation of a company or person. It could also open the door to fraud, identity theft, and other illegal activities if the information is shared with the wrong parties.

Professional Skill and Competence

Accounting is a detail-oriented career that requires knowledge and skills to do the job correctly. Mistakes lead to problems with investors, business partners, finance lenders and the Internal Revenue Service. It is imperative that anyone working at any level in accounting understands what is required of the job and how to execute it properly.

Independence and Objectivity

Most accountants are partnered or licensed to advise clients on investing and financial services. It is important that accountants maintain a fiduciary responsibility, seeking an objective solution, and providing advice based on that objectivity. It has been a rampant problem in the financial services industry that products were recommended to clients simply because they provided the highest compensation to the adviser. Accountants must be objective with independent viewpoints, especially since they are dealing with the financial details of the company.

Honesty and Integrity Standards

Integrity covers a lot of different ethical standards that include honesty and professional conduct in all circumstances. An accountant should always present the facts objectively and refrain from slanting information in a misleading way. An accountant who doesn’t demonstrate a high level of integrity isn’t trustworthy and loses the confidence of clients.

Professionalism and Demeanor

Professionalism is a standard that goes beyond the office. Whether at a networking event or a party, maintaining a professional demeanor is good business. Accountants should be law-abiding citizens who don’t have bad habits, such as gambling, that could put them in a risky position to compromise client information. No one trusts an accountant who gets drunk at a party and starts spouting off information that probably is bound by confidentiality standards.

Whistleblowing is when an individual reports wrongdoing in an organisation, for example financial misconduct or discrimination. This person is often an employee but can also be a third-party such as a supplier or customer.

Internal whistleblowing is when someone makes a report within an organisation. Often companies implement whistleblowing channels for this purpose so that employees and other stakeholders can speak up if they become aware of misconduct. Employees can also report to their line manager.

External whistleblowing is when a person blows the whistle publicly, either to the media, police or via social media channels.  People often opt to blow the whistle publicly if they have little faith in their organisation’s investigation or reporting procedure, have tried speaking up internally with no result or if there is no whistleblowing system in place.

Whistleblowing complaints focus on conduct prohibited by a specific law such as a criminal offence, discrimination or evidence of a cover up. Speak up policies may however cover a broader range of issues related to compliance and ethics.

In response to this decline in trust, we have seen legislative reform, mandating increased corporate transparency: the Commonwealth Parliament introduced legislation that will fundamentally change whistleblower protections. The Treasury Laws Amendment (Whistleblowers) Bill 2017 (the Bill) is expected to be passed later this year and aims to:

• Increase protection for whistleblowers and their family members;
• Extend protection for reports to media or to politicians (see the full list of regulatory changes here); and
• Underline a commitment to trust by requiring large corporations to implement a whistleblower policy addressing mandatory criteria.

Business should start with the things they can control. In particular:

• Building internal capabilities for transparent and consistent communication which align to the mandatory requirements in the Bill, and
• Implementing policies, processes and training which support a sustainable, “speak-up” organisational culture that commits to addressing risks and preventing workplace retaliation.

Whistleblowing means when an employee makes fraud, corruption, and wrongdoing in an organization known to the public. A whistleblower in India is a current or ex-employee who exposes information regarding what is believed to be fraud, corruption or deviation from the company rules and company law India. The employee discloses what they believe to be the unethical or illegal behavior of higher management.

The whistleblower policy in India is aimed to safeguard the interest of the general public. Employees who reveal fraud, corruption or mismanagement to the senior management are called internal whistleblowers. Employees who report fraud or corruption to the media, public or law authorities are external whistleblowers. Indian whistleblowers are protected under the Whistleblower Protection Act India.

Law dealing with whistleblowing in India

Laws relating to whistleblowing and protection of whistleblowers are inadequate in India. However, the Companies Act, 2013 lays down provisions for whistleblowing and corporate governance in India and the elimination of fraud by establishing adequate vigil mechanism. Sections 206 to 229 of the Companies Act, 2013 lay down laws relating to Inspection, Inquiry, and Investigation incorporate.

Section 208 of the Act empowers an Inspector to inspect company records and furnish any recommendations to conduct investigations. Section 210 states that the Central Government may order an investigation into the affairs of the company in the following cases:

• On receipt of a report by Registrar or Inspector of the company.
• On intimation of a Special Resolution passed by a company that the affairs of the company must be investigated.
• To uphold the public interest.

Additionally, the Securities and Exchange Board of India (SEBI) amended the Principles of Corporate Governance in 2003. Clause 49 of the Listing Agreement now includes the formulation of a Whistleblower policy in Indian companies. A company may establish a mechanism for employees to report concerns regarding unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. However, it is currently not mandatory for companies to have a whistleblowing policy in place.

The Whistleblower Protection Bill, 2011 which replaced the Government Resolution, 2004 has not come into force yet. The bill aims to balance the need to protect honest officials from undue harassment with protecting persons making a public interest disclosure.

Shortcomings or wrongdoings in a company may lead to a loss of the company’s goodwill and capital. It is important for every company to have a whistleblowing policy in place for both the organization and employees. To encourage employees in raising their voices against wrongdoing and reach the appropriate authority, a company must get a tailored whistleblowing policy through an experienced corporate lawyer.

The whistleblowing policy must include stipulations that will ensure confidentiality and anonymity of the informant. The policy must also include provisions for the establishment of an internal committee of members from each level of management to deal with potential whistleblowers.

Principles-based accounting seems to be the most popular accounting method around the globe. Most countries opt for a principles-based system, as it is often better to adjust accounting principles to a company’s transactions rather than adjusting a company’s operations to accounting rules.

The international financial reporting standards (IFRS) system the most common international accounting standard is not a rules-based system. The IFRS states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.

Encourages Professional Judgment

ICAEW notes that rules-based accounting is mechanical and only encourages accountants to look at the letter of the law. Accounting principles require accountants to look deeper into the substance of the transaction. This promotes sound professional judgment in the profession and instills more of a sense of responsibility in the accountant.

Flexibility

Principles-based accounting is more flexible than rule-based accounting. The Institute of Chartered Accountants of New England and Wales ICAEW for short  points out that principles are better suited to help accountants respond to rapid changes in a business environment. It can take the FASB years or even decades to amend accounting rules. In contrast, an accounting principle or idea can be applied to new types of transactions or financial instruments immediately.

Disadvantages

Compliance Is More Difficult

Complying with accounting principles is more complex, expensive and time-consuming. If companies are required to constantly interpret principles, they need accounting staff with vast experience and an expert understanding of accounting frameworks. Work that was previously done by a lower-level accountant has to be handled by a higher-level accountant, and more time may be needed to come to a conclusion.

Decreased Comparability

If principles are used rather than rules, accounting information may start to become less consistent. Raymond Thompson, Ph.D., a certified management accountant, points out that it’s possible for two accountants to look at the same data and come to completely different conclusions about what the data mean. Two companies with the same assets, in this case, could present them differently on the balance sheet.

Enforcement Is More Difficult

Companies and accounting firms are constantly accused of misstating financial information, but asking judges and juries with no financial experience to interpret accounting principles during enforcement cases may be a bad idea. Sue Anderson, program director for CPE Link, points out that it’s hard enough for courts to come to a conclusion based on explicit accounting rules and it would be even worse with accounting principles.

(a) Purchase of Investment:

When investment is purchased, its face value is recorded on the debit side of Investment Account and the actual cost (including brokerage, stamp duty, etc.) is recorded in the principal column. But if the same is purchased under cum-interest/dividend basis, the accrued interest must be recorded in ‘Interest’ column and will be deducted from the purchase price as the real cost is to be recorded in ‘Principal’ column.

But, if the investment is purchased under ex-interest/dividend basis, the quoted price together with brokerage and stamp duty will be recorded in the ‘Principal’ column. The accrued interest is, however, entered on the Interest/Income column.

(b) Sale of Investment:

When investment is sold, the same is recorded on the credit side of Investment Account, the face value being recorded in ‘Nominal’ column; the net selling price is entered, however, in the ‘Principal’ column. But if the investment is sold as cum-interest/dividend, the accrued interest will be recorded in ‘Interest/Income’ column and the net selling price (capital portion) on the ‘Principal’ column.

On the contrary, if the same is sold as ex- interest/dividend, the accrued interest/dividend is received by the seller in addition to quoted sale price. The accrued interest/dividend is entered on the ‘Interest/Income’ column and the quoted sale price in the ‘Capital’ column.

(c) Profit or Loss on Sale of Investment:

The difference between the capital cost of securities and the consideration received towards capital at the time of sale reveals the profit or loss on sale of investment. The profit or loss may be ascertained either for each individual sale or may be ascertained for all selling transactions at the end of the year as a whole. And if the entire investments are sold, the difference between these two ‘Principal’ columns represents profit or loss, as the case may be.

But if a part of investments is sold, the balance of investments on hand should be ascertained first. Therefore, the balance is either valued at cost if the investment is treated as fixed asset, or the balance is valued at cost or market price, whichever is less if the investment is treated as current asset.

Naturally, the value of investments at hand is entered on the credit side of the Investment Account in ‘Principal’ column and the difference represents the profit or loss on sale of investment. The profit or loss on such sale is transferred to Profit and Loss Account if the investment is treated as a current asset or the profit or loss on such sale is treated separately if the investment is treated as a fixed asset.

(d) Balancing Investment Account:

The Balance of Investment account is ascertained at the end of the accounting period. The balance of ‘Nominal’ column reveals the face value of the investment in hand and after recording the closing balance of investment in ‘Principal’ column the profit or loss is to be ascertained (which has been explained earlier). And the difference between the two ‘Interest/Income’ columns represents income/interest from Investment Account which is, ultimately, transferred to Profit and Loss Account.

But, in the true sense of the term, Accounting Treatment depends on the date of purchase and sale of investment.

It may, again, be of two types:

1. Purchase and Sale of Investment just at the date of payment of interest; and
2. Purchase and Sale of Investment before the date of payment of interest.
3. When Purchase and Sale of Investment are made just at the date of payment of interest:

Under the circumstances, there will be no problem as to the cost of investment, because the quoted price does not include the amount of interest. The quoted price represents the cost of investment.

1. Purchase and Sale of Investment before the date of payment of interest:

Under the circumstances, question arises before us whether the quoted price of investment is inclusive of interest/dividend or exclusive of interest/dividend. In short, we are to face the problem of Cum-Interest and Ex-Interest.

Cum-Interest or Cum-Dividend:

Where the right to receive interest or dividend from the issuer of security passes from the seller to the buyer, the transaction is known as ‘Cum-Interest’ or ‘Cum-Dividend’ purchase or sale. In other words, when the accrued interest or dividend from the last interest or dividend date up to the date of transaction is included in the quoted price, the capital cost of investment purchased or sold is ascertained by deducting the accrued interest/dividend from the quoted prices. And the difference between the quoted price and the actual cost may be represented as ‘Cum-Interest’ or ‘Cum-Dividend’.

Ex-Interest or Ex-Dividend:

When the seller retains the right to receive the interest/dividend, the transaction is called ‘Ex-Interest’ or ‘Ex-dividend’ purchase or sale. In other words, when the price quoted is exclusive of accrued interest/dividend, the price so quoted is treated as the capital cost of investment, i.e., the buyer has to pay accrued interest due from the last interest date to the date of transaction to the seller along with the cost price of investment.

For Cum-Interest Purchase and Sales:

To Sum up:

When investments are purchased at Cum-Interest it means quoted price is inclusive of accrued interest. So, we are to ascertain the amount of interest and the same must be deducted from the quoted price in order to find out the cost. Investment will be debited with actual cost (to be posted in Principal column) and accrued interest will be debited with the amount of interest (to be posted in Interest column) and Bank Account will be credited for the total (i.e., quoted price).

Same principle is to be followed also in case of sale of investment which includes Cum- Interest, i.e., from the quoted selling price, the amount of interest will be deducted in order to ascertain the cost/principal for this purpose, Bank Account will be debited with total amount or quoted price and Investment Account will be credited at cost and Interest Account will be credited with the amount of interest.

Ex-Interest Purchases and Sales:

When investments are purchased at Ex-Interest, it means quoted price is exclusive of accrued interest. In that case, the Investment Account will be debited with quoted prices, Interest Account will be debited with accrued interest and Bank Account will be credited with total amount (i.e., quoted price plus interest).

Entries in Case of Ex-Interest Purchase:

But when investment are sold at Ex-interest, quoted price is exclusive of interest. In other words, Investment Account will be credited with quoted price and Interest Account will be credited with Accrued Interest and Bank Account will be credited with total i.e., quoted price plus interest.

Entries in the Case of Ex-Interest Sale:

Profit or Loss on sale of investment should be transferred to Profit and Loss Account. The entries for this purpose we have shown earlier.

Prior to electronic worksheets, accountants had several pads of paper with a varying number of columns (and rows) pre-printed on them. The pads of paper were labelled as columnar pads. The pre-printed paper in these pads allowed accountants and bookkeepers to easily prepare manual spreadsheets.

The Investment Account is maintained in a columnar form with three amount columns on each side viz., Nominal, Interest/Income and Principal/Capital. The face value or nominal value of securities purchased or sold is recorded, however, in the ‘Nominal’ column. The accrued Interest/Dividend on purchase or sale of securities including the Interest/Dividend so received is recorded, however, in the ‘Interest/Income’ column. The third column, ‘Capital/Principal’, reveals the true cost or true sales consideration.

Investors are one of the many players in the financial markets, who deploy savings when there is a surplus and demand it back when there is need. The terms at which the money will be used or lent is determined by the market place and the investors’ choices have to be framed in this context. The focus, therefore, is not so much on the promises that can be made to the investor, but how well the investors evaluate their own cash-flow needs and that of the seekers of their money.

The summary of an investor’s financial life can be drawn in three columns on a worksheet. The first column holds the cash inflow of the investor. The second shows the drawdown or the outflow that may be needed. The third shows the value of assets the investor has accumulated.

Consider a young investor who has just begun to earn an income. The cash inflow is the salary income, and the outflow is the expense and the assets are those saved, provided expense is lower than the income. If the investor sees himself as earning a steadily rising income and is able to meet most of his needs with this income, he can build long-term growth assets that he need not access at a short notice. In the market place, he may be able to get a better return if he makes such an investment choice.

A retired investor, on the other hand, may find that he has a large asset base representing his accumulated wealth and retirement corpus (column 3), but does not have a steady income from salary (column 1). The assets have to continue to grow in value to meet his growing need for cash as the years go by, given the depleting caused by inflation. Therefore, he is seeking an adequate future cash flow, except that he does not frame the problem thus. Instead, he makes faulty assumptions that a fixed rate of interest represents an adequate cash flow to meet future needs.

Since, he is unwilling to draw from the corpus as he is no longer contributing to it, the investment choices available to him seem unsatisfactory. Instead, if the retirement problem is seen as a diligent management of assets, not all of which are required for immediate cash flow needs, investors can make better choices.

A newly married couple trying to build their financial lives can see how accretions to their income are not translating into an accretion to their assets. They may see that the demands on their cash inflow are too high. If they visualise any cash requirement that exceeds their income, they have no buffer in the form of assets to meet that need. If they resort to borrowing, the EMI takes away even more of the income, leaving too little for anything else. If they work towards better levels of income for themselves and move up in their professions, they will be able to build long-term assets. Until then, they need assets that they can access when needed, and rebuild when possible.

These examples are without doubt an over-simplification. Each investor’s situation could be specifically different, but financial lives can be simplified if the focus is on taking charge of these three elements of accretion (inflow), drawdown (outflow) and accumulation (assets). A financial goal is nothing but a large future cash-flow need, which cannot be met from the regular income, but has to be drawn down from the accumulated assets. A borrowing is nothing but a drawdown from a future income, which may or may not have a matching asset.

The reason I propose this framework is to return the focus to control and management of finances. We may not be able to accurately forecast the future, but we can have a plan for assets we want to build based on aspirations that need drawdowns. Then our choices in investing are completely driven by our needs. We are no longer the ‘entitled’ investors who have to be handed down an ideal product. We are investors in charge of our own lives, making choices based on what we can earn, save and invest. We then focus on our assets and their use for us and, therefore, choose carefully. We monitor them regularly and adjust what we hold based on our need. We can manage the risks to the assets by diversifying well.

How does this approach solve the problem of investment choices? We begin to see everyone else who is seeking our money as cash-flow managers and builders of assets too. We ask what their incomes are, and what their drawdowns are, and if they too would have a surplus. We begin to ask if what they offer matches what we need. We stop looking for tips, tricks, short-cuts, magical methods, assurances, iron men and miracles. We begin to see the market place and find our space there.

Format of a Three Column Cash Book

The common format used in a three-column cash book is shown below.

A company, while computing its earnings per share (EPS) for a defined period, derives the result by dividing the profit generated with the total number of shares outstanding. Here, apart from its profit factor, its earnings can also be affected by the shares outstanding, which is subject to change over time due to multiple factors.

A company thus resorts to a weighted average shares calculation to accurately determine its earnings. It utilises this calculation to arrive at a total of outstanding shares not only at the end of a period but also throughout such duration.

The number of shares in a company changes across a period due to factors like:

• Issue of shares
• Repurchase of shares
• Exercising employee stock option
• Existing shares retiring
• Stock split
• Warrant conversion
• Share buyback

The formula for EPS calculation goes as:

EPS = (Net Income of the Company – Dividend Paid to Preference Shareholders) / Weighted Average Shares Outstanding for the Said Period

The weighted average shares can thus be calculated in the following few steps.

• Identify the count of shares outstanding at the beginning of a concerned period. Also, account all changes in common shares throughout such period.
• Compute and list down an updated total of all common shares after each change.

Here, you must note that any new share issue increases a total count while share repurchase leads to a total share count reduction. Similarly, you must take into account the effects of all changes and compute the total outstanding after each change accordingly.

• Assign a weight to each outstanding share count based on the time gap between one change and the next.

If calculated in days, the weight assigned would be: Total outstanding days / 365

If calculated in months, the weight assigned would be: Total outstanding month / 12

With this weighted average number of shares formula, the calculation of a weighted average of outstanding shares can be accurately done for EPS computation.

AS 13 Accounting for Investments is widely used and deals with accounting for investments in financial statements prepared by a Company and prescribes various disclosure requirements.

Applicability of AS 13 Accounting for Investments

AS 13 Accounting for Investments doesn’t deal with the following:

• The base for recognizing dividends, interest, and rentals which are earned on the investments that are covered by AS 9
• Finance or operating leases which are covered by AS 19
• Investments in retirement benefit plans and life insurance enterprises which is covered by AS 15
• The following which is formed under the Central or the State Government Act or declared under Companies Act, 2013

1. Mutual Funds
2. Venture Capital Funds and related Asset Management Companies
3. Banks as well as public financial institutions

Disclosures in the Financial Statements

The below mentioned are the disclosures in the financial statements with respect to AS 13 Accounting for Investments is applicable:

(a) Accounting policies employed for determining carrying amount of investment.

(b) The amounts which are included in the profit and loss statement for:

(i) Dividends, interest, and rentals on the investments presenting the income from such long-term and current investments separately. Gross income must be stated, amount of TDS (tax deducted at source) included under the Advance Taxes Paid.

(ii) Profits and losses on the disposal of current investment and the changes in carrying the amount of the investment.

(iii) Profits and losses on the disposal of long-term investment and the changes in carrying the amount of the investment.

(c) Substantial limitations on the right of ownership, realizability of the investments or remittance of income and proceeds of disposal.

(d) The total amount of both the quoted and unquoted investments, providing the total market value of the quoted investments.

(e) Other disclosures as explicitly as required by the relevant statute governing the.

Treatment

The following points should carefully be remembered:

(a) For Dividend Received:

(i) If we receive dividend from Pre-incorporation profit, the same must be recorded in Nominal Column.

(ii) If we receive dividend from Post-acquisition Profit/Current Profit, such dividend must be recorded in Interest Column.

(b) For Bonus Shares and Right Shares:

If bonus shares are received, entry is made in the debit side of Investment Account in ‘Nominal’ column only and nothing is to be recorded in ‘Principal’ column. In other words, when bonus shares are received, their face value is simply shown in the Investment Account stated above. But in the case of Right shares, the shareholders have the right to avail the ‘Right’ himself or he can refer to third party. The face value of such right shares are recorded in the ‘Nominal’ column and the amount so’ paid in this regard is to be entered in the ‘Principal’ column. But in the case of sale, the amount so received against the sale of ‘Right’ will be entered on the credit side of Investment Account in ‘Principal’ column.

Broker’s Account:

A Broker purchases and sells securities on behalf of his clients. Practically, purchases and sales are made in the name of the client on his information without the receipt of cash or scripts and, consequently, the settlement of payment is made by payment of difference not by actual delivery or by payment.

However, the cost price of the share along with brokerage is debited in client’s account and similarly, the sales minus brokerage is credited in his account against the particular share. It should be remembered in this respect that brokerage should always be calculated on the face/nominal value of shares and not on the cost/selling price of the same (No brokerage is usually charged on sale if the same shares are purchased and sold in the same settlement day).

It has already been stated that the accounts are settled on the settlement or contango day at the end of settlement period. The period may be either 15 days or one month. If, however, the party does not want to settle the account he may carry forward to the next settlement period and the difference after carrying forward is made by Cash. For this carry forward, the broker makes a charge. The charge is called contango when the payment is due and the same is called backwadation when the delivery is due.

The proportionate contango or backwadation in relation to the portion of settlement period which falls in the next year is carried forward at the time of closing the accounts.

Conversion of Convertible Debentures into Equity Shares:

Sometimes Convertible Debentures may be converted into Equity Shares.

Under the circumstances we are to pass the following entry:

• Convertible Debentures into Equity Shares

  Equity Shares in …………Co. Ltd            Dr.

      To (Convertible) Debentures of….Co. Ltd A/c

It must be remembered that if there is loss on conversion such loss may be adjusted against General Reserve.

In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency.

The exchange rate is defined as the rate on the basis of which two countries involved in trade exchange marketable items or commodities. It is basically the cost of exchanging one currency for another currency.

In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency. The quoted rates will incorporate an allowance for a dealer’s margin (or profit) in trading, or else the margin may be recovered in the form of a commission or in some other way.

Different rates may also be quoted for different kinds of exchanges, such as for cash (usually notes only), a documentary form (such as traveler’s checks), or electronic transfers (such as a credit card purchase). There is generally a higher exchange rate on documentary transactions (such as for traveler’s checks) due to the additional time and cost of clearing the document, while cash is available for resale immediately.

Therefore, the exchange rate can be calculated as per the below-mentioned relationship:

Exchange Rate = Money in Foreign Currency / Money in Domestic Currency

Additionally, it can also be determined as per the below-mentioned relationship:

Exchange Rate = Money in After Exchange / Money Before Exchange

The equation for the exchange rate can be calculated by using the following steps:

• First, determine the amount that is to be transferred or exchanged from domestic currency to foreign currency.
• Next, the individual can access foreign exchange markets through trading platforms or through financial institutions to determine the available exchange rates prevalent between the two nations.
• Next, multiply the exchange rate with the domestic currency to arrive at the foreign currency.

Model

Purchasing Power Parity

Purchasing power parity is a way of determining the value of a product after adjusting for price differences and the exchange rate. Indeed, it does not make sense to say that a book costs $20 in the US and £15 in England: the comparison is not equivalent. If we know that the exchange rate is £2/$, the book in England is selling for $30, so the book is actually more expensive in England

If goods can be freely traded across borders with no transportation costs, the Law of One Price posits that exchange rates will adjust until the value of the goods are the same in both countries. Of course, not all products can be traded internationally (e.g. haircuts), and there are transportation costs so the law does not always hold.

The concept of purchasing power parity is important for understanding the two models of equilibrium exchange rates below.

Balance of Payments Model

The balance of payments model holds that foreign exchange rates are at an equilibrium level if they produce a stable current account balance. A nation with a trade deficit will experience a reduction in its foreign exchange reserves, which ultimately lowers, or depreciates, the value of its currency. If a currency is undervalued, its nation’s exports become more affordable in the global market while making imports more expensive. After an intermediate period, imports will be forced down and exports will rise, thus stabilizing the trade balance and bringing the currency towards equilibrium.

Asset Market Model

Like purchasing power parity, the balance of payments model focuses largely on tangible goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. The flows from transactions involving financial assets go into the capital account item of the balance of payments, thus balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model.

Accounting Treatment of Exchange Difference Approach # 1. Single Transaction Approach:

Single transaction approach is based on the premise that any transaction and its settlement is a single event. So if any exchange difference is there that may be charged to cost of goods purchased or to an export sale.

Accounting Treatment of Exchange Difference Approach # 2. Double Transaction Approach:

In contrast to single transaction approach, Dual transaction approach considers exchange element separately, hence emphasizes on accounting treatment of both separately. In other words, purchase or sale is recorded in the books of accounts at the exchange rate prevailing at the date of transaction and adjustments are not made for any change in exchange rates. These changes in exchange rates on different dates are treated as expenses and charged to loss on foreign exchange account.