Revised Statement of Affairs

Revised Statement of Affairs is a comprehensive financial statement used to ascertain the financial position of a business, particularly during insolvency or bankruptcy proceedings. Unlike a basic statement of affairs that is used for determining the capital by listing assets and liabilities, the revised statement provides a more detailed and realistic picture by valuing assets based on their realizable value rather than book value. It also categorizes liabilities according to their priority in repayment. This type of statement is primarily prepared when a business is undergoing liquidation, or when stakeholders require an accurate assessment of the company’s solvency status.

Purpose of Revised Statement of Affairs

The main purposes of preparing a revised statement of affairs include:

• Assessing Solvency:

It helps determine whether the company’s assets are sufficient to cover its liabilities.

• Providing Realizable Values:

Unlike the basic statement of affairs, the revised version provides the actual or estimated amounts that can be obtained from the sale of assets.

• Prioritizing Liabilities:

It classifies liabilities into secured, unsecured, preferential, and contingent, ensuring proper order of repayment in case of liquidation.

• Reporting to Stakeholders:

It offers creditors, shareholders, and other stakeholders a clear understanding of the company’s financial health.

Components of Revised Statement of Affairs

A typical revised statement of affairs includes the following sections:

1. Assets (Listed by Realizable Value):
   Assets are listed with their estimated realizable values, which are the amounts expected to be obtained upon their sale. These assets can be categorized as:
   • Fixed Assets: Land, buildings, plant, machinery, etc.
   • Current Assets: Inventory, debtors, cash, etc.
   • Other Assets: Investments, intangible assets, etc.
2. Liabilities (Listed by Priority):
   Liabilities are categorized and listed in the order of priority in which they need to be paid. These categories include:
   • Secured Liabilities: Loans or borrowings backed by specific assets (e.g., mortgage).
   • Preferential Liabilities: Liabilities that are legally required to be paid before other debts, such as unpaid wages and taxes.
   • Unsecured Liabilities: Creditors who do not have any security against the loan.
   • Contingent Liabilities: Potential liabilities that may or may not materialize, depending on future events.
3. Capital:
   This represents the equity or ownership interest in the business after deducting liabilities from assets.

Steps to Prepare a Revised Statement of Affairs

• List Assets with Realizable Values:

All assets should be listed with their realizable values. This requires assessing the market conditions and estimating what the business can reasonably expect from selling the assets.

• Classify Liabilities:

Classify liabilities based on their nature and priority. Ensure that secured liabilities are listed first, followed by preferential, unsecured, and contingent liabilities.

• Calculate Deficiency or Surplus:

The difference between total assets and total liabilities indicates whether the company has a surplus or a deficiency. A deficiency occurs when liabilities exceed assets, while a surplus indicates that assets are greater than liabilities.

Example of Revised Statement of Affairs:

Let’s take an example where a company, ABC Ltd., is undergoing liquidation. The details of its assets and liabilities are as follows:

Assets

Liabilities

Analysis

1. Total Realizable Value of Assets: ₹77,50,000
2. Total Liabilities: ₹78,00,000
3. Deficiency:

   Since total liabilities exceed total realizable assets by ₹50,000, the company has a deficiency of ₹50,000.

Interpretation of the Revised Statement of Affairs:

• Secured Creditors:

The secured creditors will be paid first using the realizable value of the mortgaged assets. If the realizable value is insufficient, the remaining balance becomes part of unsecured liabilities.

• Preferential Creditors:

After paying the secured creditors, the next priority is given to preferential creditors, such as unpaid wages and government dues.

• Unsecured Creditors:

Once secured and preferential liabilities are settled, the remaining amount is used to pay unsecured creditors.

• Deficiency to Owners:

If liabilities still exceed assets after settling all creditors, the remaining deficiency is borne by the owners or shareholders, reducing their equity to zero.