Tag: Event Management

Not all entrepreneurs are from a sound financial background. Most will need initial loans on reasonable interest rate in order to generate capital to start their venture or enterprise. It is self-explanatory but without funds, entrepreneurs cannot grow, and this is where banks, particularly commercial banks play a significant role in the lives of entrepreneurs. Once an enterprise or business is set-up, then comes the important part, funding the cash cycle.

There will be a delay in cash after selling products due to credit period provided to customers. But entrepreneurs will have to make payments upfront to service providers. Banks will help in providing working capital assistance that becomes the lifeline of companies. Apart from that, banks will also provide financial help on regular basis like during expansion or play the role of middleman to connect entrepreneurs. Banks can connect people with huge pockets to people with great ideas. Banks are great advisers as well, they can suggest young entrepreneurs invest their money on shares or commodities to earn more and without any interest rate.

Ethical manufacturing is a holistic approach to the manufacturing process that focuses on good health for all involved. This means that a product’s design, creation, and use maintain sustainable standards and that the item and the process of making these have a positive impact on communities.

An ethical manufacturer has oversight and cares about each section of their business and their own supply chain, prioritising the well-being of both customers and staff, as well as the environment in which they work, shop, and source materials.

Ethical businesses want to operate in the best interest of workers. The health and happiness of staff become priorities, going beyond the standard legal requirements. This means that safety is not sacrificed, and workers are treated fairly. In turn, this can benefit a business through a boost in productivity and staff retention.

Ethics in production is a subset of business ethic that is meant to ensure that the production function or activities are not damaging to the consumer or the society. Like other ethics there is a certain code of conduct or standards to be followed, however ensuring that the ethics are complied with is often difficult.

One of the most important characteristic of the business today is that there is a great degree of interdependence between various business functions. Production cannot happen without marketing and sales and vice versa.

In order to survive in the competitive sphere organizations try to reduce the costs involved in production processes. This cost efficiency is sometimes achieved at the cost of quality. Poor processes and technology is used to keep the cost down, this is especially true for small players who cannot afford economies of scale. Having said this there are also examples of industry giants that compromised on certain production processes, cola companies make up for a good example.

All the production functions are governed by production ethics but there are certain that are severely harmful or deleterious which need to be monitored continuously. The following are worth mentioning:

1. There are ethical problems arising out of use of new technologies that are deleterious to health, safety and environment. Technological advancements like genetically modified food, radiations from mobile phones, medical equipment etc are less problems are more of dilemmas.
2. Defective services and products or products those are innately deleterious like alcohol, tobacco, fast motor vehicles, warfare, chemical manufacturing etc.
3. Animal testing and their rights or use of economically or socially deprived people for testing or experimentation is another area of production ethics.
4. Ethics of transactions between the organization and the environment that lead to pollution, global warming, increase in water toxicity and diminishing natural resources.

Dilemma of Ethics in Production

There are certain processes involved in the production of goods and a slight error in the same can degrade the quality severely. In certain products the danger is greater i.e. a slight error can reduce the quality and increase the danger associated with consumption or usage of the same exponentially. The dilemma therefore lies in defining the degree of permissibility, which in turn depends on a number of factors. Bhopal gas tragedy is one example where the poisonous gas got leaked out due to negligence on the part of the management.

Usually many manufactures are involved in the production of same good. They may use similar or dissimilar technologies for the same. Setting a standard in case of dissimilar technologies is often very difficult. There are many other factors that contribute to the dilemma, for example, the involvement of the manpower, the working conditions, the raw material used etc.

Social perceptions also create an impasse sometimes. For example the use of some fertilizer by cola companies in India recently created a national debate. The same cold drinks which were consumed till yesterday became noxious today because of a change in the social perception that the drinks are not fit for consumption.

A Subsidiary must be excluded from the consolidation when:

• Control is planned to be temporary since the subsidiary was taken over and was held exclusively for disposal in the near future, or
• The subsidiary is operating under severe long-standing restrictions that considerably impair the subsidiary’s ability to transfer funds to its parent

In a consolidated financial statement, investments in such subsidiaries must be accounted for as per AS 13 Accounting for Investments.

Reasons for which a subsidiary isn’t included in the consolidation must be disclosed in such consolidated financial statements.

Consolidation Procedures

While preparing a consolidated financial statement, the parent company’s financial statements and its subsidiaries must be combined line by line by totaling together similar items such as assets, liabilities, income, and expenses.

For consolidating financial statements in a way to present financial information about a group as that of a lone enterprise, the below-motioned steps must be taken:

1. Eliminate the cost to the parent of its investment made in each of its subsidiaries and such parent’s equity portion of each of its subsidiaries, at the date when the investment in such subsidiaries are made
2. any additional cost to the parent company of the investment in the subsidiary over the parent company’s share of the equity of subsidiary, at the date on which the investment in such subsidiary is done, must be shown as goodwill for recognizing as the asset in its consolidated financial statements
3. when the cost to the parent of the investment in the subsidiary is lower than the parent company’s share of the equity of subsidiary, a date on which the investment in such subsidiary is done, the difference must be treated as the capital reserve in its consolidated financial statements
4. a portion of minority interests in net income of the consolidated subsidiary for reporting period must be recognized and adjusted against income of the group for arriving at the net income which is attributable to owners of such parent company; and
5. a portion of minority interests in net assets of the consolidated subsidiaries must be recognized and provided for in consolidated balance sheet distinctly from the equity and liabilities of the parent company.
6. Minority interests in net assets comprise of:

• amount of equity which is attributable to the minorities at the date on which such investment in the subsidiary is done; and
• minorities’ share of the movements in equity from the date the relationship of parent-subsidiary came in to force

1. Where carrying investment amount in a subsidiary is different from the cost, such carrying amount is to be considered for the above calculations.

Accounting for Investments in the Subsidiaries in Separate Financial Statement of the Parent

In a parent company’s separate financial statements, the investments made in subsidiaries must be accounted for as per AS 13 – Accounting for Investments.

Disclosures in the Financial Statements

Following disclosures must be made w.r.t. AS 21 Consolidated Financial Statements:

1. in the consolidated financial statements the list of all the subsidiaries of the parent company which includes the name, country of residence or incorporation, the share of ownership interest and, in case different, the share of voting power held
2. In case the consolidation of a particular subsidiary hasn’t been made according to the grounds permissible in the accounting standard, reasons for which such subsidiary isn’t included in the consolidation must be disclosed in such consolidated financial statements
3. in the consolidated financial statements, where valid:

• type of relationship between a parent and its subsidiary, whether direct control or indirect control through the subsidiaries
• effect of acquisition and disposal of the subsidiaries on the financial position at the date of reporting results for the reporting period and on corresponding amounts for the preceding period; and
• Name of the subsidiary(s) of which reporting date(s) is different

IAS 27 Consolidated and Separate Financial Statements outlines when an entity must consolidate another entity, how to account for a change in ownership interest, how to prepare separate financial statements, and related disclosures. Consolidation is based on the concept of ‘control’ and changes in ownership interests while control is maintained are accounted for as transactions between owners as owners in equity.

IAS 27 was reissued in January 2008 and applies to annual periods beginning on or after 1 July 2009, and is superseded by IAS 27 Separate Financial Statements and IFRS 10 Consolidated Financial Statements with effect from annual periods beginning on or after 1 January 2013.

Objectives of IAS 27

IAS 27 has the twin objectives of setting standards to be applied:

• In the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent;
• In accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

Definitions [IAS 27.4]

Consolidated financial statements: the financial statements of a group presented as those of a single economic entity.

Subsidiary: an entity, including an unincorporated entity such as a partnership that is controlled by another entity (known as the parent).

Parent: an entity that has one or more subsidiaries.

Control: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Scope

This Standard shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.

This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see Ind AS 103 Business Combinations).

This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by law, to present separate financial statements.

Definitions

The following terms are used in this Standard with the meanings specified:

Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

A group is a parent and all its subsidiaries.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

A parent is an entity that has one or more subsidiaries.

Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

A parent or its subsidiary may be an investor in an associate or a venturer in a jointly controlled entity. In such cases, consolidated financial statements prepared and presented in accordance with this Standard are also prepared so as to comply with Ind AS 28 Investments in Associates and Ind AS 31 Interests in Joint Ventures.

6 For an entity described in paragraph 5, separate financial statements are those prepared and presented in addition to the financial statements referred to in paragraph 5. Separate financial statements need not be appended to, or accompany, those statements, unless required by law.

The financial statements of an entity that does not have a subsidiary, associate or venturers interest in a jointly controlled entity are not separate financial statements.

8 [Refer to Appendix 1]

A parent shall present consolidated financial statements in which it consolidates its investments in subsidiaries in accordance with this Standard. Where a parent is a company, the consolidated financial statements shall be in the form set out in Appendix C to this Standard or as near thereto as circumstances admit.

A parent presents separate financial statements in compliance with paragraphs 3843.

Scope of Consolidated Financial Statements

Consolidated financial statements shall include all subsidiaries of the parent.

Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:

Footnotes:

If on acquisition a subsidiary meets the criteria to be classified as held for sale in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations, it shall be accounted for in accordance with that Indian Accounting Standard.

See also Appendix A Consolidation Special Purpose Entities.

(a) power over more than half of the voting rights by virtue of an agreement with other investors;

(b) power to govern the financial and operating policies of the entity under a statute or an agreement;

(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or

(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares3, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another partys voting power over the financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert such rights.

A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual fund, unit trust or similar entity.

A subsidiary is not excluded from consolidation because its business activities are dissimilar from those of the other entities within the group. Relevant information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by Ind AS 108 Operating Segments help to explain the significance of different business activities within the group.

A parent company that presents its consolidated financial statements must consolidate all of its subsidiaries, foreign as well as domestic.

Where a company doesn’t have any subsidiary, however, has associates and/or joint ventures such company also needs to prepare consolidated financial statements as per Accounting Standard 23 – Accounting for Associates in Consolidated Financial Statements and Accounting Standard 27 – Financial Reporting of Interests in JVs respectively.

Scope

• This Standard shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.
• This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see Ind AS 103 Business Combinations).
• This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by law, to present separate financial statements.

Derecognition refers to the removal of an asset or liability (or a portion thereof) from an entity’s balance sheet. Derecognition questions can arise with respect to all types of assets and liabilities. This project focuses on financial instruments. Questions regarding derecognition of assets and liabilities often arise in the context of certain special purpose entities and whether those entities should be included in a set of consolidated financial statements.

Derecognition is the removal of a previously recognized financial asset or financial liability from an entity’s balance sheet. A financial asset should be derecognized if either the entity’s contractual rights to the asset’s cash flows have expired or the asset has been transferred to a third party (along with the risks and rewards of ownership). If the risks and rewards of ownership have not passed to the buyer, then the selling entity must still recognize the entire financial asset and treat any consideration received as a liability.

The IASB agreed to consider both a comprehensive project on derecognition or all types of assets and liabilities and also a separate, narrower scope project that would explore the need to revise guidance in IAS 39 Financial Instruments: Recognition and Measurement in the area of derecognition of financial instruments. This limited scope project would address questions that have arisen with regard to the application of conflicting aspects of IAS 39’s guidance on derecognition. The project would result in an amendment to IAS 39 possibly through issuance of a separate standard on derecognition that supersedes that section of IAS 39.

Standard IAS 39 provides extensive guidance on derecognition of a financial asset. Before deciding on derecognition, an entity must determine whether derecognition is related to:

1. A financial asset (or a group of similar financial assets) in its entirety, or
2. A part of a financial asset (or a part of a group of similar financial assets). The part must fulfil the following conditions (if not, then asset is derecognized in its entirety):

• The part comprises only specifically defined cash flows from a financial asset (or group)
• the part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or group)
• the part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or group)

An entity shall derecognize the financial asset when:

• The contractual rights to the cash flows from the financial asset expire, or
• an entity transfers the financial asset and the transfer qualifies for the derecognition

Transfers of financial assets are discussed in more details. First of all, an entity must decide whether the asset was transferred or not. Then, if the financial asset was transferred, the entity must determine whether also risks and rewards from the financial asset were transferred.

Derecognition of a financial liability

A financial liability should be removed from the balance sheet when, and only when, it is extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or expires. [IAS 39.39] Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss. [IAS 39.40-41]

Financial instrument: a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Assets

Any asset that is:

• Cash
• An equity instrument of another entity
• A contractual right

1. to receive cash or another financial asset from another entity; or
2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or

• a contract that will or may be settled in the entity’s own equity instruments and is:
• a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments
• puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Financial Liabilities

Any liability that is:

1. a contractual obligation:

• To deliver cash or another financial asset to another entity;
• To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or

2. a contract that will or may be settled in the entity’s own equity instruments and is

• a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments or
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include: instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments; puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments

Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Fair value: The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

The definition of financial instrument used in IAS 32 is the same as that in IAS 39.

Puttable instrument: a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on occurrence of an uncertain future event or the death or retirement of the instrument holder.

Classification as liability or equity

The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument. Two exceptions from this principle are certain puttable instruments meeting specific criteria and certain obligations arising on liquidation. The entity must make the decision at the time the instrument is initially recognised. The classification is not subsequently changed based on changed circumstances. [IAS 32.15]

A financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation to deliver cash or another financial asset to another entity and (b) if the instrument will or may be settled in the issuer’s own equity instruments, it is either:

• A non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
• A derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. [ias 32.16]

Objective of IAS 32

The stated objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and liabilities. [IAS 32.1]

IAS 32 addresses this in a number of ways:

• Clarifying the classification of a financial instrument issued by an entity as a liability or as equity
• Prescribing the accounting for treasury shares (an entity’s own repurchased shares)
• Prescribing strict conditions under which assets and liabilities may be offset in the balance sheet.

Parties to Financial Instruments: In case of Financial Instruments, the two parties are called:

• Issuer of an Instrument who presents it on the Liability side of the Balance Sheet as per Schedule III- Division II.
• Holder of an Instrument who presents it on the Asset side of the Balance Sheet as per Schedule III- Division II.

An analysis of Schedule III- Division II gives us an insight as under:

1. Asset segregated into non-current and current; further segregated in terms on non-financial and financial in nature.
2. Liability is segregated into Equity and Liability; liabilities are split in terms of non-current and current and further segregated in terms of non-financial and financial in nature.

IAS 32 applies in presenting and disclosing information about all types of financial instruments with the following exceptions: [IAS 32.4]

• Interests in subsidiaries, associates and joint ventures that are accounted for under IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates or IAS 31 Interests in Joint Ventures (or, for annual periods beginning on or after 1 January 2013, IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures). However, IAS 32 applies to all derivatives on interests in subsidiaries, associates, or joint ventures.
• Employers’ rights and obligations under employee benefit plans (see IAS 19 Employee Benefits)
• Insurance contracts (see IFRS 4 Insurance Contracts). However, IAS 32 applies to derivatives that are embedded in insurance contracts if they are required to be accounted separately by IAS 39
• Financial instruments that are within the scope of IFRS 4 because they contain a discretionary participation feature are only exempt from applying paragraphs 15-32 and AG25-35 (analysing debt and equity components) but are subject to all other IAS 32 requirements
• Contracts and obligations under share-based payment transactions (see IFRS 2 Share-based Payment) with the following exceptions:
• This standard applies to contracts within the scope of IAS 32.8-10 (see below)
• Paragraphs 33-34 apply when accounting for treasury shares purchased, sold, issued or cancelled by employee share option plans or similar arrangements