Tag: Financial Statements

Management Notes

Preparation of Final accounts of General insurance

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The financial statements of general insurance companies must be in conformity with the regulations of IRDA, Schedule B.

It has three parts: viz:

(a) Revenue Account;

(b) Profit and Loss Account, and

(c) Balance Sheet.

Revenue Account (Form B-RA):

The Revenue Account of general insurance companies must be prepared in conformity with the regulations of IRDA, Regulations 2002, as per the requirements of Schedule B. It has already been stated above that separate Revenue Account is to be prepared for each individual unit i.e. for Marine, Fire, and Accident.

These individual revenue accounts will highlight the result of operation of each individual unit for a particular accounting period. It also reveals the incomes and expenditures of each individual unit. Like Revenue Account of a life insurance company, Revenue Account is prepared under Mercantile System of Accounting.

Items appearing in Revenue Account:

Premiums:

It has already been stated above that general insurance policies are issued for a short period, say, for a year. As a result, many of them may be unexpired at the end of the year. Therefore, the entire premium so received cannot be treated as an income for the current year only. A portion of that amount should be carried forward to the next year in order to cover the unexpired risks. This is what is known as Reserve for Unexpired Risks.

As per Schedule IIB of the IRDA the Reserve for Unexpired Risks should be provided for out of net premium so received as:

(a) 50% for Fire Insurance business;

(b) 50% for Miscellaneous Insurance business;

(c) 50% for Marine Insurance business other than Marine Hull business, and

(d) 100% for Marine Hull business.

In addition to the above, if any company wants to maintain more than this level, it can do so. The same is known as Additional Reserve.

Claims Incurred (Net):

It is the first item that appears in the expenditure side of the Revenue Account of an insurance company. Claims mean the amount which is payable by the insurer, to the insured for the loss suffered by the latter against which the insurance was made.

Claims can be divided into:

(a) Claims intimated but not yet accepted and paid;

(b) Claims intimated, accepted but not paid;

(c) Claims intimated, accepted and paid; and

(d) Claims rejected. But if there is only ‘Claims intimated’ the same is to be treated like (b). That is why, in order to find out the outstanding claims, claims that have been intimated (whether paid or unpaid) should be considered.

At the end of the year the entry for the purpose will be:

Claims A/c             Dr.

To Claims Intimated Accepted but Not Paid A/c

Claims Intimated but Not Accepted and Not Paid A/c

A reverse entry should be passed at the beginning of the next year for which there will be no effect in Claims Account. But, if any claim is rejected subsequently, the amount is to be transferred to Profit and Loss Account and Claims Account must be credited for the purpose.

Commissions:

Insurance Regulatory and Development Authority Act, 1999, regulates the amount of commission which is payable on policies to the agents.

Operating Expenses:

Operating expenses will come under Schedule 4 of the Act. All revenue expenses other than the commission and claims will appear under this head.

Some of the operating expenses are:

Training Expenses; Rent, Rates and Taxes; Repairs; Printing and Stationery; Legal and Professional Expenses; Advertisement and Publicity, Interest on Bank Charges, etc.

Profit and Loss Account (Form B-Pl):

In order to find out the overall performance or results of the operating of general insurance business Profit and Loss Account of the General Insurance Companies is prepared. It also takes into account the income from investment by way of interest, dividend, Rent Profit/Loss on sale of investments. Provision for Taxations and Provision for Doubtful Debts, if any, should also be provided for.

Similarly, other expenses related to insurance business and bad debts written-off also will be adjusted to this account. However, appropriation section of Profit and Loss Account will contain payment of interim dividend; proposed dividend; transfer to any reserve i.e. appropriation items.

Balance Sheet (Form B-Bs):

The Balance Sheet of a general insurance company as per IRDA format is divided into two parts, viz. Source of Funds and Application of Funds. It is prepared in vertical form.

Sources of Funds:

It consists of:

(i) Share Capital (Schedule 5):

Various classes of Share Capital viz. Authorized Capital, Issued, Subscribed, Called-up and Paid up capital are separately shown.

(ii) Reserves & Surplus- (Schedule 6):

All kinds of reserves will appear under this head, viz. Securities Premium, Balance of Profit and Loss Account, General Reserve, Capital Redemption Reserve, Capital Reserve, etc.

(iii) Borrowings (Schedule 7):

Long term borrowings viz. Bonds, Debentures, Bank Loans, taken from various financial institutes will appear under this head.

Applications of Funds:

It consists of:

(i) Investments — (Schedule 8):

All kinds of investments, whether long-term or short-term, will appear under this schedule.

(ii) Loans— (Schedule 9):

Different kinds of loans clearly specified, viz. (a) Security-wise, Borrower-wise, performance-wise, and maturity-wise classification.

(iii) Fixed Assets (Schedule 10):

All fixed assets viz. Goodwill, Intangibles, Land and Building, Freehold/Leasehold Property, Furniture & Fixture, etc. will appear in this schedule.

(iv) Current Assets:

This section has two parts:

(a) Cash and Bank Balances (Schedule 11):

All cash and bank balances lying at Deposit Account and Current Account, Money-at-call and short notice etc. will appear in the Schedule.

(b) Advances and Other Assets (Schedule 12):

All advances (short-term) and other assets, if any, will appear in this Schedule.

(v) Current Liabilities (Schedule 14):

All current liabilities viz., Agents’ balances, Premium Received in Advance, Sundry Creditors, Claims Outstanding etc.

(vi) Provisions— (Schedule 15):

All kinds of provisions viz., Reserve for Unexpired Risk; Provision for Taxation, Proposed Dividend, Others.

New Format for Financial Statement:

According to Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002, every general insurance company must prepare as per Schedule B of the Regulations the following three statements for preparation and presentation of financial statements:

For General Insurance:

Revenue Account— Form B-RA

Profit and Loss Account — Form B-PL

Balance Sheet — Form B-BS

Thus, in short, every general insurance company is required to prepare a Revenue Account (Form B-RA); Profit and Loss Account (Form B-PL) and Balance Sheet (Form B-BS).

Management Notes

Interest on doubtful debts

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(a) Interest Suspense Method:

From the standpoint of conservatism, interest on doubtful loans should be transferred to Interest Suspense Account and, at the same time, when the interest is realized (either in part or whole) the same is credited.

 

(b) Cash Basis Method:

No separate entry is required for Interest on doubtful loans. Since interest on such loans comes under Non-performing Assets, as such, such interest should not be recognized from conservatism point of view cash basis method is the best one.

The entries are:

(c) Accrual Basis Method:

Under this method, the whole amount of interest is to be credited and, at the same time, a provision should also be made for such interest to Bad and Doubtful Debts Account.

The entries under this method are:

Management Notes

Relationship between Provisions and Contingent liability

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Provision

A provision is a decrease in asset value and should be recognized when a present obligation arises due to a past event. The timing as to when the said obligation arises and the amount is often uncertain. Commonly recorded provisions are, provision for bad debts (debts that cannot be recovered due to insolvency of the debtors) and provision for doubtful debts (debts that are unlikely to be collected due to possible disputes with debtors, issues with payments days etc.) where the organization makes an allowance for the inability to collect funds from their debtors due to nonpayment. Provisions are reviewed at the financial year end to recognize the movements from the last financial year’s provision amount and the over provision or under provision will be charged to the income statement. The usual provision amount for a provision will be decided based on company policy.

Basic accounting treatment for recognizing a provision is,

Expense A\C                              Dr

Provision A\C                            Cr

Contingent Liability

For a contingent liability to be recognized there should be a reasonable estimate of a probable future cash outflow based on a future event. For instance, if there is a pending lawsuit against the organization, a possible cash payment may have to be made in the future in case the organization loses the lawsuit. Either winning or losing the lawsuit is not known at present thus the occurrence of the payment is not guaranteed. The recording of the contingent liability depends on the probability of the occurrence of the event that gives rise to such liability. If a reasonable estimate cannot be made regarding the amount, the contingent liability may not be recorded in the financial statements. Basic accounting treatment for recognizing a contingent liability is,

Cash   A\C                                       Dr

Accrued Liability A\C                   Cr

Contingent Liabilities

Provisions
Recorded at present to account for future possible outflows events. Accounting for the present, due to past events.
Occurrence is conditional or not certain. Occurrence is certain.
Reasonable estimation is made for the future amount to be paid. Amount is not largely certain.
Recorded in Statement of financial position: increase in company’s liabilities. Recorded in Statement of financial position: decrease in company’s assets.
Not recorded in the income statement. Recorded in income statements.

Management Notes

Investment Property (Ind AS 40), Concepts, Meaning, Definitions, Objectives, Scope, Recognition, Measurement, Transfer Disclosure Requirements and Importance

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Investment Property is property (land or a building, or part of a building, or both) held by an entity to earn rentals, for capital appreciation, or both, rather than for use in the production or supply of goods or services, administrative purposes, or sale in the ordinary course of business. Ind AS 40 prescribes the accounting treatment for investment property and the related disclosure requirements. The standard helps distinguish investment property from owner-occupied property and inventories, ensuring consistent recognition, measurement, and presentation in financial statements.

Meaning of Investment Property

Investment property refers to land, buildings, or parts of buildings that are held to earn rental income, for long-term capital appreciation, or for both purposes. Unlike owner-occupied property, investment property is not used in the production of goods or services or for administrative functions. Similarly, it is not held for sale in the ordinary course of business. Examples include office buildings leased to tenants, land held for future appreciation, and commercial properties rented to others. Proper classification under Ind AS 40 ensures accurate accounting treatment and helps users of financial statements understand the purpose of such properties.

Definitions under Ind AS 40 – Investment Property

  • Investment Property

Investment property is land, a building, or part of a building held by the owner or by the lessee as a right-of-use asset to earn rentals, for capital appreciation, or both. It is not used in the production or supply of goods or services, for administrative purposes, or held for sale in the ordinary course of business. Examples include office buildings leased to tenants, land held for future value appreciation, and commercial properties rented out. Investment property generates independent cash flows and is accounted for under Ind AS 40, ensuring consistent recognition, measurement, and disclosure in financial statements.

  • Owner-Occupied Property

Owner-occupied property refers to property held by an entity for use in the production or supply of goods or services or for administrative purposes. Such property is not intended to earn rental income or capital appreciation. Examples include factories, office buildings occupied by the entity, warehouses used for business operations, and administrative offices. These properties are accounted for under Ind AS 16, Property, Plant and Equipment, rather than Ind AS 40. The distinction between owner-occupied property and investment property is essential because each category follows different accounting principles and disclosure requirements.

  • Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under Ind AS 40, although investment property is subsequently measured using the cost model, entities are required to disclose its fair value whenever it can be measured reliably. Fair value reflects current market conditions and provides users of financial statements with relevant information about the property’s economic worth. It supports better investment decisions and enhances transparency in financial reporting.

  • Carrying Amount

The carrying amount is the amount at which an investment property is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses. It represents the book value of the property in the financial statements. Under Ind AS 40, investment property is carried using the cost model in accordance with Ind AS 16. The carrying amount changes over time due to depreciation, impairment, additions, or disposals. This value helps stakeholders understand the recorded worth of investment property at the reporting date.

  • Capital Appreciation

Capital appreciation refers to the increase in the market value of a property over time. Investment property is often held with the expectation that its value will rise, allowing the owner to earn profit upon sale. Land located in developing commercial areas is a common example of property held for capital appreciation. Under Ind AS 40, properties held primarily for this purpose qualify as investment property. Recognising capital appreciation as a purpose of holding property helps distinguish investment property from owner-occupied property or inventory.

Objectives of Ind AS 40 – Investment Property

  • To Prescribe Accounting Treatment for Investment Property

The primary objective of Ind AS 40 is to prescribe the accounting treatment for investment property. It establishes principles for recognising, measuring, presenting, and disclosing properties held to earn rental income or for capital appreciation. The standard ensures that investment property is accounted for consistently across different entities. By providing a structured accounting framework, it helps organisations maintain accurate financial records and present reliable financial information. This objective improves the quality of financial reporting and enables stakeholders to understand the value and performance of investment properties more effectively and make informed financial decisions confidently.

  • To Distinguish Investment Property from Other Properties

Ind AS 40 aims to clearly distinguish investment property from owner-occupied property and inventory. Investment property is held to earn rentals or for capital appreciation, whereas owner-occupied property is used in business operations, and inventory is held for sale. This distinction ensures that each category of property is accounted for under the appropriate accounting standard. Proper classification prevents accounting errors and improves consistency in financial reporting. It enables users of financial statements to understand the purpose for which a property is held and evaluate an entity’s assets more accurately and effectively.

  • To Ensure Consistent Recognition of Investment Property

Another objective of Ind AS 40 is to provide uniform recognition criteria for investment property. The standard requires investment property to be recognised as an asset only when future economic benefits are likely to flow to the entity and its cost can be measured reliably. These recognition conditions prevent inappropriate recording of assets and ensure that only qualifying properties appear in financial statements. Consistent recognition improves the reliability and credibility of accounting information. It also provides stakeholders with confidence that reported investment properties represent genuine economic resources capable of generating future benefits.

  • To Provide Proper Measurement Principles

Ind AS 40 aims to establish appropriate measurement principles for investment property. It requires investment property to be initially measured at cost, including purchase price and directly attributable expenses. After initial recognition, entities follow the cost model in accordance with Ind AS 16 while also disclosing fair value information. These measurement requirements ensure that investment properties are recorded at realistic values throughout their useful life. Proper measurement enhances comparability between financial statements and provides users with reliable information regarding the carrying amount and economic value of investment properties owned by the entity.

  • To Enhance Transparency through Disclosures

An important objective of Ind AS 40 is to improve transparency by prescribing detailed disclosure requirements. Entities must disclose accounting policies, carrying amounts, depreciation methods, fair value information, restrictions on ownership, and contractual obligations relating to investment property. These disclosures enable investors, creditors, regulators, and other stakeholders to understand the financial significance of investment properties. Comprehensive reporting improves confidence in financial statements and supports better decision-making. Transparent disclosures also promote accountability and allow users to compare investment property information across different organisations with greater ease and accuracy.

  • To Improve Comparability of Financial Statements

Ind AS 40 seeks to improve comparability among financial statements by establishing uniform accounting principles for investment property. When all entities follow the same recognition, measurement, and disclosure requirements, users can compare financial information across companies more effectively. This comparability is especially valuable for investors, lenders, analysts, and regulatory authorities who evaluate the financial performance of different organisations. Consistent accounting treatment reduces confusion, enhances the credibility of financial reports, and supports informed investment and lending decisions in both domestic and international business environments with greater confidence.

  • To Support Better Financial Decision-Making

Ind AS 40 aims to provide useful financial information that supports sound economic decision-making. Accurate accounting and disclosure of investment property enable management, investors, creditors, and other stakeholders to assess the profitability, financial position, and future earning potential of an entity. Reliable information regarding rental income, capital appreciation, and property values assists users in evaluating investment opportunities and business performance. This objective strengthens financial planning, improves resource allocation, and promotes effective management of investment property, ultimately contributing to sustainable business growth and long-term organisational success.

  • To Align Indian Accounting with International Standards

One of the major objectives of Ind AS 40 is to align Indian accounting practices with International Financial Reporting Standards (IFRS). By adopting globally accepted principles for investment property accounting, the standard improves the quality, consistency, and credibility of financial reporting in India. This alignment facilitates international comparisons, enhances investor confidence, and attracts foreign investment. It also supports Indian companies operating in global markets by ensuring that their financial statements are prepared using internationally recognised accounting practices. Consequently, Ind AS 40 contributes to greater transparency, competitiveness, and global acceptance of Indian businesses.

Scope of Ind AS 40 – Investment Property

  • Investment Property Held to Earn Rentals

The scope of Ind AS 40 includes investment properties held to earn rental income. Such properties are not used by the owner for manufacturing, administration, or business operations. Instead, they are leased to tenants to generate regular income. Examples include office buildings, shopping complexes, warehouses, and residential apartments rented to third parties. The standard prescribes the accounting treatment for these properties, including recognition, measurement, and disclosure. This ensures that rental-generating properties are accounted for consistently and their financial impact is accurately reflected in the entity’s financial statements for users and stakeholders.

  • Investment Property Held for Capital Appreciation

Ind AS 40 also applies to properties held for capital appreciation. These are properties acquired with the expectation that their market value will increase over time rather than being used in business operations. Examples include vacant land held for future value appreciation and buildings retained for long-term investment. Such properties qualify as investment property because they are intended to generate future economic benefits through appreciation in value. The standard provides guidance on recognising and measuring these assets, ensuring that they are properly classified and reported in financial statements with consistency and transparency.

  • Property Held for Both Rentals and Capital Appreciation

The scope of Ind AS 40 includes properties held for both earning rental income and capital appreciation. Many commercial buildings generate regular rental income while simultaneously increasing in market value over time. Such dual-purpose properties qualify as investment property under the standard. Ind AS 40 provides accounting guidance for recognising, measuring, and disclosing these properties in financial statements. This ensures that organisations account for all economic benefits arising from the property. Proper classification also helps users understand the investment nature of the property and its contribution to the entity’s financial performance.

  • Property Interest Held by a Lessee

Ind AS 40 also covers property interests held by a lessee as a right-of-use asset under Ind AS 116, provided the property meets the definition of investment property. If the lessee holds the property primarily to earn rentals or for capital appreciation, it falls within the scope of Ind AS 40. The right-of-use asset is accounted for in the same manner as owned investment property. This provision ensures consistency in accounting treatment regardless of whether the property is owned or leased and promotes uniform financial reporting among different entities.

  • Recognition and Measurement of Investment Property

The scope of Ind AS 40 includes the recognition and measurement of investment property. The standard specifies that investment property should be recognised when future economic benefits are expected to flow to the entity and the cost can be measured reliably. Initially, the property is measured at cost, including directly attributable expenses. Subsequently, the cost model prescribed under Ind AS 16 is followed. These provisions ensure that investment properties are recorded accurately and consistently, enabling stakeholders to rely on the financial information presented by the entity in its financial statements.

  • Transfer of Investment Property

Ind AS 40 includes guidance on transfers to or from investment property when there is a change in the property’s use. A transfer is permitted only when there is evidence of such change, such as commencement of owner occupation, beginning of development for sale, or leasing to another party. The transfer is accounted for according to the accounting standard applicable to the property’s new classification. This provision ensures that property is always classified according to its actual use and maintains consistency in financial reporting and asset presentation.

  • Disclosure Requirements

The scope of Ind AS 40 extends to disclosure requirements relating to investment property. Entities must disclose accounting policies, carrying amount, depreciation methods, useful life, restrictions on title, contractual obligations, and the fair value of investment property. These disclosures provide users of financial statements with detailed information about the nature, value, and performance of investment properties. Comprehensive disclosure enhances transparency, comparability, and reliability of financial reporting. It also enables investors, lenders, regulators, and other stakeholders to evaluate the financial position of the entity more effectively.

  • Exclusions from the Scope of Ind AS 40

Ind AS 40 excludes certain properties from its scope because they are governed by other accounting standards. These include owner-occupied property covered under Ind AS 16, inventories such as property held for sale covered under Ind AS 2, biological assets related to agricultural activities, and mineral rights. The exclusion ensures that each category of property is accounted for under the most appropriate accounting standard. This avoids duplication, maintains consistency in accounting practices, and improves the clarity and accuracy of financial reporting across different types of assets.

Recognition of Investment Property (Ind AS 40)

  • Recognition Criteria

Under Ind AS 40, an investment property is recognised as an asset only when it is probable that the future economic benefits associated with the property will flow to the entity. Additionally, the cost of the property must be measured reliably. Both conditions must be satisfied before recognition. This ensures that only genuine investment properties are recorded in the financial statements. Proper recognition improves the accuracy of accounting records and provides users with reliable information regarding the entity’s investment assets and their expected contribution to future income and financial performance.

  • Probability of Future Economic Benefits

Investment property is recognised when it is expected to generate future economic benefits for the entity. These benefits may arise through rental income, capital appreciation, or both. Before recognising the property, management must assess whether the expected benefits are likely to occur based on available evidence. If future benefits are uncertain, the property should not be recognised as an investment property. This requirement ensures that only assets capable of providing economic value are included in the financial statements, thereby improving the reliability and relevance of financial reporting.

  • Reliable Measurement of Cost

Another essential requirement for recognition is that the cost of the investment property can be measured reliably. The cost generally includes the purchase price, import duties, non-refundable taxes, legal fees, registration charges, brokerage, and other directly attributable expenses incurred to acquire the property. If the acquisition cost cannot be determined with reasonable accuracy, recognition is not permitted. Reliable measurement ensures that investment property is initially recorded at its correct value and provides a dependable basis for subsequent accounting and financial reporting.

  • Initial Recognition at Cost

When an investment property satisfies the recognition criteria, it is initially recognised at cost. The cost includes the purchase price and all directly attributable expenses necessary to bring the property to its intended condition. Examples include legal charges, stamp duty, registration fees, professional fees, and transfer taxes. Administrative costs and abnormal wastage are generally excluded from the cost. Initial recognition at cost ensures consistency in accounting practices and provides an objective basis for measuring investment property in the financial statements.

  • Recognition of Self-Constructed Investment Property

Ind AS 40 also applies to self-constructed investment property. Such property is recognised as an investment property when construction is completed and the property is ready for its intended use of earning rentals or capital appreciation. During the construction period, the property is accounted for under Ind AS 16. Once construction is complete and the property meets the definition of investment property, it is transferred to Ind AS 40. This treatment ensures that self-constructed investment properties receive appropriate accounting treatment at every stage of development.

  • Subsequent Expenditure Recognition

After initial recognition, expenditure incurred on an investment property is recognised as part of the carrying amount only when it is probable that the expenditure will generate additional future economic benefits beyond the originally assessed performance. Examples include major renovations or improvements that increase the property’s value or income-generating capacity. Routine repairs and maintenance expenses are recognised in the Statement of Profit and Loss as incurred. This distinction ensures that only capital expenditures are added to the property’s carrying amount, while normal maintenance costs are treated as current expenses.

  • Recognition of Property Acquired Through Exchange

Investment property acquired in exchange for another asset is recognised when the exchange has commercial substance and the fair value of either the asset received or the asset given up can be measured reliably. The cost of the acquired property is generally measured at fair value unless specific exceptions apply. This recognition principle ensures that exchanged investment properties are recorded at values that reflect their economic significance. It promotes fairness, consistency, and comparability in accounting for non-cash acquisition transactions under Ind AS 40.

  • Importance of Proper Recognition

Proper recognition of investment property is essential for presenting a true and fair view of an entity’s financial position. It ensures that only qualifying properties are included in the financial statements and that they are measured using appropriate accounting principles. Correct recognition enhances the reliability, transparency, and comparability of financial reports. It also assists management, investors, creditors, and regulators in evaluating the entity’s investment activities, future earning potential, and overall financial performance. Proper recognition forms the foundation for accurate measurement, disclosure, and decision-making under Ind AS 40.

Measurement of Investment Property (Ind AS 40)

  • Initial Measurement at Cost

Under Ind AS 40, investment property is initially measured at cost. The cost includes the purchase price and all directly attributable expenses necessary to acquire the property and make it ready for its intended use. Such expenses include legal fees, registration charges, stamp duty, brokerage, transfer taxes, and professional fees. Any trade discounts or rebates are deducted from the purchase price. Measuring investment property at cost ensures objective and reliable initial recognition. This approach provides a consistent basis for accounting and forms the starting point for subsequent measurement in accordance with the provisions of Ind AS 40.

  • Components Included in Cost

The cost of investment property includes all expenditures directly related to its acquisition. These include the purchase price, legal and professional fees, property transfer taxes, registration charges, brokerage, and other expenses necessary to complete the purchase. If the property requires preparation before use, directly attributable costs are also included. However, administrative expenses, general overheads, and abnormal wastage are excluded from the cost. Including only relevant expenditures ensures that the carrying amount accurately reflects the actual investment made by the entity and provides a reliable basis for financial reporting.

  • Expenditure Excluded from Cost

Certain expenditures are specifically excluded from the cost of investment property under Ind AS 40. These include start-up costs, administrative expenses, operating losses incurred before the property reaches its intended use, and abnormal waste of materials, labour, or resources. Routine maintenance and repair costs are also excluded because they do not increase the future economic benefits of the property. Such expenses are recognised in the Statement of Profit and Loss as incurred. Excluding these items prevents overstatement of asset values and ensures that only capital expenditures are included in the property’s carrying amount.

  • Subsequent Measurement Using the Cost Model

After initial recognition, Ind AS 40 requires entities to measure investment property using the cost model prescribed under Ind AS 16. Under this model, the investment property is carried at cost less accumulated depreciation and accumulated impairment losses. Depreciation is charged systematically over the property’s useful life, while impairment losses are recognised whenever the carrying amount exceeds the recoverable amount. The cost model ensures consistency in financial reporting and provides users with reliable information regarding the book value of investment properties held by the entity.

  • Fair Value Disclosure

Although Ind AS 40 requires subsequent measurement using the cost model, entities must disclose the fair value of investment property in the notes to the financial statements whenever it can be measured reliably. Fair value represents the current market value of the property between knowledgeable and willing parties in an orderly transaction. Disclosure of fair value provides users with additional information about the economic worth of investment property. This enhances transparency and helps investors, lenders, and other stakeholders assess the potential value of the entity’s property investments.

  • Measurement After Capital Expenditure

When significant improvements or additions are made to an investment property, the expenditure is added to the carrying amount only if it is probable that additional future economic benefits will flow to the entity. Examples include major structural improvements, extensions, or renovations that increase rental income or market value. Expenditure on routine repairs and maintenance is not capitalised but is recognised as an expense. This distinction ensures that only expenditures enhancing the property’s future benefits affect its carrying amount, resulting in accurate measurement and financial reporting.

  • Measurement of Self-Constructed Investment Property

For self-constructed investment property, the property is measured according to Ind AS 16 during the construction phase. All directly attributable construction costs are accumulated until the property is completed. Once construction is finished and the property is ready for earning rentals or capital appreciation, it is classified as investment property under Ind AS 40. The completed property’s cost becomes its initial carrying amount. This treatment ensures consistency in accounting and accurately reflects the investment made by the entity in developing the property.

  • Importance of Proper Measurement

Proper measurement of investment property is essential for presenting reliable and meaningful financial statements. Accurate measurement ensures that investment properties are neither overstated nor understated, providing a true and fair view of the entity’s financial position. It helps management assess investment performance and supports informed decision-making by investors, creditors, and regulators. Consistent application of the measurement principles under Ind AS 40 improves comparability between organisations and strengthens confidence in financial reporting. Proper measurement also forms the basis for depreciation, impairment assessment, disclosure, and overall compliance with accounting standards.

Transfer of Investment Property (Ind AS 40)

A transfer of investment property refers to the reclassification of a property to or from investment property when there is a change in its use. Under Ind AS 40, a transfer is permitted only when there is clear evidence that the purpose for which the property is held has changed. A mere change in management’s intention is not sufficient to justify a transfer. The transfer ensures that the property is accounted for under the appropriate accounting standard based on its current use. Proper classification improves the accuracy, consistency, and reliability of financial reporting and asset presentation.

  • Transfer from Investment Property to Owner-Occupied Property

An investment property is transferred to owner-occupied property when the owner starts using the property for business operations or administrative purposes. This change is evidenced by the commencement of owner occupation. Once transferred, the property is accounted for under Ind AS 16 (Property, Plant and Equipment). The carrying amount of the property on the date of transfer becomes its deemed cost under Ind AS 16. This treatment ensures that the property is measured and depreciated according to the accounting requirements applicable to owner-occupied assets from the date of the change in use.

  • Transfer from Owner-Occupied Property to Investment Property

A property is transferred from owner-occupied property to investment property when the owner stops using it for business purposes and begins holding it to earn rental income or for capital appreciation. The change must be supported by clear evidence, such as leasing the property to another party. Before the transfer, the property is accounted for under Ind AS 16. After the transfer, it is classified as investment property and measured according to the cost model under Ind AS 40. This ensures correct classification and consistent financial reporting.

  • Transfer from Inventory to Investment Property

A property held as inventory may be transferred to investment property when it is no longer intended for sale in the ordinary course of business but is instead held to earn rentals or for capital appreciation. For example, an unsold apartment retained by a real estate developer and leased to tenants qualifies as investment property. The transfer is recognised only when there is evidence of the change in use. After the transfer, the property is accounted for under Ind AS 40. This ensures that the property’s accounting treatment reflects its revised purpose and expected economic benefits.

  • Transfer from Investment Property to Inventory

Investment property is transferred to inventory when the entity decides to sell the property in the ordinary course of business and begins development or preparation for sale. This transfer is recognised only when there is evidence of the change in use, such as the commencement of redevelopment for sale. After the transfer, the property is accounted for under Ind AS 2 (Inventories). The carrying amount of the investment property becomes the deemed cost of inventory. This treatment ensures appropriate accounting based on the property’s new business purpose and classification.

  • Evidence Required for Transfer

Ind AS 40 requires objective evidence of a change in use before any transfer of investment property is recognised. Examples of such evidence include the commencement of owner occupation, leasing the property to another party, beginning redevelopment for sale, or ending owner occupation. A simple intention or future plan to change the property’s use is insufficient. The requirement for objective evidence prevents arbitrary reclassification of assets and ensures that transfers are based on actual events. This improves consistency, transparency, and reliability in financial reporting.

  • Accounting Treatment of Transfers

The accounting treatment for transfers depends on the new classification of the property. When transferred to owner-occupied property, Ind AS 16 becomes applicable. When transferred to inventory, Ind AS 2 applies. Similarly, transfers from these categories to investment property are recognised based on the carrying amount at the date of transfer. No gain or loss arises merely because of the transfer itself. The property continues to be measured according to the accounting principles of its new classification. This ensures continuity, consistency, and proper presentation in financial statements.

  • Importance of Proper Transfer

Proper transfer of investment property is essential to ensure that assets are classified according to their actual use. Correct classification enables the application of the appropriate accounting standard and improves the reliability of financial statements. It also prevents manipulation of financial results through improper reclassification of assets. Accurate transfer accounting helps investors, creditors, regulators, and management understand the true purpose and value of the property. Consequently, proper transfer under Ind AS 40 enhances transparency, comparability, and compliance with accounting standards while supporting informed financial decision-making.

Disclosure Requirements under Ind AS 40 – Investment Property

  • Disclosure of Accounting Policy

Ind AS 40 requires an entity to disclose the accounting policies adopted for investment property. The financial statements should clearly explain the basis used for recognising, measuring, depreciating, and presenting investment property. Users of financial statements should understand how the entity has applied the requirements of Ind AS 40. Disclosure of accounting policies promotes consistency and transparency in financial reporting. It also enables investors, creditors, and other stakeholders to compare the accounting practices of different organisations and make informed economic decisions based on reliable financial information.

  • Disclosure of Carrying Amount

An entity must disclose the carrying amount of investment property at the reporting date. The carrying amount represents the cost of the property after deducting accumulated depreciation and accumulated impairment losses. This disclosure helps users understand the book value of the investment property included in the balance sheet. It also provides information about the entity’s investment in property and its contribution to the overall financial position. Proper disclosure of the carrying amount enhances transparency and supports effective analysis of financial statements by stakeholders.

  • Disclosure of Depreciation Information

Ind AS 40 requires entities to disclose the depreciation method used for investment property, its useful life or depreciation rate, and the depreciation expense recognised during the accounting period. These disclosures help users understand how the property’s cost is allocated over its useful life. Information about depreciation enables stakeholders to assess the remaining value and future earning potential of investment property. Proper disclosure also improves comparability between entities by providing a clear explanation of the depreciation policies applied in financial reporting.

  • Disclosure of Fair Value

Although investment property is measured using the cost model under Ind AS 40, the entity must disclose the fair value of the investment property whenever it can be measured reliably. Fair value represents the market value of the property on the reporting date. This disclosure provides users with additional information about the current economic worth of investment property beyond its carrying amount. Fair value disclosure improves transparency, supports investment decisions, and enables stakeholders to compare the market value of investment properties with their book values.

  • Disclosure of Rental Income and Direct Operating Expenses

Entities should disclose the rental income earned from investment property during the reporting period. They should also disclose direct operating expenses incurred on investment property that generated rental income and those that did not generate rental income. These disclosures help users evaluate the profitability and efficiency of investment properties. Information regarding income and expenses enables investors and management to assess the financial performance of property investments and make better economic decisions based on accurate and comprehensive financial data.

  • Disclosure of Restrictions and Contractual Obligations

Ind AS 40 requires disclosure of restrictions on the realisability of investment property or on the remittance of rental income and disposal proceeds. Entities must also disclose contractual obligations to purchase, construct, develop, repair, or maintain investment property. These disclosures provide important information regarding legal or financial commitments associated with investment property. They help users understand any limitations affecting the property’s use or disposal and assess the entity’s future obligations related to investment property investments.

  • Disclosure of Changes in Carrying Amount

The standard requires entities to disclose a reconciliation of the carrying amount of investment property at the beginning and end of the reporting period. This reconciliation includes additions, disposals, transfers, depreciation, impairment losses, impairment reversals, and other changes. Such disclosures allow users to understand how the carrying amount has changed during the year. It enhances transparency by explaining the movements in investment property balances and enables stakeholders to evaluate the entity’s investment activities more effectively.

  • Importance of Disclosure Requirements

Disclosure requirements under Ind AS 40 improve the transparency, reliability, and comparability of financial statements. They provide detailed information about the recognition, measurement, valuation, depreciation, fair value, rental income, expenses, and changes in investment property. These disclosures help investors, creditors, regulators, and management understand the financial impact of investment properties on the entity. Proper disclosure also ensures compliance with accounting standards, strengthens stakeholder confidence, and supports informed economic decision-making based on complete and accurate financial information.

Importance of Ind AS 40 – Investment Property

  • Ensures Proper Accounting of Investment Property

Ind AS 40 is important because it provides clear guidelines for accounting for investment property. It explains how properties held for rental income or capital appreciation should be recognised, measured, transferred, and disclosed in financial statements. Without a common accounting framework, organisations may follow different practices, leading to inconsistency and confusion. The standard ensures that investment properties are recorded accurately and presented fairly. This improves the reliability of financial statements and helps stakeholders understand the actual value and purpose of investment property owned by an entity in a consistent and transparent manner.

  • Improves Accuracy of Financial Reporting

Ind AS 40 enhances the accuracy of financial reporting by providing uniform principles for recognising and measuring investment property. It ensures that investment properties are recorded at appropriate values and that depreciation, impairment, and disclosures are applied consistently. Accurate financial reporting reduces the possibility of errors, overstatement, or understatement of assets. Reliable financial information helps investors, creditors, regulators, and management evaluate the financial position and performance of an organisation. As a result, financial statements become more trustworthy and useful for making informed economic and business decisions by all stakeholders.

  • Distinguishes Investment Property from Other Assets

One of the major importance of Ind AS 40 is that it clearly distinguishes investment property from owner-occupied property and inventory. Investment property is held for earning rentals or capital appreciation, whereas owner-occupied property is used for business operations, and inventory is held for sale. This clear distinction ensures that each type of property is accounted for under the appropriate accounting standard. Proper classification improves the quality of financial statements, avoids accounting errors, and enables users to understand the purpose of each property owned by the entity more accurately and effectively.

  • Promotes Consistency and Comparability

Ind AS 40 promotes consistency and comparability in financial reporting by prescribing uniform accounting principles for investment property. When all entities follow the same recognition, measurement, and disclosure requirements, users can compare financial statements of different organisations with confidence. Consistent accounting practices improve the credibility of financial information and reduce confusion arising from different accounting methods. Investors, lenders, analysts, and regulators benefit from comparable financial reports, enabling them to evaluate business performance, investment opportunities, and financial stability more effectively across different industries and reporting periods.

  • Supports Better Investment Decisions

Ind AS 40 provides reliable information about investment property, helping investors and other stakeholders make informed decisions. Accurate disclosure of carrying amount, fair value, rental income, depreciation, and impairment allows users to assess the profitability and future earning potential of property investments. Investors can compare organisations based on the quality and performance of their investment properties. Reliable accounting information reduces uncertainty and strengthens confidence in investment decisions. Thus, Ind AS 40 plays a significant role in improving financial analysis and supporting sound investment and business planning activities.

  • Enhances Transparency Through Disclosures

Ind AS 40 requires detailed disclosures relating to investment property, including accounting policies, carrying amount, depreciation methods, fair value, rental income, expenses, and changes during the reporting period. These disclosures provide stakeholders with a complete understanding of the entity’s investment property activities. Transparent reporting improves confidence in financial statements and helps investors, creditors, and regulators evaluate the financial impact of investment properties. Enhanced transparency also strengthens corporate accountability and ensures that organisations provide complete and meaningful information to users of financial statements for effective decision-making.

  • Facilitates Compliance with International Standards

Ind AS 40 aligns Indian accounting practices with internationally accepted accounting principles relating to investment property. This alignment improves the global comparability of financial statements prepared by Indian companies. International investors and multinational organisations can easily understand and compare financial information prepared under Ind AS. Compliance with globally recognised standards increases the credibility of Indian businesses, encourages foreign investment, and supports international business expansion. It also enhances the reputation of Indian financial reporting by ensuring consistency with modern global accounting practices and professional standards.

  • Strengthens Stakeholder Confidence

Ind AS 40 strengthens the confidence of investors, creditors, regulators, shareholders, and other stakeholders by ensuring reliable accounting and transparent reporting of investment property. Accurate recognition, measurement, transfer, and disclosure reduce the risk of misleading financial information. Stakeholders gain a better understanding of the entity’s property investments, rental income, and future growth potential. This confidence improves business relationships, facilitates access to finance, and supports long-term organisational development. Consequently, Ind AS 40 contributes significantly to maintaining trust, accountability, and high-quality financial reporting in the corporate sector.

Management Notes

Process of Formulation of Accounting Standards in India

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Procedure for Issuing an Accounting Standard

Broadly, the following procedure is adopted for formulating Accounting Standards:

(i) The ASB determines the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof.

(ii) In the preparation of Accounting Standards, the ASB will be assisted by Study Groups constituted to consider specific subjects.

(iii) The draft of the proposed standard will normally include the following:

  • Objective of the Standard,
  • Scope of the Standard,
  • Definitions of the terms used in the Standard,
  • Recognition and measurement principles, wherever applicable,
  • Presentation and disclosure requirements.

(iv) The ASB will consider the preliminary draft prepared by the Study Group and if any revision of the draft is required on the basis of deliberations, the ASB will make the same.

(v) The Exposure Draft of the proposed Standard will be issued for comments by the members of the Institute and the public. The Exposure Draft will specifically be sent to specified bodies (as listed above), stock exchanges, and other interest groups, as appropriate.

(vi) After taking into consideration the comments received, the draft of the proposed Standard will be finalised by the ASB and submitted to the Council of the ICAI.

(vii) The Council of the ICAI will consider the final draft of the proposed Standard, and if found necessary, modify the same in consultation with the ASB. The Accounting Standard on the relevant subject will then be issued by the ICAI.

(viii) For a substantive revision of an Accounting Standard, the procedure followed for formulation of a new Accounting Standard, as detailed above, will be followed.

(ix) Subsequent to issuance of an Accounting Standard, some aspect(s) may require revision which are not substantive in nature. For this purpose, the ICAI may make limited revision to an Accounting Standard. The procedure followed for the limited revision will substantially be the same as that to be followed for formulation of an Accounting Standard, ensuring that sufficient opportunity is given to various interest groups and general public to react to the proposal for limited revision.

Compliance with the Accounting Standards:

While discharging their attest functions, it will be duty of the members of the Institute to ensure that the Accounting Standards are implemented in the presentation of financial statements covered by their audit reports.

In the event of any deviation from the Standards, it will also be their duty to make adequate disclosures in their reports so that the users of such statements may be aware of such deviations.

In the initial years, the Standards will be recommendatory in character and the Institute will give wide publicity among the users and educate members about the utility of Accounting Standards and the need for compliance with the above disclosure requirements. Once an awareness about these requirements Is ensured, steps will be taken, in course of time, to enforce compliance with the accounting standards.

The adoption of Accounting Standards in our country and disclosure of the extent to which they have not been observed will, over the years, have an important effect, with consequential improvement in the quality of presentation of financial statements.

Management Notes

Statutory obligation, Legal Procedure for establishment of NGO, Online & Offline, NGO Registration process, Documentation, Eligibility to start an NGO

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Different types of NGO Laws in India

The following laws would be applicable for NGO registration in India:

Trust: It is a public charitable institution registered under the Charity Commissioner’s office having jurisdiction over the state. Maharashtra has adopted the Bombay Public Trust Act, 1950, which has become a model for the various other states. The law that regulates trusts are the Indian Trusts Act, 1882.

Societies: According to the Societies Registration Act, 1860, states have adopted their version from the model Societies Act, 1860. A society is considered as an independent form of organization. It has broad membership, which elects a governing body periodically for managing the affairs of the society. The body is accountable to members. There are multiple types of societies that may be registered under the Act which includes:

  • Charitable societies;
  • Societies which are established for the promotion of science, literature, or fine arts, education; and
  • Public Art Museums, and galleries, and certain other types of museums.

Company: A Company has been described under the Companies Act, 2013. The Act permits “Section 8 companies” to be formed. According to the Act, Section 8 Companies are those which are formed for the purpose of art, religion, charity, and other useful objects. Internal governance of Section 8 Company is similar to that of a society. The members of the committee or governing council are elected by the members of the Charitable Company. A section 8 company can be dissolved. The registration process takes time and requires the memorandum of association and articles of association that has to be submitted with the ROC (registrar of companies).

Trade Union: According to the Trade Union Act, 1926, a Trade Union is defined as temporary or permanent combination formed to regulate and control the relations of employees and employers.

Multi-State Co-operative Societies: The Multi-State Co-operative Societies Act, 2002 has substituted the previous Act of 1984. The Act provides for the compliance of both primary and federal co-operatives.

Legal compliances of NGO

There are various legal compliances of the NGO are as follows:

  • Permanent Account Number (PAN): This is a unique alphanumeric combination issued to all the juristic entities- identifiable under the Income Tax Act, 1961. The PAN number is used as the national identification number.
  • Tax Deduction Number (TAN): It is the Tax Deduction and Collection Account Number. It is a ten digit alpha-numeric number required to be obtained by all the individuals who are responsible for deducting or collecting tax (TDS) at source. The TAN number is required to be quoted at the following places:
  1. A challan depositing the tax so deducted,
  2. A certificate issued against the tax deducted,
  3. All returns furnished in respect of the tax deducted at source, etc.

Legal Procedure for establishment of NGO, Online & Offline

Non-Governmental Organization (NGO) is an entity that works for charitable purposes. NGO is known as a not-for-profit making organization that works towards the promotion of arts, science, sports, education, research, social welfare, religion, charity, and more. NGOs in India are of various types which are registered under Trust Act, Society Registrations Act, or the Companies Act.

NGO is registered in the form of Section 8 Company under the Companies Act, 2013. Companies registered under this act are all not-for-profit and charitable trusts. The only difference between a trust or society and NGO is that the latter is registered under the Ministry of Corporate Affairs (MCA).

Before Applying for NGO Registration

Obtain Digital Signature Certificate (DSC)

Proposed directors are supposed to provide Digital Signatures, as the registration forms are to be digitally signed before filing the form online. Certifying agencies under the Government of India issue Digital Signature Certificate (DSC). Applicants need to obtain either Class 2 or Class 3 category of DSC. The fees for obtaining DSC vary and depend on the certifying agency.

Apply for Director Identification Number (DIN)

Applicants are required to apply for a DIN for the proposed directors of the company. Filling of application Form DIR-3 helps in the allotment of DIN. Scanned documents like self-attested copies of PAN, identity, and address proof of directors are to be submitted along with the application form. The application form can be submitted online on the Ministry of Corporate Affairs (MCA) portal. The documents are required to be attested by a practicing chartered accountant, company secretary, or cost accountant.

Steps to Register as an NGO

Step 1: The applicant needs to obtain a DSC of the proposed Directors of an NGO. After a DSC is obtained, file Form DIR-3 with the ROC to get a DIN.

Documents to attach for DIN application:

    Identity and Address Proofs: Passport, Voter’s ID card, Aadhar card, electricity bill, driving license, PAN card, house tax receipt, business address proof, society’s name, etc.

Step 2: After the approval of DIR-3, the respective ROC will allot a DIN to the proposed directors.

Step 3: Next the applicant needs to file Form INC-1 with the ROC to apply for a company name. Preference of 6 names can be applied from which one would be allotted by ROC, depending on the availability.

Step 4: After the approval from ROC, file Form INC-12 to apply for a license for an NGO

Documents to attach with INC-12:

  • Declaration, as per Form INC-14 (Declaration from CA)
  • Declaration, as per Form INC-15
  • Draft Article of Association (AOA) and Memorandum of Association (MOA) as per Form INC-13
  • Estimated Income & Expenditure for next 3 years

Step 5: After the Form’s approval, the NGO license will be issued in Form INC-16.

Step 6: After the applicant has obtained the NGO license, he/she needs to file SPICE Form 32 with ROC for incorporation. After the ROC has checked and verified the documents, it issues a Certificate of Incorporation with a unique Corporate Identification Number (CIN).

Eligibility to Start an NGO

  • Minimum 2 directors required if NGO is to be incorporated as a private limited company
  • Minimum of 3 directors required, in case of incorporation as a public limited company
  • The maximum number of members is 200, in the case of a private limited company
  • No member limit in case of a public limited company
  • No fee is charged if registering as an NGO

Forms Required for NGO Registration

  • DIR 12 Appointments of Directors
  • DIR 2 Consent of Directors
  • DIR 3 Application to ROC to get DIN
  • INC 1 Business name approval
  • INC 12 Applications for License
  • INC 13 Memorandum of Association
  • INC 14 Declaration from a practicing CA
  • INC 15 Declaration from each person making the application
  • INC 16 License to incorporate as NGO
  • INC 22 Situation of Registered Office
  • INC 7 Applications for Company’s Incorporation
  • INC 8 Declarations
  • INC 9 Affidavit from each director and subscriber
Management Notes

Trust and Society Registration Act

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Procedure for Registration of Trust under the Indian Trusts Act,1882

Decide the following:

a) Name of the trust

b) Address of the trust

c) Objects of the trust (Charitable or Religious)

d) One settlor of the trust

e) Two trustees of the trust (minimum)

f) Property of the trust: Movable or immovable property (normally a small amount of cash/cheque is given to be the initial property of the trust, in order to save on the stamp duty).

Prepare a Trust Deed on stamp paper of the requisite value. The rates of stamp duty varies from state to state. Kindly check the current rate of stamp duty applicable in your state.

Requirement for registration of Trust Deed with the Local Registrar under the Indian Trusts Act, 1882:

a) Trust Deed on stamp paper of requisite value.

b) One passport size photograph & copy of the proof of identity of the settlor.

c) One passport size photograph & copy of the proof of identity of each of the two trustees.

d) One passport size photograph & copy of the proof of identity of each of the two witnesses.

e) Signature of settlor on all the pages of the Trust Deed.

t) Witness by two persons on the Trust Deed.

Go to the local Registrar and submit the Trust Deed, along with one photocopy, for registration. The photocopy of the Deed should also contain the signature of settlor on all the pages. At the time of registration, the settlor and two witnesses are required to be personally present, along with their identity proof in the original.

The Registrar retains the photocopy and returns the original registered copy of the Trust Deed.

The Societies Registration Act, 1860

The Societies Registration Act, 1860 is legislation in India which allows the registration of entities generally involved in the benefit of society education, health, employment etc.

The British Indian Empire, with a wish to encourage such activities and to promote the formal organisation of groups of likeminded people, incorporated the Act 21 of 1860, in other words, The Societies Registration Act, 1860 (21 of 1860), which came into force on 21 May 1860. The Act continues until today and being an Act of Parliament, comes under the Right to Information Act, wherein the government is legally responsible to give any information requested by any citizen of India with respect to any society.

Closing of a Registered Society

A society is legally registered under the Societies Registration Act, 1860. The Indian Societies Registration Act of 1860 was enacted under the British Raj in India, but is largely still in force in India today. It provides for the registration of literary, scientific and charitable societies. Under the Act societies may be formed, by way of a memorandum of association, by any seven or more people associated for any literary, scientific or charitable purpose. The memorandum of association has to be filed with the Registrar of Societies. The memorandum has to contain the name of the society, its objects, and the names, addresses, and occupations of the members of the governing body, by whatever name it may be called, duly signed for consent by all the members forming the society.

Provisions under the Act

Under Section 13 of the Societies Registration Act, 1860; a number of provisions relating to dissolution of a society and adjustments of its affairs are stated. It is stated that Any number not less than three-fifths of the members of any society may decide and determine that it shall be dissolved, and consequently it shall be dissolved without any delay, or at the time then agreed upon by the members, and all necessary steps are to be taken for the disposal and settlement of the property of the society, its claims and liabilities, according to the rules of the said society applicable thereto, if any were made at the time of the registration of the society and if not, then as the governing body shall find a convenient expedient, provided that, in the incident of any dispute or disagreement arising among the said governing body or the members of the society, the adjustment of its affairs shall be referred to the principal Court of original civil jurisdiction of the district in which the chief building of the society is situated and the Court shall make such order in the matter as it shall deem required by law and practically apt. The assent is necessarily required provided that no society shall be dissolved unless three-fifths of the members shall have expressed a wish for such dissolution by their votes delivered in person, or by proxy, at a general meeting convened for the purpose. There is also a concept of Government consent. It is provided in the aforesaid statute that whenever any Government is a member of, or a sponsor or contributor to, or otherwise interested in any society registered under this Act, such society shall not be dissolved without the consent of the Government of the State where the society was registered. There are also several state amendments given under this section.

Purpose of Society Registration

A society registration can be done for the development of fine arts, science, or literature or else for the diffusion of purposeful knowledge or charitable purposes of political education. According to section 20 of the Society Act, 1860, a society registration can be done for the following purposes:

  • Promotion of fine arts.
  • Diffusion of political education.
  • Grant of charitable assistance.
  • Promotion of science and literature.
  • Creation of military orphan funds.
  • Maintenance or foundation of galleries or public museum.
  • Maintenance or foundation of reading rooms or libraries.
  • Promotion or diffusion or instruction of useful knowledge.
  • Collections of natural history.
  • Collections of mechanical and philosophical inventions, designs, or instruments.

Registration of a Society in India

A Society can be created by a minimum of 7 or more persons. Apart from persons from India, companies, foreigners, as well as other registered societies can also register for the Memorandum of association of the society.

Similar to Partnership firms, society can also be either unregistered or registered. But, only the registered societies will be able to withstand consigned properties and/or have an ensemble filed against or by the society.

Society registration is maintained by state governments. Thus, the application for society registration must be created to the specific authority of the state, where the registered office of the society is situated.

For Society registration, the establishing members must agree with the name of society first and then prepare for the Memorandum, followed by Rules & Regulations of the society.

Selection of a Name

When selecting a name for society registration, it is vital to understand that according to Society Act, 1860, an identical or similar name of a currently registered society will not be allowed. Moreover, the proposed name shall not suggest for any patronage of the state government or the government of India or fascinate the provisions of the Emblem & Names Act, 1950.

Memorandum of Association

The Memorandum of Association of the society along with Rules & Regulations of society must be signed by every establishing member, witness by Gazetted Officer, Notary Public, Chartered Accountant, Oath Commissioner, Advocate, Magistrate first-class or Chartered Accountant with their official stamping and complete address.

The memorandum must contain the name of the society, the object of the society. Also, it consists of details of members of the society registration along with their names, addresses, designations, and occupations. The following document has to be prepared, submitted and signed for the sake of registration:

  • Requesting society registration by providing covering letter, signed by all establishing members.
  • Duplicate copy of Memorandum of Association of society along with certified copy.
  • Duplicate copy of Rules & Regulations of society along with duplicate copy duly signed by all establishing members.
  • Address proof of registered office of society as well as no-objection certificate (NOC) issued by landlord.
  • Affidavit avowed by secretary or president of society declaring relationship among subscribers.
  • Few minutes of meeting regarding the society registration along with providing some essential documents.

Dissolution of Society by Court

As per the provisions of this act, on the application of the Registrar under section 13A or under section 24 or on an application made by not less than one- tenth of the members of a society registered under this Act, the Court of competent jurisdiction referred to in section 13 may make an order for the dissolution of the society on any of the following grounds, viz.

(a) That the society has contravened any provision of this Act or of any other law for the time being in force and it is just and equitable that the society should be dissolved

(b) That the number of the members of the society is reduced below seven;

(c) That the society has ceased to function for more than three years preceding the date of such application;

(d) That the society is unable to pay its debts or meet its liabilities; or

(e) That the registration of the society has been cancelled under section 12D on the ground that its activities or proposed activities have been or are or will be opposed to public policy.

It has to be noted that when an order for the dissolution of a society is made under sub-section (1) or sub-section (2), all necessary steps for the disposal and the settlement of the property of the society, its claims and liabilities and any other adjustment of its affairs take place in manner as the Court may direct.

Matters of profit upon dissolution

Under section 14 of the act, upon the dissolution of the society, no member is entitled to receive any profits. If upon the dissolution of a society registered under this Act there remains, after the satisfaction of all its debts and liabilities, any property whatsoever, the same will not be paid to or disseminated and distributed among the members of the said society or any of them, but is required by law to be given to some other society which is to be determined by the votes of not less than three-fifths of the members present individually or by proxy at the time of the dissolution, or, in default thereof, by such Court as aforesaid. It is important to note here that this clause does not to apply to the Joint-Stock Companies. Provided, however, that this clause shall not apply to any society which has been founded or established by the contributions of share-holders in the nature of a Joint-Stock Company

Management Notes

Pledger and Pledgee

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Rights and Duties of a Pledger

Rights

  • The pledger has a right to claim back the security pledged on repayment of the debt with interest and other charges.
  • The pledger has a right to receive a reasonable notice in case the pledgee intends to sell the goods and in case he does not receive the notice he has a right to claim any damages that may result.
  • In case of sale, the pledgor is entitled to receive from the pledgee any surplus that may remain with him after the debt is completely paid off.
  • The pledgor has a right to claim any accruals to the goods pledged.
  • If any loss is caused to the goods because of mishandling or negligence on the part of the pledgee, the pledgor has a right to claim the same.

Duties

  • A pledgor must disclose to the pledgee any material faults or extraordinary risks in the goods to which the pledgee may be exposed.
  • A pledgor is responsible to meet any extraordinary expenditure incurred by the pledgee for the preservation of the goods.
  • Where the pledgee has exercised his right of sale of goods, any shortfall has to be made good by the pledgor.
  • The pledgor is liable for any loss caused to the pledgee because of defects in his (pledgor’s) title the goods.

Rights and duties of a Pledgee

Essential Elements of the Pledge:

According to Section 172 of the Indian Contract Act, 1872, the following conditions are to be satisfied to constitute a pledge.

a) Delivery of goods,

b) Such delivery of goods is as security for payment of debt and

c) The subject matter must be movable property.

 

a) Delivery of Goods: To constitute a pledge, there must be bailment of goods, that is the delivery of goods from one person (borrower in case of loan) to the another person (the person giving loan). Such delivery of the possession of the goods may be actual or constructive.

Rights of Pledgee:

Sections 173 to 176 deals about the rights of the pledgee.

  • Right to retain the pledged goods.
  • Right to recover extraordinary expenses from the pledger.
  • Right to sue and sell the pledged property.
Management Notes

Intermediaries (Players) in the New Issue Market

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The new issue market / activity was regulated by the Controller of Capital Issues (CCI) under the provisions of the Capital Issues (Control) Act, 1947 and the exemption orders and rules made under it. With the repeal of the Act and the consequent abolition of the office of the CCI in 1992, the protection of the interest of the investors in securities market and promotion of the development and regulation of the market/ activity became the responsibility of the SEBI.

Merchant Bankers (Managers to the Issue):

SEBI regulations 1992 prescribes that all public issues should be managed by at least one merchant banker functioning as Lead manager or Managers to the Issue.

“Merchant banker means any person/institution who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management.” [Sec 2(cb) SEBI (Merchant Bankers) (Third Amendment) Regulations, 2006]

Depending on the size of the issue there can be more than one manager to the issue. If the size exceeds Rs. 400 crores there can be five or more managers as agreed by SEBI. These Managers to the issue assist the promoters in designing the capital structure, drafting the prospectus and application forms, listing of shares, appointment of registrars and other operators in the new issue, arrangement of long term loans- marketing of public issues etc. The lead manager prepares Draft Red Herring Prospectus (RHP) and is responsible for any irregularities in the same. The company should enter into a memorandum of understanding with the managers to the issue in the form prescribed by SEBI.

The lead merchant bankers appointed by the Issuer Company are referred to as the Book Running Lead Managers (BRLM) or Book Runners (If the issue is through book building process).

Underwriters

Underwriters: Another important intermediary in the new issue/ primary market is the underwriters to issue of capital who agree to take up securities which are not fully subscribed.

They make a commitment to get the issue subscribed either by others or by themselves. Though underwriting is not mandatory after April 1995, its organization is an important element of primary market. Underwriters are appointed by the issuing companies in consultation with the lead managers / merchant bankers to the issues.

Methods of Underwriting

An underwriting agreement may take any of the following forms:

  • Standing behind the Issue:

Under this method the underwriter guarantees the sale of a specified number of shares within a specified period. If the public do not subscribe to the specified amount of issue, the underwriter will buy the balance. It is also called full underwriting.

  • Outright Purchase:

In this method the underwriters purchases the entire issues at an agreed price and sell them to investors.

  • Consortium Method:

In mega issues several underwriters join together to underwrite. They form a consortium/syndicate for this purpose. It is also called syndicate underwriting.

  • Partial Underwriting:

The underwriter undertakes the guarantee for only a part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him under this method.

  • Joint Underwriting:

The issuing company may enter into underwriting agreement with more than one underwriter in case of large issues. Each under-writer undertakes the guarantee for the issue of a certain portion of the whole issue offered to the public and shares the risk.

  • Firm Underwriting:

Under this method, the underwriter undertakes to buy or subscribe a certain number of shares irrespective of the subscription from the public. Underwriter will be liable for shares underwritten as well as that part of issue unsubscribed by the public.

  • Sub-Underwriting:

Under this method, the underwriter enters into agreement with some other underwriters to undertake guarantee for the issue of whole or part of the issue under-written by him.

Underwriting has the following advantages:

(i) Issuing company is assured of procuring the required funds from issue through underwriting.

(ii) Under writers supply expert advice and valuable information with regard to capital market conditions, general response of the investors etc. to the issuing company.

(iii) Underwriting helps promoters to retain control over the management of the company, because they distribute the issue over a large number of investors scattered in different part of the country.

(iv) Prestige of the underwriting agencies increases the goodwill of the issuing company.

(v) Prospective investors are also benefited through the service of underwriters as they provide essential information about the issuing companies and encourage them to save money is corporate securities.

Underwriters charge a commission for their service which is known as underwriting commission. The underwriters must be registered with SEBI. There are three SEBI registered underwriters now. E.g., Citicorp Capital Markets Ltd., State Bank of India etc.

Brokers to the Issue

Brokers are persons mainly concerned with the procurement of subscription to the issue from the prospective investors. The appointment of brokers is not compulsory and the companies are free to appoint any number of brokers. The managers to the issue and the official brokers organize the preliminary distribution of securities and procure direct subscription from as large or as wide a circle of investors as possible. A copy of the consent letter from all the brokers to the issue, should be filed with the prospectus to the ROC. The brokerage applicable to all types of public issue of industrial securities is fixed at 1.5%, whether the issue is underwritten or not. The listed companies are allowed to pay a brokerage on private placement of capital at a maximum rate of 0.5%. Brokerage is not allowed in respect of promoters’ quota including the amounts taken up by the directors, their friends and employees, and in respect of the rights issues taken by or renounced by the existing shareholders. Brokerage is not payable when the applications are made by the institutions/ bankers against their underwriting commitments or on the amounts devolving on them as underwriters consequent to the under subscription of the issues.

Registrars to the Issue (Registrar and Share Transfer (R&T) Agents):

R&T agent plays a significant role in a public issue along with the lead managers. Registrars are persons appointed in consultation with lead managers to assist the issue management functions. Their work relates to pre-issue management, management during the currency of issue, pre- allotment Work, allotment work and post allotment work.

It is their duty to collect the application forms from bankers to the issue, process them for allotment and issue certificate of allotment.

Major functions of registrars can be listed as follows:

(i) Design and draft the format of application form for the merchant banker or lead manager.

(ii) Collect application forms from banks.

(iii) Scrutinize application forms.

(iv) Finalize the allotment as per the basis approved by the stock exchange.

(v) Ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done

(vi) Print refund orders and letters of allotment.

(vii) Submit all statements to the company for their final approval.

(viii) Help the company in getting the shares listed.

Bankers to an Issue

The bankers to an issue are engaged in activities such as acceptance of applications along with application money from the investor in respect of capital and refund of application money.

Registration: To carry on activity as a banker to issue, a person must obtain a certificate of registration from the SEBI. The applicant should be a scheduled bank. Every banker to an issue had to pay to the SEBI an annual free for Rs. 5 lakh and renewal fee or Rs. 2.5 lakh every three years from the fourth year from the date of initial registration. Non-payment of the prescribed fee may lead to the suspension of the registration certificate.

Syndicate Members:

The Book Running Lead Managers to the issue appoint the Syndicate Members, who enter the bids of investors in the book building system. Syndicate Members are commercial or investment banks registered with SEBI who also carry on the activity of underwriting in IPO.

They work as intermediaries for Issuer Company and the buyers of the IPO stocks. Investors submit their bids for IPO shares through Syndicate Members appointed by the Issuer Company. They are also known as ‘the Members of the Syndicate’. The Members of the Syndicate circulate copies of the Red Herring Prospectus along with the bid cum application form to potential investors. After receiving the bid for IPO Shares from an investor, Syndicate Member enters bidding detail into the electronic bidding system and generates a Transaction Registration Slip (TRS) for each price and demand option and gives the same to the bidder.

Management Notes

Account Current Meaning, Need and Situation leading to Account Current Preparation

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The account current is a detailed statement detailing the financial performance of an individual insurance agent’s business over a specified period. These statements form the basis for the reconciliation of accounts between the insurer and the agent. The account current is the basis for the paper trail as premiums paid by policyholders travel between insurance provider, agencies, and agents.

An account current lays out the financial components of an insurance agent’s business in detail. The statement is usually comprehensive in that it specifies premium and claim performance at the individual policy level. The accounting also typically shows summary transaction information as a record of balances owed. These balances are due either to the insurance agent or the insurer depending on the balance of claims paid, the premiums that are written, the premiums returned, and commissions.

Summary items on the account current may include gross premiums, agency commissions, the net payable amount on the current statement, and payments made or received between each submittal of the accounting.

Individual line item columns per policy may include the name of the agent underwriting the policy, the policy number, the name of the insured party, the date of policy underwriting, and the premium amount for the insurance policy. Other items include the percentage of an agent’s commission, the actual dollar amount of the commission, and the net amount due to the insurer for that specific policy.

Situations when account current is prepared are:

  • A consignee of goods can also prepare an Account Current, if the latter is to settle the account at the end of the consignment & interest is chargeable on outstanding balance.
  • It is prepared when frequent transactions regularly take place between two parties. An example is of a manufacturer who sells goods frequently to a merchant on credit and receives payments from him in instalments at different intervals and charges interest on the amount which remains outstanding.
  • It is prepared when two or more persons are in joint venture and each co-venture is entitled to interest on their investment. Also, no separate set of book is maintained for it.
  • An Account Current also is frequently prepared to set out the transactions taking place between a banker and his customer.
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