Corporate Accounting Unit 1/4

Accounting Standards

Guidelines and protocols that dictate how businesses should manage their accounting processes, ensuring accuracy, consistency, and comparability in financial statements.

Accounting Standards Board (AcSB) Definition

Official guidelines for financial reporting and form the foundation of generally accepted accounting principles (GAAP).

Accounting Standards Board (ASB)

Established by the ICAI to standardize accounting policies and practices across India.

Indian Accounting Standards (Ind AS)

Standards aligned with IFRS, issued by the Central Government of India.

International Financial Reporting Standards (IFRS)

A globally accepted framework for preparing and presenting financial statements, ensuring uniformity and comparability worldwide.

International Accounting Standards Committee (IASC)

Established in 1973 to harmonize various financial reporting practices, predecessor to IASB.

International Accounting Standards Board (IASB)

Develops and publishes IFRS, ensuring consistent global application and interpretation.

Generally Accepted Accounting Principles (GAAP)

A collection of commonly followed accounting rules and standards for financial reporting.

Convergence to IFRS

A process where national accounting standards are aligned with IFRS but may include some exceptions, aiming for complete alignment over time.

Harmonization

The process of aligning different sets of accounting standards to improve consistency and comparability across different jurisdictions.

Fair Value Measurement

The process of estimating the market value of an asset or liability based on current market conditions.

Securities and Exchange Board of India (SEBI)

The regulatory authority in India overseeing the securities market, including the enforcement of financial disclosure requirements.

National Advisory Committee on Accounting Standards (NACAS)

A committee in India that recommends accounting standards to the Ministry of Corporate Affairs (MCA).

IFRS 1

First-time Adoption of International Financial Reporting Standards: assists companies in adopting IFRS for the first time to prepare comprehensive financial statements for a financial year.

IFRS 2

Share-based Payment: details the accounting treatment for stock options and other share-based payments made to employees.

IFRS 3

Business combinations: specifies how companies should account for mergers or acquisitions with other businesses.

Ind AS 101

First-time Adoption of Indian Accounting Standards: specifies procedures for transitioning to Ind AS for the first time, ensuring comparability across periods. It includes exemptions and exceptions to retrospective application of Ind AS.

Ind AS 102

Share-based Payment: deals with accounting for transactions involving share-based payments, such as employee stock options, and requires fair value measurement of these payments.

Ind AS 103

Business combinations: prescribes accounting for business combinations using the acquisition method, including recognition of goodwill or gains from bargain purchases.

Corporate Accounting

The branch of accounting concerned with accounting related to corporate bodies, including preparing and consolidating financial statements as per the Companies Act, 2013.

Objectives of Corporate Accounting

Include recording financial transactions, preparing financial statements, complying with legal requirements, facilitating decision-making, disclosing financial performance, and managing assets and liabilities.

Statutory Companies

Companies constituted by a special Act of Parliament or State Legislature, formed to provide public service (e.g., Reserve Bank of India, Life Insurance Corporation of India).

Registered Companies

Companies registered under the Companies Act, 2013, or any previous Company Law, coming into existence when registered and granted a certificate of incorporation by the Registrar of Companies (ROC).

Companies Limited by Shares

Companies where the liability of members is limited to the extent of their shareholding, including any unpaid amount on shares held.

Companies Limited by Guarantee

Companies where the liability of members is limited to the amount they undertake to contribute to the company's assets as a guarantee in the event of winding-up/liquidation.

Unlimited Liability Companies

Companies with no limit on the liability of its members, who are liable for the company’s debts in proportion to their interests; their personal assets can be used to clear company debts.

Public Company

A company which is not a private company, may be formed by 7 or more persons, requires a minimum of 3 directors, and must add 'Limited' at the end of its name. Shares can be freely transferred to the public.

Private Company

A company which restricts the right to transfer shares, limits the number of members to 200 (excluding OPC), must have a minimum of 2 directors, and adds 'Private Ltd.' at the end of its name.

One Person Company (OPC)

A company with only one person as a member, requiring a nominee, which is a significant departure from sole proprietorships by providing limited liability.

Foreign Company

A company incorporated outside India which has a place of business in India (physically or electronically) and conducts business activity in India.

Indian Company

A company formed and registered in India under the Companies Act, 2013.

Section 8 Company

A company registered as a limited company under Section 8 of the Companies Act, 2013, holding a license from the Central Government, with objectives related to promotion of commerce, art, science, etc., and intends to apply its profits to these objectives.

Government Company

Any company in which not less than 51% of the paid-up share capital is held by the Central Government, State Government(s), or partly by the Central Government and partly by one or more State Governments.

Small Company

A company, other than a public company, with paid-up share capital not exceeding Rs. 50 lakh (or prescribed higher amount up to Rs. 10 crore) and turnover not exceeding Rs. 2 crore (or prescribed higher amount up to Rs. 100 crore).

Subsidiary Company

A company in which the holding company controls the composition of the Board of Directors or exercises/controls more than one half of the total voting power.

Holding Company

A company which has subsidiary companies.

Associate Company

A company in which another company has significant influence (at least 20% of the total voting power or control of business decisions).

Producer Company

A legally recognized body of farmers/agriculturists with the aim to improve the standard of living of its members.

Dormant Company

A company formed for a future project or to hold an asset or intellectual property, not having any significant accounting transaction.

Financial Statements

Documents summarizing the financial activities and position of a company, including the balance sheet, profit and loss statement, cash flow statement, and notes to the financial statements.

Balance Sheet

A financial statement presenting a company's assets, liabilities, and shareholders' equity at a specific point in time.

Profit and Loss Statement

Summarizes a company's revenues, expenses, gains, and losses during a specific period, determining the net profit or loss; also known as the income statement.

Cash Flow Statement

Presents inflows and outflows of cash and cash equivalents from operating, investing, and financing activities.

Notes to the Financial Statements

Additional information and explanations accompanying the financial statements, providing details about specific items, accounting policies, contingencies, and other relevant information.

Accounting Standards

Prescribed rules and principles guiding the preparation and presentation of financial statements, ensuring consistency, comparability, and transparency.

Extraordinary Items

Abnormal gains or losses not generated from the ordinary business operations of a company, infrequent in nature, and unlikely to recur.

Contingent Liability

A potential liability that may occur in the future, such as pending lawsuits or honoring product warranties.

Forfeiture of Shares

Termination of membership by taking the shares because of default on payment on allotment and/or call money by a shareholder

Conditions for valid forfeiture of shares

The power to forfeit shares must be expressly given by the company’s Articles; The procedure given in the Articles must be followed; There should be a default by the shareholder in payment of a valid call; A notice of demand, requiring the shareholders to pay calls of a specified amount within the specified period must be given by the company; The Board of Directors must pass a resolution for forfeiture of shares

Forfeited Shares

The property of the company that can be reissued at par, premium, or discount, but the discount cannot exceed the amount received on these shares

Surrender of Shares

Act of voluntary return of shares by the shareholder(s) of the company for cancellation

Circumstances for acceptance of Surrender of Shares

When shares are surrendered in exchange of new issue of shares of the same nominal value or When shares are surrendered as a workaround to forfeiture of shares, where similar situation as with forfeiture have arisen

Impact of Forfeiture of Shares

Results in reduction of share capital; share capital account should be debited with the amount called upon these shares so far

Accounting entries for Reissue of Forfeited Shares

Should be taken into account while passing accounting entries regarding reissue of forfeited shares: The amount at which they are taken as paid up on reissue; The amount that had already been received on the shares forfeited and The amount allowed as discount

Surrender of shares

The return of shares voluntarily by the shareholder to the company for cancellation

Dual-Class Shares

Two distinct types of equity shares, each with unique rights and benefits

Lien of Shares

Right to retain possession of an item until a claim is settled; In the context of a company, implies that a member cannot transfer their shares until they clear their debt to the company

Alteration of Share Capital

Modifying a company's capital structure, either by increasing or decreasing the number of shares, or by changing the rights associated with existing shares

Reserve Capital

The portion of a company's increased nominal capital or uncalled share capital that cannot be called up except in the event of the company's winding up.

Redemption

Repaying an obligation according to predetermined amounts and schedules, especially preference shares

Provisions of The Companies Act (Section 55)

Authorization by the company's Articles of Association, Shareholder Approval through a special resolution and Redemption Period within a maximum of 20 years from their issue date

Methods of Preference Share Redemption

Redemption from Profits, Redemption through a Fresh Issue of Shares, Redemption out of Capital and Purchase of Own Shares

Shareholder's liability

Shareholders are liable to pay for the shares they have subscribed to in full, and failure to do so can result in the forfeiture of their shares.

Share repurchase

Refers to the process of a company buying back its own shares from the open market or from shareholders.

Reserve Fund

It is a fund created by the company, out of profits earned during the period, generally used to meet unexpected expenses and financial obligations.

Share Capital

The amount of capital sourced by a company from issue of Shares.

Share

A unit into which the total share capital of a company is divided.

Share (as per Section 2(84) of the Companies Act, 2013)

Means a share in the share capital of a company and includes stock. It represents the interest of a shareholder in the company, measured for the purposes of liability and dividend. It attaches various rights and liabilities.

Share Capital

The total amount of money a company raises by issuing shares.

Share Capital as per Section 43 of the Companies Act 2013

Share capital of a company limited by shares shall be of two kinds i.e., equity share capital or preference share capital, unless otherwise provided by MOA or Articles of Association (hereinafter referred to as “AOA”) of a private company.

Right Share (as per section 62(1) of the Companies Act, 2013)

Shares offered to existing equity shareholders in proportion to their holdings when a company increases its subscribed capital.

Bonus Share

Shares given to existing shareholders in proportion to the number of shares they hold; additional shares given to current shareholders without any receipt of any consideration.

Sweat Equity Share / Employee Stock Option Plan (ESOP) (According to section 54 of the Companies Act)

Equity shares issued by a company to its employees or directors, usually at a discount or for consideration other than cash.

Employee Stock Option Scheme (ESOS)

An arrangement where a company grants its employees the option to purchase a specified number of shares in the company at a predetermined price, usually lower than the market value. Governed by SEBI's Share Based Employee Benefits and Sweat Equity Regulations, 2021.

Cumulative Preference Share

Preference shareholders can be paid from the profits made in the subsequent years for the current year’s dividends that are in arrears; the fixed dividend keeps on accumulating.

Non-Cumulative Preference Share

The non-cumulative preference share gives the right to its holder to a fixed amount or a fixed percentage of dividends out of the profits of each year. If no profits are available in any year or no dividend is declared, the preference shareholders do not get dividend and also they cannot claim unpaid dividends in the subsequent year(s).

Redeemable Preference Share

Shares refer to the type of shares where the shareholders are repaid after an agreed period of time. The repayment of Preference Capital to the Preference Shareholders is known as redemption of preference shares.

Irredeemable Preference Share

Shares are the type of shares which cannot be redeemed. These shares typically stay till the life of the company.

Participating Preference Share

The shares which are entitled to an additional amount apart from the fixed preferential dividend which they are entitled to are known as Participating preference shares.

Non-Participating Preference Share

Unless expressly provided, preference shareholders are non- participating and get only the fixed preferential dividend and return of capital in the event of winding- up out of realised values of assets after meeting all external liabilities and nothing more.

Convertible Preference Share

Shares are those shares that can be converted into equity shares after the life of the preference shares.

Non-Convertible Preference Share

Shares are those shares that cannot be converted into equity shares.

Authorized Capital

As per Section-2(8), it is the maximum Share Capital of a Company which must be mentioned in the Memorandum of Association (MOA) of the said Company. This is also referred to as its nominal capital.

Issued Capital

The portion of the Authorized Share Capital which is issued by the company to the investors.

Subscribed Capital

Share Capital is the portion of the issued share capital which the investors have subscribed.

Called up Capital

The Company can prefer to call up only 90 percent of the Subscribed Capital

Paid up Capital

If the Investors or Shareholders pay 95 percent of the Called up Capital, then the amount received by the company

Uncalled Capital

Uncalled Capital is that portion of the Share Capital which the company has not yet called

Reserve Capital

Reserve capital refers to that part of the authorised capital which is yet to be called up and will be available for drawing when needed.

Oversubscription

The situation where the application money received by the company is in excess of the number of shares offered to the public for subscription.

Under subscription

A situation where the application received by the company from the public is less than the shares offered by the company.

Share premium

Amount that investors pay for shares that is above the nominal or face value of the shares.

Dilution

Occurs when a company issues additional shares, which can reduce the ownership stake of existing shareholders.

Initial public offering (IPO)

When a private company issue shares to the public for the first time. This allows the company to raise significant capital and provide liquidity to existing shareholders who may wish to sell their shares.

Private Placement

Sale of securities to a small number of private investors.

Share certificate

This is a document that serves as proof of ownership of shares in a company.