Accounting Standards - Detail Explain

Accounting Standards :

Accounting is the art of recording transactions in the best manner possible, so as to enable the reader to arrive at judgments/come to conclusions, and in this regard it is utmost necessary that there are set guidelines. These guidelines are generally called accounting policies. The intricacies of accounting policies permitted Companies to alter their accounting principles for their benefit. This made it impossible to make comparisons. In order to avoid the above and to have a harmonised accounting principle, Standards needed to be set by recognised accounting bodies. This paved the way for Accounting Standards to come into existence.

Accounting Standards in India are issued By the Institute of Chartered Accountanst of India (ICAI). At present there are 30 Accounting Standards issued by ICAI.

Objective of Accounting Standards

Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.

  

The institute of Chatered Accountants of India, recognizing the need to harmonize the diversre accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.  

Compliance with Accounting Standards issued by ICAI

Sub Section(3A) to section 211 of Companies Act, 1956 requires that every Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards. 'Accounting Standards' means the standard of accounting recomended by the ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards(NACAs) constituted under section 210(1) of companies Act, 1956.

Accounting Standards Issued by the Institute of Chatered Accountants of India are as below:

• Disclosure of accounting policies.
• Valuation Of Inventories.
• Cash Flow Statements.
• Contingencies and events Occurring after the Balance sheet Date
• Net Profit or loss For the period, Prior period items and Changes in accounting Policies.
• Depreciation accounting.
• Construction Contracts.
• Revenue Recognition.
• Accounting For Fixed Assets.
• The Effect of Changes In Foreign Exchange Rates.
• Accounting For Government Grants.
• Accounting For Investments.
• Accounting For Amalgamation.
• Employee Benefits.
• Borrowing Cost.
• Segment Reporting.
• Related Party Disclosures.
• Accounting For Leases.
• Earning Per Share.
• Consolidated Financial Statement.
• Accounting For Taxes on Income.
• Accounting for Investment in associates in Consolidated Financial Statement.
• Discontinuing Operation.
• Interim Financial Reporting.
• Intangible assets.
• Financial Reporting on Interest in joint Ventures.
• Impairment Of assets.
• Provisions, Contingent, liabilities and Contingent assets.
• Financial instrument.
• Financial Instrument: presentation.
• Financial Instruments, Disclosures and Limited revision to accounting standards.

Disclosure of Accounting Policies: Accounting Policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statements. 

Valuation of Inventories: The objective of this standard is to formulate the method of computation of cost of inventories / stock, determine the value of closing stock / inventory at which the inventory is to be shown in balance sheet till it is not sold and recognized as revenue.

Cash Flow Statements: Cash flow statement is additional information to user of financial statement. This statement exhibits the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one of the tools for assessing the liquidity and solvency of the enterprise.

Contigencies and Events occuring after the balance sheet date: In preparing financial statement of a particular enterprise, accounting is done by following accrual basis of accounting and prudent accounting policies to calculate the profit or loss for the year and to recognize assets and liabilities in balance sheet. While following the prudent accounting policies, the provision is made for all known liabilities and losses even for those liabilities / events, which are probable. Professional judgement is required to classify the likehood of the future events occuring and, therefore, the question of contingencies and their accounting arises.

  

Objective of this standard is to prescribe the accounting of contigencies and the events, which take place after the balance sheet date but before approval of balance sheet by Board of Directors. The Accounting Standard deals with Contingencies and Events occuring after the balance sheet date. 

Net Profit or Loss for the Period, Prior Period Items and change in Accounting Policies : The objective of this accounting standard is to prescribe the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced. Profit and loss account being a period statement covers the items of the income and expenditure of the particular period. This accounting standard also deals with change in accounting policy, accounting estimates and extraordinary items.

Depreciation Accounting : It is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time. Depreciation is nothing but distribution of total cost of asset over its useful life.

Construction Contracts : Accounting for long term construction contracts involves question as to when revenue should be recognized and how to measure the revenue in the books of contractor. As the period of construction contract is long, work of construction starts in one year and is completed in another year or after 4-5 years or so. Therefore question arises how the profit or loss of construction contract by contractor should be determined. There may be following two ways to determine profit or loss: On year-to-year basis based on percentage of completion or On cpmpletion of the contract. 

Revenue Recognition : The standard explains as to when the revenue should be recognized in profit and loss account and also states the circumstances in which revenue recognition can be postponed. Revenue means gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of an enterprise such as:- The sale of goods, Rendering of Services, and Use of enterprises resources by other yeilding interest, dividend and royalties. In other words, revenue is a charge made to customers / clients for goods supplied and services rendered.

Accounting for Fixed Assets : It is an asset, which is:- Held with intention of being used for the purpose of producing or providing goods and services. Not held for sale in the normal course of business. Expected to be used for more than one accounting period.

The Effects of changes in Foreign Exchange Rates : Effect of Changes in Foreign Exchange Rate shall be applicable in Respect of Accounting Period commencing on or after 01-04-2004 and is mandatory in nature. This accounting Standard applicable to accounting for transaction in Foreign currencies in translating in the Financial Statement Of foreign operation Integral as well as non- integral and also accounting for For forward exchange.Effect of Changes in Foreign Exchange Rate, an enterprises should disclose following aspects:

• Amount Exchange Difference included in Net profit or Loss;
• Amount accumulated in foreign exchange translation reserve;
• Reconciliation of opening and closing balance of Foreign Exchange translation reserve; 

Accounting for Government Grants : Governement Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions. Government assistance, which cannot be valued reasonably, is excluded from Govt. grants,. Those transactions with Governement, which cannot be distinguished from the normal trading transactions of the enterprise, are not considered as Government grants.

Accounting for Investments : It is the assets held for earning income by way of dividend, interest and rentals, for capital appreciation or for other benefits.

Accounting for Amalgamation : This accounting standard deals with accounting to be made in books of Transferee company in case of amalgamtion. This accounting standard is not applicable to cases of acquisition of shares when one company acquires / purcahses the share of another company and the acquired company is not dissolved and its seperate entity continues to exist. The standard is applicable when acquired company is dissolved and seperate entity ceased exist and purchasing company continues with the business of acquired company.

Employee Benefits : Accounting Standard has been revised by ICAI and is applicable in respect of accounting periods commencing on or after 1st April 2006. the scope of the accounting standard has been enlarged, to include accounting for short-term employee benefits and termination benefits.

Borrowing Costs : Enterprises are borrowing the funds to acquire, build and install the fixed assets and other assets, these assets take time to make them useable or saleable, therefore the enterprises incur the interest (cost on borrowing) to acquire and build these assets. The objective of the Accounting Standard is to prescribe the treatment of borrowing cost (interest + other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not.

Segment Reporting : An enterprise needs in multiple products/services and operates in different geographical areas. Multiple products / services and their operations in different geographical areas are exposed to different risks and returns. Information about multiple products / services and their operation in different geographical areas are called segment information. Such information is used to assess the risk and return of multiple products/services and their operation in different geographical areas. Disclosure of such information is called segment reporting.

Related Paty Disclosure : Sometimes business transactions between related parties lose the feature and character of the arms length transactions. Related party relationship affects the volume and decision of business of one enterprise for the benefit of the other enterprise. Hence disclosure of related party transaction is essential for proper understanding of financial performance and financial position of enterprise.

Accounting for leases : Lease is an arrangement by which the lesser gives the right to use an asset for given period of time to the lessee on rent. It involves two parties, a lessor and a lessee and an asset which is to be leased. The lessor who owns the asset agrees to allow the lessee to use it for a specified period of time in return of periodic rent payments.

Earning Per Share :Earning per share (EPS)is a financial ratio that gives the information regarding earning available to each equiy share. It is very important financial ratio for assessing the state of market price of share. This accounting standard gives computational methodology for the determination and presentation of earning per share, which will improve the comparison of EPS. The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in stock exchange.

Consolidated Financial Statements : The objective of this statement is to present financial statements of a parent and its subsidiary (ies) as a single economic entity. In other words the holding company and its subsidiary (ies) are treated as one entity for the preparation of these consolidated financial statements. Consolidated profit/loss account and consolidated balance sheet are prepared for disclosing the total profit/loss of the group and total assets and liabilities of the group. As per this accounting standard, the conslidated balance sheet if prepared should be prepared in the manner prescribed by this statement.

Accounting for Taxes on Income :                     
This accounting standard prescribes the accounting treatment for taxes on income. Traditionally, amount of tax payable is determined on the profit/loss computed as per income tax laws. According to this accounting standard, tax on income is determined on the principle of accrual concept. According to this concept, tax should be accounted in the period in which corresponding revenue and expenses are accounted. In simple words tax shall be accounted on accrual basis; not on liability to pay basis.

Accounting for Investments in Associates in consolidated financial statements :         The accounting standard was formulated with the objective to set out the principles and procedures for recognizing the investment in associates in the cosolidated financial statements of the investor, so that the effect of investment in associates on the financial position of the group is indicated.

Discontinuing Operations : The objective of this standard is to establish principles for reporting information about discontinuing operations. This standard covers "discontinuing operations" rather than "discontinued operation". The focus of the disclosure of the Information is about the operations which the enterprise plans to discontinue rather than dsclosing on the operations which are already discontinued. However, the disclosure about discontinued operation is also covered by this standard.

Interim Financial Reporting (IFR) : Interim financial reporting is the reporting for periods of less than a year generally for a period of 3 months. As per clause 41 of listing agreement the companies are required to publish the financial results on a quarterly basis.

Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset without physical substance held for use in the production or supplying of goods or services for rentals to others or for administrative purpose.

Financial Reporting of Interest in joint ventures : Joint Venture is defined as a contractual arrangement whereby two or more parties carry on an economic activity under 'joint control'. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefit from it. 'Joint control' is the contractually agreed sharing of control over economic activity.

Impairment of Assets : The dictionary meanong of 'impairment of asset' is weakening in value of asset. In other words when the value of asset decreases, it may be called impairment of an asset. As per AS-28 asset is said to be impaired when carrying amount of asset is more than its recoverable amount.

Provisions, Contingent Liabilities And Contingent Assets : Objective of this standard is to prescribe the accounting for Provisions, Contingent Liabilitites, Contingent Assets, Provision for restructuring cost.

Provision: It is a liability, which can be measured only by using a substantial degree of estimation.

Liability: A liability is present obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Financial Instrument: Recognition and Measurement, issued by The Council of the Institute of Chartered Accountants of India, comes into effect in respect of Accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for An initial period of two years. This Accounting Standard will become mandatory in respect of Accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business Entities except to a Small and Medium-sized Entity. The objective of this Standard is to establish principles for recognizing and measuring Financial assets, financial liabilities and some contracts to buy or sell non-financial items. Requirements for presenting information about financial instruments are in Accounting Standard.

Financial Instrument: presentation : The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in Accounting Standard Financial Instruments:

Financial Instruments, Disclosures and Limited revision to accounting standards: The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to evaluate:

the significance of financial instruments for the entity’s financial position and performance; and

the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.

Source : http://www.saralaccounts.com

How to Register a Company in India

Introduction - Forming A Company In India:

The Companies Act of 1956 sets down rules for the establishment of both public and private companies. The most commonly used corporate form is the limited company, unlimited companies being relatively uncommon. A company is formed by registering the Memorandum and Articles of Association with the State Registrar of Companies of the state in which the main office is to be located.

Foreign companies engaged in manufacturing and trading activities abroad are permitted by the Reserve Bank of India to open branch offices in India for the purpose of carrying on the following activities in India:

·       To represent the parent company or other foreign companies in various matters in India, for example, acting as buying/selling agents in India, etc.

·      To conduct research work in which the parent company is engaged provided the results of the research work are made available to Indian companies

·      To undertake export and import trading activities.

·      To promote possible technical and financial collaboration between Indian companies and overseas companies.

Application for permission to open a branch, a project office or liaison office is made via the Reserve Bank of India by submitting form FNC-5 to the Controller, Foreign Investment and Technology Transfer Section of the Reserve Bank of India. For opening a project or site office, application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India. A foreign investor need not have a local partner, whether or not the foreigner wants to hold full equity of the company. The portion of the equity thus not held by the foreign investor can be offered to the public.

Incorporating a Company  - Approval of Name:

• The first step in the formation of a company is the approval of the name by the Registrar of Companies (ROC) in the State/Union Territory in which the company will maintain its Registered Office.
• This approval is provided subject to certain conditions:

• For instance, there should not be an existing company by the same name.

• Further, the last words in the name are required to be "Private Ltd." in the case of a private company and "Limited" in the case of a Public Company. 
• The application should mention at least four suitable names of the proposed company, in order of preference.
• In the case of a private limited company, the name of the company should end with the words "Private Limited" as the last words.
• In case of a public limited company, the name of the company should end with the word "Limited" as the last word.
• The ROC generally informs the applicant within seven days from the date of submission of the application, whether or not any of the names applied for is available.
• Once a name is approved, it is valid for a period of six months, within which time Memorandum of Association and Articles of Association together with miscellaneous documents should be filed.
• If one is unable to do so, an application may be made for renewal of name by paying additional fees.
• After obtaining the name approval, it normally takes approximately two to three weeks to incorporate a company depending on where the company is registered

 Memorandum of Articles:

·         The Memorandum of Association and Articles of Association are the most important documents to be submitted to the ROC for the purpose of incorporation of a company.

·         The Memorandum of Association is a document that sets out the constitution of the company.

·         It contains, amongst others, the objectives and the scope of activity of the company besides also defining the relationship of the company with the outside world.

·         The Articles of Association contain the rules and regulations of the company for the management of its internal affairs.

·         While the Memorandum specifies the objectives and purposes for which the Company has been formed, the Articles lay down the rules and regulations for achieving those objectives and purposes.

·         The ROC will give the certificate of incorporation after the required documents are presented along with the requisite registration fee, which is scaled according to the share capital of the company, as stated in its Memorandum.

·         A private company can commence business on receipt of its certificate of incorporation.

·         A public company has the option of inviting the public for subscription to its share capital.

·         Accordingly, the company has to issue a prospectus, which provides information about the company to potential investors. The Companies Act specifies the information to be contained in the prospectus.

·         The prospectus has to be filed with the ROC before it can be issued to the public.

·         In case the company decides not to approach the public for the necessary capital and obtains it privately, it can file a "Statement in Lieu of Prospectus" with the ROC.

·         On fulfillment of these requirements, the ROC issues a Certificate of Commencement of Business to the public company.

·         The company can commence business immediately after it receives this certificate

Certificate of Incorporation:

• After the duly stamped Memorandum of Association and Articles of Association, documents and forms are filed and the filing fees are paid, the ROC scrutinizes the documents and, if necessary, instructs the authorised person to make necessary corrections.
• Thereafter, a Certificate of Incorporation is issued by the ROC, from which date the company comes in to existence.
• It takes one to two weeks from the date of filing Memorandum of Association and Articles of Association to receive a Certificate of Incorporation.
• Although a private company can commence business immediately after receiving the certificate of incorporation, a public company cannot do so until it obtains a Certificate of Commencement of Business from the ROC

 Miscellaneous Documents:

The documents/forms stated below are filed along with Memorandum of Association and Articles of Association on payment of filing fees (depending on the authorised capital of the company):

·         Declaration of compliance duly stamped.

·         Notice of the situation of the registered office of the company.

·         Particulars of Directors, Manager or Secretary.

·         Authority executed on a non-judicial stamp paper, in favour of one of the subscribers to the Memorandum of Association or any other person authorizing him to file the documents and papers for registration and to make necessary corrections, if any.

·        The ROC’s letter (in original) indicating the availability of the name.

With whom to be filed:

With “The Registrar of Companies” of the State in which the company is to be registered.

Documents required to be submitted:

·       A printed copy each of the Memorandum and Articles of Association of the proposed company filed along with the declaration duly stamped with the requisite value of adhesive stamps from the State/ Union Territory Treasury .

·       Below the subscription clause the subscribers to the Memorandum should write in his own handwriting his full name and father's, or husband's full name in block letters, full address, occupation, e.g.,'business executive, engineer, housewife, etc. and number of equity shares taken and then put his or her signatures in the column meant for signature.

·       Similarly at the end of the Articles Of Association the subscriber should write in his own handwriting :

·       His full name and father's full name in block letters, full address, occupation.

·       The signatures of the subscribers to the Memorandum and the Article of Association should be witnessed by one person preferably by the person representing the subscribers, for registration of the proposed company before the Registrar of Companies.

·       Under column 'Total number of equity shares' write the total of the shares taken by the subscribers e.g., 20 (Twenty) only. Mention date e.g. 5th day of August, 1996. Place- eg., 'New Delhi'.

·       With the stamped copy, one spare copy each of the Memorandum and Articles of Association of the proposed company.

·       Original copy of the letter of the Registrar of Companies intimating the availability of name.

·       Form No. 18 - Situation of registered office of the proposed company.

·       Form No. 29-Consent to act as a director etc. Dates on the consent Form and the undertaking letters should be the same as is mentioned in the Memorandum of Association signed by the director himself. A private company and a wholly-owned Government company are not required to file Form No. 29.

·       Form No. 32 (in duplicate). Particulars of proposed, directors, manager or secretary.

·       Power of attorney duly typed on a non-judicial stamp paper of the requisite value. The stamp paper should be purchased in the name of the persons signing the authority.

·        No objection letter from the persons whose name has been given in application for vailability of name in Form No. 1-A as promoters/directors but are not interested at a later stage should be obtained filed with the Registrar at the time of submitting documents, for registration.

·        The agreements, if any, which the company proposes to enter with any individual for, appointment as managing or whole-time director or manager are also to be filed.

Finance Terminology- Amortization,Negative Goodwill,Capital Reserve,Net Asset Value (NAV)

Amortization:

The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest.

Charges made against the interest received on a debt in order to offset a premium paid for the debt. Thus, with each periodic payment, a debtor is not only paying back interest, but also part of his or her premium. This leads to higher periodic payments than in the case when only interest is paid out. However, a payment schedule which includes premium amortization makes debt management easier, especially if the principal is large. While paying just the interest each period will lead to a low outflow of cash each month, the debtor might not save enough to pay the principal.

Thus, amortizing the premium each period also reduces the credit risk of the debt, since the creditor gets some part of the principal each time period, as opposed to allowing a debtor to forfeit on all of it at the maturity of the loan. Amortization of premium is a common feature in cases when a person or company takes on a large amount of debt at one time, such as a mortgage

Depreciation:

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow. Depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn.

Example:

For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming straight-line depreciation), which will be matched with the money that the equipment helps to make each year.

Contingency Reserve:

A reserve set aside for unforeseen events or damages. The term contingency reserve refers primarily to the amount of quantity of funds or other financial resources that is required to be allocated at and above the previously designated estimate amount to reduce the risk of overruns to an acceptable level for the financially responsible organization. However, contingency reserve need not refer exclusively to monetary terms. It can also refer to as specific quantity of time in man hours that must be allocated above and beyond the previously determined quantity of hours required to assure that any overtime or other unexpected hours of work required can be properly compensated for.

Typically the contingency reserves, in terms of both finance and time, are determined at the outset of a project. However, as a project is ongoing, if it appears that the project will require additional funds or time allocation to complete, contingency reserves can be instituted or modified at any time to better prepare the organization for the possibility of their usage at some point in a projects life.

Capital Reserve:

Capital reserve is a reserve created by a company with a view to face contingencies like inflation, instability etc.  in times of rising price. Normally, capital reserves are the reserves raised through non-trading activities and relates to company. For example, to boost investors’ confidence during inflation time, the book value of the company can be increased using revaluation of assets reserve. In the same way, the company can allocate certain portion of their profit for capital redemption reserves for purchasing their own company shares when the share market is in downtrend thus keeping the value of the share in check protecting the shareholders interest which is called buy back of shares. Also any profit on purchase of business, forfeiture of shares, gain on reissue of forfeited shares and debenture premium may be put under capital reserves under different heads. These capital reserves can be used to write off fictitious assets subject to certain conditions.

General Reserve:
At the end of an accounting period the company may decide to transfer part of the profits to a reserve and retain the balance in the profit and loss account. The reserve created out of profits transferred from profit and loss account is called general reserve. The balance in the profit and loss account is called a surplus and will be shown under this head in the balance sheet.

The company can use the general reserve for various purposes including issue of bonus shares to shareholders and payment of dividend when profits are insufficient.

Impairment Charges:

The term impairment refers to assets that are no longer of the same value as in a prior period. An impairment charge is used and the asset is revalued downward and a "charge" is made to net assets. An Impairment Charge is incurred when the fair value of a company's goodwill is less than the recorded value. If the fair value of goodwill is less than the recorded value, a company's goodwill is said to be "impaired" and the difference (between the fair value and recorded value) must be charged off as an expense.

Example:

Goodwill Asset  Value (Year 0) $4,000,000

Impairment Test Results Value (Year 1) $3,000,000

Income Statement Impact/ Impairment Charge $1,000,000

Negative goodwill, also called a bargain-purchase amount, occurs when a company buys an asset for less than its fair market value. Negative goodwill is the opposite of goodwill.

Negative Goodwill:

Negative goodwill is based on the concept of goodwill, an intangible asset that represents the worth of a company's brand name, patents, customer base and other items that are difficult to price but that help to make a company valuable. Most of the time, a company will be purchased for more than the value of its tangible assets, and the difference is attributed to goodwill. When the price paid is less than the actual value of the company's net assets, you have negative goodwill

Example:

let's assume Company XYZ purchases the assets of Company ABC for $20,000,000. The assets are actually worth $35,000,000, but Company XYZ gets a deal because Company ABC needs cash immediately and Company XYZ was the only buyer willing to pay cash. The difference between the purchase price and the fair market value is $15,000,000. 

Company XYZ records this as negative goodwill on its income statement, however it does not record the whole $15,000,000 at once. XYZ records the negative goodwill over the remaining weighted-average estimated useful life of the acquired assets. The remainder stays on the balance sheet as a contra asset that eventually dwindles down to zero as the assets age.

After the acquisition is complete, Company XYZ must test the fair value of the assets for impairment. In cases where a company is acquiring future losses and expenses, the negative goodwill is deferred and recognized on the income statement as those future losses or expenses occur.

A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. One example is the issuance of preferred stock that gives shareholders the right to redeem their shares at a premium after the takeover.

Poison Pill:

There are two types of poison pills:

1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. By purchasing more shares cheaply (flip-in), investors get instant profits and, more importantly, they dilute the shares held by the acquirer. This makes the takeover attempt more difficult and more expensive.

2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger

A company which makes a hostile takeover bid on a target company. The acquisition of one company (called the target company) by another (called the acquirer) that is accomplished not by coming to an agreement with the target company's management, but by going directly to the company’s shareholders or fighting to replace management in order to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

A golden parachute has been defined as an agreement between a company and an Executive specifying that the employee will receive certain significant benefits if employment is terminated. In other words, benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss of their job. Benefits include items such as stock options, bonuses, severance pay, etc.

A process that increases the current net value of business or shareholder capital gains, with the objective of bringing in the highest possible return. The wealth maximization strategy generally involves making sound financial investment decisions which take into consideration any risk factors that would compromise or outweigh the anticipated benefits.

Any project which generates positive net present value creates wealth to the company. When a company creates wealth from a course of action it has initiated the share holders benefit because such a course of action will increase the market value of the company’s share.

For Example in taking an investing decision management should choose that project for investment, which will give maximum return to the share holders.

Similarly in other financial Decision and for that matter any decision should be taken to with the objectives of maximization of wealth of the shareholders.

A capital gain realized by the sale or exchange of a capital asset that has been held for exactly one year or less. Short-term gains are taxed at the taxpayer's top marginal tax rate. A short-term gain can only be reduced by a short-term loss

Short-term gains and losses are netted against each other. For example, assume a taxpayer purchased and sold two different securities during the tax year: Security A and Security B. If he/she earned a gain on Security A of $5,000 and a loss on Security B of $3,000, then the net short-term gain is $2,000 ($5,000 - $3,000).

It is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors and, thereby, represent the net asset value per share.[1]

It is calculated by totaling the value of all the fund's holdings plus money awaiting investment, subtracting operating expenses, and dividing by the number of outstanding shares.

A fund's NAV changes regularly, though day-to-day variations are usually small.

The NAV is the price per share an open-end mutual fund pays when you redeem, or sell back, your shares. With no-load mutual funds, the NAV and the offering price, or what you pay to buy a share, are the same. With front-load funds, the offering price is the sum of the NAV and the sales charge per share and is sometimes known as the maximum offering price (MOP).

The NAV of an exchange traded fund (ETF) or a closed-end mutual fund may be higher or lower than the market price of a share of the fund. With an ETF, though, the difference is usually quite small because of a unique mechanism that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the fund's stocks.

Working capital is the capital available for conducting day-to-day operations of the business and consists of current assets and current liabilities. In other words, working capital is needed by the business to:

Pay suppliers and other creditors,

Pay employees

Pay for stocks

Allow for customers who are allowed to buy now, but pay later (so-called “trade debtors”)

Working capital is the difference between current assets and current liabilities: 

Current Assets means Inventory, Trade Receivables, Cash, Short term investments, Sundry Debtors etc.

Current liabilities means Trade payables, Bank Overdraft, Sundry Creditors etc.

Effective management of working capital ensures the organization  is maximizing the benefits from net current assets by having  an optimal level to meet working capital demands.

The Working Capital Cycle measures the time between paying for goods supplied to you and the final receipt of cash to you from their sale. It is desirable to keep the cycle as short as possible as it increase the effectiveness of working capital.

Working Capital Cycle:

Net Asset Value (NAV):

Short Term Capital Gain:

Wealth Maximization:

Golden Parachute:

Black Knight:

Mutual Funds

Definition :
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.


Mutual Fund is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner


Analysis :
A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification.


Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously.
Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time.


One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue.
On the basis of their structure and objective, mutual funds can be classified into following major types:


1. Open End Mutual Fund :

Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.


Open-end funds are required to calculate their net asset value (NAV) daily. Since the NAV of an open-end fund is calculated daily, it serves as a useful measure of its fair market value on a per-share basis. The NAV of the fund is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. Open-end funds usually charge an entry or exit load from the investors.


Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.


Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.

2. Closed-End Mutual Fund :
A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.


Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.


>>Distinct Features of Closed-end Funds

• These funds are closed to new capital after they begin operating
• Closed-end funds trade on stock exchanges rather than being redeemed directly by the fund
• Unlike open-end funds, the closed-end funds can be traded during the market day at any time. Open-end funds are generally traded at the closing price at the end of the market day.
• Closed-end funds are usually traded at a premiuim or discount whereas open-end funds are traded at NAV.

>>Advantages of Closed-end Funds

• Closed-end funds don't have to worry about the redemption of shares, hence they tend to keep less cash in their portfolios and cam invest more capital in the market. Therefore, they have the potential to generate greater returns as compared to open-end funds.
• In case of market panic and mass-selling by investors, open-end funds need to raise money for redemptions. To cope with the liquidity concerns, the manager of an open-ended fund may be forced to sell stocks he would rather keep, and keep stocks he would rather sell. In such as scenario the quality of the portfolio may be affected.

Reverse Merger

Reverse Merger :

An act where a private company purchases a publicly traded company and shifts its management into the latter. It also normally involves renaming the publicly traded company. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO.

In order for a reverse merger to happen smoothly, the publicly traded company is usually a shell corporation, that is, one with only an organizational structure and little or no activity. The two businesses can then merge the private company's product(s) with the public company's structure. It also makes initial trading less dependent on market conditions, a key risk in IPOs. However, it is important to note that a reverse merger only provides the private company with more liquidity if there is a real market interest in it.

A reverse merger is a strategy where a private company purchases control of a public shell company and then they do a merger with the private company. With a reverse merger the private company shareholders receive most of the shares in the public company and control of the board. A reverse merger is a very fast way to go public with the time table only being a couple of weeks. The reason a reverse merger is so quick is the public shell company already went through all the paper work and reviews in order to become public.

Reverse Merger Analysis :

Reverse merger allows your private company to go public.  

Reverse merger financial transactions are becoming increasingly popular and accepted. It is an alternative means for private companies to go public. The public shell is a vital aspect of a reverse merger transaction. A public shell is a publicly listed company with no assets or liabilities. It gets the name "shell" because the only thing remaining from the current company is its corporate shell structure. When a private company merges into this entity it becomes a shell.

Advantages :

There are several benefits to a reverse merger when compared to an Initial Public Offering (IPO). You will often receive a higher value for your company and the company won't have to have an underwriter. Another few benefits are that it is much cheaper and less time consuming to go public this way. Also with a reverse merger the ownership control will not be as diluted as with a regular public offering.

More businesses qualify for a reverse merger because a long and stable history of income is not required to qualify. The lack of an earning history will not keep a privately-held company from going public this route.

The benefits to reverse mergers is that you can demand a higher stock offering for the company stock, going public at a lesser cost and less dilution then an initial public offering. With the reverse merger you are less susceptible to the market. When going public the benefits are great when trying to raise capital. With the company now being public the stock is liquid and able to be uses for financing. Your company will now have the ability to acquire other companies using stock. Being public allows the company to offer stock incentive plans to keep employees.

Public Company Vs. Private Company

Distinction between a public company and a private company :
The distinction between a public company and a private company are explained in the following manner:

1. Minimum Paid-up Capital :

A company to be Incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000

2. Minimum number of members:

The minimum number of person required to form a public company is seven, whereas in a private company their number is only two.

3. Maximum number of members:

There is no limit on the maximum number of member of a public company, but a private company cannot have more than fifty members excluding past and present employees.

4. Commencement of Business:

A private company can commence its business as soon as it is incorporated. But a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business.

5. Invitation to public:

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public.

6. Transferability of shares:

There is no restriction on the transfer of share In the case of public company whereas a private company by its articles must restrict the right of members to transfer the share.

7. Number of Directors:

A public company must have at least three directors whereas a private company may have two directors.

8. Statutory Meeting :

A public company must hold a statutory meeting and file with the register a statutory report. But in a private company there are no such obligations.

9. Restrictions on the appointment of Directors:

A director of a public company shall file with the register a consent to act as such. He shall sign the memorandum and enter into a contact for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two-thirds of the directors of a public company must retire by rotation. These restrictions do not apply to a private company.

10. Managerial Remuneration :

Total managerial remuneration in the case of public company cannot exceed 11% of net profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions do not apply to a private company.

11. Further Issue of Capital:

A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders.

12. Name :

A private company has to use words ‘private limited’ at the end of its name. But a public company has to use only the word ‘Limited’ at the end of its name.