State with reasons your views on the following :
a. The Nepal Stock Exchange suspended trading in shares of Kasthmandap Ceramics (P) Ltd. (KCPL) after it was de-listed on 15 Ashadh 2061 due to non- payment if listing fees. On 14 Ashadh 2061 the shares of the company, with the face value of Rs.100, were traded at Rs.90per share. Alpha Beta co. (P) Ltd. (ABCPL) held 1500 shares of KCPL as its current investment. The shares were acquired at a price equal to the face value of shares. In the financial statements of 31stAshad 2061, ABCPL stated the value of investment in shares of KCPL at the cost price.
The carrying amount of current investment is lower of cost and fair value on the date of the balance sheet. In respect of investments for which an active market exists, market value generally provides the best evidence of fair value. The lower of cost and fair value provides a prudent method of determining the carrying amount to be stated in the financial statements. In the case given, the shares of KCPL were actively traded in the Nepal Stock Exchange before the company was de-listed with effect from 15 Ashadh 2061. the price of share on 14 Ashadh 2061, therefore, provides an indicative fair value of shares which may be considered vis-à-vis the cost of shares for the purpose of determining the carrying value of investment. The price at which KCPL shares were traded on 14 Ashadh 2061, therefore, should be considered for determination of the carrying value of investment, being lower of the cost or the considered fair value on the balance sheet date ABCPL‟s valuation or investment in shares of KCPL at the cost price, therefore is not appropriate.
b. In the financial statements for FY 2059/60, Makalu Finance Co. Ltd. (MFCL) had provided Rs.45 lacs towards provision for income tax. The advance tax paid that year was Rs.60 lacs. Internal Revenue Office assessed Rs.55 lacs as tax for FY 2059/60. In the financial statements of FY 2060/61, MFCL showed the amount of tax short provided in FY 2059/60 and paid in FY 2060/61 amounting to Rs.10 lacs as appropriations from the distributable profits for FY 2060/61.
Provision for tax being a charge on the profit & loss account of the company has to be shown above the line. Provision for tax which falls short of the tax amount assessed the Internal Revenue Office and paid in the subsequent year should, therefore, be added to the provision for tax made in the subsequent year as amount short provided in the previous year. The provision for tax made Makalu Finance Co. ltd. In FY 2059/60, which fell short of Rs. 10 lacs vis-à-vis the tax amount assessed and paid in the subsequent year should, therefore, be added to the provision for tax made in FY 2060/61. it is not correct to show the amount of tax short provided in FY 2059/60 as appropriation from the distributable profit of FY 2061/61.
c. In connection with the audit of Gamma Delta & Co. (P) Ltd. (GDCPL) for the year ended 31stAshadh 2060, the audit staff found that as a result of an improper cut-off of inventory shipments at the end of the year, approximately Rs.50, 000 of sale applicable to the subsequent year was recorded in the current year. The management of GDCPL refuses to adjust the financial statements for the Rs.50, 000 errors.)
The profit and loss account of a business enterprise should include only income and expenses relating to the relevant financial year. Inclusion of any income and / or expenses pertaining to the previous or the subsequent year in the profit and loss account of the current year will inhibit presentation of a true and fair view of the working results of the enterprise. In the books of Gamma Delta & Co. (P) Ltd. The auditors found appx Rs. 50, 000 of sales applicable to the subsequent year recorded as sales in the current year due to improper cut – off of inventory shipments at the year-end. Having detected overstatement of sales in the financial statements the auditor should explain to the management that overstatement of sales will artificially inflate the net profit, thereby, not presenting a true and fair view of the operating results of the company. Should the management refuse to take heed of the suggestions, the auditor should express qualified opinion in his audit report.
d. CD Co. Ltd. a fully subsidiary Co. of AB Co. ltd. was sold AB Ltd. to ER Ltd. on Bhadra 15 of FY 2061/62 and on 15 Aswin 2061 the Board of Directors of AB Co. Ltd. approved the Financial Statements of FY 2060/61. Is it necessary to disclose the transaction in the financial statements of FY 2060/61?
Accounting Standards for Events after the Balance Sheet Date:
This category of event which although take place after the balance sheet date are required to be reflected in the financial statements because of statutory, requirements or because of their special nature.
Disclosure on Non-adjusting Events After the Balance Sheet Date: –
Where non-adjusting events after the balance sheet date are of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions, an enterprise should disclose the following information for each significant category of non-adjusting event after the balance sheet date:
the nature of the events; and
an estimate of its financial effect, or a statement that such an estimate cannot be made.
As per the Events after the Reporting Period : announcing a plan to discontinue an operation, disposing of assets or setting liabilities attributable to a discontinuing operation or entering into binding agreements to sell such assets or settle such liabilities is a transaction as non-adjusting events after the balance sheet date but that may be of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluation and decisions. The company is required to disclose such transaction of sale of investment to ER Ltd. on its financial statement of finance year 2060/61.\