Corporate Accounting

Corporate accounting is the branch of accounting that deals with the formation, financing, operation, reorganisation and winding up of companies, including the issue of shares and debentures, preparation of final accounts, valuation of shares, amalgamation, absorption and liquidation.

Preference shares are shares that carry a preferential right over equity shares to receive a fixed rate of dividend and to be repaid first in case of winding up. They usually carry no voting rights and may be cumulative or non-cumulative, redeemable or irredeemable.

Minority interest is the share of the outside (minority) shareholders in the net assets and profits of a subsidiary company, that is, the part of the subsidiary's equity not owned by the holding company. It is shown as a separate item in the consolidated balance sheet.

Two objectives of price level accounting:

1. To show the effect of changing prices (inflation) on the financial statements so that figures are stated in comparable purchasing-power units.
2. To measure real profit and maintain the capital of the firm, so that profit is not overstated and capital is not eroded by distributing it as dividends.

Liquidation (winding up) is the process of closing down a company by converting its assets into cash, paying its liabilities in order of priority, and distributing any surplus among the shareholders, after which the company ceases to exist legally.

Cost of sales adjustment (COSA) is the extra charge needed because stock was held while prices rose. On the opening stock:

$\text{Opening stock restated} = 30{,}000 \times \frac{120}{100} = \text{Rs } 36{,}000$

$\text{COSA} = 36{,}000 - 30{,}000 = \text{Rs } 6{,}000$

The closing stock of Rs 18,000 is already at Chaitra prices, so it needs no adjustment. COSA is Rs 6,000 (a charge against profit).

$\text{Normal profit} = 300{,}000 \times 25\% = \text{Rs } 75{,}000$

$\text{Super profit} = \text{Actual profit} - \text{Normal profit} = 60{,}000 - 75{,}000 = -\text{Rs } 15{,}000$

There is no super profit. The company earns Rs 15,000 less than the normal profit (a sub-normal profit).

Adjusted yearly wages $= 200{,}000 \times 1.4 = \text{Rs } 280{,}000$.

Present value factor of an annuity for 5 years at 10% is

$\frac{1-(1.10)^{-5}}{0.10} = 3.7908$

$PV = 280{,}000 \times 3.7908 = \text{Rs } 1{,}061{,}424$

The present value of the human resource is about Rs 1,061,424.

Paid-up capital $= 30{,}000 \times 80 = \text{Rs } 2{,}400{,}000$.

$\text{Capitalised value} = \frac{157{,}500}{12\%} = \text{Rs } 1{,}312{,}500$

$\text{Value per share} = \frac{1{,}312{,}500}{30{,}000} = \text{Rs } 43.75$

Monetary working capital (debtors less creditors):

• 2023 (opening) $= 140{,}000 - 110{,}000 = 30{,}000$
• 2024 (closing) $= 200{,}000 - 140{,}000 = 60{,}000$

Both restated to average-price level (110):

• Opening $= 30{,}000 \times \frac{110}{100} = 33{,}000$
• Closing $= 60{,}000 \times \frac{110}{120} = 55{,}000$

Increase in real terms $= 55{,}000 - 33{,}000 = 22{,}000$.

$\text{MWCA} = \text{Money increase} - \text{Real increase} = 30{,}000 - 22{,}000 = \text{Rs } 8{,}000$

The monetary working capital adjustment is Rs 8,000.

Accounting standard: An accounting standard is a written policy statement issued by an authorised body (in Nepal, the Accounting Standards Board of Nepal, based on NFRS/IFRS) that lays down the rules for recognising, measuring, presenting and disclosing items in financial statements.

Why it is needed

1. Uniformity and comparability: companies follow the same rules, so statements can be compared across firms and years.
2. Reliability and transparency: it reduces manipulation and gives a true and fair view.
3. Protects users: investors, lenders and regulators can rely on the information.
4. Reduces alternative treatments: it narrows the choice of accounting methods.
5. Aids auditing and legal compliance, and helps raise foreign capital by meeting international standards.

Forensic accounting applies accounting, auditing and investigative skills to detect and prevent fraud and to present findings that can be used in a court of law. Its main functions are:

1. Fraud detection and investigation: finding embezzlement, falsification of records, money laundering and corruption.
2. Fraud prevention: designing internal controls and risk assessment to reduce fraud.
3. Litigation support: gathering and presenting financial evidence in disputes and quantifying damages or losses.
4. Expert witness testimony: explaining financial evidence in court.
5. Dispute resolution: assisting in business valuation disputes, insurance claims, partnership and divorce settlements.
6. Asset tracing and recovery: tracking hidden or misappropriated assets.
7. Reporting: preparing reports for management, regulators and law-enforcement agencies.

Social accounting is the process of identifying, measuring, recording and reporting the social costs and benefits of a firm's activities on society (employees, community and the public), in addition to its financial results. It is reported through a social income statement and social balance sheet.

Importance

1. It shows the firm's contribution to and burden on society, so management can see its social performance.
2. It helps the firm meet its social responsibility and build goodwill and a good image.
3. It supports decision-making on projects by considering social costs such as pollution.
4. It gives governments, investors and the public information to judge the firm's wider impact.
5. It encourages ethical conduct and helps control social losses.

Number of shares $= 600{,}000 / 100 = 6{,}000$.

(a) Net assets method

$\text{Value per share} = \frac{590{,}000}{6{,}000} = \text{Rs } 98.33$

(b) Yield method

Profit distributed as dividend $= 80{,}000 \times 70\% = 56{,}000$.

$\text{Expected yield} = \frac{56{,}000}{600{,}000} \times 100 = 9.33\%$

$\text{Value per share} = \frac{9.33}{10} \times 100 = \text{Rs } 93.33$

In Hermanson's adjusted discount model, each year's remuneration is adjusted by the ratio of the firm's rate of return to the economy's rate of return, and the adjusted amounts are discounted at 12%.

$\text{Adjusted remuneration} = \text{Remuneration} \times \frac{\text{Firm's ARR}}{\text{Economy rate}}$

Present value of the human resource is about Rs 1,408,391 (small differences arise from rounding of factors).

Items are converted to closing price level (index 200). Sales, purchases and expenses are taken as arising evenly, so the average index is $(120+200)/2 = 160$. Fixed assets (depreciation) are at index 100.

Current Purchasing Power Income Statement

Social Income Statement for the year ending December 2024 (Rs)

The factory generates a net social benefit of Rs 930,000, of which Rs 680,000 goes to employees, Rs 220,000 to the community and Rs 30,000 to the general public.

Human resource accounting (HRA) is the process of identifying, measuring and reporting the cost and value of human resources (the people of an organisation) and communicating this information to interested parties, so that people are treated as assets and not merely as expense.

Approaches to valuation of human resources

A. Cost-based approaches

1. Historical (acquisition) cost: the actual cost of recruiting, selecting, hiring, training and developing employees, capitalised and amortised over their service life.
2. Replacement cost: the cost that would be incurred to replace the present employee with an equivalent one.
3. Opportunity cost: the value of the employee in his best alternative use, determined through competitive bidding among departments for scarce staff.

B. Value-based (economic value) approaches

4. Present value of future earnings (Lev and Schwartz): the discounted value of the employee's expected future wages up to retirement.
5. Hermanson's unpurchased goodwill/adjusted discount model: future wages are adjusted by an efficiency ratio (firm's rate of return relative to the economy's) and discounted.
6. Flamholtz's stochastic rewards model: value depends on the service states the employee may occupy and the probability of leaving, and the rewards of each state.
7. Capitalisation of excess earnings (Brummet/Flamholtz): the extra earnings of the firm over the industry average are capitalised and allocated to human resources.

C. Other approaches

8. Human resource accounting by non-monetary (behavioural) measures: attitude surveys, skill inventories and performance ratings.

Cost-based methods are objective and simple; value-based methods give a better picture of worth but depend on assumptions.

Amalgamation is the combining of two or more existing companies into a new company formed to take over their business; the old companies are wound up. Absorption is the taking over of the business of one or more existing companies by another existing company; the absorbed company is wound up, but the purchasing company continues.

In both, the transferor company's accounts are closed through the realisation account, and consideration is calculated by the net assets, net payment or lump-sum method.

Examples: The formation of a new bank by merging two development banks, where both are dissolved, is amalgamation. A commercial bank acquiring a finance company, which is then liquidated while the bank continues, is absorption.

Liabilities (from the balance sheet): equity capital Rs 400,000; 12% preference capital Rs 200,000; 10% debentures Rs 200,000 (secured on plant and machinery); accounts payable Rs 40,000; preference dividend payable (arrears) Rs 120,000.

Liquidator's Final Statement of Account

Working for equity: balance after preference dividend $= 930{,}000 - 10{,}000 - 54{,}000 - 200{,}000 - 40{,}000 - 200{,}000 - 120{,}000 = 306{,}000$.

Let $X$ be the payment to equity shareholders:

$X + 0.02X = 306{,}000 \Rightarrow X = \frac{306{,}000}{1.02} = 300{,}000$

Remuneration $= 2\% \times 300{,}000 = 6{,}000$. Number of equity shares $= 400{,}000/100 = 4{,}000$, so each gets $300{,}000/4{,}000 = \text{Rs } 75$.

Assumptions: S Ltd. has 6,000 shares of Rs 100; H Ltd. holds 5,000 (5/6), the minority holds 1/6. H Ltd.'s fixed assets are Rs 2,000,000 and the investment is Rs 100,000, which balance H's balance sheet; the unlabelled Rs 100,000 on S Ltd.'s liability side is treated as an other liability. Shares were bought on 1 Shrawan, 3 months after the start of the year, so one quarter of the year's profit of S is pre-acquisition. Goods supplied by H are taken as Rs 40,000; half remain in stock, giving unrealised profit of $20{,}000 \times 10\% = 2{,}000$.

Capital and profits of S Ltd.

(a) Minority interest

$\frac{1}{6} \times 900{,}000 = \text{Rs } 150{,}000$

(b) Cost of control

(c) Consolidated Balance Sheet of H Ltd. and its subsidiary as at 30 Chaitra 2081

Working for P&L: H's balance $200{,}000 + 400{,}000 = 600{,}000$; less unrealised profit $2{,}000$; plus H's share of S's post-acquisition profit $5/6 \times 75{,}000 = 62{,}500$; total $660{,}500$.

Adjustments: Rs 20,000 cash in transit is added to cash and deducted from debtors; the Rs 40,000 mutual debtor/creditor balance is eliminated.

Assumption: the cash price is taken as Rs 7 per share, because Rs 70 would exceed the whole value of the company's assets on a Rs 10 share. All assets, including cash at bank, are taken over, and liabilities are taken at agreed values.

Number of ABC shares $= 400{,}000/10 = 40{,}000$.

(a) Purchase consideration

The debenture holders get new SS debentures of Rs 110,000 (Rs 100,000 plus 10% premium), which SS takes over as a liability.

(b) Journal entries in the books of ABC Company

(c) Realisation Account

(d) Shareholders Account

(e) Journal entries in the books of SS Company

Goodwill check: net assets taken over $= 630{,}000 - 30{,}000 - 110{,}000 = 490{,}000$; goodwill $= 680{,}000 - 490{,}000 = 190{,}000$. The debenture premium of Rs 10,000 is already included in the debentures liability of Rs 110,000.