MGT401 Handouts Set 2

Table of Contents · MGT401 (Financial Accounting – II) · Lesson · Title / Topic

Page No.

Relationships between Companies Preparation and Presentation of Financial statements Property, Plant and Equipment Revaluation of Assets Property, Plant & Equipment and Borrowing Cost Intangible Assets – Companies Ordinance 1984 Intangible Assets – IAS 38 & Investment in Associates Other Non Current Assets Inventories Valuation of Inventories Current Assets, Fourth Schedule - Companies Ordinance 1984 Presentation and Disclosure of Assets in Balance Sheet Long Term Investments, Presentation and Disclosure Long Term Investments Risks & Disclosure under IAS 32 and 39 & Long Term Loans and Long Term Deposits and Prepayments & Current Assets IASB’s Framework IASB’s Framework (Contd.) Presentation of Liabilities in Balance Sheet Liabilities side area of Balance Sheet (Share Capital and Reserves)

Repurchase of Shares – Section 95 A Prospectus & Non-Current Liabilities – 4th Schedule Leasing – IAS 17 Leasing – IAS 17 (Contd.) Leasing – IAS 17 (Contd.) Leasing – IAS 17 (Contd.) Leasing – IAS 17 (Contd.) & Provisions, Contingent assets and Contingent Liabilities IAS 37 Provisions, Contingent Assets & Contingent Liabilities (Contd) Provisions, Contingent Assets & Contingent Liabilities (Contd) and Income Statement Income statement IAS-01 Revenues IAS-18 Presentation and Disclosure of Expenses in Income statement Statement of Changes in Equity, Accounting Policies, Changes in Accounting Estimates and Errors Changes in Accounting Policies – IAS 8, Errors and Cash Flows Cash Flow Statement IAS-7 Cash Flow Statement (contd.) Cash Flow Statement (contd.) Events after the Balance Sheet Date IAS-10 IAS-33 Earnings per Share IAS-33 Earnings per Share & Financial Statements Presentation and Disclosure Requirements of Financial Statements –

Presentation and Disclosure Requirements of Financial Statements – Revision (Contd)

Lecture 01

Profit Oriented / Commercial Entities

Profit oriented or commercial entities are those entities where the main aim of carrying out business is to earn profit for the owners of the business. Profit oriented entities are of following types:

Sole Proprietorship Partnership Companies

3 Sole Proprietorship – Is the type of business is owned by a single individual. There may a number of employees of the business but ownership and risks and returns rest with a single owner. All assets and liabilities of the business are the assets and liabilities of the owner.

3 Partnership – Is the type of business that is owned by more than one person. These persons form a “Partnership Firm” through an agreement called “Partnership Agreement”. Partnership firms and agreements are governed by the Partnership Act 1932.

All partners of a firm are jointly and severally liable to liabilities of the firm. This means that in case of bankruptcy of the firm personal properties of the partners would also be utilized for payment of liabilities of the firm.

3 Companies – are separate legal entities formed under the Companies Ordinance 1984. The main difference between companies or limited companies as they are commonly called is that companies are separate legal entities and the liability of the owners is also limited whereas characteristics are not there in case of sole proprietorship and partnership.

Non Profit Oriented Entities

Non-profit oriented entities are those business entities / concerns where the main purpose of doing business is not to earn profits for the owners / sponsors but to provide benefit to general public or to carryout a social cause. Profits of a non-profit oriented entity can only be utilized for the purpose for which the entity is established NGO’s Trusts Societies

Separate Entity Concept

This concept forms the basis of the accounting principles. It means that for the purpose of accounting ‘The Business’ is treated independently from The Owners”.

This means that although anything owned by the business belongs to the owners of the business and anything owed by the business is payable by the owners but for accounting purposes we assume that the business is independent of its owners.

If the business purchases a machine or piece of equipment it will own and obtain benefit from that equipment. Likewise if the business borrows money from ‘someone’ it will have to repay the money. This someone includes even the owner of the business.

This treatment of the business independently from its owners is called the ‘Separate Entity Concept’.

Separate Legal Entity (Corporate Entity) / Limited Liability

Limited company is a legal entity separate from its owners (called shareholders). The basic difference between a partnership and a limited company is the concept of limited liability. In case a sole proprietor or partnership business runs into losses and is unable to pay its liabilities, its proprietor / partners will have to pay the liabilities from their own wealth.

Whereas in case of limited company the shareholders don’t lose anything more than the amount of capital they have contributed in the company i.e. their personal wealth is not at stake and their liability is limited to the amount of share capital they have contributed.

Limited company is an artificial legal person. It has a legal entity separate from its owners (shareholders). It can enter into agreements under its own name, can sue and can be sued.

company is limited to the amount of share capital that they have contributed. This means that the owners will only suffer a loss to the extent of the amount contributed as capital, in case the company is closed and its

"company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

Types of Companies Limited by Shares

3 Private Limited Companies 3 Single Member Companies 3 Public Limited Companies ¾ Public Listed Companies ¾ Public Unlisted Companies

3 Private Limited Companies – are those companies that restrict the right of shareholders to transfer their shares to a person other than the existing shareholders.

If a member wishes to sell his shares he will first have to offer the shares to the existing members. In case, none of the existing members accepts the shares and at the same time does not object to the selling of the shares to an outsider only then the shares can be sold to an outsider. Private Limited companies use the words “Private Limited” or “(Pvt) Ltd” at the end of their name.

The maximum numbers of shareholders allowed in a private limited company is 50. Private Limited Company is defined in Companies Ordinance 1984 in Section 2 (28) as:

" Private company" means a company which, by its articles,—

(i) restricts the right to transfer its shares, if any; (ii) limits the number of its members to fifty not including persons who are in the employment of the company; and (iii)

Provided that, where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member;

3 Single Member Companies – are also private limited companies but there is only one shareholder in the company. Before 2002 there was a limit of two for the minimum number of shareholders in a private limited company. However the limit was relaxed and companies with only one member were also allowed.

In case of a single member company two persons are required to be nominated to takeover the company in case of the death of the member.