Friday 21 January 2011
KERALA COOPERATIVE AUDIT MANUEL VOLUME I PART III CHAPTER IV
VERIFICATION AND VALUATION OF LIABILITIES
1. Classification of liabilities :- Owned capital and borrowed capital :- The liabilities of Co-operative Societies are broadly classified under the following heads in the Balance Sheet.
(i) Share Capital
(ii) Statutory Reserves.
(iii) Other funds
(iv) Deposits from members and non-members
(vii) Outstanding creditors and provisions
All liabilities except capital and the statutory reserve fund and other funds built out of profit, which constitute the owned funds of the society are to be grouped under two heads-long term and current liabilities. Long term liabilities are those which are not payable within a year. Current liabilities are those payable within a year. Excess of current assets over current liabilities indicate the resources available with the society for meeting its day to day requirements.
2. Share capital :- State participation :- The byelaws of the society have to be examined to ascertain the authorised share capital. It should be seen whether the paid up share capital has exceeded the authorised shares. If the limit has been exceeded the auditor should advise the society to enhance the authorised share capital by suitably amending the bylaws. The authorised share capital by suitably amending the bylaws. The authorised share capital should provide also for Government contribution, if any, towards shares which are issued to Government only. Conditions regarding payment of dividend, redemption of shares, creation of share capital redemption Fund etc. are prescribed in the Government orders sanctioning so are capital contribution. The Auditor should also ensure that conditions prescribed in the Government orders sanctioning share capital contribution have been fully complied with by the society.
3. Principal State Partnership Fund and Subsidiary State Partnership Fund :- These funds are required to be created and maintained by the Apex Society and the Central Society respectively. Contributions received from Government to the Principal State Partnership Fund are to be utilised for directly purchasing shares of other societies with limited liability or for providing money to a Central Society to enable that society to purchase shares in other societies or for making payments to the Government in accordance with the provisions contained in chapter VI of the Kerala Co-operative Societies Act 1969.
Subsidiary State Partnership fund is constituted with the money paid by the Apex Society from out of the Principal State Partnership Fund. The Central Society shall utilise this fund for purchasing shares in Primary Societies or for making payments to the Apex Society as contemplated under chapter VI of the Act. (Section 44 & 45 of the K.C.S. Act).
4. Meaning of Reserve :- The term ‘reserve’ has not been specifically defined in the Co-operative Societies Act. The Indian Companies Act has defined the term ‘reserve’ as not including any amount written off or retained by way of providing depreciation, renewals or diminition in value of assets or retained by way of providing for any known liability. The term ‘provision’ means any amount “written off or retained by way of providing for depreciation, renewals or diminition in value of assets as retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy”.
(i) Statutory Reserve Fund :- Creation and maintenance of reserve fund out of the net profit are compulsory under the provisions of the Act. No distribution of profits can be made until necessary amounts as required under section 56 of the K.C.S. Act 1969 are carried to the statutory Reserve Fund. The Reserve fund is indivisible and it can be used only for purposes mentioned in Rule 61 of the K.C.S. Rules, viz. to discharge the debts due to the Government, other debts of the society, the paid up share capital and to pay dividend upon such share capital at a rate not exceeding 10% per annum for any period for which no dividend has been paid.
(ii) Fund’s created out of profits :- The term “fund” strictly speaking denotes investment of a reserve outside the business of the society. The term should be applied only when the particular reserve is represented by specific investments outside the business of the society. The Institute of Chartered Accountants of India are of the view that all reserves, which are not represented by specific securities, should be called reserves or reserve account and the term “Reserve Fund” should be used only when the amount of such fund is invested outside business of the company. But, as far as Co-operative Societies are concerned, there is no such distinction made either in the Act or in the Rules. Therefore the term ‘Fund’ is also indiscriminately used to denote all reserves created out of profits.
5. Provision for anticipated losses and unascertained liabilities :- Normally a provision is required to be made when a loss is anticipated. But the amount of provision thus to be made cannot be ascertained exactly. As the loss might have been incurred before the date of the balance sheet, the loss so incurred should have been debited to the profit and loss account and a provision created on liability side of the balance sheet. This kind of provisions will have to be made for losses likely to be sustained on the realisation of certain assets and also for accruing liabilities the amounts of which cannot be exactly ascertained. Examples of such losses in the realisation of assets are bad debts, rebates, discounts or other allowances. The Auditor should examine whether such losses are written off or adequate provision made in the balance sheet to meet such anticipated losses.
As regards unascertained liabilities, it is likely that bills discounted may be dishonoured, guarantees may have to be fulfilled, or damages under pending actions, claims for which have not been admitted may have to be paid. Losses may also arise as a result of fire or other risks not fully covered. Therefore, the auditor has to see that adequate provision has been made for all such accruing liabilities. But no provision is to be made for liabilities accruing out of acquisition of assets of corresponding value.
6. Sinking Fund :- A Sinking Fund is created either to redeem an existing liability at the end of a certain period or to provide for the diminition in the value of an existing asset which will have to be replaced at the end of a specified period. Societies which float debentures are required to maintain a Sinking Fund for the redemption of the debentures at the end of the period for which they are issued. Creation of a Sinking Fund entails a charge on the profit and loss account every year of an amount which if invested outside at compound interest, will yield the amount necessary to redeem the liability or acquire the new asset at the end of the given period. Housing Societies, Land Mortgage Banks and other similar societies, are required to create Sinking Fund which is required to be invested outside the business of the society.
7. Bonus Equalisation Fund :- This is permissive but not mandatory. Discretion vests with the general body to allocate a portion of the net profit to this fund if it is contemplates in the bylaws of the society. The fund is intended for payment of bonus to the members.
8. Provision for overdue interest :- Interest accrued on a loan the due date of which has fallen on or before the date of Balance Sheet and remains unpaid till the date of Balance Sheet is called interest accrued and overdue. All interest accrued and accruing and which are overdue as on the date of Balance sheet should be excluded from the amount of net profits. If interest receivable has been included in profits it is necessary that, that portion of interest receivable which is overdue is deducted. This can be done either by debiting the interest account and by crediting the “Provision for overdue interest receivable account, or by deducting overdue interest pending collection from the total amount of interest collected and due.
In the case of loans which have become fully overdue ie. the entire balance under the loan has fallen overdue, any interest accrued on these fully overdue loan should be classified only as overdue interest. Since the loan itself has fallen in default, it will be prudent to treat any interest accrued on such loans as overdue interest so as not to treat it as a profit item.
9. Contingent Liability :- There may be certain liabilities that may arise at a future date through not at the time of closing of books, as a result of the transactions. For example, bills discounted before due dates, calls on shares held and not fully paid up pending litigation, discounting of hundies etc. The term ‘Contingent Liability’ may be defined as the possible future liability arising from one or more business acts preceding the date of the balance sheet.
Contingent liability may be of two kinds broadly:-
(1) A liability involving an ultimate loss. eg. a liability in a disputed case where damages may have to be paid.
(2) A liability which will involve the acquisition of an asset eg. when goods have been purchased for future delivery or under an agreement of service.
The Auditor should find out such liabilities during the course of audit and enquire into them in detail with a view to see that adequate provision is made in the accounts for these liabilities. Unless the liability is definite, provision is not made in the accounts in the normal course.
10. Income Tax :- Section 2(19) of the Income Tax Act 1961, defines a Co-operative Society as “a Co-operative Society registered under the Co-operative Societies Act, 1912 or under any Law for registration of Co-operative Societies”.
The income of a Co-operative Society is computed according to the provisions of Income Tax Act, just as any other assessee. After computing the gross total income of the Co-operative Society under various Heads of Income provided under the Income Tax Act, the following deductions are made as per provisions of Section 80 (P) of the Income Tax Act 1961, to the extent noted against each.
(i) The whole income derived from the following business is exempted:-
(a) Banking or providing credit facilities.
(b) Cottage Industry
(c) Marketing of agricultural produce.
(d) Purchase of agricultural implements, livestock or other articles intended for agriculture for purpose of supplying them to its members.
(e) Processing without the aid of power of agricultural produce of its members.
(f) Supplying milk raised by its members to a Federal Milk Co-operative Society.
(g) Labour Contract Societies.
(h) Co-operative Societies engaged in fishing and other allied pursuits.
In the case of item Nos. (g) and (h), the Tax concession will be available only if the Bylaws of such Societies, restrict the voting rights to its members, State Government and Co-operative Credit Societies, which extend financial assistance to them.
(ii) In the case of Co-operative Society engaged in activities other than those mentioned in item (1) above, Rs.20,000 of the profits derived by such activities.
(iii) In the case of every Co-operative Society the whole income it derives by way of interest or dividends from its investments in other Co-operative Societies.
(iv) In the case of every Co-operative Society whole of income derived from letting of godowns or warehouses for storage, processing or facilitating marketing of commodities.
(v) The whole of income chargeable as “Interest on Securities” (under section 18 of the Income Tax Act) or “Income from House Property” (Chargeable under section 22 of the Act) provided the gross total income of the said society does not exceed Rs. 20,000.
This deduction is not however made available to housing societies or transport societies. As per Section 27 (iii) of Income Tax Act, the member to whom the house is constructed is liable to pay in respect of income from the house property even through the ownership is with the housing society.
11. Unpaid Expenses :- Expenses incurred during the year but for which payment has not been effected till the date of balance sheet are called unpaid expenses. This should be first debited to the profit and Loss Account and shown as a liability in the Balance Sheet. Common expenses of unpaid expenses are Rent, Rates, Taxes, Electric charges etc. Before providing these items under “unpaid expenses” the auditor should examine vouchers, invoices etc. relating to such payments.
12. Unearned Income :- I stances like rent received in advance which is not applicable to the year under audit should not be credited to profit and loss account of the current period, but should be shown as a liability. The Auditor should examine the vouchers to find out which portion of the amount is to be carried forward as a liability for the subsequent year.
13. Others :- Any other item which is not covered by the above should be verified and valued according to the circumstances of each case.