1

INDEX
SR NO PARTICULAR PAGE NO
1 ACCOUNTING STANDARD- 16 3-7
2 ACCOUNTING STANDARD- 20 8-11
3 VALUATION OF GOODWILL 13-19
4 VALUATION OF SHARES 19-26
5 INSURANCE 28-29
6 INSURANCE ACT, 1938 30-32
7 LIFE INSURANCE 33-44
8 GENERAL INSURANCE 45-52
9 BIBLIOGRAPHY 53


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TOPIC NO: 1
STATUTORY REQUIREMENTS 2
SPECIFIED ACCOUNTING STANDARD
ACCOUNTING STANDARD- 16 AND
ACCOUNTING STANDARD- 20


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INDIAN ACCOUNTING STANDARD
Indian Accounting Standards, (abbreviated as India AS) are a set of accounting standards
notified by the Ministry of Corporate Affairs which are converged with International Financial
Reporting Standards (IFRS). These accounting standards are formulated by Accounting
Standards Board of Institute of Chartered Accountants of India. Now India will have two sets of
accounting standards viz. existing accounting standards under Companies (Accounting Standard)
Rules, 2006 and IFRS converged Indian Accounting Standards(Ind AS). The Ind AS are named
and numbered in the same way as the corresponding IFRS. NACAS recommend these standards
to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs has to spell out the
accounting standards applicable for companies in India. As on date the Ministry of Corporate
Affairs notified 35 Indian Accounting Standards (Ind AS). But it has not notified the date of
implementation of the same.
OBJECTIVE:
The basic objective of Accounting Standards is to remove variations in the treatment of several
accounting aspects and to bring about standardization in presentation. They intent to harmonize
the diverse accounting policies followed in the preparation and presentation of financial
statements by different reporting enterprises so as to facilitate intra-firm and inter-firm
comparison.







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ACCOUNTING STANDARD (AS) 16 BORROWING
COSTS
CONTENTS
This Accounting Standard includes paragraphs set in bold italic type and plain type, which have
equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting
Standard should be read in the context of its objective, the Preface to the Statements of
Accounting Standards1 and the Applicability of Accounting Standards to Various Entities
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment forborrowing costs.
SCOPE
1. This Standard should be applied in accounting for borrowing costs.
2. This Standard does not deal with the actual or imputed cost of owners equity, including
preference share capital not classified as a liability.
DEFINITIONS
The following terms are used in this Standard with the meanings specified:
1 Borrowing costs are interest and other costs incurred by an enterprise in connection with the
borrowing of funds.
2 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale. Attention is specifically drawn to paragraph 4.3 of the Preface, according
to which
Accounting Standards are intended to apply only to items which are material. What constitutes a
substantial period of time primarily depends on the facts and circumstances of each case.
Borrowing costs may include:
(a)Interest and commitment charges on bank borrowings and other short-term and long-term
borrowings;
(b) Amortizations of discounts or premiums relating to borrowings;
(c) Amortization of ancillary costs incurred in connection with the arrangement of borrowings;
(d) Finance charges in respect of assets acquired under finance leases or under other similar
arrangements; and

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(e) Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
RECOGNITION
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalized as part of the cost of that asset. The amount of borrowing
costs eligible for capitalization should be determined in accordance with this Standard. Other
borrowing costs should be recognized as an expense in the period in which they are incurred.
Borrowing costs are capitalized as part of the cost of a qualifying asset when it is probable that
they will result in future economic benefits to the enterprise and the costs can be measured
reliably. Other borrowing costs are recognized as an expense in the period in which they are
incurred.
BORROWING COSTS ELIGIBLE FOR CAPITALIZATION
The borrowing costs that are directly attributable to the acquisition, construction or production of
a qualifying asset are those borrowing costs that would have been avoided if the expenditure on
the qualifying asset had not been made. When an enterprise borrows funds specifically for the
purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that
qualifying asset can be readily identified. It may be difficult to identify a direct relationship
between particular borrowings and a qualifying asset and to determine the borrowings that could
otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity
of an enterprise is co-ordinate centrally or when a range of debt instruments are used to borrow
funds at varying rates of interest and such borrowings are not readily identifiable with a specific
qualifying asset. As a result, the determination of the amount of borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset is often difficult
and the exercise of judgment is required.






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EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYINGASSET
OVER RECOVERABLE AMOUNT
When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its
recoverable amount or net realizable value, the carrying amount is written down or written off
inaccordance with the requirements of other Accounting Standards. In certain circumstances, the
amount of the write-down or write-off is written back in accordance with those other Accounting
Standards.
COMMENCEMENT OF CAPITALIZATION
The capitalization of borrowing costs as part of the cost of a qualifying asset should commence
when all the following conditions are satisfied:
(a) Expenditure for the acquisition, construction or production of a qualifying asset is being
incurred;
(b) Borrowing costs are being incurred; and
(c) Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Expenditure on a qualifying asset includes only such expenditure that has resulted in payments of
cash, transfers of other assets or the assumption of interest-bearing liabilities. Expenditure is
reduced by any progress payments received and grants received in connection with the asset
Accounting Standard12, Accounting for Government Grants). The average carrying amount of
the asset during a period, including borrowing costs previously capitalized, is normally a
reasonable approximation of the
SUSPENSION OF CAPITALIZATION
Capitalization of borrowing costs should be suspended during extended periods in which active
development is interrupted.Borrowing costs may be incurred during an extended period in which
the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs
are costs of holding partially completed assets and do not qualify for capitalization. However,
capitalization of borrowing costs is not normally suspended during a period when substantial
technical and administrative work is being carried out. Capitalization of borrowing costs is also
not suspended when a temporary delay is a necessary part of the process of getting an asset ready
for its intended use or sale.


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CESSATION OF CAPITALIZATION
Capitalization of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete. An asset is normally ready
for its intended use or sale when its physical construction or production is complete even though
routine administrative work might still continue. If minor modifications, such as the decoration
of a property to the users specification, are all that are outstanding, this indicates that
substantially all the activities are complete. When the construction of a qualifying asset is
completed in parts and a completed part is capable of being used while construction continues
for the other parts, capitalization of borrowing costs in relationto a part should cease when
substantially all the activities necessary to prepare that part for its intended use or sale are
complete.A business park comprising several buildings, each of which can be used individually,
is an example of a qualifying asset for which each part is capable of being used while
construction continues for the other parts



















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ACCOUNTING STANDARD (AS) 20
OBJECTIVE
The objective of this Standard is to prescribe principles for the determination and presentation of
earnings per share which will improve comparison of performance among different enterprises
for the same period and among different accounting periods for the same enterprise. The focus of
thisStandard is on the denominator of the earnings per share calculation. Even though earnings
per share data has limitations because of different accounting policies used for determining
earnings, a consistently determined denominator enhances the quality of financial reporting.
SCOPE
This Standard should be applied by all the entities. However, a Small and Medium Sized
Company and a Small and Medium Sized non-corporate entity falling in Level II or Level III, as
defined in Appendix 1 to this Compendium, Applicability of Accounting Standards to Various
Entities,may not disclose diluted earning per share (both including and excluding extraordinary
items). Further, a non-corporate Small and Medium Sized Entity falling in level III as defined in
Appendix 1 to this Compendium, may not disclose the information required by paragraph 48(ii)
of thestandard. A limited revision to this Standard was made in 2004Attention is
specificallydrawn to paragraph 4.3 of the Preface, according to which Accounting Standards are
intended to apply only to items which are material. In consolidated financial statements, the
information required by this Standard should be presented on the basis of consolidated
information.2
In the case of a parent (holding enterprise), users of financial statements are usually concerned
with, and need to be informed about, the results of operations of both the enterprise itself as well
as of the group as a whole. Accordingly, in the case of such enterprises, this Standard requires
thepresentation of earnings per share information on the basis of consolidated financial
statements as well as individual financial statements of the parent. In consolidated financial
statements, such information is presented on the basis of consolidated information.
DEFINITIONS
For the purpose of this Standard, the following terms are used with the meanings specified:
An equity share is a share other than a preference share.
A preference share is a share carrying preferential rights to dividends and repayment of capital.

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A financial instrument is any contract that gives rise to both a financial asset of one enterprise
and a financial liability or equity shares of another enterprise.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arms length transaction.Equity shares participate in the net
profit for the period only .A financial instrument is any contract that gives rise to both a financial
asset of one enterprise and a financial liability or equity shares of another enterprise. For this
purpose, a financial asset is any asset that is
(a) Cash;
(b) A contractual right to receive cash or another financial asset from another enterprise;
(c) A contractual right to exchange financial instruments with another enterprise under
conditions that are potentially favorable; or
(d)An equity share of another enterprise.
PRESENTATION
An enterprise should present basic and diluted earnings per share on the face of the statement of
profit and loss for each class of equity shares that has a different right to share in the net profit
for the period. An enterprise should present basic and diluted earnings per share with equal
prominence for all periods presented.
This Standard requires an enterprise to present basic and diluted earnings per share, even if the
amounts disclosed are negative
MEASUREMENT
Basic Earnings per ShareBasic earnings per share should be calculated by dividing the net profit
or loss for the period attributable to equity shareholders by the weighted average number of
equity shares outstanding during the period.
Earnings Basic For the purpose of calculating basic earnings per share, the net profit or loss for
the period attributable to equity shareholders should be the net profit or loss for the period after
deducting preference dividends and any attributable tax thereto for the period.All items of
income and expense which are recognized in a period, including tax expense and extraordinary
terms, are included in the determination of the net profit or loss for the period unless an
Accounting Standard requires or permits otherwise (see Accounting Standard (AS) 5, Net Profit
or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The amount of
preference dividends and any attributable tax thereto for the period is deducted from the net

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profit for the period (or added to the net loss for the period) in order to calculate the net profit or
loss for the period attributable to equity shareholders.
The amount of preference dividends for the period that is deducted from the net profit for
theperiod is:
(a)The amount of any preference dividends on non-cumulative preference shares provided for in
respect of the period; and
(b) The full amount of the required preference dividends for cumulative preference shares for the
period, whether or not the dividends have been provided for. The amount of preference dividends
for the period does not include the amount of any preference dividends for cumulative preference
shares paid ordeclared during the current period in respect of previous periods.
If an enterprise has more than one class of equity shares, net profit or loss for the period is
apportioned over the different classes of shares in accordance with their dividend rights.
Per Share Basic For the purpose of calculating basic earnings per share, the number of equity
shares should be the weighted average number of equity shares outstanding during the period.
The weighted average number of equity shares outstanding during the period reflects the fact that
the amount of shareholders capital may have varied during the period as a result of a larger or
lesser number of shares outstanding at any time. It is the number of equity shares outstanding at
thebeginning of the period, adjusted by the number of equity shares bought back or issued during
the period multiplied by the time-weighting factor. The time-weighting factor is the number of
days for which the specific shares are outstanding as a proportion of the total number of days in
the period; areasonable approximation of the weighted average is adequate in many
circumstances.In most cases, shares are included in the weighted average number of shares from
the date the consideration is receivable, for example:
(a) Equity shares issued in exchange for cash are included when cash is receivable;
(b) Equity shares issued as a result of the conversion of a debt instrument to equity shares are
included as of the date of conversion;
(c) Equity shares issued in lieu of interest or principal on other financial instruments are included
as of the date interest ceases to accrue;Where an enterprise has equity shares of different nominal
values but with the same dividend rights, the number of equity shares is calculated by converting
all such equity shares into equivalent number of shares of the same nominal value.
Equity shares which are issuable upon the satisfaction of certain conditions resulting from

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contractual arrangements (contingently issuable shares) are considered outstanding, and included
in the computation of basic earnings per share from the date when all necessary conditions under
thecontract have been satisfied.
. Examples include:
(a) A bonus issue;
(b) A bonus element in any other issue, for example a bonus element in a rights issue to existing
shareholders;
(c) A share split; and
(d) A reverse share split (consolidation of shares) In case of a bonus issue or a share split, equity
shares are issued to existing shareholders for no additional consideration. Therefore, the number
of equity shares outstanding is increased without an increase in resources. The number of equity
shares outstanding before the event is adjusted for theproportionate change in the number of
equity shares outstanding as if the event had occurred at the beginning of the earliest period
reported. ForIn a rights issue, on the other hand, the exercise price is often less than the fair value
of the shares. Therefore, a rights issue usually includes a bonus element. The number of equity
shares to be used in calculating basic earnings per share for all periods prior to the rights issue is
the number of equityshares outstanding prior to the issue, multiplied by the following factor:Fair
value per share immediately prior to the exercise of rights.
DISCLOSURE
In addition to disclosures as required by paragraphs 8, 9 and 44 of this Standard, an enterprise
should disclose the following:
(i) where the statement of profit and loss includes extraordinary items (within the meaning of AS
5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), the
enterprise should disclose basic and diluted earnings per share computed on the basis of earnings
excludingextraordinary items (net of tax expense); and
(ii)(a) the amounts used as the numerators in calculating basic and diluted earnings per share, and
a reconciliation of those amounts to the net profit or loss for the period;
(b) the weighted average number of equity shares used as the denominator in calculating basic
and diluted earnings per share, and a reconciliation of these denominators to each other; and
(c)the nominal value of shares along with the earnings per share figures. Provided that a non-
corporate Small and Medium Sized Entity Falling in Level III, as defined in Appendix 1 to

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thisCompendium, Applicability of Accounting Standards to Various Entities.
TOPIC NO: 2
VALUATION OF GOODWILL,
SHARES AND BUSSINESS FOR
AMALGAMATION












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INTRODUCTION
Goodwill means reputation of a business concern which attracts customers. It is the special
advantage or reputation possessed by an established concern as compared to a new concern or
even old but average concern. Goodwill is the benefit or advantage of the good name, reputation
and connections of a business. It is the attractive force which brings in customers. It is one thing
which distinguishes an old business from a new business at its first start. It arises due to several
factors e.g. particular location; the skills of a professional like lawyer; the efficient management
of capital employed; monopoly; patents and so on. In valuation of goodwill first step is to
calculate the amount of the expected future income. This is called the amount of Future
Maintainable Profits. However, it is very difficult to accurately calculate today, the amount of
profits maintainable in future. Future profits can be estimated to a certain extent on the basis of
the profits earned in past few years. The value of shares is ascertained from the market price
quoted on stock exchange. Sometimes however share valuation has to be done by an independent
valuer. Shares can be classified into two basic types such as (a) equity or ordinary shares and (b)
preference shares. Shares can be valued by three methods such as (a) net assets method or
intrinsic value method, (b) yield method or earning capacity method and (c) fair value method.
MEANING OF GOODWILL
According to Spicer and Pegler goodwill is defined as, goodwill is said to be that element rising
from the reputation, connection or other advantages possessed by a business which enables it to
earn greater profits than the return normally to be expected on the capital represented by the net
tangible assets employed in the business. Thus goodwill is the value of the reputation of the
concern, it consists the benefits a business enjoys in connection with its customer, employees and
other third party. It is also said that, goodwill is the present value of a firms anticipating excess
earning. Goodwill may be described as extra saleable value attaching to a prosperous business
beyond the intrinsic worth of the net assets. Being of the nature of extra value or advantage, it is
considered as an intangible asset like patents, trademarks and copyrights. It is not a fictitious
asset. According to Lord Macnaghten goodwill is the benefit or advantage of the good name,

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reputation and connections of a business. It is the attractive force which brings in customers. It is
one thing which distinguishes an old business from a new business at its first start.

NEED FOR VALUATION OF GOODWILL
It depends on the form of business organization.
SOLE TRADERS:-
Under the sole trade4rs form of business organization the need for the valuation of goodwill may arise in
the following circumstances:
a. When the business is sold.
b. When a new person is admitted in the firm and the firm becomes a partnership firm.
c. When the business is converted into a company.
PARTNERSHIP FIRM:-
Under the partnership form of business organization the need for the valuation of goodwill may
arise in the following circumstances:
a. When a new partner is admitted to a partnership firm.
b. When an existing partner retires or dies.
c. When there exists any change in the profit sharing ratio of the existing partners.
d. When whole of the partnership firm is sold out to any other firm or person.
e. When a partnership firm is converted into a company.
f. When there is a case of amalgamation of two firms.



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COMPANIES:-
In case of a company, the need for valuation of goodwill may arise in the followincircumstances
a. When there is a situation of amalgamation of two companies.
b. When the business of the company is sold to another existing company.
c. When one class of the shares is converted to another.
d. When a company acquires the controlling interest in the company and becomes a holding
company.
e. When there arises a need for the valuation of the shares of the company.
f. When shares of the company are not listed on the stock exchange and they have to be valued
for taxation purposes.










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METHODS OF VALUATION OF GOODWILL
1. ARBITRARY ASSESSMENT METHOD:-
The value of goodwill under this method is arrived at by mutual agreement b/w the
vendor of a business and its buyer. The amount agreed to be payable for goodwill is the
excess of purchase price over the net assets taken over. For example, A ltd. purchases the
business of B ltd. and it is mutually agreed upon that A ltd. will pay to B ltd. a sum of Rs.
5,00,000 on account of goodwill. Although very simple, this method is not a reliable and
scientific method based on a yardstick of performance of business. The value of goodwill
being based on future maintenance profits, the earning capacity of business must be
considered while valuing goodwill. If formation regarding earning capacity is not
available, this method cannot be used.
2. AVERAGE PROFITS METHOD:-
Under this method, goodwill is valued as under:
Goodwill = average profit X no. Of years of purchase
In this case profit means future expected trading profit.
For this purpose following adjustments are to be done:
Balance of profit and loss
Add: (i) all abnormal losses (if already debited)
Like loss by fire or theft, loss on sale of Fixed assets.
Less: (i) all abnormal incomes (if already credited)
Like insurance claim income from lottery or speculation, profit on sale of fixed assets.

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(ii) Non-trading incomes, like income from investment (non-trade), rent from building let
out
(iii) Normal expenses (if not already debited)
Adjusted trading profit
Average profit may be calculated as
(i) Simple averages
Simple average = total profits of some years/no. of years.
Weighted profit = total of products of profits & weights/total of weights.
Under this method, goodwill is valued on basis of an agreed no. Of years purchase of the
average adjusted profit. The number of years selected depends upon the probable maintenance of
past profit in future years.
3. SUPER PROFITS METHODS:-
It is the excess of the average profits over the normal profits based on normal rate
of return for representative firm in industry. For computation of super profit, the
following three factors are required:
A. Normal rate of return.
B. Capital employed
C. Normal profit
Where capital employed = fixed assets + trade investments + current assets
debentures current liabilities. Or Paid up equity and preference share capital +
accumulated balance on capital reserves, general reserves and credit balance in
profit and loss revaluation profits or loss fictitious assets non assets.

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Goodwill under super average method
Goodwill = super profit x no. Of years purchase
Where super profit = average adjusted profit normal profit
Normal profit = capital employed x normal rate of return
4. ANNUITY METHOD:-
Under this method the value of goodwill is calculated by finding the present worth of an
annuity paying the super profit (per year) over the estimated period discounted at the
appropriate rate of interest.
Goodwill = super profits x value of an annuity.
Mostly the value of annuity at the normal rate of profit and is same for number of years
for which purchase of super profit method is to be applied is given.
5. CAPITALISATION METHOD:-
There are two methods of calculation of goodwill under capitalization method, viz.
a. Capitalization of average trading profit: under this method normal capital employed is
be found out by capitalizing average trading profit. Normal capital employed means the
amount of capital must be invested in the same class of business to earn such average
trading profit. But if actual capital employed is less than the normal capital employed,
then such difference will be the goodwill of the firm.
b. Capitalization of super profit: in this case goodwill is calculated by capitalizing the
super profit at the normal rate of return. This method attempt to determine the amount of
capital needed for earning super profit. Under this method,
Goodwill = super profit x 100/normal rate of return.



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DETERMINATION OF FUTURE MAINTAINABLE PROFIT [F.M.P]
Determination of Future Maintainable Profit under normal circumstances is most
important and complicated task. F. M. P. is subject to evolution of many factors such
as capability of companys management, future government policies; general and
economical trend etc. For determining F. M. P. non operating expenses and incomes
are not to be considered. It is decided on the basis of average post trading profits subject
to certain changes that may have effect on future earning of the business concerns.
CALCULATION OF PAST AVERAGE EARNINGS:-
In order to calculate F. M. P. the profit of the previous year can be considered, if necessary.
Such business profit should be making adjusted to make it acceptable for averaging.
Average profit may be simple average or weighted average profit.
Simple average profit = Total Profit /No. of years

MEANING OF SHARES
According to Section 2(46) of the Companies Act, share means share in the share capital of a
company and includes stock except where a distinction between stock and share is expressed or
implied. A share is one unit into which total share capital is divided. It is a fractional part of the
share and forms the basis of ownership in the company and the people who contribute the money
through shares, which constitute the share capital of the company. Thus for example, when a
company has a share capital of Rs. 5,00,000 divided into 50,000 shares of Rs.10 each and a
person who has taken 50 shares of that company is said to have a share in the share capital of the

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company to the tune of Rs. 500. In other words, shares are divisions of the share capital of a
company. There are two basic types of share capital based on the types of shares which can be
issued by a company under the Companies Act, 1956 i.e. (a) preference shares and (b) equity
shares.
CLASSIFICATION OF SHARES
Shares can be classified mainly into two basic types described as follows:
PREFERENCE SHARES:-
Preference shares are those which carry the following preferential rights as to:
(i) The payment of dividend at a fixed rate; and
(ii) The return of capital on winding up of the company.
Both the rights must exit to make a share preference; the rights are conferred by the Articles of
Association. Preference shareholders can enforce their rights of getting dividend in priority
over the equity shareholders only if there are profits and the directors decide to distribute
them by way of dividend. Unless the Articles otherwise provide preference shares will be
cumulative, i.e., they will be entitled to receive arrears of their dividend.
Preference shareholders do not have any voting right except when dividend is outstanding for
more than two years in case of Cumulative Preference Shares, and for more than three years
in the case of Non-cumulative Preference Shares. But they have the right to vote on any
resolution for winding up of the company or for the reduction or repayment of share capital.
If the Articles of the company so provide, the preference shareholders may also be given the
following rights in addition to the preferential rights mentioned above:
(i) To participate in the surplus profits remaining after the equity shareholders have received
dividend at a fixed rate. (Participating Preference Shares).

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(ii) To receive arrears of dividend at the time of winding up; if the Articles are silent, preference
shareholders will be entitled to receive the arrears.
(iii) To receive premium on redemption of Preference Shares.
(iv)To participate in the surplus remaining after the equity shares are redeemed in winding up.
EQUITY SHARES:-
An equity share is one which is not a preference share. These are normally risk bearing
shares. Equity shareholders will get dividend and repayment of capital after meeting the claims
of preference shareholders. In other words, if the shareholder is not entitled to dividend at a fixed
rate in preference to others or if there is no preferential right for the capital to be repaid, the
share capital will be treated as equity share capital. After payment of dividend at a fixed rate on
preference shares, if profit is left, it can be distributed as dividend among the equity shareholders.
During liquidation of the company, equity shareholders are paid out but are usually entitled to
all the surplus assets after the payment of creditors and preference shareholders. The value of
these shares in the market fluctuates with the
NEED FOR VALUATION OF SHARES
Following are the circumstances, necessitating valuation of shares:
1. At the time of amalgamation and absorption.
2. When unquoted shares are to be bought or sold.
3. At the time of converting preference shares or debentures into equity shares.
4. Where a portion of shares is to be given by a member of proprietary company to another
member as a member cannot sell it in the open market it become necessary to certify the fair
price.
5. For the valuation of the assets of a finance or investment trust company.

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6. At the time of assessment by the income tax authorities for the purpose of estate duty, capital
gain, wealth tax and gift tax.
7. When the company is nationalized and the compensation is payable by the government.
8. When a company acquires majority shares of another company for the purpose of acquiring a
controlling interest in another company.
9. When shares are pledged as a security against loan
10. At the time of paying court fees.
11. When shares are purchased by the employees of a company to be kept by them during the
tenure of their service.
12. At the time of purchase and sale of shares in private companies.
13. When partners hold shares of a company for ascertaining the amount to be distributed
amongst them on dissolution of firm.
14. For satisfying dissentient shareholders in the case of reconstruction of a company under
section 494.
METHODS OF VALUATION OF SHARES
1. NET ASSETS METHOD OR INTRINSIC VALUE OR NET WORTH METHOD:-
As the name suggest, that the value of shares under this method is calculated by dividing
the net assets of the business by no. of equity shares. All the assets from the asset side of
balance sheet are sum up than deduct the liabilities appearing on liabilities side also less
any probable loss or expenses the value arrived is the amount available for equity
shareholders.
While calculating the value of net assets if it is necessary to understand that the non-
trading assets like investments should also be included and all the assets should be taken
in their market value. If the preference share capital appears in the balance sheet than the

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total amount of preference share capital and the payment of any type of dividend in
arrears on them should also be deducted from the total value of assets:
All assets =XXX (at realizable value if any, otherwise (except fictitious assets) Book
value)
All outside liabilities = (-) xxx
Balance = xxx
Preference share capital = (-) xxx
Any divided in arrears = (-)
Net assets for equity shares = xxx
Value of per share = net assets for equity shares/ no. Of equity shares.
FORMAT FOR CALCULATION BY INTRINSIC METHOD:-
1. Net Assets Basics [Excluding the goodwill]
All Assets [Excluding goodwill and factious assets]
Less: All Liabilities (Including preference share capital but excluding equity paid up
capital and reserves & surplus)
NET TANGIBLE assets
Value per Equity share=Net Tangible Assets/no. Of Equity shares
[B] Net assets Basics [including goodwill]
All Assets [Excluding fictitious assets]
Less: All liabilities [including Preference share capital and reserves & surplus]
Value per Equity Share=Net Assets/No. Of Equity Shares

2. YIELD METHOD OR EARNING CAPACITY OR MARKET VALUE
METHOD:-

24

Under this method the value of the shares are calculated on the basis of its prospective
earnings. Market value of assets and liabilities is not considered.The value of shares is
calculated by comparing the expected earnings of the company with normal rate of
return on investments. This method is based on the philosophy that shareholders value
the return which he received and not the earnings of the company.
The calculation under this method is divided into three parts:
a. Calculation of expected rate of return:-
Profits available from dividend to equity/paid up equity share capital x 100
b. Value of equity shares:-
Expected rate of return/normal rate of return x paid up value of share. Profits
available for dividend to equity shareholders are calculated as follows:-There
exist some items which should be deducted from profits of the company while
calculating the expected profits available for equity shareholders viz.
Amount for tax charges
Amount to be transferred to reserves
Amount transfer to debenture redemption fund
Preference dividend if any
The rest of the amount will be the expected profits available for equity
shareholders.

FORMAT FOR CALCULATION BY YIELD METHOD:-
(A) Valuation based on rate of return
(b) (I) valuation based on rate of dividend

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Value per Share= possible Rate of Dividend/Normal Rate of Dividend*paid-up Value per
dividend
Where, Possible Rate of Dividend=Total profits available for dividend/Equity paid up
capital
Calculations of total profits available for dividend;
Profit after tax
Less: transfer to reserve
Transfer to debenture redemption fund
Preference dividend
Total profits available for equity dividend
[A ](II) VALUATION BASED ON RATE OF EARNING
Value for share= possible earning rate/normal earning rate*paid up value per share
Where possible rate of earning=actual profit earned/capital employed*100
Capital employed includes equity paid up capital +preference share capital + reserve and
surplus +long term borrowing fictitious assets.
Actual profit earned means profit after tax but before debenture interest and preference dividend.
(B) VALUATION BASED ON PRICE EARNING RATIO (P/E RATIO)
Market value per share = price earning ratio x earning per share.
Where, earning per share = profits available for equity shares/no. Of equity shares
(C) VALUATION BASED ON PRODUCTIVITY FACTOR

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Productivity factor = average weighted adjustment profit (after tax)/average weighted net
worth (i.e. shareholders fund) X 100
Maintainable profit = net worth on valuation date X productivity factor.
Maintainable profit for equity shares = maintainable profit transfer to reserve dividend
on preference shares.
Capitalization of maintainable profit for equity shares =
Maintainable profit for equity shares X 100/normal rate of return
Value for equity shares = capitalized value / no. Of equity shares
3. FAIR VALUE METHOD:-
As we had already discussed the two methods of calculating the value of shares viz.
Net asset method
Yield earning method
But both have some drawbacks say net asset method is not suitable where the company is
having the phase of super profits where as yield earning method is not fit where the
expansion plans are undertaken in the company. The formula applied to get the value of
share is:
Fair value of shares= intrinsic value+ yield value/2 Where intrinsic value is the value
of share calculated by net asset method.
CALCULATION BY FAIR VALUE METHOD:-
Value per share = (value per share on net assets basis + value per share on earning
basis)/2


27







TOPIC NO: 3
INSURANCE COMPANY
ACCOUNTING






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INTRODUCTION
Simply speaking, insurance is the means by which risks of loss or damage can be shifted to
another party (the insurers) on payment of a charge known as premium. The party whose risk is
shifted to the insurer is known as the insured. Obviously insurer is generally an organization
(Insurance Company), which is willing to share the loss or damage and it is also qualified to do
so. Insurance is a contract between the insurer and insured whereby the insurer undertakes to pay
the insured a fixed amount, in exchange for a fixed sum (premium), on the happening of a certain
event (like at a certain age or on death), or compensate the actual loss when it takes place, due to
the risk insured. If you think about the basis of insurance, you will realize that it is a form of co-
operation through which all the insured, which are subject to a risk, pay premium and only one
or few among them who actually suffer the loss or damage is/are compensated. Actually, the
number of parties exposed to a risk is very large and only a few of them might actually suffer
loss during a certain period. The insurer (company) acts as an agency to spread the actual loss
suffered by a few insured parties among a large number of parties.
Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a
number of persons who are exposed to it and who agree to ensure themselves against that risk.
Risk is uncertainty of a financial loss. It should not be confused with the chance of loss which is
the probable number of losses out of a given number of exposures.
TYPES OF INSURANCE

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All too often we hear about various types of insurance policies without really understanding what
they are and more importantly, what they protect. The truth is, there are two main types of
insurance, namely life insurance and general insurance which covers different aspects in your
life.



LIFE INSURANCE
Life insurance is an insurance coverage that pays out a certain amount of money to the insured or
their specified beneficiaries upon a certain event such as death of the individual who is insured.
This protection is also offered in a Family tactful plan, a Shariah-based approach to protecting
you and your family. The coverage period for life insurance is usually more than a year. So this
requires periodic premium payments, either monthly, quarterly or annually.
The main products of life insurance include:
Whole life
Endowment
Term
Investment-linked
Life annuity plan
Medical and health


GENERAL INSURANCE
General insurance is basically an insurance policy that protects you against losses and
damages other than those covered by life insurance. For more comprehensive
coverage, it is vital for you to know about the risks covered to ensure that you and your
family are protected from unforeseen losses. The coverage period for most general
insurance policies and plans is usually one year, whereby premiums are normally paid
on a one-time basis.

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The main products of general insurance
includes:
Motor insurance
Fire/ House owners/ Householders
insurance
Personal accident insurance
Medical and health insurance
Travel insurance

INSURANCE ACT, 1938
The provision of Insurance Act, 1938 as amended up to date, relevant to insurance accounting ,
are summed up below:
SEPARATION OF ACCOUNTS AND FUNDS (S. 10)
(1) Where the insurer carries on business of more than one of the 2[ following classes, namely,
life insurance, fire insurance, marine insurance or miscellaneous insurance], he shall keep a
separate account of all receipts and payments in respect of each such class of insurance business
3[ and where the insurer carries on business of 2[ miscellaneous insurance] whether alone or in
conjunction with business of another class, he shall, unless the 4[ Controller] waives this
requirement in writing, keep a separate account of all receipts and payments in respect of 2[ each
of such sub- classes of miscellaneous insurance business] as may be prescribed in this behalf:
Provided that no sub- class of 2[ miscellaneous insurance business] shall be prescribed under this
sub- section if the insurance business comprised in the sub- class consists of insurance contracts
which are terminable by the insurer at intervals not exceeding twelve months and under which, if
a claim arises, the insurer' s liability to pay benefit ceases within one year of the date on which
the claim arose.]

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ACCOUNTS AND BALANCE SHEET (S. 11)
(1) Every insurer, in the case of an insurer specified in sub-clause (a) (ii) or sub clause (b) of
clause (9) of section 2 in respect of all insurance business transacted by him, and in the case of
any other insurer in respect of the insurance business transacted by him in India, shall at the
expiration of each financial year prepare with reference to that year,
(a) in accordance with regulations contained in part I of the First Schedule, a balance sheet in the
form set forth in Part II of that Schedule;
(b) in accordance with the regulations contained in part I of the Second Schedule, a profit
andloss account in the forms set forth in Part II of that Schedule, except where the insurer carries
on business of one class only of the following classes, namely, life insurance, fire insurance
or marine insurance and no other business;
(c) in respect of each class or sub class of insurance business for which he is required under sub
section (1) of section 10 to keep a separate account of receipts and payments, a revenue account
in accordance with the Regulations, and in the form or forms, set forth in the Third Schedule
applicable to that class or sub class of insurance business.
AUDIT (S. 12)
The balance-sheet, profit and loss account, revenue account and profit and loss appropriation
account of every insurer, in the case of an insurer specified in sub- clause (a) (ii) or sub- clause
(b) of clause (9) of section 2 in respect of all insurance business transacted by him, and in the
case of any other insurer in respect of the insurance business transacted by him in India, shall,
unless they are subject to audit under the Indian Companies Act, 1913 (7 of 1913 ), be audited
annually by an auditor, and the auditor shall in the audit of all such accounts have the powers of,
exercise the functions vested in, and discharge the duties and be subject to the liabilities and
penalties imposed on, auditors of companies by section 145 of the Indian Companies Act, 1913 .
REGISTER OF POLICIES AND REGISTER OF CLAIMS (S. 14)

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Every insurer, in the case of an insurer specified in sub- clause (a) (ii) or sub- clause (b) of clause
(9) of section 2 in respect of all business transacted by him, and in the case of any other insurer
in respect of the insurance business transacted by him in India, shall maintain--
(a) a register or record of policies, in which shall be entered, in respect of every policy issued by
the insurer, the name and address of the policy- holder, the date when the policy was effected
and a record of any transfer, assignment or nomination of which the insurer has notice, and
(b) a register or record of claims, in which shall be entered every claim made together with the
date of the claim, the name and address of the claimant and the date on which the claim was
discharged, or, in the case of a claim which is rejected, the date of rejection and the grounds
therefore.
INVESTMENT (S. 27 & S. 27B)
Every insurer shall invest and at all times keep invested assets equivalent to not less than the sum
of LISTED in this S.27.No insurer carrying on general insurance business shall, after the
commencement of the Insurance (Amendment) Act, 1968 (62 of 1968 ), invest or keep invested
any part of this assets otherwise than in any of the approved investments listed in this S.27B.
PROHIBITION OF PAYMENT BY WAY OF COMMISSION OR OTHERWISE
FOR PROCURING BUSINESS (S.40)
(1) No person shall, after the expiry of six months from the commencement of this Act, pay or
contract to pay any remuneration or reward whether by way of commission or otherwise for
soliciting or procuring insurance business in India to any person except an insurance agent 1[ 2[
or a principal, chief or special agent].
(2) No insurance agent 1[ shall be paid or contract to be paid by way of commission or as
remuneration in any form an amount exceeding, in the case of life insurance business, forty per
cent. of the first year' s premium payable on any policy or policies effected through him and five
per cent. of a renewal premium, 3[ payable on such a policy], or, in the case of business of any
other class, fifteen per cent. of the premium: Provided that insurers, in respect of life insurance
business only, may pay, during the first ten years of their business, to their insurance agents fifty-

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five per cent. of the first year' s premium payable on any policy or policies effected through them
and six per cent. of the renewal premiums 3[ payable on such policies]: 4[ Provided further that
nothing in this sub- section shall apply in respect of any policy of life insurance issued after the
31st day of December, 1950 (47 of 1950 ), or in respect of any policy of general insurance issued
after the commencement of the Insurance (Amendment) Act, 1950 .]


LIFE INSURANCE
INTRODUCTION
Life insurance is a contract under which the insurer (Insurance Company) in consideration of a
premium paid undertakes to pay a fixed sum of money on the death of the insured or on the
expiry of a specified period of time whichever is earlier. In case of life insurance, the payment
for life insurance policy is certain. The event insured against is sure to happen only the time of
its happening is not known. So life insurance is known as Life Assurance. The subject matter of
insurance is life of human being. Life insurance provides risk coverage to the life of a person. On
death of the person insurance offers protection against loss of income and compensate the
titleholders of the policy.
TYPES OF LIFE INSURANCE POLICIES
Life insurance policies can be grouped into the following categories:
TERM POLICY
In case of Term assurance plans, insurance company promises the insured for a nominal
premium to pay the face value mentioned in the policy in case he is no longer alive during the
term of the policy.
Term assurance policy has the following features:
It provides a risk cover only for a prescribed period. Usually these policies are short-
term plans and the term ranges from one year onwards. If the policyholder survives till
the end of this period, the risk cover lapses and no insurance benefit payment is made to
him.

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The amount of premium to be paid for these policies is lower than all other life insurance
policies. As savings and reserves are not accumulated under this policy, it has no
surrender value and loan or paid-up values are not allowed on these policies.
This plan is most suitable for those who are initially unable to pay high premium when
income is low as required for Whole Life or Endowment policies, but requires life cover
for a high amount.



WHOLE LIFE POLICY
This policy runs for the whole life of the assured. The sum assured becomes payable to the legal
heir only after the death of the assured. The whole life policy can be of three types.
(1) Ordinary whole life policy In this case premium is payable periodically throughout the life
of the assured.
(2) Limited payment whole life policy In this case premium is payable for a specified period
(Say 20 Years or 25 Years) Only.
(3) Single Premium whole life policy In this type of policy the entire premium is payable in
one single payment.
ENDOWMENT LIFE POLICY
In this policy the insurer agrees to pay the assured or his nominees a specified sum of money on
his death or on the maturity of the policy which ever is earlier. The premium for endowment
policy is comparatively higher than that of the whole life policy. The premium is payable till the
maturity of the policy or until the death of the assured which ever is earlier. It provides
protection to the family against the untimely death of the assured.
HEALTH INSURANCE SCHEMES
An individual is subject to uncertainty regarding his health. He may suffer from ailments,
diseases, disability caused by stroke or accident, etc. For serious cases the person may have to be
hospitalized and intensive medical care has to be provided which can be very expensive. It is
here that medical insurance is helpful in reducing the financial burden. These days the
vulnerability to lifestyle diseases such as heart, cancer, neurotic, and pollution based, etc are on
the increase. So it makes sense for an individual to go for medical insurance cover.

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JOINT LIFE POLICY
This policy is taken on the lives of two or more persons simultaneously. Under this policy the
sum assured becomes payable on the death of any one of those who have taken the joint life
policy. The sum assured will be paid to the survivor(s). For example, a joint life policy may be
taken on the lives of husband and wife, sum assured will be payable to the survivor on the death
of the spouse.
ANNUITY POLICY
Under this policy, the sum assured is payable not in one lump sum payment but in monthly,
quarterly and half-yearly or yearly installments after the assured attains a certain age. This policy
is useful to those who want to have a regular income after the expiry of a certain period e.g. after
retirement. Annuity is paid so long as the assured survives. In annuity policy medical checkup is
not required.
GROUP INSURANCE
Group life insurance is a plan of insurance under which the lives of many persons are covered
under one life insurance policy. However, the insurance on each life is independent of that on the
other lives. Usually, in group insurance, the employer secures a group policy for the benefit of
his employees. Insurer provides coverage for many people under single contract.
POLICIES FOR CHILDREN
Policies for children are meant for the various needs of the children such as education, marriage,
security of life etc. Some of the major children policies are:
(1) Childrens deferred assurances
(2) Marriage endowment and educational annuity plans
(3) Children endowment policy
MONEY BACK POLICY
In this case policy money is paid to the insured in a number of separate cash payments. Insurer
gives periodic payments of survival benefit at fixed intervals during the term of policy as long as
the policyholder is alive.
SOME IMPORTANT TERMS
I. WHOLE LIFE POLICY
Policy under which, amount of policy is received only when the insured expired.
II. ENDOWMENT POLICY

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Amount of policy received by the insured either he/she reaches certain age or expired whichever
is earlier.
III. WITH PROFIT POLICIES -
Policy holder is entitled to share in profit of insurer along with the guaranteed amount payable on
maturity
IV. WITHOUT PROFIT POLICIES
On maturity policy holder received only fixed sum of money stated in the policy


V. BONUS
The share of profit enjoyed by insured is called bonus
a) Reversionary bonus is one which is paid only on maturity of the policy along with
guaranteed amount.
b) Bonus in cash is paid immediately
c) Bonus in reduction of premium is normally adjusted by policy holder against the future
premium due from him.
d) Interim bonus is paid on maturity of policy before deciding the exact profit amount
VI. PREMIUM
First years premium is the premium paid for the first year of the life insurance policy and
premium paid for the subsequent year is termed as renewal premium. Single premium is the total
of all the premiums amount, paid by the policy holder once at the initiation of policy period.
VII. SURRENDER VALUE
It is the amount which is life insurance company agrees to pay when policy holder discontinue to
pay further premium and surrender the policy.
VIII. CLAIMS
It is the amount payable by an insurer against the policy either on maturity (known as claim by
maturity or survivance) or on the death of the policy holder (known as claim by death).
IX. RE-INSURANCE
Re-insurance is the transfer of part of risk by the insurance company on another insurance
company. When the insurance company find it difficult to carry risk involves huge amount, it
makes an arrangement for reinsurance by giving away a part of its business to another company

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(known as accepting company or re-insurance) and receives commission from accepting
company
X. ANNUITIES
The insurance company agrees to pay a fixed sum of money at regular intervals of time to the
policy holder during a specified period in return for a lump sum paid in advance known as
annuities.



PREPARATION OF FINANCIAL STATEMENTS
The financial statement of the life insurance companies consist of Revenue account, Profit & loss
account and Balance sheet. These statements to be prepared in accordance with the provisions of
IRDA (Preparation of Financial Statements and Auditors Report of Insurance Companies)
Regulations, 2002 and comply with the requirements of schedule A. The Insurer needs to
prepare Revenue A/C in form A-RA; profit & loss A/C inform A-PL and Balance sheet in form
A-BS. The Revenue account contains total 4 schedules- schedule1 Premium; schedule 2-
Commission expenses; Schedule 3- Operating expenses and schedule 4 Benefits paid. It also
shows the items having no specific schedule such as Income from Investments, Interim bonus
paid; Provision for doubtful debts; tax and such other provisions. The bottom section of Revenue
account exhibits appropriators of surplus such as transfer to shareholders accounts, transfer to
other reserves, etc. The remaining balance of revenue account is transferred to life Insurance
Fund account. The profit and loss account shown all expenses and income not directly related to
Insurance business The Balance Sheet of like insurance companies are prepared in vertical
form having too sections sources of fund and application of fund. The schedule 5,6 and 7
deals with sources of fund and schedule 8 to schedule 15 shows the application of Fund. The
contingent liabilities is disclosed as part of financial statement by way of notes to Balance Sheet.

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39


Notes:
The total surplus shall be disclosed separately with the following details:
a) Interim bonuses Paid;
b) Allocation of Bonus to Policyholders;
c) Surplus shown in the Revenue Account;
d) Total Surplus [(a) + (b) + (c)].See Notes appended at the end of Form A-PL.

40



41



Notes to Form A-RA and A-PL:
(a) Premium income received from business concluded in and outside India shall be separately
disclosed.
(b) Reinsurance premiums whether on business ceded or accepted are to be brought into account
gross (i.e. before deducting commissions) under the head reinsurance premiums.
(c) Claims incurred shall comprise claims paid, specific claims settlement costs wherever
applicable and change in the outstanding provision for claims at the year end.
(d) Items of expenses and income in excess of one per cent of the total premiums (less re-
insurance) or Rs. 5,00,000 whichever is higher, shall be shown as a separate line item.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub-head Others shall be included items like foreign exchange gains or losses
and other items.
(g) Interest, dividends and rentals receivable in connection with an investment should be stated
as gross amount, the amount of income-tax deducted at source being included under advance
taxes paid and taxes deducted at source.
(h) Income from rent shall include only the realized rent. It shall not include any notional rent.

42



43




44









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GENERAL INSURANCE
General Insurance is the type of insurance which covers the loss and pays compensation against
any uncertain financial event. It is often referred to as the non-life insurance. General Insurance
covers all aspects of loss in case of objects and one which does not fall under life insurance and
is particularly done for property loss in any natural hazards, theft, burglary, accidents etc.
General Insurance is often under annual contracts but there are also a few products under general
insurance policies which are under the long-term contracts.
TYPES OF GENERAL INSURANCE
General Insurance can be sub-divided into six types of Insurances viz:
MEDICAL/ HEALTH INSURANCE:
In this insurance policy, the insurer pays the medical expense of an individual or a group
of consumers.
TRAVEL INSURANCE:
Travel insurance plan is quite an interesting one and proves to be of great help where in
case, an individual while traveling, if faces any theft or loss or is injured or ill. Travel
insurance covers any loss that might occur in any of the above cases mentioned.
Travelers can get a travel insurance done while going either on a domestic travel or an
international travel.
PROPERTY INSURANCE:
This insurance policy provides financial protection against any risk to property through
natural hazard or theft or burglary.
AUTO INSURANCE:

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Often referred to as vehicle or motor insurance covers any loss resulting from traffic
accident.
HOME INSURANCE:
Also referred to as Homeowners insurance or hazard insurance covers any loss incurred
in the private homes in terms of the content of the house, loss of possessions and because
of any accidents that might take place at home.
AGRICULTURAL INSURANCE:
The agricultural insurance policy helps the farmer against incurring any kind of loss due
to crop failure. In today's world every individual should have the awareness of getting
maximum of their property insured so that they are compensated with the maximum in
case of any loss.
PREPARATION OF FINANCIAL STATEMENT
The General insurance company in India prepares its financial statements in accordance with
provision of IRDA regulations, 2002. The financial statements consist of revenue account, profit
and loss account and vertical balance sheet in form B-RA, form B-PL and Form B-BS
respectively. Revenue accounts for fire, marine and miscellaneous insurance business to be
prepared separately. Revenue account contains schedule-1, schedule-2, schedule-3, and schedule
-4 and given operating profit or loss from insurance business which is transferred to profit and
loss account. Items not directly related to the insurance business are exhibited in profit and loss
account for e.g. transfer fees, diminution in the value of investment bad debts written-off.
Balance sheet contains source of funds and application of fund. Sources of funds consists of
schedule-5, schedule-6 and schedule-7 and application of funds consist of schedule-8 to schedule
15. Contingent liabilities are disclosed at the bottom of Balance Sheet.

47



48



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Notes to Form B-RA and B-PL:
a) Premium income received from business concluded in and outside India shall be separately
disclosed.
b) Reinsurance premiums whether on business ceded or accepted are to be brought into account
gross (i.e. before deducting commissions) under the head reinsurance premiums.
c) Claims incurred shall comprise claims paid, specific claims settlement costs wherever
applicable and change in the outstanding provision for claims at the year end.
d) Items of claims at the year end.
e) Fees and expenses connected with claims shall be included in claims.
f) Under the sub-head others shall be included items like foreign gains or losses and other
items.
g) Interest, dividends and rentals receivable in connection with an investment should be stated as
gross amount, the amount of income-tax deducted at source beings included under advance
taxes paid and taxes deducted at source.
h) Income from rent shall include only the realized rent. It shall not include any national rent.

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BIBLIOGRAPHY
www.icai.org.com
www.irda.org
http://www.mca.gov.in/Ministry/pdf/Ind_AS39.pdf