The Hindu Business Line : Too student-friendly

THE PE II paper on accountancy was simple, with a few interesting questions that might have surprised students. There were certain significant omissions, such as:

a) cash flow statements, a standard question in the past few examinations.

b) institutional accounts of banks and insurance companies, which normally account for 16 marks.

The questions on partnership, underwriter accounts, single entry and branches were on expected lines.

As usual, the theory portion of the paper covered accounting standards, partnerships and company accounts. The queries on these topics, which included internal reconstruction, absorption, admission and retirement, were simple and should not have posed any problems to the students.

The 16 marks allotted to underwriter accounts would have come as a bonus for the candidates. This question is easier than the one given in the revision test paper (RTP). The query on single entry, though lengthy, is not complicated with sundry debtors and machinery being the main factors to be considered.

The four-mark theory question on accounting policy changes was repeated in the auditing paper for eight marks.

Accounting Standard 5 states three circumstances under which accounting policies can be changed by an entity.

They are: i) requirement of law; ii) compliance with accounting standards; and iii) more appropriate presentation of financial statements.

Any change in accounting policy that materially affects the financial statements has to be properly disclosed. Any material adjustment consequent to change in accounting policy and its impact has to be disclosed in the financial statements of the period in which the change is made.

6(b): This query is on subsequent events, and reads as follows: ABC Ltd could not recover Rs 10 lakh from a debtor. The company is aware that the debtor is in great financial difficulty. The accounts of the company were finalised for the year ended March 31, 2005, by making a provision at 20 per cent of the amount due from the said debtor.

The debtor became bankrupt in April 2005 and nothing is recoverable from him. Do you advise the company to provide for the entire loss of Rs 10 lakh in the books of account for the year ended March 31, 2005?

Since the debtor has become bankrupt and nothing is recoverable, the entire debt is to be written off as a bad debt during the year ended March 31, 2005. This situation is an adjusting event occurring after the balance-sheet date.

Compare this with Question 1(b) in auditing, wherein a customer files a suit against a company for alleged failure to provide satisfactory after-sales service. Before finalisation of the accounts for the year ended March 31, 2005, the company won the case and had no liability whatsoever in this regard.

The company has made a provision for this contingent liability in its accounts for the year ended March 31, 2005, which, it says, will be reversed next year.

Since the books of account are not yet closed, the situation is not one that occurred after the balance-sheet date. The question of adjusting event does not arise. The company is not justified in making a provision and then reversing it later.

Both the questions are based on contingencies and events occurring after the balance-sheet date. And they are identical in the sense that in both situations, there is a likelihood of a loss. Also, in both the situations, there is an event occurring after the balance-sheet date, though in the auditing paper books of account are not yet closed.

While in the accounts paper, the adjustment is made and the accounts are closed by making a provision of 20 per cent for sundry debtors, in the auditing paper, the books of account have not been finalised, and during this time the company wins the case and is absolved of its responsibility.

While the loss element is included in the accounts paper, the auditing paper does not have it. Also, in the accounts paper, it is an event occurring after the balance-sheet date and adjusting event, in the auditing paper it is not so. In both the questions the answers arise out of the same source but divergent situations.

Several topics, such as government accounting, accounting for leases, accounts for farms and accounting of electricity companies, are generally overlooked by the paper-setters.

Candidates must have wasted much time answering Question 1, which involves cumbersome calculations, and would have been constrained for time while attempting the later questions, especially the technical ones on accounting standards.

Overall, the paper is student-friendly. Considering that it is a PE II level paper, it could have been more demanding. Any candidate who had done his homework well and gone through the RTPs thoroughly should have done well.

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