The Hindu Business Line : Loss as asset

I slumped into my chair smugly after writing on the blackboard the last entry `Profit and Loss Account' on the asset side of the balance-sheet and declaring triumphantly that this represented the accumulated losses of the company.

Young Surinder Singh not normally known for his inquisitiveness suddenly stood up and challenged me, "How can a loss be an asset, sir?" The class roared in laughter at this wisecrack. Momentarily flummoxed, I retrieved ground by invoking the fundamentals of accounting — debit all expenses and losses, and credit all incomes and gains.

Since the assets side is the repository of all debit balances the debit balance in the profit and loss (P&L) account must also necessarily figure thereunder, I declared, casting a nervous glance at the cynical faces. A teacher cannot convince his students unless he himself is. Therefore I examined the relevant entry on the assets side in Part I of Schedule VI to the Companies Act, 1956 — profit and loss account with the instruction `Show here the debit balance of profit and loss account carried forward after deduction of the uncommitted reserves, if any' — closely.

Not justified

The entry preceding this is Miscellaneous Expenditure (to the extent not written off or adjusted), which includes preliminary expenses and discount on issue of shares or debentures among others. While these are in the nature of deferred revenue expenditure and, hence, genuinely belong to the genre of assets, no such justification exists for showing a loss as an asset.

It is customary for accountants to compute the net worth by adding share capital and reserves and surplus and deducting the debit balance in the profit and loss figuring under the assets side, thanks to the disclosure requirement contemplated by Schedule VI.

What must be done is to shift the disclosure of loss from the asset side to the liability side by deducting the same if necessary even from the figure of share capital because to this extent the share capital has admittedly been wiped off. This would not only bring out the figure of net worth more sharply but also put an end to the unseemly spectacle of loss being shown as an asset much to the amusement of laymen and the discerning alike.

Law sometimes require `committed reserves' to be shown as such. Investment allowance reserve and foreign project reserve belonged to this genre, ordained as they were by the Income-Tax Act to be specially created and maintained till used in the prescribed manner.

Obviously, the accumulated losses cannot be adjusted against these. It is not uncommon to find accumulated losses resulting in a negative net worth.

Nevertheless, the resultant negative figure should not be allowed to take sanctuary under the assets side. Rather it should be mandated to be shown as a negative figure under the liability side.

It could be contended that reserves and surplus belong to the shareholders and, hence, constitute a liability to them. And by the same token, losses should be construed as an asset as the shareholders are supposed to make good the loss.

But a moment's reflection would show that a shareholder's liability is confined to what he has agreed to contribute to the share capital and share premium. The law doesn't require him to make good the losses as a matter of course unless the shareholders themselves resolve to bring in more. Therefore there is no way a loss can be construed as an asset.

The government must forthwith amend the format of Schedule VI so that losses do not find mention under the assets side, confounding the readers of accounts.

(The author is a Delhi-based chartered accountant.)