1.20 Query: Accounting treatment of the unclaimed amount of bonds.
1. A corporation has been issuing, almost every year, ‘Government Guaranteed Bonds’ with a view to mobilise resources of carrying on its activities. At the time of issue, these bonds are generally subscribed by private placement with banks, charitable trusts, provident funds etc. These bonds, as per the terms and conditions of their issue, are transferable by endorsement and delivery. The management of these bonds has been entrusted to the Central Bank of India (hereinafter referred to as ‘the bank’). The bank looks after all the aspects of the management of the bonds such as payment of periodical interest, deduction of tax at source and payment thereof to the Government, wherever applicable; consolidation and sub-division of bond certificates; issue of duplicate bonds in lieu of lost bond certificates; repayment of the principal amount on maturity etc. All the records in connection with the management of the bonds are, therefore, kept with the bank only. The important point to be noted, as per the querist, is that since these bonds are transferable by endorsement and delivery, neither the corporation nor the bank is aware, at any point of time, who are the present holders of the various bonds. The payment of interest and the amount of principal on maturity of bonds is made to those bond-holders who present the same to the bank for such payment.
2. It has been the experience of the corporation that some of the bond-holders do not present the bonds to the bank either for payment of interest or for redemption of the bonds on maturity or for both. In such cases, after the date of redemption passes, the corporation follows the practice of transferring the unpaid amount of principal and interest to the account styled ‘Unclaimed Bonds’ which is clubbed with ‘Other Liabilities’ under the broad heading ‘Current Liabilities and Provisions’ in the balance sheet.
3. By experience, it has been found by the corporation that such amounts which remain unclaimed, continue to remain so even after a passage of long time. As stated earlier, since the bonds are transferable by endorsement and delivery, the names and addresses of bond-holders are not known either to the corporation or the bank. Hence, it is not possible to send reminders to the bond-holders requesting them to collect the amounts from the banks. Under the circumstances, it is assumed that after the expiry of three years from the date of maturity of bonds, the claims of the bond-holders will become legally time barred. (However, no legal opinion has been obtained in this regard). It has, therefore, been decided to transfer the amounts of principal and interest, which remain unclaimed for more than three year after the date of maturity of the respective bonds, to the ‘General Reserve’ of the corporation. It has internally been decided that in case any of these bond-holders present the bonds for payment of their dues, the request should be honoured despite the fact that the claim has become technically time barred. Such payments will be made by debit to the ‘General Reserve Account’. In view of this position, the corporation decided to follow the practice of showing such amounts which are transferred to ‘General Reserve’ under separate sub-heading, viz., ‘Unclaimed bonds and interest thereon’. The first such entry was passed while finalising the accounts for the year ended 31st March, 1991. This entry has been explained in the notes to the accounts as follows:
“It is the experience of the corporation that some of bondholders do not present the bonds on maturity or thereafter for repayment of principal and payment of interest. The details of such bondholders are not available on the records of the corporation as the bonds are transferable by endorsement and delivery. From the current year, the corporation has taken a decision to transfer to ‘General Reserve’, the principal amount of such bonds and interest thereon, if the same remains unclaimed for more than three years from the date of maturity. However, if such bonds or any of them are presented for payment after such transfer to ‘General Reserve’, the amount of principal or interest in respect of such bonds will be paid to the respective bondholders by debit to ‘General Reserve’.”
4. The Comptroller and Auditor General (CAG) of India in his comments on the accounts of the corporation for the said year observed that such practice of transferring to the ‘General Reserve’, the unclaimed amounts in respect of the bonds is incorrect as the bonds constitute capital liabilities. According to the CAG, the same should have been continued to be shown under the heading ‘Current Liabilities’. In this connection, the observation of the CAG is as follows:
“A reference is invited to item 5 of the notes forming part of accounts wherein it has been stated that the principal and interest in respect of unclaimed bonds to the tune of Rs. 6.86 lakhs after expiry of three years have been transferred to the general reserve. As bonds constitute capital liabilities, transfer of such liability (Rs.6.86 lakhs) to general reserve is incorrect. The same should have been shown under ‘Current Liabilities’.”
5. As per the querist, during their oral discussions with, and detailed written replies given to, the CAG, it was argued that it was pointless to continue to show such liabilities under the heading ‘Current Liabilities’, since the chances of bond-holders claiming the same appear remote and, in any case, the liabilities had become time barred due to expiry of the period of 3 years. However, the corporation, nevertheless, is prepared to honour such requests, if any, received even after the expiry of 3 years, as being a government corporation it does not want to take undue advantage of such technical lapses committed by bond-holders. Hence, the corporation is transferring the amounts to ‘General Reserve’ but still disclosing it separately in the relevant schedule. In this connection, the office of the CAG had argued that if the corporation pays dividend out of such amount transferred to the ‘General Reserve’, it will not be possible for it to pay the amount to the concerned bond-holders if the same is claimed at a later date, i.e., after payment of the dividend. In this connection, the corporation had explained to the office of the CAG that, as a general practice, it has not been declaring dividend to the Government of Maharashtra, which is the sole shareholder of all the shares in the corporation. Secondly, if it declares dividend, the same will be made from that part of the ‘General Reserve’ which does not include the amount transferred from unclaimed bonds account. This explanation was, however, not acceptable to the office of the CAG.
6. During the discussions with the office of the CAG, as per the querist, the question had also arisen that such unclaimed amounts in respect of bonds should be treated as ‘Capital Reserve’. In this connection, the querist feels that under the provisions of the Companies Act, only ‘Capital Redemption Reserve’ and the amounts received on account of ‘Share Premium’ are treated as ‘Capital Reserve’. Hence, it is not mandatory that the amounts of unclaimed bonds should be treated as ‘Capital Reserve’. It may, however, be mentioned that despite the above mentioned arguments the office of the CAG ultimately took a view that this amount has to be treated as ‘Current Liability’ only.
7. The querist has sought the opinion of the Expert Advisory Committee as to the manner of treatment of the amounts of unclaimed bnds in the accounts.
Opinion October 7, 1992
1. The Committee notes that two situations may arise in case of the liability in respect of unclaimed amount of the bonds, issued by the corporation, namely-
i) The debt is legally enforceable against the corporation.
ii) The corporation acknowledges it as a liability, even if it is not legally enforceable, as a matter of sound and fair business practice.
2. The Committee notes in this regard that para 60 of the Framework for the Preparation and Presentation of Financial Statements, issued by the International Accounting Standards Committee (IASC), describes liabilities as follows:
“An essential characteristic of a liability is that the enterprise has a present obligation. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. This is normally the case, for example, with amounts payable for goods and services received. Obligations also arise, however, from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. If, for example, an enterprise decides as a matter of policy to rectify faults in its products even when these become apparent after the warranty period has expired, the amounts that are expected to be expended in respect of goods already sold are liabilities.”
3. The Committee notes that in the present case the liability falling in the two situations enumerated in para 1 above, fulfills the characteristics of a liability as described by IASC, as reproduced in para 2 above.
4. The Committee is accordingly of the opinion that the amounts due towards the bond-holders should continued to be shown as a liability. However, after the lapse of a reasonable period, say 3 to 5 years, subsequent to the bonds becoming time barred, the company may, as a matter of its accounting policy, transfer the unclaimed amount to the profit and loss account and then to a special reserve with appropriate disclosures. ___________________________ |