1.14     Query

Disclosure of equity pending allotment in the

balance sheet of a Government Company.

  A Government Company received a sum of Rs. 5.00 lakhs from a State Government for allotment of 5,000 fully paid equity shares of Rs. 100 each. On the date of balance sheet, the company could not allot these shares to the Government though the amount of Rs. 5.00 lakhs was utilised by the company for its various developmental activities. The company proposed to show this amount separately as ‘Share Deposit’ under the head ‘Share Capital’. On this, the Government Auditors in their supplementary comments u/s 619 (4) of the Companies Act, 1956, also concurred with the company. The querists sought the opinion of the Expert Advisory Committee on the following:

                   (i) Whether the amount of Rs. 5.00 lakhs being equity pending allotment should be disclosed under the head ‘Share Capital’                    separately as ‘Share Deposit’ after ‘Paid-up Share Capital’ or it should be disclosed under the head ‘Current Liabilities and                    Provisions’.

                   (ii) Whether there would be any difference in the disclosure if the allotment was made after the balance sheet date but before                    the date of audit.

                                                              Opinion                                                      August 13, 1982

 1.  The Committee notes that the disclosure of the amount received by the Government company against equity pending allotment as on the date of balance sheet does not fall in exactly under any of the heads provided in Part I of Schedule VI to the Companies Act, 1956. It may be argued that the amount received may be refunded, and therefore, should be shown under the head ‘Current Liabilities and Provisions’. The Committee does not favour this mode of disclosure excepting when the liability to refund the amount so received has accrued as on the balance sheet date. On the other hand it may also be argued that the amount received is on account of share capital; therefore, it may be shown after paid-up share capital under the head ‘Share Capital’. The Committee feels that this mode of disclosure may be adopted provided appropriate disclosure of the nature of transaction is also made. However, in the opinion of the Committee it would be preferable to exhibit the item separately after the head ‘Share Capital’.

2. Regarding the second question as to whether there will be any difference in the disclosure if the allotment is made after the balance sheet date but before the date of audit, the relevant generally acceptable accounting principles are given below: --

                   (i) Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to                    assist the estimation of amounts relating to conditions existing at the balance sheet date.

                   (ii) Assets and liabilities should not be adjusted but disclosure should be made in the report of the approving authority of                    events occurring after the balance sheet date that represent material changes, and commitments affecting the financial                    position of the enterprise.

3. From the above, it may be seen that since the amount to be shown on account of equity pending allotment is not based on an estimate but is an actual amount, no adjustment need be made on the allotment of shares after the balance sheet date. If the amount is shown under the head ‘Share Capital’ as proposed by the company or is shown after the head ‘Share Capital’, the allotment of shares to the State Government does not represent a material change affecting the financial position of the company. In view of this even a disclosure in the report of the approving authority is not necessary.

4. On the above consideration, the opinion of the Committee on the two questions raised by the querist is as follows:

                   (i)         The company may show the amount of Rs. 5 lakhs received from the State Government for allotment of full paid                    equity shares pending allotment as on the date of balance sheet under the head ‘Share Capital’ separately as ‘Share Deposit’                    after ‘Paid-up Share Capital’, along with appropriate disclosure of the nature of transaction. However, the Committee prefers                    its disclosure after the head 'Share Capital’.

                   (ii)        There should not be any difference in the disclosure if the allotment is made after the balance sheet date but before                    the date of audit, provided the disclosure has been made as suggested in (i) above.

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