1.10 Query Disclosure of cash securities received from borrowers1. A housing development corporation incorporated under the Companies Act, 1956, has the major objectives as the housing and urban development programme in the country. For this purpose, moneys are received from time to time from the Government of India and other sources.
2.The board of Directors of the Corporation have approved the desire of the other housing agencies to offer interest bearing cash securities as guarantee for proper fund management as under: “The Corporation’s fund outlay in the form of loan releases do not occur as anticipated in its cash flow forecasts, mainly due to the slow progress of the projects and documentation delays involving security. Presently, the security for the Corporation’s loans is in the forms of Central/State Govt. guarantees, mortgage of properties or bank guarantees. On occasions, there are normal delays in receiving the Govt. guarantee due to administrative exercises. The borrowing agencies have to incur heavy expenditure either in execution of mortgage deeds or in obtaining band guarantees, wherever necessary, in respect of the schemes carrying higher interest rates. This difficulty would continue to be experienced even though the RBI has since increased the limit of accepting Govt. guarantee on loans carrying interest rate from 8.5 per cent to 10.5 per cent. It would be in the interest of the overall shelter activities in the country as well as the Corporation’s operations if the security for loan is allowed to be covered by interest bearing cash securities as an interim measure. In other words, the borrowing agencies may be allowed to keep an amount equivalent to the quantum of security required, with the Corporation, which will in turn allow interest of such cash securities. It will be open for any borrowing agency to keep sufficient amount with the Corporation to secure the loan required over any period of time. The Corporation could have the right to call for additional fresh security besides its right to recall the entire loan balance with all interests, costs, etc. in case of defaults by the agency in repayment of dues to the Corporation. It will be appropriate to allow the interest on these cash securities at reasonable rates, as may be determined by the CMD, from time to time.”
3. The Corporation has so far received the following amounts from the housing agencies as interest bearing cash securities:
4. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(i) Whether the said cash securities are to be shown in the annual accounts as “unsecured loan”, and if not;
(ii) Whether these are to be shown under “Current Liabilities” as “loan from borrowing agencies” or as “interest bearing cash securities from borrowing agencies”;
(iii) What should be the proper head of account for these securities in the General Ledger?
(iv) What should be the treatment of interest paid on these securities during the year so as to conform to the requirements of Profit and Loss Account under Part II of Schedule VI to the Companies Act, 1956?
(v) Whether the interest should be clubbed under “interest on borrowings” or should be shown under “other expenses” ;
(vi) What should be the treatment of interest accrued but not due on these securities as at the close of the year, i.e., 31.3.1987 and where this should be shown, i.e., under “unsecured loan” or under “current liabilities”?
(vii) Whether any note is required to be given in the Accounting Policies or under Notes to Balance Sheet and Profit and Loss Account; and
(viii) Any other disclosure required under Schedule VI to the companies Act, 1956.
Opinion May 15, 1987
1.The Committee notes that the term ‘Current Liability’ has been defined as follows in the Guidance Note on Terms Used in Financial Statements, issued by the Institute of Chartered Accountants of India:
“Liability including Loans, deposits and bank overdraft which falls due for payment in a relatively short period, normally not more than twelve months”.
2. The Committee is of the view that in case the cash securities given by the borrowers are normally substituted with bank/govt. guarantees or other securities within twelve months, these should be separately disclosed under the sub-head “other liabilities” under the main head “Current liabilities”, as “cash securities from the borrowing housing agencies in lieu of bank/govt. guarantees and/or other securities.” The Committee is of the view that this manner of disclosure is appropriate as it indicates the true nature of the liability and since the security cannot be considered as a ‘loan’ in the strict commercial parlance.
3. On the basis of the above, the point-wise opinion of the Expert Advisory Committee, in respect of the issues raised by the querist in para 4 of the query, is as below:
(i) The said cash securities should not be shown in the annual accounts as “unsecured loan”.
(ii) The said cash securities should be separately disclosed as “cash securities from the borrowing housing agencies in lieu of bank/govt. guarantees and/or other securities”, under ‘other liabilities’ under the main head “Current Liabilities”.
(iii) In respect of the said securities, the account head “cash securities from borrowing housing agencies” or words to the effect may be used in General Ledger.
(iv) & (v) Interest paid on the said cash securities should be shown as ‘Other interest’ under the broad head “Interest on Borrowings” in the profit and loss account to comply with the requirements of Part II of Schedule VI to the Companies Act, 1956.
(vi) Interest accrued but not due on the said securities should be shown under the head “Current Liabilities”
(vii) In the opinion of the Committee, it is not necessary to include a note in this regard in the Statement of Accounting Policies.
(viii) In the opinion of the Committee no other disclosure is necessary in this regard in the balance sheet and the profit and loss account of the Corporation. ________________________ |