1.11 Query
Disclosure of loan/cash credit taken against fixed deposits and interest thereon in the financial statements
1. A housing development corporation has been making fixed deposits with various banks at the time of placing investments and debenture issue. Further, the corporation is availing the credit limit and taking loans against these fixed deposits, as per the RBI guidelines on the following terms:
(i) The amount so advanced is equal to 75 per cent of fixed deposit amount;
(ii) An additional rate of interest @ 2 per cent per annum is charged over and above the rate at which these fixed deposits have been taken.
2.The corporation has entered the loan so received in the books of account whereas the credit limit availed by it is not entered in the books and is shown only as overdrawn amount in the bank balances. The querist has illustrated this with the following cases which are based on the figures as at the close of the financial year i.e., 31.3.1987:
3. Keeping the figures of above three cases in view, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
Case A
(i) Whether loan of Rs. 5.00 lakhs against fixed deposit is to be shown under “Current Liabilities” or under “Unsecured loans”.
(ii) Since the entry of loan of Rs. 5.00 lakhs, when received, was taken in bank balance and as such forms a part of negative closing “Bank Balance” whether any disclosure is required under ‘Cash and Bank Balance’ or under “Current Liabilities” or under “Unsecured Loans”.
(iii) Bank balance as per the bank is Rs. (-) 10 lakhs at the year end which is against credit limit of Rs. 10.00 lakhs in addition to the loan of Rs. 5 lakhs. Whether the negative bank balance of Rs. 10.00 lakhs can be set-off against the debit balance of other banks and, if not, where it should be shown and whether this need to be explained by way of a note.
(iv) Whether the loan/credit limit has to be segregated from the bank balance at the close of the year and has to be shown separately. If yes, then under which head of balance sheet and whether any disclosure is required.
Case B
(i) Whether loan taken against fixed deposits of Rs. 4 lakhs is to be shown under current liabilities or under “Unsecured Loan”, with a note. Keeping in view the fact that loan against fixed deposits can be taken upto Rs. 5 lakhs as sanctioned, whether any disclosure is required for the loan not utilised at the year end.
(ii) Bank balance as per the bank book is Rs. (-) 8 lakhs at the year end which is against credit limit of Rs. 10.00 lakhs in addition to the loan of Rs. 4 lakhs. Since the credit limits is under utilised, whether disclosure is required to this effect.
Case C
Whether any disclosure is required for the loan/credit limit not utilised at all by the corporations against the loan/credit limit sanctioned by the bank at the year end.
4.The querist has also raised the following issues regarding the disclosure of interest on loans/credit taken against fixed deposit:
(i) Whether the interest charged by the bank on the credit limit utilised during the year is to be shown under ‘Interest on Borrowings’ or under “other expenses” or under any other separate head so as to conform to the requirements of Part II of Schedule VI to the Companies Act, 1956.
(ii) What should be the treatment of interest charged by the banks on loan against fixed deposits?
(iii) What should be the treatment of the interest not charged by the bank upto the close of the year on the credit limit/loan against fixed deposits utilised by the Corporation, i.e., whether any entry for interest accrued on loan/credit limit has to be passed and if so, under which head this item should be shown in the schedules to the balance sheet?
(iv) Whether any disclosure is required in the statement of accounting policies.
(v) Is any other disclosure required to conform to the provisions of Schedule VI to the Companies Act, 1956.
Opinion May 15, 1987
1. The Committee notes that the term ‘secured loan’ has been defined in the ‘Guidance Note on Terms Used in the Financial Statements’ as a “loan secured wholly or partly against an asset”. The Committee notes that a fixed deposit with a bank is an asset of the corporation. The Committee is therefore of the view that a loan and cash credit taken from the bank against a fixed deposit should be classified as a ‘secured loan’ under the sub-head ‘Loans and advances from banks’ in the balance sheet.
2. On the basis of the above considerations, the opinion of the Committee, in respect of the issues raised by the querist in para 3 above, is as below:
Case A
(i) Loan of Rs. 5 lakhs from the bank against the fixed deposit placed with the bank should be classified under the head ‘secured loans’ under the sub-head ‘Loans and advances from banks’. (ii) Bank balance should be shown at the figure at which it appears in the books of account of the company. The negative cash credit bank balance should be shown separately under the head ‘Secured Loans’ under the sub-head ‘Loans and advances from banks’ in the balance sheet. No separate disclosure is necessary regarding the loan amount drawn from the bank and included in the aforesaid bank balance.
(iii) and (iv) These questions do not arise in view of answers at (i) and (ii) above. Cases B and C : Same as Case A above
3. With regard to issues related to disclosure of interest on loans/credit availed of from the bank against the fixed deposits placed by the corporation with it, stated in para 4 of the query, the Committee notes that clause 3 (v) of Part II of Schedule VI to the Companies Act, 1956, requires that “The amount of interest on the Company’s debentures and other fixed loans, that is to say loans for fixed periods stating separately the amount of interest, if any, paid or payable to the managing director and manager, if any,” should be disclosed.
4.The Committee further notes that Part I of Schedule VI to the Companies Act, 1956, requires that “Interest accrued and due on Secured Loans” should be included under the appropriate sub-head under the head ‘Secured Loans’.” In this regard, the Committee also notes that the Company Law Committee has issued a clarifications in the November, 1986 issue of “The Chartered Accountant” according to which “The amount of interest accrued and due should be disclosed separately.” 1 The Committee further notes that “Interest accrued but not due on loans” should be shown separately under the head “Current Liabilities” as per the requirement of Part I of Schedule VI to the Companies Act, 1956.
5. On the basis of the above considerations, the point-wise opinion of the Expert Advisory Committee on the various issues raised by the querist in para 4 of the query, is as below:
(i) The interest charged by the bank on the cash credit availed of by the corporation should not be shown under “Interest on company’s debentures and other fixed loans”, but may be shown separately, as is the prevailing practice, along with other types of interest, as ‘other interest’ under the board head “Interest on borrowings” or in a schedule of that nomenclature.
(ii) Interest charged by the bank on loan against fixed deposits should be shown at ‘Interest on fixed loans’ if the loan is for a fixed period, otherwise, it should be shown separately as ‘other interest’ under the broad head “Interest or borrowings”.
(iii) Interest accrued and due on loan against fixed deposit should be included under the sub-head ‘loans and advances from banks’ under the main head “Secured Loans”. The amount of interest accrued and due on the loan should be disclosed separately. Interest accrued but not due on the loan should be shown separately under the head “Current Liabilities”. Interest accrued and due and interest accrued but not due on cash credit should be disclosed in a similar manner.
(iv) The Committee is of the opinion that no disclosure is required, in this regard, in the Statement of Accounting Polices.
(v) The Committee is further of the opinion that there is no other disclosure requirement under Schedule VI to the Companies Act, 1956.
_______________________________ 1 “Modification in note (ii) of Item1 at pages 39 and 42 of “A Guide to Company Audit (1982)”, November 1986, “The Chartered Accountant”.
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