S. No.

DESCRIPTION

A

Financial information required to be contained in the Letter of Offer

1

5 years' statement of profit or loss and statement of assets and liabilities as on a specified date

2

Adjustments in Statements of Profit or Loss and Assets and Liabilities:

Wherever statements of assets and liabilities and profit and loss or any other financial information is qualified by the notes of an auditor, all necessary adjustments wherever quantification is possible, shall be made in the statements itself. In particular, the following rectifications adjustments shall be made:

Where it is not possible to make adjustments/rectifications, it should be specifically so stated, and the exact qualification should be reproduced by way of a note. For example, there may be a qualification regarding non-availability of significant information.

(b) Material amounts relating to adjustments for previous years shall be identified and adjusted in arriving at the profits of the years to which they relate irrespective of the year in which the event triggering the profit or loss occurred.

(c) Where there has been a change in accounting policy, the profits or losses of the earlier years (required to be shown in the offer documents) and of the year in which the change in the accounting policy has taken place shall be recomputed to reflect what the profits or losses of those years would have been if a uniform accounting policy was followed in each of these years. However, if an incorrect accounting policy is being followed, the recomputation of the financial statements would be in accordance with correct accounting policies.

The impact of a change in an accounting policy is required to be made with retrospective effect over the five years period under report so in the last year under report would become the applicable policy that the profits or losses of earlier years can be reflected on the basis of the changed accounting policy. The policy being followed in the last year under report would become the applicable policy for each of the five years.

(d) Statement of profit or loss shall disclose either the profit or loss arrived at before considering extraordinary items and after considering the profit or loss from extraordinary items.

Note: It should be noted that in making the adjustments, regard should be had to the 'materiality' of the amounts involved in respect of various items of adjustments. The term 'materiality' is defined in Accounting Standard (AS) 1 on 'Disclosure of Accounting Policies', as below:

"Financial statements should disclose all 'material' items, i.e., items the knowledge of which might influence the decisions of the user of financial statements."

3

Disclosure is required in the offer document in respect of changes (with quantification wherever possible) in the activities of the issuer, which may have had a material effect on the statement of profit/loss for the five years. Disclosure of these changes in the activities of the company shall include discontinuance of lines of business, loss of agencies or markets and similar factors.

Following information be disclosed in case of a discontinued operation of the type covered in the above requirement:

(a)             The nature of the discontinued operation.

(b)            The effective date of discontinuance for accounting purposes.

(c)             The manner of discontinuance [sale, abandonment etc.].

(d)            Turnover of the discontinued operation. Where divisional accounts are maintained, the gain or loss on discontinuance and the accounting policies used to measure that gain or loss should be disclosed, e.g., the policy regarding allocation of overheads.

Similar disclosures should be made in respect of loss of major agencies or markets etc.

A material change in activities of a company can also arise due to addition of new lines of business. Similar disclosures should be made in this regard for the year in which the new activity was started.

4

Disclosure shall be made in the offer document in respect of all significant accounting policies followed in the preparation of the financial statements.

5

Disclosure is required to be made of sales/incomes or purchase/expenses between companies in the promoter group when such sales or purchases exceed in value in the aggregate 10% of the total sales or purchases of the issuer and also disclose material items of income or expenditure arising out of transactions in the promoter group.

Note: It is significant to note that the requirement is both for particulars of sales and purchases as well as other transactions whether income or expenditure.

6

The offer document shall disclose details of 'Other Income' in all cases where such income (net of related expenses) exceeds 20% of the net profit before tax and extraordinary items, including:

(a)             the sources and other particulars of such income; and

(b)            an  indication  as  to  whether  such  income is  recurring  or non-recurring, or has arisen out of business activities/other than the normal business activities.

As per the requirement, the following disclosures should be made with regard to the 'other income':

(a)             The source.

(b)            The nature.

(c)             The amount.

(d)            Whether recurring or non-recurring.

(e)             Whether on account of normal business activity or not.

7

The turnover disclosed in the Profit or Loss Statement shall be bifurcated into:

(a)             turnover' of products manufactured by the company;

(b)            turnover of products traded in by the company; and 

(c)             details of products not normally dealt in by the company but included in (b) above, shall be mentioned separately.

8

The statement of assets and liabilities prepared after deducting the amount of revaluation reserve from both fixed assets and reserves and the net worth arrived at after such deduction. All fictitious assets should be adjusted from reserves.

B.

1

Tax provisions are also affected by timing differences which can be reversed in the future (for example, the difference between book depreciation and tax depreciation) and permanent differences. For a proper understanding of the future tax incidence, these factors shall be identified and explained through proper disclosures.

Note: Income tax should be computed on the basis of actual rates on the profits after making adjustments for qualifications in auditor's report, previous year adjustments, changes in accounting policies etc.

2

3

Disclosure is required to be made of the following accounting ratios for each of the accounting periods for which financial information is given:

Earning per share (EPS)

Earnings per share may be either -

(a)          Basic earnings per share, or
(b)          Diluted earnings per share.

Return on Net Worth is computed by using the following formula: 

Net Profit after tax adjustments
Net Worth

Net asset value (NAV) has been calculated as per the latest audited balance sheet date. Net asset value can be computed either by the net assets method or by the net equity method. Under the former, from the total assets of the company, all liabilities and preference capital, if any, are deducted. The net asset value as calculated from the assets side of the balance sheet in the above manner can be cross-checked by calculating the same by net equity method whereby equity share capital is added to reserves and surplus, deducting therefrom miscellaneous expenditure to the extent not written off and the debit balance of profit and loss account to the extent not adjusted against reserves and surplus.

Note: The following points should be kept in mind while computations of the net asset value whether on net assets basis or net equity basis:

(a)           Intangible assets like goodwill, patents, trade marks, copyrights, etc., have not been taken into account, unless they have been paid for.

(b)           Revaluation of assets, if any, have not been taken into account.

(c)           Arrears of preference dividend have been provided for.

NAV per share is calculated as below:

NAV arrived at as above
No. of equity shares at the end of the accounting period

Note: for making various computations for the above accounting ratios, the various items of profit/loss and assets/liabilities have been adjusted as per the requirements relating to qualifications in auditor's report, previous years' items etc.

4

Under the heading 'Basis for issue price' the following information shall be disclosed:

(a)          Earnings per share, i.e., EPS pre-issue for the last three years (as adjusted for changes in capital),

(b)          P/E pre-issue and comparison thereof with industry P/E where available (giving the source from which industry P/E has been taken),

(c)           Average return on net worth in the last three years,

(d)         Minimum return on increased net worth required to maintain pre-issue EPS;

(e)          Net Asset Value per share based on last balance sheet.

(f)            Net Asset Value per share after issue and comparison thereof with the issue price.

Note:

(a)           The accounting ratios disclosed in the offer document in support of basis of the issue price shell be calculated after giving effect to the consequent increase of capital on account of compulsory conversions outstanding, as well as on the assumption that the options outstanding, if any, to subscribe for additional capital will be exercised.

(b)           Projected earnings shall not be used as a justification for the issue price in the offer document.

(c)            For making various computations for the above accounting ratios, the various items of profit/loss and assets/liabilities have been adjusted as per the requirements relating to qualifications in auditor's report, previous years' items etc.

5

A Capitalisation Statement, which shows total debt and net worth and the dept/equity ratios before and after the issue, is made. Where there has been a change in the share capital since the date as of which the financial information has been disclosed in the offer document, there shall be a note explaining the nature of the change.

For computation of the debt/equity ratio, the following points should be considered:

(a)          Debt includes only long-term debt, for example, debentures, bonds, long-term loans from financial institutions, etc.

(b)          Preference share capital has been considered as a part of equity, unless it is to be repaid shortly, e.g., within 12 months.

(c)           Convertible debentures and other loans carrying compulsory conversion clause, to the extent of convertibility, has been considered as equity.

(d)         Equity includes paid-up equity share capital, preference capital, and reserves and surplus after deducting therefrom the miscellaneous expenditure to the extent not written off and the debit balance of profit and loss account to the extent not adjusted against reserves and surplus.

Note:

(a)            It may be noted that two debt/equity ratios would be calculated and disclosed, namely, one for pre-issue and the other for post-issue.

(b)          In case there is any change in the share capital since the date in respect of which the financial information has been disclosed in the offer document, there should be a note explaining the nature of the change, for example, issue of bonus shares, issue of shares to vendors against acquisition of property.

6

Details of:

(a)          Actual expenditure incurred on the project(in cases of companies raising capital for a project) upto a date not earlier than 2 months of filing the prospectus with SEBI or Registrar of Companies, whichever is later;

(b)          Means and source of financing such expenditure;

(c)           Year-wise break-up of the expenditure proposed to be incurred on the said project.

7

It should be noted that not all 'bridge loans' or other financial arrangements made for incurring expenditure on the project are required to be disclosed; only those 'bridge loans' which have both the characteristics, viz., (a) the loans are for incurring project expenditure; and (b) the loans would be repaid out of the proceeds of the issue, are required to be disclosed.

8

The offer document should disclose principal terms of loan and assets charged as security.

C

The offer document should include a forecast of the estimated profits for the financial year ending immediately before the date of the offer document (if such information is not already given in the offer document) and for the financial year ending immediately after the date of the offer document duly supported by an auditor's certificate which lists the major assumptions on which the forecast is based and gives assurance on the arithmetical calculations derived from such assumptions.

Profit forecast to be included in the offer document for the following periods:

(a)          A forecast of the estimated profits for the financial year ending immediately before the date of the offer document (if such information is not already given in the offer document);

(b)          For the financial year ending immediately after the date of the offer document.

Auditor's certificate should list the major assumptions on which the forecast is based. It is the primary responsibility of the management to prepare the profit forecast.