Elements of Financial statement

According to conceptual framework of financial reporting approved by

international accounting standard board (ISAB) published in 2018

Asset.
An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
Liability.
A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
Equity.
Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
Income. Income is increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributions from equity participants.
Expense. Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants.
https://www.iasplus.com/en/standards/other/framework#:~:text=Asset.,to
%20flow%20to%20the%20entity.%20%5B

According to the Framework for the Preparation and Presentation of

Financial Statements Prepared on 15 March 2016 by the Australian
Accounting Standards Board.
Asset
is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.
Liability
is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources
embodying economic benefits.
An essential characteristic of a liability is that the entity 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
Equity
Equity iis the residual interest in the assets of the entity after deducting all its
liabilities.
Income
Income is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to contributions from
equity participants.
Expenses
Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating to distributions to
equity participants.
https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-
04_COMPjun14_07-14.pdf

Ordinary share:
Ordinary shares, also called common shares, are stocks sold on a public
exchange. Each share of stock generally gives its owner the right to one vote
at a company shareholders' meeting. Unlike in the case of preferred shares,
the owner of ordinary shares is not guaranteed a dividend.
Ordinary shareholders share profits of the firm, in the form of dividend
declared by the company and bonus shares. The dividend is paid to them at
last, i.e. after paying off all the taxes, interest and dividend to preference
shareholders.
1. Right Shares:

 A rights issue is one way for a cash-strapped company to raise capital

often to pay down debt.
 Shareholders can buy new shares at a discount for a certain period.
 With a rights issue, because more shares are issued to the market, the
stock price is diluted and will likely go down.

2. Bonus Shares:
 A bonus issue of shares is stock issued by a company in lieu of cash
dividends. Shareholders can sell the shares to meet their liquidity needs.
 Bonus shares increase a company's share capital but not its net assets.
Preference Shares
Preference shares, more commonly referred to as preferred stock, are shares
of a company’s stock with dividends that are paid out to shareholders before
common stock dividends are issued. If the company enters bankruptcy,
preferred stockholders are entitled to be paid from company assets before
common stockholders. Most preference shares have a fixed dividend, while
common stocks generally do not. Preferred stock shareholders also typically
do not hold any voting rights, but common shareholders usually do.
Convertible preference shares:
Convertible preferred stock includes an option that allows shareholders to
convert their preferred shares into a set number of common shares, generally
any time after a pre-established date. Under normal circumstances,
convertible preferred shares are exchanged in this way at the shareholder's
request. However, a company may have a provision on such shares that
allows the shareholders or the issuer to force the issue. How valuable
convertible common stocks are being based, ultimately, on how well the
common stock performs.
Cumulative preference shares:
 Cumulative preferred stock is a type of preference share that has a
provision that mandates a company must pay all dividends, including
those that were missed previously, to cumulative preferred shareholders.
 This class of shareholders is to be paid ahead of other classes of preferred
stock shareholders and ahead of common stock shareholders.
 Cumulative preferred stock contrasts with non-cumulative preferred
stock, in which no omitted or unpaid dividends are issued; if there are no
dividends in a particular quarter or year, the shareholders simply miss
out.
Non-cumulative preference shares:
 Noncumulative stock does not pay unpaid or omitted dividends.
 Cumulative stock entitles investors to missed dividends.
 Cumulative preferred stock is more attractive to investors than
noncumulative.
Redeemable preference shares:
 Redeemable preference shares are those preference shares that have a
predetermined redemption clause at the time of their issue. In the case of
these shares, a redemption price/price range is predetermined and noted
in the issue prospectus. The issuing company has a right to redeem i.e.,
buy back these shares at the predetermined redemption price at any time
before the redemption period specified.
 The primary purpose of issuing redeemable preference shares is to give
companies flexibility when they wish to buy-back shares. Let us
understand this with an example.
Irredeemable preference shares:
 Irredeemable preference shares are those preference shares which can
only be redeemed at the time of liquidation of the company. These shares
do not have any incorporated clause with respect to their redemption and
thus cannot be bought back at the choice of the issuing company.
 Irredeemable preference shares remain in existence so long as the
company is in existence i.e., they do not have any predetermined maturity
period and are perpetual in nature. These shares are only extinguished in
the event that the company goes into liquidation and the shareholders
receive share of assets in exchange of extinguishment of shares.
 Irredeemable preference shares become a permanent liability for the
issuing company, in that they are obligated to pay dividend on these
shares for perpetuity.
 Although these shares exist in theory, several jurisdictional laws have
imposed restrictions on issue of irredeemable preference shares.
Participating preference shares:
 Participating preferred stock is similar to preferred shares that pay both
preferred dividends plus an additional dividend to their shareholders.
 The additional dividend ensures that these shareholders receive an
equivalent dividend as common shareholders.
 Participating preferred stock is not common but can be issued in response
to a hostile takeover bid as part of a poison pill strategy.
Non-participating preference shares:
 Non-Participating Preferred Stocks entails the shareholders to have
preferential rights or high priority. This happens during liquidation or
dividend payment.
 They receive a total amount which is equal to the initial investments plus
accrued and unpaid dividends.
 However, they will not enjoy a share of the surplus profits of the
company.
 The distinctive features of Non-Participating Preferred stocks are as
follows:
a. It has a fixed rate of dividends.
b. Shareholders cannot enjoy the benefits of share in the company’s surplus
profits.
c. Limitations up to a maximum amount for each year in dividends.
d. If the Article of Association is silent, then the Preferred Stocks are
presumed to be non-participating
https://businessjargons.com/shares.html
https://www.investopedia.com/terms/p/preferredstock.asp
https://www.termscompared.com/redeemable-vs-irredeemable-
preference-shares/

Procedure for issue of shares

 According to Section 62 (1) of the Companies Act 2013, the procedure for
issue of shares is as follows:
Issue of Prospectus:
Before the issue of shares, comes the issue of the prospectus. The prospectus
is like an invitation to the public to subscribe to shares of the company. A
prospectus contains all the information of the company, its financial
structure, previous year balance sheets and profit and Loss statements etc.
It also states the manner in which the capital collected will be spent. When
inviting deposits from the public at large it is compulsory for a company to
issue a prospectus or a document in lieu of a prospectus.

Receiving Applications:
When the prospectus is issued, prospective investors can now apply for
shares. They must fill out an application and deposit the requisite application
money in the schedule bank mentioned in the prospectus. The application
process can stay open a maximum of 120 days. If in these 120 days
minimum subscription has not been reached, then this issue of shares will be
cancelled. The application money must be refunded to the investors within
130 days since issuing of the prospectus.

Allotment of Shares:
Once the minimum subscription has been reached, the shares can be allotted.
Generally, there is always oversubscription of shares, so the allotment is done
on pro-rata bases. Letters of Allotment are sent to those who have been allotted
their shares. This results in a valid contract between the company and the
applicant, who will now be a part owner of the company.
If any applications were rejected, letters of regret are sent to the applicants.
After the allotment, the company can collect the share capital as it wishes, in
one go or in instalments.
https://www.toppr.com/guides/accountancy/accounting-for-share-
capital/nature-and-classes-of-shares-and-issue-of-shares/
1929 Stock Crash, Great depression
On October 29, 1929, Black Tuesday hit Wall Street as investors traded some
16 million shares on the New York Stock Exchange in a single day. Billions of
dollars were lost, wiping out thousands of investors.
In the aftermath of Black Tuesday, America and the rest of the industrialized
world spiralled downward into the Great Depression (1929-39), the deepest and
longest-lasting economic downturn in the history of the Western industrialized
world up to that time.
What Caused the 1929 Stock Market Crash?
During the 1920s, the U.S. stock market underwent rapid expansion, reaching
its peak in August 1929 after a period of wild speculation during the roaring
twenties.
By then, production had already declined and unemployment had risen, leaving
stocks in great excess of their real value. Among the other causes of the stock
market crash of 1929 were low wages, the proliferation of debt, a struggling
agricultural sector and an excess of large bank loans that could not be
liquidated.
 Stock prices began to decline in September and early October 1929, and
on October 18 the fall began, and on October 24, Black Thursday, a
record 12,894,650 shares were traded.
 Investment companies and leading bankers attempted to stabilize the
market by buying up great blocks of stock, producing a moderate rally on
Friday.
 On Monday, however, the storm broke a new, and the market went into
free fall. Black Monday was followed by Black Tuesday (October 29,
1929), in which stock prices collapsed completely and 16,410,030 shares
were traded on the New York Stock Exchange in a single day.
 Billions of dollars were lost, wiping out thousands of investors, and stock
tickers ran hours behind because the machinery could not handle the
tremendous volume of trading.
Effects of the 1929 Stock Market Crash: The Great Depression
 After October 29, 1929, stock prices had nowhere to go but up, so
there was considerable recovery during succeeding weeks.
 Overall, however, prices continued to drop as the United States
slumped into the Great Depression, and by 1932 stocks were worth
only about 20 percent of their value in the summer of 1929.
  The stock market crash of 1929 was not the sole cause of the Great
Depression, but it did act to accelerate the global economic collapse of
which it was also a symptom.
 By 1933, nearly half of America’s banks had failed, and
unemployment was approaching 15 million people, or 30 percent of
the workforce. 
 African Americans were particularly hard hit, as they were the “last
hired, first fired , Women during the great depression fared slightly
better, as traditionally female jobs of the era like teaching and nursing
were more insulated than those dependent on fluctuating markets.
 Life for the average family during the great depression was difficult.

INTERNATIONAL ACCOUNTING STANDARDS—

A BRIEF HISTORY

International convergence of accounting standards is not a new idea. The

concept of convergence first arose in the late 1950s in response to post World
War II economic integration and related increases in cross-border capital flows.

Initial efforts focused on harmonization—reducing differences among the

accounting principles used in major capital markets around the world. By the
1990s, the notion of harmonization was replaced by the concept of convergence
—the development of a unified set of high-quality, international accounting
standards that would be used in at least all major capital markets.

The International Accounting Standards Committee, formed in 1973, was the

first international standards-setting body. It was reorganized in 2001 and
became an independent international standard setter, the International
Accounting Standards Board (IASB). Since then, the use of international
standards has progressed. As of 2013, the European Union and more than 100
other countries either require or permit the use of international financial
reporting standards (IFRSs) issued by the IASB or a local variant of them.

The FASB and the IASB have been working together since 2002 to improve
and converge U.S. generally accepted accounting principles (GAAP) and IFRS.
As of 2013, Japan and China were also working to converge their standards
with IFRSs. The Securities and Exchange Commission (SEC) consistently has
supported convergence of global accounting standards. However, the
Commission has not yet decided whether to incorporate International Financial
Reporting Standards ( IFRS) into the U.S. financial reporting system. The
Commission staff issued its final report on the issue in July 2012 without
making a recommendation.

The following is a chronology of some of the key events in the evolution of the
international convergence of accounting standards.

 The 1960s—Calls for International Standards and Some Early Steps

 The 1970s and 1980s—An International Standard-Setting Body Takes
Root
 The 1990s—The FASB Formalizes and Expands its International
Activities
 The 2000s—The Pace of Convergence Accelerates: Use of International
Standards Grows Rapidly, the FASB and IASB Formally Collaborate,
and the U.S. Explores Adopting International Accounting Standards

THE 1960S—CALLS FOR INTERNATIONAL STANDARDS AND

SOME EARLY STEPS

Interest in international accounting began to grow in the late 1950s and early
1960s due to post World War II economic integration and the related increase in
cross-border capital flows.

1962—8TH INTERNATIONAL CONGRESS OF ACCOUNTANTS IS

HELD—MANY SEE A NEED FOR INTERNATIONAL ACCOUNTING
AND AUDITING STANDARDS

The American Institute of Certified Public Accountants (AICPA) hosted the 8th
International Congress of Accountants. The discussion focused on the world
economy in relation to accounting. Many participants urged that steps be
undertaken to foster development of auditing, accounting, and reporting
standards on an international basis.

1962—THE AIPCA REACTIVATES ITS COMMITTEE ON

INTERNATIONAL RELATIONS
Likely in reaction to the 8th International Congress of Accountants, the AICPA
reactivated its Committee on International Relations. The goal of that
Committee was to establish programs to improve the international cooperation
among accountants and the exchange of information and ideas, with the idea
those efforts might perhaps lead to eventual agreement on common standards.
In 1964, the Committee completed a review of accounting standards
internationally, published as Professional Accounting in 25 Countries (AICPA).

1966—ACCOUNTANTS INTERNATIONAL STUDY GROUP IS

FORMED

The AICPA and its counterparts in the United Kingdom and Canada formed a
group to study the differences among their standards. The group was active for
about 10 years, producing studies of differences in 20 areas of accounting that
also included conclusions on best practices.

1967—THE FIRST TEXTBOOK ON INTERNATIONAL ACCOUNTING

IS PUBLISHED

International Accounting (New York: Macmillan, 1967) was the first textbook
on international accounting. It was written by Professor Gerhard G. Mueller,
who later became an FASB member (1996).

THE 1970S AND 1980S—AN INTERNATIONAL STANDARD-SETTING

BODY TAKES ROOT, AND THE FASB BEGINS TO COLLABORATE

The 1970s saw the creation of the first international accounting standard-setting
body and a gradual increase in voluntary cooperation among the FASB, the
IASC, and other national standard setters.

1973—THE INTERNATIONAL ACCOUNTING STANDARDS

COMMITTEE (IASC) IS ESTABLISHED

The IASC (the predecessor body to the IASB) was established by the AICPA
and its counterparts in 8 other countries. Its mission was to formulate and
publish, in the public interest, basic standards to be observed in the presentation
of audited accounts and financial statements and to promote their worldwide
acceptance. Until 2002, only a few countries decided to use IASC standards.
Many of those were countries that lacked their own standard-setting
infrastructure.

1979—FASB FORMS FIRST TASK FORCE THAT INCLUDES

REPRESENTATIVES FROM INTERNATIONAL STANDARD
SETTERS

When the FASB took on a project to revise its accounting standard on foreign
currency, it decided to include representatives of the UK Accounting Standards
Board, the Accounting Standards Board of Canada, and the IASC on its Task
Force. This was one of the FASB’s first efforts to formally collaborate
internationally when developing a standard.

1987—THE IASC EMBARKS ON ITS COMPARABILITY AND

IMPROVEMENTS PROJECT

By 1987, the IASC had issued 25 standards covering various issues. Because
those standards were essentially distillations of existing accounting practices
used around the world, they often allowed alternative treatments for the same
transactions. The IASB decided to undertake a comparability and improvements
project to reduce the number of allowable alternatives and make the standards
more prescriptive rather than descriptive.

1988—THE FASB BECOMES A MEMBER OF THE IASC

CONSULTATIVE GROUP AND A NON-VOTING OBSERVER AT IASB
MEETINGS

The AICPA, as the IASC member, coordinated U.S. involvement in IASC

activities. The FASB/IASB relationship was an informal one. That changed in
1988 when the FASB became a member of the IASC Consultative Group—a
body established to provide the IASC with input on technical and others issues
—and an Observer to the IASC, which meant that a FASB representative was
permitted to attend and participate in IASC meetings.

1988—THE FASB EXPRESSES SUPPORT FOR

INTERNATIONALIZATION OF STANDARDS
By the late 1980s, the need for a common body of international standards to
facilitate cross-border capital flows had generated a high level of worldwide
interest. The FASB decided that the need for international standards was strong
enough to warrant more focused activity on its part. FASB Chairman Dennis
Beresford expressed his support for “superior international standards” that
would gradually replace national standards and identified new initiatives to get
the FASB more directly involved in the drive to improve international standards
(Status Report No. 195, June 27, 1988).

THE 1990S—THE FASB FORMALIZES AND EXPANDS ITS

INTERNATIONAL ACTIVITIES

During the 1990s, the FASB developed its first strategic plan for international
activities and significantly expanded the scope of its collaboration with other
standard setters. The U.S. Congress and the SEC also became involved in the
issues of international accounting standards. At the end of the decade, the FASB
directly participated in the working party that led efforts to restructure the IASC
into the IASB.

1991—THE FASB ISSUES ITS FIRST STRATEGIC PLAN FOR

INTERNATIONAL ACTIVITIES

The Board’s first formal plan for international activities described the ultimate
goal of internationalization as a body of superior international accounting
standards that all countries accepted as GAAP for external financial reports.
Since the Board had concluded that the ultimate goal was beyond immediate
reach, it established a near-term strategic goal of making financial statements
more useful by increasing the international comparability of accounting
standards while improving their quality.

The plan outlined specific efforts toward achieving that goal. Those included (a)
actively considering the existing requirements of international standards in the
Board’s projects, (b) taking on joint projects with other standard setters, (c)
actively participating in the IASC’s processes, (d) strengthening international
relationships, and (e) expanding international communications.
1993—THE FASB AND THE ACCOUNTING STANDARDS BOARD OF
CANADA UNDERTAKE JOINT PROJECT ON SEGMENT
REPORTING

The FASB and its counterpart in Canada undertook a joint project that resulted
in both Boards issuing improved standards on segment reporting that were
substantially the same.

1993—THE FASB AND OTHER STANDARD SETTERS FORM THE G4

In the interest of working collaboratively, the FASB and its counterparts in

Canada, the United Kingdom, and Australia formed a group to research and
propose solutions to common accounting and reporting issues. Originally
referred to as the “G4,” the group published 11 research reports on various
issues such as reporting financial performance and accounting for leases. The
Group was later renamed the “G4+1” when New Zealand became a member.
Representatives of the IASB participated as an observer.

1994—THE FASB AND IASC UNDERTAKE THEIR FIRST

COLLABORATIVE STANDARD-SETTING EFFORT

The FASB and IASC undertook concurrent projects to improve their earnings
per share standards with a specific objective of eliminating the differences
between them.

1995—THE FASB UPDATES ITS STRATEGIC PLAN AND

UNDERTAKES A PROJECT TO COMPARE U.S. GAAP AND IASC
STANDARDS

In 1995, the FASB updated its strategic plan for international activities,
essentially affirming the strategic goals and action plans set forth in 1991.

Consistent with that plan, the FASB staff undertook a broad project to compare
U.S. GAAP and existing IASC standards. That effort resulted in the FASB’s
publication of The IASC-U.S. Comparison Project: A report on the Similarities
and Differences between IASC Standards and U.S. GAAP (1996). In 1999, the
FASB published an update of that staff research study.
1995—THE IASC UNDERTAKES A CORE STANDARD PROGRAM;
THE INTERNATIONAL ORGANIZATION OF SECURITIES
COMMISSIONS AGREES TO REVIEW THOSE STANDARDS

The IASC and the International Organization of Securities Commissions

(IOSCO, of which the SEC is a member) agreed on what constitutes a
comprehensive set of core standards. The IASC undertook a project to complete
those core standards by 1999. The IOSCO agreed that if it found those core
standards acceptable, it would recommend endorsement of IASC standards for
cross-border capital and listing purposes in all capital markets.

1996—THE U.S. CONGRESS EXPRESSES SUPPORT FOR HIGH-

QUALITY INTERNATIONAL STANDARDS

In October 1996, the National Securities Markets Improvement Act of 1996

became law. Section 509, which dealt with promoting the global pre-eminence
of American Securities Markets, stated that, among other things, “establishment
of a high-quality comprehensive set of generally accepted international
accounting standards in cross-border securities offerings would greatly facilitate
international financing activities and, most significantly, would enhance the
ability of foreign corporations to access and list in United States markets.” The
Act required the SEC to report to Congress within a year on the progress toward
developing international standards (the SEC published that report in October
1997).

1996—THE SEC ANNOUNCES ITS INTENT TO CONSIDER THE

ACCEPTABILITY OF USE OF IASC STANDARDS BY FOREIGN
PRIVATE ISSUERS

The SEC issued a press release stating its intent to consider the acceptability of
IASC standards as the basis for the financial reports of foreign private issuers.
To be accepted by the SEC, the IASC standards would have to be (1)
sufficiently comprehensive, (2) high-quality, and (3) rigorously interpreted and
applied.

1998—THE ASIAN FINANCIAL CRISIS PROMPTS MORE CALLS

FOR INTERNATIONAL STANDARDS
Following the Asian financial crisis, the World Bank, International Monetary
Fund, G7 finance ministers, and others called for rapid completion and global
adoption of high-quality international accounting standards.

1999—THE FASB PUBLISHES ITS VISION FOR THE FUTURE OF

INTERNATIONAL ACCOUNTING STANDARD SETTING

In 1999, the FASB published International Accounting Standard Setting: A

Vision for the Future, describing its vision of the ideal international financial
reporting system. The report said that such a system would be characterized by
a single set of high-quality accounting standards established by a single,
independent, international standard setter. The report also identified the
characteristics of high-quality standards and of a high- quality global standard
setter. (Available from the FASB Store)

THE 2000S—THE PACE OF CONVERGENCE ACCELERATES: USE

OF INTERNATIONAL STANDARDS GROWS RAPIDLY, THE FASB
AND IASB AGREE TO WORK COLLABORATIVELY, AND THE U.S.
EXPLORES ADOPTING INTERNATIONAL STANDARDS

Beginning in the 1990s, efforts to harmonize accounting standards

internationally evolved into a broad convergence effort. In 2001, the IASC was
restructured into the IASB; and by 2009, the European Union and over 100
other countries had adopted international standards or a local variant of them.
Several other countries, including Canada, Korea, India and Brazil, had
committed to adopt international standards by 2011. In 2002, the FASB and
IASB embarked on a partnership to improve and converge U.S. GAAP and
international standards. Japan and China have also forged convergence plans
with the IASB. In late 2008, the SEC issued a proposed Roadmap that, if
adopted, could result in the mandatory use of international standards by U.S.
SEC registrants as early as 2014.

2000—THE SEC ISSUES A CONCEPT RELEASE ON

INTERNATIONAL ACCOUNTING STANDARDS

The Concept Release, International Accounting Standards, sought broad input

on a framework for the convergence of accounting standards and sought input
on the conditions under which the SEC should accept the financial statements of
foreign private issuers prepared using IASC standards and eliminate the
requirement to reconcile those financial statements to U.S. GAAP (Concept
Release).

2001—THE IASC IS RECONSTITUTED INTO THE IASB

In response to calls for improvements in the governance, funding, and

independence of the IASC, it was reconstituted into the IASB. The IASB’s
structure and operations resulted from the efforts of a strategy working party
formed in 1998. The governance, oversight, and standard-setting processes of
the IASB are similar to those of the FASB.

The IASB was established as an independent standard-setting Board that is

appointed and overseen by a group of Trustees of the IASC Foundation. At
inception, it had 14 Board members from 9 countries, including the U.S., with a
variety of functional backgrounds (IASB).

2002—THE EUROPEAN UNION DECIDES TO USE INTERNATIONAL

FINANCIAL REPORTING STANDARDS

The European Union (EU) adopted legislation requiring all listed companies to
prepare their consolidated financial statements using IFRS starting in 2005,
becoming the first major capital market to require IFRS. The EU subsequently
decided to “carve-out” a portion of the international standard for financial
instruments, producing a European version of IFRS.

2002—THE NORWALK AGREEMENT: THE FASB AND IASB AGREE

TO COLLABORATE

In September 2002, the FASB and the IASB met jointly and agreed to work
together to improve and converge U.S. GAAP and IFRS. That partnership is
described in “The Norwalk Agreement,” issued after that joint meeting. The
Norwalk Agreement set out the shared goal of developing compatible, high-
quality accounting standards that could be used for both domestic and cross-
border financial reporting. It also established broad tactics to achieve their goal:
develop standards jointly, eliminate narrow differences whenever possible, and,
once converged, stay converged (Norwalk Agreement).
2003—THE SEC REAFFIRMS THE FASB AS THE U.S. PRIVATE
SECTOR STANDARD SETTER

Pursuant to the Sarbanes-Oxley Act of 2002, the SEC issued a Policy Statement
that reaffirmed the FASB as the private-sector accounting standard setter for the
U.S. That policy statement also said that the SEC expects the FASB to consider,
in adopting accounting principles, the extent to which international convergence
of high-quality standards is necessary or appropriate in the public interest and
for the protection of investors (Policy Statement).

2005—SEC STAFF SPEECH PROVIDES A PROPOSED ROADMAP TO

THE ELIMINATION OF THE RECONCILIATION REQUIREMENT

In April 2005, SEC Chief Accountant Don Nicholiasen provided his views on a
proposed “Roadmap” to eliminate by 2009 the requirement that foreign private
issuers filing financial statements prepared under IFRSs reconcile reported net
income and equity to U.S. GAAP (the 20-F reconciliation). The proposed
Roadmap identified several milestones that, if achieved, would support
eliminating the reconciliation. One of those milestones was the continued
progress of the IASB/FASB convergence program (Nicholiasen’s Speech).

2006—THE FASB AND IASB ISSUE A MEMORANDUM OF

UNDERSTANDING

In February 2006, the FASB and the IASB issued a Memorandum of

Understanding (MoU) that described the progress they hoped to achieve toward
convergence by 2008. In the MoU, the two Boards reaffirmed their shared
objective of developing high-quality, common accounting standards. The MoU
elaborated on the Norwalk Agreement, setting forth the following guidelines in
working toward convergence:

Convergence of accounting standards can best be achieved by developing high-

quality, common standards over time.

Instead of trying to eliminate differences between standards that are in need of

significant improvement, the Boards should develop a new common standard
that improves the quality of financial information.

Serving the needs of investors means that the Boards should seek to converge
by replacing weaker standards with stronger standards (MoU).
2007—THE SEC PROPOSES AND SUBSEQUENTLY ELIMINATES
THE RECONCILIATION REQUIREMENT

In July 2007, the SEC issued a proposing release, Acceptance from Foreign
Private Issuers of Financial Statements Prepared in Accordance with
International Financial Reporting Standards without Reconciliation to U.S.
GAAP, to eliminate the reconciliation requirement for foreign registrants that
use IFRS as issued by the IASB (Proposed Rule). After considering the input
received, the SEC issued a final rule eliminating that requirement in December
2007 (Final Rule).

2007—THE SEC ISSUES A CONCEPT RELEASE ON POSSIBLE

OPTIONAL USE OF IFRS BY U.S. ISSUERS

On August 7, 2007, the SEC issued Concept Release on Allowing U.S. Issuers
to Prepare Financial Statements in Accordance with International Financial
Reporting Standards. The Concept Release sought public input on whether to
give U.S. public companies the option of using IFRS as issued by the IASB in
their financial statements filed with the SEC (Concept Release).

2007—THE FASB RESPONDS TO THE SEC’S CONCEPT RELEASE

ON POSSIBLE OPTIONAL USE OF IFRS BY U.S. ISSUERS

On November 7, 2007, the Financial Accounting Foundation (FAF) and the

FASB responded to the SEC’s request for comments on its Concept Release
(see above). While reaffirming the FASB’s support for a single set of high-
quality common standards developed by an independent, international standard
setter, the letter argued against permitting the optional use of IFRS in the
absence of the planned adoption by all SEC registrants, citing the complexity
that would result from such a dual reporting system. (Comment Letter)

2007—THE FASB AND IASB ISSUE CONVERGED STANDARDS ON

BUSINESS COMBINATIONS

In late 2007, the FASB and the IASB completed their first major joint project
and issued substantially converged standards on business combinations (News
Release).
2008—THE FASB AND IASB UPDATE THEIR MEMORANDUM OF
UNDERSTANDING

In September 2008,the FASB and the IASB issued an update to the 2006 MoU
to report the progress they have made since 2006 and to establish their
convergence goals through 2011 (Update to 2006 Memorandum of
Understanding).

2008—THE SEC ISSUES A PROPOSED ROADMAP TO ADOPTION OF

IFRS IN THE U.S. AND A PROPOSED RULE ON OPTIONAL EARLY
USE OF IFRS

In November 2008, the SEC published for public comment a proposed

Roadmap to the possible use of IFRS by U.S. issuers beginning in 2014. Under
the proposed Roadmap, the Commission would decide by 2011 whether
adoption of IFRS would be in the public interest and would benefit investors.
The proposed Roadmap identified several milestones that, if achieved, could
lead to the use of IFRS by U.S. issuers. The SEC also proposed that U.S. issuers
meeting certain criteria be given the option of filing financial statements
prepared using IFRS as issued by the IASB as early as years ending after
December 15, 2009 (Proposed Roadmap).

2009: FAF AND FASB ISSUE THEIR COMMENT LETTER ON THE

SEC’S PROPOSED ROADMAP

On March 11, 2009, the FAF and FASB responded to the SEC’s request for
comments on its proposed Roadmap. The letter reiterated the FASB’s strong
support for the goal of a single set of high-quality international standards and
recommended additional study to better evaluate the strengths, weaknesses,
costs, and benefits of possible approaches the U.S. could take in moving toward
that goal (Comment Letter).

Most recently, in a joint meeting held in October 2009, the FASB and IASB
reaffirmed their commitment to convergence, agreed to intensify their efforts to
complete the major joint projects described in the MoU, and committed to
making quarterly progress reports on these major projects available on their
websites. As a further affirmation of that commitment, the Boards issued a joint
statement describing their plans and milestone targets for achieving the goal of
completing major MoU projects by mid-2011.
2010: SEC ISSUES A STATEMENT IN SUPPORT OF CONVERGENCE
AND GLOBAL ACCOUNTING STANDARDS

In February 2010, the SEC issued a statement (Statement) that lays out the
SEC’s current position regarding global accounting standards. That Statement
reflects the Commission’s consideration of the input it received on its
November 2008 proposed rule, Roadmap for the Potential Use of Financial
Statements Prepared In Accordance With International Financial Reporting
Standards (IFRS) by U.S. Issuers. The Statement makes clear that the SEC
continues to believe that a single set of high-quality, globally accepted
accounting standards would benefit U.S. investors. The Statement also:

Continues to encourage the convergence of U.S. GAAP and IFRS

Outlines factors that are of particular importance to the Commission as it

continues to evaluate IFRS through 2011

Directs the staff of the SEC to develop and execute a work plan (Work Plan)
that transparently lays out specific areas and factors for the staff to consider
before potentially transitioning our current financial reporting system for U.S.
issuers to a system incorporating IFRS.

In February 2010, the FASB and the Financial Accounting Foundation issued a
statement regarding the SEC’s Statement and Work Plan.

2010: FASB REPORTS PERIODICALLY ON THE STATUS OF THEIR

PROJECT TO IMPROVE AND CONVERGE U.S. GAAP AND IFRS

In April 2010, the FASB and IASB published a first-quarter progress report on
their work to improve and achieve convergence of U.S. GAAP and IFRS.

In June 2010, the FASB and IASB agreed to modify their joint work plan to (a)
prioritize the major projects in the MoU to permit a sharper focus on issues and
projects for which the need for improvement is most urgent and (b) phase the
publication of exposure drafts and related consultations to enable the broad-
based and effective stakeholder participation that is critically important to the
quality of the standards. On June 24, 2010, the FASB and IASB issued a
quarterly joint progress report that describes that modified work plan.
In November 2010, the FASB and IASB issued a quarterly progress report on
the status of their work to complete the MoU. That progress report describes the
Boards’ affirmation of the priorities laid out in their June 2010 report described
above. It also describes how the Boards modified aspects of their plans for other
projects in order to put them in the best position to complete the priority
projects by the June 2011 target date.

2011: THE FAF AND FASB PROVIDE FEEDBACK TO THE IFRS

FOUNDATION ON ITS STRATEGY REVIEW

In February 2011, the FAF and the FASB issued a brief letter to the IFRS
Foundation Trustees providing their views on several key issues with respect to
mission, governance, and process raised in the Strategy Review the IFRS
Foundation published for public comment on November 5, 2010.

2011: REPORT OF THE MEETING OF NATIONAL STANDARD-

SETTERS (NSS)

In March, the FASB hosted the semi-annual meeting of national standards

setters in New York City. Over 60 individuals representing more than 20
different national standards setting and other organizations met to discuss a
variety of matters of mutual interest, such as progress on technical projects of
the IASB and joint projects between the FASB and IASB, the IASB’s post-
implementation review process, and issues arising in the application of
international financial reporting standards. Read the full meeting report.

2011: PROGRESS REPORT ON IASB-FASB CONVERGENCE WORK

In April, the FASB and IASB reported on their progress toward completion of
the convergence work program. The Boards were giving priority to three
remaining projects on their MoU (financial instruments, revenue recognition,
and leasing) as well as their joint project on insurance. The Boards also agreed
to extend the timetable for those priority projects beyond June 2011 to permit
further work and consultation with stakeholders in a manner consistent with an
open and inclusive due process. The Boards issued a progress report that
provides details on the timeline for completion of the MoU projects.

2012: SEC STAFF “FINAL REPORT” ON WORK PLAN

In July 2012, the SEC staff issued its final staff report on the “Work Plan for
Consideration of Incorporating International Financial Reporting Standards into
the Financial Reporting System for U.S. Issuers.” The report was the final
phase of a work plan, initiated in February 2010, to consider specific issues
relevant to the Commission’s determination as to where, when and how the
current financial reporting system for U.S. issuers should be transitioned to a
system incorporating IFRS. The 2012 staff report summarized the staff’s
findings regarding key issues surrounding the potential incorporation of IFRS
into U.S. financial reporting, but did not make any recommendation to the
Commission. In the report, the SEC staff examined a number of unresolved
issues relating to the potential incorporation of IFRS into the U.S. financial
reporting system. These issues include, among others, the diversity in how
accounting standards, including IFRS, are interpreted, applied and enforced in
various jurisdictions around the world; the potential cost to U.S issuers of
adopting or incorporating IFRS; investor education; and governance.

2013: IFRS FOUNDATION ESTABLISHES ACCOUNTING

STANDARDS ADVISORY FORUM

The International Financial Reporting Standards Foundation in early 2013

established the Accounting Standards Advisory Forum (ASAF) to improve
cooperation among worldwide standard setters and advise the IASB as it
develops International Financial Reporting Standards (IFRS). The FASB was
selected as one of the ASAF’s twelve members. The FASB’s membership on
the ASAF is an opportunity to represent U.S. interests in the IASB’s standard-
setting process and to continue the process of improving and converging U.S.
Generally Accepted Accounting Principles and IFRS. The FASB was
nominated for membership on the ASAF by the FAF Board of Trustees, which
oversees both the FASB and its sister standard-setting board, the Governmental
Accounting Standards Board (GASB).

List of Reporting Standards and International Accounting Standards

 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Disclosure of
Accounting Policies
IAS (1975) January
1975
1 1, 1975
Presentation of
Financial
Statements (1997)
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Valuation and
Presentation of
Inventories in the
IAS Context of the January
1976
2 Historical Cost 1, 1976
System (1975)
Inventories (1993)
Consolidated IAS
IAS January January 1,
Financial 1976 27 and IAS
3 1, 1977 1990
Statements 28
IAS Depreciation January July 1,
1976 IAS 36
4 Accounting 1, 1977 1999
Information to Be
IAS Disclosed in January July 1,
1976 IAS 1
5 Financial 1, 1977 1998
Statements
Accounting
IAS January January 1,
Responses to 1977 IAS 15
6 1, 1978 1983
Changing Prices
Statement of
Changes in
Financial Position
IAS (1977) January
1977
7 Cash Flow 1, 1979
Statements (1992)
Statement of Cash
Flows (2007)
IAS Unusual and Prior 1978 January
8 Period Items and 1, 1979
Changes in
Accounting Policies
(1978)
Net Profit or Loss
for the Period,
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Fundamental Errors
and Changes in
Accounting Policies
(1993)
Accounting
Policies, Changes
in Accounting
Estimates and
Errors (2003)
Accounting for
IAS Research and January July 1,
1978 IAS 38
9 Development 1, 1980 1999
Activities
Contingencies and
Events Occurring
After the Balance
Sheet Date (1978)
IAS Events After the January
1978
10 Balance Sheet Date 1, 1980
(1999)
Events after the
Reporting Period
(2007)
Accounting for
Construction
IAS Contracts (1979) January
1979 IFRS 15
11 1, 1980
Construction
Contracts (1993)
Accounting for
Taxes on Income
IAS (1979) January
1979
12 1, 1981
Income
Taxes (1996)
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Presentation of
IAS January July 1,
Current Assets and 1979 IAS 1
13 1, 1981 1998
Current Liabilities
Reporting Financial
Information by
IAS Segment (1981) January January 1,
1981 IFRS 8
14 1, 1983 2009
Segment reporting
(1997)
Information
IAS Reflecting the January January 1,
1981 N/A
15 Effects of Changing 1, 1983 2005
Prices
Accounting for
Property, Plant and
IAS Equipment (1982) January
1982
16 1, 1983
Property, Plant and
Equipment (1993)
Accounting for
IAS Leases (1982) January January 1,
1982 IFRS 16
17 1, 1984 2019
Leases (1997)
Revenue
IAS Recognition (1982) January January 1,
1982 IFRS 15
18 1, 1984 2018
Revenue (1993)
Accounting for
Retirement Benefits
in Financial
Statements of
IAS Employers (1983) January
1983
19 1, 1985
Retirement Benefit
Costs (1993)
Employee Benefits
(1998)
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Accounting for
Government Grants
IAS January
and Disclosure of 1983
20 1, 1984
Government
Assistance
Accounting for the
Effects of Changes
in Foreign
Exchange Rates
IAS (1983) January
1983
21 1, 1985
The Effects of
Changes in Foreign
Exchange Rates
(1993)
Accounting for
Business
Combinations
IAS (1983) January April 1,
1983 IFRS 3
22 1, 1985 2004
Business
Combinations
(1993)
Capitalisation of
Borrowing Costs
IAS (1984) January
1984
23 1, 1986
Borrowing Costs
(1993)
IAS Related Party January
1984
24 Disclosures 1, 1986
IAS
IAS Accounting for January January 1,
1986 39 and IAS
25 Investments 1, 1987 2001
40
IAS Accounting and 1987 January
26 Reporting by 1, 1988
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Retirement Benefit
Plans
Consolidated
Financial
Statements and
Accounting for
Investments in
IAS Subsidiaries (1989) January
1989
27 1, 1990
Consolidated and
Separate Financial
Statements (2003)
Separate Financial
Statements (2011)
Accounting for
Investments in
Associates (1989)
Investments in
Associates &
IAS January
ASSOCIATES 1989
28 1, 1990
(2003)
Investments in
Associates and
Joint Ventures
(2011)
Financial Reporting
IAS in January
1989
29 Hyperinflationary 1, 1990
Economies
Disclosures in the
Financial
IAS Statements of January January 1,
1990 IFRS 7
30 Banks and Similar 1, 1991 2007
Financial
Institutions
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

Financial Reporting
of Interests in Joint IFRS
IAS Ventures (1990) January January 1,
1990 11 and IFR
31 1, 1992 2013
Interests in Joint S 12
Ventures (2003)
Financial
Instruments:
Disclosure and
IAS Presentation (1995) 1995 January
32 1, 1996
Financial
Instruments:
Presentation (2005)
IAS January
Earnings per Share 1997
33 1, 1999
IAS Interim Financial January
1998
34 Reporting 1, 1999
IAS Discontinuing July 1, January 1,
1998 IFRS 5
35 Operations 1999 2005
IAS Impairment of July 1,
1998
36 Assets 1999
Provisions, Conting
IAS July 1,
ent Liabilities and 1998
37 1999
Contingent Assets
IAS July 1,
Intangible Assets 1998
38 1999
Financial
IAS Instruments: January January 1,
1998 IFRS 9
39 Recognition and 1, 2001 2018
Measurement
IAS Investment January
2000
40 Property 1, 2001
IAS January
Agriculture 2000
41 1, 2003
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

First-time Adoption
IFRS of International January
2003
1 Financial Reporting 1, 2004
Standards
IFRS Share-based January
2004
2 Payment 1, 2005
IFRS Business April 1,
2004
3 Combinations 2004
IFRS January January 1,
Insurance Contracts 2004 IFRS 17
4 1, 2005 2021
Non-current Assets
IFRS Held for Sale and January
2004
5 Discontinued 1, 2005
Operations
Exploration for and
IFRS January
Evaluation of 2004
6 1, 2006
Mineral Resources
Financial
IFRS January
Instruments: 2005
7 1, 2007
Disclosures
IFRS Operating January
2006
8 Segments 1, 2009
2009
IFRS Financial January
(updated
9 Instruments 1, 2018
2014)
Consolidated
IFRS January
Financial 2011
10 1, 2013
Statements
IFRS January
Joint Arrangements 2011
11 1, 2013
Disclosure of
IFRS January
Interests in Other 2011
12 1, 2013
Entities
 Fully
IA Original Effecti Supersed
Title of standard withdra
S ly issued ve ed by
wn

IFRS Fair Value January

2011
13 Measurement 1, 2013
IFRS Regulatory Deferral January
2014
14 Accounts 1, 2016
Revenue from
IFRS January
Contracts with 2014
15 1, 2018
Customers
IFRS January
Leases 2016
16 1, 2019
IFRS January
Insurance contracts 2017
17 1, 2021

What is the Stock Market?

The stock market refers to the collection of markets and exchanges where
regular activities of buying, selling, and issuance of shares of publicly-held
companies take place. There can be multiple stock trading venues in a country
or a region which allow transactions in stocks and other forms of securities.

Understanding the Stock Market:

 A stock market is a similar designated market for trading various kinds of

securities in a controlled, secure and managed environment.

 Since the stock market brings together hundreds of thousands of market

participants who wish to buy and sell shares, it ensures fair pricing
practices and transparency in transactions.

 While earlier stock markets used to issue and deal in paper-based

physical share certificates, the modern day computer-aided stock markets
operate electronically.
Functions of a Stock Market:

A stock market primarily serves the following functions:

 Fair Dealing in Securities Transactions:  Stock exchange needs to

ensure that all interested market participants have instant access to
data for all buy and sell orders thereby helping in the fair and
transparent pricing of securities. Additionally, it should also perform
efficient matching of appropriate buy and sell orders.

 Efficient Price Discovery: Stock markets need to support an efficient

mechanism for price discovery, which refers to the act of deciding the
proper price of a security and is usually performed by assessing
market supply and demand.

 Liquidity Maintenance:  It needs to ensure that whosoever is

qualified and willing to trade gets instant access to place orders which
should get executed at the fair price.
 Security and Validity of Transactions: While more participants are
important for efficient working of a market, the same market needs to
ensure that all participants are verified and remain compliant with the
necessary rules and regulations, leaving no room for default by any of
the parties

 Support All Eligible Types of Participants: A marketplace is made

by a variety of participants, which include market makers, investors,
traders, speculators, and hedgers. The stock market should ensure that
all such participants are able to operate seamlessly fulfilling their
desired roles to ensure the market continues to operate efficiently.

 Investor Protection:  Investors may have limited financial

knowledge, and may not be fully aware of the pitfalls of investing in
stocks and other listed instruments. The stock exchange must
implement necessary measures to offer the necessary protection to
 such investors to shield them from financial loss and ensure customer
trust.

How the Stock Market Works?

Stock markets act as primary markets and as secondary markets. As a primary

market, the stock market allows companies to issue and sell their shares to the
common public for the first time. The stock exchange acts as a facilitator for
this capital raising process and receives a fee for its services. After the first-time
share issuance IPO, the exchange also serves as the trading platform that
facilitates regular buying and selling of the listed shares. The exchange
shoulders the responsibility of ensuring price transparency, liquidity, price
discovery and fair dealings in such trading activities. The stock exchange often
creates and maintains various market-level and sector-specific indicators. These
indicators include the S&P 500 index or Nasdaq 100 index. The stock
exchanges also maintain all company news, announcements, and financial
reporting. A stock exchange also supports various other corporate-level,
transaction-related activities.

https://www.investopedia.com/terms/s/stockmarket.asp

What is a Speculator?

A speculator utilizes strategies and typically a shorter time frame in an attempt

to outperform traditional longer-term investors Speculators take on risk,
especially with respect to anticipating future price movements, in the hope of
making gains that are large enough to offset the risk.

Speculation sometimes gets confused with gambling. There is an important

distinction, though. If a trader is using untested methods to trade, often based on
hunches or feelings, it is highly likely they are gambling. If gambling, the trader
is likely to lose over the long-run. Profitable speculation takes a lot of work, but
with proper strategies, it is possible to gain a reliable edge in the marketplace.

Profitable speculators look for repeating patterns in the marketplace. They look

for commonalities between many rising and falling prices, in an attempt to use
that information to profit from future ups and downs in price. It is detailed
work, and because prices are always moving and there are nearly infinite
variables to consider, each speculator often develops their own unique way of
trading.

KEY TAKEAWAYS

 Speculators are sophisticated investors or traders who purchase assets for

short periods of time and employ strategies in order to profit from
changes in its price.
 Speculators are important to markets because they bring liquidity and
assume market risk. Conversely, they can also have a negative impact on
markets, when their trading actions result in a speculative bubble that
drives up an asset's price to unsustainable levels.

Speculators' Impact on the Market:

If a speculator believes that a particular asset is going to increase in value, they

may choose to purchase as much of the asset as possible. This activity, based on
the perceived increase in demand drives up the price of the particular asset. If
this activity is seen across the market as a positive sign, it may cause other
traders to purchase the asset as well, further elevating the price. where the
speculator activity has driven the price of an asset above its true value.

The same can be seen in reverse. If a speculator believes a downward trend is

on the horizon, or that an asset is currently overpriced, they sell as much of the
asset as possible while prices are higher. This act begins to lower the price of
the asset. If other traders act similarly, the price will continue to fall until the
activity in the market stabilizes.

https://www.investopedia.com/terms/s/speculator.asp

Q4: What is the economical and organizational impacts of market shares

fluctuations?
There are many impacts of fluctuation of shares prices on economy as well as
on organizations, some of these impacts are in the following.
Economic Impacts
 Wealth effect
The first impact is that people with shares will see a fall in their wealth. If the
fall is significant, it will affect their financial outlook. If they are losing money
on shares they will be more hesitant to spend money; this can contribute to a fall
in consumer spending. However, this effect should not be given too much
importance. Often people who buy shares are wealthy and prepared to lose
money; their spending patterns are usually independent of share prices,
especially for short-term losses. Also, only around 10% of households own
shares – for the majority of consumers, they will not be directly affected by a
fall in share prices.
 Effect on pensions
If there is a serious and prolonged fall in share prices, it reduces the value of
pension funds. This means that future pension payouts will be lower. If share
prices fall too much, pension funds can struggle to meet their promises. The
important thing is the long-term movements in the share prices. If share prices
fall for a long time, then it will definitely affect pension funds and future
payouts..
 Confidence
Often share price movements are reflections of what is happening in the
economy. E.g. a fear of a recession and global slowdown could cause share
prices to fall. The stock market itself can affect consumer confidence. Bad
headlines of falling share prices are another factor which discourages people
from spending.
 Investment
Falling share prices can hamper firm’s ability to raise finance on the stock
market. Firms who are expanding and wish to borrow often do so by issuing
more shares – it provides a low-cost way of borrowing more money. However,
with falling share prices it becomes much more difficult.
 Bond market
A fall in the stock market makes other investments more attractive. People may
move out of shares and into government bonds or gold. These investments offer
a better return in times of uncertainty. Though sometimes the stock market
could be falling over concerns in government bond markets
Organizational impacts

 General fall in Shares

If there is a fall in general share prices then the company will not worry too
much. The stock market is quite volatile, rise and falls in the share prices won’t
affect its overall business directly. However, if there is a sustained fall in share
prices, it may deter the firm from issuing more shares to raise revenue

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) describes the relationship between
systematic risk and expected return for assets, particularly stocks. CAPM is
widely used throughout finance for pricing risky securities and generating
expected returns for assets given the risk of those assets and cost of capital
The formula for calculating the expected return of an asset given its risk is as
follows:

ERi=Rf+βi(ERm−Rf)

where:

ERi =expected return of investment

Rf =risk-free rate

βi =beta of the investment

(ERm−Rf)=market risk premium

Investors expect to be compensated for risk and the time value of money.

The risk-free rate in the CAPM formula accounts for the time value of money.
The other components of the CAPM formula account for the investor taking on
additional risk.

The beta of a potential investment is a measure of how much risk the investment

will add to a portfolio that looks like the market. If a stock is riskier than the
market, it will have a beta greater than one. If a stock has a beta of less than
one, the formula assumes it will reduce the risk of a portfolio.

The market risk premium is the difference between the expected return on a
market portfolio and the risk-free rate.
The risk-free rate of return is the interest rate an investor can expect to earn on
an investment that carries zero risk.

The goal of the CAPM formula is to evaluate whether a stock is fairly valued
when its risk and the time value of money are compared to its expected return.

What are CAPM assumptions?

 Market is perfect
 Investors are risk-averse
 There is no transaction cost
 Investors have homogeneous expectations
 Price-takers
 Lending & borrowing can be done risk-free rate of interest
 No inflation exists in the market
 Beta is the only measure of risk
The CAPM model is criticized for its assumptions. It is more of a theoretical
representation of financial markets.

https://www.investopedia.com/terms/c/capm.asp#:~:text=The%20Capital
%20Asset%20Pricing%20Model%20(CAPM)%20describes%20the
%20relationship%20between,assets%20and%20cost%20of%20capital.

What is highly leveraged company?

When one refers to a company, property, or investment as "highly leveraged," it

means that item has more debt than equity. In other words, instead of issuing
stock to raise capital, companies can use debt financing to invest in business
operations in an attempt to increase shareholder value. If a company takes on
too much debt relative to operating cash and equity, it's considered highly
leveraged. Highly leveraged companies are very sensitive to economic declines
and at higher risk for bankruptcy.
Leveraging your business carries some risks, but the benefits often outweigh
those risks.
Advantages:
 Retain Ownership
One of the advantages of using leverage in your business is that it allows you to
retain full ownership over the company. When you finance business operations
with equity financing, you have to sell a portion of the ownership in your
company. If you want full control over the business, using leverage can provide
you with this option instead of having to share control.
 Eventual Repayment
When you use debt to finance business operations, you will have to repay the
amount that you borrow at some point. While this may be a temporary financial
burden, you will eventually pay off the debt.
 Tax Breaks
Another advantage of using leverage to finance business operations is that it
provides tax breaks. When you have to pay interest for business purposes, the
Internal Revenue Service allows you to deduct this on your tax return. The
amount of the interest paid on the loan reduces the total amount of taxable
income for the business. Because of this, it also reduces the effective cost
associated with borrowing money for business purposes.
 Less Formality
When compared with financing a business through equity, using debt is much
less formal. When you use equity to finance business operations, you have to
issue shares of stock, hold shareholder meetings and issue regular
correspondence to all of your investors. By comparison, a loan is much easier to
deal with. Disadvantages
 Limited Growth Potential
Lenders require borrowers to pay back their loan in a timely manner. This
becomes a problem for fledgling companies that borrow money for projects
with long-term returns. Paying back the loan on a regular basis means less
money to finance operations and invest in growth opportunities.
 Losing Assets
Substantial loan payments can easily cripple a highly leveraged company. A
company doesn't have an obligation to repay capital from equity sources.
However, banks and lenders have top seniority when it comes to repayment in
the event of bankruptcy. This means that lenders will get paid out before anyone
else, including the company owner. If the company has a secured loan the bank
can repossess company assets. Depending on the business structure and the
terms of the loan, the owner of the company may also be personally liable for
the loan repayment.
 Inability to Increase Debt
Just like with individual lending, banks scrutinize corporate credit reports
before doling out more loans. Banks are unlikely to provide further funding to
highly leveraged organizations. Not only are these companies at high risk for
bankruptcy, the new lender might not get paid back if the company goes under.
 Inability to Attract Equity
One of the options a company has to reduce its financial leverage is to increase
the amount of equity capital. However, investors rarely give money to highly
leveraged businesses. Investors avoid highly leveraged companies for all the
same reasons lenders do, plus they're the last in line to get repaid. If an investor
is willing to issue to invest in a highly leveraged company they'll expect to
receive an especially large percentage of ownership in exchange for their
money.
Impact on shareholders
Financial leverage provides the potentials for increasing the shareholder’s
wealth as well as creating the risks of loss to them. The financial leverage is a
prerequisite for achieving optimal capital structure. If value is added from
financial leveraging than the associated risk will not have a negative effect
Impact on weighted average cost of capital
Corporate taxes lower the effective cost of debt financing, which translates into
a reduction in the weighted average cost of capital. The magnitude of the
reduction in the WACC is proportional to the amount of debt financing.
What is Memorandum of Association (MOA)
Meaning:
It is legal & constitutional document of the company document of the company
which states the matter like Name, Place of business, Object, Liability,
Subscription of the company
Definition of MOA sec2(56):
"Memorandum" means the MOA of company as originally framed or as altered
from time to time in pursuance of any previous company law or of this Act.
Purpose of MOA:
Third parties
 Work related contract
 Whether this is within the
 Object power scope of the company
Shareholders
 Investment
 Amt of risk involved
Contents of MOA:
 Name Clause of Memorandum of Association:
The name of the company should be stated in this clause. A company is free to
select any name it likes. But the name should not be identical or similar to that
of a company already registered. It should not also use words like King, Queen,
Emperor, Government Bodies and names of World Bodies like U.N.O.,
W.H.O., World Bank etc. If it is a Public Limited Company, the name of the
company should end with the word ‘Limited’ and if it is a Private Limited
Company, the name should end with the words ‘Private Limited’.
 Situation Clause of Memorandum of Association
In this clause, the name of the State where the Company’s registered office is
located should be mentioned. Registered office means a place where the
common seal, statutory books etc., of the company are kept. The company
should intimate the location of registered office to the registrar within thirty
days from the date of incorporation or commencement of business.
The registered office of a company can be shifted from one place to another
within the town with a simple intimation to the Registrar. But in some situation,
the company may want to shift its registered office to another town within the
state. Under such circumstance, a special resolution should be passed. Whereas,
to shift the registered office to other state, Memorandum should be altered
accordingly.
 Objects Clause of Memorandum of Association
This clause specifies the objects for which the company is formed. It is difficult
to alter the objects clause later on. Hence, it is necessary that the promoters
should draft this clause carefully. This clause mentions all possible types of
business in which a company may engage in future.
The objects clause must contain the important objectives of the company and
the other objectives not included above.
 Liability Clause of Memorandum of Association
This clause states the liability of the members of the company. The liability may
be limited by shares or by guarantee. This clause may be omitted in case of
unlimited liability.
 Capital Clause of Memorandum of Association
This clause mentions the maximum amount of capital that can be raised by the
company. The division of capital into shares is also mentioned in this clause.
The company cannot secure more capital than mentioned in this clause. If some
special rights and privileges are conferred on any type of shareholder’s mention
may also be made in this clause.
 Subscription Clause of Memorandum of Association
It contains the names and addresses of the first subscribers. The subscribers to
the Memorandum must take at least one share. The minimum number of
members is two in case of a private company and seven in case of a public
company.
Thus the Memorandum of Association of the company is the most important
document. It is the foundation of the company
Note: This document is required to be published and presented to the
shareholders, creditors and others associated with the company so that
everybody knows the lines on which a company shall operate.
What is Article of Association (AOA)
Meaning:
AOA of company Lays down rules & regulations for its internal management.
Definition [ Sec.2(5)]:
AOA as originally framed or as altered from time to time or applied in
pursuance of any previous company law or of this act.
The Articles of Association or AOA are the legal document that along with the
memorandum of association serves as the constitution of the company. It is
comprised of rules and regulations that govern the company’s internal affairs.
The articles of association are concerned with the internal management of the
company and aims at carrying out the objectives as mentioned in the
memorandum. These define the company’s purpose and lay out the guidelines
of how the task is to be carried out within the organization. The articles of
association cover the information related to the board of directors, general
meetings, voting rights, board proceedings, etc.
The articles of association are the contracts between the shareholders and the
organization and among the shareholder themselves. This document often
defines the manner in which the shares are to be issued, dividend to be paid, the
financial records to be audited and the power to be given to the shareholders
with the voting rights.
The articles of association can be considered as the user manual for the
organization that comprises of the methodology that can be used to accomplish
the company’s day to day operations. This document is a binding on the
shareholders and the organization and has nothing to do with the outsiders.
Thus, the company is not accountable for any claims made by any external
party.
Purpose of AOA:
The defines the power of officers. They also be established a contract between
the company and members.
The articles of association are comprised of following provisions:
 Share capital, call of share, forfeiture of share, conversion of share into
stock, transfer of shares, share warrant, surrender of shares, etc.
 Directors, their qualifications, appointment, remuneration, powers, and
proceedings of the board of director’s meetings.
 Voting rights of shareholders, by poll or proxies and proceeding of
shareholder’s general meetings.
 Dividends and reserves, accounts and audits, borrowing powers and
winding up.
It is mandatory for the following types of companies to have their own articles:
Unlimited Companies: The article must state the number of members with
which the company is to be registered along with the amount of share capital, if
any.
Companies Limited by Guarantee: The article must define the number of
members with which the company is to be registered.
Private Companies Limited by Shares: The private company having the share
capital, then the article must contain the provision that, restricts the right to
transfer shares, limit the number of members to 50, prohibits the invitation to
the public for the further subscription of shares in the form of shares or
debentures.
Note: In the case of a public company limited by shares, the articles may be
framed by the company itself or in case company does not register articles then
it might adopt all of any of the regulations as contained in Table A in the
Companies Act.
MOA & AOA (General points)
Signature:
 Each subscriber to the memorandum.
 Signing in the presence of at least one witness.
In case of Illiterate subscriber:
 Affix his thumb impression or mark.
 The writer shall read & explain the AOA & MOA.
 Place the name of subscriber.
 Write the no of shares taken by him.
Difference between MOA and AOA
Basis MOA AOA
Definition A document that A document that
contaions all the contains the rules and
condition which are regulations for the
required for the administration of the
registration of the company.
company
Source Defined in sec 2(56) Defined in sec 2(5)
Registration Must be registered at the May or may not be
time of incorporation. registered.
Types of info. Powers & objects of the Rules of the company
company.
Status Sub-ordinate to the Sub-ordinate to the
company act. memorandum.
Contents Must contain 6 clauses Can be drafted
according to company
decision.
Relation Between company & Between Company and
outsiders. members.
 Procedure for issue of shares
According to Section 62 (1) of the Companies Act 2013, the procedure for issue
of shares is as follows:
Issue of Prospectus:
Before the issue of shares, comes the issue of the prospectus. The prospectus is
like an invitation to the public to subscribe to shares of the company. A
prospectus contains all the information of the company, its financial structure,
previous year balance sheets and profit and Loss statements etc.
It also states the manner in which the capital collected will be spent. When
inviting deposits from the public at large it is compulsory for a company to
issue a prospectus or a document in lieu of a prospectus.
Receiving Applications:
When the prospectus is issued, prospective investors can now apply for shares.
They must fill out an application and deposit the requisite application money in
the schedule bank mentioned in the prospectus. The application process can stay
open a maximum of 120 days. If in these 120 days minimum subscription has
not been reached, then this issue of shares will be cancelled. The application
money must be refunded to the investors within 130 days since issuing of the
prospectus.
Allotment of Shares:
Once the minimum subscription has been reached, the shares can be allotted.
Generally, there is always oversubscription of shares, so the allotment is done
on pro-rata bases. Letters of Allotment are sent to those who have been allotted
their shares. This results in a valid contract between the company and the
applicant, who will now be a part owner of the company.
If any applications were rejected, letters of regret are sent to the applicants.
After the allotment, the company can collect the share capital as it wishes, in
one go or in instalments.
https://www.toppr.com/guides/accountancy/accounting-for-share-
capital/nature-and-classes-of-shares-and-issue-of-shares/
Does companies issue shares on premium/Discount price or on installment
basis?
Issue of shares on installment basis:
A share is issued at either on lumsum basis or on installment basis. In lumsum
basis cash is fully paid at once. However a company might also issue its shares
to be paid in various installment. Generally such amounts of installements is
collected in form of application, allotmet, 1 st call and 2nd and final call. A
subscriber intending to purchase the share pays the 1 st installment of the amount
of share within application form.
The remaing amount of the shares allotted is called up by writing a letter to the
shareholders which are known calls on the share. Such reaming amount is called
up after receiving the allotment money. The balance of share money can be
called up either in one or two installments. If the entire balance is called up at
once it is called first and final call if it is called at two installments it is called 1 st
and final call.
Issue of shares at discount:
Genrally a company dose not issue shares at discount. If shares are issued in
different installments after deducting the amount discount from the face or
nominal value of shares for example issuing a share of rupees 10 at 9 per share
is called issuing share at discount.
Issue of shares at premium:
The issue of share at a price higher than its face value or nominal value is
known as an issue of shares at a premium. Premium is capital gain and credited
to share premium account. It can be collected with application or with allotment
or calls money. There are two methods for the treatment of amount of share
premium.
 Due Method:
The money is received in a single heading of share allotment which include
share capital and share premium. Usually this method is preferred.
 Receipt Method:
The money is received under two headings which is the share capital amount
and share premium.
What Is a Prospectus?
A prospectus is a formal document that is required by and filed with the
Securities and Exchange Commission (SEC) that provides details about an
investment offering to the public. A prospectus is filed for offerings of stocks,
bonds, and mutual funds. The document can help investors make more informed
investment decisions because it contains a host of relevant information about
the investment security.
How a Prospectus Works?
Companies that wish to offer bond or stock for sale to the public must file a
prospectus with the Securities and Exchange Commission as part of the
registration process. Companies must file a preliminary and final prospectus,
and the SEC has specific guidelines as to what's listed in the prospectus for
various securities.
The preliminary prospectus is the first offering document provided by a security
issuer and includes most of the details of the business and transaction. However,
the preliminary prospectus doesn't contain the number of shares to be issued or
price information. Typically, the preliminary prospectus is used to gauge
interest in the market for the security being proposed.

The final prospectus contains the complete details of the investment offering to
the public. The final prospectus includes any finalized background information,
as well as the number of shares or certificates to be issued and the offering
price.
A prospectus includes some of the following information:
 A brief summary of the company’s background and financial
information
 The name of the company issuing the stock
 The number of shares
 Type of securities being offered
 Whether an offering is public or private
 Names of the company’s principals
 Names of the banks or financial companies performing the
underwriting
 Some companies are allowed to file an abridged prospectus, which is a
document that contains some of the same information as the final
prospectus.

Who Needs a Prospectus?

Prospectus documents are for potential investors to understand the value of the
offered public security, including information about the company’s history,
financial performance, its management team, and the investment’s growth
potential. In other words, they aim to inform investors about potential risks from
investing in a specific mutual fund or other type of securities.
Who Issues a Prospectus?
US companies are required to file a prospectus with the SEC prior to offering
the sale of stock or bonds to the public. Mutual funds also provide a company
prospectus to potential clients, including a description of the fund's strategies,
manager's background, fund's fee structure, and its financial statements.
Prospectus Types:
There are several different types of a prospectus for an IPO that may be created
for any number of offered products. Generally, they fall into one of six of the
following categories.

1. Preliminary Prospectus
Also called a “red herring prospectus” (because the document’s cover needs
to have a special notice printed in red), it’s the one most companies use to
attract potential investors, since it’s the first document issued. The
preliminary prospectus usually contains details of a company’s business and
the proposed security.
2. Final Prospectus
The final prospectus is a document outline that fully details the security
that’s been released to the public. Details include the number of securities
issued, the offering price, and information included in the preliminary
prospectus.
3. Abridged Prospectus
Also known as a summary prospectus, the abridged prospectus is basically a
prospectus summary, containing all of the most important features in a
condensed, reader-friendly version.
4. Statutory Prospectus
This type of prospectus is common with mutual funds or ETFs. It provides
full detail of the fund being sold.
5. Shelf Prospectus
 The information contained in this prospectus refers to its “shelf-life” (it’s
valid for up to three years). A shelf prospectus is used for a shelf registration,
which describes multiple securities offerings so the company does not need
to offer a prospectus for each.
6. Deemed Prospectus
This document is for securities that aren’t directly issued to the public.
Instead, a company agrees to give the shares to an issuing house who then
later sells them to the public. The deemed prospectus discloses the offer
from the issuing house.
Components of a prospectus
The following are the components of a prospectus:

#1 Overview and history of the company

The prospectus gives an overview of the company since its creation. It
provides a chronology of events that have occurred over the years, such as
those that have helped the company experience growth. It also includes
information about the founders, company registration, and initial service
offerings. This section may also include an overview of the company’s
strategy and what management believes is its competitive advantage or
“unique selling proposition” (USP).
#2 Services/products offered by the company
The services/products section lists the core economic activities undertaken
by the company. The company provides information about the services and
products provided to customers, and any additions to its operations over the
years.
#3 Management profile
A prospectus also includes information about the company’s executive
management. It outlines the management team’s experience and education
qualifications that make them a good fit for the company. Investors want
assurance that the company’s executives have what it takes to safeguard their
investments.
#4 Desired deal structure
 If the issuer is an existing company that has issued securities before, it may
provide an overview of its current capital structure and how the new issue
will affect the structure. For example, when selling bonds, the investors will
be interested in knowing the level of the company’s debt and its ability to
pay. Equity investors will want to see the current equity ownership structure
and how their investment will influence the structure and the expected rate of
return.
#5 Use of proceeds
A company will often offer an issue of securities when it is unable to raise
capital internally to finance a large investment. For example, the company
may want to expand its operations to other geographical locations, acquire
proprietary technology, purchase large machinery, finance the production of
a new line of products, execute mergers and acquisitions (M&A), etc.
#6 Security offering details
The prospectus also provides information on the number of securities that
are being offered to the public and the price for each security. It should also
state the expected rate of return on the investor’s funds. This section also
provides information on the subscription period when interested investors
can purchase the securities.
#7 Financial information
The prospectus should provide investors with information about the
company’s past financial performance. The information may include EBIT,
net profit, stock performance, etc. The security performance can be
compared to a known benchmark such as the S&P 500 or Dow Jones
Industrial Average.
#8 Risks involved
The prospectus should disclose the risks that investors face when investing
in a mutual fund. For example, an international mutual fund may include a
disclosure detailing the currency risks that investors face when investing in
the fund.Other risks that a company may reveal include possible capital
restrictions, government regulations, individual investors holding large
numbers of stocks, etc. The disclosures protect the company from
accusations that it withheld vital information that caused the investors to
incur losses.
Impact of Financial Leverage:
 The financial leverage is used to magnify the shareholders earnings. It is
based on the assumption that the fixed charges/costs funds can be obtained at
a cost lower than the firm’s rate of return on its assets.When the difference
between the earnings from assets financed by fixed cost funds and the costs
of these funds are distributed to the equity stockholders, they will get
additional earnings without increasing their own investment.
Consequently, the earnings per share and the rate of return on equity share
capital will go up. On the contrary, if the firm acquires fixed cost funds at a
higher cost than the earnings from those assets then the earnings per share
and return on equity capital will decrease. The impact of financial leverage
can be analysed while looking at earnings per share and return on equity
capital.
Significance of Financial Leverage:
Financial leverage is employed to plan the ratio between debt and equity so
that earning per share is improved. Following is the significance of financial
leverage:
(1) Planning of Capital Structure:
The capital structure is concerned with the raising of long-term funds, both from
shareholders and long-term creditors. A financial manager has to decide about
the ratio between fixed cost funds and equity share capital. The effects of
borrowing on cost of capital and financial risk have to be discussed before
selecting a final capital structure.
(2) Profit Planning:
The earning per share is affected by the degree of financial leverage. If the
profitability of the concern is increasing then fixed cost funds will help in
increasing the availability of profits for equity stockholders. Therefore, financial
leverage is important for profit planning.
The level of sales and resultant profitability is helpful in profit planning. An
important tool of profit planning is break-even analysis. The concept of break-
even analysis is used to understand financial leverage. So, financial leverage is
very important for profit planning.
Limitations of Financial Leverage:
The financial leverage or trading on equity suffers from the following
limitations:
1. Double-edged Weapon:
Trading on equity is a double-edged weapon. It can be successfully employed to
increase the earnings of the shareholders only when the rate of earnings of the
company is more than the fixed rate of interest/ dividend on
debentures/preference shares. On the other hand, if it does not earn as much as
the cost of interest bearing securities, then it will work adversely and hence
cannot be employed.
2. Beneficial only to Companies Having Stability of Earnings:
Trading on equity is beneficial only to the companies having stable and regular
earnings. This is so because interest on debentures is a recurring burden on the
company and a company having irregular income cannot pay interest on its
borrowings during lean years.
3. Increases Risk and Rate of Interest:
Another limitation of trading on equity is on account of the fact that every rupee
of extra debt increases the risk and hence the rate of interest on subsequent
loans also goes on increasing. It becomes difficult for the company to obtain
further debts without offering extra securities and higher rates of interest
reducing their earnings.
4. Restrictions from Financial Institutions:
The financial institutions also impose restrictions on companies which resort to
excessive trading on equity because of the risk factor and to maintain a balance
in the capital structure of the company.