Droma Shoes Private Limited was established in year 2022-23 for manufacturing of footwear. As funds were needed to carry on its business activities…

CA Intermediate · Auditing and Ethics · RTP · May 2024
Droma Shoes Private Limited was established in year 2022-23 for manufacturing of footwear. As funds were needed to carry on its business activities including for purchase of different raw materials, incurring of regular expenses like power and fuel and payment of wages etc., it had got sanctioned a credit facility amounting to 2 crores repayable on demand from a bank against primary security of its current assets and collateral security of residential house of one of its directors. Duly signed guarantee documents by directors in favour of bank also form part of bank's loan documentation. Account statement of above facility downloaded from bank's website shows debit balance of 1.85 crores as on 31st March, 2023. The operations in above credit facility are satisfactory. In this regard: (i) Identify nomenclature of such credit facility given by banks. How would above amount of 1.85 crores be reflected and classified in financial statements of company as on 31.3.23? (ii) Also state specific disclosure requirements of Schedule III of Companies Act, 2013 in relation to above.

Suggested Answer and Working Notes:

(a) (i) The type of credit facilities referred to in above situation given by banks to meet working capital requirements of business which are repayable on demand are known as "cash credit facilities/overdraft" facilities. The amount of 1.85 crores outstanding as on 31st March, 2023 reflects borrowings of the company and it would be classified as "short-term borrowings” as loans repayable on demand from banks under current liabilities in balance sheet of the company. Borrowings shall further be subclassified as secured. (ii) Specific disclosure requirements of short-term borrowings under Schedule III to Companies Act, 2013 in given situation are as under: - Nature of security i.e. primary security of current assets and collateral security of residential house belonging to a director shall be specified.As loans have been guaranteed by directors, the aggregate amount of such loans shall be disclosed. To be disclosed as Additional Regulatory Information Since the Company has borrowings from bank on the basis of security of current assets, it shall also disclose the following:- (a) whether quarterly returns or statements of current assets filed by the Company with banks or financial institutions are in agreement with the books of accounts. (b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately disclosed.

Topics: Audit of Items of Financial Statements

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