1.39 - Query

Incorporation of Branch Returns/Statements in the
Head Office Final Accounts as Governed by Part II
of Schedule VI.

A company has only one branch dealing in item A. The Branch Manager is allowed to deal in another item B, provided the net result is not a loss. The Branch Manager is personally liable for the losses incurred on item B. He is however entitled to carry over such loss for being set off against the profits of the following two years. Similarly, the Branch Manager is also entitled to carry forward to profits from item B for being set off against losses, if any, made in the next following two years.

For the first year the Branch has submitted its accounts to the Head office showing the profit or loss from item A, but fully carrying forward the profits form item B through the Balance Sheet. It may be mentioned that only the direct profit from item B has been carried forward i.e. without apportioning the incidental and office expenses to items A and B.

The said branch accounts have been incorporated in the Head Office accounts in a manner that the profit from item B has not been included because of the above understanding. The statutory auditor agreed with the views of the management, and certified the accounts as ‘true and fair’.

In the above circumstances, do the annual accounts show true and fair view of the state of affairs of the company and do they conform to the generally accepted principles of accounting in compilation and presentation?


April 22, 1977

The extent of disclosure required with regard to this new item would be governed by Part II of Schedule VI and more particularly, item 3 (i) (a) and item 3 (ii) (b) of the said Part. It is obligatory to disclose the aggregate amount of sales of all items dealt with by the company in that particular year. Necessarily, therefore, the sale proceeds in respect of this particular item will require to be included in the aggregate sales. With regard, however, to expenses related to the said item, whether to disclose the expenses in bifurcated form will depend upon the nature and extent of the new line of activity vis-à-vis the existing activity. If the amount of expenses attributable to the new item is significant or if the new item is entirely a different item from the items that are usually dealt with by the company then the expenses attributable to such item will require to be separately reckoned in determining the results of the particular new item. There is, however, no requirement of separately disclosing the expenses attributable to the new item in the Profit & Loss Account. The extent of expenses will have a bearing only for the purpose of determining the profit or loss from the new item dealt with. This aspect will thus have a direct bearing in so far as the ultimate recovery, if any, to be made from the branch manager on account of insufficiency of profits for set off.

In the opinion of the Committee, the treatment accorded to the profits in the books of the branch as well as that of the Head Office is in accordance with the generally accepted accounting principles and the accounts thus certified would show a “true and fair” view, if the disclosure requirements of Part II are, otherwise, complied with.