Reserves & Surplus
Let us take a further glance at Equity, or Reserves & Surplus, for Bata India.
This section consists of two line items, Equity Share capital and Other Equity, the details of which can be found in notes 12 and 13.
The share capital of Bata stays the same, so there is no need to model it. However, if they were to raise more money, the situation would be different.
We need to take a look at Note 13 in order to understand the different components of this equity part, or reserves and surplus. This will give us a snapshot of what is contained therein.
I will use the base rule concept to construct a schedule. I won’t dwell on setting up the excel sheet, since we’ve already done that in prior chapters.
Rather than tell you, I’d prefer to demonstrate the excel set up.
I have completed the usual excel set-up, indexing the columns and including the line items while abiding by the base rule. This set-up is consistent with that of the Note 13 associated with it and only considers the most recent annual report similarly to before.
Let us put the data into our schedule.
I’ve maintained the amount of fully paid-up share capital throughout each year.
We previously discussed the ‘Security Premium Reserve’ in this chapter. If no new Equity has been issued by a firm during the year, its security premium reserve remains unaffected.
The annual report has data only for March 2020 and 2021. To create the securities premium reserve, I’ve utilized the base rule in which the closing value of one year becomes the opening balance of the next year.
The ‘General Reserve’ is next in line. It is designated for general business operations of a firm without any specific goal. Companies may either keep the reserve as it is or contribute a bit more each year from their profits and losses.
Bata India has chosen to leave some funds alone, without any annual augmentations, therefore the principle is easy to apply to the general reserve.
The company’s ‘general reserves’ are utilized for working capital needs and other corporate outlays.
Proceeding forward, ‘Retained earnings’ need to be examined. Something of critical importance is that the Profit After Tax (PAT) or bottom line profit of the enterprise is seen as the profit accrued during that fiscal year. This income is amassed in the business’s balance sheet in the retained earnings segment.
The PAT goes to the liabilities section of the balance sheet, and remains in retained earnings. It’s one of the ways these two financial statements are linked together.
The company additionally distributes dividends and associated taxes from the retained earnings segment of the balance sheet. Furthermore, on the Excel spreadsheet – The March 19 balance carries over to become the opening balance of March 2020. To this, we add the PAT figure from the P&L – INR 3289.53 Million.
The company then has two other items to consider, namely the remeasurement of gains/losses on defined benefit plan and the impact from Ind AS 116. These are result of accounting treatments and generally do not have any extensive consequences. You can take cognisance of these figures, but I do not see there being too much need for forecasting or modelling.
Additionally, it is evident that dividend payment and the required dividend distribution tax have been subtracted from the total amount.
The closing balance of retained earnings is the sum of all profits and losses. For March 2021, unfortunately the company reported a deficit, which was noted in the balance sheet. Whenever the company suffers a loss, their retained earnings will be reduced accordingly.
The Share Capital and Reserves & Surplus of the company is its Net worth. If a business has continual losses, then its retained earnings decrease, leading to a reduction in its Net worth.
The combination of the Securities premium reserve, general reserves and retained earnings makes up the Equity included in the balance sheet.