Final Accounts: Including Computation of Managerial Remuneration and Disposal of Profit

-

Final Accounts: Computation of Managerial Remuneration and Disposal of Profit

Managerial remuneration under the Companies Act, 1956 (replaced by Companies Act, 2013) and its subsequent amendments, encompasses various payments and benefits provided to management personnel such as directors, managing directors, and managers. This detailed explanation outlines how managerial remuneration is computed, including limits based on net profit and effective capital, and the process for calculating net profit.

1. Components of Managerial Remuneration

Managerial remuneration includes all forms of compensation and benefits provided to management, such as:

  • Salaries: Regular payments made to the management.
  • Commission: Earnings based on company performance or sales targets.
  • Retirement Benefits: Contributions to retirement funds or pension schemes.
  • Life Insurance Policies: Premiums paid for life insurance on behalf of the management.
  • Club Membership Fees: Costs related to memberships in clubs.
  • Cost of Car Facilities: Expenses for company cars provided to management.
  • Other Allowances or Benefits: Any additional perks or allowances.

2. Limits on Managerial Remuneration

A. Based on Net Profit

Managerial remuneration is capped based on the company's net profit, with the following scenarios:

  • Situation I: Company with only one whole-time director or managing director:
    • 5% of Net Profit.
  • Situation II: Company with more than one whole-time director or managing directors:
    • 10% of Net Profit.
  • Situation III: Company with only one part-time director or managing director:
    • 3% of Net Profit.
  • Situation IV: Combination of Situation I and Situation III:
    • 6% of Net Profit.
  • Situation V: Combination of Situation II and Situation III:
    • 11% of Net Profit.

B. Based on Effective Capital

In the absence or shortage of profits, remuneration is calculated based on effective capital:

  • Effective Capital < ₹1 Crore: ₹75,000 per month.
  • ₹1 Crore ≤ Effective Capital < ₹5 Crore: ₹100,000 per month.
  • ₹5 Crore ≤ Effective Capital < ₹25 Crore: ₹125,000 per month.
  • ₹25 Crore ≤ Effective Capital < ₹50 Crore: ₹150,000 per month.
  • ₹50 Crore ≤ Effective Capital < ₹100 Crore: ₹175,000 per month.
  • Effective Capital ≥ ₹100 Crore: ₹200,000 per month.

3. Calculation of Net Profit

The calculation of net profit for the purpose of determining managerial remuneration involves adjustments to the profit as reported in the financial books:

  • Starting Point: Net profit as per financial books.
  • Adjustments:
    • Add Back:
      • Provisions: All provisions made in the financial books.
      • Actual Depreciation: Depreciation as reported in the financial books.
      • Profit on Sale of Fixed Assets: Gains from the sale of fixed assets.
      • Interest/Dividend/Rental Income: Income from investments.
    • Deduct:
      • Appropriations: Any allocations made from profits.
      • Depreciation as per the Companies Act: Depreciation calculated as per statutory requirements.
      • Voluntary Compensation/Donation: Any additional voluntary compensation or donations.
      • Profit on Sale of Investments: Gains from the sale of investments.
      • Loss on Sale of Investments: Losses from the sale of investments.
      • Capital Expenditure: Investments in research and development.
  • Result: The adjusted profit is referred to as "Profit as per Section 349."

4. Exclusion of Director Fees

  • Director Fees: Should not be included in managerial remuneration calculations and are separately allowed under the net profit calculation as per Section 349.

Summary

The Companies Act provides a structured approach for calculating managerial remuneration based on the company's net profit or effective capital. It sets clear limits and detailed procedures for computing net profit, ensuring transparency and adherence to statutory requirements. Understanding these guidelines helps ensure compliance and accurate financial reporting.