Calculation of Managerial Remuneration

Once again after a long time I am back with an important concept in corporate accounting that is, Managerial remuneration. First of all we need to understand what managerial remuneration means, it is the remuneration given to the managerial level personnel that is, whole time director, managing director, and other independent and executive director.

We know that a company is managed by the board of directors in which few are responsible to run and managed the business these are called managing director or whole time directors and other are responsible to see whether company is doing the work according to the laws and regulations and whether any interest of internal or external parties like shareholder, debenture holder etc has been affected by the conduct of the company.

So there are basically two groups in board of directors -first, who execute the business operation (get the things done from people) and other who oversee the working of first group of managers.

Before I continue to the provision of company act regarding managerial remuneration, I must say that there is a difference between managing director and whole time director. Managing director can be appointed for fixed term say 5 year but whole time director are the employee of a company working as an employee and are not appointed for fixed term. Where the work of company is diversified each whole time director is appointed for each segments. But managing director is the person managing whole business. If I talk about Larsen and Toubro company, Mr M.V. Kotwal is the whole time director of Heavy Engineering segments, Mr S.N. Subhrahmanyan is the whole time director of infrastructure and construction and so on but Mr k. Venkatraman is the only managing director of the company.

So it is clear that there is a difference between managing and whole time director.

Calculation of managerial remuneration when there is adequate profit or sufficient profit.

Now section 197 of the company act 2013 deals with the managerial remuneration. It says that overall managerial remuneration given to whole time or managing director and other independent director should not be more than 11% of the net profit of the company determine as per sec 198.

second criteria is , in that 11 % remuneration--remuneration given to whole time director or managing director should not be more than 10% of the net profit determine as per sec 198. and remuneration to other director (independent directors) should not be more than 1% of the net profit as per sec 198.

third criteria is , if there is only one managing or whole time director in a company than the remuneration to him should not be more than 5% of the net profit as per sec 198.

fourth criteria is, if there is no managing director or whole time director then the remuneration given to other directors (that is independent director) should not be more than 3% of the net profit determine as per sec198.

Independent directors are not the employee of the company they just see the workings of executive directors (that is whole time or managing directors ) they get sitting fees for their work. Their sitting fees are also included in the managerial remunerations which should not be more than 1% of the net profit

one thing should be noted that chairman is of two types executive chairman and non executive chairman. Executive chairman is treated as whole time director in calculating managerial remuneration.

Non executive is treated as other director in calculating managerial remuneration.

Sec 198 determines the net profit for the purpose of managerial remuneration. What we have to do is take net profit as per profit and loss account and add back provision for tax and all the capital expenditure included in p/l and deduct all the capital related income included in p/l.

In case of depreciation multiple shift allowance expenses is allowable and should not be added back but special depreciation is not allowable and to be added back from net profit as per p&l .

profit on sale of investment should be deducted from net profit as per p&l.

In case of profit on sale of fixed asset, it should be deducted to the extent of difference between cost and wdv of asset. For example profit on sale of machine showing in credit side of p&l is 8000 rupees, and cost of that machine was 150000 and wdv was 145000. here the difference between wdv and cost is 5000 and profit on sale is 8000 so 3000 should be deducted from net profit of the company for calculating net profit for the purpose of managerial remuneration.

Loss on sale of fixed asset should not be added back.

If the profit after appropriation is given in the question then all the reserves, dividends should be added back.

Take a question,

Net profit for the year 100,000 rupees. The following amount have also been taken into consideration in calculation of net profit:

1. provision for tax –20,000

2. subsidy received from government—30,000

3.bonus paid to technician –5000

4. depreciation (multiple shift allowance of rs 2000 is included in it)--7000

5. investment allowance reserve—700

6. compensation to injured employee—1000.

7. profit on sale of investment—2500.

8. profit on sale of fixed asset (original cost 20000 and wdv 11000)--15500

Calculate the remuneration payable to managers and other directors.

ANS:

Net profit –100,000

Add: provision for tax –20,000

investment allowance reserve—700

less: profit on sale 2500

less: profit on sale –6500

(bonus paid to technician is allowable expenses whereas, subsidy received is allowable income so they are not taken into above calculation. )

so the adjusted net profit is 111700. thus, remuneration given to managers should not be more than 10% of 111700. that is, 11170. and to the other directors not more than 1% i.e 1117

Calculation of managerial remuneration when there is no profit or inadequate profit of company:

where the effective capital is

negative or less than 5 crore----yearly remuneration should not exceed 30 lakh.

5 crore and above but less than 100 crore—should not exceed 42 lakh

100 crore and above but less than 250 crore-- should not exceed 60 lakh.

250 crore and above—60 lakh plus 0.01% of the effective capital over 250 crore.

"Effective capital" means the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits

repayable after one year (excluding working capital loans, over drafts, interest due on loans

unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the

aggregate of any investments (except in case of investment by an investment company whose

principal business is acquisition of shares, stock, debentures or other securities), accumulated

losses and preliminary expenses not written off.

 Thus, it was all about managerial remuneration. Hope you all liked it . If you have any questions  feel free to write me in the comment box below.