The 2013 Act mandates preparation of consolidated financial statements (CFS) by all Companies, including unlisted Companies, having one or more subsidiaries, joint ventures or associates. Previously, the Securities and Exchange Board of India (SEBI) required only listed Companies to prepare CFS. Mandating preparation of CFS is a step in the right direction to align the reporting requirements to the international reporting practices, since standalone financial statements do not present a true picture from an economic entity perspective.
Consolidated financial statements normally include consolidated balance Sheet, Consolidated statement of profit and loss, and notes, explanatory material that form an integral part thereof, and also consolidated cash flow statement (in case a parent present its own cash flow statement). Consolidated financial statements are presented, to the extent possible, in the same format as adopted by the parent for its separate financial statement.
Objective of CFS:
A Move to Greater Transparency, The Government of India, in its endeavour to enforce and raise compliance standards, has legislated the Companies Act, 2013, the much required code for corporates in India in line with the developments taking place worldwide and in order to meet the growing demands of stakeholders towards greater transparency and ease of understanding.
The Concept of CFS was brought with an objective of achieving the true and fair view of reporting the position of the company for the financial year, since the consolidated financial Statements are generally considered as the primary financial statements from an economic entity perspective, whereas the standalone Financial Statements projects only the position of the company in its individual performance and it does not provide the true and fair view to the shareholders about the overall performance of the company with its subsidiaries.
Key compliance requirements:
a. CFS is to be prepared and laid before an AGM, in addition to SFS. Audited accounts of the listed companies, along with those of the subsidiaries, have to be made available on the website.
b. Audited accounts of all of the subsidiaries are required to be prepared and provided to shareholders on request
Requirement of Consolidation of Financial Statement:
Section 129 sub section 3 states that ‘Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2)’.
Explanation: — for the purposes of this sub-section, the word “subsidiary” shall include Associate Company and Joint Venture.
Financial Statement: As per section 2 clause 40
“Financial Statement” in relation to a company, includes—
a) A balance sheet as at the end of the financial year;
b) A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
c) cash flow statement for the financial year;
d) A statement of changes in equity, if applicable; and
e) Any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):
“Associate Company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
“Significant Influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement.
Companies which have to consolidate its Financial Statement:
- Where a Company have one or more subsidiary (ies).
- Where a Company have Associate Company (ies).
- Where a Company have Joint Venture(s).
- Where a Company have Foreign Subsidiary (ies)
- Where a Company have wholly owned subsidiary.
- Where a Company have Subsidiaries, Associates and joint ventures all.
Applicability of Provision of Companies Act, 2013
Manner of Preparation of CSF: As stated in Section 129 (4) the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements of the Company. The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards (i.e. AS 21- Consolidated Financial Statements, AS 23-Accounting for Investments in Associates in Consolidated Financial Statements & AS 27-Financial Reporting of Interests in Joint Ventures).
Presentation of Notes in CSF:
As per MCA General Circular No. 39/2014 dated 14th October, 2014 Government has received representations from stakeholders seeking clarifications on the manner of presentation of notes in Consolidated Financial Statement (CFS) to be prepared under Schedule III to the Companies Act, 2013(Act). These representations have been examined in consultation with the Institute of Chartered Accountants of India (ICAI) and it is clarified that Schedule III to the Act read with the applicable Accounting Standards does not envisage that a company while preparing its CFS merely repeats the disclosures made by it under stand-alone accounts being consolidated. In the CFS, the company would need to give all disclosures relevant for CFS only.
It is clear from the above mentioned circular that there is no need to repeat the disclosures relates to only stand alone account of the Company. They would need to give all the disclosures relevant for CSF Only.
Accounting Standard:
In case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.
According to Companies (Accounts) Rules, 2014 the consolidation of financial statements of the Company shall be made in accordance with the provision of schedule III to the Act and the applicable accounting standards. However, a Company which is not required to prepare consolidated financial statements under the accounting standards, it shall be sufficient if the Company complies with provisions on consolidated financial statements provided in schedule III of the Act.
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