Introduction:
The Companies Act, 2013(the Act or New Act) brought in many changes which directly impact preparation of financial statements and require understanding of the new definitions and provisions relating to related party disclosures, deposits inter corporate loans, dividends etc., These changes thrust huge responsibility on the CEO/MD/WTD/CFO/ independent directors to ensure their compliance. Changes in the New Act have also increased the accountability and duties of auditors. To ensure their independence and accountability, New Act imposes restrictions on providing services and huge penalties. This article aims to give coverage to matters which require special attention while preparing the financial statements for the benefit of the readers.
Provisions in Old Act:
In the Old Act, Section 209 dealt with Books of account to be maintained, Section 209A dealt with inspection of books of account, Section 210 stipulated that every company has to lay annual accounts before its shareholders within 6 months from the end of the year. Section 211 provided for the manner of preparation of balance sheet and profit and loss account, Section 212 and 214 mandate that balance sheet of holding company should include certain particulars of subsidiary company and exemptions. Section 215 indicates the manner of authentication of balance sheet and P& L a/c and approval of accounts before submitting the same to auditors. Section 216 and 218 and require attachment of auditors report and certain documents to annual accounts. Section 217 dealt with preparation of Board’s report.
Provisions under New Act:
Sections 128 to 138 under Chapter IX deal with Accounts of companies in the new Act. New definitions such as “financial year, financial statements, associate company etc have given a new dimension to the compliances.
Definitions which impact:
Let us first examine the new definitions as understanding of these is relevant for preparation of financial statements. In the old act, Balance sheet and profit and loss account have not been defined. The new Act defines financial statements to include balance sheet, P& L, cash flow. Only listed companies are required to prepare cash flow but now with this new definition even private limited companies will be required to prepare Cash flow statement.
A) Financial year
It is apt to start with new definition of financial year as it assumes significance from the point of view of preparation of financial statements. Section 2(41) defines financial year. The following points can be noted from the definition:-
i. Any company or body corporate has to end its financial year on 31st March every year
ii. If a company or body corporate has been incorporated on or after 1st day of January of year, in such cases the financial year can end on 31st March of the following year. In other words it can consist of 15 months in case it is incorporated on 1st day of January and 14 months if incorporated on February 13 months if incorporated on March.
iii. In the case of an company or a body corporate which is a holding or subsidiary of a company incorporated outside India and that company is required to follow a different financial year for consolidation of its accounts, such company or body corporate with the permission of Tribunal can have a different period as its financial year.
iv. Any company or body corporate which is not following 31st March ending as its financial year can switch to uniform accounting year within a period of 2 years from the commencement of the Act.
B) Financial statement: We also need to analyze the definition of financial statement which is also a new definition. The following points emerge from the analysis:-
1. Every company is required to prepare financial statements. Financial statement in relation to a company includes a balance sheet as at the end of the financial year, profit and loss account for the year( income & expenditure in the case of a company carrying on any activity not for profit), cash flow statement for the financial year, a statement of changes in equity, if applicable and any explanatory note annexed to, or forming part of, any document referred to above.
2. One Person Company, small company and dormant company, are exempted from the requirement of including the cash flow statement in the financial statements.
Implication above new definitions:
One obvious advantage is that the financial year ending 31st March will suit computations to be made to meet requirements under Income Tax Act. However it will put to stress the directors who are members of audit committee and other directors who have to attend meetings for adoption accounts and the Auditors who have to plan completion of audits of companies which they accept. The inclusion of cash flow along with balance sheet and P&L for all companies is a new requirement. Earlier only listed companies under listing agreement clause no. 32 are required to prepare cash flow statement as per AS-3 of Accounting standards issued by the ICAI.
C) Definitions of holding, subsidiary, associate companies:
Holding company in relation to one or more other companies, means , a company of which such companies are subsidiary companies. {Section 2(46)}
D) Subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company-
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies.
Readers may note the word “ Total share capital” means both preference and equity capital taken together. In the old Act, it is holding of more than 50% in nominal value of equity capital (not total share capital) of a company will make it a subsidiary of the company besides the control of composition of the board.
E) 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. The purport of significant influence has been clarified in the explanation as control of at least twenty per cent of total share capital, or of business decisions under an agreement. In the case of joint ventures it is always by way an agreement significant influence is used but not necessarily by control over share capital. The meaning of significant influence is in line with AS18.
The other important definitions are as follows:
a) “book and paper” and “book or paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form. Section 128 makes it clear that a company can maintain its books of account in electronic form.
b) “books of account” includes records maintained in respect of—
i. all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place
ii. all sales and purchases of goods and services by the company;
iii. the assets and liabilities of the company; and
iv. the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;
c) Accounting standards” means the standards of accounting or any addendum thereto for companies or class of companies referred to in section 133. Now a new body may be created by the central government known as National Financial Reporting Authority(NFRA) which will recommend to the CG on formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors.
Study of Relevant sections:
Now with the above background, it is easier to analyze the provisions of Section 128 which deals with maintenance of books of account.
Books of account to be kept at registered office
Section 128 (1) mandates that every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year. Books of account can be kept at such other place in India by passing a resolution of the Board and file within 7days of such decision a notice in writing giving the full address of such other place.
True and fair view
Books of account shall be kept on accrual basis and according to the double entry system of accounting. Books of account should explain and transactions effected. Such books of account must give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any.
Branch Accounts
“Branch office” in relation to a company, means any establishment described as such by the company. If company wants to maintain a separate set of books at branch, the Board has to pass a resolution and within 7 days of such decision intimate the RoC, location of such declared branch office. If separate books of account are maintained at branch in India or outside India, it would be deemed to be compliance of Section 128(1) if summarized returns are sent at regular intervals to the Registered office or to a place where accounts are maintained as per decision of the Board(Section 128(2).
Rule No. 9.2 of company Rules 2013 provides that in case books of account are maintained outside India, summarized returns shall be sent to the registered office at a monthly or quarterly intervals as may be decided by the Board of directors. If any director wishes to make inspection, the same should be made available and if he makes a request personally (not through any Power of attorney holder) for such information, the same shall be provided by the company within 15 days of receipt of request.
Books of account in Electronic mode:
Books of account can be kept in electronic mode. Recently displayed rules indicate that they shall be retained completely in the format in which they were originally generated, sent or received. System should be capable of being displayed in legible form and facilitate storage, retrieval, display or print outs from the data. Certain companies as may be notified later shall mandatorily file financial statements in Extensible Business Reporting language(XBRL) format(Rule no.9.3)
Compliance with standards:
Section 129(1) mandates that the financial statements be prepared in prescribed form (New Schedule III) and they shall give a true and fair view and comply with accounting standards. Any deviations from accounting standards must be disclosed with reasons for such deviation and impact on profit in the financial statements {Section 129(5)}.
Inspection of books of account:
The books of account and other books and papers maintained by the company within India shall be open for inspection by any director during business hours, and in the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director as per conditions in Rule no. 9.2. Inspection of books of account of subsidiary company can be done only a person authorised in this behalf by a resolution of the board.
Preservation of books of account:
The company has to preserve the books of account for a period of not less than 8 financial years immediately preceding the year, if company has been in existence for more than 8 years. The period can be longer, if the company is subjected to a investigation under Chapter XIV and central government directs the company by its order.
Penalty for violation of Section 128:
If the provisions of section 128 are violated, then MD/WTD/CFOor such other person charged with duty shall be punishable with imprisonment for a term upto one year or with fine ranging from Rs.50,000/- to Rs.1,00.000/- or with both.
Adoption of accounts:
The Board of directors of the company must ensure that at every annual general meeting of a company financial statements for the year are laid before the shareholders for adoption of financial statements. (Section 129(2}
Consolidation of accounts:
If a company has one or mores subsidiaries, it shall in addition to its financial statements prepare a consolidated financial statements of the company and of all subsidiaries in the same form and manner of its own and lay before the shareholders along with its financial statements. The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed. (Section 129(3)}.Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.
Rule no. 9.4 states that the Consolidation of financial statements of the company shall be made in accordance with the Accounting Standards. If under such Accounting Standards, consolidation is not required for the reason that the company has its immediate parent outside India, then such companies will also be required to prepare Consolidated Financial Statements in the manner and format as specified under Schedule III to the Act.
Readers may note that explanation at the end of section clarifies that for the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture. This is a new requirement.
Exemption from requirements of Section 129
Sub section 6 of Section 129 provides that Central government may on its own or on the application by a class of company/companies by notification may exempt from the requirements of the section or rules made there under, if such exemption is in the interest of public.For eg; If a company could not make ready accounts within 6 months from the close of year, it can seek time.
Penalty for violation of Section 129
If any violation is committed in compliance of section 129, Managing Director ,Whole time Director in charge of finance, CFO or any other officer charged with duty, in the absence any of the officers mentioned above, all directors shall be punishable with imprisonment for a term up to 1year or with fine ranging from Rs.50,000 to 5,00,000 or with both.
Revision of Financial statements or Board’s report (Section 131)
A restriction is imposed on the companies for revision of Financial statements or re casting of its statements. Firstly such revision is permissible only in respect of past 3 years only that to on an application made by the company in this regard to the Tribunal. Detailed reasons must be disclosed in the Boards report explaining necessity for re-casting or re-opening of accounts. Before an order is made, a notice shall be given to Central Government, Income Tax, SEBI or any other statutory regulatory body or any person concerned and an order is made by a court having jurisdiction or Tribunal when it is found that fraud is committed or detected mismanagement. The liberty which was available earlier to companies to revise their financial statements as per DCA General Circular of 2003 is now subject to restrictions mentioned above.
Procedure under Rules:
Rule no.9.5 stipulates that an application in Form no.9.2 shall be made to Tribunal within 2 weeks of the passing of the resolution by the Board for the purpose. Auditor will be noticed and Tribunal will hear before passing the order. The order of the Tribunal has to be filed with RoC within 30 days of receipt of certified copy of the order. The same steps for adoption of revised accounts as taken in the case of adoption of original accounts shall be taken. Auditor has to do the audit and give his report on the revised financial statements.
Authentication of accounts: Section 134
This section is not happily worded (it corresponds to Section 215, 216 and 217 of the Old act). The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed and submitted to the auditors for their report. The authentication has to be done by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed.
One has to read Section 203 which deals with appointment of Key managerial persons. As per this section, every company belonging to such class or class of companies as may be specified shall have:
- MD or CEO or Manager and in their absence whole time director
- Company secretary and Chief Financial officer.
A company may or may not appoint Secretary or CFO but it shall have MD or CEO or Manager or whole time director. Therefore manner in which authentication is done as per old act can be applied. Any two directors (one has to be MD/CEO/Manager/WTD) and company secretary and CFO if appointed. In the case of One Person Company, authentication can be done only by one director, for submission to the auditor for his report thereon. The auditors’ report shall be attached to every financial statement.
Conclusion: New changes will certainly cause difficulties to Finance professionals including auditors in preparation and audit of financial statements. Let us hope that approved Rules and clarifications will throw light on handling of grey areas such as conflict of Accounting standards with provisions of Act wherever non applicability is indicated so as to True and fair view is not jeopardized.
G S Rao,
DGM(Legal),OCL India Limited
Tags: The Companies Act, 2013, Books of account, financial statements
Disclaimer:
This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.
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