As per the Guidance Note of the ICAI, ‘The Council of the Institute of Chartered Accountants of India has issued Accounting Standard (AS) 21 'Consolidated Financial Statements' which lays down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented for a group of entities under the control of a parent. A 'parent' is an entity that has one or more subsidiaries. A group comprises a parent and its subsidiaries. Thus, consolidated financial statements are the financial statements of a group presented as those of a single entity.AS 21 is applicable to a parent that presents consolidated financial statements. In other words, whenever a parent decides to prepare and present consolidated financial statements, it should do so in accordance with the requirements of Accounting Standard (AS) 21, Consolidated Financial Statements.’
The above is the quote of the Guidance Note issued whence there are no mandatory Company Law requirements to prepare Consolidated Financial Statements except for listed companies under SEBI Guide lines.
But, under Section.129 (3) of the Companies Act 2013, there is a sea change. To quote, ‘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 also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2).
Provided that 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:
Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed. Explanation.—for the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture.
(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 referred to in sub-section (3).
Proviso two to sub Sec. (3) provides for the preparation consolidation of accounts of companies in such manner as may be prescribed. But, where the mischief played out is sub -sec. (4) that is very much vocal as to the fact that the provisions of this Act is applicable to the audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3) besides to the preparation and adoption of accounts.
Section 143 of the Act copiously deals with the preparation of Audit Report. Besides, the auditor’s report shall also state among other things under ASs 700/705/706, a ‘Report on Other Legal and Regulatory Requirements as required by Section 143 (3) of the Act’. So far so good. AASB has issued six Illustrative Auditor’s Report Formats under Companies Act, 2013. - (16-12-2014). But, all relate to stand alone financial statements. ICAI has once again come forward, though a bit late, with two Illustrative Auditors Report Formats, that settles the whole issue. Now that ‘Report on other Legal and Regulatory Requirements are also to be part and parcel of consolidated audit reports, the confusion surrounding the issue is settled once for all, for which once again a great Salute.
Sensible Questions:
Notwithstanding the above, some sensible questions arise that are better addressed by ICAI/MCA sooner than later as to:
i. Whether ‘Report on other Legal and Regulatory Requirements are also to be part and parcel of consolidated audit reports?
ii. Whether the new Companies (Auditor’s Report) Order, 2015 under Section 143(11) of the Companies Act 2013 is really relevant for Consolidated Financial Statements?
Consolidated Financial Statements are the financial statements of a group presented as those of a single entity by the holding company. Is it a legal entity?- a question that is to be pondered over- on the face of it not, since the CFSs are presented as those of a single entity by the holding company, notwithstanding they are prepared under aegis of the companies Act. Group can be compared to a ‘family’ at the most but the legal entity is the individual members of the family except in the case of Hindu Undivided Family, against whom only legal requirements rest. Therefore, Legal and Regulatory requirements relate only to holding companies, subsidiaries, associates etc. that have a legal existence to comply with individually, any non-compliance will drag them to penal actions.
An entity which prepares the consolidated financial statements, either under any law or regulation governing the entity or suo -moto, might be required to comply with guidance on the specific issues and audit procedures to be applied in an audit of consolidated financial statements. But, the moot point is whether report on ‘Other Legal and Regulatory Requirements’ related to individual legal entities are relevant wholesale for Group Consolidated Statements which are now prepared under mandatory requirements under Sec. 129(3) of the Companies Act? For example, it may be noted that in some cases, say, written representations from directors that are indicated only from companies incorporated in India, why? It is because; this information is not available in the reports of the subsidiaries from foreign countries. Partial information given in the consolidated report will be misleading- it is as good a chasing a shadow.
The purpose of consolidation is mainly to report the true and fair view of the results of the group to the stakeholders. Therefore, there is still a big scope to trim the reporting of ‘Other Legal and Regulatory Requirements’ related to individual legal entities’ in the Consolidated Financial statements without losing the essence, especially when legal requirements individual companies centric.
Application of CARO:
Adverting to CARO under sub-section (11) of section 143 of the Companies Act, 2013 the Central government after consulting the ICAI has issued the order on 10th April 2013 called the companies (Auditor’s Report) Order, 2015 , according to which,
“It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2O13 (18 of 2O13) [hereinafter referred to as the Companies Act, except
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (1O of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of
19381:
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act and a small company as defined under clause (85) of section 2 of the Companies Act; and
(v) a private limited company with a paid up capital and reserves not more than rupees fifty lakh and which does not have loan outstanding exceeding rupees twenty five lakh from any bank or financial institution and does not have a turnover exceeding rupees five crore at any point of time during the financial year.
The above Order only says that it applies to every company that includes a foreign company as defined in Section 2 (42) of the said Act except for the five mentioned in the above Order.
What’s a company?
As per Section2 (20) of the Companies Act, Company is defined as the one incorporated under this Act or any previous company law’. CFSs relate to a group of a holding company. That group is not registered under the Act; therefore, a plain reading makes it clear that this order applies only to the companies coming under the grasp of the Order and not beyond. Since CFSs represent a group of the holding company, it is but stretching too much to rope in, why? To grab under the grip of CARO, notwithstanding the fact that consolidation is mandatory for the companies in the ambit of Section 129 0f the Act. Further, clause 3 of the Order on CARO that deals with ‘Matters to be included in auditor’s report’ only speaks of a company to which the Order applies to include a statement of the 12 items mentioned therein. This amply speaks for itself without any ambiguity that applying CARO is ‘Greek and Latin’ to CFSs, hence outside the purview of the consolidation.
How to go about?
It is ordained duty of ICAI as a Regulatory Authority to take it up with the Ministry of Corporate Affairs to set things right and proper. The above points can be focussed right earnest so that Consolidated Audit Reports are to the point and where necessary, including other relevant points that may come to the realm of the best brains of ICAI. The Audit Reports are already going to be the lengthiest one in the world, besides more onerous. Let us arise and stop not, to set right the obese character of the consolidated report by eschewing out what is not essential reporting on CFSs. Let us not bloat over by including unwarranted; but gloat over in delivering the exact, precise and accurate to the stakeholders.
In this connection, it is appropriate; even encroach upon section 129(6) of the Companies Act, 2013 to achieve the well-intended object of reporting to the point. To quote, it runs as follows,
‘(6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made there under, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.’
‘Devil lies in unwarranted. Eschew superfluous to serve better’.
Let us hope 2016 audit report see the light under the leadership and guidance of the ICAI.
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