Financial statement to be filed with Registrar

According to section 2(40) ( Enforced with effect from 12-9-2013.) of the 2013 Act, in relation to a company, the term “financial statement” includes:

(i)           a balance sheet as at the end of the financial year;

(ii)          a profit and loss account/an income and expenditure account (in case of a company carrying on an activity not for profit) for the financial year;

(iii)         cash flow statement for the financial year (not applicable to one person companies, small companies and dormant companies);

(iv)         a statement of changes in equity, if applicable;

(v)          notes to account (any explanatory note annexed to, or forming part of financial statements in (i) to (iv) above).

For the purposes of section 129, except where the context otherwise requires, any reference to the “financial statement” shall include any notes annexed to or forming part of such financial statement giving information required to be given and allowed to be given in the form of such notes or document under this Act. [Explanation to section 129]

Q: What is a BALANCE SHEET of Company ?

The balance-sheet of the company is a document and not an account in the strict sense. It is merely a statement of the company’s assets and liabilities as at the end of the financial year. It describes a state of affairs as at a particular point of time. – Chandra Spg. & Wvg. Mills (P.) Ltd. v. Registrar of Companies [1990] 69 Comp. Cas. 117 (Kar.)

In J. K. Industries Ltd. v. Union of India [2007] 80 SCL 283 (SC), it was held as under:

             The function of a balance sheet is to show the share capital, reserves and liabilities of the company at the date on which it is prepared and the manner in which the total moneys representing them are distributed over several types of assets.

             A balance sheet is a historical document.

             As a general rule it does not show the net worth of an undertaking at any particular date.

             It does not show the present realizable value of goodwill, land, plant and machinery, etc.

             It also does not show the realizable value of stock-in-trade, except in cases where the realizable value of stock-in-trade is less than cost.

             Therefore, it cannot be said that the balance sheet shows the true financial position.

Q: What is Profit and loss account ?

The profit and loss account presents the figures for a period of activity (for a particular financial year) designed to show the resulting profit or loss. – Chandra Spg. & Wvg. Mills (P.) Ltd. v. Registrar of Companies [1990] 69 Comp. Cas. 117 (Kar.)

Q: What is Cash flow statement ?

The 2013 Act makes preparation and presentation of cash flow statement mandatory for all companies except:

             One Person Company

             small companies and

             dormant companies.

Q: What is the  Importance of cash flow statement ?

A company is compulsorily required to follow accrual basis of accounting. Accrual basis of accounting requires that revenues be recorded when earned and the expenses be recorded when incurred. Thus net income will not indicate the net cash provided by operating activities or net loss will not indicate the net cash used in operating activities. How the cash flow statement overcomes this limitation of accrual system was well-explained by the Supreme Court in Reliance Energy Limited v. Maharashtra State Road Development Corporation Ltd. [2008] 85 SCL 320 as under :

             The financial statements prepared on accrual basis do not reflect the timing of the cash flow and amount of cash flow.

             The object of the cash flow statement is to assess the company’s ability to generate the cash flow in future and to assess reasons for difference between “net profit” and “net cash flow” from operations.

             There are two methods of “cash flow reporting” i.e. direct and indirect.

             The indirect method is called the reconciliation method.

             Both give identical results in the matter of the final total. They differ only in presentation of the data.

             In fact net cash flow from operations is the regular source of cash in any enterprise that determines whether or not an enterprise will continue to exist in the long run.

             Accrual basis of accounting requires that revenues be recorded when earned and the expenses be recorded when incurred.

             Earned revenues more often include credit sales that have not been collected in cash and expenses incurred that may not have been paid in cash during the accounting period.

             Thus net income will not indicate the net cash provided by operating activities or net loss will not indicate the net cash used in operating activities. In order to calculate the net cash provided by (or used in) operating activities, it is necessary to replace revenues and expenses on accrual basis with actual receipts and actual payments in cash. This is done by eliminating the non-cash revenues and non-cash expenses from the given earned revenues and incurred expenses in the profit and loss account.

             The profit and loss account is also debited and credited with purely non-cash items which reduce and increase the profits respectively but do not affect the cash at all e.g. depreciation, loss (or profit) on the sale of fixed assets, amortization of intangible assets like goodwill, patents trademarks etc. deferred revenue expenditures like preliminary expenses, discount on the issue of shares and debentures and so on.

             Since cash provided by operations is to be calculated, certain non-operating items like rent income, interest income, dividend income, refund of tax etc. should also be adjusted although these items may have been recorded on cash basis. Such items are analysed separately in the cash flow statement as operating, investing and investing activities.

Q: What is Statement of changes in equity (SOCIE) ?

Statement of Changes in Equity has to be prepared and presented only “if applicable”. Presently the Accounting Standards don’t deal with this statement. This Statement is mentioned in IFRS. When Ind ASs becomes applicable, the classes of companies to which these are made applicable will have to compulsorily prepare and present SOCIE.

Q What are the requirements to be satisfied by Financial statements ?

Section 129(1) of the Act provides as under :

             The financial statement (FS) shall:

■            give a true and fair view (see para 2.2-1) of the state of affairs of the company or companies as at the end of the financial year,

■            comply with the notified accounting standards (see section 133) [see para 2.2-2], and

■            be in such form specified in Schedule III to the 2013 Act

             The items contained in such FS shall be in accordance with Accounting Standards.

             At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting a financial statement for the financial year.

             The above provisions shall not apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company.

2.2-1 True and Fair View

In J. K. Industries Ltd. v. Union of India [2007] 80 SCL 283 (SC), it was held as under:

             The annual financial statements should convey an overall fair view and should not give any misleading information or impression.

             All the relevant information should be disclosed in the balance sheet the profit and loss account (and cash flow statement) in such a manner that the financial position and the working results are shown as they are.

             There should be neither an overstatement nor an understatement. Further, the information to be disclosed should be in consonance with the fundamental accounting assumptions and commonly accepted accounting policies.

             Therefore, failure to make provision for taxation would not disclose true and fair view of the state of affairs and, therefore, amount to contravention of sections 209 and 211 of the 1956 Act [corresponding to sections 128 and 129 of the 2013 Act].

             Accordingly, it is necessary for the auditor to qualify in his report, and such qualification should bring out in what manner the accounts do not disclose a true and fair view of the state of affairs of the company as well as the profit/loss of the company.

The 3rd proviso to section 129(1) of the Act provides that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose—

(a)          in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;

(b)          in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;

(c)          in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003 ;

(d)          in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.

2.2-2 Accounting Standards

COMPANIES (INDIAN ACCOUNTING STANDARDS) RULES, 2015

NOTIFICATION [F.NO.01/01/2009/CL-V(PART)], DATED 16-2-2015 hey shall come into force on the 1st day of April, 2015.

Q : What should be done in case  financial statements of a company do not comply with the accounting standards ?

Section 129(5) of the 2013 Act provides that the company shall disclose in its financial statements:

             the deviation from the accounting standards,

             the reasons for such deviation, and

             the financial effects, if any, arising out of such deviation.

Q : In Which format Financial Statements shall be Filed ?

Rule – 12, COMPANIES (ACCOUNTS) RULES, 2014

(1) Every company shall file the financial statements with Registrar together with Form AOC-4.

(2) The class of companies as may be notified by the Central Government from time to time, shall mandatorily file their financial statement in Extensible Business Reporting Language (XBRL) format and the Central Government may specify the manner of such filing under such notification for such class of companies.

Explanation. – For the purposes of this sub-rule, the term “Extensible Business Reporting Language” means a standardised language for communication in electronic form to express, report or file financial information by companies under this rule.

(3) The fees or additional fees referred to in sub-section (1) of section 137 and in the second proviso to the said sub section and in sub-section (2) of the said section shall be as specified in the Companies (Registration Offices and Fees) Rules, 2014.

Q; What are the sailent features of Financial Statements of Subsidiaries / Associates/ JV’s

Rule 5 and Form No. AOC-1 of the Companies (Accounts) Rules, 2014

The statement containing the salient feature of the financial statement of a company’s subsidiary or subsidiaries, associate company or companies and joint venture or ventures under the first proviso to sub-section (3) of section 129 shall be in Form AOC-1.

Q : Whether the consolidation of Financial Statements is mandatory ?

Section 129(3) of the 2013 Act provides that where a company has one or more subsidiaries, it shall in addition to the financial statements  :

             prepare a consolidated financial statement of the company and all the subsidiaries in the same form and manner as that of its own ; and

             lay the consolidated financial statement also before the annual general meeting of the company along with the laying of its financial statement.

The following requirements are also relevant:

             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. 

             The Central Government shall prescribe the manner of consolidation of accounts of companies by way of rules.

             The provisions of this Act applicable to the preparation, adoption and audit of financial statements of a holding company shall, mutatis mutandis, apply to consolidated financial statements also.

See rule 6 of the Companies (Accounts) Rules, 2014 which read as follow :-

Manner of consolidation of accounts

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:

Provided that 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:

*[Provided further that nothing in this rule shall apply in respect of preparation of consolidated financial statement by an intermediate wholly-owned subsidiary, other than a wholly-owned subsidiary whose immediate parent is a company incorporated outside India:

Provided also that nothing contained in this rule shall, subject to any other law or regulation, apply for the financial year commencing from the 1^st day of April, 2014 and ending on the 31^st March, 2015, in case of a company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both, for the consolidation of financial statement in respect of associate companies or joint ventures or both, as the case may be: ]

**[Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1^st April, 2014.]

*Second and third provisos inserted by the Companies (Accounts) Amendment Rules, 2014, w.e.f. 14-10-2014.

** Fourth proviso inserted by the Companies (Accounts) Amendment Rules, 2015, w.e.f. 16-1-2015.

Q Should the Company  while preparing its CONSOLIDATED FINANCIAL STATEMENT  repeats the disclosures made by it under stand-alone accounts being consolidated ?

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. ”

SECTION 129 OF THE COMPANIES ACT, 2013 – FINANCIAL STATEMENT – CLARIFICATION ON MATTERS RELATING TO CONSOLIDATED FINANCIAL STATEMENT GENERAL CIRCULAR NO.39/2014 [NO.4/2/2014-CL-I], DATED 14-10-2014

Q What is Subsidiary ?

Section 2(87) of the Act defines the term “subsidiary” as under :

(87)        “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:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—

(a)          a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b)          the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c)          the expression “company” includes any body corporate;

(d)          “layer” in relation to a holding company means its subsidiary or subsidiaries.

Explanation to section 129(3) provides that the term “subsidiary” shall include associate company and joint venture.

The term “associate company” is defined in section 2(6) of the 2013 Act. However, there is no definition of “joint venture”.

As definition of ‘subsidiary’ in section 129 of the 2013 Act is inclusive, definition of “subsidiary” in section 2(87) of the 2013 Act is also relevant.

The following aspects of definition in section 2(87) are important:

             It covers not only subsidiaries which are ‘Companies’ within the meaning of section 2(20) of the 2013 Act [i.e.companies registered under the 2013 Act or any previous company law] but also any body corporate.

             This implies that accounts of all subsidiaries which are bodies corporate will have to be consolidated. It does not matter whether the subsidiary is a ‘company’ as defined in section 2(20) or not.

             The subsidiary may even be a foreign company or LLP or any other body corporate – its accounts will have to be consolidated.

Q: What are the Objective of consolidated accounts (group accounts) ?

In Industrial Equity Ltd. v. Blackburn [1977] HCA 59/(1977) 137 CLR 567, the purpose of compulsory consolidation requirements were explained as under:

             The purpose of these requirements is to ensure that the members of, and persons dealing with, a holding company are provided with accurate information as to the profit or loss and the state of affairs of that company and its subsidiary companies within the group, information which would not be forthcoming if all the shareholders received was limited to the accounts of the holding company disclosing as assets the shares which it holds in its subsidiaries.

             It is for this purpose that the Companies Act treats the business group as one entity and requires that its financial results be incorporated in consolidated accounts to be circulated to shareholders and laid before a general meeting.

Q Where the Company is preparing group accounts for all its subsidiary , It is still required to prepare its own profit and loss account and balance sheet ?

In Industrial Equity Ltd. v. Blackburn [1977] HCA 59/(1977) 137 CLR 567 (at p. 578), it was held as under:

             It can scarcely be contended that the provisions of the Act requiring preparation of group accounts operate to deny the separate legal personality of each company in a group.

             The Companies Act does not, in the case of holding companies, substitute the requirement for group accounts for the old requirement of accounts of the holding company itself.

             Group accounts are an additional requirement.

             The holding company is still obliged to lay before its shareholders in general meeting its profit and loss account and balance sheets, containing the information prescribed by the statute and accompanied by the prescribed documents.

Q; Does the central Govt has to power to Exempt the companies from requirements of Section 129 ?

Section 129(6) of the 2013 Act provides that the power of the Central Government to exempt the company from the above requirements is as under:

             The Central Government may, by notification, exempt any class or classes of companies from complying with any of the above requirements or the rules made thereunder.

             The Central Government may do so on its own or on an application by any class or classes of companies.

             The Central Government may do so if it is considered necessary to grant such exemption in the public interest.

             Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.

Q : What happens if the company Contravenes any of the above provisions ? 

Section 129(7) of the 2013 Act provides that following shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000 or with both:

             the managing director,

             the whole-time director in charge of finance,

             the Chief Financial Officer,

             any other person charged by the Board with the duty of complying with the requirements, and

             in the absence of any of the officers mentioned above, all the directors.