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PREPARATION OF FINANCIAL STATEMENTS UNDER COMPANIES ACT 2013

PREPARATION OF FINANCIAL STATEMENTS UNDER COMPANIES ACT 2013. Companies Act -1956 Companies Act 2013. While discussing the new provisions under Companies Act 2013 regarding preparation of Financial statements, we will cover Books of accounts Depreciation Financial statements

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PREPARATION OF FINANCIAL STATEMENTS UNDER COMPANIES ACT 2013

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  1. PREPARATION OF FINANCIAL STATEMENTSUNDER COMPANIES ACT 2013 D.P. Shah – D. Shah & Associates

  2. Companies Act -1956 Companies Act 2013 D.P. Shah – D. Shah & Associates

  3. While discussing the new provisions under Companies Act 2013 regarding preparation of Financial statements, we will cover • Books of accounts • Depreciation • Financial statements • Consolidated Financial Statements • Directors Report D.P. Shah – D. Shah & Associates

  4. Key Provisions – Books of Accounts D.P. Shah – D. Shah & Associates

  5. Provisions relating to Accounts D.P. Shah – D. Shah & Associates

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  9. Changes: • Definition of ‘book and paper’ and ‘book or paper’ is modified, so as to include minutes and registers and all documents maintained in electronics form also form part of it. • Now `books of account’ are specifically defined. D.P. Shah – D. Shah & Associates

  10. Companies (Account) Rules 2014 inter alia, provides manner of keeping books of accounts in electronic mode. It reads as; • 3. Manner of books of account to be kept in electronic mode.- (1) The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference. • (2) The books of account and other relevant books and papers referred to in sub-rule (1) shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered. • (3) The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches. D.P. Shah – D. Shah & Associates

  11. (4) The information in the electronic record of the document shall be capable of being displayed in a legible form. (5) There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law: Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis. D.P. Shah – D. Shah & Associates

  12. (6) The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement- (a) the name of the service provider; (b) the internet protocol address of service provider; (c) the location of the service provider (wherever applicable); (d) where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider. Explanation.- For the purposes of this rule, the expression "electronic mode" includes “electronic form” as defined in clause (r) of sub-section (1) of section 2 of Information Technology Act, 2000 (21 of 2000) and also includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000) and “books of account ” shall have the meaning assigned to it under the Act. D.P. Shah – D. Shah & Associates

  13. Unlike The Companies Act 1956, now manner of maintenance of books of accounts under electronic mode have prescribed along with filling of the details of the service providers with its IP Address, Location of servers etc. • It is also provided that vouchers be maintained in legible form. • Audit committee or board is required to evolved a system for storage, retrieval and display of print out of electronic records and disposal there of. • In case of accounts being maintained in electronic mode out side India it is required that the back ups there of be kept in servers physically located in India. D.P. Shah – D. Shah & Associates

  14. If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both. • It may be interesting to note that in view of representations various Chamber of Commerce, Standing committee on finance had made following suggestion on the issue of penalty in case of default: • “The Committee are of the view that the Ministry may consider a less harsh position on the question of default not committed willfully with respect to books of accounts etc., to be kept by the company, particularly in the context to the existing position in law, which provides defenses for non-willful cases.” However the relief prescribed by the Standing Committee on Finance constituted by Parliament has not been addressed by MCA. D.P. Shah – D. Shah & Associates

  15. Companies Act 1956, did not permit inspection of books of accounts by any director of the company. • CA 2013 by Section 128 (3) provides that provides that books of accounts etc shall be open for inspection by any of the director of the company and under Rule 4 it provides the manner and conditions of inspection of books of accounts of company and its subsidiary. D.P. Shah – D. Shah & Associates

  16. Poser: It has been provided that a Director of the Company can inspect books of accounts of the company. Can a director nominate a professional for carrying out inspection of books of accounts on his behalf ? Can a director of holding company inspect books of accounts of subsidiary ? D.P. Shah – D. Shah & Associates

  17. Poser 3. Maintenance of books of accounts in electronic form has been permitted now in CA 2013, similar provision was not there in CA 1956. Most of the companies were maintaining accounts in SAP/ERP or Tally or such other software. Was it illegal to maintain accounts in electronic form under the regime of CA 1956 ? D.P. Shah – D. Shah & Associates

  18. Poser • 4. Section 116 (5) inter alia, provides that books of accounts together with vouchers be kept in good order for eight years or till the completion of inspection if any, which ever is later. • Now a days every company has a space problem. Whether maintaining vouchers in electronic form i.e. scanned copy, would be sufficient compliance ? D.P. Shah – D. Shah & Associates

  19. Financial Statement D.P. Shah – D. Shah & Associates

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  21. Changes • 1. Definition - now financial year can only be of April to March and only a company or body corporate, which Is a holding company or subsidiary company of a company incorporate outside India and is required to follow a different financial year for consolidation of its accounts out side India, may have different financial year subject to approval of tribunal. • 2. A transition period of 2 year has been prescribed for companies existing on the commencement of this Act to align their financial year to April-March. D.P. Shah – D. Shah & Associates

  22. The definition of Financial Statement is not provided under the Companies Act, 1956. • But the manner of keeping books of account is provided in section 209 of the Companies Act, 1956 D.P. Shah – D. Shah & Associates

  23. MEANING OF “FINANCIAL STATEMENT” [Sec. 2(40)] In relation to company, includes: a) Balance Sheet at the end of financial year. b) statement of Profit & Loss for the financial year c) Cash Flow statement (not mandatory for small companies, OPCs & Dormant companies) for the financial year. d) Statement of Changes in equity, if applicable e)Explanatory statement Note annexed to & forming part of Financial statements. D.P. Shah – D. Shah & Associates

  24. Changes • The Companies Act, 2013 provides that books of accounts may be kept in electronic form also. • Every Company shall now be required to prepare and keep financial statements, other relevant books, minutes and registers at its registered office. • The term Balance Sheet, Profit & Loss Account, has been define collectively as Financial Statement under the Act, cash flow statement and statement showing change in equity (if applicable) of the company also forms part of the same. D.P. Shah – D. Shah & Associates

  25. Small Company : • Small Company is not defined under the Companies act, 1956. • As per section 2(85) of the Companies Act, 2013, small company means a company, other than a public company- • Paid up share capital does not exceed Rs.50 lakh or such higher amount as may be prescribed which shall not be more than Rs. 5 crore or • Turn over as per its last statement of profit and loss does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 20 crore. D.P. Shah – D. Shah & Associates

  26. Small Company (Contd..) This clause shall not apply to – • A holding company or subsidiary company • A company registered under section 8 (formation for charitable objects) • A company or body corporate governed by any special Act. D.P. Shah – D. Shah & Associates

  27. Requirements of Financial Statement (Sec. 129) • The FS shall give a true and fair view and comply with the AS & shall be in the form as provided in Schedule III. • The FS shall be laid in the AGM within six months form the end of the financial year. • The holding company shall in addition, prepare a Consolidated Financial Statement of the Company along with its all subsidiaries, associates & joint ventures and lay before the AGM. D.P. Shah – D. Shah & Associates

  28. Consolidated Financial Statement (CFS) Neither the Companies Act, 1956 nor AS 21 requires the Companies to prepare Consolidated Accounts. At present, Clause 32 of the Listing Agreement mandates listed Companies to publish its Consolidated Accounts which is neither required to be laid before the AGM nor to be filed with ROC. D.P. Shah – D. Shah & Associates

  29. Under the Companies Act, 2013 where a company has one or more subsidiaries, it shall, in addition to financial statements, prepare consolidated financial statement of the company and laid before the annual general meeting of the company. • All subsidiaries, associates and joint ventures will be covered under CFS. • Company shall prepared the Consolidated Financial Statements according to Schedule III of the Companies Act, 2013 which is in line with revised schedule VI. • All Companies including unlisted and private companies, with subsidiaries will need to prepare CFS. D.P. Shah – D. Shah & Associates

  30. General Instructions for preparation of CFS • Where a company is required to prepare CFS, the company will mutatis mutandis follow the requirements of this Schedule. • Profit or Loss attributable to ‘minority interest’ and to owners of the parent in the statement of profit and loss shall be presented as allocation for the period. • A company will disclose the list of subsidiaries or associates or joint ventures, which have not been consolidated along with the reasons for non consolidation. D.P. Shah – D. Shah & Associates

  31. Re-opening of accounts on Court’s or Tribunal’s orders (Sec. 130) • Re opening of accounts is not provided under the Companies Act, 1956. • This new Section provides for provisions relating to re-opening or re-casting of the books of accounts of Company pursuant to order of Court or Tribunal on application made by CG, any Statutory Authority or any person concerned if it was found that earlier accounts were prepared in fraudulent manner or financial statements are not reliable due to mismanagement of affairs of the company. The accounts so revised or re-cast shall be final. D.P. Shah – D. Shah & Associates

  32. Voluntary revision of FS or Board’s report (Sec. 131) The directors to prepare revised financial statement or a revised Board’s report of any of the 3 preceding financial years only once in a FY, if it appears to them that they did not comply with the requirement of Section 129 or Section134 after obtaining approval of the Tribunal. Tribunal shall take into account the representations if any, of the CG and of the IT Department. Such revised financial statement or report shall be done in conformity with the rules as may be prescribed. D.P. Shah – D. Shah & Associates

  33. Form 9.2 provided in draft rules requires disclosure of effect of revision on – • Assets • Liabilities (including contingent liabilities) • Revenue • Profit/loss before taxes • Net profit after tax/loss • Earning per share • Dividend • Any other item (specify in detail) D.P. Shah – D. Shah & Associates

  34. The revised account along with board’s report there on is required to be approved by board and to be placed before the AGM along with report of the auditors there on. • However if the original financial statement was audited by different auditor, than, the revised financials shall accompanied by the consent letter from the auditor who reported upon the financial statements sought to be revised. • In case such auditor does not agree or the company is unable to procure the consent letter, reasons for such different opinion or inability to procure consents shall be explained. • Such revised financials are required to be filed with ROC and in case of listed company with stock exchange. D.P. Shah – D. Shah & Associates

  35. Constitution of National Financial Reporting Authority (Sec. 132) This Section provides that the CG may by notification constitute the NFRA • to advice on Accounting Standards (AS) & Auditing Standards(SA), • to monitor, enforce, compliance and overseeing the quality of service of associated professionals. Contd.. D.P. Shah – D. Shah & Associates

  36. Constitution of National Financial Reporting Authority (Sec. 132) The authority shall have power to investigate the matters of misconduct committed by any member of ICAI or any other prescribed profession and pass order which may be appealed to Appellate Authority to be constituted by CG. Qualifications, terms and conditions of appointment of the chairperson and members of the Appellate Authority have also been provided. D.P. Shah – D. Shah & Associates

  37. CG to prescribe AS (Sec. 133) This Section provides that the CG may, after consultation with NFRA, prescribe the Accounting Standards as recommended by the ICAI for adoption by companies. As per Rule 7 of Companies (Account) rules 2014, Accounting standards prescribed under Companies Act 1956 shall be deemed to be the accounting standards until accounting standards are notified under Section 133. D.P. Shah – D. Shah & Associates

  38. A. Following AS are applicable to all companies, without exception: • AS-1 Disclosure of Accounting Policies • AS-2 Valuation of Inventory • AS-4 Contingencies and Events occuring after Balance sheet date • AS-5 Net Profit or Loss for the period. Prior period items and changes in Accounting policies • AS-6 Depreciation Accounting D.P. Shah – D. Shah & Associates

  39. AS-7 Construction Contracts • AS-9 Revenue Recognition • AS-10 Accounting for Fixed Assets • AS-11 The effects of changes in Foreign exchange Rates • As-12 Accounting for Government grants • AS-13 Accounting for Investments • AS-14 Accounting for Amalgamations • As-16 Borrowing costs • AS-18 Related Party Transactions D.P. Shah – D. Shah & Associates

  40. As-22 Accounting for taxes on Income • As-24 Discontinuing operations • As-26 Intangible Assets D.P. Shah – D. Shah & Associates

  41. B. At present, following AS are applicable to companies only if, the preparation of consolidated FS/Interim FS are either mandatory or these companies voluntary chooses to do so. However, till the time IND AS are notified, companies required to prepare consolidated FS would have to follow; • AS- 21ConsolidatedFinancial Statements • As-23 Accounting for investments in Associates • AS-27 Financial Reporting of Interest in Joint Ventures • AS-25 Interim Financial Reporting D.P. Shah – D. Shah & Associates

  42. Following standards are not applicable to SMCs in its entirety: • AS-3 Cash Flow • AS-17 Segment Reporting • SMC as per Accounting Standard Rules 2006 are the companies: • a. Whose equity or debt securities are not listed on any stock exchange or are not in process of listing. • b. which is not a bank, financial institution or an insurance company. D.P. Shah – D. Shah & Associates

  43. c. Whose turnover excluding other income does not exceed Rs.50 Crore in immidiately preceding previous year. • d. which does not have borrowings including public deposits in excess of Rs.10 Crore • e. which is not a holding or subsidiary of a company which is not SMC D.P. Shah – D. Shah & Associates

  44. D. Following Standards are applicable to SMCs with certain exemptions D.P. Shah – D. Shah & Associates

  45. D. Following Standards are applicable to SMCs with certain exemptions D.P. Shah – D. Shah & Associates

  46. Though MCA has issued 35 Ind AS in February 2011 yet they are not notified. • Upon its’ Notification, companies would be required to follow Ind AS issued by MCA. D.P. Shah – D. Shah & Associates

  47. BOD shall approve FS (Sec. 134) This Section provides that the Financial Statements, including CFS should be approved by the BOD before they are signed and submitted to auditor. The Board’s Report & Auditor’s Report are to be attached with every FS before it is issued. D.P. Shah – D. Shah & Associates

  48. Board Report (Sec. 134) • Financial Statement shall be signed by at least the chairperson if authorized by board or by at least 2 directors one of whom shall be managing director and CEO if he is a director in the company and CFO and Company Secretary where ever they are appointed. In case of OPC only by one director. • Board report to contain following information:- • Extract of the Annual Return as prescribed under section 92 in Form MGT - 9 • No. of Board Meeting held. • Director’s Responsibility Statement. • Declaration by Independent Directors regarding their appointment • Co.s policy on Director’s appt. & remuneration if required to constitute Nomination and Remuneration Committee. D.P. Shah – D. Shah & Associates

  49. Explanation/Comments by the Board on every qualification, reservation or adverse remark or disclaimer made by Auditor in his Audit Report and Company Secretary in his Secretarial Audit Report • Particulars of loans, guarantees or investments under section 186. • Particulars of contracts or arrangements with related parties in Form AOC - 2 pursuant to Rule 8(2) • The state of the company’ s affairs. • The amounts, if any, which it propose to carry to any reserves. • The amount, if any, which it recommends should be paid by way of dividend. D.P. Shah – D. Shah & Associates

  50. Material changes & commitments affecting company’s financial position between previous year and current year & date of the report. • Statement indicating development and implementation of risk management policy • Details of policy developed and implemented on CSR applicable to companies having net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit of Rs. 5 crore or more during the financial year. • For listed companies & prescribed companies , a statement of manner of annual evaluation of its own performance, its committees and individual directors. D.P. Shah – D. Shah & Associates

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