The Companies Act 2013 (hereinafter referred to as the “Act”)has replaced the Companies Act 1956. The Act is a comprehensive landmark legislation that governs all the aspects of all listed and unlisted companies in India. Some of the noteworthy features that the act provides for are as democracy and supremacy of shareholders; strengthening women participation at the directorial level;prescribes for mandatory corporate social responsibility; establishes the National Company Law Tribunal; allows fast track and cross border mergers; prohibits forward dealing and insider trading; provides for one person companies, e-governance, independent directors; defines the duties and liabilities of directors and key officers; provides for the rotation of auditors and rehabilitation and liquidation process of the companies.
Amidst the comprehensive, exhaustive provisions of the Companies Act 2013, this article focuses on the ten important requirements under the provisions of the act with regards to completing financial statements.
The discussion below will cover the concepts of books of accounts, depreciation, financial statements, consolidated financial statements and director’s report under the Companies Act 2013.
Before dwelling into the above-mentioned areas of discussion, it is important to understand that, the above-mentioned areas of discussion are covered by Chapter IX & X and Schedule II & III of the Companies Act 2013.
Further, it is also important to understand some key concepts.
In relation to a company, “financial statement” means the collective records of the Balance Sheet, statement of Profit and Loss, Cash Flow Statement, Statement of Changes in Equity (if applicable) and an Explanatory Notes annexed to the Financial Statements. The statements have to be prepared at the end of the financial year and may be kept in electronic form provided they are complete and unaltered. Further, all such statements and books have to be preserved at the companies registered office or any other place that the Board of Directors may decide.
(It is important to note that, cash flow statements are not mandatory for small companies, one person companies and dormant companies).
The Financial Statements shall abide with the accounting standards and be in the form as prescribed in Schedule III and shall give a true and fair view of the financial condition of the company. The financial statements shall be disclosed in the annual general meeting.
In case of a holding company, it shall additionally prepare a Consolidated Financial Statement of the Company along with that of its subsidiaries, associates and joint ventures and disclose it at the annual general meeting. The consolidated financial statements have to be prepared in accordance with Schedule III of the Companies Act 2013 which is in line with the revised Schedule IV.
A company is required to attach with its Financial Statements, a separate form AOC-1 in order to file it with the Registrar of Companies.
The financial statements including the consolidated financial statement has to be approved and signed as prescribed, by the Board of Directors. It can be signed either by the authorized chairperson of the Board or by at least 2 directors and the appointed company secretary. The Board’s Report and Auditor’s Report are to be attached with the Financial Statement before it is issued.
The Companies Act 2013 provides for the re-opening or re-casting of the books of accounts pursuant to an order of the Court or Tribunal on an application made by the Central Government, Statutory Authority or any person concerned if, it was found that the earlier accounts were prepared in a fraudulent manner due to the mismanagement of the affairs of the company.
Further, if it appears that the financial statements or board reports are not in compliance with the provisions of this Act, the Company may revise such statement or report with the approval of the Tribunal. Such revised or re-casted reports or statements shall be final.
The Board may pass a resolution to revise the financial statements or books of accounts if, they believe that the statements do not comply with the requirements of Section 129 or Section 134. Such revision can be done for any of the 3 preceding financial years, only after obtaining prior approval of the Tribunal.
The reason for the revision along with the revised statements have to be filed in the Board Report and needs the approval of the board at the annual general meeting. It requires an auditor’s report as well. In the event there is a different auditor, then the revised financial statements have to be accompanied by a consent letter from the auditor who’s work sought to be revised.
Such revised financial reports have to be filed with the Registrar of Companies along with a copy, if any, of the Tribunal.
The Companies Act 2013 provides that, the Central Government may, by notification, constitute the National Financial Reporting Authority with the predominant objective of advising on Accounting Standards (AS) and Auditing Standards (SA) and to monitor, enforce, and oversee the compliance and quality of service of associated professionals.
The National Financial Reporting Authority shall have the power to investigate companies or professionals in the matters of misconduct, order discovery production of books of accounts, summon or enforce attendance, order inspection of books, registers and documents, pass orders. The decisions of the National Financial Reporting Authority are appealable to the Appellate Authority.
The Central Government may, after consultations with the National Financial Reporting Authority, may prescribe the Accounting Standards to be adopted by the companies in completion of their financial statements.
The following Accounting Standards (AS) are applicable to all companies. The AS-1 for disclosure of accounting policies; the AS-2 for valuation of inventory; the AS-3 for cash flow; the AS-4 for contingencies and events occurring after balance sheet date; AS-5 for net profit or loss for the period; AS-6 for depreciation; the AS-7 for construction contracts; the AS-9 for revenue recognition; the AS-10 for accounting of fixed assets; the AS-11 for the effects of change in forex rates; the AS-12 for government grants; the AS-13 for investments; the AS-14 for amalgamations; the AS-16 for borrowing costs; the AS-17 for segment reporting; the AS-18 for related party transactions; the AS-22 for income taxes; the AS-24 for discontinuing operations and the AS-26 for intangible assets.
In case a company has to prepare consolidated financial statements, the following accounting standards would have to be followed; the AS-21 for consolidated financial statements, the AS-23 for investment in associate companies; the AS-27 for reporting of interest in joint ventures and the AS-25 for interim financial reporting.
The Board Report shall contain the extract of the Annual Return (MGT-9) as prescribed, the number of board meetings held, the directors responsibility statement, a declaration by Independent Directors regarding their appointment, the company’s policy on the Directors Appointment and Remuneration, explanations by the Board with regard to every reservation or adverse remark made by the Auditor in his Report or the Company Secretary in his Report, particulars of loans and guarantees under section 186, particulars of related party transactions (AOC-2), the state of company’s affairs, statement of material changes affecting the company’s financial position, state with regard to developing and implementing risk management policy and corporate social responsibility policy.
The Directors Responsibility Statement shall contain the details of the accounting standards followed with explanations for material departures, prudent judgments made as to give a true and fair view of the state of affairs of the company, measures taken to maintain adequate accounting records and safeguard assets, and measures taken to ensure compliance with all applicable laws.
All members have the rights to receive the copies of financial statements and every report required to annexed with the financial statements at least 21 days before the date of the annual general meeting.
The financial statements along with prescribed reports have to be filed with the Registrar of Companies within 30 days of the Annual General Meeting.
Find sample Annual Report here.
The Companies Act 2013 requires companies to e-file the following documents annually with the Registrar of Companies.
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