FINANCIAL STATEMENTS OF A COMPANY

Introduction

Company: A company is an artificial person with a separate legal entity, perpetual succession,
and a common seal. However, a company is similar to a natural person in many respects. Just
like natural persons, these juristic persons, too, have parents (promoters), birth (registration
with appropriate authority), rights and duties, and death (winding up). In India, companies are
governed by the Companies Act, of 2013 (hereinafter referred to as “The Act”).

Section 2(20) of the Companies Act, 2013 defines a company as, “A company incorporated
under this Act or any previous company law.”
Previous company legislations of India include the Companies Act of 1956, the Companies
Act of 1936, the Joint Stock Company Act of 1850, etc.

The Companies Act is applicable to insurance companies, banking companies, companies

engaged in the generation and supply of electricity, companies governed by a special Act of
the Parliament or the State Legislature and to any other body corporate that the Central
Government may, via notification, specify.

Characteristics of a company
 A company has a corporate personality or an artificial personality. This means that it
has an existence separate from its members.
 The members of a company have limited liability. This is one of the primary
advantages of carrying out business as a corporate. The members are not personally
liable for the losses and liabilities of the company.
 A company has perpetual succession. This means that it can carry out business even
after the death of one or more members. A popular saying in respect of this is “For
men may come and men may go but the company exists”
 It is an artificial person created by law. It is not a human but it acts through humans. It
can enter into contracts and sue and be sued in its own name.
 A company, though a legal person, is not a citizen of the country. However, it does
have a nationality and residence.
 A company, being a legal person, can acquire, sell, lease and mortgage property in its
own name.
 A company can sue and be sued.
 A company can enter into contracts.

Financials of a company
Every company incorporated under the Companies Act, 2013 or any previous company
law is required to prepare the financial statements of the company that reflect its profits or
losses and its financial health.
The definition of Financial Statements is given in Section 2(40) of the Act. According to
the definition, financial statements include:
 The Statement of Profit and Loss
 The Balance Sheet
  The Cash Flow Statement
 A statement of changes in equity (if applicable)
 Any explanatory note annexed to, or forming part of, any document referred to
sub-clause (i) to sub-clause (iv)

The financials of a company are prepared in accordance to the provisions of the

Companies Act read with the Accounting Standards of 2014 or the Indian Accounting
Standards of 2015.

Books of Accounts to be kept by the Company

Section 128 of the Act requires that every company registered under this Act or any
previous Companies Act shall keep the books of accounts in the prescribed format.

Section 128(1) states 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 which give a true and fair view of the state of the affairs of the company. If
the company has any other branches or offices, the books and relevant papers for same
have to be kept at the registered office as well as the branch offices.
The books have to be maintained on an accrual basis in double entry system.

The proviso to section 128 allows the books and other relevant documents to be kept at
any other place as the Board of Directors may decide. However, such address has to be
intimated to the Registrar within seven days.
If the company has branches outside India, the statements of such office shall also be
maintained at the registered office in the same manner.
Section 128(3) states that the books and other relevant documents of the company can be
inspected at any time during the normal business hours of the company in the registered
office.
Further, Section 128(5) provides that the books of accounts and all relevant documents
for 8 years preceding the current financial year have to be kept in good order in the
registered office of the company.

Section 129 states that the books of accounts of the company shall give a true and fair
view of the state of affairs of the company and that the books shall be maintained in
accordance with the Accounting Standards provided under section 133 and in the form(s)
given under Schedule III of the Act.
Section 129 also states certain exceptions in which the financial statements of certain
classes of companies do not have to disclose certain items and that such non-disclosure
shall not be treated as non-compliance with the Act.
Section 129(2) mandates that the Board of Directors of the company have to lay the
financial statements of that financial year in the Annual General Meeting.

Section 129(3) mandates that in case a company has one or more subsidiaries, the holding
company is required to prepare a consolidated financial statement for all the subsidiaries
in the prescribed format.
Section 133 provides that the Central government has the authority to prescribe the
Accounting Standards or any addendum thereto as recommended by the Institute of
Chartered Accountants of India (ICAI) in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.

Signature of Financial Statements: Board’s report, approval

Section 134 of the Act outlines the rules in relation to the financial statements and the
report by the Board.

Section 134(1) mandates that the financial statement, including the consolidated financial
statement (if applicable), must be approved by the Board of Directors. It should then be
signed on behalf of the Board by either the chairperson (if authorized by the Board) or by
two directors, one of whom must be the managing director and the Chief Executive
Officer (if they are a director in the company).
Additionally, the Chief Financial Officer and the company secretary (wherever they are
appointed) should also sign the statement. In the case of a One Person Company, only one
director needs to sign the statement. The approved statement is then submitted to the
auditor for their report.

Section 134(2) requires that the auditor’s report prepared as per Section 139 of the Act
has to be attached to the financial statements of the company.

Section 134(3) requires a report to be given by the Board of Directors in regard to the
financial statements of the company. Such report shall contain-
 The annual return of the company as published as per Section 92.
 The number of meetings of the Board
 Directors’ Responsibility Statement
 Details of frauds reported by the auditors of the company as per Section 143
 A statement on declaration given by independent directors under sub-section (6)
of section 149
 In case of a company covered under sub-section (1) of section 178, company’s
policy on directors’ appointment and remuneration including criteria for
determining qualifications, positive attributes, independence of a director and
other matters provided under sub-section (3) of section 178
 The explanations for every qualification, reservation or adverse remark made by
the auditor in his report or by the Company Secretary in practice in his Secretarial
Audit Report.
 The particulars of loans, investments etc and contracts and arrangements as per
Section 186 and Section 188 respectively
 The state of affairs of the company
 The amounts that the company proposes to carry to reserves and to pay by way of
dividends
 Any and all material changes and commitments that have happened between the
end of the financial year and the date of report that have affected that financial
position of the company.
  The conservation of energy, technology absorption, foreign exchange earnings and
outgo in the prescribed form
 A statement regarding the development and implementation of the risk
management policy of the company and the elements of risk that could affect the
existence of the company.
 The Corporate Social Responsibility Policy of the company and the initiatives
taken in the financial year for the same.
 In case of a listed company and every other public company having such paid-up
share capital as may be prescribed, a statement indicating the manner in which
formal annual evaluation has been made by the Board of its own performance and
that of its committees and individual directors.
 Any other matters that may be prescribed by the central Government.

Section 134(6) states that the Board’s report and any annexures thereto have to be signed by
the chairperson of the company if he is authorised to do so. In case he is not, the report has to
be signed by at least 2 directors one of whom has to be a Managing Director.

Section 134(7) requires that a signed copy of every financial statement including the
consolidated financial statement has to be issued or published along with the notes annexed to
the statements, the auditor’s report and the report of the Board.

Section 134(8) prescribes the penalties for non-compliance of these provisions. The company
shall be punishable with fine which shall not be less than fifty thousand rupees but which
may extend to twenty-five lakh rupees and every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to three years or with
fine which shall not be less than fifty thousand rupees but which may extend to five lakh
rupees, or with both.

Company’s fine: 50,000 to 25 lakhs

Every officer- 50,000 to 5 lakhs or up to 3 years of imprisonment or both

Case Law
Hari Sankaran vs. Union of India and Ors.
The Supreme Court of India inter-alia observed that the Tribunal may, under Section 130 of
the Act, pass an order of re-opening of accounts if it is of opinion that (i) the relevant earlier
accounts were prepared in a fraudulent manner; or (ii)the affairs of the company were
mismanaged during the relevant period casting a doubt on the reliability of the financial
statements. Thus, the Tribunal would be justified in passing the order under Section 130 of
the Act upon fulfilment of either of the said two conditions.

In view of the above referred legal position in addition to the reports of SFIO & ICAI, the
specific observations made by the learned Tribunal while passing the order under Section
241/242 of the Companies Act and considering the fact that the Central Government has
entrusted the investigation of the affairs of the company to SFIO in exercise of powers under
Section 242 of the Companies Act, the Apex Court observed that it cannot be said that the
conditions precedent while invoking the powers under Section 130 of the Act are not
satisfied.

The Supreme Court of India upheld the order passed by NCLAT under Section 130 of the
Companies Act for re- opening of the books of accounts and re-casting the financial
statements of the Infrastructure Leasing & Financial Services Limited; IL&FS Financial
Services Limited and IL&FS Transportation Networks Limited for the last five years, viz.
from Financial Year 2012-13 to the Financial Year 2017-18 in larger public interest.
Thus, it was held that the NCLAT’s order to reopen books was valid.

Audit of financial statements

The Companies Act mandates that an audit has to be conducted for the financial statements