FINANCIAL

REPORTING
Under Companies Act, 2013

CHARAK RAY

libra.charak@gmail.
CONTENTS
BACKGROUND

Companies
Act, 2013

Act contains 470 Sections, 29 Chapters, 7 schedules

MCA has notified 282 Sections till date

BACKGROUND…

The Changed Approach:

Shift from Shareholders Protection to stakeholders protection

Corporate Governance /Investor Protection is Mantra
Widened disclosure requirements
Stricter penalties and Prosecution
Liability of Directors / Professionals increased
Increased coverage of the Act
BACKGROUND…
New Concepts

 Introduction of One Person Company & Small Company

 Internal Audit & Secretarial audit
 New Regulators (NFRA, SFIO, NCLT)
 New Committees - Nomination and Remuneration Committee
and Stakeholders Relationship Committee, Vigil Mechanism
 New definition for Associate company, Control, Small company,
Key managerial personnel, Related party, etc.
NATIONAL FINANCIAL REPORTING
AUTHORITY
NATIONAL FINANCIAL REPORTING
AUTHORITY
 NFRA to be constituted by Central Government (CG) to provide for dealing with matters
relating to accounting and auditing policies and standards to be followed by companies and
their auditors.
 The Chairperson and full time members of NFRA shall not be associated with any audit
firm (including related consultancy firms) during the course of their appointment and 2
years thereafter.
 Functions of NFRA are as below:
 Make recommendations to CG on the formulation of accounting and auditing policies
and standards
 Monitor and enforce compliance with accounting and auditing standards
 Oversee the quality of service of the professions and suggest measures required for
improvement in quality of services and such other related matters as may be prescribed;
 Perform other prescribed functions in relation to above as may be prescribed.
NATIONAL FINANCIAL REPORTING
AUTHORITY…
 Powers of NFRA include:
 Investigate into the matters of professional or other misconduct committed by member or firm of
CA.
 Powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit.
 Where professional or other misconduct is proved, NFRA has the power to make order for
imposing monetary penalty or debarring the member or the firm from engaging himself or itself
from practice as member of the institute for a minimum period of 6 months or for such higher
period not exceeding 10 years.
 Any person aggrieved by the order of NFRA can prefer an appeal to NFRAA.
 Function of NFRA – Standard Setting, Monitoring, Compliance Review and Overseeing
Quality of Service, Enforcement and Investigation
 It has he power to investigate, suo moto or on reference made by Central Government in
matters of professional or other misconduct by CA or firm. No other institute or body
shall initiate or continue any proceedings in matters where NFRA has initiated an
investigation and vise versa ( see para 81 of 13th Report of Standing Committee of 16 th
Lok Sabha.)
NATIONAL FINANCIAL REPORTING
AUTHORITY…
• For monitoring compliance with Accounting Standards by Companies, the
Committee on Accounting Standards shall conduct scrutiny of financial statements of
such class of companies and in such manner as may be decided by the Committee or
the Authority.
• For monitoring compliance with Auditing Standards, the Committee on Auditing
Standards shall monitor the compliance of auditors including individual auditors,
audit firms and audit LLPs, with the notified accounting standards and auditing
standards and submit such periodical report(s) to the Authority as the Authority may
specify.
• Class of companies covered for investigation and quality review of audit
• Listed Companies
• Unlisted companies with net worth not less than ` 500 crores or paid up capital not
less than `500 crores or annual turnover not less than ` 1,000 crores as on 31st
March of immediately preceding financial year or
• Companies having securities listed outside India
NATIONAL FINANCIAL REPORTING
AUTHORITY…
• Auditors to be covered under investigation by NFRA
• Auditors or audit firms which conduct the audit of the following category
of companies or their branches (including through the network or brand to
which it belongs), whether “directly or indirectly”, as defined in
Explanation to Sec. 144 of the Act -
a) audit of 200 companies or more in a year
b) audit of 20 or more listed companies
c) company or companies (including listed company or companies), having
net worth not less than ` 500 crores or paid up capital not less than `
500 crores or annual turnover not less than ` 1,000 crores as on 31st
March of immediately preceding financial year or
d) company or companies having securities listed outside India
NATIONAL FINANCIAL REPORTING
AUTHORITY…

 Act replaces NACAS with NFRA

 Legal sanctity for Auditing Standards
 Judicial powers to ensure independent oversight over CA’s
 NFRA can take action against those working in Companies as well as
Auditors
KEY
DEFINITIONS
KEY DEFINITIONS
“Financial Statement” in relation to a company, includes—
(i) a balance sheet as at the end of the financial year
(ii) a profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the financial
year
(iii) cash flow statement for the financial year
(iv) a statement of changes in equity, if applicable and
(v) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company,
small company and dormant company, may not include the cash flow
statement; Sec. 2(40)
KEY DEFINITIONS… Sec. 2(41)

“Financial Year”, in relation to any company or body corporate, means the period
ending on the 31st day of March every year, and where it has been incorporated on or
after the 1st day of January of a year, the period ending on the 31st day of March of the
following year, in respect whereof financial statement of the company or body
corporate is made up:
Provided that on an application made by a company or body corporate, which is a
holding company or a subsidiary of a company incorporated outside India and is
required to follow a different financial year for consolidation of its accounts outside
India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether
or not that period is a year:
Provided further that a company or body corporate, existing on the commencement of
this Act, shall, within a period of two years from such commencement, align its
financial year as per the provisions of this clause

As this provision is effective from April 1, 2014, companies shall align their financial years
as per this provision within April 1, 2016.
The exemption has not been provided for an associate or joint venture.
 KEY DEFINITIONS… Sec. 2(43)

“Free Reserves” means such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether
shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair value, shall
not be treated as free reserves.
Key Points
Definition excludes securities premium
Instances of provisions where the definition of free reserves is referred:
• Sec.63 for Issue of Bonus Shares.
• Sec.68 for purchase of its own shares or specified securities by companies.
• Sec.123 for declaration of dividend..
• Sec.180(1)(c) restriction on powers of the Board.
• Sec.186 Loans and investment by a company.
 KEY DEFINITIONS… Sec. 2(57)

“Net Worth” means the aggregate value of the paid-up share capital and all
reserves created out of the profits and securities premium account, after
deducting the aggregate value of the accumulated losses, deferred expenditure
and miscellaneous expenditure not written off, as per the audited balance sheet,
but does not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation.
Instances of provisions where the definition of net worth is referred:
Sec.76(1) relating to Acceptance of deposits by Companies, for determination
of eligible company.
Sec.135 determining criteria for Corporate Social Responsibility
Sec.148 where the Central Government shall specify audit of items of cost in
respect of certain Companies.
Limits for the purposes of approval by Special resolution – Related Party
transactions
 KEY DEFINITIONS… Sec. 2(76)

Related party with reference to a company means:

Director or his relative & KMP or his relative
a firm, in which a director, manager or his relative is a partner
private company in which a director/manager/his relative is a member/ director
public company in which a director or manager is a director and holds along with his relatives,
more than 2% of its paid-up share capital
any body corporate whose Board of Directors, managing director or manager is accustomed to
act in accordance with the advice, directions or instructions of a director or manager (excluding
advice given in professional capacity)
any person on whose advice, directions or instructions a director or manager is accustomed to
act (excluding advice given in professional capacity)
any company which is—
 a holding, subsidiary or an associate company of such company or
 a subsidiary of a holding company to which it is also a subsidiary
• a director other than an independent director or KMP of the holding company or his relative
with reference to a company, shall be deemed to be a related party.
HOLDING
&
SUBSIDIARY
COMPANIES
 HOLDING & SUBSIDIARY COMPANIES

“Holding company”, in relation to one or more other companies, means a

company of which such companies are subsidiary companies (Sec. 2(46)
A Company shall make investments through not more than two layers of
investment companies. (Sec.186 (1))
The provisions of this section shall not effect the following:
 a company from acquiring any other company incorporated in a country
outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country
 a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force
 HOLDING & SUBSIDIARY COMPANIES…
Subsidiary Company Sec. 2(87)

“Subsidiary Company” or “Subsidiary”, in relation to any other company

(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. (This proviso is not notified)
As per the Companies (Specification of definitions details) Rules, 2014,
Total share capital = paid up equity share capital + convertible preference share
capital.
 HOLDING & SUBSIDIARY COMPANIES…
Subsidiary Company… Sec. 2(87)

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 above 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
HOLDING & SUBSIDIARY COMPANIES…
As per Sec 2(27) of the Act, “control”
“shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting
agreements or in any other manner.”
As per AS-21, Control is defined as:
(a) the ownership, directly or indirectly through subsidiary(ies), of more than
one-half of the voting power of an enterprise or
(b) control of the composition of the board of directors in the case of a
company or of the composition of the corresponding governing body in case of
any other enterprise so as to obtain economic benefits from its activities.
BOOKS OF
ACCOUNTS
BOOKS OF ACCOUNTS.. Sec. 128

• 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.
• Such books shall be kept on accrual basis and according to the double entry
system of accounting
• All or any of the books of account aforesaid and other relevant papers may
be kept at such other place in India as the Board of Directors may decide and
where such a decision is taken, the company shall, within 7 days thereof, file
with the Registrar a notice in writing giving the full address of that other
place
• Company may keep such books of account or other relevant papers in
electronic mode in such manner as may be prescribed.
 BOOKS OF ACCOUNTS..Rule 3 of Companies (Accounts) Rules, 2014
 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.
 The books of account and other relevant books and papers 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.
 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.
 The information in the electronic record of the document shall be capable of
being displayed in a legible form.
 BOOKS OF ACCOUNTS..Rule 3 of Companies (Accounts) Rules, 2014
• 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.
• 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.
• The company shall intimate to the Registrar on an annual basis at the time of filing
of financial statement-
• the name of the service provider
• the internet protocol address of service provider
• the location of the service provider (wherever applicable)
• where the books of account and other books and papers are maintained on cloud, such
address as provided by the service provider.
 BOOKS OF ACCOUNTS… Sec. 128

• If a company has a branch office in India or outside India proper books of

account relating to the transactions effected at the branch office shall be kept
at that office and proper summarised returns shall be periodically sent by the
branch office to the company at its registered office.
• The books of account and other books and papers maintained by the company
within India shall be open for inspection at the registered office of the
company or at such other place in India by any director during business
hours, and in the case of financial information, if any, maintained outside the
country, copies of such financial information shall be maintained and
produced for inspection by any director subject to such conditions as may be
prescribed.
• Inspection in respect of any subsidiary of the company shall be done only by
the person authorised in this behalf by a resolution of the Board of Directors.
 BOOKS OF ACCOUNTS… Sec. 128

• The books of account of every company relating to a period of not less than 8
FY’s immediately preceding a FY, or where the company had been in
existence for a period less than 8 years, in respect of all the preceding years
together with the vouchers relevant to any entry in such books of account
shall be kept in good order.
• If the MD, the WTD in charge of finance, the CFO 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 MD, WTD in
charge of finance, CFO 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 ` 50,000 but which may extend to ` 5
lakh or with both.
ACCOUNTING
STANDARDS
 ACCOUNTING STANDARDS Sec. 133

 The Central Government may prescribe the standards of accounting or any

addendum thereto, as recommended by the ICAI, constituted under section 3 of
the Chartered Accountants Act, 1949, in consultation with and after examination
of the recommendations made by the NFRA.
Transitional provisions with respect to Accounting Standards (Rule 7 of
Companies (Accounts) Rules, 2014-
 The standards of accounting as specified under the Companies Act, 1956 shall
be deemed to be the accounting standards until accounting standards are
specified by the Central Government under section 133.
 Till the NFRA is constituted under section 132 of the Act, the Central
Government may prescribe the standards of accounting or any addendum
thereto, as recommended by the ICAI in consultation with and after examination
of the recommendations made by the National Advisory Committee on
Accounting Standards constituted under section 210A of the Companies Act,
1956.
FINANCIAL STATEMENTS
 FINANCIAL STATEMENTS Sec. 129

• The financial statements shall give a true and fair view of the state of affairs
of the company or companies, comply with the accounting standards notified
under section 133 and shall be in the form or forms as may be provided for
different class or classes of companies in Schedule III.
• The items contained in such financial statements shall be in accordance with
the accounting standards.
• These 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:
 FINANCIAL STATEMENTS… Sec. 129

 At every AGM of a company, the Board of Directors of the company shall lay
before such meeting financial statements for the financial year.
 Where a company has one or more subsidiaries, it shall, in addition to
standalone financial statements prepare a consolidated financial statement
(CFS) of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the AGM of the
company along with the laying of its financial statement.
 Subsidiary shall include associate company and joint venture.
 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 Form AOC I (Rule 5 of Companies (Accounts)
Rules, 2014)
FINANCIAL STATEMENTS…
 As per the proviso to Sec. 129(3), the Central Government may provide for
the consolidation of accounts of companies in such manner as may be
prescribed.
 As per Rule 6 of Companies (Accounts) Rules, 2014 Manner of
consolidation of accounts.-
 The CFS of the company shall be made in accordance with the provisions
of Schedule III of the Act and the applicable accounting standards.
 In case of a company covered under Sec. 129(3) which is not required to
prepare CFS under the Accounting Standards, it shall be sufficient if the
company complies with provisions on CFS provided in Schedule III of
the Act. As per Companies (Meetings of Board and its Powers)
Second Amendment Rules, 2014 consideration of financial statements,
including CFS, if any, shall not be dealt with in a meeting held through
video conferencing.
 FINANCIAL STATEMENTS… Sec. 129

• 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 CFS.
• Where the financial statements of a company do not comply with the
accounting standards, 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.
• 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 thereunder, 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
 FINANCIAL STATEMENTS… Sec. 129

 If a company contravenes the provisions of this section, the MD the WTD in

charge of finance, the CFO or any other person charged by the Board with the
duty of complying with the requirements of this section and in the absence of
any of the officers mentioned above, all the directors shall be punishable with
imprisonment for a term which may extend to one year or with fine which
shall not be less than ` 50,000 but which may extend to ` 5 lakhs, or with
both.
 FINANCIAL STATEMENTS…
Consolidated Financial Statements – Key Points
Companies having one or more subsidiaries, shall also prepare CFS and the same shall
be laid before the AGM of the Company along with standalone financial statements.
A separate statement containing salient features of the financial statement of
subsidiaries to be attached to the holding company’s financial statements. – Form
AOC - I
‘Subsidiary’ includes ‘associate company’ and ‘joint venture’.

Associate means a company other than a subsidiary company and joint venture
company, in which the other company has a significant influence.
Significant influence means control of at least 20% of total share capital or of business
decisions under an agreement.
In case of a company covered u/s 129(3), which is not required to prepare CFS under
the Accounting Standards, it shall be sufficient if the company complies with
provisions on CFS provided in Schedule III of the Act.
 FINANCIAL STATEMENTS…
Form AOC-I
Part A – Subsidiaries
Information in respect of each subsidiary to be presented with amounts in `

1. Sl. No. 7. Total assets

8. Total Liabilities
2. Name of the subsidiary
9. Investments
3. Reporting period for the subsidiary concerned, if 10. Turnover
different from holding company’s reporting period 11. Profit before taxation
4. Reporting currency and Exchange rate as on the 12. Provision for taxation
last date of the relevant Financial year in the case of 13. Profit after taxation
foreign subsidiaries. 14. Proposed Dividend
15. % of shareholding
5. Share capital
6. Reserves & surplus
1. Names of subsidiaries which are yet to commence operations
2. Names of subsidiaries which have been liquidated or sold during the year.
 FINANCIAL STATEMENTS…
Form AOC-I
Part B – Associates and Joint Ventures
Name of Associates/Joint Ventures Name 1 Name 2
1. Latest audited Balance Sheet Date
2. Shares of Associate/Joint Ventures held by the company on the year end

No.
Amount of Investment in Associates/ Joint Venture
Extend of Holding %
3. Description of how there is significant influence
4. Reason why the associate/joint venture is not consolidated
5. Net worth attributable to Shareholding as per latest audited Balance Sheet

6. Profit / Loss for the year

i. Considered in Consolidation
ii. Not Considered in Consolidation

1. Names of associates or joint ventures which are yet to commence operations

2. Names of associates or joint ventures which have been liquidated or sold during the year.
 FINANCIAL STATEMENT - SIGNING
Sec. 134(1)

 The financial statement, including CFS, if any, shall be approved by the

Board of Directors before they are signed on behalf of the Board at least by
 the chairperson of the company where he is authorised by the Board or
 by two directors out of which one shall be managing director and
 the Chief Executive Officer, if he is a director in the company,
 the Chief Financial Officer, &
 the Company Secretary of the company,

wherever they are appointed, or in the case of a One Person Company, only by
one director, for submission to the auditor for his report thereon.
 The auditors’ report shall be attached to every financial statement.
FINANCIAL STATEMENT – CIRCULATION OF
ACCOUNTS
 A listed company shall also place its financial statements including CFS, if any, and all
other documents required to be attached thereto, on its website.
As per the Rule 11, of Companies (Accounts) Rules, 2014, Manner of circulation of
financial statements in certain cases.-
 In case of all listed companies and such public companies which have a net worth of
more than ` 1 crore and turnover of more than ` 10 crore rupees, the financial
statements may be sent
 by electronic mode to such members whose shareholding is in dematerialised
format and whose email Ids are registered with Depository for communication
purposes;
 where Shareholding is held otherwise than by dematerialised format, to such
members who have positively consented in writing for receiving by electronic
mode; and
 by dispatch of physical copies through any recognised mode of delivery as
specified under section 20 of the Act, in all other cases.
FINANCIAL STATEMENT – COPY TO BE FILED
Sec. 137
Copy of Financial Statement to be Filed with Registrar
A copy of the financial statements, including CFS, if any, along with all the
documents which are required to be or attached to such financial statements
under this Act, duly adopted at the AGM of the company, shall be filed with the
Registrar within 30 days of the date of AGM in Form AOC-4 - Rule 12(1).
Where the financial statements are not adopted at the AGM or adjourned
AGM, such unadopted financial statements along with the required documents
shall be filed with the Registrar within 30 days of the date of AGM and the
Registrar shall take them in his records as provisional till the financial
statements are filed with him after their adoption in the adjourned AGM for that
purpose.
The financial statements adopted in the adjourned AGM shall be filed with the
Registrar within 30 days of the date of such adjourned AGM.
FINANCIAL STATEMENT - COPY TO BE FILED…
Sec. 137

Copy of Financial Statement to be Filed with Registrar…

Along with its financial statements to be filed with the Registrar, attach the
accounts of its subsidiary or subsidiaries which have been incorporated outside
India and which have not established their place of business in India.
Where the AGM of a company for any year has not been held, the financial
statements along with the documents required to be attached, duly signed along
with the statement of facts and reasons for not holding the AGM shall be filed
with the Registrar within 30 days of the last date before which the AGM should
have been held.
REVISION OF
FINANCIAL
STATEMENTS
REVISION OF FINANCIAL STATEMENTS
Mandatory reopening or recasting (Sec.130)
A Company can reopen its books of accounts and recast its financial
statements if:
• The relevant accounts were prepared in fraudulent manner or
• Affairs of the Company were mismanaged during the relevant period
casting a doubt on the reliability of the financial statements
On an application by Central Government, IT authorities, SEBI or any
regulatory body and an order being made by Court or Tribunal.

Voluntary Revision (Sec.131)

The Company may, if it appears to the directors that the Financial Statements
or Board’s Report are not in compliance with the provisions of the Act, may
prepare revised financial statement or a revised Board’s Report with the
approval of Tribunal.
Not Notified
REVISION OF FINANCIAL STATEMENTS…
Key Points
Revision / Reopening of financial statements for a period earlier than
immediately preceding financial year may impact financial statements for
subsequent years also.
Presently, as per circular issued by SEBI in August 2012, SEBI is empowered
to require revision of financial statements, if the audit report is qualified.
Complications may arise when revision/ reopening pertains to companies
which have already amalgamated / amalgamation is pending Court’s approval.
Detailed process for revision, including involvement of current and previous
auditors , may lead to frivolous litigations.
May require current auditor to re-audit entire financial statements for one or
more previous periods.
Revision / reopening might have an impact on taxation as well.
 Framework for
the Preparation
and Presentation
of Financial
Statements
 Framework for the Preparation and Presentation of Financial
Statements

The Framework is the conceptual framework upon which the Ind AS are based and
determine how financial statements are prepared and the information they contain.

 It provides the general principles upon which Ind AS will be based .

 The framework is the standard of all standards, but is not an accounting standard.

 It is issued in July 2000.

 In case of conflict between Framework and Ind AS, Ind AS shall prevail over the
Framework, as Ind AS contains specific principles with respect to items of financial
statement whereas framework contains general principles with respect to items of
financial statement.
 Scope

The Framework deals with:

1.the objective of financial statements;

2.the qualitative characteristics that determine the usefulness of information provided

in financial statements;

3.definition, recognition and measurement of the elements from which financial

statements are constructed; and

4.concepts of capital and capital maintenance.

 Objective of financial statements

The objective of financial statements is to provide information about

 Financial position,

 Financial performance, and

 Cash flows

of an entity that is useful to a wide range of users in making economic decisions.

 Qualitative Characteristics of Financial Statement

Qualitative characteristics are the attributes that make the information provided in
financial statement useful to users.
Understandability Relevance Reliability Comparability
 Element of Financial Position

The elements of financial position are

1.Assets,
2.Liabilities,
3.Equity
Element of Financial Performance and their definition

The elements of financial performance :

1.Income
2.Expenses
 Measurement Basis

Measurement is the process of determining the monetary amounts at

which the elements of financial statement are recognised and carried in the
Financial Statement.
 Measurement Basis

(a) Historical cost:

 Assets are recorded at the amount of cash or cash equivalents paid or the fair
value of the other consideration given to acquire them at the time of their
acquisition.
 Liabilities are recorded at the amount of cash or cash equivalents expected to
be paid to satisfy the liability or at the amount of proceeds received in
exchange for the obligation, in the normal course of business.

(b) Current cost:

 Assets are carried at the amount of cash or cash equivalents that would have to
be paid if the same or an equivalent asset were acquired currently.
 Liabilities are carried at the undiscounted amount of cash or cash equivalents
that would be required to settle the obligation currently.
 Measurement Basis

(c) Realisable (settlement) value:

 Assets are carried at the amount of cash or cash equivalents that
could currently be obtained by selling the asset in an orderly
disposal.
 Liabilities are carried at their settlement values, that is, the
undiscounted amount of cash or cash equivalents expected to be
required to settle the liabilities in the normal course of business.

(d) Present value:

 Assets are carried at the present value of the future net cash
inflows that the item is expected to generate in the normal course
of business.
 Liabilities are carried at the present value of the future net cash
outflows that are expected to be required to settle the liabilities in
the normal course of business.
 Capital and Capital maintenance

There are two concepts of capital:

1.Financial concept: Under the financial concept, such as invested

money or invested purchasing power, capital is synonymous with the net
assets or equity of the entity.

2.Physical concept: Under the physical concept, such as operating

capability, capital is regarded as the productive capacity of the entity.
This productive capacity may be defined in terms of volume of
production. For eg.- Units of output per annum.
 Underlying Assumptions

 Under Going concern, it is assumed that the entity will continue in

operation for the foreseeable future and has neither the intention nor the need to
liquidate or curtail materially the scale of its operations.

 Under Accrual basis, the effects of transactions are recognised on mercantile basis
i.e. when they occur (and not as cash or a cash equivalent is received or paid) and they
are recorded in the accounting records and reported in the financial statement of the
periods to which they relate.

 Under Consistency, same accounting policies are followed from one period to
another so that comparability of the financial statement can be achieved.
Applicability of
Ind AS
 Applicability of Ind-AS to Companies

LISTED COMPANY UNLISTED COMPANY

NW - Rs. 250 NW -
NW - Rs. NW – Less NW - Rs.
Crore or more Less than
500 Crore than Rs. 500 Crore
but less than Rs. 250
or more 500 Crore or more
Rs. 500 Crore Crore

1st April 1st April 1st April 1st April

NA
2016 2017 2016 2017

 Listed comapany means company whose equity and /or debt

securities are listed or are in the process of listing on any stock
exchange in or outside India.

 NW stands here for Net Worth

 All Companies can voluntarily adopt Ind AS from 1st April 2015.
 Ind AS is applicable to Banks, NBFCs and Insurance Companies
from 1st April, 2018.
 Ind AS is not applicable to Unlisted companies with net worth of
less than Rs. 250 Crore and Companies listed on SME exchange.
They are required to comply with existing Accounting
Standards.
 Holding, Subsidiary, Associate and Joint Venture of above are
also required to follow Ind-AS from respective date.
 Apply to both consolidated and stand-alone financial statements.
 Comparatives of previous year are also required to be Ind AS
compliant.
 Ind ASs are notified by MCA on 16th February, 2015.
 Once opt to follow Ind AS, cannot switch back.
 In case of conflict between Ind AS and law, the provisions of law
shall prevail.
 Companies listed on SME Exchange & Net Worth
 Companies having paid up share capital of Rs. 25 Crore or less are
listed on Small and Medium Enterprises (SME) exchange.

 What is net worth and how to calculate? When to calculate?

 Net worth is the agreegate value of the paid up share capital and all
reserves created out of the profits and securities premium account, after
deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellanous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation.

 Net worth will be determined based on the standalone accounts of

the company as on 31st March, 2014 or the first audited period ending
after that date.
 Old AS
vs.
New Ind AS
 Salient Features of Ind AS

• Principle-based Standards
• Applicable on separate as well as consolidated financial
statements.
• Give more importance to concept of ‘substance over form’,
i.e., economic reality of a transaction.
• Rely more on fair valuation approach, and measurements
based on time value of money.
• Require more disclosures of all the relevant information and
assumptions used.
• Require higher degree of judgment and estimates.
 Understanding Ind AS from AS

IND AS ARE BASED MORE ON SUBSTANCE OVER FORM :

Sale of Goods on Extended Credit Terms, i.e., goods sold on terms extending more
than normal credit period.
 Financing element inbuilt in price is segregated and considered as ‘interest’
income.
 Say, goods normally sold at price at Rs. 100 for 3 months credit
 If sold for Rs. 110 for 15 months credit: Rs. 10 considered as ‘interest’ income
This has VAT and TDS implications
 Substance over form (Contd.)

• Fixed assets or inventories purchased on

deferred credit terms having financing element:
• Financing element, viz., ‘interest’ to be segregated
from the ‘purchase price’
• Implications: What would be the original cost of
the fixed asset/inventories for tax?
 Substance over form (Contd.)

 Unbundling of multiple elements from the sale price where

required:
Sale of Automobile on Extended Warranty
 An automobile dealer sells a car for extended warranty of 3 years
instead of normal 1 year
 Extended warranty element of 2 years required to be separated under
Ind AS from the selling price based on Fair Value of warranty.
 Revenue from warranty service recognised in the year when the
service is rendered, i.e., revenue recognition is deferred.
 Substance over form (Contd.)

Implications:
Tax: Income from sale of car to be recognised when car sold
VAT: To be levied on invoice price exclusive of value of extended
warranty
Service Tax: To be levied on value of extended warranty
 Substance over form (Contd.)

• Redeemable preference shares carrying fixed rate of dividend

considered a liability under Ind AS
• Dividend paid/payable considered as ‘interest’
• Charged to statement of profit and loss and not to be considered as an
appropriation of profit as at present
• Implications:
• TDS on interest
• MAT implication as Book Profit
 Substance over form (Contd.)

• Certain transfers in substance considered as finance lease under

Ind AS
• Accordingly, only receivable is recognised in the Balance Sheet by
the transferor
• Presently, the transferor recognises it as its fixed asset and charges
depreciation
• Implications:
• MAT implication as Book Profit
• Where lease more than 12 years, will be considered as sale for VAT
purpose
 Time value of money as a measurement basis

 Measurement of interest at Effective Interest Rate rather than

the contracted rate to recognise interest income and expense
Illustration:
 A company issues bond of Rs. 100 carrying interest rate at 10% to
be redeemed at Rs. 110 after five years.
 Presently , interest expense recognised at Rs. 10 per year and Rs.
10 premium paid at the time of redemption recognised in the year
of redemption (though some companies amortise this Rs. 10 over
the five year term on straight line basis)
 Time value of money as a measurement basis

 Under Ind AS, interest rate is recomputed to recognise Rs. 10

premium payable at the end of the term of the bond.
Accordingly, interest is recognised every year, at the effective
rate of 11.43%

Implications:
 TDS
 MAT on account of change in Book Profit
 Greater use of Fair Value (FV) as Measurement Basis

 Certain investments (e.g., held for trading in normal course of

business) required under Ind AS to be measured at FV and
changes in FV, gains and losses, recognised in profit or loss.
 Presently, only FV changes resulting in losses recognised in profit
or loss; gains ignored
Implications:
 MAT implications on Book Profit
 Fair Value as Measurement Basis (Contd.)

 Service Concession Arrangement, e.g., Build-Operate-

Transfer arrangement of a road
 Revenue is required to be recognised at FV of the construction
services rendered during construction period
 Even though actual receipts start when the road is put under
operation, i.e., toll is collected
Implications:
 Should the income be taxed during construction period?
 MAT implications on Book Profit
 Other significant differences

• Component approach and concept of useful life of charging

depreciation
• Ind AS require depreciation to be charged on significant parts
of a fixed asset where useful lives of the parts and the
remaining asset are different
• Presently, depreciation required to be charged on the
complete asset at a single rate
• Ind AS also confer primacy to useful life concept for
charging depreciation, rather than statutory minimum
depreciation concept hitherto followed
• Implications: MAT on Book Profit
 Other significant differences

• Effects of Changes in Foreign Exchange Rates

• Ind AS based on ‘functional currency’ concept, existing AS is
not
• Where functional currency of an entity other than INR,
impact on profit or loss different from existing AS
• Consequential tax impact
• After transitioning to Ind AS, option of capitalising/deferring foreign
exchange differences under existing AS no longer available,
• Such differences would be recognised in profit or loss
• Implications: Consequential tax impact on Book Profit
 Comparative Summary of Indian Accounting Standards,
77
IFRS & Present AS

AS Existing Indian IFRS Ind AS

Converged IFRS
No. Standard No. No.
AS 1 Disclosure of IAS 1 Ind AS 1 Presentation of
Accounting Financial Statements
Policies
AS 2 Valuation of IAS 2 Ind AS 2 Inventories
Inventories
AS 3 Cash Flow IAS 7 Ind AS 7 Statements of Cash
Statements Flows
AS 4 Events Occurring IAS 10 Ind AS Events after the
after the Balance 10 Reporting Period
Sheet Date
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 5 Net Profit or Loss for IAS 8 Ind AS Accounting
the Period, Prior 8 Policies, Changes
Period Items and in Accounting
Changes in Estimates and
Accounting Policies Errors
AS 6 Depreciation - - -
Accounting
AS 7 Construction IAS 11 Ind AS Revenue
Contracts 115
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 9 Revenue IAS 18 Ind AS Revenue
Recognition 115
AS 10 Accounting for IAS 16 Ind AS Property, Plant and
Fixed Assets 16 Equipment
AS 11 The Effects of IAS 21 Ind AS The Effects of
Changes in Foreign 21 Changes in Foreign
Exchange Rates Exchange Rates
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 12 Accounting for IAS 20 Ind AS Accounting for
Government 20 Government Grants
Grants and Disclosure of
Government
Assistance
AS 13 Accounting for IAS 40 Ind AS Investment Property
Investments 40
IAS 27 Ind AS Separate Financial
27 Statements
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 14 Accounting for IFRS 3 Ind AS Business
amalgamations 103 combinations
AS 15 Employee Benefits IAS 19 Ind AS Employee
19 Benefits
AS 16 Borrowing costs IAS 23 Ind AS Borrowing costs
23
AS 17 Segment Reporting IFRS 8 Ind AS Operating
108 Segments
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 18 Related Party IFRS Ind AS Disclosure of
Disclosures 12 24 Interests in other
Entities
AS 19 Leases IAS 17 Ind AS Leases
17
AS 20 Earnings Per Share IAS 33 Ind AS Earnings Per Share
33
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 21 Consolidated IFRS Ind AS Consolidated
Financial 10 110 Financial Statements
Statements
IAS Ind AS Separate Financial
27 27 Statements

Ind AS Disclosure of Interest

IFRS 112 in other entities
12
AS 22 Accounting for IAS Ind AS Income taxes
Taxes on Income 12 12
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 23 Accounting for IAS Ind AS Investments in
Investments in 28 28 Associates and Joint
Associates in Ventures
Consolidated Financial
Statements
AS 24 Discontinuing IFRS Ind AS Non Current Assets
operations 5 105 Held for Sale and
Discontinued
operations
AS 25 Interim financial IAS Ind AS Interim Financial
reporting 34 34 Reporting
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 26 Intangible assets IAS 38 Ind AS Intangible
38 Assets
 Comparative Summary of Indian Accounting Standards, IFRS &
Present AS
AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 27 Financial Reporting of IAS 28 Ind AS Investments in
Interests in Joint 28 Associates and
Ventures Joint Ventures

IAS 27 Ind AS Separate

Financial
27
Statements

IFRS Ind AS Joint

11 111 Arrangements

Ind AS Disclosure of
IFRS 112 Interest in other
12 entities
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS
AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 28 Impairment of assets IAS 36 Ind AS Impairment of
36 assets
AS 29 Provisions, Contingent IAS 37 Ind AS Provisions,
Liabilities and 37 Contingent
Contingent Assets Liabilities and
Contingent Assets

AS 30 Financial Instruments IAS 39 Ind AS Financial

Accounting 109 Instruments
AS 31 Financial Instruments IAS 32 Ind AS Financial
Presentation 32 Instruments –
Presentation
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
AS 32 Financial IFRS 7 Ind AS Financial Instruments:
Instruments- 107 Disclosures
Disclosures
- - IFRS 2 Ind AS Share based payment
102
- - IAS 29 Ind AS Financial Reporting in
29 hyperinflationary
Economies
- - IFRS 6 Ind AS Exploration for and
106 Evaluation of Mineral
Resources
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS
AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
- - IAS 26 Ind AS Accounting and Reporting
26 of Retirement Benefit
Plans*
- - IAS 41 Ind AS Agriculture
41
- - IFR S4 Ind AS Insurance Contracts
104
- - IFRS 1 Ind AS First Time Adoption
101 of Indian Accounting
Standards
 Comparative Summary of Indian Accounting Standards,
IFRS & Present AS

AS IFRS Ind-AS
Indian Standard IFRS
No. No. No.
- - IFRS Ind AS Regulatory Deferral
12 114 Accounts
- - IFRS Ind AS Fair Value
13 113 Measurement
 Ind AS 1: Presentation of Financial Statement

In India, Presentation of Financial Statement is always governed by

Companies Act instead of Accounting Standard.

Earlier there is Schedule VI, now Schedule III is there for Presentation of
Financial Statement as per Accounting Standard.

Recently Ministry of Corporate affairs had issued Format of Financial

Statement as per Ind AS. (As per notification dated 06/04/2016).
 Financial Statement comprises of:-

(a)Balance Sheet as at the end of the period;

(b)Statement of Profit and Loss for the period;
(c)Cash Flow Statement for the period; and
(d)Notes.

Financial
Statement

Balance Statement of Cash Flow

Notes
Sheet Profit and Loss Statement
 Comparative Information

1. Should have comparatives with all the amounts reported in current period
financial statements
2. When Change in Accounting policy retrospectively, Retrospective
restatement / Reclassifies items
 Present 3 balance sheets and two statements
 Current period end
 Previous period end
 Beginning of earliest comparative period end
3. When the entity changes the presentation or classification of items in its
financial statements, the entity shall reclassify comparative amounts
unless reclassification is impracticable and disclose Nature, amount and
reasons of Reclassification in Notes.
4. When impossible to reclassify, disclose the reason for not reclassifying the
amounts and Nature of the adjustments that would have been made if the
amounts had been reclassified.
 Balance Sheet
 Balance sheet include Statement of change in equity which is presented as
a part of the Balance Sheet.

Statement of Profit and Loss

 Statement of Profit and Loss include other comprehensive income
which is presented as part of a single statement of profit and loss.

 There is no concept of extraordinary item in Ind AS.

Notes
 Notes comprises of summary of accounting policies and other
explanatory information about items of financial statement.
 Ind AS use ‘Other Comprehensive Income’ (OCI) concept

• Reason: Definition of Income

• Enhancement of an Asset or reduction of a Liability (other
than transactions with owners)
• Accordingly, any increase in asset, e.g., upward
revaluation of asset, is an ‘income’ even though not
realised
• Earlier, such increase transferred directly to Revaluation
Reserve in Balance Sheet
• Now, transferred to Reserve through OCI
 OCI concept (Contd.)

 Statement of profit and loss is, therefore, divided into two

sections:
 Profit or loss section:
Containing items of revenue/income and expenses which are
hitherto normally included in the statement of profit and loss
with a few exceptions (e.g. actuarial gains & losses on
measurement of defined benefit obligations now not included)
 Other comprehensive income comprises items of income and
expense (including reclassification adjustments) that are not
recognised in profit or loss as required by other Ind ASs.
 OCI concept (Contd.)

 OCI section contains generally unrealised gains and

losses arising from re-measurements of assets &
liabilities
 On realisation, with few exceptions, gains & losses
are recognised in profit or loss section
Exceptions:
 Sale of revalued assets
 Equity Instruments opted to be measured at Fair
Value through OCI

97
 COMPONENTS OF OCI

The components of other comprehensive income include:

(a) changes in revaluation surplus (see Ind AS 16 Property, Plant and Equipment and Ind AS 38
Intangible Assets);
(b) actuarial gains and losses on defined benefit plans (see Ind AS 19 Employee Benefits);
(c) gains and losses arising from translating the financial statements of a foreign operation (see
Ind AS 21 The Effects of Changes in Foreign Exchange Rates);
(d) gains and losses on remeasuring available-for-sale financial assets (see Ind AS 39 Financial
Instruments: Recognition and Measurement);
(e) the effective portion of gains and losses on hedging instruments in a cash flow hedge (see
Ind AS 39 Financial Instruments: Recognition and Measurement).
Reclassification adjustments are amounts reclassified to profit or loss in the current
period that were recognised in other comprehensive income in the current or previous
periods.
Implication : OCI concept (Contd.)

For MAT purposes ‘profit or loss’ as per that section may

be considered for the sake of simplicity
Since OCI mostly comprises unrealised gains & losses,
may be ignored
 profit or loss section also includes certain unrealised
gains and losses on operating items, e.g., fair value
changes in held for trading investments; should be
tax neutral, i.e., if unrealised gains included for MAT
then unrealised losses also should be allowed as
deduction

99
FORMAT OF FINANCIAL STATEMENT AS PER Ind AS
ENCLOSED

FORMAT NOTIFIED BY MCA ON Double click on

06.04.2016 Format
 Example- Accounts of SECL in New Format

Accounts of SECL - Old Format Double click on

Accounts of SECL - New Format Format
 Compliance with Ind ASs
 Financial statements complying with Ind ASs shall make an explicit
and unreserved statement of such compliance in the notes.

 Financial statements shall not be described as complying with Ind ASs

unless they comply with all the requirements of applicable Ind ASs.
THANK YOU