FINANCIAL STATEMENTS UNDER NEW COMPANY LAW – Part 1

Historical Background

Section 129 of the Companies Act, 2013 corresponds to Section 210 on ‘Annual accounts and balance sheet’, Section 211 on ‘Form and contents of balance sheet and profit and loss account’ and Section 212 on ‘Balance sheet of holding company to include certain particular as to its subsidiaries’ of Companies Act, 1956.

The significant changes in the provisions are as follows:

(a)  the term Balance Sheet and Profit & Loss account, has been defined collectively as financial statements under this clause. Cash flow statement and statement showing changes in equity , if any ,of the company ,also form part of the same.

(b)  consolidated financial statement of all subsidiaries and the Company shall be prepared and laid before the Annual General Meeting.

(c)  for this Section ,the word “Subsidiary” shall include associate company and joint venture.

(d)  it does not prescribe whether  financial year can be extended or not.

(e)  the requirement of attaching Balance Sheet, Profit & Loss account, report of Board of Directors, Auditor Report, statement of the Holding company’s interest in the Subsidiary and other Reports by Section 212 of the Companies Act, 1956. has been dispensed with.

Statutory Provisions (Section 129)

This Section corresponds to Section 211 of the Companies Act, 1956 and seeks to provide that the financial statements shall give a true and fair view of the state of affairs of the companies in the form as may be provided for different class or classes in Schedule III and shall comply with accounting standards. Insurance companies, banking company, companies engaged in generation / supply of electricity or any other class of companies shall make financial statements in the form as has been specified in or under the Act governing such companies. The financial statement shall be laid in the annual general meeting of that financial year. In case of subsidiary companies, the company shall prepare a consolidated financial statement of the Company and all subsidiaries and lay before the annual general meeting. The Central Government shall have the power to exempt a class or classes of companies from any of the requirements of this section. The Section also provides the penalty where company contravenes the provision of this section.

Financial Statements

Financial Statement is defined under Section 2 (40), to include -

i)      Balance Sheet

ii)     Profit and Loss account or Income and Expenditure account

iii)    Cash flow Statement

iv)   Statement of change in equity, if applicable

v)    any explanatory notes annexed to or forming part of financial statements, giving information required to be given and allowed to be given in the form of notes.

However, the financial statement with respect to one person company , small company and dormant company, may not include the cash flow statement.

Financial statements should be prepared for financial year and shall be in form as per Schedule III.

True and Fair view

As per provisions of sub-sections (1) and (2), every financial statement of the company must give true and fair view of the state of affairs of the company at the end of financial year. True and Fair view in respect of financial statement means-

i)      financial statements and items contained should comply with accounting standards notified under section 133;

ii)     financial statement shall be in form or forms as may be provided for different class or classes of companies in Schedule III;

iii)  in case of 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 offinancial statement has been specified in or under the Act governing such class of company, not treated to be disclosing a true and fair view of the state of affairs of the company, merely by the reason of the fact that they do not disclose-

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

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

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

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

Other Requirements for financial statements

(a)  Financial statements shall lay before the board of the directors in every annual general meeting of a company.

(b)  where a company has one or more subsidiaries, in additional to financial statement provided in sub-section 2, it shall prepare a consolidated financial statement of the company  with salient features of financial statements of subsidiary and subsidiaries in such form as prescribed and the same shall be laid before board in annual general meeting.

(c)  Central Government may prescribe for the consolidation of accounts of companies.

(d)  Where financial statements of the company do not comply with the applicable accounting standards, the company shall disclose the following:

i)      the deviation from the accounting standards

ii)     the reason for such deviation and

iii)    financial effects arising out of such deviation

(e)  Central Government may exempt any class or classes of the companies from complying with any of the requirements of this section or the rules there under, either conditionally or unconditionally as may be specified in the notification.

(To be continued …….)