Download Impact Of Companies Act 2013 on Consolidation of accounts

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Highlights:
a. Section 129: Consolidated Financial Statements (CFS) to be prepared in Indian GAAP including at
intermediate parent level.
The 2013 Act mandates preparation of consolidated financial statements for all companies that
have one or more subsidiaries. These would be in addition to the separate financial statements
and are required to be prepared in the same form and manner as the separate financial
statements.
b. CFS is to be prepared and laid before an annual general meeting (AGM), in addition to separate
financial statements (SFS). Audited accounts of the listed companies, along with those of the
subsidiaries, have to be made available on the website.
c. Definition of subsidiary and control has been broadened. The word subsidiary would include
associate companies and joint ventures.
Term ’associate’ has been introduced which refers to “significant influence” over other entity
d. The term Balance Sheet & Profit & Loss Account, has been defined collectively as financial
statement under the Act. Also, cash flow statement and statement showing changes in equity, if
any, forms part of the same.
e. Additional disclosures required in CFS: Amount and percentage of net assets and profit/ loss of
each subsidiary, associate and JV vis-à-vis consolidated net assets have to be disclosed indicating
Indian or foreign entity separately.
 Statement containing salient features of financial statements of Associates and JVs will
also have to be prepared. Currently such statement is required only for Subsidiaries
Applicability, requirement & Implications:
Applicability All companies with subsidiaries (including associate companies and joint ventures) need to prepare
CFS
Listed companies currently preparing CFS under the IFRS will mandatorily need to prepare CFS
under the Indian GAAP
Unlisted companies need to prepare CFS, along with Standalone Financial Statement (SFS)
Intermediate unlisted parent companies will also need to prepare CFS 1
Companies
CFS has to be prepared in addition to standalone financials
Act
2013 Some additional mandatory disclosures are also required as per Schedule III 2
Requirement
There are no transitional provisions available to ease the process of consolidation, where groups
have been in existence for a long time
Implications
Earlier, Clause 41 mandated only listed company to prepare CFS
Now significant responsibility casted on unlisted companies and private limited companies
Groups with complex tiered structures and private equity firms will have to prepare CFS at each
intermediate holding company level1
1.
2.
An intermediate wholly owned subsidiary, other than a wholly owned subsidiary whose
immediate parent is a company incorporated outside India, shall not be required to prepare CFS.
It has been clarified that the Company would need to give all disclosures relevant for CFS only.
Section 129
The Companies Act 2013 mandates preparation and presentation of consolidated financial statements
(CFS) for any company having a subsidiary or an associate or a joint venture, in addition to standalone
financial statements.
The manner of consolidation is required to be in line with the requirements of Accounting Standard 21,
‘Consolidated Financial Statements’
Section 129(4)
First proviso to section 129 (3)
Section 136(1)
Requires adoption and audit of Apart
from
consolidated Requires an entity to file
consolidated financial statements financial
statements,
the accounts of subsidiaries outside
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39/1 Ballupur Chowk
in the
same
manner
as
standalone financial statements
of the holding company*
Contact Number
+91-9997311247, +91-9412452451
Companies Act 2013, requires a
separate statement, containing
the salient features of financial
statements of its subsidiary/(s)
in a form as prescribed in the
rules
of India, along with the financial
Statements
(including
CFS).
Thus, entities with foreign
subsidiaries need to submit
individual financial statements of
such foreign subsidiaries along
with its own standalone and
consolidated financial statements
* For company which does not have any subsidiary but has one or more associate / JV or both, CFS in
respect of associate and JV would not be required for FY commencing from 1April 2014 and ending on 103-2015
Definitions:
a. Subsidiary:
Accounting Standards
AS 21 Consolidated Financial Statements
defines a subsidiary as an enterprise that is
controlled by another enterprise.
Control is defined as the ownership, directly or
indirectly through subsidiary/(s), of more than
one-half of the voting power of an enterprise;
and / or control of the composition of the
board of directors
Companies Act 2013
Section 2(87): ‘subsidiary’ is as an entity of which the
holding company controls more than one-half of the
total share capital (either directly or indirectly) or
controls composition of the board of directors
Control includes right to appoint majority of the
directors (or to control the management or policy
decisions, individually or in concert, directly or
indirectly)
Key impact:
1. The definition of a subsidiary under the Companies Act 2013 is based on ownership of the
total share capital which is defined as sum of equity share capital and convertible preference
share capital
2. Significant impact on several companies which have issued convertible preference shares
3. Definition does not consider the concept of control over voting power covered in AS 21
b. ‘Associate’
Accounting Standards
Companies Act 2013
AS 23 Accounting for Investments in Section 2(6): “associate company”, in relation to
Associates
in
Consolidated
Financial another company, means a company in which that
Statements, ‘associate’ is defined as an other company has a significant influence, but which is
enterprise in which the investor has ‘significant not a subsidiary company of the company having such
influence’.
influence and includes a joint venture company.
‘Significant influence’ is defined as the power Explanation.—For the purposes of this clause,
to participate in the financial and operating “significant influence” means control of at least twenty
policy decisions of the investee but not control per cent of total share capital, or of business decisions
over those policies
under an agreement
a.
Definition of an associate in the 2013 Act is based on control of business decisions as compared to
the concept of power to participate under AS 23
b. 2013 Act sets a threshold of 20 percent ownership of total share capital and hence does not
consider influence over voting power, or any other manner in which significant influence may be
established
c. AS 23 envisages situations in which significant influence may be demonstrated without meeting
the 20 percent threshold which are not addressed in the 2013 Act
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39/1 Ballupur Chowk
Contact Number
+91-9997311247, +91-9412452451
Financial Year:
Companies Act 2013:
Section 2(41): 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.
Company may apply to NCLT for adoption of different financial year, if it satisfies the following
two criteria.
a. Company is holding or subsidiary of a company incorporated outside India, and
b. Company is required to follow a different financial year for consolidation of its financial
statement outside India.
Key impact:
a. The definition requires a company adopt a uniform accounting year-ending 31 March.
b. Companies which are following a different financial year need to align with the new
requirement within two years from 01 April 2014.
Companies (Accounts) Rules, 2014
Rule 5 - Form of Statement containing salient features of financial statements of subsidiaries
The statement containing the salient feature of the financial statement of a company’s subsidiary
or subsidiaries, associate company or companies and joint venture or ventures under the first
proviso to sub-section (3) of section 129 shall be in Form AOC-1.
Section 129 (7):
If a company contravenes the provisions of this section, the managing director, the whole-time
director in charge of finance, the Chief Financial Officer 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 fifty thousand rupees but
which may extend to five lakh rupees, or with both.
Explanation— for the purposes of this section, except where the context otherwise requires, any
reference to the financial statement shall include any notes annexed to or forming part of such
financial statement, giving information required to be given and allowed to be given in the form
of such notes under this Act.
Imprisonment Term which may extend to one year &/Or Fine – Rs. 50,000 to Rs. 5,00,000
Companies Act 1956 vs Companies Act 2013:
Basis of Comparison
Companies Act 1956
Consolidation of accounts
Mandatory for listed companies
only, as per SEBI regulations
Scope
Associates and Joint Ventures are
not included in the definition of
‘subsidiary
Uniform financial year-end
Financial year should not exceed
15 months and the Financial year
may end on any date (date other
than 31st March)
Statement containing salient Required only for subsidiaries
features
[not for associates / joint
ventures]
Companies Act 2013
Mandatory for ALL companies
Definition of a subsidiary under the 2013
Act includes an associate or joint venture
Financial year should end on 31st March
every year for all companies. No explicit
provisions for extension of financial yearend
A statement containing salient features of
the financial statements of Associates and
Joint Ventures will also have to be
prepared