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Rabindra Nath Sinha

KOLKATA, April 18

THERE is scope to rationalise the provisions which stipulate presentation by the parent companies of consolidated financial statements (CFS), starting from financial year 2001-02. The prime need is to avoid duplication.

This is the assessment of parent companies for whom the time has come to apply their mind on presentation of CFS, a mandatory requirement that derives from ICAI's Accounting Standard (AS) 21.

The relevant portion of AS 21 reads: "Users of the financial statements of a parent...need to be informed about the financial position and results of operations of not only the enterprise itself but also of the group as a whole. This need is served by providing separate financial statements of the parent and CFS which present financial information about the group as that of a single enterprise without regard to the legal boundaries of the separate legal entities''. For listed corporates, the provisions that matter in this context are contained in Clause 32 read with Clause 50 of the listing agreement and Section 212 of the Companies Act, 1956.

The relevant portions thereof read: "Companies shall be mandatorily required to publish CFS in the annual report in addition to the individual financial statements; companies shall mandatorily comply with all the accounting standards issued by ICAI from time to time and the profit and loss account and directors' as also auditor's reports shall be made out in accordance with the requirements of the Companies Act."

The concept of CFS is new to India, although abroad, publication of CFS is a long-standing requirement to be fulfilled by parent companies. There is, however, no requirement abroad to attach the separate accounts of subsidiary companies along with CFS.

In India, the position appears to be different. Section 212 of the Companies Act requires that a copy of the balance sheet and profit and loss account, together with the report of directors and auditors and certain other particulars, in respect of each subsidiary should be attached to the balance sheet of the holding company.

The position becomes more complicated for parent companies which have subsidiaries incorporated abroad. It is stipulated that the accounts of subsidiaries to be annexed to the accounts of the parent company should be drawn up according to the provisions of the Companies Act, 1956.

This means that each foreign subsidiary will have to prepare two sets of accounts, one in the local currency and the other in Indian rupees. This is apart from the additional information requirement prescribed in Schedule VI to the Companies Act, 1956.

In the perception of corporates, a true and fair view of the accounts does not appear to be affected if separate accounts of subsidiaries are not attached.

This is because assets, liabilities, turnover, expenses and profit/loss of subsidiaries are all reflected in CFS to be published by the parent company.

The position becomes somewhat inexplicable when accounts of third/ fourth-generation subsidiaries, in which the parent does not have any direct investment, are also required to be separately attached with the parent's annual accounts.

CFS, being a new requirement for Indian companies, has probably escaped the attention of law makers that CFs and fulfilment of Section 212 requirement should not be simultaneous. Presentation of consolidated accounts together with separate accounts of each subsidiary in the same annual report will clearly amount to duplication.

There is, therefore, an immediate need for the authorities to reexamine the provisions of Section 212 and grant exemption so that listed companies can avoid duplication. If this is done, reporting by companies will be in line with the practices followed abroad.

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