For a better financial picture

The adoption of the Companies Act moves Indian companies closer to global standards for governance, compliance and reporting. Meanwhile, tax law changes in the form of the Direct Taxes Code and the Goods and Services Tax are awaited, as also convergence with International Financial Reporting Standards.

In continuation of efforts to align reporting requirements with global standards and reflect economic reality, the Securities and Exchange Board of India has proposed significant amendments to Clause 41 of the Listing Agreement. Based on the recommendations of the SEBI Committee on Disclosures and Accounting Standards, the market regulator has proposed amendments that could have a far-reaching impact on several companies.

Consolidated results

A key change proposed relates to consolidated financial statements. If a company does not opt to submit quarterly and year-to-date consolidated financial results, then it should disclose in addition to annual consolidated results its half-yearly consolidated results including statement of assets and liabilities, and cash flow statement. The additional disclosure applies to companies whose consolidated results differ significantly (20 per cent) from the corresponding standalone results. The consolidated results shall also be subjected to a limited review or audit. Currently, many large companies do not present quarterly or half-yearly consolidated financial results. SEBI’s proposal is likely to impact many companies, especially in sectors such as real estate and infrastructure where there are many subsidiaries. As consolidated financial statements are universally acknowledged to better reflect the financial performance of companies, the new requirements will benefit those who use them.

Several companies currently prepare quarterly consolidated financial results for their internal requirement, but these are not audited or reviewed. SEBI’s proposal calls for additional rigour in the preparation and audit/ review of the interim consolidated financial statements. Besides the need to audit or review all Indian subsidiaries, the proposal calls for reviewed or audited results of foreign subsidiaries which, together with the reviewed or audited results of all the Indian subsidiaries or joint ventures, would constitute at least 80 per cent of the consolidated turnover, net worth, or profit/ loss of the company. Companies need to gear their financial reporting systems and processes accordingly.

use of IFRS

The second proposal changes the accounting standards used to prepare financial results. Under the existing Clause 41, consolidated financial results can use the IFRS issued by the International Accounting Standards Board. The SEBI proposal mandates the use of Indian GAAP (generally accepted accounting principles). Companies may additionally publish financial results under IFRS if they wish. This may impact companies with significant global operations, as the results of the foreign operations would need to be converted into Indian GAAP.

Additionally, the consolidated financial statements should present previous period numbers as comparative, entailing additional effort for companies that did not prepare them in the previous years.

The proposal clarifies that any change in accounting policy during a period would not result in restatement of previous quarters to reflect the change. Other modifications aim to bring consistency in reporting for exceptional items by clarifying their meaning in line with accounting standards.

In conclusion, while SEBI’s proposal seeks to ensure consistency in reporting by listed companies and align the requirements of the Listing Agreement with the new Companies Act, it would additionally burden affected companies.

The author is Global Head of Accounting Advisory Services, KPMG in India

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