New financial reporting paradigm

Companies Bill 2012 introduces certain new requirements for financial reporting, which may have a significant impact on companies.

Consolidation and cash flow statements: The Bill will make preparation of consolidated financial statements mandatory for all companies. Currently only listed companies in India have to do it. Also, unlike under International Financial Reporting Standards (IFRS), there is no exemption from consolidation at intermediate levels — that is, each entity, even within a group, must prepare consolidated financial statements if it has subsidiaries, associates or joint ventures.

The Bill will also make preparation of cash-flow statement mandatory for almost all companies.

Both these requirements may, perhaps, be onerous and not as relevant for a majority of companies, especially smaller companies or subsidiaries that present consolidated financial statements at a group level.

Uniform yearend: The Bill proposes a uniform financial year for all companies — that is, March 31. However, a different financial year may be permitted for a company which is a holding company or a subsidiary of a company incorporated outside India, if it follows a different financial year outside India. A transition period of two years has been allowed for existing companies. A number of corporates may have to change their financial year to comply.

Schemes of arrangement: The Bill proposes that all schemes of compromise or arrangement (mergers, de-mergers, other forms of re-organisation and so on) should follow prescribed accounting standards and an auditor certificate filed with the Tribunal.

Previously, under the listing requirements, only listed companies seeking approval for amalgamation/ merger/ reconstruction and so on were required to obtain an auditor’s certificate showing that the scheme’s accounting treatment followed prescribed standards.

Hitherto we have seen several companies undertaking mergers, de-mergers, capital reduction and so on without following the accounting standards, but obtaining the desired outcomes through court approved schemes.

Such avenues are practically unavailable to a company anymore.

While the Bill says the schemes should be in line with accounting standards, this may not mean much unless the standards are updated for current realities. The gaps in Indian GAAP (Generally Accepted Accounting Principles) should be filled first.

Restatement of financial statements: The Bill will allow revision or re-casting of financial statements in limited circumstances — for example, under order from a Tribunal when accounts were fraudulently prepared or unreliable.

Further, voluntary revision of financial statements, for up to three preceding years, is allowed with Tribunal’s approval.

The concept of restatement is not new and is an internationally required practice. Further, SEBI recently mandated that companies should restate financial statements if there are justified audit qualifications. Accordingly, the Bill enables implementation of SEBI rules.

Financial reporting and disclosure standards: The Bill prescribes accounting standards for companies. However, it also has provisions for introducing another set of standards for a prescribed class of companies.

It is reasonable to presume that this set of standards would be converged with IFRS.

The proposals are welcome and bring financial reporting in India closer to international standards.

The biggest challenge will be enforcement and monitoring — in seeing how many of India’s eight lakh-plus companies implement them, and what action is taken for non-compliance.

Yogesh Sharma is Partner and Aman Bhargava is Associate Director, Financial Reporting Advisory Services, Grant Thornton

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