Consolidation of Financial Statements – A Move to Greater Transparency, The Government of India, in its endeavor to enforce and raise compliance standards, has legislated the Companies Act, 2013, the much required code for corporates in India in line with the developments taking place worldwide and in order to meet the growing demands of stakeholders towards greater transparency and ease of understanding. Now scroll down below and check more details regarding consolidated financial statements.
Consolidation of Financial Statements
However, changes in any form bring with it numerous doubts and complications, so is the case with the introduction of new provision in the form of section 129(3) which mandates every company to prepare Consolidated Financial Statements.
So, let us strive to understand the changes that are taking place around us and implement the same with the conviction that “we must be in tune with the times and be prepared to break the traditions’
Section 129(3) of the Companies Act, 2013 deals with the placing of financial statement and CFS of the company and its subsidiaries in AGM. Accordingly, where a company has one or more subsidiaries, it shall, in addition to standalone financial statement, prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its standalone financial statement
The company shall also attach along with its financial statement, a separate Statement containing the salient features of the financial statement of its subsidiary or subsidiaries in form AOC-1.
Explanation.—For the purpose of this sub-section, the word “subsidiary” shall include associate company and joint venture.
Further, Rule 6 of the Companies (Accounts) Rule, 2014 lays down the manner of consolidation of accounts of companies.
Manner of Consolidation of Accounts
The consolidation of financial statements of the company shall be made in accordance with the Consolidation of Financial Statements – A Move to Greater Transparency provisions of Schedule III of the Companies Act, 2013 and the applicable accounting standards (i.e. AS 21- Consolidated Financial Statements, AS 23-Accounting for Investments in Associates in Consolidated Financial Statements& AS 27-Financial Reporting of Interests in Joint Ventures).
Provided that in case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the accounting standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act
There are some exclusions under the accounting standard (AS 21) for certain subsidiaries from being taken into consideration for CFS. These exclusions cover the following situations:
a) When control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future;
(b) When it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent.
If any company is having subsidiary or subsidiaries which satisfy the above mentioned conditions, then such Holding Company is not required to prepare Consolidation of Financial Statements in respect of those subsidiaries, but such Holding Company is required to give disclosure about the same in Schedule III, stating details of subsidiaries along with the reason for non-consolidation.
The requirement for consolidated financial statements under the Companies Act, 2013 has been introduced for the first time; however, it is not new for listed companies. The listed companies were already required to prepare consolidated financial statements in adherence to the terms of listing agreements with stock exchanges. Thus, the new requirements majorly affect the unlisted companies in India which practically might be doing this for the first time
The accounting for subsidiaries, joint ventures and associates in the consolidated financial statements will also require extensive financial information from their respective investees.
For example, the financial statements of the subsidiaries, associates and joint ventures must be prepared following the Indian accounting standards and must conform to the accounting policies of the Indian Parent Company
This has caused trouble to the unlisted companies as it will be a challenging task for them to accumulate all the required details within such a short span of time. Therefore for them information for making consolidation may not be readily available.
There can also be a situation wherein a Company having subsidiaries, associates and joint ventures, incorporated outside India may be preparing their financial statements only to comply with the local requirements, but now these foreign subsidiary companies will also have to undertake the cumbersome job of complying with the Indian Financial Reporting Requirements.
Accordingly, for certain companies which were facing genuine difficulty in preparation of CFS, the Ministry of Corporate Affairs (‘MCA’) came out with couple of notifications to tackle the practical issues discussed above.
1) Notification dated 14/10/2014, exclude the following companies from making Consolidation of Financial Statements
“An intermediate wholly-owned subsidiary other than a whooly-owned susidiary whose immediate parent is a company incorporated outside India
“ A company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both for the Financial year 2014-15.
Notification dated 16/01/2015, excludes the following companies from making Consolidation of Financial Statements
A company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1 April 2014
Example 1) ‘XYZ Private Limited’ a Parent Company has an associate company named ‘ABC Private Limited’ and a Joint Venture named ‘PQR Private Limited’. All the three companies are incorporated in India and XYZ Private limited has no Subsidiary Company. Will ‘XYZ consultancy Private Limited’ be required to prepare CFS for the FY 2014-15?
Solution: In this case, XYZ Private Limited is not require to make CFS for the FY 2014-15 in pursuance of notification issued by MCA on 14/10/2014 as it has only an associate and joint venture but no subsidiary
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Example 2) ‘A Private Limited’ has two foreign subsidiaries named ‘B Inc.’ and ‘C Inc.’ Will ‘A Private -limited, be require to prepare CFS for the FY 2014-15?
Solution: No, in pursuance of the Companies ? (Accounts) Amendments Rules 2015 notifies by the MCA on 16/01/2015, an Indian parent company which has subsidiaries incorporated outside India is not required to prepare CFS for the financial year commencing on or after 1st April, 2014.
Example 3) ‘X Private limited’ has subsidiary named ‘Y Private Limited, both X and Y Private Limited are SMC’s. Will X Private Limited be required to prepare CFS for the FY 2014-15?
Solution: As per section 129(3) every company is required to prepare the CFS. But some people argued that “since as-21 is not applicable to SMC companies, how will SMC prepare the CFS”. In AS -21, it is clearly stated that the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS.
So in this case, X Private Limited will be required to prepare the CFS as per the requirement of Companies Act, 2013 (the statute), and for the purpose of making CFS it has to follow guidelines of AS.
Some Important Terms
Subsidiary Company: Subsidiary Company means a company in which the holding company
(i) Controls the composition of the Board of Directors; or
Exercies or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies
Explanation (a) A company shall be deemed to be a subsidiary company of the holding company even if the control is in the nature of indirect control
(b) The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or majority of the directors
(c) The word share capital includes equity share capital and convertible preference share capital.
Associate Company: An associate company means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company
Explanation Significant Influence means control of at least twenty per cent of total share capital, or of business decisions under an agreement.
Some Practical Issues
1) In the notification (dated 16/01/2015) the word subsidiary is not explained, so can we take the explanation of subsidiary as subsidiary which is being given in the explanation to section 129(3) of Companies Act, 2013.
2) Whether the intention of MCA for its notification dated 16/01/2015, is to provide the temporary relief or to give exemption for all upcoming years.
3) If a company is having Indian as well as Foreign subsidiary then will it be required to prepare Consolidation of Financial Statements.
To conclude, for the Financial Year 2014-15, following companies are not required to prepare consolidated financial statement in pursuance of MCA notifications dated 14/10/2014 and 16/01/2015.
1) An intermediate wholly-owned subsidiary incorporated in India, other than a wholly-owned subsidiary whose immediate parent is a company incorporated outside India
2) A company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both for the financial year 2014-15
3) A company having subsidiary or subsidiaries incorporated outside India.
However, for other companies, it is mandatory to prepare Consolidated Financial Statement for the FY 2014-15
Lastly, I want to share with you the Quote of Swami Vivekananda on our thoughts,
“We are what our thoughts have made us; so take care what you think. Words are secondary. Thoughts live; they travel far.”
Therefore, let us bring more thoughts to prepare our minds to face the challenges we encounter in our professional journey and embrace all changes with gladness.