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ACCOUNTS OF COMPANIES - Proposed Amendments in the Companies Act 2013

News and Press Release - Dated:- 2-2-2016 - Consolidated Financial Statements 9.1 Section 129(3) of the Act requires a company having a subsidiary, a joint venture, or an associate company, to prepare a Consolidated Financial Statement (CFS), in addition to its stand-alone financial statements. The requirement for a CFS under the Act had been introduced for the first time in the Companies Act, 2013. Before 1st April 2014, such a requirement existed only for listed companies, which were required .....

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diaries, associates or joint ventures which have not been consolidated in the CFS, along with the reasons for not consolidating. Comments received by the Committee suggested that the Instruction indicated a lack of clarity on the kind of entities to be so disclosed. The Committee noted that the Accounting Standard indicated instances where accounts of subsidiaries, associates or joint ventures was not required to be consolidated; and the recommendations in Paragraph 9.5 would resolve the issue/b .....

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ittee recommended that in such cases, where a CFS was statutorily required to be prepared as per the law of the jurisdiction in which the overseas subsidiary is established and is placed on the website in the statutory format, there should be no requirement for standalone financial statements of the step down subsidiaries to be placed on the website as per 4th proviso to Section 136(1) and included in the salient features that are required to be attached. There should be no exemption in other ca .....

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equirements of the local jurisdiction. No change in the provision is required on this account. 9.5 The Explanation to Section 129(3) provides that for the purposes of this sub-section, the word subsidiary shall include associate company, and joint venture. The suggestions received stated that some difficulties arose on account of the differences in the definition of a subsidiary under Section 2(87) of the Companies Act, 2013, and the Accounting Standards. In this regard, the Committee noted that .....

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gestions received by the Committee had referred to the provisions of Section 129(4), which provides that the provisions of the Act, applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements. It had been stated that a combined reading of Sections 129(3), 129(4), and Sections 143(2) and 143(3) of the Act prescribe the same reporting requirements for the auditors of both the standalone a .....

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ith respect to reporting on the Internal Financial Controls and CARO, and for overseas subsidiaries), for the convenience of stakeholders, in the form of guidance from ICAI to its members should be helpful. This matter has also been dealt with in Paragraph 10.12 of Part I of this report. Re-opening of accounts 9.7 Section 130 of the Act provides for the re-opening of accounts, after due approval from a court or a Tribunal. The Proviso to Section 130(1) provides that the court or the Tribunal sha .....

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heir point of view. The Committee deliberated and felt that while a court/Tribunal always had the inherent power to call/give notice to any concerned party in the process, it would be appropriate if a provision was specifically made in the Section enabling the Court/Tribunal to give notice to any other party/person concerned, in addition to those specifically referred to in the provisions. 9.8 A concern was also raised on the absence of any mention about the period up to which the accounts could .....

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r the re-opening of accounts could be restricted to eight years, unless a longer period is required through a specific direction issued by Central Government, under Section 128(5). National Financial Reporting Authority 9.9 The Committee noted that ICAI has submitted a letter dated 18th August 2015, wherein ICAI had raised concerns with respect to constitution of National Financial Reporting Authority (NFRA). It was stated that the ICAI is already discharging its regulatory functions with regard .....

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ature of responsibilities wherein lapses have been seen to cause serious repercussions, the need for an independent body to oversee the profession is a requirement of the day. Major economies of the world have already established such regulatory bodies. The Committee by a majority view recommended that NFRA should be established early. Consultation may, however, be carried out with ICAI with regard to the jurisdiction of NFRA and the ICAI representation on NFRA. Board s Reports, etc. 9.10 Sectio .....

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ef Executive Officer, irrespective of whether he was a director or not, being a KMP, and responsible for the overall management of the company; should be mandated to sign the financial statements. The Committee also noted that since the appointment of a managing director was not mandatory for all companies, the words if any , may be inserted after the words managing director . 9.11 Several suggestions pointed out that due to the numerous disclosures in the Board s Report, the Report had become l .....

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t and the detailed documents/policies provided on the website of the company, if any, and web address or link of these documents/policies provided. Changes in the policies should be specifically highlighted in the salient points. Disclosures with regard to loans or investments under section 186 and particulars of contracts with related parties under section 188, if provided in the financial statements, may be only referred, and salient points discussed, in the Board s Report. Disclosure requirem .....

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harmonized so that the Report is structured, repetition is avoided and made more readable. 9.13 The Committee deliberated on the suggestion of replacing the specific requirement for disclosure, pursuant to the provisions of Section 197(12), of the ratio of the remuneration of each director to the median employee s remuneration, with a comparison of the director s remuneration with the weighted average of all the employees, since big companies had a large numbers of workers. The Committee decide .....

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ceived by the Committee stated that directors were facing difficulties in certifying that the directors had laid down the internal financial controls to be followed by the company, and that it should be sufficient for the managing/executive directors to confirm that the company had a mechanism in place for internal financial controls. However, the Committee observed that it was essential to cast this responsibility on the Board in consonance with the fiduciary responsibilities bestowed on the Di .....

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mmittee), constituted by the MCA. 9.16 Section 135 (1) requires every company having a net worth of Rupees Five Hundred Crore or more; or a turnover of Rupees One Thousand Crore or more; or a net profit of Rupees Five Crore or more, during any financial year, to constitute a Corporate Social Responsibility Committee of the Board, consisting of three or more directors, out of which at least one director has to be an independent director. Rule 5(1) of CSR Policy Rules, 2014, allows unlisted compan .....

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n with regard to any financial year as used in Section 135(1) for determining whether the threshold of specified net worth or turnover or net profit is met to constitute the CSR Committee. The Committee recommended that the words any financial year be replaced by the words preceding financial year . 9.18 Rule 2(1)(f) of CSRP Rules, 2014, requires dividend income, etc. to be excluded while calculating the net profit for the purposes of CSR spending. This would lead to an incongruous situation, wh .....

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le to foreign companies, as provided in the Rules. The High Level CSR Committee had also recommended vide its recommendation at para number 4.15 of its Report that clarity be provided on the applicability of the section to foreign companies. The Committee, therefore, recommended that Section 384 of the Act may specifically include this requirement. 9.20 Section 135(3)(a) requires that the CSR Policy shall indicate the activities to be undertaken by the company as specified in Schedule VII . Sche .....

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vel CSR Committee has recommended in para 4.16 of the report for the term average net profit to be replaced with the words net profit , to remove any ambiguity. The Committee also agreed with the recommendation. Further, prescriptive powers were also recommended to be introduced for specifying the manner of calculation of net profits of a foreign company, through Rules, while referring to Section 381. 9.22 The High Level CSR Committee, in paragraph 4.10 of its report, had recommended for allowin .....

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ovisions, where the actual expenditure was reported with no obligation to carry over. 9.23 The suggestion to allow CSR spends in kind was not agreed to by the High Level Committee on CSR (as specified in para 3.13.2 of its report), in view of various issues (including the valuation issue) involved. The Committee concurred with the aforementioned observation and did not recommend any amendment. 9.24 Section 135 (5) provides that a company has to give preference to the local area, and areas around .....

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re new provisions, and as such, all companies should be given the required flexibility for a reasonable period, say five-years, to experience the implementation of this provision. Accordingly, no amendment was recommended. 9.25 The High level CSR Committee had recommended for Section 8 companies to be exempted from the provisions on CSR. It had been noted by the said Committee that Section 8 companies are not for profit companies registered under Section 8 of the Companies Act, 2013 (Section 25 .....

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es already included in Schedule VII. Therefore, it may be not necessary for these companies to undertake CSR activities outside the ambit of their normal course of business. The Committee, however, felt that it would not be appropriate to give differential treatment to section 8 companies in the matter of providing exemptions from compliance of CSR provisions, as there are certain areas where examples could be found of section 8 and other companies co-existing, for example, companies in microfin .....

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