page 1 implication of companies act on financial reporting ctc seminar 5 september 2015 presentation...

Implication of Companies Act on Financial Reporting

CTC Seminar5 September 2015

Presentation by Jayesh Gandhi

Overview of key developments

► Passed by the Lok Sabha on 18 December 2012► Passed by the Rajya Sabha on 8 August 2013► Received the President assent on 29 August 2013 and notified on 30 August

2013► MCA is implementing the 2013 Act in a phased manner► Out of total 470 sections, 283 sections have been notified ► Final rules released for 19 Chapters - Covers most of the notified sections

Accounts

Overview and key changes

► Companies to follow uniform financial year, i.e., 1 April to 31 March

► Limited exemption

► Holding/ subsidiary of company incorporated outside India

► Need to follow different financial year for consolidation of its financial statements outside India

► Tribunal grants permission to follow different financial year

► Transitional period

► Existing companies to align with the new requirement within 2 years i.e. by March 2017

Key impact

► Impact on industries in cyclical/ seasonal businesses

► Exemption is not automatic – Need to apply to tribunal

► No exemption for associates/ joint ventures

► For Indian parent having foreign subsidiary, no exemption possible, as CFS will be prepared in India

Financial year

Understanding Companies Act, 2013

Financial statements

Key impact► Difference in exemption from cash

flow statement under the Act and AS 3

► More companies to prepare cash flow statement under the 2013 Act

► Onerous responsibility on the CFO to ensure financial statements are true and fair

Overview and key changes

► The 2013 Act defines the term financial

statements to include:

Balance Sheet

Profit & Loss

Cash Flow Statement

SOCIE, if applicable

► One person, small and dormant company

exempt from preparing cash flow statement

► Format of financial statements prescribed in

Schedule III to the 2013 Act in line with

revised schedule VI

► Addition of general instructions for preparation

of CFS

► CFO to mandatorily attest financial statements


Small Company

► Small company means a company, other than a public company—(i) paid-up share capital of which does not exceed fifty lakh rupees or suchhigher amount as may be prescribed which shall not be more than five crorerupees; or(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shallnot be more than twenty crore rupees:

► Following companies are not small companies though they may be meeting the above conditions—

(A) a holding company or a subsidiary company;(B) a company registered under section 8; or(C) a company or body corporate governed by any special Act;

Preparation of consolidated financial statements

Overview and key changes► Preparation of CFS mandatory for all

companies having subsidiaries (including associate and joint ventures)

► CFS to be prepared in the same form and manner as SFS of the parent

► Schedule III lays down general instructions for preparation of CFS

► List of subsidiaries/associates/JVs not consolidated along with reasons to be disclosed

► Rules clarify that CFS shall be made in accordance with Accounting Standards.

► Additional information required to be given for net assets, profit of each entity with the percentage to the consolidated numbers

► If the company is not required to prepare CFS under AS for the reason that its immediate parent is outside India, then also under 2013 Act, company is required to prepare CFS.

Key impact► Unlisted companies and private companies to

gear up their financial reporting process and consolidation

► Impact on companies currently preparing CFS under IFRS

► Intermediate unlisted parent not exempt from preparing CFS

► Mandatory disclosure of statutory information in CFS


Control vs. subsidiary

► Control includes:

Right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner

► Subsidiary means a company in which the holding company:

► Controls the composition of the board of directors, or

► Exercises 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.

► Total share capital is the aggregate of paid up equity and preference share capital


Definition of the term “associate”

► “Associate” definition in the Companies Act, 2013:

“Associate company, in relation to another company, means a company in which the 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.”

“Significant influence means control of at least 20% of total share capital, or of business decisions under an agreement.”

► “Associate” definition in notified AS 23:

“An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.”

“Significant influence is the power to participate in the financial/ operating policy decisions of the investee but not control over those policies.”


Depreciation

► Schedule II prescribes useful lives of various assets instead of SLM/ WDV rates.

► Useful lives of fixed assets prescribed under the Companies Act, 2013 different from those envisaged under Schedule XIV e.g.

► Plant & Machinery - Continuous Process plant –Life increased from 18 to 25 years

Non – continuous – Life reduced from 20 to 15 years

► General furniture and fittings – useful life reduced from 15 to 10 years

► Buildings other than factory buildings and other than RCC frame structure - useful life reduced from 58 to 30 years

► Companies can adopt useful lives/residual values which are different from schedule II if an appropriate justification is disclosed in financial statements.

► Useful Life prescribed for certain Industries


Depreciation

► Component accounting

► Useful life of significant part to be determined separately

► If its cost is significant vis-à-vis total cost of the asset and

► Its useful life is different from the remaining parts

► Applicability defer by one year to FY 2015-16

► No specific requirement to charge 100% depreciation on assets whose actual cost does not exceed Rs.5,000

► No separate rate for double/ triple shift; depreciation to be increased by

► 50% for the period of double shift use

► 100% for the period of triple shift use

► Transitional provisions

► If remaining useful life is not nil, carrying amount of the asset to be depreciated over the remaining useful life

► If remaining useful life is nil by applying Schedule II, carrying amount of assets to be adjusted either from retained earnings or charge to CY P & L

► Transitional provisions can be separately applied for component accounting


DepreciationKey Impact

► AS 6 requires lower life/ residual value to be used if management estimate is lower

► Companies may also choose to adopt higher useful life or residual value if the same can be justified

► Disclosure required for using higher/ lower useful life and residual values

► Additional depreciation due to revaluation of assets needs to be charged to P&L - No option to recoup from revaluation reserve


Declaration and payment of dividend

► Dividend can be declared only out of free reserve.

► Final dividend can be declared out of: ► Profits of the company for that year after depreciation and after adjusting accumulated losses

for the earlier year

► Accumulated profits for any previous financial year(s) arrived at after providing for depreciation

► Both i.e. profits for the year and accumulated profits

► Out of money provided by Central Government/state government for payment of dividend

► Interim dividend : ► May be declared out of surplus in the P&L/ Profits for the current financial year

► In case of YTD loss, dividend rate cannot exceed last 3 years’ average rate

► No dividend can be declared on failure to comply with provisions relating to acceptance and repayment of deposits under the 2013 Act

► Before declaration of dividend accumulated loss, if any needs to be fully adjusted.

► No specific requirement concerning transfer to reserve – Companies to decide the % of transfer


Declaration and payment of dividend

► Rules for declaring dividend out of reserves:

► Rate of dividend not to exceed the average dividend rate of immediately preceding 3 years – Rule not applicable to companies which have not declared dividend in past 3 years

► Total amount to be drawn from accumulated profits not to exceed 1/10th of total of paid-up share capital and free reserves

► The amount so drawn first to be utilized to set off losses incurred in the financial year

► The balance of reserves after such withdrawal shall not be below 15% of its paid up share capital


Free reserves

“Free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that

► Any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

► Any change in carrying amount of an asset or of a liability recognized in equity, including surplus in P&L on measurement of the asset or the liability at fair value

shall not be treated as free reserves.

Key Impact

► Free reserves exclude unrealized gains; however unrealized losses are reduced. For e.g. revaluation reserve/ credit balance of hedging reserve are not included in free reserves.


Utilization of securities premium

Overview and key changes► Utilization of securities premium restricted for prescribed class of companies

which comply with prescribed AS. Given below is comparative analysis:

Purpose Companies Act, 1956

Companies Act, 2013

Prescribed class Others

Issue of fully paid equity shares as bonus shares √ √ √

Issue of fully paid preference shares as bonus shares √ X √

Writing off preliminary expenses √ X √Writing off equity share issue expenses √ √ √Writing off preference share/ debenture issue expenses √ X √

Providing for premium payable on redemption of preference shares/debentures √ X √

Buy- back of its own shares or other securities √ √ √

Rules have not yet clarified the prescribed class of companies- most likely IND-AS companies


Issue of bonus shares

► Bonus shares can be issued only from free reserves, securities premium and capital redemption reserve► Bonus shares cannot be issued by capitalizing revaluation reserve► Currently the Supreme Court judgment allows non-listed company to issue bonus

shares out of revaluation reserve► Pre-conditions introduced for bonus issue:

► Articles of Association to authorize bonus issue► Authorization through the General Meeting► No default in payment of statutory dues of employees► No default in payment of principal and interest on fixed deposits or debt securities ► Partly paid-up shares outstanding on the date of allotment must be made fully paid-

up► Bonus shares not be issued in lieu of dividend► Company which has once announced the decision of its Board

recommending a bonus issue, will not subsequently withdraw the same.

Auditors reporting responsibilities

► Auditor’s report to include additional matters such as:

► Whether the company has adequate internal financial controls systems in place and the operating effectiveness of such controls(Applicable from 2015-16)

► Observations/comments on financial transactions or matters having adverse effect on the functioning of the company

► Whether the company has disclosed the effect of pending litigations on its financial position in its financial statement

► Whether the company has made provision as required under any law/accounting standards for material foreseeable losses on long term contracts including derivative contracts

► Whether there is delay in depositing money in IP&E fund

► Companies (Auditor’s Report) Order 2015, (CARO 2015)

► No. of reporting clauses reduced from 21 to 12 clause in the new CARO 2015

► These 12 reporting clauses are similar in requirement to the corresponding clauses in previous CARO

► The clauses not included in the new CARO relates to transaction with Section 301 parties, comment on internal audit system, chit fund, records relating to dealings in shares / securities / debenture, preferential allotment of shares, etc.

Auditors reporting responsibilities

Fraud reporting:► If the auditor, in the course of audit, has reasons to believe that an offence involving

fraud is being or has been committed against the company by its officers or employees, he will report the matter to the Central Government (CG) immediately

► Auditor is required to report to CG for material frauds and in case of others required to report to Audit Committee.

► Materiality not defined in the Act

► Rules prescribe the following procedures for fraud reporting

► Auditor will forward his report to the board or the Audit Committee, as the case may be, immediately after a fraud comes to his knowledge, seeking their reply or observations within 45 days

► On receipt of reply/ observations, the auditor will forward his report, reply received and his comments on the reply to the Central Government within 15 days

► If the auditor fails to get any reply/ observations within 45 days, he will forward his report to the Central Government along with a note explaining the fact

► Maximum time limit 60 days

► The provision will also apply, mutatis mutandis, to a cost auditor and a secretarial auditor

Board Report

Board reportOverview and key changes

Key disclosures for performance, risks

Extract of annual return which covers matters such as indebtedness, details of promoters, directors and KMP and their remuneration

Financial summary or highlights Change in the nature of business, if any Directors/ KMP appointed/ resigned during year Companies that have become/ ceased to be subsidiaries, associates

or joint ventures Significant/ material orders passed by courts, regulators, etc.,

impacting going concern status and company’s operations in future Statement indicating development and implementation of risk

management policy

2013 Act - Board report to be prepared based on SFS of the company – separate section to explain financial position/ performance for each subsidiary, associate and joint venture

Board reportInternal financial control

► Directors responsibility statement to include additional information e.g.

► Existence and adequacy of internal financial controls (IFC) – Applicable for listed Companies

► Systems for compliance with all applicable laws - Applicable for all Companies

Explanation

IFC means policies and procedures adopted by the company for ensuring orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information

► Rules requires board report to contain details in respect of adequacy of internal financial controls related to financial statements

Board’s reportDisclosure regarding median remuneration

The rules require every listed company to disclose the following in the Board’s report:

► Ratio of the remuneration of each director to the median remuneration of the employees

► % increase in remuneration of each director, CFO, CEO, CS or manager if any.

► % increase in the median remuneration of employees

► Number of permanent employees on the rolls of company

► Explanation on relationship between average increase in remuneration and company performance

► Comparison of the remuneration of the KMP against the performance of the company

► Key parameters for any variable component of remuneration availed by directors

► Ratio of the remuneration of the highest paid director to that of the employees who are not directors but receive remuneration in excess of the highest paid director

► Variations in the market capitalisation of the company and PE ratio as compared to previous year

► % increase over decrease in market quotations of shares in comparison to last IPO price for listed companies

► Average % increase in the salaries of employees other than managerial personnel in the last financial year and its comparison with % increase in managerial remuneration and justification thereof pointing out exceptional circumstances or increase in the managerial remuneration

Board’s reportOther key disclosures

► Board report to also include, for all companies:► Details of employees receiving remuneration not less than Rs 60 lakh p.a. or Rs. 5 lakh p.m.► Details of every employee receiving remuneration in excess of that drawn by managing

director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than 2% of the equity shares of the company.

► Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor/company secretary in his report

► Penalty or punishment imposed under the Companies Act on the company, its directors► Statement on independence declaration given by independent directors► Particulars of loans, investments, etc. ► Contracts or arrangements with related parties► Statement indicating development and implementation of risk management policy► Details of policy developed and implemented on CSR► Details of significant and material orders passed by regulators impacting the going concern

status► Statement indicating how formal annual evaluation has been made by the board of its own

performance and that of its committees and individual directors:► Listed companies► Non-listed public companies having a paid up share capital of ` 25 crores or more


Related party transactions, loans and investments


Relative

Overview and key changes► Definition: With reference to any person means anyone who is related to another if

► They are member of HUF► They are Husband and wife► They are related in any manner as prescribed in the list of relatives under the rules

► The rules include the following person in the list of relative► Father (includes step-father)► Mother (includes step-mother)► Son (includes step-son)► Son’s wife► Daughter► Daughter’s husband► Brother (includes step-brother)► Sister (includes step-sister)


Definition of related party

Related Parties with respect to company means:

i. A director, KMP or their relativeii. A firm, in which a director, manager or his relative is a partneriii. A private company in which a director/ manager is a member/ directoriv. A public company in which a director/ manager is a director or holds along with his relatives, more

than 2% of its paid-up share capitalv. A body corporate whose board, managing director or manager is accustomed to act in

accordance with the advice, directions or instructions of a director or manager, except if advice is given in the professional capacity

vi. Any person on whose advice/ directions/ instructions a director or manager is accustomed to act, except advice given in professional capacity

vii. Any company which is:i. Holding, subsidiary or an associate company of such company; orii. Fellow Subsidiary;

viii. A director or KMP of the holding or his relative with reference to a company;


Related party transactions

Transactions covered► Sale, purchase or supply of any goods or materials► Selling or otherwise disposing of, or buying, property► Leasing of property► Availing or rendering of any services► Appointment of any agent for purchase or sale of goods, materials, services or

property► Appointment to office/ place of profit in the company, its subsidiary or associate► Underwriting the subscription of any securities or derivatives thereof, of the

company


RPT – Approval process

► A company needs approval of the Audit Committee, if applicable, on all RPT and subsequent modifications thereto under section 166► Approval needed even if RPT are in the ordinary course of business and consummated

at arm’s length► Neither the board approval nor the special resolution of disinterested shareholders

need if the transactions meets both the criteria:► Transaction is entered into the ordinary course of business► Transaction is at arms’ length price

► For transactions not meeting either of the two criteria, i.e., RPT either not in ordinary course or not at arm’s length, atleast approval of the board is needed

► Regarding the special resolution of disinterested parties, there is an additional exemption which needs to be considered, viz., the company satisfies both the criteria► Paid-up share capital of the company is below the prescribed threshold► Transaction value does not exceed the prescribed limit

► If either of these criteria is not met, approval is needed by shareholder’s special resolution

► Members of the company, who are related parties, are not permitted to vote


RPT - Thresholds for exemption from special resolution

Criteria As per Rules

Paid-up share capital threshold Rs.10 crores or more

Transaction value threshold

Sale, purchase or supply of any goods or materials (Directly or through agent)

More than 25% of annual turnover

Selling or otherwise disposing of, or buying, property of any kind (Directly or through agent)

More than 10% of net worth

Leasing of property of any kind More than 10% of net worth or 10% of turnover

Availing or rendering of any services (Directly or through agent)

More than 10% of net worth

Appointment to any office or place of profit in the company, its subsidiary company or associate company

Remuneration exceeds Rs.250,000 per month

Underwriting the subscription of any securities of the company or derivatives thereof

Remuneration exceeds 1% of net worth


Disclosure as per 2013 Act in the Board Report► S. 188 (2) – every

contract / arrangement entered under S. 188 (1) will be referred to in the Board Report along with justification.

Disclosure as per clause 49 of Listing agreement► Policy on dealing with

related parties on its website and in the annual report

► Details of material related party transactions on a quarterly basis along with the compliance report on corporate governance

► Disclosure by senior management to the Board of all material financial and commercial transactions where they have a personal interest that may have a potential conflict with the interest of the company

Disclosure as per AS 18► Name of the related party► Nature of the relationship► Description of the nature

of the transactions► Volume of the transactions

either as amount or as appropriate proportion

► Any other elements necessary for understanding the financial statements

► Amounts outstanding and provision for doubtful debts

► Amounts written off or written back

► Remuneration paid to KMPs

Disclosures

Form ACO-2 includes disclosure of:► All RPT not on arms’

length basis .► Material RPT on arms’

length basis


Loans to directors and subsidiaries

2013 Act prohibits advancing loan to and providing guarantee/ security for loan to any director or person in whom director is interested (Sec-185).

Person in whom director is interested includes: Any body corporate, the board, managing director or manager, whereof is accustomed to act

in accordance with the directions or instructions of the board, or of any director or directors, of the lending company

No possibility of seeking the Central Government approval to provide prohibited loans/guarantees/ security

No specific exemption for loan/ guarantee/ security given by a private company Restriction on loan does not apply to:

Making of loan to managing/ whole-time director as part of service condition extended by a company to all its employees or pursuant to any scheme approved through special resolution

A company, which in ordinary course of its business provides loans/guarantees/ securities and interest charged is not less than the bank rate declared by RBI

Any loan made, guarantee given or security provided by a holding company to its WOS company

Any guarantee given or security provided by a holding company for loan made by any bank or financial institution to its subsidiary company

Such loans should be utilised by a subsidiary company for its principle business activities


Loans and investments by a company

► Prohibits a company from giving loans, providing guarantees/security to other body corporate or acquiring securities of other body corporate (Section 186) exceeding higher of :

► 60% of paid up capital, free reserves and securities premium. or

► 100% of free reserves and securities premium

► 2013 Act extends restriction for provision of loan to/ guarantee/ security on behalf of any person or entity also

► 2013 Act allows provision of loan/ guarantee/ security or acquiring securities exceeding the limit by prior approval through special resolution (not applicable to WOS and JV companies)

► Rate of interest cannot be lower than prevailing yield on one year, three year, five year or ten year Government security closest to tenor of loan even for WOS

► Full disclosure required in the financial statements of the loans given, investments made or guarantee given/ security provided along with purpose


Corporate Social Responsibility



► Applicable to companies having one or more of the following criteria:► Net worth of `500 crore or more or► Turnover of ` 1,000 crore or more or► Net profit of `5 crore or more

► Company can be out of CSR ambit only if the conditions given above are not satisfied for three consecutive years.

► Constitution of CSR committee mandatory for above companies

► To comprise at least 3 directors, with 1 independent director

► Role of CSR Committee:► To formulate and recommend CSR policy, including activities to be undertaken ► To recommend amount to be spent► To monitor CSR policy and activities



► Applicable companies to spend minimum 2% of its average net profit during 3 immediately preceding financial years on CSR activities.

► In case of failing to do so, the board report needs to explain the same.

► For this purpose net profit to be determined as per Section 198.

► Preference to local area and area around for spending CSR amount.

► Board report and the company’s website, if any, to disclose CSR policy

► Schedule VII of the 2013 Act sets out the eligible CSR Activities

► Net profit” means net profit as per financial statements prepared under the Act and does not include:

► Profits of overseas branches

► Dividend received from companies which are covered and complying with the provisions relating to CSR.


Acceptance of Deposits


► For deposits accepted and outstanding before commencement of the Act,► Repayment with accrued interest shall be made within one year of the

Commencement or one year from the date on which such payments are due, whichever is earlier.

► Tribunal can grant further time. The said sub section is not yet notified. If it remains un notified, this route is not available.

► Rules provides that if deposits are paid on due dates, above provisions will not apply

► If not repaid, the company shall be fined between Rs.1 to 10 crores and officer between 25 lakhs to 2 crores and imprisonment upto 7 years.

► Banking Companies and NBFCs will continue to get governed by RBI.

Acceptance of Deposits - Transitional Provisions


► Exempt Deposits now covers:► Amount received from foreign collaborators, Mutual Funds (SEBI registered) and insurance companies.► Amount received against issue of Commercial papers/Other instruments, as per RBI guidelines► Share Application money or advance against securities to be issued is exempt only for 60 days. If

securities are not allotted, it should be refunded within next 15 days. If not, will be treated as Deposits. Refund has to be made in cash and adjusted for any other purpose cannot be considered as refund.

► Any amount received from relative of directors or shareholders in case of Private Company, not exempted any more. Amount from director continue to be exempt, provided declaration of own fund is given.

► Any debentures or bonds secured by first charge of assets other than intangible assets. Previously, it was only if secured by any immovable property. Security market value, as assessed by registered valuer, should be higher than amount of bonds.

► Secured Compulsorily Convertible Bonds, provided it is convertible into shares within 5 years.► Amount received by Security Deposits from employees, provided it is as per contract of employment, it

does not exceed annual salary and is non interest bearing.► Any non-interest bearing amount received or held in trust► Any amount received in the course of business of the Company provided -

► Advance for goods and services should be appropriated within 365 days,► Advance received against agreement or arrangement for sale of property

► Advance received for supply of capital goods of long term project or Performance Deposits.► Any amount brought in by the promoters or by their relatives by way of unsecured loan pursuance to the

stipulation.

Acceptance of Deposits


► Eligible Companies are – ► A Public company► Having Net worth of Rs.100 Crores or more or turnover of Rs. 500 Crores or more.► Special Resolution is passed in the General Meeting and filed with ROC. If total

borrowings is within the limit of paid capital and free reserves then ordinary resolution will do.

► Only eligible companies can invite deposits from public. Other companies can accept deposits from its members.

► Previously company having net owned fund of less than Rs.1 crore was not allowed to invite Public deposits.

Eligible Companies


► Period of Deposit cannot be less than 6 months or more than 36 months. It can be repayable on demand after 6 months period.

► Exception is to meet short term requirement of funds, where deposit for a period of 3 to 6 months can be accepted, within a limit of 10% of paid up share capital and Free Reserves.► To note share capital includes preference capital► Surplus in P&L on measurement of the asset or liability at fair value not part of Free

Reserves!► If no deposits are invited from the Public, limit for acceptance of deposits from

members is 25% of the paid up capital and free reserves. It has to issue circular to members giving specified details.

► For eligible company limit is 10% from members and additional 25% from public. To note that limit available under one cannot be substituted by another.

► For Government Company, limit is 35% without bifurcation between members and public.

► Rate of Interest and maximum brokerage in line with stipulation by RBI for NBFCs.

Limits and Period of Deposits


► Advertisement inviting deposits or circular to members should be published in 2 newspapers and to be uploaded on the website of the company, if any. Advertisement be given only under authority of the Board of Director.

► Deposit Insurance – It should minimum cover amount of Rs.20000 for all depositors.► Appointment of deposits trustees is required in case of Secured Deposits. Duties have

been defined in the Rules.► Rating to be disclosed.► Provides penal rate of interest of 18% per annum for deposits claimed but remaining

unpaid► For contravention there is a fine of Rs.5000 plus Rs.500 for each day. ► Maintenance of Liquid Assets

► 15% of the amount of deposits maturing during the current financial year and next financial year.

► Amount should be deposited with scheduled bank under ‘Deposit Repayment Reserve Account.

Deposit holders’ Protection

Thank You

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