The new Companies Act, 2013 has triggered new debate. What are the key changes? What is an impact on corporate word? Lot of seminars, conferences and clinics are being organized by various institutions and organizations to understand the nittygritty of the new law. Despite the fact that rules are
yet to be notified and they are too many, quite a bit of apprehension prevailing right now in the air. In this write up, I will focus on limited area to capture 5 key issues, which will have an impact on accounting and auditing of companies with this new development.
Financial Year
The financial year is proposed to be synchronized and all the companies will have their yearly closing on 31st March. Sounds nice! Let us have a closer look. What will happen to auditors? All the audit reports to be issued simultaneously. Auditor community will have to work hard on closing dates and it will not be possible to spread the work. Any concern for Independent
directors, who will have to attend the board meetings - all happening at the same time ?. Issue remains open. The subsidiary companies of foreign companies will have another addition to their compliance requirement and they will need another permission in order to close the books according to head office guidelines.
Accounting Standards
Second issue is about Accounting Standards. Already there is lot of confusion as to International Financial Reporting Standards (IFRS), Indian Accounting
Standards (Ind-AS), which are converged with IFRS and notified Accounting Standards (AS) are all on my desk. IFRS applicable for the companies who need to report outside India - so they are converting their financials accordingly. Ind-AS already notified and awaiting date of implementation. It is heard informally that they might become applicable to section of companies with effect from April 1, 2015. All companies are supposed to prepare financial statements according to AS - which may result in conflicts with this new Act. At various places, IFRS has been kept in mind, as this is the future. What about present? The Act itself is defining what will
be called financial statements. Besides Balance sheet, Statement of Profit and Loss and accounting policies, Statement of Change in Equity (SOCIE) and Cash flow statements (CFS) are now necessary. This is in contradiction of existing Schedule VI and Accounting Standard on Cash Flow (AS-3) which is mandating CFS only for certain companies and not everyone.
Auditors
As per the new Act, auditors are to be appointed for a term of five years and the same auditor can be there for two terms. That means it will be compulsory to change auditor after every 10 years. All of us know Indian scenario. Maximum of family owned businesses are having old association with their
auditor and the same auditor is carrying out audit for many years. Advantage - they are aware of the business environment and quickly complete the audits. Disadvantage can be seen as probability of overlooking is higher and relationship can influence the audit results. Another issue is deciding the fate of old auditors - whether this 5 year and 10 year term starts now or will be retrospective. Yet to see.
Consolidation
Fourth, consolidation made mandatory and is surely a welcome move. But what about definition of control. As per IFRS-10, the companies, which have power to govern financial and operation policies of an entity and are exposed to risk and ownership rights thereof are supposed to be controlling the entity and are supposed to consolidate. AS 10 is more rule based and defines control in terms of having more than 50 per cent of voting rights or control over more than half of board. This will need clear guidance and will certainly ignite some
serious debate in the market. Of course, we all want true and fair presentation of the financial statements, but practical realities and subjectivity remain there. Reopening of Financials Once the financial statements have been adopted by the shareholders, the previous Act did not allow any tinkering with those financial statements. That means there was no possibility of restatement or re-opening of such financial statements. This Act will allow reopening of previous financial statements. The concept is similar to IFRS, and probably outcome of recent exposed cases in Indian corporate world. It carries its own challenges in terms of role and responsibilities of previous directors and auditors. Details have to be seen how it will be used or misused in Indian Scenario. This is my fifth case. Lots of questions are floating in the air. Dependency on rules, draft is exposed to public for comments (when this piece is written). Personally feel that full marks to be given to our young minister for being able to push it through, as there had been lot of disappointments and wasted efforts in the past. We all know about human tendency to resist change - but change is rule and this change is certainly one of the most welcome changes in the corporate world.
(ICAI Student Journal, CA Praveen Kumar)
yet to be notified and they are too many, quite a bit of apprehension prevailing right now in the air. In this write up, I will focus on limited area to capture 5 key issues, which will have an impact on accounting and auditing of companies with this new development.
Financial Year
The financial year is proposed to be synchronized and all the companies will have their yearly closing on 31st March. Sounds nice! Let us have a closer look. What will happen to auditors? All the audit reports to be issued simultaneously. Auditor community will have to work hard on closing dates and it will not be possible to spread the work. Any concern for Independent
directors, who will have to attend the board meetings - all happening at the same time ?. Issue remains open. The subsidiary companies of foreign companies will have another addition to their compliance requirement and they will need another permission in order to close the books according to head office guidelines.
Accounting Standards
Second issue is about Accounting Standards. Already there is lot of confusion as to International Financial Reporting Standards (IFRS), Indian Accounting
Standards (Ind-AS), which are converged with IFRS and notified Accounting Standards (AS) are all on my desk. IFRS applicable for the companies who need to report outside India - so they are converting their financials accordingly. Ind-AS already notified and awaiting date of implementation. It is heard informally that they might become applicable to section of companies with effect from April 1, 2015. All companies are supposed to prepare financial statements according to AS - which may result in conflicts with this new Act. At various places, IFRS has been kept in mind, as this is the future. What about present? The Act itself is defining what will
be called financial statements. Besides Balance sheet, Statement of Profit and Loss and accounting policies, Statement of Change in Equity (SOCIE) and Cash flow statements (CFS) are now necessary. This is in contradiction of existing Schedule VI and Accounting Standard on Cash Flow (AS-3) which is mandating CFS only for certain companies and not everyone.
Auditors
As per the new Act, auditors are to be appointed for a term of five years and the same auditor can be there for two terms. That means it will be compulsory to change auditor after every 10 years. All of us know Indian scenario. Maximum of family owned businesses are having old association with their
auditor and the same auditor is carrying out audit for many years. Advantage - they are aware of the business environment and quickly complete the audits. Disadvantage can be seen as probability of overlooking is higher and relationship can influence the audit results. Another issue is deciding the fate of old auditors - whether this 5 year and 10 year term starts now or will be retrospective. Yet to see.
Consolidation
Fourth, consolidation made mandatory and is surely a welcome move. But what about definition of control. As per IFRS-10, the companies, which have power to govern financial and operation policies of an entity and are exposed to risk and ownership rights thereof are supposed to be controlling the entity and are supposed to consolidate. AS 10 is more rule based and defines control in terms of having more than 50 per cent of voting rights or control over more than half of board. This will need clear guidance and will certainly ignite some
serious debate in the market. Of course, we all want true and fair presentation of the financial statements, but practical realities and subjectivity remain there. Reopening of Financials Once the financial statements have been adopted by the shareholders, the previous Act did not allow any tinkering with those financial statements. That means there was no possibility of restatement or re-opening of such financial statements. This Act will allow reopening of previous financial statements. The concept is similar to IFRS, and probably outcome of recent exposed cases in Indian corporate world. It carries its own challenges in terms of role and responsibilities of previous directors and auditors. Details have to be seen how it will be used or misused in Indian Scenario. This is my fifth case. Lots of questions are floating in the air. Dependency on rules, draft is exposed to public for comments (when this piece is written). Personally feel that full marks to be given to our young minister for being able to push it through, as there had been lot of disappointments and wasted efforts in the past. We all know about human tendency to resist change - but change is rule and this change is certainly one of the most welcome changes in the corporate world.
(ICAI Student Journal, CA Praveen Kumar)
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