Audited annual reports may face scrutiny

 

The ministry of corporate affairs is working on a proposal according to which audited annual accounts of companies would be scrutinised on a regular basis. Currently, the government directs special audits only in cases where irregularities come to light. The development follows a proposal from a high-level committee on financial sector reforms. The Planning Commission constituted panel, chaired by former IMF chief economist Raghuram Rajan, had proposed that a review of such annual accounts would result in greater public confidence in company reports. Emergence of large financial conglomerates and holding companies makes such a system of supervision a necessity, goes the argument. Even as the proposal is at a deliberative phase, government officials say that in case the panel’s recommendations are accepted, amendments will have to be made to the Company Law. At present, companies are mandated to submit their accounts to the registrar of companies (RoC). The accounts are required to be audited by an authorised chartered accountant before they are submitted to the RoC. The present law does not call for review of all accounts submitted before the RoCs, but it has a provision wherein suspect companies go through a special audit. In cases where the government is of the opinion that a company is being mismanaged or its financial position is endangering its solvency, the government can order special audits. While acknowledging that regular review could lead to harassment for companies, the panel has also called for setting up of a monitoring mechanism to ensure that corporates do not face difficulties. While the ministry of corporate affairs is supposed to review the accounts of unlisted companies, capital market regulator Sebi should take up the review of listed companies. Strengthening ties between the ministry and the Sebi has also been recommended for effectiveness and greater coordination. – www.economictimes.indiatimes.com

 

NOTIFICATION OF ACCOUNTING STANDARDS BY THE CENTRAL GOVERNMENT UNDER THE COMPANIES ACT, 1956

PRESS RELEASE, DATED 14-5-2008

 

The Government recognises the importance of financial reporting in providing essential financial information about the company to its shareholders and other stakeholders, as an integral and important part of good corporate governance. Such information needs to be reliable, free from bias and should enable comparison on the basis of common benchmarks. This, in turn, necessitates an appropriate, financial reporting system in the form of accounting standards that incorporate sound accounting principles and reflect a true picture of the financial health of the company while ensuring legally enforceable accountability.

 

The work of formulating down accounting standards for the companies operating in India was initiated when the Institute of Chartered Accountants of India (ICAI), a statutory body regulating the accounting profession in the country, first took up this task in 1977. However, the accounting standards prepared and issued by the ICAI were mandatory only for its members, who, while discharging their audit function, were required to examine whether the said standards of accounting were complied with. With the amendment of the Companies Act, 1956 through the Companies (Amendment) Act, 1999, accounting standards as well as the manner in which they were to be prescribed, were provided a statutory backing.

 

Today, in pursuance of the statutory mandate provided under the Companies Act, 1956, the Central Government prescribes accounting standards in consultation with the National Advisory Committee on Accounting Standards (NACAS), also established under the Companies Act, 1956. NACAS, a body of experts including representatives of various regulatory bodies and Government agencies, has been engaged in the exercise of examining Accounting Standards prepared by ICAI for use by Indian corporate entities, since its constitution in 2001. In this exercise, it has adapted the international norms established by the International Financial Reporting Standards issued by the International Accounting Standards Board.

 

The Central Government notified 28 Accounting Standards (AS 1 to 7 and AS 9 to 29) in December 2006 in the form of Companies (Accounting Standard) Rules, 2006, after receiving recommendations of NACAS. These Accounting Standards are to be applied with effect from company financial year 2007-08, the accounts with respect to which are to be finalised during 2008-09. In notifying the Accounting Standards, the Government has adopted a policy of enabling disclosure of company accounts in a transparent manner at par with widely accepted international practices, through a process of convergence with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In doing so, the requirements of the companies functioning in the country are being kept in view. The initiative for harmonization of the Indian accounting standards with IFRS, taken up by NACAS in 2001 and implemented through notification of accounting standards by the Central Government in 2006, would be continued by the Government with the intention of achieving convergence with IFRS by 2011.

 

Consistent with international practices, the accounting standards are prepared in India in context of the issues concerning large publicly held and listed corporate entities so as to enable the widest possible coverage of financial issues concerning a corporate entity. Consequently, some of the requirements of accounting standards may prove to be onerous for Small and Medium Companies (SMCs), who may not have the necessary resources to apply these requirements and incur associated compliance costs. Also, users of financial statements of the SMCs and their information requirements may also have limited requirements. Keeping this in view, necessary exemptions and relaxations to SMCs have been incorporated in the accounting standards on the recommendation of NACAS to enable them to apply the broad framework of the Accounting Standards in a simple manner.

 

The accounting and financial reporting practices need to change and evolve with the changing business and economic situation. Accounting practices prevailing in the country would also need to develop likewise. The institutional arrangements under the Companies Act, 1956 enable such developments through the efforts of NACAS and with inputs from ICAI and other quarters to meet the requirements of a changing economy. In this context, ICAI would continue to prepare and hold public consultation on standards of accounting for general application to various entities. It may also issue advice and guidance to its members to consider following certain practices approved by it in pursuance of prudence. The Government would examine further accounting standards to be followed by companies, on the basis of the standards proposed by ICAI, subject to the recommendations of NACAS thereon, for notification in accordance with the procedure laid down under the Companies Act, 1956. In the process, the approach of convergence with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), being increasingly accepted as a common standard internationally, would be continued so that the financial information disclosed by Indian companies compares well with that disclosed by non-Indian companies in compliance with IFRS. This would not only provide reliable financial information to investors globally but also lower compliance costs since the need for restatement of accounts would be obviated for Indian companies seeking to tap international financial markets.

 

The Ministry of Corporate Affairs would, through the reform of accounting standards, continue to strengthen the corporate financial systems, at par in the best international practices, in the interest of all stakeholders to meet the requirements of India’s changing economy.

 

Companies (Accounting Standards) Rules, 2006.

Ministry of Company Affairs - NOTIFICATION - New Delhi, the 7th December, 2006 - ACCOUNTING STANDARDS

G.S.R. 739 (E). – In exercise of the powers conferred by clause (a) of
sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956),
read with sub-section (3C) of section 211 and sub-section (1) of section
210A of the said Act, the Central Government, in consultation with
National Advisory Committee on Accounting Standards, hereby makes
the following rules, namely:-

1. Short title and commencement.- (1) These rules may be called
the Companies (Accounting Standards) Rules, 2006.

(2) They shall come into force on the date of their publication
in the Official Gazette.

2. Definitions.- In these rules, unless the context otherwise requires,-

(a) “Accounting Standards” means the Accounting Standards as
specified in rule 3 of these rules;

(b) “Act” means the Companies Act, 1956 (1 of 1956);

(c) “Annexure” means an Annexure to these rules;

(d) “General Purpose Financial Statements” include balance sheet,
statement of profit and loss, cash flow statement (wherever
applicable), and other statements and explanatory notes which form
part thereof.

(e) “Enterprise” means a company as defined in section 3 of the
Companies Act, 1956.

(f) “Small and Medium Sized Company” (SMC) means, a company-

(i) whose equity or debt securities are not listed or are not in
the process of listing on any stock exchange, whether in
India or outside India;

(ii) which is not a bank, financial institution or an insurance
company;

(iii) whose turnover (excluding other income) does not
exceed rupees fifty crore in the immediately preceding
accounting year;

(iv) which does not have borrowings (including public
deposits) in excess of rupees ten crore at any time during
the immediately preceding accounting year; and

(v) which is not a holding or subsidiary company of a
company which is not a small and medium-sized
company.

Explanation: For the purposes of clause (f), a company shall
qualify as a Small and Medium Sized Company, if the conditions
mentioned therein are satisfied as at the end of the relevant
accounting period.

(2) Words and expressions used herein and not defined in
these rules but defined in the Act shall have the same meaning
respectively assigned to them in the Act.

3. Accounting Standards.- (1) The Central Government hereby
prescribes Accounting Standards 1 to 7 and 9 to 29 as recommended by the
Institute of Chartered Accountants of India, which are specified in the
Annexure to these rules.

(2) The Accounting Standards shall come into effect in
respect of accounting periods commencing on or after the
publication of these Accounting Standards.

4. Obligation to comply with the Accounting Standards.- (1) Every
company and its auditor(s)shall comply with the Accounting Standards in
the manner specified in Annexure to these rules.

(2) The Accounting Standards shall be applied in the
preparation of General Purpose Financial Statements.

5 . An existing company, which was previously not a Small and
Medium Sized Company (SMC) and subsequently becomes an SMC,
shall not be qualified for exemption or relaxation in respect of Accounting
Standards available to an SMC until the company remains an SMC for
two consecutive accounting periods.

[No. 1/3/2006/CL-V]
JITESH KHOSLA, Jt. Secy.

ANNEXURE
(See rule 3)

ACCOUNTING STANDARDS

A. General Instructions

1 . SMCs shall follow the following instructions while complying
with Accounting Standards under these rules:-

1.1 the SMC which does not disclose certain
information pursuant to the exemptions or relaxations
given to it shall disclose (by way of a note to its
financial statements) the fact that it is an SMC and has
complied with the Accounting Standards insofar as they
are applicable to an SMC on the following lines:

“The Company is a Small and Medium Sized Company
(SMC) as defined in the General Instructions in respect of
Accounting Standards notified under the Companies Act,
1956. Accordingly, the Company has complied with the
Accounting Standards as applicable to a Small and Medium
Sized Company.”

1.2 Where a company, being a SMC, has qualified for any
exemption or relaxation previously but no longer qualifies
for the relevant exemption or relaxation in the current
accounting period, the relevant standards or requirements
become applicable from the current period and the figures
for the corresponding period of the previous accounting
period need not be revised merely by reason of its having
ceased to be an SMC. The fact that the company was an
SMC in the previous period and it had availed of the
exemptions or relaxations available to SMCs shall be
disclosed in the notes to the financial statements.

1.3 If an SMC opts not to avail of the exemptions or relaxations
available to an SMC in respect of any but not all of the
Accounting Standards, it shall disclose the standard(s) in
respect of which it has availed the exemption or relaxation.

1.4 If an SMC desires to disclose the information not required
to be disclosed pursuant to the exemptions or relaxations
available to the SMCs, it shall disclose that information
in compliance with the relevant accounting standard.

1.5 The SMC may opt for availing certain exemptions or
relaxations from compliance with the requirements
prescribed in an Accounting Standard:

Provided that such a partial exemption or relaxation and
disclosure shall not be permitted to mislead any person or
public.

2. Accounting Standards, which are prescribed, are intended to be in
conformity with the provisions of applicable laws. However, if due to
subsequent amendments in the law, a particular accounting standard is found to be not in conformity with such law, the provisions of the said law will
prevail and the financial statements shall be prepared in conformity with
such law.

3. Accounting Standards are intended to apply only to items which are
material.

4. The accounting standards include paragraphs set in bold italic type
and plain type, which have equal authority. Paragraphs in bold italic type
indicate the main principles. An individual accounting standard shall be
read in the context of the objective, if stated, in that accounting standard and
in accordance with these General Instructions.

B. Accounting Standards

AS1

AS2

AS3

AS4

AS5

AS6

AS7