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  1. Important Provisions of The Companies Act, 2013, in relation to Financial ReportingAccounting, Auditing and Important Regulatory UpdatesPresented by:Khushroo B. PanthakyChartered Accountant, Bombay17 June 2017 – Aurangabad

  2. Contents • Companies Act, 2013 • Fraud Reporting • Companies Act, 2013- Other updates • Schedule II • Reporting on Internal Financial Controls • Companies (Auditor’s Report) Order 2016 (CARO 2016) • CSR • SEBI Updates • ICAI Updates • Other Updates • Ind AS

  3. Companies Act, 2013

  4. Companies Act 2013 – Independence Key changes • Independence requirements under Companies Act 2013 are stricter than existing independence rules under IESBA Code • Under the 2013 Act, an auditor is not allowed to render, among other services, “management service” to the company, its holding or subsidiary company • Term management services has not been defined either in 2013 Act or the Rules.

  5. Companies Act 2013 – Non Audit Services Key changes Restriction on services • severe restrictions on providing non-audit services, directly or indirectly to the company, its holding or subsidiary company include: • accounting and book keeping services; • internal audit; • design and implementation of any financial information system; • actuarial services; • investment advisory services; • investment banking services; • rendering of out sourced financial services; and • management services.

  6. Companies Act 2013 – Non Audit Services Restriction on services • transition period • Complete / terminate all services mentioned above on or before 31 March 2015. • Not to enter into any new agreement to render above mentioned services on or after 1 April 2014.

  7. Identify risks Evaluate risks Respond to risks Risk based approach Understand the entity and its internal control Perform inquiries Evaluate risk indicators Perform preliminary analytics Identify matters impacting the financial statements Link matters to financial statement risks and assertions Identify controls that respond to the risks Materialmisstatement isreasonably possible? Yes Additional risks identified during execution Perform walkthroughs No Assess inherent risk Perform appropriate substantive procedures Perform tests of controls

  8. Companies Act 2013 – Accounts-Financial Statements Key changes • 31 March to be the mandatory FY end (except for the purpose of aligning the FY with that of holding/subsidiary incorporated outside India, with prior approval of the NCLT) • consolidation mandatory for all companies including unlisted and private companies having subsidiaries (including associates and joint ventures) • the 2013 Act prescribes the format (similar to existing revised schedule VI of the Act) for preparation of Consolidated Financial Statement (CFS). • requirement to show minority interest separately within equity on the balance sheet • in the CFS, the company would need to give all disclosures relevant for CFS only

  9. Consolidated Financial Statements (CFS)With the Companies Act, 2013 coming into effect • AGENDA • Applicability of the CFS standard • Exemptions provided under the Companies Act, 2013 • Areas of Interpretation • How professional firms assist in preparation of CFS

  10. Applicability of the CFS Standard • Companies Act, 2013 establishes the requirement for CFS for Indian Companies • Preparation of CFS is mandatory for all companies, including unlisted and private companies having subsidiaries (including associates and joint ventures) • Consolidation is done in accordance with the provisions of Schedule III of the Act and the applicable accounting standards (21, 23 and 27) • Companies preparing CFS under IFRS would now need to prepare the CFS under Indian GAAP and are required to conform to the accounting policies of the parent company

  11. Applicability of the CFS Standard • Companies that do not have any subsidiary but only has associates and / or joint venturesalso need to prepare CFS • Unlisted companies that have foreign subsidiary (ies) need to prepare CFS • Ministry of Corporate Affairs (MCA) has provided the below exemptions:- • Intermediate parent companies need not prepare CFS as long as they are wholly-owned and the immediate parent is in India

  12. How professionals can support in preparation of CFS • Review consolidation requirements for the group • Accounting and tax advice on the alignment of group structure • Review of the financial reporting framework, manage multi GAAP reporting and prepare for India GAAP reporting • Review of consistency in accounting policies • Review of the CFS reporting related internal controls within the group • Training and knowledge transfer

  13. Fraud Reporting

  14. Effective date Rules notified MCA prescribes threshold for fraud reporting • MCA notified 14 December 2015 as the date of commencement of provisions of Companies (Amendment) Act, 2015relating to reporting of fraud • MCA issued Companies (Audit and Auditors) Amendment Rules, 2015 • all fraudsto be reported to audit committee/board immediately • no later than 2 days of auditor's knowledge of the fraud • fraud involving / expected to involve individually INR 1 crore or more to be reported to Central Government • frauds not reported to Central Government: Board report to disclose specified details • amended provisions also applicable to cost auditor and secretarial auditor

  15. Effective date Guidance Note on Reporting on Fraud under section 143(12) of the Companies Act, 2013 (Revised 2016) Guidance Note Erstwhile GN modified pursuant to amendment to section 143(12) of the 2013 Act and Rule 13 of the Companies (Audit and Auditors) Rules, 2014, which requires the statutory auditor to report to the Central Government only for frauds which involve/expected to involve individually an amount => INR 1 crore In case of fraud involving lesser than above amount, statutory auditor to report matter to the audit committee/Board of company instead of Central Government.

  16. Companies Act 2013 – Fraud Reporting

  17. Companies Act, 2013 - Other updates

  18. Effective date Rules notified Omnibus approval by Audit Committee • MCA notified 14 December 2015 as the date of commencement of provisions of Companies (Amendment) Act, 2015 relating to omnibus approval for related party transactions (RPTs) • MCA issued Companies (Meeting of Board and its Powers) Second Amendment Rules, 2015 to permit omnibus approval for RPTs subject to prescribed conditions including: • audit committee to consider certain factors while specifying criteria for omnibus approval • criteria to be approved by board; consideration for approval include: • repetitiveness of the transaction (in past or in future) • justification for the need of omnibus approval • omnibus approval to be valid only for a period of 1 financial year • no omnibus approval for selling/disposing of the undertaking of company • Amended rules aligned with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

  19. Companies (Amendment) Bill, 2016 introduced in Lok Sabha Companies (Amendment) Bill, 2016 (the Bill) • Finance Minister introduced the Bill on 16 March 2016 in Lok Sabha • On 1 February 2016 MCA issued report of Companies Law Committee(CLC) proposing several changes to the 2013 Act • Recommendations would result in changes in 78 sections and more than 100 changes in the 2013 Act; proposed 50 amendments in rules • Report aims at further improving ease of doing business and proposes to • address transitional-cum-implementation challenges • removal of inconsistencies between the 2013 Act and Accounting Standards/SEBI requirements • rectifying omissions and inconsistencies in the Act • The Bill proposes amendments based on comments received from stakeholders, ministries and recommendations of the CLC Report

  20. Companies (Amendment) Bill, 2016 introduced in Lok Sabha Key Amendments Proposed • Definition of subsidiary company and associate company to be amended • term 'total share capital' to be replaced by 'total voting power' for determining holding subsidiary relationship • significant influence means control of at least 20 percent of total voting power or control of or participation in taking business decisions under an agreement • Removal of requirement for annual ratification of appointment or continuance of auditor • Re-opening of financial statementsrestricted to eight years • Removing restriction on layers of subsidiaries and investment companies

  21. Companies (Amendment) Bill, 2016 introduced in Lok Sabha Key Amendments Proposed • Simplification of the private placement process by doing away with separate offer letter • Removing provisions relating to forward dealing and insider trading from the existing company law • Replacing central government approval with special resolution approval of shareholders in case managerial remuneration crosses the prescribed thresholds • Introduction of test of material for pecuniary interest for testing independence of independent directors

  22. Companies (Amendment) Bill, 2016 introduced in Lok Sabha Key Amendments Proposed • Companies may advance loan to any other person in whom director is interested subject to prior approval by special resolution • Align prescription for companies to have Audit Committee and Nomination and Remuneration Committee with that of Independent Directors • Exempting certain class of foreign companies from registering and compliance regime under the Act • Process of incorporationto be made easier for companies and unrestricted objects clauses to be permitted in the Memorandum of Association

  23. Companies (Amendment) Bill, 2016 introduced in Lok Sabha Key Amendments Proposed • The requirement of deposit of INR one lac is proposed to be done away with in cases of independent directors and directors nominated by Nomination and Remuneration committee • Disclosure in prospectus to be aligned with SEBI regulations (omitting prescription in 2013 Act and allowing these prescriptions to be made by SEBI) • Central Government to prescribe abridged form of annual return for One Person Company and small company

  24. Relaxation in audit limits under the 2013 Act - Eligibility Earlier provision • As per section 141 (3) (g) of the 2013 Act, “a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies” shall not be eligible for appointment as an auditor of a company. 20 companies included all companies without any exemption MCA notification • MCA has excluded one person companies, dormant companies, small companies and private companies having a paid up share capital less than ₹100 crores from the audit limit of 20 companies as specified under section 141(3)(g) of the 2013 Act.

  25. Other Updates - At glance • MCA issued Companies (Share Capital and Debentures) Third Amendment Rules, 2015 additionally permitting certain classes of companies to issue secured debentures for a period upto 30 years • companies permitted by a Ministry or Department of the Central Government or by RBI or by the National Housing Bank or by any other statutory authority to issue debentures for a period exceeding 10 years Large number of companies can now issue secured debentures for term exceeding 10 years

  26. Schedule II

  27. Companies Act 2013 – Schedule II • Useful life of an asset and residual value shall not be different from that indicated in Schedule II – Part C • In case an entity choses a useful life or residual value different from Schedule II, it shall disclose the justification of the same • The carrying amount of the asset on the date this Schedule becoming effective: • shall be depreciated over the remaining useful life of the asset as per this Schedule; • after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

  28. Guidance Note (GN) on Accounting for Depreciation in Companies • The GN provides guidance on significant issues arising from practical applicationof Schedule II like: • Extra shift depreciation applicable where useful life estimated on single shift basis at the beginning of the year • Company, which estimated the useful life of an asset on single shift basis at the beginning of the year, used the asset on double /triple shifts during the year, the depreciation expense to be increased by 50% /100%

  29. Guidance Note (GN) on Accounting for Depreciation in Companies • Component approach made mandatory under Schedule II – effective from 1 April 2015 • Companies will need to identify and depreciate significant components with different useful lives •  Unlike Schedule XIV, no requirement to provide depreciation at the rate of 100% any for low value items in Schedule II • a company may have a policy to fully depreciate the assets upto certain threshold limits considering materiality aspect in the year of acquisition • GN applicable for accounting periods beginning on or after 1 April 2016;earlier application is encouraged

  30. Reporting on Internal Financial Control

  31. Reporting on Internal Financial Control • Reporting on internal financial controls (IFC) for financial years beginning on or after 1 April 2014 by directors • Internal financial controls defined as the policies and procedures adopted by the company for ensuring the 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 • The reporting on IFC would apply to audits of standalone and consolidated annual financial statements . Auditor’s reporting on the adequacy of internal financial control system and its operating effectiveness mandatory from financial years beginning on or after 1 April 2015 ICAI issued guidance note on Audit of Internal Financial Controls Over Financial Reporting in September 2015

  32. Companies Act 2013 – Board Responsibilities Section 134 Board of Directors • State in Director's responsibility statement that directors had laid down "internal financial controls" to be followed by the Company and that such internal financial controls were adequateand operating effectively • Applicable only in case of listed entity Companies (Accounts) Rules, 2014 Board of Directors • Include the details in respect of adequacy of "internal financial controls" with reference to the financial statements in Board's report • Applicable to all companies

  33. Companies Act 2013 – Audit Committee and Independent Director's role Section 177 Audit Committee • Evaluation of internal financial controls and risk management systems; • Call for and discuss auditor's comments on internal control systems and their audit observations and discuss those with management, if considered necessary. Schedule IV Independent Directors • Satisfy themselves on the integrity of financial information and that financial • controls and the systems of risk management are robust and defensible

  34. Companies Act 2013 – Auditor's Responsibilities Section 143 Auditor • Report on whether the company has adequate internal financial controls system and operating effectiveness of such controls • Applicable to all companies CARO, 2015 Auditor • Report if there are adequate internal control procedures for purchase of inventory and fixed assets and for sale of goods and services

  35. Companies Act 2013 – IFC Applicability • * Specified class of companies: • public companies with a paid up capital of Rs.10 Crores or more; • public companies having turnover of Rs.100 Crores or more; • public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores or more. • The above thresholds as existing on the date of last audited Financial Statements shall be taken into account.

  36. Reporting on Internal Financial Control Key highlights of the guidance note Internal financial controls framework: Permits the Company to establish its own internal control over financial reporting criteria using the guidance in other auditing standards in addition to permitting the use of COSO framework, Turnbull Report, CoCo framework. Materiality: Based on quantitative and qualitative risk factors Approach: Top down approach - Identify risk of material misstatements due to error or fraud at financial statements level (including disclosures). Consider the auditor's understanding of the overall risks to internal financial controls over financial reporting while identifying the risk of material misstatement. 36

  37. Reporting on Internal Financial Control Key highlights of the guidance note Extent of testing: Provides number of samples to test the design and operating effectiveness of internal financial controls Audit opinion: Auditor may choose to issue combined report (i.e., one report containing both an opinion on the financial statements and an opinion on internal financial controls over financial reporting) or separate reports on those. 37

  38. Reporting on Internal Financial Control Key Definitions Deficiency Deficiency in internal financial control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Significant deficiency: A significant deficiency is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting that is important enough to merit attention of those charged with governance since there is a reasonable possibility that a misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weakness: A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. 38

  39. External auditors engagement at each stage Methodology for IFCOFR PLAN EXECUTE REPORT Key strategic considerations Key operation consideration Materiality Entity-Level Controls Process Risks Control Improvements Internal Control Report Elements Significant locations/accounts Control Design Control Effectiveness Project plan and timelines Relevant Processes Report Preliminary assessment Assess Current State and Identify Relevant Processes Design Solutions for Control Gaps Implement Solutions for Control Gaps Document Design and Evaluate Critical Processes and Controls Steps Knowledge Sharing Project Management Communication Continuous Improvement- moving towards control rationalisation IT Controls IT Organisation and structure IT Process Level Control Evaluations IT Entity-Level Control Evaluations 39

  40. Approach on IFCOFR Scoping Current State Analysis – “AS IS” processes Conduct gap analysis Design and validate ‘ To be’ processes 3 4 Steps 1 2 • Understand the ‘as-is’ process and sub-processes by interviewing key operating personnel • Review entity level controls • Conduct process / system walk-through including all the process steps where finance has an interface. • Review ITGC Controls on the accounting systems being used • Identify financial reporting elements, critical processes, supporting systemsand locations • Account level materiality and chart of accounts analysis • Confirm the methodology for the engagement • Prepare a detailed project plan • Identify process owners • Devise communication and reporting protocols • Map risk factors and dependencies • Identify ‘gaps’ and ‘what can go wrong’ in existing processes • Identify control points with improvement opportunities • Identify anti-fraud controls w.r.t. segregation of duties, safeguarding and authorization controls • Suggest remedial action for gaps identified , in line with leading practices, and to ensure compliance • Prepare ‘To-be’ process maps • Update the risk control matrix and obtain buy-in from the process owners • Develop and institutionalize a frame-work to make a continuous assessment on internal controls Key Activities • Detailed project plan • Gap Analysis Report • ‘To-be’ process maps • Risk control matrix • Control Dashboard for the Leadership Team • ‘As-is’ process documentation Deliverables Focus on significant risks and controls having an interface with finance function for each in-scope process 40

  41. Companies (Auditor’s Report) Order 2016 (CARO 2016)

  42. Companies (Auditor’s Report) Order 2016 (CARO 2016) CARO 2016 not applicable to Consolidated financial statements – A welcome relief!

  43. Companies (Auditor’s Report) Order 2016 (CARO 2016) CARO 2016 is now compatible with The Companies Act ,2013!!!

  44. Companies (Auditor’s Report) Order 2016

  45. Companies (Auditor’s Report) Order 2016

  46. Companies (Auditor’s Report) Order 2016

  47. CARO 2015 Vs. CARO 2016-Modifications

  48. CARO 2015 Vs. CARO 2016-Modifications

  49. CARO 2015 Vs. CARO 2016-Modifications

  50. CSR