THE COMPANIES ACT, 2013 ACCOUNTS & AUDIT

1. THE COMPANIES ACT, 2013ACCOUNTS & AUDIT ACAE STUDY CIRCLE - EIRC KOLKATA, AUGUST 23, 2014 CA. P. R. RAMESH

2. Contents

3. BACKGROUND

4. Background Companies Act, 2013 Presidential Assent – August 29, 2013 Act contains 470 Sections, 29 Chapters, 7 schedules Total – 283 Sections have been notified ‘Government regulated’ regime to a new regime of self regulation.

5. New Concepts Background… • Introduction of One Person Company & Small Company • Corporate Social Responsibility (CSR) • Internal Audit & Secretarial audit • Rotation of auditor • Woman director • Resident director • Class Action • Prohibition on forward dealings in securities of Company by directors and KMP & Insider Trading of Securities • New Regulators (NFRA, SFIO, NCLT) • New Committees - Nomination and Remuneration Committee and Stakeholders Relationship Committee, Vigil Mechanism • New definition for Associate company, Control, Small company, Key managerial personnel, Related party, etc.

6. Background… The Changed Approach: • Shift from Shareholders Protection to stakeholders protection • Corporate Governance /Investor Protection is Mantra • Widened disclosure requirements • Stricter penalties and Prosecution • Liability of Directors / Professionals increased • Increased coverage of the Act

7. Background… Powers vested with MCA – Delegated Legislation

8. Background… The Ministry of Corporate Affairs (MCA) has laid down a draft notification under sec.462 containing exemptions/ modifications for Private Companies before the Parliament, the following are the proposed modifications, inter alia:

9. KEY DEFINITIONS

10. Key Definitions “Financial Statement” in relation to a company, includes— (i) a balance sheet as at the end of the financial year (ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year (iii) cash flow statementfor the financial year (iv) a statement of changes in equity, if applicable and (v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv): Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement; Sec. 2(40)

11. Sec. 2(41) Key Definitions… “Financial Year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up: Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside Indiaand is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year: Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause • As this provision is effective from April 1, 2014, companies shall align their financial years as per this provision within April 1, 2016. • The exemption has not been provided for an associate or joint venture.

12. Key Definitions… “Foreign Company”means any company or body corporate incorporated outside India which— (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner. Sec. 2(42)

13. Key Definitions… “Electronic mode”, means carrying out electronically based, whether main server is installed in India or not, including, but not limited to- • business to business and business to consumer transactions, data interchange and other digital supply transactions • offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India • financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management • online services such as telemarketing, telecommuting, telemedicine, education and information research and • all related data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise. Rule 2(1)(h) of Companies (Specification of Definition Details) Rules, 2014

14. Sec. 2(43) Key Definitions… “Free Reserves”means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend: Provided that— (i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or (ii) any change in carrying amount of an asset or of a liability recognisedin equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves Key Points • Definition excludes securities premium • Instances of provisions where the definition of free reserves is referred: • Sec.63 for Issue of Bonus Shares • Sec.68 for purchase of its own shares or specified securities by companies • Sec.123 for declaration of dividend. • Sec.180(1)(c) restriction on powers of the Board • Sec.186 Loans and investment by a company

15. Key Definitions… “Net Worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciationand amalgamation. Instances of provisions where the definition of net worth is referred: • Sec.76(1) relating to Acceptance of deposits by Companies, for determination of eligible company. • Sec.135 determining criteria for Corporate Social Responsibility • Sec.148 where the Central Government shall specify audit of items of cost in respect of certain Companies. • Limits for the purposes of approval by Special resolution – Related Party transactions Sec. 2(57)

16. Key Definitions… Sec. 2(76) Related party with reference to a company means: • Director or his relative • KMP or his relative • a firm, in which a director, manager or his relative is a partner • a private company in which a director or manager or his relativeis a member or director • public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital • any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager (excluding advice given in professional capacity) • any person on whose advice, directions or instructions a director or manager is accustomed to act (excluding advice given in professional capacity) • any company which is— • a holding, subsidiary or an associate company of such company or • a subsidiary of a holding company to which it is also a subsidiary • a director other than an independent director or KMP of the holding company or his relative with reference to a company, shall be deemed to be a related party.

17. Key Definitions… ‘‘Relative’’, with reference to any person, means any one who is related to another, if— • they are members of a Hindu Undivided Family • they are husband and wife or • one person is related to the other in such manner as may be prescribed • Father (including Step Father) • Mother (including Step Mother) • Son (including Step Son) • Son’s wife • Daughter • Daughter’s husband • Brother (including Step Brother) • Sister (including Step Sister) Sec. 2(77)

18. HOLDING & SUBSIDIARY COMPANIES

19. Holding & Subsidiary Companies “Holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies (Sec. 2(46)) A Company shall make investments through not more than two layers of investment companies. (Sec.186 (1)) The provisions of this section shall not effect the following: • a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country • a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force

20. Holding & Subsidiary Companies… Subsidiary Company “Subsidiary Company” or “Subsidiary”, in relation to any other company (holding company), means a company in which the holding company— (i) controls the composition of the Board of Directors or (ii) 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 Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. (This proviso is not notified) As per the Companies (Specification of definitions details) Rules, 2014, Total share capital = paid up equity share capital + convertible preference share capital. Sec. 2(87)

21. Holding & Subsidiary Companies… Subsidiary Company… Explanation—For the purposes of this clause, (a) a company shall be deemed to be a subsidiary company of the holding company even if the controlreferred to above is of another subsidiary company of the holding company (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors (c) the expression “company” includes any body corporate (d) “layer” in relation to a holding company means its subsidiary or subsidiaries Sec. 2(87)

22. Holding & Subsidiary Companies… As per Sec 2(27) of the Act, “control” “shall include the 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.” As per AS-21, Controlis defined as: (a) the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

23. BOOKS OF ACCOUNTS

24. Books of Accounts • Company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company. • Such books shall be kept on accrual basis and according to the double entry system of accounting • All or any of the books of accountaforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within 7 days thereof, file with the Registrar a notice in writing giving the full address of that other place • Company may keep such books of account or other relevant papers in electronic modein such manner as may be prescribed. Sec. 128

25. Books of Accounts… • The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference. • The books of account and other relevant books and papers shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered. • The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches. • The information in the electronic record of the document shall be capable of being displayed in a legible form. Rule 3 of Companies (Accounts) Rules, 2014

26. Books of Accounts… • There shall be a proper system for storage, retrieval, display or printout of the electronic recordsas the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law. • The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis. • The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement- • the name of the service provider • the internet protocol address of service provider • the location of the service provider (wherever applicable) • where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider. Rule 3 of Companies (Accounts) Rules, 2014

27. Books of Accounts… • If a company has a branch office in India or outside India proper books of account relating to the transactions effected at the branch office shall be kept at that office and proper summarised returns shall be periodically sent by the branch office to the companyat its registered office. • The books of account and other books and papers maintained by the company within India shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours, and in the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as may be prescribed. • Inspection in respect of any subsidiary of the company shall be done only by the person authorised in this behalf by a resolution of the Board of Directors. Sec. 128

28. Books of Accounts… • The books of account of every company relating to a period of not less than 8 FY’s immediately preceding a FY,or where the company had been in existence for a period less than 8 years, in respect of all the preceding years together with the vouchers relevant to any entry in such books of account shall be kept in good order. • If the MD, the WTD in charge of finance, the CFO or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions, such MD, WTD in charge of finance, CFO or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ` 50,000 but which may extend to ` 5 lakh or with both. Sec. 128

29. SCHEDULE III

30. Schedule III • Schedule III of the Companies Act 2013, is the same as Revised Schedule VI of the Companies Act, 1956 except that it contains general instructions for preparation of CFS of Company and its subsidiaries, as the same has been mandated by the new Act. • If a company is required to prepare CFS, i.e., consolidated balance sheet and consolidated statement of profit and loss, the company shall mutatis mutandis follow the requirements of Schedule III. • In addition, the CFS shall disclose the information as per the requirements specified in the applicable Accounting Standards including: • Profit or loss attributable to “minority interest” and to owners of the parent in the statement of profit and loss shall be presented as allocation for the period. • “Minority interests” in the balance sheet within equity shall be presented separately from the equity of the owners of the parent

31. Schedule III… • All subsidiaries, associates and joint ventures (whether Indian or foreign) will be covered under CFS. • An entity shall disclose the list of subsidiaries or associates or joint ventures which have not been consolidated in the CFS along with the reasons of not consolidating. • Schedule III of the Act, does not have format for the Cash Flow Statement and Statement for Changes in Equity.

32. DEPRECIATION

33. Depreciation Depreciation on tangible fixed assets based on estimated useful life • From a Rates regime to Useful Lives • Useful life of an asset is the period over which the asset is expected to be available for use by the entity or the number of production or similar units expected to be obtained from the asset Depreciation of plant & machinery based on industry category. Specified industries: Schedule II

34. Depreciation… • Componentisation of assets mandated • Separate capitalisation and depreciation of a part of an asset if its cost is significant to the total cost of the asset and its estimated life is different from the remaining asset. • Where a company uses a useful life other than prescribed by Schedule II or residual value other than 5% of the original cost of the asset, justification for the difference shall be disclosed in financial statement. • Depreciation / amortisation of intangible assets should be as per the Accounting Standards. • Intangible assets (toll roads) can continue to be amortised based on the expected revenue from operating such assets. Schedule II

35. Depreciation… • *Useful life of CPP have been increased from 18 years to 25 years. Schedule II

36. Depreciation… Transitional Provisions • Carrying value (net of residual value) to be depreciated over the remaining revised useful life of the asset. • If the remaining revised useful life is nil, the carrying value net of residual value should be recognised in the opening balance of retained earnings. • Incremental depreciation relating to surplus on revaluation of assets would need to be charged to the Statement of Profit & Loss and will impact Profits. • Depreciable amount is the cost of an asset or other amount substituted for its cost less residual value. Schedule II

37. ACCOUNTING STANDARDS

38. Accounting Standards • The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the ICAI, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the NFRA. Transitional provisions with respect to Accounting Standards(Rule 7 of Companies (Accounts) Rules, 2014- • The standards of accounting as specified under the Companies Act, 1956 shall be deemed to be the accounting standards until accounting standards are specified by the Central Government under section 133. • Till the NFRA is constituted under section 132 of the Act, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the ICAI in consultation with and after examination of the recommendations made by the National Advisory Committee on Accounting Standards constituted under section 210A of the Companies Act, 1956. Sec. 133

39. FINANCIAL STATEMENTS

40. Financial Statements • The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III. • The items contained in such financial statements shall be in accordance with the accounting standards. • These provisions shall not apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company: Sec. 129

41. Financial Statements… • At every AGM of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year. • Where a company has one or more subsidiaries, it shall, in addition to standalone financial statements prepare a consolidated financial statement (CFS) of the companyand of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the AGM of the companyalong with the laying of its financial statement. • Subsidiary shall include associate company and joint venture. • Company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in Form AOC I (Rule 5 of Companies (Accounts) Rules, 2014) Sec. 129

42. Financial Statements… • As per the proviso to Sec. 129(3), the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed. • As per Rule 6 of Companies (Accounts) Rules, 2014Manner of consolidation of accounts.- • The CFSof the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards. • In case of a company covered under Sec. 129(3) which is not required to prepare CFS under the Accounting Standards, it shall be sufficient if the company complies with provisions on CFS provided in Schedule III of the Act. As per Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014 consideration of financial statements, including CFS, if any, shall not be dealt with in a meeting held through video conferencing.

43. Financial Statements… • The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the CFS. • Where the financial statements of a company do not comply with the accounting standards, the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation. • The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made thereunder, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification Sec. 129

44. Financial Statements… • If a company contravenes the provisions of this section, the MD the WTD in charge of finance, the CFO or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ` 50,000 but which may extend to ` 5 lakhs, or with both. Sec. 129

45. Financial Statements… Consolidated Financial Statements – Key Points • Companies having one or more subsidiaries, shall also prepare CFS and the same shall be laid before the AGM of the Company along with standalone financial statements. • A separate statement containing salient features of the financial statement of subsidiaries to be attached to the holding company’s financial statements. – Form AOC - I • ‘Subsidiary’ includes ‘associate company’ and ‘joint venture’ • Associate means a company other than a subsidiary company and joint venture company, in which the other company has a significant influence. • Significant influence means control of at least 20% of total share capital or of business decisions under an agreement. • In case of a company covered u/s 129(3), which is not required to prepare CFS under the Accounting Standards, it shall be sufficient if the company complies with provisions on CFS provided in Schedule III of the Act.

46. Financial Statements… Form AOC-I Part A – Subsidiaries Information in respect of each subsidiary to be presented with amounts in ` 1. Sl. No. 2. Name of the subsidiary 3. Reporting period for the subsidiary concerned, if different from the holding company’s reporting period 4. Reporting currency and Exchange rate as on the last date of the relevant Financial year in the case of foreign subsidiaries. 5. Share capital 6. Reserves & surplus 7. Total assets 8. Total Liabilities 9. Investments 10. Turnover 11. Profit before taxation 12. Provision for taxation 13. Profit after taxation 14. Proposed Dividend 15. % of shareholding 1. Names of subsidiaries which are yet to commence operations 2. Names of subsidiaries which have been liquidated or sold during the year.

47. Financial Statements… Form AOC-I Part B – Associates and Joint Ventures 1. Names of associates or joint ventures which are yet to commence operations 2. Names of associates or joint ventures which have been liquidated or sold during the year.

48. Financial Statement - Signing • The financial statement, including CFS, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by • the chairperson of the company where he is authorised by the Board or • by two directors out of which one shall be managing director and • the Chief Executive Officer, if he is a director in the company, • the Chief Financial Officer and • the Company Secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon. • The auditors’ report shall be attached to every financial statement. Sec. 134(1)

49. Financial Statement – Circulation of Accounts • A listed company shall also place its financial statements including CFS, if any, and all other documents required to be attached thereto, on its website. As per the Rule 11, of Companies (Accounts) Rules, 2014, Manner of circulation of financial statements in certain cases.- • In case of all listed companies and such public companies which have a net worth of more than ` 1 crore and turnover of more than ` 10 crore rupees, the financial statements may be sent • by electronic mode to such members whose shareholding is in dematerialised format and whose email Ids are registered with Depository for communication purposes; • where Shareholding is held otherwise than by dematerialised format, to such members who have positively consented in writing for receiving by electronic mode; and • by dispatch of physical copies through any recognised mode of delivery as specified under section 20 of the Act, in all other cases.

50. Financial Statement – Copy to be filed Copy of Financial Statement to be Filed with Registrar • A copy of the financial statements, including CFS, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly adopted at the AGM of the company, shall be filed with the Registrar within 30 days of the date of AGMin Form AOC-4 - Rule 12(1). • Where the financial statements are not adopted at the AGMor adjourned AGM, such unadopted financial statements along with the required documents shall be filed with the Registrar within 30 days of the date of AGMand the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned AGM for that purpose. • The financial statements adopted in the adjourned AGMshall be filed with the Registrar within 30 days of the date of such adjourned AGM. Sec. 137