By: CA Kamal Garg [B. Com (H), FCA, DISA (ICAI), LLB]

Financial Statements Disclosures, Related Party Transactions,Auditor’s Liabilities, Dividends & CARO, under Companies Act, 2013 By: CA Kamal Garg [B. Com (H), FCA, DISA (ICAI), LLB]

Part I Changed Face of “Significant Financial Transactions“under Companies Act, 2013

Cash flow statement made mandatory except for Small Companies, OPCs and Dormant Companies • Under section 2(40)(iii)** of the 2013 Act, Cash flow statement shall form part of the financial statements for all companies; • Exception: Cash Flow Statement not mandatory for: • One Person Companies [Section 2(62)], • Small Companies [Section 2(85)], and • Dormant Companies [Section 455]; • Section 143(2) of the 2013 Act also requires the auditor's report to statewhether in his opinion the financial statements give a true and fair view of the cash flow for the year

Statement of Changes in Equity made mandatory if applicable • According to section 2(40)(iv)** of the 2013 Act, the financial statements shall also include: • a statement of changes in equity [SOCIE], • if applicable

Financial year to be 1st April to 31st March subject to exceptional cases • The definition of "financial year" in section 2(41) of the 2013 Act requires companies to adopt 1st April to 31st March as financial year except in certain circumstances; • A company or a body corporateexisting as at the commencement of the 2013 Act shall within 2 years align its financial year as above from such commencement

Financial year to be 1st April to 31st March subject to exceptional cases…..contd. • Exception: where company incorporated on or after the 1st January of a financial year: • Where a company or a body corporate has been incorporated on or after the 1st day of January of a year: • the (first) financial year is the period ending on the 31st day of March of the following year, • Example: • If a company is incorporated on 31-12-2013, its first financial year shall be the period from 31-12-2013 to 31-3-2014 • If a company is incorporated on 1-1-2014, its first financial year will be 1-1-2014 to 31-3-2015

Consolidated financial statements made mandatory [Section 129] • Where a company has one or more subsidiaries, it shall: • prepare a CFS of the company and all the subsidiaries in the same form and manneras that of its own; and • lay the CFS also before the AGMof the company along with the laying of its financial statement • The term "subsidiary" for above purposes shall include: • associate company [Section 2(6)] **, and • joint venture

Consolidated financial statements made mandatory….contd. • The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary(s) in prescribed form. • The provisions of this Act applicable tothe preparation, adoption and audit of financial statements of a holding company shall, mutatis mutandis, apply to CFS also. • The auditor of a holding company shall also have the right of access to the records of all its subsidiaries insofar as it relates to the consolidation of its financial statement with that of its subsidiaries.[Section 143(1)]. • Section 143(1) seems to imply that auditor of holding company shall also be auditor of CFS.

Share Application Money • The offer or invitation in a financial year is to be made to such number of persons not exceeding 50 or such higher number as may be prescribed; • If a company makes an offer to allot or invites subscription or allots or enters into agreement to allot securities to more than prescribed number of persons, the same shall be deemed to be an offer to the public; • All monies payable on subscription of securitiesunder this section shall be paid through cheque or DD or other banking channelsbut not by cash [section 42(5) of the 2013 Act]; • Securities to be allotted within 60 days from the receipt of application money [section 42(6) of the 2013 Act]; • Moneys received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any other purpose

Securities Premium Account • To eliminate conflict with Accounting Standards, section 52(3) of the 2013 Act provides that such class of companies as may be prescribed whose financial statements comply with Accounting Standards prescribed for such class of companies under section 133 of the 2013 Act cannot utilize securities premium account • for writing off the expenses of, or the commission paid or discount allowed on the issue of preference shares or debentures of the company; or • for writing off preliminary expenses; or • for providing premium payable on redemption of any redeemable preference shares or debentures

Issue of Shares at Discount • Section 79 of the 1956 Act permitted issue of shares at a discount subject to certain conditions. • This position has undergone a drastic change as the 2013 Act has prohibited issue of shares at a discount

Depreciation • Schedule II of the Companies Act, 2013 provides the useful life as against the minimum rates of depreciation prescribed in Schedule XIV of the Companies Act, 1956; • For Intangible assets, there is no specific provision in the Schedule XIV of the Companies Act, • Now, for intangible assets, the provisions of the Accounting Standards would be applicable; • Component Accounting made mandatory:Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately

Revaluation Reserve vis-à-vis Depreciation The depreciable amount of an asset is: • the cost of an asset; or • other amount substituted for cost, • less its residual value[Part A of Schedule II].

CSR Spending • Schedule III requires disclosure by way of notes additional information: • regarding aggregate expenditure incurred by the Companies covered under section 135, • on CSR activities

Part II Related Party Transactions under Companies Act, 2013

Related Party with reference to a Company - Meaning • a Director or his relative; • a KMP or his relative; • a Firm, in which a director,manager or his relative is a partner; • a Pvt. Co. in which a director or manager is a member or director; • a Public Co. in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital; • any Body Corporate of which a director or manager of the company is a shadow director; • any Shadow Director of the company; • any Company which is— (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary. • such other person as may be prescribed

Consent of Board in case ofrelated party transaction • A company can enter into: • specified related party transaction • only with approval of Board and subject to prescribed conditions - Section 188(1) of the 2013 Act; • The consent must be obtained in the Board meeting and not by circular resolution;

Consent of Board in case ofrelated party transaction….contd. • Specified Related Party Transactions: • sale, purchase or supply of any goods or materials; • selling or otherwise disposing of, or buying, property of any kind; • leasing of property of any kind; • availing or rendering of any services; • appointment of any agent for purchase or sale of goods, materials, services or property; • related party's appointment to any office or place of profit (OPP) in the Co., its Subsidiary Co. or Associate Co.; and • underwriting the subscription of any securities or derivatives thereof, of the company

Prior approval in general meeting by special resolutionin case of large companies or large contracts • In the case of a company having: • paid-up share capital of not less than Rs. 1 crore, or • transactions not exceeding prescribed sums**, the contract or arrangement can be entered into by company only after prior approval by special resolution in general meeting - First proviso to section 188(1) of the 2013 Act. • **Next Slide

**Prescribed Sums • For other than OPP: amount exceeding the higher of: • 5% of the annual turnover; or • 20% of the net worth of the company as per the last audited financial statements of the company • For OPP: a monthly remuneration exceeding Rs. 1 Lakh p.m.; • For Underwriting Commission: remuneration for underwriting exceeding Rs. 10 Lakhs

Case Study • Reliable Castings Limited is a subsidiary of Unique Machineries Limited. The Board of Directors of the respective companies have made the following appointments on a consolidated monthly salary of Rs. 1.25 Lakhs w.e.f 1.4.2014: • Shri Ram Singh a director of Unique Machineries Limited, as factory manager of Reliable Castings Limited. • Shri Rajesh Patel, a director of Reliable Castings Limited, as purchase manager of Unique Machineries Limited. • Shri Sundar, relative of a director of Unique Machineries Limited, as sales manager of Unique Machineries Limited. • Shri Rakesh, not related to any director of both the companies, as chief accountant of Unique Machineries Limited. But his relative has been appointed as additional director of Unique Machineries Limited with effect from 1-5-2014.

The provisions relating to related party transactions do not apply in certain situations • Any transactions entered into by the company in its ordinary course of business, other than transactions which are not on an arm's length basis- Third proviso to section 188(1) of the 2013 Act;

Disclosure in Board's report of related party transactions • Every contract or arrangement entered into under section 188(1) shall be referred to in the Board's report to the shareholders along with the justification for entering into such contract or arrangement - Section 188(2) of the 2013 Act.

Consequences if contract or arrangement is not ratified by board/general meeting • Such contract or arrangement shall be voidable at the option of the Board; • The directors concerned shall indemnify the company against any loss incurred by it; • Company can recover losses from director or other employee; • A director is disqualified for appointment, if he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years

Disclosures • Companies to maintain register for: • contracts or arrangements which directors are interested; • related party transactions • Loans and advances from and to related parties shall be disclosed - General Instructions for Preparation of Balance Sheet - Schedule III of the 2013 Act; • Disclosures as per AS 18also required

Part III Loan to Directors, etc.

Loan to directors, etc.[Sec 185 (2013 Act) corresponding to Sec 295 (1956 Act)] • Section 295 of the 1956 Act did not apply to loans made or guarantee given or security provided by private companies. Section 185 of the 2013 Act allows no such exemption to loans, etc., by private companies; • In terms of section 295 of the 1956 Act, loans made to or security provided or guarantee given in connection with loan taken by director of the lending company and certain specified parties required previous approval of the Central Government in that behalf. Under section 185 of the 2013 Act, there is total prohibition on such transactions;

Loan to directors, etc.[Sec 185 (2013 Act) corresponding to Sec 295 (1956 Act)] • Specified Persons for Section 185: • any director of the lending company, or • any director of a company which is its holding company, or • any partner or relative of any such director; • any firm in which any such director or relative is a partner; • any private company of which any such director is a director or member; • any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or • any body corporate, the Board of directors, 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

Loan to directors, etc…..contd.[Sec 185 (2013 Act) corresponding to Sec 295 (1956 Act)] • The prohibition shall not apply to the giving of any loan to a managing or whole-time director: • as a part of the conditions of service extended by the company to all its employees; or • pursuant to any scheme approved by the members by a special resolution • Penal Provisions: • On Company = Rs. 5 Lakhs to Rs. 25 Lakhs; • On Director = Upto 6 Months imprisonment or Fine of Rs. 5 Lakhs to Rs. 25 Lakhs or Both • Under section 295 of the 1956 Act imprisonment could be avoided by fully repaying the loan. Section 185 of 2013 Act does not contain such a provision

Part IV Auditor’s Obligations and Liabilities

Services which auditor should not provide to the auditee company • Statutory auditor shall not directly or indirectly provide any of the prescribed "other services“ to the: • auditee-company; or • its holding company; or • subsidiary company [Section 144]

Services which auditor should not provide to the auditee company….contd. • Prescribed Other Services: • 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 outsourced financial services; • management services; and • any other kind of services as may be prescribed.

Requirement of highlighting certain comments in audit report in thick type or italics omitted • Section 143(3)(f) omits requirement to highlight comments in thick type or italics; • Section 143(3)(f) redrafts the requirement to provide that auditor's report shall state the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; • Section 143(i) of the 2013 Act requires the auditor's report to state whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls

Auditor's duty to AGM • Section 146 provides that the auditor shall attend any general meeting: • by himself, or • through his authorised representative who is qualified to be an auditor. • Such attendance is compulsoryunless otherwise exempted by the company.

Auditor's liabilities Section 147(2) provides as under: • If an auditor of a company contravenes any of the provisions relating to: • appointment of auditors (section 139), • contents of audit report (section 143), • compliance with auditing standards (section 143), • rendering prohibited services (section 144), and • signing of audit report (section 145), • the auditor shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5,00,000

Auditor's liabilities….contd. • If an auditor has contravened such provisions knowingly or wilfully with the intention to deceive: • the company, or • its shareholders; or • creditors; or • tax authorities, he shall be punishable with: • imprisonment for a term which may extend to one year; and • with fine which shall not be less than Rs. 1,00,000 lakh but which may extend to Rs. 25,00,000 [proviso to section 147(2)]

Auditor's liabilities….contd. • Section 147(3) provides that where an auditor has been convicted of an offence as above, he shall be liable to- • Refund the remuneration received by him to the company; and • Pay for damages: • to the company, • to the statutory bodies or authorities, • to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report

Part V Dividends

Whether dividend declaration/payment barred if company is in default of repayment of deposits:A company which fails to comply with section 74 of the 2013 Act shall not, so long as such failure continues, declare any dividend on its equity shares; • Whether past losses required to be set off before declaring dividend: No express provisions along the lines of section 205(1)(b) of the 1956 Act. DraftRule 8.2 however requires such set off • Power of CG to permit declaration of dividend without providing depreciation: No such power under the 2013 Act; • Whether transfer to reserves compulsory: No, it is not compulsory. A company may before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company. • Payment of dividend through electronic mode to registered shareholder:Expressly allowed under 2013 Act

Part VI CARO, 2003 and Auditors

Companies Act, 2013 Obligations vis-à-vis CARO, 2003 • Prevention, detection and reporting of frauds by the auditor; • Mandatory obligations regarding internal audit; • Reporting on internal controls by the auditors;

Prevention, detection and reporting of frauds by the auditor • Clause 4(xxi) of CARO requires auditors to report: “whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated” • Section 143(12) of the 2013 Act states that: if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed

Internal Audit • Clause 4 (vii) of CARO, 2003 requires auditors to report: “in the case of: • listed companies; and/or • other companies having: • a paid-up capital and reserves > Rs.50 lakhs as at the commencement of the financial year concerned, or • an average annual turnover > Rs. 5 crores for a period of three consecutive financial years immediately preceding the financial year concerned, • whether the company has an internal audit system commensurate with its size and nature of its business”

Internal Audit [Section 138] • Such class or description of companies as may be prescribed shall appoint an internal auditorto conduct internal audit of books of account of the company. • Internal auditor shall be: • a Chartered Accountant, or • a Cost Accountant, or • such other professional as may be decided by the Board. • CG may make rules to prescribe the manner and the intervals in which internal audit shall be conducted and reported to the Board

Internal Audit [Section 138]….Contd. • The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors:— • every listed company; • every public company having paid up share capital of Rs. 10 crores or more; • every other public company: • which has any outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 25 crores; or • which has accepted deposits of Rs. 25 crores or more, at any point of timeduring the last financial year.

Internal Controls • Clause 4 (iv) of CARO, 2003 requires auditors to report: “is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system” • Section 143(3)(i) of 2013 Act requires auditor to report: “whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls”

THANK YOU cakamalgarg@gmail.com, 9811054015 www.kgma.in

By: CA Kamal Garg [B. Com (H), FCA, DISA (ICAI), LLB]