Ushering in more strong disclosure requirements, the Government has asked auditors to provide details about a company’s internal financial controls as well as their effectiveness in annual statements.
The new provision is part of rules under new Companies Act, that seeks to strengthen corporate governance practices, among others.
“... For the financial years commencing on or after April 1, 2015, the report of the auditor shall state about existence of adequate internal financial controls system and its operating effectiveness,” the Corporate Affairs Ministry has said.
For the current financial year (2014-15), this provision would be made voluntary for the auditor of a company.
This provision has been introduced by amending the Companies (Audit and Auditors) Rules, 2014, according to a communication from the Ministry yesterday.The Corporate Affairs Ministry is implementing the new companies law, whose many provisions came into force from April 1.
Besides, corporates have been advised to give all disclosures relevant to consolidated financial statements while reporting the same rather than just repeating the disclosures made under stand-alone accounts that are being consolidated.
In this regard, the Ministry issued a circular on Tuesday. “... It is clarified that Schedule III to the Act read with the applicable Accounting Standards does not envisage that a company while preparing its CFS merely repeats the disclosures made by it under stand-alone accounts being consolidated.
“In the CFS, the company would need to give all disclosures relevant for CFS only,” the circular said.
Meanwhile, the Ministry has said that provisions of consolidated financial statement in the new companies law would not be applicable for the current fiscal on corporates that do not have any subsidiaries but have joint ventures, among others.Amendments have been made to the Companies (Accounts) Rules, 2014, in this regard.As per the Ministry, the rule pertaining to consolidated financial statement would not be applicable on certain entities for the current financial year ending March 31, 2015.
This rule would not “apply for the financial year commencing from the April 1, 2014 and ending on the March 31, 2015, in case of a company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both, for the consolidation of financial statement in respect of associate companies or joint ventures or both, as the case may be”.
The Ministry in a statement on Tuesday said that “nothing in this rule shall apply in respect of preparation of consolidated financial statement by an intermediate wholly- owned subsidiary, other than a wholly-owned subsidiary whose immediate parent is a company incorporated outside India”.
Separately, the Ministry has provided clarity with regard to deposits received by a non-profit company.Clarification was sought on how to handle a situation if a depositor -- who gives Rs 1 lakh -- to a non-profit company fails to secure to more than 25 per cent of total valid votes.
“... It is clarified that in such cases, the board of directors of a Section 8 company is to decide as to whether the deposit made by or on behalf of the person failing to secure more than twenty-five percent of the valid votes is to be forfeited or refunded,” the Ministry said on Tuesday.
Non-profit companies are registered under Section 8 of the new companies law, while they came under Section 25 in the Companies Act, 1956.In another communication, the Ministry said that a trustee representing Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvITs) can be a partner in a limited liability Partnership (llP).
The Ministry’s observation has come after clarifications were in this regard.“The matter has been examined in consultation with the law Ministry and it is clarified that for the purposes of these trusts it is not barred for a trustee, being a body corporate, to hold partnership in an llP in its name without the addition of the statement that it is a trustee,” it had said in another statement.
To attract more investments into the country’s real estate and infrastructure sectors, the government has recently introduced REITs and InvITs.
“The amendments are timely and would provide companies great relief as they plan their implementation efforts for the various aspects of the Companies Act, 2013,” Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said in a statement.
The amendment to the Companies (Audit and Auditors) Rules, 2014 defers the auditors’ reporting requirements on a company’s internal financial controls system by a year.With regard to Companies (Accounts) Rules, 2014, there are two amendments.One provides an exemption to intermediate wholly-owned subsidiary companies from presenting consolidated financial statements, unless such an entity has an immediate parent company incorporated outside India.