Friday, October 03, 2014


By K P C Rao, LLB, FCMA, FCS.,
CMA (USA)., FIPA (Australia)
Practicing Company Secretary
Under the Companies Act 1956, companies are generally not permitted to revise or restate financial information presented in their financial statements. Material misstatements in the accounts related to previous years, whether due to occurrence of fraud or error are reported as a ‘prior period adjustment’ in the financial statements of the year / period in which such misstatements are discovered[1].

The Provisions of the Companies Act 2013 relating to Books of Accounts & Financial Statements are very much similar to Companies Act 1956. Section 129 talks about Financial Statements. The Financial Statements must be True and Fair and shall comply with Accounting Standards issued by Institute of Chartered Accountants of India. The Financial Statements must be in Form or Forms as prescribed in Schedule III. The Schedule III is same as Schedule VI of Companies Act 1956. The Schedule III contains Format for Balance sheet & Profit & Loss Account, General Instructions on how to treat items in Financial Statements. The Financial Statements shall also contain Auditors Report, Report of Board of Directors & Directors Responsibility Statement.

However, the Companies Act 2013 introduces a new provision under Sections130 and 131 on re-opening/restatement of financial statements in the following circumstances:

a)     A statutory regulatory authority (e.g., Central Government, SEBI, income tax authorities, etc.) or any person concerned applies to the Tribunal or a court of law when the accounts of the company were prepared in a fraudulent manner or the affairs of the company were mismanaged thereby casting a doubt on reliability of the financial statements.
b)     Voluntary restatement on application  by the Board of Directors if in their  opinion the financial statements/ Board report do not comply with  the requirements of the New Act,  e.g., relating to compliance with  accounting standards/form of  financial statements, mandatory  disclosures in the Board report,  etc. Voluntary restatement is permitted after obtaining approval of the Tribunal in respect of three preceding financial years. Further, such restatement cannot be carried out more than once in a financial year.
While the voluntary revision to accounts is restricted only to the preceding three years, there is no time restriction to revision initiated by a statutory regulatory authority. The impact could be significant if the restatement is ordered of a period, many years into the past, as a restatement in one year will have a cascading effect on the following years.

It is pertenent to note here that in June 2012, SEBI had announced that it may require restatement of financial statements of listed companies, where the auditors had issued a qualified opinion. SEBI’s announcement had set out a process relating to this, however, this requirement to restate was not consistent with the provisions of the Companies Act 1956. The Companies Act 2013, however, provides an enabling legal framework for SEBI or any other regulatory authorities to apply for restatement of a company’s financial statements.

The taxation implications of restatement will need to be evaluated by companies to understand the impact on Minimum Alternate Tax (MAT) liabilities as a result of change in the reported profits. In the event that restated financial statements are required to be audited and adopted by the members in a general meeting of the company, it is likely that the revised profit amount would be considered for MAT purposes. The Company would also need to consider whether it is required to / may voluntarily file a revised income tax return based on the restated accounts.
When a merger or other scheme of arrangement has been approved with retrospective effect by a court of law, it is unclear whether restatement of the previous year’s financial statements will be required. Alternatively, the directors may be able to seek approval for voluntary restatement to give effect to the terms of the scheme in the financial statements of an earlier year.

The Company Rules also state that when there is a change of auditors, the present auditor of the company has to report on the restated financial statements. This could prove to be   burdensome on the Company and the auditor, as the entire financial statements would need to be subject to a re-audit. Additional guidance in the process to be followed by the present auditor could alleviate this issue.

Published int the Monthly Magazine  ' CIRCUIT' of ICAI,  Hyderabad  

[1] The ICAI in its note issued in February, 1985explained that ordinarily, the accounts once adopted at the annual general meeting cannot be reopened. However, if the company decided to reopen its accounts which have been adopted at the annual general meeting for meeting certain technical requirements of taxation laws and prepared a revised/rectified financial statements, the Council of the ICAI advised the auditors to examine the revised/rectified financial statements and give the report in a manner suggested in the note. The Council has also clarified that the Department of Company Affairs has agreed with the above procedure.

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