By K P C Rao, LLB,
FCMA, FCS.,
CMA (USA)., FIPA
(Australia)
Practicing
Company Secretary
kpcrao.india@gmail.com
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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