In 2012, infrastructure firm IVRCL was going through a restructuring process and awaiting a court nod for the merger/demerger. “Hence, to avoid cumbersome accounting with respect to the merger/demerger and to have the merged balance sheet in place”, the company decided to extend the accounting year up to June 2012. For the next year, the company reverted to the usual April-March period. Thus, while the FY12 profit and revenue numbers were for a 15-month period, FY13 numbers were for a truncated, nine-month period.
IVRCL was not alone. Several Indian companies made such changes. So far, these had the leeway to alter the accounting year, depending on internal factors such as profitability and external events such as court orders. However, the Companies Act, 2013, has clamped down on this. It has removed the provision that allowed companies to cut or extend financial years as they pleased, paving way for uniform reporting by corporate India.
The Act has defined financial year as “the period ending on the 31st day of March every year, and where it has been incorporated on or after the first 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 corporate body is made up”. It said all existing companies should, within a period of two years, align their financial year with the provisions of this clause. This means a number of companies, including large ones such as HCL Technologies (which follows the year ending June) and Ranbaxy Laboratories (which follows the calendar year) have to adjust their accounting cycles in coming days.
According to data provided by advisory firm Corporate Professionals, as many as 226 listed companies don’t follow financial years ending March. Of these, 74 follow the calendar year for accounting; 58 follow the year ending September, while 89 follow the July-to-June financial year. A few listed companies follow the financial year ending April (2), August (2) and October (1).
One of the primary reasons for different accounting years is the cyclicality of the business. Saurabh Agarwal, director, Kennis Consultancy, cites the example of the sugar industry. “Most companies in the sugar industry follow the July-June year because typically, the sugar season starts in September. In March, most of these have stocks in their books. By June, all the stocks are sold and the books look very good. This practice would come to an end.”
The Ministry of Corporate Affairs’ move to bring uniformity in the corporate sector could be the first step towards harmonising different sectors in the economy, said Pavan Kumar Vijay, managing director, Corporate Professionals.
Today, different accounting years are followed within different government agencies. While the Union government continues to follow the April-March year, the Reserve Bank of India (RBI) follows the July-June year. Agricultural commodities such as sugar, paddy and wheat have different crop years, aligned to their respective harvest seasons.
A few years ago, the government had considered the July-June financial year so that while making the Union Budget, the finance minister had a better idea of the monsoons, a major factor influencing the agriculture-based economy. Pranab Mukherjee, in his first stint as finance minister, had even set up a committee under former RBI governor L K Jha to study and make recommendations in this regard. However, the idea was dropped.
Another reason for following different accounting years is consolidation of accounts with a foreign parent or a subsidiary. Several multination company arms operating in India follow the calendar year or the July-June year for accounting. Nestle India, Ambuja Cements, Bosch, Glaxo Smithkline, Thomas Cook are among the 74 companies that follow the calendar year. Siemens closed its books in September, while Procter and Gamble and Gillette ended the financial year in June.
The Companies Act, 2013, however, provides for such companies to move the Company Law Tribunal and seek an exemption. According to Madhavan Menon, managing director, Thomas Cook (India), the new Act provides for certain exceptions for a company that is a subsidiary of a company incorporated outside India.
“If the Indian company is required to follow a certain financial year for consolidation of the parent company accounts outside India, the Indian company may apply to the tribunal to retain the same financial year as its holding company, i.e. January-December, and if the tribunal is satisfied, it may allow so,” he says. Further, the Act also allows a two-year period for the company to align its accounting year to the April-March accounting period. “If at all Thomas Cook (India) Ltd decides to change its accounting year, it would take the necessary steps during 2015; it could have a 15-month period from January 2015 to March 2016,” adds Menon.
Experts say convincing the tribunal would take time. Vijay of Corporate Professionals said, “While it may be easy for a company following the calendar year to extend the period by three months, this may not be possible for companies that follow the year ending June. These companies may go for truncation of the period. Analysts doing comparisons and calculating earning per share for listing companies will have to be very careful.”
Companies have to give comparative numbers under each head of accounts such as sales, overheads and operating profit for the previous period. “The comparative situation is eroded for two consecutive years---the year you make the adjustment and the following one,” said Rajesh Mittal, managing director, Alamak Capital, a consultancy.
But the move is in line with the bigger picture. Agarwal says, “The new provision will bring more transparency and uniformity and will be in harmony with other steps such as implementation of IFRS (international financial reporting standards) and XBRL (extensible business reporting language).” IFRS is the globally applicable common reporting norms issued by international accounting body International Accounting Standards Board, while XBRL is a machine-readable reporting format developed for financial reporting.
Officials in companies that don’t follow the year ending March said their jobs would now be easier, as they had to maintain separate books for tax purposes, as cording to the country’s tax rules the date of year closure is March 31. An IVRCL spokesperson recalled how the company had to prepare two sets of accounts. “We had to prepare yearly financials i.e. April to March in case of both these years for income tax purposes. It has definitely increased the work pressure in terms of accounts/audit.”