Consolidated statements: Govt might give firms one more year

Relief would only be for unlisted companies; listed ones already have to prepare statements once a year

The Union ministry of corporate affairs (MCA) is considering deferring a requirement for companies to come out with consolidated financial statements by a year, to 2015-16, after India Inc pushed for it.

The relief would be for unlisted companies. Listed ones already have to prepare consolidated statements once a year.

The requirement for such a financial statement for all companies arose due to provisions under section 129 of the new Companies Act, enacted last year. The section says every parent company, along with its standalone financial statements, has to prepare consolidated statements of itself and its subsidiaries, whether or not these are listed. The Act defines the word "subsidiary" broadly, to include associate companies and joint ventures.

"Traditionally in India, the primary financial statements of a company are its standalone financial statements. For, declaration of dividend is based on the standalone profits of the company and not on the consolidated profits of the group," said N Venkatram, managing partner, audit, Deloitte Haskins and Sells.

Therefore, the preparation, audit and adoption of consolidated financial statements were not covered under the earlier Companies Act, 1956. However, listed companies were required to present consolidated financial statements on at least an annual basis, under clause 41 of the Listing Agreement prescribed by the Securities and Exchange Board of India.

Companies had asked for more time to comply with the new requirement for consolidation of statements. For this, the parent and subsidiary companies should necessarily follow the same accounting policies. If, due to regulatory or other requirements, the accounting policies of the two companies are different, it becomes difficult to consolidate their statements.

"Providing more time to implement the regulations would assist the industry to align the accounting policies of the holding and subsidiary companies," said Vijaya Sampath, senior partner, Lakshmikumaran and Sridharan Attorneys.

The new law also provides that if there are step-down subsidiaries, each subsidiary will also have to come out with a consolidated financial statement of its step-down entity. An exemption may be given if the step-down subsidiaries are wholly owned. "The government is also thinking to exempt wholly-owned subsidiaries from this rule," a senior MCA official, who did not wish to be named, told Business Standard.

In India, there are groups which have many step-down subsidiaries.

There are those who don't agree with the new provision for consolidated financial statements under the new Companies Act for a closely held group.

"Reporting of consolidated financial statement is for better understanding of the financial position of the group as a whole. If the group is closely held among family members, requiring compliance...(consolidated statement) for the (whole) group would not serve any purpose," said Sampath.

Business has also been apprehensive on the significant resource allocation needed.

For unlisted companies, "the share of net worth attributable to the minority shareholders would need to be determined and any unrealised intra-group profit between the company and its subsidiary/associate will need to be identified for elimination. These could involve significant efforts," said Venkatram.