Now updated based on Final Rules
It is believed that to get correct picture of financials of a business, the financials of the subsidiaries and joints ventures of the company should be analyzed together. On this premise the concept of Consolidation of Accounts is devised and is part of the generally accepted accounting principles would over. Conceptually there are two types of consolidation – (1) Line-by-line consolidation where all the assets, liabilities, and financial transactions are clubbed except for the transaction among the companies and minority interest if any, is disclosed separately; and (2) Partial or Proportionate Consolidation i.e. Consolidation to the extent of equity interest. In the previous Companies Act there was no legal requirement of Consolidation of Accounts by a Company. However as per Accounting Standards- 21 issued by the Institute of Chartered Accountants of India every listed company having one or more subsidiaries had to mandatorily prepare consolidated accounts. As per AS-23 only share of profits in case of Associate Company and as per AS-27 proportionate share of assets & liabilities along with profits in case of Joint Ventures are added while consolidating the accounts of the company. These accounting Standards where later adopted by Advisory Committee on Accounting Standards as constituted under section 210A of that Act.
To ensure transparency and facilitate disclosure of clear and refined picture of the state of affairs of companies, the Companies Act, 2013 makes mandatory, the preparation of consolidated financial statements of all the subsidiaries, besides presenting its own financial statements. The inclusion of associates and joint venture companies in the term ‘subsidiary’ shall further enhance the scope of consolidation process. The new provision is another step in creating a more transparent and investor friendly environment in the Indian economy.
Though the step will enhance transparency in corporate accounts, it may prove cumbersome, with the present corporate structure which involves number of Joint Ventures and Associate Companies. Even closely held companies have to consolidate the accounts of their associate companies and joint ventures besides those of their subsidiaries.
Salient Features of the New Law
The Act of 2013 provides for the inclusion of associate and joint venture companies in the word ‘subsidiary’. Where a company has one or more subsidiaries, it shall, in addition to preparing its own financial statements, prepare a consolidated financial statement with all the subsidiaries in the same form and manner as that of its own and it shall also be laid before the annual general meeting of the company along with its financial statement.
The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in Form AOC-1. The Consolidation of Financial Statements of the company shall be made in accordance with the Accounting Standards issued by the Central Government. In case there are no Standards issued by the Central Government, Accounting Standards as issued by the Institute of Chartered Accountants of India shall be applicable. In case the company has its immediate parent outside India, then Consolidated Financial Statements shall be prepared in the manner and format as specified under Schedule III to the new Act.
Further, to bring transparency in the working of companies, the concept of ‘associate’ has been inserted at various places in the newAct, such as:
- Disclosure in the financial statement through consolidation of accounts, Annual Return, etc.
- Even the accounts of foreign subsidiaries shall be required to be attached for filing them with the Registrar. Subsidiary to include ‘‘associate’’ and ‘‘joint venture’’ for the purpose of consolidation.