COGNIZANCE TO IND-AS IN INDIA BY INTRODUCING NEW COMPANIES ACT, 2013
by Mr. Vivek Sharma
India has principally agreed to the implementation of Ind -AS by revamping Schedule VI of Companies Act 1956 being the first constructive step in the journey. Many of the new insertions and amendments in Companies Act 2013 augur well for going ahead with the implementation in Ind-AS. This article aims to bring out the amendments in Companies Act which are effective arm of Ind-AS in the coming days.
On 25th Feb 2011, MCA with its Press Release on new Accounting Standards (titled Ind-AS) made it clear with the agenda of globalization in accounting in India. This process was kick started with introduction of 35 new AS, however it could not be implemented from 1st Apr 2011 due to various reasons as per issued aforesaid roadmap.
A revised roadmap for implementation of Ind-AS was issued at the meeting held on 20-22 Mar 2014 by the Council of ICAI. The first set of AS i.e., converged Ind AS shall be applicable for preparation of specified class of companies for preparing their Consolidated Financial Statement for the accounting period beginning from Apr 1 2016 with comparatives for the year ending 31st Mar 2016.
Companies Act 2013: A Paradigm Shift
The long awaited Companies Bill 2012 got its assent in the Lok Sabha on 18th Dec 2012 and in the Rajya Sabha on 8th August. After obtaining the assent of the President of India on 29th Aug 2013, it has now become the much awaited Companies Act 2013. With 98 sections of the Act came in to force w.e.f. 12th Sept 2013 and Further 190 sections of the Act have been notified and become effective from 1st April 2014 and are applicable to companies.
Following table provides a summary of comparison between Companies Act, 2013, Companies Act, 1956 and Ind-AS:
Point of Comparison
Companies Act 2013
Companies Act 1956
Writing off of Premium/ Discount on Redemption of Preference Share, Debentures and FCCB
Profit & Loss A/C is to be used to w/off redemption premium relating to debenture, preference shares and FCCB by companies which are prescribed separately and whose financial statements comply with the accounting standards prescribed for such class of companies.
Securities Premium is to be used to w/off redemption premium relating to debenture, preference share and FCCB by any company.
As per Ind-AS 39 on ‘Financial Instrument; Recognition & Measurement’, in case of convertible instruments, liability and equity elements are accounted separately i.e., split accounting and premium or discount is written off through Profit & Loss Account.
Companies Act 2013 in addition to person mentioned in Old Act includes option given to directors, officers or employees of holding company or subsidiary company(s) which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre- determined price.
Companies Act 1956 include option, benefit or right given to purchase or subscribe at a future date, the securities offered by the company at a predetermined price to employees, directors, officers and whole time directors of a company only and not to employees, directors or offices of holding or subsidiary company.
Ind-AS 102 ‘Share Based Payment’ already covers accounting for such transactions in Para 43A to 43D and definition of ‘Share based payment agreement’ given in Standard includes such agreement between entity and other party(including an employee) that entitles the other party to receive equity instruments or cash or other asset.
of Change in
Companies Act 2013 defined
‘financial statements’ for the first time as follows:
Financial Statement in relation to company shall, includes:
1. Balance Sheet
2. P&L or Income & Expenditure Account whichever applicable
3. Cash Flow Statement
4. Statement of
5. Changes in Equity
6. Explanatory notes.
However the Act doesn’t lays down any format for preparation of Statement of Change in Equity.
Preparation of Statement of Change in Equity and definition of financial statement is not covered in the old Act.
As defined in Ind-AS 1 on
‘Presentation of Financial Statements’, ‘financial statements’ comprises
‘Statement of Change in
Further Ind-AS 1 mandates to present “Statement of change in equity’ as a part of Balance Sheet. It also provides information to be presented in detail in this Statement.
Preparation of CFS
A company with one or more Subsidiary has to prepare CFS in addition to Stand Alone Financial Statement. As per Sec
129(3), ‘Where a company has one or more subsidiaries, it shall, in addition to financial statements provided, prepare a CFS of the company’.
Companies Act 1956 or AS doesn’t mandates preparation of CFS. Currently Clause 42 of listing agreement of SEBI mandates preparation of CFS for Companies whose shares are listed on a Stock Exchange.
Ind-AS 27 on ‘C & SFS’ compulsory requires preparation of CFS and read as follows:
A parent shall present CFS in which it consolidates its investments in subsidiaries in accordance with this Standard. Where a parent is a company, the CFS shall be in the form set out in.
‘Associate company’ is defined as in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
For the purposes of this definition, ‘significant influence’ means control of at least 20% of total share capital, or of business decisions under an agreement.
Existing Act doesn’t defines
‘Associate company’. AS 23 defined Associate as an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.
‘Significant influence’ is ‘the power to participate in the financial /operating policy decisions of the investee but not control over those policies’
There is a rebuttable presumption that holding of 20% or more of voting power of investee constitutes significant influence. However, in certain circumstances, a company may demonstrate that 20% share ownership does not constitute significant influence.
Ind-AS 23 on ‘Investment in Associate’ defines associate as an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence means the same as explained in existing AS 23.
Useful life and Residual value of asset
As per new Companies Act 2013 useful life of an asset and residual value will not be higher than those specified in the Part C of Schedule II except for the prescribed companies whose financial statements comply with AS prescribed for such class of companies.
Companies Act 1956 gave the rates of depreciation and those were the minimum rates for charging depreciation.
Ind-AS 16 on ‘Property, plant
& Equipment’ and current AS 6 on ‘Depreciation’ also contemplate that Useful life and residual value of asset is an estimation of Management.
Schedule III of Companies Act 2013 has made it mandatory for the companies to identify and depreciate significant component with different useful lives separately.
Companies Act 1956 doesn’t contemplate anywhere in regard of providing depreciation on component basis.
Ind-AS 16 on ‘Property, plant and Equipment’ as well as AS 10 on ‘Fixed Asset’ ensures ‘component accounting’. However Ind-AS mandates component accounting like Companies Act 2013 while AS 10 makes it discretionary for the company.
Definition of Control
Definition of Control is important for establishing Holding Subsidiary definition. Companies Act 2013 gives the following definition :
‘Control’ shall include the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly.
Existing Act doesn’t define ‘control’ though it explains the meaning of Holding & Subsidiary.
The definition given by Companies Act 2013 is much wider than given in AS 21 and also in consonance with Ind-AS 27 on ‘C & SFS’. Ind-AS defines ‘control’ as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The Companies Act 2013 contains provisions for:
1. Voluntary change in Accounting Policy, errors & reclassification.
2. Reopening of accounts on court/tribunal orders.
Currently there isn’t a concept of “Voluntary Revision of Accounts”. MCA Circular allowed to reopen & revise its accounts:
1. To comply with technical requirement of any other law.
2. To exhibit true & fair view.
Ind-AS 8 on ‘Accounting Policies, changes in Accounting Estimates & Errors’ already deals with Voluntary change in accounting policies, errors and reclassification.
In case of change in accounting policy, the entity shall adjust the opening balance of each affected component of equity for earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.
However Ind AS gives exemption from retrospective application wherever it is impractical to retrospectively apply the changes.
Depreciation on basis of Units of Production
Companies Act 2013 defines useful life of an asset as the number of production or similar units expected to be obtained from the asset by the entity.
This indicates that a company may be able to use UOP method of depreciation.
Companies Act 1956 prohibits depreciation on UOP method for those assets which are covered under Schedule XIV.
As per Ind-AS depreciation is systematic allocation of depreciable amount of an asset over its useful life and useful life is number of production or similar units expected to be obtained from the asset by entity.
Presentation of Minority Interest
Schedule III of the New Companies Act 2013 provides the format for preparation of ‘CFS’ and as per Schedule III Minority Interest is to be shown within equity separately from the equity of the owners of the Parent Shareholder’s equity.
Revised Schedule VI of Old Act was silent about the preparation of ‘CFS’ and as such no format was given. However minority interest was disclosed in ‘Non-Current Liabilities’.
Format for additional disclosure given in Schedule III is same as format given in Ind AS ‘C & SFS’. Treatment of Minority interest is also similar to Schedule III by which minority interest is shown with in equity separately from Parent Shareholder’s equity.
Preparation of Financial Statements as per the new Ind-AS will be a challenging task involving various practical issues. The major changes in the new Companies Act 13 are aiming at adoption of International Financial Reporting practices in India thereby globalizing the accounting system in India and it is definitely a path breaking initiative.
Disclaimer :- Author’s personal views. Purely for Education Purpose.
List of Abbreviations used in the article:
Consolidated Financial Statement
C & SFS
Consolidated & Separate Financial Statement
Foreign Currency Convertible Bond
Institute of Chartered Accountants of India
Indian Accounting Standards notified by MCA as Indian Equivalent of IFRS
Securities Exchange Board of India
Unit of Production