Query No. 26

 

Subject:          

  Applicability  of Accounting Standard (AS) 21.1

 

A.   Facts  of  the  Case

 

1. A wholly owned government company (within the meaning of section 617 of the Companies Act, 1956) with 100% shareholding by the Hon’ble President of India and his nominees, has been co-ordinating the policies and activities of its six subsidiaries, viz., A Ltd. (having two subsidiaries, viz., X Ltd. and Y Ltd.), B Ltd., C Ltd., D Ltd., E Ltd. and F Ltd. (having a subsidiary, viz., Z Ltd.). The querist has informed that most of the subsidiaries including subsidiary’s subsidiaries are 100% owned by the company or its subsidiaries, as the case may be, except for B Ltd., in which the holding company holds around 99% shares and Y Ltd. in which A Ltd. (a subsidiary of the holding company) holds around 88% shares. Pertinently, directors of these companies are appointed by the Government of India.

 

2. Most of the companies have been referred to Board for Industrial and Financial Reconstruction (BIFR) and disinvestment process for many group companies  has been  initiated  by  the  Department  of  Heavy Industry.   In some cases, BIFR has referred the company to High Court for winding up.

 

3. The company has been receiving substantial funds year after year by way of equity from the Government of India (GOI).  These funds are used by the company, on the Government of India’s instructions, for investments in shares of its subsidiaries who in turn invest such money in procuring assets or for other purposes as per the GOI approval.

 

4. The querist has also separately informed that the equity or debt securities of the enterprise to which the query relates are not listed on a recognised stock exchange.

 

5. In compliance with the Companies Act, 1956, the Annual Report and accounts of the company include a statement pursuant to section 212(1)(e) of the  said  Act.   The  company  does  not  present  consolidated  financial statements.   The balance sheets and profit and loss accounts of all these companies are prepared at the end of each financial year, i.e., 31st  March and thereafter these are subjected to statutory audit and C&AG Audit as per the provisions under section 619(4) of the Companies Act, 1956.

 

6. As per the querist, in case consolidated financial statements are to be prepared by the company under consideration, completion of the same will be delayed beyond 30th  September which is the statutory time for holding AGM.   Delay  would  also  occur  in  laying  of  Annual  Accounts  before Parliament during November/December, since separate financial statements of the subsidiaries would be required. Further, whether consolidated financial statements  should  be  prepared  after  the  statutory/C&AG  audit  of  the respective subsidiaries, has not been deliberated upon.

 

7. The querist has also stated that for preparation of consolidated financial statements, the delay in date of holding AGM of even one subsidiary would affect the company’s closing of its accounts requiring permission under section 212, etc. This would have implications for the directors’ responsibility. The querist has mentioned that there are no minority interests excepting in B Ltd. and Y Ltd., wherein these are negligible.

 

B. Query

 

8. The querist has sought the opinion of the Expert Advisory Committee in respect of the applicability of Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, in the case of the company on the following issues:

 

        (a)        Whether AS 21 is applicable to the company.

 

        (b)        At present, the Directors’ Report of the holding company reports some consolidated figures as to production, profit/(loss),                     operating margins, manpower and cash profit.  Whether such reporting tantamounts to consolidation of financial statements                     in any way.

 

        (c)        Time of consolidation – Whether after statutory/C&AG audit of  the respective subsidiaries.

 

        (d)        In case consolidated financial statements are to be prepared after C&AG audit of the respective subsidiaries, finalisation of                     audit of accounts of the company including audit by C&AG will be delayed and the time schedule for holding of AGM of the                     holding company may not be maintained.

 

        (e)        Whether consolidated financial statements should be audited. Whether it would be a separate assignment for the statutory                     auditors.

 

        (f)         Compliance with the requirement of submission of various reports to different statutory bodies would be delayed                                      consequently.

 

C. Points  considered  by  the  Committee

 

9.  The  Committee  notes  the  introductory  paragraph  of  AS  21  which provides as below:

 

“.... An enterprise that presents consolidated financial statements should prepare and present these statements in accordance with this Standard....”

 

10. The Committee also notes that clause 32 of the Listing Agreement provides as below:

 

“...

The company will mandatorily publish Consolidated Financial Statements in its Annual Report in addition to the individual financial statements. The company will have to get its Consolidated Financial Statements audited by the statutory auditors of the company and file the same with the Stock Exchange. ...”

 

11. The  Committee  notes  from the  above  that  AS  21  does not  require compulsory preparation of consolidated financial statements. AS 21 only requires that if an enterprise presents consolidated financial statements, e.g., in compliance with clause 32 of the Listing Agreement, it should prepare and present the consolidated financial statements in accordance with this Standard. Clause  32  of  the  Listing  Agreement,  which  mandatorily  requires  the presentation  of  consolidated  financial  statements,  does not  apply to  the company in question, as the company is not a listed company.

 

12. The Committee is of the view that despite the fact that the company is not  mandatorily  required  to  prepare  and  present  consolidated  financial statements, the company may prepare these statements on voluntary basis since the company holds more than one-half of the ownership of voting power in all its subsidiaries including subsidiary’s subsidiaries.

 

13. The Committee also notes from the above that consolidated financial statements should be audited by the statutory auditors, where so required. The parent company may also get the said statements audited on voluntary basis.  In this context, the Committee notes the format of auditor’s report on the consolidated financial statements prescribed by the Institute of Chartered Accountants of India and published in its journal ‘The Chartered Accountant’, page 1376, May 2002.  It provides as below:

 

“...

We report that the consolidated financial statements have been prepared by the Company in accordance with the requirements of Accounting Standard (AS) 21, Consolidated Financial Statements, issued by the Institute of Chartered Accountants of India and on the basis of the separate audited financial statements of XYZ Ltd. and its subsidiaries included in the consolidated financial statements.

...”

 

14. If the company decides to prepare consolidated financial statements, the  opinion  given  hereinafter  would  be  relevant  under  the  facts  and circumstances of the case.

 

15. The Committee notes paragraph 7 of AS 21, which is reproduced below:

 

“7. A parent which presents consolidated financial statement s should present these statements in addition to its separate financial statements.”

 

16. The Committee also notes paragraph 6 and paragraph 13 of AS 21, which provide as below:

 

“6. Consolidated financial statements normally include consolidated balance sheet, consolidated statement of profit and loss, and notes, other statements and explanatory material that form an integral part thereof.  Consolidated cash flow statement is presented in case a parent presents its own cash flow statement. The consolidated financia l statements are presented, to the extent possible, in the same format as that adopted by the parent for its separate financial statements.”

 

“13. In preparing consolidated financial statements, the financial statements of the parent and its subsidiaries should be combined on a line by line basis by adding together like items of assets , liabilities, income  and expenses.  …”

 

The Committee notes from the above paragraphs that the term ‘consolidated financial statements’, means a complete set of consolidated balance sheet, profit and loss, and notes, other statements and explanatory material that form an integral part thereof and that the same are prepared by combining the financial statements of the parent and subsidiaries on line-by-line basis. Hence, the Committee is of the view that mere reporting of consolidated figures as to production, profit/(loss), operating margins, manpower and cash profit, in the Directors’ Report or as a part of the financial statements of the parent does not amount to preparation of consolidated financial statements within the meaning of AS 21.

 

17. With regard to delays in preparing consolidated financial statements in view of the delay in completion of statutory audit as well as C&AG audit , the Committee is of the view that there is no option but to streamline the system, unless a specific exemption is granted under law or by a regulation.

 

D.  Opinion

 

18. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 8 above:

 

        (a)        AS 21 is not mandatory for the company in question.

 

        (b)        The inclusion of consolidated figures as to production, profit/(loss), operating margins, manpower and cash profit in the                      Directors’ Report of the holding company does not tantamount to consolidation of financial statements.

 

        (c)        It is desirable that consolidated financial statements should be prepared after statutory/C&AG audit of the respective                             subsidiaries have been completed.

 

        (d)        If the consolidated financial statements are prepared, it is desirable that the C&AG audit of the respective subsidiaries should                    be expedited for timely preparation of audited accounts of the holding company and for timely conduct of AGM of the                            holding company.

 

        (e)        If consolidated financial statements are prepared, it is desirable that these are audited.  In such a case the auditors will have                    to give a separate audit report on consolidated financial statements and express an opinion as to whether they reflect a true                    and fair view. In the view of the Committee, audit of consolidated financial statements would be a separate assignment for                    the statutor y auditors.

 

        (f)         Please see (d) above.

  1  Opinion finalised by the Committee on 20.1.2003.