Query No. 7

Subject:           Requirement of preparation of complete/condensed set of financial statements for interim financial                          reporting. 1

A.        Facts of the Case

1.       A Government company (hereinafter referred to as the ‘company') incorporated under the Companies Act, 1956, is a leading turnkey construction company having widespread operations in several parts of India and other countries. The company got listed in Mumbai and Delhi Stock Exchanges in the year 1992 when the Government of India disinvested 0.27% of its shares in the company.

2.       The querist has stated that the company got delisted from Mumbai and Delhi Stock Exchanges w.e.f. 03.11.2011 and 15.04.2012 respectively but two investors who are Government of India institutions continued with their holding which constitutes 0.27% of total share capital of the company.

3.       Even after delisting of shares from the stock exchanges, the company continued to prepare condensed statement of profit and loss on quarterly basis and putting up to Audit Committee and the Board. The company is also getting its quarterly results limited reviewed by the central statutory auditors as was being done when the company was listed. However, the limited review report by the auditors is used for internal purposes only and is not put in public domain.

4.       The querist has further stated that recently, statutory auditors of the company gave their observations that the company is not complying with Accounting Standard (AS) 25, ‘Interim Financial Reporting'. They were of the view that the company should prepare complete set of financial statements, i.e., condensed balance sheet, condensed statement of profit and loss, condensed cash flow statement and selected explanatory notes.The querist has referred to the following provisions of AS 25:

       "Objective

The objective of this Standard is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors and others to understand an enterprise's capacity to generate earnings and cash flows, its financial condition and liquidity.

 

 Scope

 

1.     This Standard does not mandate which enterprises should be required to present interim financial reports, how frequently, or how soon after the end of an interim period. If an enterprise is required or elects to prepare and present an interim financial report, it should comply with this Standard.

 

2.     A statute governing an enterprise or a regulator may require an enterprise to prepare and present certain information at an interim date which may be different in form and/or content as required by this Standard. In such a case, the recognition and measurement principles as laid down in this Standard are applied in respect of such information, unless otherwise specified in the statute or by the regulator.

 

3.     The requirements related to cash flow statement, complete or condensed, contained in this Standard are applicable where an enterprise prepares and presents a cash flow statement for the purpose of its annual financial report.”

5.       The company is of the view that it is not required to prepare complete or condensed set of financial statements for each quarter due to following reasons:

(a)     The objective of interim financial reporting is to improve the ability of investors, creditors and others to understand an enterprise's capacity to generate earnings and cash flows, its financial condition and liquidity. The interim financial reports being prepared by the company and getting them limited reviewed by the auditors are for internal purposes only and are not given to outside agencies like investors, creditors etc. Since the financial statements are not used for the objective of their preparation as laid down in the Standard, the company is not required to prepare all the components of interim financial reports. As a matter of precaution, these reports and limited review reports can be marked as ‘for internal purposes only'. The querist has provided the format of interim financial report being prepared by the company for the perusal of the Committee.

 

(b)     Shares of the company are no longer listed on stock exchanges, hence, there is no listing agreement requirement to prepare quarterly results.

 

(c)     The company has no obligation by any statute to prepare interim financial statements.

 

(d)     As per listing requirement of SEBI, statement of assets and liabilities is required to be prepared by the companies only for the half year ending. Therefore, many listed companies are publishing their quarterly results for the quarter ending June and December without condensed balance sheet. Listed companies are also not preparing cash flow statement for any interim financial reporting.

B.       Query

6.       In the above background, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i) Whether the company is required to prepare complete set of condensed financial statements for each       quarter considering the fact that the company has no obligation by any statute to prepare quarterly results.

 

(ii) If it is required, what are the minimum components of interim financial reports?

 

(iii) Any additional disclosure, if required, in the existing reports being prepared by the company so that the        reporting is in compliance with the Standard?

C.       Points considered by the Committee

7.       The Committee notes that the basic issue raised in the query relates to requirement of preparation by the company of complete or condensed set of financial statements for interim financial reporting and, if required, minimum components of interim financial reports and any additional disclosure requirements in the existing report being prepared by the company to make it in compliance with AS 25. The Committee has, therefore, considered only these issues and has not examined any other issue that may arise from the Facts of the Case, such as, requirements to prepare interim financial statements under any statute, preparation of cash flow statement by listed companies for interim financial reporting, applicability of any other suitable reporting framework apart from the requirements of AS 25, etc. The Committee has presumed that the company, after delisting from stock exchanges, has no requirement to prepare interim financial report under any law and that by preparing only a condensed statement of profit and loss, the company is not claiming preparation of ‘interim financial report' in compliance with the requirements of AS 25. Further, the opinion expressed hereinafter is purely from accounting perspective and not from the perspective of legal interpretation of the legal enactment, such as, SEBI guidelines etc.

8.       The Committee notes paragraphs 1 to 3, 4.2, 6 and 9 of AS 25, notified under the Companies (Accounting Standards) Rules, 2006 and paragraph 4 of the Guidance Note on Applicability of AS 25 to Interim Financial Results, issued by the Institute of Chartered Accountants of India as follows:

AS 25

 

"Scope

 

1.   This Standard does not mandate which enterprises should be required to present interim financial reports, how frequently, or how soon after the end of an interim period. If an enterprise is required or elects to prepare and present an interim financial report, it should comply with this Standard.

 

 2.   A statute governing an enterprise or a regulator may require an enterprise to prepare and present certain information at an interim date which may be different in form and/or content as required by this Standard. In such a case, the recognition and measurement principles as laid down in this Standard are applied in respect of such information, unless otherwise specified in the statute or by the regulator.

 

3.   The requirements related to cash flow statement, complete or condensed, contained in this Standard are applicable where an enterprise prepares and presents a cash flow statement for the purpose of its annual financial report.”

 

“4.2 Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements (as described in this Statement) for an interim period. ”

 

“Content of an Interim Financial Report

 

6.       A complete set of financial statement normally includes:

        (a)       balance sheet;

        (b)      statement of profit and loss;

        (c)      cash flow statement; and

        (d)     notes including those relating to accounting policies and other statements and explanatory material that are an                   integral part of the financial statements.”

“MINIMUM COMPONENTS OF AN INTERIM FINANCIAL REPORT

 

9. An interim financial report should include, at a minimum, the following components:

(a)       condensed balance sheet;

(b)       condensed statement of profit and loss;

(c)       condensed cash flow statement; and

(d)       selected explanatory notes.”

 

Guidance Note on Applicability of AS 25 to Interim Financial Results

“4. The presentation and disclosure requirements contained in AS 25 should be applied only if an enterprise prepares and presents an ‘interim financial report’ as defined in AS 25. Accordingly, presentation and disclosure requirements contained in AS 25 are not required to be applied in respect of interim financial results (which do not meet the definition of ‘interim financial report’ as per AS 25) presented by an enterprise. For example, quarterly financial results presented under Clause 41 of the Listing Agreement entered into between Stock Exchanges and the listed enterprises do not meet the definition of ‘interim financial report’ as per AS 25. However, the recognition and measurement principles laid down in AS 25 should be applied for recognition and measurement of items contained in such interim financial results.”

From the wholesome reading of the above requirements, the Committee notes that AS 25 does not mandate which enterprises should be required to present interim financial reports. However, if an enterprise is required or elects to prepare and present an interim financial report, as defined in the Standard, it should comply with the requirements of AS 25. In this regard, the Committee notes from the Facts of the Case that the company, after delisting of shares from the stock exchanges, is not required to prepare and present interim financial report. The company, however, has elected to prepare only the condensed statement of profit and loss. The Committee notes that, as per the requirements of the Standard, interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements for an interim period. The Committee is of the view that only preparation of condensed statement of profit and loss cannot be considered as preparation of ‘interim financial report’ as per the requirements of AS 25. Therefore, the requirements of AS 25 to prepare either complete set of financial statements or a set of condensed financial statements for each quarter, as being contended by the statutory auditor, are not applicable to the company. The Committee further notes the Objective paragraph of AS 25 as reproduced by the querist in paragraph 4 above and is of the view that, primarily, the purpose of preparing interim financial report is to report or present an enterprise’s capacity to generate earnings and cash flows, its financial condition and liquidity to the investors, creditors and other users (external). However, the company in the extant case is not presenting the condensed statement of profit and loss to external users and is preparing the statement for internal purposes only. In this regard, the Committee also wishes to point out that it would be useful if the company includes a note alongwith the condensed statement of profit and loss stating that the statement should not be considered as an ‘interim financial report’ as per the requirements of AS 25 and further such a statement of profit and loss should not be referred to as ‘interim financial report’ or ‘interim financial statement’. It would also be useful if the condensed statement of profit and loss prepared by the company for internal purposes is marked as ‘for internal purposes only’, as being suggested by the querist in paragraph 5 above.

D.          Opinion

9.           On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 6 above:

(i)  No, the company is not required to prepare either complete set of financial statements or a set of condensed financial statements for each quarter as discussed in paragraph 8 above.

 

(ii) & (iii) In view of the (i) above, the answer to these does not arise.

 

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1 Opinion finalised by the Committee on 3.6.2015.