CHAPTER 4 REGULATORY ENVIRONMENT GOVERNING INSURANCE COMPANIES IN INDA

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1 CHAPTER 4 REGULATORY ENVIRONMENT GOVERNING INSURANCE COMPANIES IN INDA

2 CHAPTER 4 REGULATORY ENVIRONMENT GOVERNING INSURANCE COMPANIES IN INDIA The increasing awareness among the public for information and changing socioeconomic environment in the country have enhanced the need for adequate disclosure of information in the company s annual reports. Gone are the days in which the trade was shielded by an artificial veil of super-secrecy. The era of no-information philosophy is over. The involvement of people s money in corporate functioning has imposed a legal and moral obligation on modern states to set a legal mechanism for the disclosure of somewhat uniform information in public interest (Chakraborty, 1990). Now a days companies are disclosing greater amount of information in order to enhance their corporate image.varoius companies are giving voluntary disclosure along with the mandatory information. But there are some companies which hesitate to disclose more information because of fear of mis-use of information. Sometimes the information which may be useful to the users of the financial statements is concealed by the managers. So the companies can not be relied upon to make a fair and adequate disclosure at their own. To enhance the credibility of information in the eyes of the users, some type of regulation becomes necessary. Moreover, to strengthen their image in the mind of public new generation insurance companies must have a set of standards so that they can be considered as trustworthy as their public sector counterparts. 4.1 Insurance Industry at a Glance Indian insurance industry is on the way of deep and fundamental changes. Prior to nationalization of life insurance industry in 1956 and the general insurance industry in 1972 there was a competitive insurance industry in India with hundreds of private and foreign operators. The year 1999 saw a revolution in the Indian insurance market due to major structural changes that took place with the passing of Insurance Regulatory Development Authority (IRDA) Act 1999.This Act resulted in ending age long monopoly of government in insurance sector and allowing private and foreign players to enter the market. Consequently, the number of insurance companies both in life and general insurance sector is increasing gradually.

3 4.2 Financial Reporting Requirements of Insurance Companies in India Reform process initiated by the government of India gave a momentum to the competition and the growth of the insurance industry. As a part of these reforms, private and foreign players are allowed to enter the insurance market of India. These players are capturing a large market share and giving a stiff competition to public sector companies. As insurance contracts are based on the principle of utmost good faith, it is the duty of all insurance companies to prevent misutilization of policyholders and shareholders fund. To protect the interests of policyholders and to increase transparency and credibility of insurance companies there is a need to have an effective regulatory system for financial reporting of insurance companies. Reporting requirements of insurance companies are different from that of other companies, because of the concept of policyholders and shareholders fund, segment reporting in respect of all the funds maintained by the company, complexity of insurance contracts and insurance itself is an intangible product. Earlier the accounts of insurance companies were governed by Insurance Act 1938, but passing of IRDA Act in 1999 opened a new chapter for disclosure norms of insurance companies. In the year 2002, the IRDA came up with regulations for the preparation of the financial statements of insurance companies. According to the Insurance (Amendment) Act, 2002, the first, second and third schedules prescribed for balance sheet, profit and loss account and revenue account respectively as given in Insurance Act 1938 have been omitted. Now revenue account, profit and loss account and balance sheet are to be prepared as per the formats prescribed by IRDA. However, following are the statutes governing financial reporting practices of insurance companies in India: Insurance Act 1938 IRDA Act,1999 (including IRDA Regulations) Companies Act, Institute of Chartered Accountants of India ( ICAI) Insurance Act 1938 Section 11 of the Insurance Act 1938, deals with the preparation of financial statements of insurance companies in India. Financial Statements of insurance 53

4 companies include preparation of a revenue account, balance sheet and a profit and loss account. Following are the detailed provisions regarding preparation of these accounts: Revenue Account In order to prepare revenue account for life insurance companies under Insurance Act 1938, a set Performa i.e. Form D is used. As it is prepared in a vertical form, the debit side shows claims, annuity, surrender value (there is no surrender value in case of general insurance policies), bonus in cash, bonus in reduction of premium ( it is shown both on the debit side and credit side by adding to the premium), expenses of management, bad debt, taxes and other expenditure and life assurance fund (the difference between debit and credit side). On the credit side of the revenue account life assurance fund at the beginning of the period, premium earned, considerations for annuities granted, interest, dividend and rent received by the company, registration fee and other incomes to be specified are shown. Revenue account of general insurance companies is prepared according to Form F. In case of companies doing more than one business (i.e. fire, marine, motor, health, accident etc.) a separate revenue account is prepared in the prescribed form in accordance with the regulations contained in the Third Schedule of the Insurance Act On the debit side of the revenue account of general insurance company claims, commission, expenses of management and foreign taxes are shown and credit side includes balance of account at the beginning of the year, reserve for unexpired risks, premium and other income. As policies in general insurance are only for one year, there may be such policies which are issued during the year but risks covered remain unexpired at the end of the accounting period. So, a reserve for unexpired risk is maintained out of premium received during the current accounting year to meet the unexpected loss which may occur during the next accounting year before the lapse of insurance policy Balance Sheet Balance sheet of both life and general insurance companies is prepared in Form A in accordance with regulations contained in Part- I of the First Schedule of Insurance Act Asset side of the balance sheet includes loans, investments, agents balances, outstanding premium, interest, dividends and rents outstanding, interest, dividends and rents accruing but not due, sundry debtors, bills receivables and cash. On the liability side shareholders capital, reserves or contingency accounts, balance of funds and other 54

5 accounts and loans and advances are shown. Details regarding each item are given in the balance sheet itself Profit and Loss Account Under this Act, a combined Profit and Loss Account is prepared in accordance with the regulations given in Part- I of the second schedule. A set performa of Form B is used to prepare profit and loss account and Form C is used to prepare profit and loss appropriation account. Specimen proformas are prescribed for preparing revenue account, balance sheet and profit and loss account of life insurance companies and general insurance companies IRDA Act 1999 (Including IRDA Regulations) Under section 114 A of the principal act i.e. Insurance Regulatory Development Authority Act, 1999 (IRDA Act 1999), the authority has so far issued 53 sets of regulations on various topics. Insurance Regulatory Development Authority (Preparation of Financial Statements and Auditor s Report of Insurance Companies) Regulations, 2002 are one of them. These regulations are related to the financial reporting practices of insurance companies. These regulations are important constituents of the Indian regulatory regime. According to the regulations made by the authority in consultation with the Insurance Advisory Committee accounts of insurance companies are prepared according to the prescribed formats given by the authority. Details are given as under: Preparation of Financial Statements After the commencement of Insurance Regulatory Development Authority, Regulations, 2002, all the life insurance companies shall comply with the requirements of Schedule A and general insurance companies with Schedule B of these regulations while preparing their financial statements. The auditors report on the financial statements of all insurance companies shall be in conformity with the requirements of Schedule C. Insurance Regulatory and Development Authority issued The Gazette of India Extraordinary Part III-Section 4 on 30 th March 2002 (Anonymous, 2002). It gives the list of items to be disclosed in the financial statements of insurance companies under part II of Schedule A (for life insurance companies) and Schedule B (for general insurance companies) of the (Preparation of Financial Statements and Auditor s Report of Insurance Companies) Regulations, According to these regulations, following disclosure will form part of financial statements of insurance companies: 55

6 1. Every insurance company will disclose all significant accounting policies and accounting standards followed by them in the manner required under Accounting Standard I issued by the Institute of Chartered Accountants of India (ICAI). 2. All companies will separately disclose if there is any departure from the accounting policies with reasons for such departure. 3. Disclosure of investments made in accordance with statutory requirements separately together with its amount, nature, security and any special rights in and outside India. 4. Disclosure of performing and non-performing investments separately. 5. Disclosure of assets to the extent required to be deposited under local laws or otherwise encumbered in or outside India. 6. All the companies are required to show sector-wise percentage of their business. 7. To include a summary of financial statements for the last five years in their annual report to be prepared as prescribed by the IRDA. 8. Disclose the basis of allocation of investments and income thereon between policyholders account and shareholders account. 9. To disclose accounting ratios as prescribed by the Insurance Regulatory and Development Authority. 10. Disclosure of following items is made by way of notes to balance sheet: Contingent Liabilities: Actuarial assumptions for valuation of liabilities for life policies in force. Encumbrance s to assets of the company in and outside India. Commitments made and outstanding for loans, investments and fixed assets. Basis of amortization of debt securities. Claims settled and remaining unpaid for a period of more than six months as on the balance sheet date. Value of contracts in relation to investments, for purchases where deliveries are pending and sales where payments are overdue. 56

7 Operating expenses relating to insurance business and basis of allocation of expenditure to various segments of business. Computation of managerial remuneration. Historical costs of those investments valued on fair value basis. Basis of revaluation of investment property Management Report According to the IRDA Regulations 2002, all the insurance companies are required to attach a management report to their financial statements. The contents of the management report are given under PART IV (Schedule A and Schedule B) of these regulations and reproduced below: 1. Confirmation regarding the continued validity of the registration granted by the IRDA. 2. Certification that all the dues payable to the statutory authorities has been duly paid. 3. Confirmation to the effect that the shareholding pattern and the transfer of shares during the year are in accordance with the statutory or regulatory requirements. 4. Declaration that the management has not directly or indirectly invested outside India the funds of the policyholders. 5. Confirmation regarding required solvency margins. 6. Certification to the effect that no part of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investment of the life insurance funds. 7. Disclosure with regard to the overall risk exposure and strategy adopted to mitigate the same. 8. Operations in other countries, if any, with a separate statement giving the management s estimate of country risk and exposure risk and the hedging strategy adopted. 9. Ageing of claims indicating the trends in average claim settlement time during the preceding five years. 57

8 10. Certification to the effect as to how the values, as shown in the balance sheet, of the investments and stocks and shares have been arrived at, and how the market value thereof has been ascertained for the purpose of comparison with the values so shown. 11. Review of asset quality and performance of investment in terms of portfolios, i.e. separately in terms of real estate, loans, investments, etc. 12. A schedule of payments, which have been made to individuals, firms, companies and organisations in which directors of the insurance company are interested. 13. A responsibility statement indicating therein that: a) in the preparation of financial statements, the applicable accounting standards, principles and policies have been followed along with proper explanations relating to material departures, if any; b) the management has adopted accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the operating profit or loss and of the profit or loss of the company for the year; c) the management has taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the applicable provisions of the Insurance Act 1938 and Companies Act 1956 for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; d) the management has prepared the financial statements on a going concern basis; e) the management has ensured that an internal audit system commensurate with the size and nature of the business exists and is operating effectively. 58

9 General Instructions for Preparation of Financial Statements Insurance Regulatory Development Authority under the (preparation of financial statements and auditors report) Regulations 2002, states various instructions for the preparation of financial statements of insurance companies, given in Part III (Schedule A and Schedule B) of these regulations. Important instructions relating to disclosure are reproduced here below; 1. All the insurance companies are required to give the corresponding amounts for the immediately preceding financial year for all items of the balance sheet, revenue account, profit and loss account and receipts and payments account. 2. The figures in financial statements shall be rounded off to the nearest thousands. 3. Extent of risk retained and re-insured shall be separately disclosed. 4. Any debit balance of the profit and loss account shall be shown as deduction from uncommitted reserves and the balance, if any, shall be shown separately Formats for Preparation of Financial Statements of Life Insurance Companies (Schedule A) As per IRDA (preparation of financial statement and auditors report of insurance companies) Regulations, 2002, a life insurance company prepares its revenue account, profit and loss account and the balance sheet in Form A-RA, A-PL and A-BS respectively, as prescribed in the Part V of Schedule A of these regulations. A life insurance company is required to prepare separate revenue account and balance sheet for participating policies and non-participating policies; linked business and non-linked business and business within India and business outside India. The prescribed performa s for preparing financial statements of life insurance companies are given as follows:- Revenue Account: Revenue account is also known as policyholders account. Life insurance companies should comply with the requirements of Schedule A for preparing its revenue account. Revenue account is given in a summary form. The details are given in the accompanying schedules. Fifteen schedules are prepared in case of life insurance companies. First four schedules relate to revenue account and the remaining eleven 59

10 FORM A-RA Name of the Insurer: Registration No. and Date of Registration with the IRDA REVENUE ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20. Policyholders Account (Technical Account) Particulars Premiums earned net (a) Premium (b) Reinsurance ceded (c) Reinsurance accepted- Schedule Current Previous Year Year (Rs. 000) (Rs. 000) 1 Income from Investments (a) Interest, Dividends & Rent Gross (b) Profit on sale/redemption of investments (c) (Loss on sale/ redemption of investments) (d) Transfer/Gain on revaluation/change in fair value* Other Income (to be specified) TOTAL (A) Commission 2 Operating Expenses related to Insurance Business 3 Provision for doubtful debts Bad debts written off Provision for Tax Provisions (other than taxation) (a) For diminution in the value of investments (Net) (b) Others (to be specified) TOTAL (B) Benefits Paid (Net) 4 Interim Bonuses Paid Change in valuation of liability in respect of life policies (a) Gross** (b) Amount ceded in Reinsurance (c) Amount accepted in Reinsurance TOTAL (C) SURPLUS/ (DEFICIT) (D) =(A)-(B)-(C) APPROPRIATIONS Transfer to Shareholders Account Transfer to Other Reserves (to be specified) Balance being Funds for Future Appropriations TOTAL (D) 60

11 FORM A-PL Name of the Insurer: Registration No. and Date of Registration with the IRDA PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20. Shareholders Account (Non-technical Account) Particulars Schedule Current Year (Rs. 000) Amounts transferred from/to the Policyholders Account (Technical Account) Previous Year (Rs. 000) Income From Investments (a) Interest, Dividends & Rent Gross (b) Profit on sale/redemption of investments (c) (Loss on sale/ redemption of investments) Other Income (To be specified) TOTAL (A) Expense other than those directly related to the insurance business Bad debts written off Provisions (Other than taxation) (a) For diminution in the value of investments (Net) (b) Provision for doubtful debts (c) Others (to be specified) TOTAL (B) Profit/ (Loss) before tax Provision for Taxation Profit / (Loss) after tax APPROPRIATIONS (a) Balance at the beginning of the year. (b) Interim dividends paid during the year (c) Proposed final dividend (d) Dividend distribution on tax (e) Transfer to reserves/ other accounts (to be specified) Profit carried to the Balance Sheet 61

12 FORM A-BS Name of the Insurer: Registration No. and Date of Registration with the IRDA BALANCE SHEET AS AT 31ST MARCH, 20. SOURCES OF FUNDS Schedule Current Year (Rs. 000) Previous Year (Rs. 000) Shareholders funds Share capital 5 Reserves and surplus 6 Credit/[debit] fair value change account Sub-Total Borrowings 7 Policyholders funds: Credit/[debit] fair value change account Policy liabilities Insurance reserves Provision for linked liabilities Sub-Total Funds for future appropriations TOTAL APPLICATION OF FUNDS Investments Shareholders 8 Policyholders 8A Assets held to cover linked liabilities 8B Loans 9 Fixed assets 10 Current assets Cash and Bank Balances 11 Advances and Other Assets 12 Sub-Total (A) Current liabilities 13 Provisions 14 Sub-Total (B) Net current assets (C) = (A B) Miscellaneous expenditure (to the extent not written off or adjusted) Debit balance in profit & loss account (Shareholders Account) TOTAL 15 62

13 relate to balance sheet. Registration number of the company and the date of registration with IRDA are given on the top of the revenue account. Premium earned income from investments and other incomes are added up and written as Total (A) in the revenue account. Commission paid, operating expenses, provision for doubtful debts, bad debts written off, provision for tax and other provisions are added up and shown as Total (B). After that benefits paid(net), interim bonuses paid and any change in valuation of liability in respect of life policies is mentioned and total of this category is added and named Total (C).Surplus or deficit is found by subtracting total (B) and (C) from total (A). From surplus fund appropriations are made towards shareholders account and other reserves and balance amount is fund for future appropriations. Profit and Loss Account: This is a shareholders account. Surplus from revenue account, income from investments and other incomes are given and total is written as Total (A). Expenses include expenses other than those directly related to insurance business, bad debts written off, and provisions (other than taxation). These expenses are added up and shown under the head of Total (B).Difference between Total (A) and Total (B) is profit or loss. Out of these profits provision for taxation is made. Profit after tax is then appropriated towards interim dividends, proposed final dividend, and other reserves. Balance of profit is carried to the balance sheet. Balance Sheet: Balance sheet is also prepared in summary form. Details of various heads are given in the accompanying schedules. Schedule number five to schedule number fifteen gives the details of various heads given in the balance sheet. Sources of funds include shareholders funds, borrowings, policyholders funds and funds for future appropriations. Application of funds have investments, assets held to cover linked liabilities, loans, fixed assets, net current assets, miscellaneous expenditure ( to the extent not written off or adjusted ) and debit balance in profit and loss account as main heads Formats for Preparation of Financial Statements of General Insurance Companies (Schedule B) According to PART V of Schedule B of the IRDA Regulations 2002 regarding preparation of financial statements of insurance companies, a general insurance company is required to prepare the revenue account, profit and loss account and the balance sheet in Form B-RA, B-PL, and B-BS respectively. A general insurance company must prepare separate revenue accounts for fire, marine, and miscellaneous 63

14 insurance business and separate schedules shall be prepared for marine cargo, marineother than marine cargo and also for miscellaneous insurance including motor, workmen s compensation, public/ product liability, engineering, aviation, personal accident, health insurance and others. Following are the prescribed formats of financial statements of general insurance companies. Revenue Account: Revenue account of a general insurance company is prepared in Form B-RA. It is prepared in a summary form. Details are given in the accompanying schedules. A separate revenue account is prepared for fire, marine and miscellaneous insurance business and separate schedules shall be prepared for marine cargo, other than marine cargo and various classes of miscellaneous insurance business i.e. motor, health, public and product liability, engineering, aviation and others. Particulars about income earned from premiums, profit on sale of investments, income from interest, dividends and rent and other incomes are given. Total of all incomes is stated under the heading Total (A). Net claims incurred, commission paid and operating expenses related to insurance business are added up and sum is shown under the heading Total (B). Difference between Total (A) and Total (B) is the operating profit or loss. Appropriations towards shareholders account and reserves are also shown in the revenue account. Profit and Loss Account: Profit and Loss Account of general insurance company is prepared in Form B-PL. Incomes include operating profit, income from investments and other income (to be specified). Expenses include provisions (other than tax), expenditure other than related to insurance business, bad debts written off and other expenses. Difference between total income and total expenditure is the profit or loss. After various appropriations, balance profits are carried forward to the balance sheet. Balance Sheet: Balance Sheet of a general insurance company is prepared in Form B- BS. It is also prepared in a summary form. Details are given in the schedules. Total fifteen schedules are prepared, out of which first four relate to revenue account and remaining eleven schedules relate to the balance sheet. Balance sheet shows share capital, reserves and surplus, fair value change account and borrowings as sources of funds. Application of funds include investments, loans, fixed assets, net current assets, miscellaneous expenditure to the extent not written off or adjusted and debt balance in profit and loss account. Contingent liabilities are shown in a separate statement. 64

15 FORM B-RA Name of the Insurer: Registration No. and Date of Registration with the IRDA REVENUE ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20. S. N. Particulars Schedule Current Year Previous Year (Rs. 000) (Rs. 000) 1. Premiums earned (Net) 1 2. Profit/ Loss on sale/redemption of Investments 3. Others (to be specified) 4. Interest, Dividend & Rent Gross TOTAL (A) 1. Claims Incurred (Net) 2 2. Commission 3 3. Operating Expenses related to Insurance Business 4 TOTAL (B) Operating Profit/(Loss) from Fire/Marine/Miscellaneous Business C= (A - B) APPROPRIATIONS Transfer to Shareholders Account Transfer to Catastrophe Reserve Transfer to Other Reserves (to be specified) TOTAL (C) 65

16 FORM B-PL Name of the Insurer: Registration No. and Date of Registration with the IRDA PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 20. Particulars Schedule Current Year Previous Year (Rs. 000) (Rs. 000) 1. OPERATING PROFIT/(LOSS) (a) Fire Insurance (b) Marine Insurance (c ) Miscellaneous Insurance 2. INCOME FROM INVESTMENTS (a) Interest, Dividend & Rent Gross (b) Profit on sale of investments Less: Loss on sale of investments 3. OTHER INCOME (To be specified) TOTAL (A) 4. PROVISIONS (Other than taxation) (a) For diminution in the value of investments (b) For doubtful debts (c) Others (to be specified) 5. OTHER EXPENSES (a) Expenses other than those related to Insurance Business (b) Bad debts written off (c) Others (To be specified) TOTAL (B) Profit Before Tax Provision for Taxation APPROPRIATIONS (a) Interim dividends paid during the year (b) Proposed final dividend (c) Dividend distribution tax (d) Transfer to any Reserves or Other Accounts (to be specified) Balance of profit/ loss brought forward from last year Balance carried forward to Balance Sheet 66

17 Name of the Insurer: FORM B-BS Registration No. and Date of Registration with the IRDA BALANCE SHEET AS AT 31 ST MARCH, 20. SOURCES OF FUNDS Share capital 5 Reserves and surplus 6 Fair value change account Borrowings 7 TOTAL APPLICATION OF FUNDS Investments 8 Loans 9 Fixed assets 10 Current assets Cash and Bank Balances 11 Advances and Other Assets 12 Sub-Total (A) Current liabilities 13 Provisions 14 Sub-Total (B) Net current assets (c) = (a - b) Schedule Current Year (Rs. 000) Previous Year (Rs. 000) Miscellaneous expenditure (to the extent not written off or adjusted) 15 Debit balance in profit and loss account TOTAL 67

18 4.2.3 Companies Act 1956 The history of corporate financial reporting in India dates back to the year 1882, when the Companies Act was passed. The Act came into force with effect from 1 st May, Under the section 74 of the Act 1882, the production of balance sheet and its audit were made compulsory while profit and loss account, circulation of annual accounts, auditors report, and directors report were left to be optional under the regulations as per sections 78 to 94 of Table A of this Act (Bhattar, 1995).The Indian companies Act of 1913 made certain changes in the matters relating to financial reporting. This Act made compulsory provisions as regards the preparation of profit and loss account for the first time. A new form of balance sheet was introduced (Form F of Schedule III) and many new items were required to be disclosed therein (Chander, 1992). The provisions about financial reporting were further amended by The Companies (Amendment) Act No. XXII of 1936, which came into force with effect from 15 th January, 1937(Das Gupta, 1977).Under this amendment many new sections were added and existing sections were amended and also the profit and loss account and the directors report which were up till now contained in the optional regulations of Table A were bought to the Act itself. The Government of India appointed a committee on 28 th October, 1950 under the chairmanship of C.H. Bhaba to consider and report what amendments were necessary in the existing legislation pertaining to the companies in the light of the experience of larger changes taking place in the organization and working of the joint stock companies (Chander, 1992). It recommended a standard form of balance sheet and schedules relating to the contents of profit and loss account. On the recommendations of the Bhabha Committee report released in 1952, Companies Act 1956 was passed. It was a major change in the history of regulation of financial reporting in India. The main object of this Act was to protect the interest of the investors by making them available the relevant information through published annual reports duly authenticated by auditors (Bhattar, 1995). The main regulations regarding corporate financial reporting of Indian companies are provided in Companies Act This Act is a comprehensive piece of legislation which contains a number of sections relating to the financial reporting practices of Indian companies. Various amendments have been made over a period owing to the demands of time in this Act. There were some practical problems in the enforcement of the Companies Act 1956, so a committee under the chairmanship of Shri A. V. Vishwanath Shastri was 68

19 appointed in May Acting upon the report of this committee Companies (Amendment) Act 1960 was passed by parliament. Through this amendment certain changes were made in the information required to be disclosed in the balance sheet and profit and loss account. The Indian Companies Act was also amended in 1973 and 1974.The companies Amendment Act, 1974 made it obligatory for the companies to give the particulars of employees getting remuneration of Rs. 36,000 p.a. or more (This limit of Rs. 36,000 p.a. has been increased to Rs. 1, 44,000 p.a. by an amendment made to the Companies Act in 1988), in the report of the board of directors to be attached to the balance sheet and profit and loss account. The amendments of 1988 have brought drastic changes in the provisions on financial reporting contained in the Companies Act, 1956.According to this, every company shall, in its directors report disclose particulars with respect to conservation of energy, technology absorption and foreign exchange earnings and outgo (Section 217). In another significant amendment, listed companies have to send detailed accounts or a statement containing only the salient features of accounts to their shareholders. However, even if a company opts to send salient features of accounts to its shareholders, it is obliged to send a copy of the detailed accounts free of cost to a shareholder, in case he demands for the same within 21 days before the meeting. Further the Companies (Amendment) Act, 1999 made it compulsory to comply with the Indian accounting standards. With the emergence of corporate governance as an important tool of financial reporting, the Companies Act 1956 was again amended in the year 2000 to enhance transparency and credibility in the financial reporting system. As per Companies (Amendment) Act, 2000, the board of director s report shall include a director s responsibility statement (Section 217 (2AA), and shall also disclose the composition of the audit committee (Section 383A (1)).Various amendments from time to time in the companies Act, 1956 helped a lot in the improvement of disclosure practices of Indian companies. The provisions of companies Act 1956 are not applicable entirely on insurance companies due to different nature of transactions of these companies. As for as 69

20 preparations of financial statements of insurance companies are concerned various sections of companies Act 1956 apply as under: Balance sheet, profit and loss account and revenue account of all the insurance companies are prepared according to the accounting standards referred in section 211(3A) of this Act. Statement of interest in the subsidiary companies to be disclosed in the annual report as per section 212 of the Companies Act The Report of the board of directors of the company should be attached with the balance sheet as per section 217. The Companies (Amendment) Act of 1974 inserted Section 217(2A) which made it obligatory for the company to include in the report of board of directors, the name of the employees getting remuneration not less than the amount which may be prescribed, their relationship if any with any of the directors of the company. As per section 217(2AA) of this Act, the directors report shall also include Directors Responsibility Statement (according to the companies Bill of 1997). Addendum to directors report is prepared according to Section 217(3). Auditors are required to report on the truth and fairness of the financial statements (Section 227). Preparation of balance sheet abstract and company s general business profile under section (1of 1956) Schedule VI Part IV. Comments of The Comptroller and Auditor General of India under Section 619(4) for public sector companies Institute of Chartered Accountants of India (ICAI) Institute of Chartered Accountants of India (ICAI) was set up in 1949 under the Chartered Accountant Act 1949, even before adoption of constitution of India in 1950.ICAI plays an important role in regulating the disclosure practices of companies in India. The institute is one of the members of International Accounting Standards Committee (IASC). The institute issues various accounting standards and guidance notes regarding accounting, measurement and reporting. In April 1977, Accounting Standards Board (ASB) was constituted by the Institute of Chartered Accountants of India. The function of ASB is to formulate various accounting standards and to motivate 70

21 companies to adopt them in preparation of their financial statements. As on 2010, 32 accounting standards have been issued by the institute. However AS-8 on Accounting for Research and Development has been withdrawn consequent to the issuance of AS- 26 on Intangible Assets. Thus effectively there are 31 accounting standards at present. The ASB considers the International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) while framing Indian Accounting Standards (ASI) and try to integrate them in the light of the applicable laws, customs and business environment in the country. Compliance with accounting standards becomes a statutory requirement with the notification of Companies (Accounting Standards) Rules, 2006 by the Government of India. Financial statements of an insurance company shall be in conformity with the accounting standards issued by the Institute of Chartered Accountants of India ( ICAI), to the extent applicable to life insurance and general insurance companies with the exception that: Accounting Standard 3(AS 3) - Cash Flow Statements shall be prepared only under the Direct Method. Accounting Standard 13 (AS 13) - Accounting for Investments, shall not be applicable. Accounting Standard 17(AS 17)-Segment Reporting shall apply to all insurers irrespective of the requirements regarding listing and turnover mentioned therein. The Institute also holds competition for the best published accounts annually. Before 2004 the Institute of chartered Accountants of India used to present awards in the four categories only. However from onwards, ICAI has started presenting the awards for Excellence in Financial Reporting in the following seven categories: Category I: Manufacturing and Trading Enterprises; Category II: Finance Sector (including NBFC s, Mutual Funds, Invesment bankers) Category III: Service Sector Category IV: Banking, Insurance and Financial Institutions Category V: Information Technology, Communication and Entertainment Category VI: Infrastructure and Construction Sector 71

22 Category VII: Others (Educational Institutions, N G O s and Charitable Hospitals and other organizations) ( ) As stated above, Insurance companies fall in the fourth category (i.e. Banking, Insurance and Financial Institutions) for this purpose. Gold shields and silver shields are presented to the award winner for excellence in financial reporting in all the seven categories. ICICI Lombard General Insurance Company got a gold shield in the year 2006 for this purpose. Following are some of the important factors considered by the Institute of Chartered Accountants of India for the award for the best presented accounts: Compliance with the legal requirements in the preparation and presentation of financial statements as specified by the relevant statute, e.g. the Companies Act 1956,Insurance Act 1938 and others. Basic quality of accounts as judged from the qualifications of the auditors report, notes to the accounts and compliance with the GAAP. Extent to which additional information is provided to the readers through charts and graphs. Financial highlights and ratios Extent of clarity, lucidity and comprehensiveness of the information contained in the financial statements in the context of a layman. Information regarding social concerns( e.g. contribution to conservation development of environment and ecology) and Information on contribution to community development projects (e.g. medical institutes, educational institutions, provisions of sanitary and drinking water etc.) Compliance repot on the corporate governance, clearly indicating non-compliance with any of the mandatory requirements with the reasons thereof. Layout of contents, general appearance, presentation and quality of printing. Timeliness in presenting accounts based on the date of the notice of the annual general meeting in respect of which the annual report is circulated to the shareholders. 72

23 References Anonymous (2002). The Gazette of India Extraordinary, Part III, Section 4, Insurance Regulatory And Development Authority, New Delhi, Notification 30 th March. Bhattar, M.M. (1995). Corporate Published Accounting Information and Investors. ISBN , Sunshine Computer, Jodhpur, 1995, p. 61. Chander, Subhash (1992). Corporate Reporting Practices. ISBN , Deep and Deep Publications, 1992, p 26. Charaborty, G. (1990). New Perspectives in Corporate Financial Reporting in India - A Critical Review of the Emerging Trends, in M. Saeed (Ed.). Corporate Financial Reporting, ISBN , Anmol Publications, New Delhi, p Gupta, N. Das (1977). Financial Reporting in India. Sultan Chand and Sons, July,