Companies Act 2013 Accounts and audit. By CA. S. Santhanakrishnan July

Transcription

1 Companies Act 2013 Accounts and audit By CA. S. Santhanakrishnan July

2 Some changes look negative on the surface but you will soon realize that space is being created in your life for something new to emerge.»eckhart Tolle

3 Some basics These are strictly my views- not my firms nor my partners and certainly not ICAI! The laws are evolving 282 sections ( ) out of 470 in New act notified Out of these 10 sections of Old act still continue New Corporate governance guidelines of SEBI are not covered here (Effective Oct 1,14) For Mar 14 accounts and audit, 1956 act still applies (General circular 8 dated 4 Apr 14) New clarifications /amendments are quite likely In most cases we will have guidance from ICAI soon ICAI also in the process of making some representations/or done

4 Matters of Concern Mandatory rotation should not be retrospective S 139 and Rule 6 Relatives should only include dependents S 141 and Rule 10 Limit of 20 cos per auditor should not apply to private cos and clarification required regarding branches /CFS S 141(3)g) Internal financial control system should be limited to those related to financial statements (as done for Board) S 143 Additional reporting like pending litigation, foreseeable losses for Long term contracts and derivatives etc should be dispensed with (rule 11 chapter X)

5 Matters of Concern Reporting of fraud- auditor requires legislation protecting auditor against criminal /civil liability; also should be limited to frauds which have been investigated and concluded(s 143(12)) Prohibited services for auditors-clarification required (S 144) Entire firm being debarred by NFRA should be reconsidered (S 132(4)) Auditor should not be responsible to any other person. (S 147(3)(ii))

6 Understanding Grandfathering A grandfather clause is a provision in which an old rule continues to apply to some existing situations, while a new rule will apply to all future cases. Wikipedia This is one main issue with the New companies act and Rules Some clarifications have come like accounts, audit, Section 180 regarding Borrowing powers etc But in many cases this is the fundamental doubt Is old rule applicable or new!?

7 SOME KEY PROVISIONS AUDIT-CHAPTER X OF RULES

8 New audit landscape Some will lose existing audits Most will gain audits and do other work We will all benefit by the CHANGE Change anyway is the only constant in the world

9 Loss of audit to one/ gain to another-1 1. Because a member of auditor s HUF, spouse, father/s, mother/s, son/s, son s wife, daughter, daughter s husband, brother/s, sister/s (/s for step) acquires /holds security >Rs 1 lakh face value Becomes indebted to company/subsidiary, holding, associate, co-subsidiary for >Rs 5 lakhs Gives guarantee /provides security to above for >Rs 1 lakh And don t take corrective action in 60 days» Rule 10 section 141(3)

10 Loss of audit to one/ gain to another-2 2. Because the auditor has business relationship with Company, subsidiary, holding co, associate, associate or subsidiary of holding co. and not in ordinary course, at arm s length (he can use mobile service provider, travel in a plane, get admitted in a hospital, stay in a hotel room /eat in a restaurant of any of the above cos or do such other similar business. he can also do what is permitted by ICAI) S 141(3) Rule 10

11 Loss of audit to one/ gain to another-3 3. Because the auditor has a relative who is a CFO or Company secretary (being KMP) in the Company S 141

12 Loss of audit to one/ gain to another-4 4. Because he has over 20 audits, he has two choices now leave the not so remunerative ones to smaller firms better still bring in a new partner! Best provision to help SMP auditors that manager in the firm who has slogged for 20 yearswho can get a partnership now! S 141

13 Loss of audit to one/ gain to another-5 5. Because the private limited consulting firm where he has significant influence does Management services (one of the prohibited services) for the holding co or subsidiary (If existing work he has one year to comply) S 144

14 Loss of audit to one/ gain to another-6 6. Because he has been an auditor from generation to generation in a 112 year old co (formed originally under 1913 act- listed or with Public borrowing >=Rs 50cr, or Public co with PUC >=Rs 10cr, or Private co with PUC>=Rs 20cr) he has to retire after 3 more years! (and he has to wait on the wings only for 5 years to get back!) S 139(2)

15 Loss of audit to one/ gain to another-7 7. Because the members of the Company say let s have a joint auditor because of the size of the Company and as existing auditor has to retire in 3 years S 139(5) 8. Because the members do not ratify his appointment after say the second AGM even though appointed for 5 years. Explanation to Rule 3(7)

16 Loss of audit to one/ gain to another-8 9. Because the firm where he practices is no longer a majority CA firm (when multi-disciplinary firms are allowed) and thankfully an MBA cannot sign FS as auditor! Proviso to S 141(1) I am not considering normal removal, resignation etc. Thus there are 9 different ways (may be more?) in which audits will get distributed across a larger CA population and audits will get a new look To me that looks GOOD!

17 THE LEGAL PROVISIONS RELATING TO AUDIT-NOT COVERED SO FAR

18 Auditor Appointment - S (S 224) Audit appointment till conclusion of 6th AGM (against conclusion of next AGM) Ratification at AGM every year by ordinary resolution If not ratified, Board shall appoint another auditor Company to inform auditor and ROC (auditor was filing F 23B); inform ROC in form ADT-1 Audit committee to recommend auditor to Board and Board in turn recommend to AGM Consecutive years mean all preceding financial years until there has been a break by 5 years or more

19 Auditor Appointment - S (S 224) contd... Rotation of auditors in listed and other prescribed cos (contd.) No audit firm with common partner of firm whose tenure has expired, to be appointed for 5 years For existing cos/auditors 3 years time provided to comply Members of Co. may decide on audit partner/ team rotation and joint audit Prohibition applies to A partner who certifies FS resigns and joins another firm, the latter firm Other firms whose name, trade name, or brand is used by the firm or any of its partners If Joint audit, all auditors not to complete term in same year What will happen if auditor resigns after say 8 years and

20 Auditor Appointment - S (S 224(1B)/ 226) Additional disqualifications: Partner can t hold security or interest in company in the Company/ subsidiary /holding co/ associate/ subsidiary of holding co Person convicted by a court of an offence involving fraud for 10 years Provision of specialized services u/s 144 Previous extension of disqualification of an auditor disqualified in subsidiary or holding company or a co-subsidiary is removed now

21 Auditor Appointment - S (S 224(1B)/ 226) contd.. Issues: The list is too long Relative or partner can t owe money or hold shares but can have business relations! As auditor includes firm, firm cannot hold shares or have debts due also (expl. 2 S 140)

22 Independent Auditors Report - S (S 227) Enquiry by auditor Good old 6 clauses u/s 227(1A) still there! Holding company auditor to have access to subsidiary records so far as it relates to consolidation SA 600 is not yet mandatory in India but does this mean holding co auditor is responsible for subsidiary also even if audited by another CA? Auditor does not have access to associate/jv company books still

23 Independent Auditors Report - S (S 227) contd Italics /Bold for qualifications no longer exists Report to have additionally: Observation or comments on financial transactions or matters which have any adverse effect on functioning of the Company Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith Whether company has adequate internal financial control system in place and the operating effectiveness of such controls (Back door entry to SOX?) Under Rule 11 to report further: Whether company had disclosed impact, if any, of pending litigations on its financial position in financial statements Whether company had made provision as required under any law or accounting standards for material foreseeable losses if any on long term contracts including derivative contracts Whether there has been any delay in transferring amounts to IEPF by company

24 Reporting fraud to Central Government - S 143 rw Rule 12/ 13 (S 227) Applies to main auditor as well as branch auditor Presently only in respect of money laundering there is a requirement to report to CG (Implementation of S 51A of Unlawful activities (Prevention) Act 1969 ICAI circ. dated 22 Apr 2010) Now if an auditor has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company he shall report it to CG No duty of auditor regarded as contravened if such reporting done in good faith

25 How to report fraud to CG - S 143 rw Rule 12/ 13 (S 227) Time - Within 60 days In - Form ADI 4 How? Auditor to forward report to Board/AC of Co. seeking reply within 45 days Forward his report and reply with his comments to CG within 15 days of receipt of reply If no reply, auditor to forward his report to CG with a note containing details of report forwarded to Board or AC To - Secretary, MCA By registered post ack due or speed post followed by Branch auditor to have same duty related to the concerned branch audited (Rule 12)

26 Reporting fraud to CG - S 143 rw Rule 12/ 13 (S 227) Are we opening a Pandora s box? Will aggrieved auditors report/ send reports to CG to take revenge on management and not accept replies of management? Board/ AC may call for the auditor after the report goes to them and persuade him aggressively No materiality is mentioned here! What about past frauds? Officers will include directors also!

27 Independent Auditors Report - S (S 227) Other Issues: Equivalent of CARO u/s 227(4A) S 143(11) what it will contain we need to wait and see Observations on adverse effect on functioning of co- does it mean propriety audit? Does it extend audit responsibility? Reporting on adequacy of IC and effectiveness of IC is going to be Herculean task! Not required anywhere in the world! SA also does not require this! (Caro talked of only 2 sales and purchase)

28 Non audit services - S new Directly or indirectly to Company/ Holding /Subsidiary: To be approved by Board or audit committee other than following which are banned: Accounting; Internal audit; Design and implementation of Financial info system; Actuarial services; Investment advisory ;Outsourced financial services; Management services*; Others as prescribed Existing work- To comply with before closure of first FY Prior approval does not seem necessary but what if Board /Ac fail to approve after the event? Forensic audit does not seem prohibited? ICAI rule of fees for other services would still apply? Applies to auditor, firm, partners, parent, subsidiary/ associate/ any other entity where firm/partner has significant influence/ control or common trade mark/ brand * ICAI has stated what are permitted Management services

29 Non audit services - S new contd Issues: List is too long but associate is not covered IFAC / IESBA code do not prohibit these services in all companies; stricter rules apply to only Public interest entities- so this is harsher than International standards If Company or subsidiary abroad obviously the restriction can t apply? What is management services? S141(3)(i) talks of consulting and specialized services indirect recognition to multi national firms? (trade mark/brand)

30 Penal provisions Penalties /prison time go up sky high! (In S 185/186 it is fine plus imprisonment) Refund of remuneration/ paying damages etc contemplated Liability extends to concerned partner/ partners who have acted in a fraudulent manner or abetted or as the case may be colluded in the fraud (R 9). Will it cover, for instance, an engagement quality control reviewer who may not have the full facts? Joint and several liability to firm/partners Action by NFRA/ Tribunal provided for Class action suits arrive in India Will an LLP help at all? Will audit be a very onerous and thankless job?

31 SOME KEY PROVISIONS-ACCOUNTS

32 Securities premium: - S 52 - (S 78) For prescribed class of companies following set off against securities premium will not be permitted: Issue of fully paid preference shares w/off expenses /commission/discount on preference shares/debentures W/off of preliminary expenses Providing premium payable on redemption of redeemable preference shares /debentures

33 Depreciation - S 123- (S 205) Schedule II Useful life and residual value prescribed (generally not more than 5%); where these differ disclose justification in FS Schedule xiv Minimum Depreciation rate prescribed Useful lives Generally lower rates; increased/decreased as compared to Sch xiv- ex. ocean going liners 25 years (20); Furniture 10(15) higher charge will result in general esp. when assets nearing end of life Componentisation required (note 4) Componentisation was not required; allowed under AS 10

34 Depreciation - S 123- (S 205) contd.. Schedule II No 100% depreciation No ESA rate- 50% more for 2 shifts; 100% more for 3 shifts for period More sub divisions in individual assets like for Buildings ; separate rates for some industries; Where remaining useful life nil charge to Opening retained earnings Revalued assets depreciation to P&L Schedule xiv 100% depreciation for assets costing less than Rs 5000 Rates specified for ESA Less sub divisions and less industries Always to Statement of P&L The differential depreciation was taken to revaluation reserve

35 Consolidated Financial statements (CFS) - S 129- Ch ix (S 211) Where any company has a subsidiary (which definition includes associate or JV Co) CFS to be prepared and laid before AGM along with standalone FS (now for all cos) If no subsidiary but associate/ JV is there, will consolidation apply? Option to prepare under IFRS per listing agreement goes CG may provide rules for consolidation of accounts Statement containing salient features also continues! Form AOC 11- (R5) Will apply to associates and JV also now Proviso to Rule 6 In the case of a co. covered u/s 129(3)which is not required to prepare CFS under AS, it shall be sufficient if the Co. complies with provisions of CFS provided in Sch III of the Act. This possibly means only the additional information at the end of Sch III need be provided; however not clear

36 Consolidated Financial statements (CFS) - - S 129 (S 211) contd.. Total Share capital is Paid up equity share capital plus Convertible preference share capital (Ch 1-R 2(r)) What about partly convertible preference? Is it only Compulsorily convertible preference? Conflict between Co law and Accounting standard: Subsidiary definition in S 2(87) states control of more than one-half of total share capital whereas in AS 21 it is one-half of the voting power Also S 2 (87) talks of control of composition of board of directors only, whereas AS 21 has in addition to obtain economic benefits from its activities

37 Consolidated FS issues - S 129 (S 211) Do we have to give all disclosures per Sch III in CFS also? May be not. as Sch III states the schedule will be followed mutatis, mutandis (ie with necessary changes) Also AS 21 gives exemption from statutory information (Cl 6 exp c of AS 21) Such information on an aggregate basis may not really help users of FS but confuse them! For instance: what is the earthly use of aggregating audit fee of all group cos or disparate information like raw materials or goods purchased which make sense only for standalone cos; or imports and expenditure in foreign currency of foreign subsidiaries?

38 Reopening/recasting of accounts - S 130 / S131 new Court/Tribunal order (S 130) / Voluntary (S 131): Who can apply? CG IT authorities SEBI Any other statutory/regulatory authority Board/Company- S 131 To Court /Tribunal S 130 Tribunal S 131

39 Reopening/recasting of accounts - S 130 / S131 new contd Conditions for reopening S 130 Accounts prepared in fraudulent manner Affairs of the company was mismanaged during the relevant period casting a doubt on reliability of FS Conditions S 131 FS or Board report not in compliance with S 129/S 134

40 Reopening/recasting of accounts - S 130 / S131 new contd Notice to same authorities only viz CG, IT, SEBI, other statutory regulatory body S 130 Notice to CG, IT S 131 Reopening/recasting only on order by court/tribunal S 130 / Tribunal S 131 Accounts so recast shall be final S 130

41 Reopening/recasting of accounts - S 130 / S131 new contd S 131 revision of FS/Board report Revision for any of the 3 preceding FY Not more than once in a FY Detailed reasons to be disclosed in Board report Where already filed with ROC revision to be confined to correction to the extent of non compliance with S 129/S 134 and consequential corrections CG to frame rules including functions of company auditor Recently SEBI issued circular which empowers it to order revision of FS thus there are 3 ways SEBI has power only to ask company to restate results and file same with Stock exchanges and company has to give impact to this in the next year as prior period items

42 Reopening/recasting of accounts - S 130 / S131 new contd Questions that arise: How many years can be reopened not clear in S 130? For application by authorities nothing provided for opportunity of being heard to Company! S 130? Finality is provided in S 130 not in S 131!? S 131 revisions every year possible!? Revision of CFS possible?

43 National Financial Reporting Authority (NFRA) - S 132 (S 210A) NACAS becomes NFRA Reach extends to audit standards and overview of audit profession also NFRA has powers to investigate professional or other misconduct Suo moto or on reference by CG ICAI can t initiate/ continue any proceedings where NFRAS initiates action Misconduct of CFO/Co. officials also covered NFRA has powers of civil court

44 NFRA - S 132 (S 210A) contd Penalty action if member(ca) proved guilty Penalty not < Rs 1Lakh upto 5 times fees received for individual Penalty not < Rs 10 lakhs upto 10 times fees received for firms Fees for how many years? Debarring member or firm min. 6 months max. 10 years Appeal to Appellate authority possible

45 Corporate Social Responsibility (CSR) - S 135 CSR rw CSR rules dtd 27 feb 14 Spend At least 2% of average net profit of 3 immediately preceding FY (per S 198) Excluding Profit from overseas branches Dividend received from other companies in India complying with S 135 (avoids double counting)

46 Corporate Social Responsibility (CSR) - S 135 Limit of 5% on own personnel and implementation agencies R 4(6) Rule 4(1) excludes activities undertaken in pursuance of company s normal course of business. So for inst. a hospital cannot extend healthcare services. Schedule III requires Disclosure of CSR expenses Disclose reasons if amount not spent.

47 Corporate Social Responsibility (CSR) Issues - S Does extension to foreign company in rule violate act? 2. Foreign companies may require FCRA approval 3. What does building CSR capability of own personnel mean? How is 5% cap to be calculated? R 4(3) 4. What does profit for financial years for which financial statements prepared under Companies act, 1956 not required to be recalculated mean? 5. Is a provision required in accounts on accrual basis? In my opinion no as not spending is also possible

48 S 136, 137 ( S 219, 220) Copies of FS /filing: CFS also to be sent to members etc Listed co can send statement containing salient features to members etc provided it makes them available for inspection at regd office (in view of cl 32 they can t send abridged CFS) Listed cos to place CFS and standalone FS on website Electronic dispatch of FS under certain circumstances All companies with subsidiary need to place separate audited a/cs of subsidiary/ies on website Thus unlisted cos having subsidiary need a website? and Need not place the holding co a/cs or cfs on website!

49 S 138 rw Ch IX rule 13 Internal auditor Required for Listed cos All companies with TO Rs 200cr or more or o/s loans and borrowings from Banks/FI Rs 100cr or more Unlisted public cos with Share capital Rs 50cr or more or Public deposits Rs 25 cr or more Shall appoint a CA /cost accountant; can be firm of internal auditors; 6 months time for compliance AC or Board in consultation with IA to formulate scope, functioning, periodicity and methodology of IA

50 SOME OTHER KEY PROVISIONS RELEVANT FOR AUDIT

51 Net worth - S 2(57) Reserves created out of Write back of depreciation and amalgamation Excluded As auditors we need to note this carefully.

52 Related party - S 2(76) rw CH 1-R4 Director of co/holding co KMP of co/holding co Relative of above And.

53 Related party new co law New Companies Act S 276 read with MCA Rule 3 of chapter I Rules related party, with reference to a company, means (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private company in which a director or manager is a member or director; (v) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent. of its paid-up share capital; (vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

54 Related party new co law contd. (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any company which is (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix) such other person as may be prescribed; (Rule 3 of Chapter I) A director or KMP of the Holding Co or his Relative with ref to a co.

55 Related party Cos act Vs AS S 276 read with MCA Rule 3 of chapter I Rules Holding Company Subsidiary Fellow Subs AS Holding Company 2(76) VIII A Subsidiary 2(76) VIII A Fellow Subs - 2(76) VIII B a subs of holding company to which it is also a subsidiary. Associate includes JV Company Associate 2(76) VIII A KMP & Relatives KMP & Relative 2(76) II

56 Entrenchment - S 5(3) -New The articles can now contain provisions for entrenchment ie. specified provisions of the articles may be altered only if conditions or procedures that are more restrictive than those applicable in the case of a special resolution, are met or complied with We should as auditors to ensure that If there is such a provision in articles, resolutions passed are as prescribed Similarly if Board meeting called at short notice and no independent director present, whether independent director has ratified decisions later (S 173(3)

57 Special resolution required - S 180/181/182 (S 293/293A) The clause regarding investment in trust securities now applies to compensation received by company as a result of merger or amalgamation Donations now for bona fide charitable and other funds above 5% of average net profits for 3 immediately preceding years will require prior permission of company in general meeting. (Rs lower limit removed) Political parties donation hiked to 7.5% from 5% For both above profit means profit (after tax?) and link to managerial remuneration profits goes If existing borrowing limit u/s 293(1)(d) is sufficient, no need for a special resolution again. If limit exceeded under New act for new borrowings, charge registration, Special resolution to be taken before 11 Sep 14. (Circular 4/14)

58 Loans to directors etc. - S 185- (S295) Loans /guarantees /providing security to director or any other person in whom director interested prohibited (director of lending co or holding co or partner/relative of such director; any firm where such director or relative is partner; private co of which such director is director or member; any BC where over 25% voting power exercised by such director/directors together; or where Board is accustomed to act according to instruction of board or directors of lending co) Except for loan to MD/WTD as part of service condition extended to all employees or per scheme approved by members by special resolution Loans in the ordinary course at rates of interest not less than bank rate

59 Loans/investments - S (S 372A) Only two layers of investment companies Unless acquiring another company out of India Subsidiary having investment subsidiary to meet requirements of any law Giving of loans/guarantee/security extended to any person/body corporate (not only corporates) Prior approval by special resolution needed if limits exceeded for loans/guarantee/security/investment (i.e 60% of PUC/Free reserves/securities premium or 100% of free reserves incl. securities premium) Rule 11 Ch XII Loans/guarantee/providing security to WOS/JV exempt Guarantees to Subsidiaries exempt if a)to banks /FI; b) used for subsidiary s principal activities Investments in WOS exempt.

60 Loans/investments - S (S 372A) contd.. No loans /investments if in default of repayment of deposits Rate of interest not less than prevailing yield on 1 year/3 years/ 5 years /10 years Government security, closest to tenor of loan (previously bank rate) What about Forex loans? Disclose in FS details of loans / investments / guarantee/ security, purpose No exemptions for private cos, etc One year time given to get approvals Omnibus resolutions possible

61 Related party transactions - S (S 297) Related party definition widened Prior Special resolution required for RPTs (previously CG approval if PUC over Rs 1cr) if not at arm s length No vote by related party gives enormous powers to non related parties for material transactions! How to take care in fellow subsidiaries/jv cos?- deadlock situations? New items now brought under RPTs if not on an arm s length basis: Leasing of property; selling/buying property; appointment of agents for purchase/sale of materials/service/property; appointment to office or place of profit in Company/Holding co.; underwriting securities/ derivatives Arm s length V IT department Transfer pricing? How to determine arm s length? And document?

62 Related party transactions covered - S 188 Transactions covered under new Act 188(1) a)sale purchase or supply goods or materials b) Selling or otherwise disposing off or buying, property of any kind Transactions covered under Old Act a sale purchase or supply goods or materials Not Covered c) Leasing of property of any kind Not covered d) Availing or rendering of any services a for supply of any services e) appointment of any Agent for purchase or sale of goods materials services or property f) such related parties appointment to any office or place of profit in the company or subsidiary or associate co. g) underwriting of subscription any securities or derivatives thereof of the co. Sole selling agents b for underwriting the sub of any shares in or deb of the co.

63 RPT requiring prior approval of membersmajority of minority- if not at arm s length Chapter XII Rule 15 (3) Prior approval of members by special Resolution Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party The Co having paid up share capital of over Rs 10 cr or. sale purchase supply of goods or materials exceeding 25% of annual TO selling or disposing of or buying property exceeding 10% of networth leasing of property exceeding 10% of networth or 10% of TO availing or rendering of service exceeding 10% of the net worth. iii) appointment to any office or place of profit in the co or subsidiary or associate at a monthly remuneration exceeding Rs 2.5 lacs iv) remuneration for underwriting the subscription of derivatives exceeding 1% of Net worth. Does it mean if paid up capital is over Rs 10 Cr, none of the other conditions help?

64 Non cash transactions directors - S 192- Director of company/holding/subsidiary/associate co. or person connected with him (not defined) requires prior approval of Company in GM (also GM of holding co if director of holding co) for: Acquiring assets from Company or For Company to acquire from the above for consideration other than cash

65 Minimum managerial remuneration - S197/ SchV Slabs for Effective Capital Limits on yearly remuneration not exceeding (can be double if approved by Special resolution) Negative or less than Rs. 5 crores Rs. 30 lakhs Rs. 5 crores and above but less than Rs. 100 crores Rs.100 crores and above but less than Rs. 250 crores Rs. 42 lakhs Rs. 60 lakhs Rs. 250 crores and above Rs. 60 lakhs plus 0.01% of the effective capital in excess of Rs. 250 crores

66 Freezing of assets - S 221 -New The Tribunal, on reference made to it by the Central Government or in connection with any inquiry or investigation into the affairs of a company or on any complaint made by such number of members as specified or a creditor having Rs 1 lakh amount outstanding against the company or any other person having a reasonable ground to believe that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of the company or its shareholders or creditors or in public interest, it may by order direct that such transfer, removal or disposal shall not take place during such period not exceeding three years as may be specified in the order or may take place subject to such conditions prescribed

67 OTHER PROVISIONS-ACCOUNTS/AUDITING

68 Financial Year - S 2 (41) Uniformly Mar 31 A holding/ subsidiary of foreign co. can follow different FY with permission of Tribunal Two years time for conversion to Mar 31 Result: More work for companies and auditors due to peaking up

69 Free Reserves - S 2 (43) (i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or (ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves; The underlined parts are going to pose lot of challenges!

70 Free reserves - to take care S 123 no dividend to be declared from reserves other than free reserves. New declaration of dividends out of reserves rules (chapter VIII) clearly states amount drawn from accumulated profits shall first be utilised to set off losses incurred in the financial year in which dividend is declared. Hence the previous option of declaration out of surplus in P&L is no longer there.

71 Free reserves - to take care S 180 on restrictions on powers of Board Borrowing moneys exceeding paid up share capital and free reserves here free reserves would mean only those available for distribution as dividend and after reducing unrealised gains and surplus on measurements of assets and liabilities at fair value. Special resolution to be taken before 11 Sep 14 if borrowing is more than limit (Circular 4/14) S 179 rw Rule 8(6) Chapter 12 Board resolution required in meeting and to be filed with ROC Buy sell investment held by company (non trade) constituting 5% or more of Paid up capital and free reserves of investee company.

72 Share application money to take care Companies acceptance of deposits Rules 2014 makes it compulsory to issue shares within 60 days of receipt of share application money or refund it within 15 days. Else this will be treated as deposit with serious consequences. Esp. for private limited companies.

73 Small Company - S 2 (85) new Paid up share capital- Rs 50 lacs to Rs 5cr as prescribed Turnover per last P&L Rs 2cr to Rs 20cr as prescribed (Rs 50cr under AS) Exempt: Issues: Holding or subsidiary S 8 co Cos under special act Definition different from AS for SMC So cash flow statement becomes applicable for companies with turnover per cos act limit which is smaller; What about companies with Turnover less than co. law limit but borrowings exceeding Rs 10cr?

74 Section 71 rw rule 18 Chapter IV Company is now required to create DRR equivalent to 50% of amount raised through the debenture issue before redemption commences (sub rule 7 (b)) This is more than current requirement in some cases In my opinion new rule applies to debentures issued after Apr 1, 14 only

75 Dividends - S 123 (S 205) Transfer of current profits to reserves rule go- transfer will be at discretion of company No power to declare dividend without providing for depreciation with CG approval Interim dividend: Out of surplus in P&L and out of profits of the FY If loss during CY upto previous quarter, rate not to be higher than average dividends during immediately preceding 3 FY Declaration of dividend out of reserves to be as per rules No dividend if S 73/74 (deposits acceptance and repayment) not complied with

76 Books of accounts - S 128 (S 209) Type/details: Recognises electronic mode No details of account books like money received, expended, assets and liabilities and cost of material and labor (S 209(1)(d)) in new act Branch: Branch returns periodically (previously not more than 3 months) Inspection: Inspection of subsidiary books by a person authorised by a resolution of Board Preservation of books: In case of investigation under chxiv, CG may direct longer period than 8 years

77 Books of accounts - S 128 (S 209) contd When books not maintained: No longer to have defense that a competent and reliable person was charged with the duty Willful offense not required for imprisonment Responsible person: Director (where no MD) and every officer removed Now it is MD, WTD and CFO or any other person charged by Board with the duty

78 Authentication of FS - S 134 (S ) Chairperson where authorised by Board or Two directors including MD/CEO director CFO (need not be director) New /onerous requirement for all companies; Previously only in listed companies he was required to sign a certificate that FS are free from material misstatement. Secretary Does this mean if Chairperson is authorised by Board he only need sign FS?

79 Directors Report - S 134 (S ) Board report to also include: Extract of annual return Number of meetings of Board Director s responsibility statement Statement on declaration by independent directors Policy on director s appointment and remuneration

80 Directors Report - S 134 (S ) contd Explanation by board on qualifications etc in secretarial audit report Contracts/arrangements with related parties Risk management policy including elements of risk which may threaten existence of company Previously this was restricted to listed cos CSR initiatives For listed and other prescribed cos Annual evaluation of performance of board, committees and directors Others as may be prescribed Board report to include summary of CFS results also?

81 Directors Report - S 134 (S ) contd Internal financial controls Policies and procedures adopted by the Company for ensuring orderly and efficient conduct of its business including adherence to company s policies, safeguarding of its assets, the prevention/detection of frauds and errors, the accuracy and completeness of accounting records, and the timely preparation of financial statements Rule 8(5)(viii) Ch ix talks of Internal financial controls wrt financial statements in Director s report hence only ICFR and not all Internal controls

82 Directors Report - Other sections Board report to include: Every contract/arrangement with related party along with justification (including non cash transactions) Form AOC -2 Ch IX Accounts This is going to be a long list!

83 Directors responsibility Statement - S 134 Applicable AS followed Selection and application of accounting policies, making reasonable and prudent judgments and estimates to give true and fair view of FS Proper /sufficient care for maintenance of adequate accounting records for safeguarding assets and for preventing/detecting fraud/ irregularities Prepared accounts on going concern basis

84 Directors responsibility Statement - S 134 contd Proper systems to ensure compliance with provisions of all applicable laws and such systems were adequate and running effectively Constitution of CSR committee where applicable ; disclose CSRP and reasons for not spending 2% of avg profits on CSR (S 135) In listed company, Laid down internal financial controls to be followed by the company (for orderly and efficient conduct of business) These internal financial controls are adequate and operating effectively

85 Auditor removal - S 140 (S 225) Special resolution and previous approval of CG required By Tribunal suo moto or application made, if it is satisfied that auditor has directly or indirectly acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to company or its directors or officers By Tribunal if application is made by CG If Tribunal passes order, auditor debarred for 5 years and also liable for action u/s 447 Liability of firm and every partner who acted in fraudulent manner or abetted or colluded in the fraud

86 Auditor resignation - S 140 (S 225) Auditor to file a statement indicating reasons for resignation within 30 days Resigning auditor to file form ADT-3 with ROC Fine not filing- Rs 50k to Rs 5 lakhs! Even resignation is not easy!

87 S 447 (new) S 447 defines fraud and hence is very important from auditor s view point. fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled; wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled.

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