Earlier, the Securities and Exchange Board of India (SEBI) required the listed entities to prepare Consolidated Financial Statements along with the separate financial statements of the Holding Company.
Now, also the Companies Act, 2013 mandates the preparation of Consolidated Financial Statements (CFS) by all the Companies, including unlisted companies, having one or more Subsidiaries, associate companies or joint ventures.
What is Consolidated Financial Statements (CFS)?
Consolidation Financial Statements (CFS) is the combination of the financial statements of all the Subsidiaries, Associates and Joint Ventures by the Parent Company into single set of financial statements for the entire group companies.
What does the CFS includes?
CFS includes –
– Consolidated balance sheet;
– Consolidated Profit and Loss Statement;
– Consolidated Cash Flow Statement;
– Basis of consolidation;
– Significant Accounting policies and
– other relevant notes to the account as required under the Act.
In addition to this, CFS shall also disclose the applicable information as per requirements specified in the applicable accounting standards and Schedule III of the Act.
Section 129 (3) of the Act mandates that the Consolidated financial Statements must be prepared in the same structure as the separate financial statements of the parent companies. Moreover, it also requires to present the CFS along with separate financial statements in the Annual General Meeting (AGM) before the shareholders.
Objective of CFS
The Concept of Consolidated Financial Statements (CFS) was brought into existence with an objective to provide true and fair view of the financial position and affairs of the Company, having Subsidiaries, associate companies or joint ventures.
Standalone Financial Statement projects only the position of the Company in its individual capacity and performance. It does not include the impact of its Subsidiaries, associates and joint ventures on its financial position. As a result, it does not provide the shareholders a true and fair view about the overall performance of the Company along with its Subsidiaries, associates or Joint Ventures.
For better transparency, Company are required to prepare and file CFS along with its standalone financial statements. This will bring more transparency to the shareholders of the Parent Company about the Company’s business and its market value.
Preparation of Consolidated Financial Statements:
Section 129 (4) states that the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements of the Company.
The Company shall prepare its consolidated financial statements in accordance with the provisions of schedule III of the Act and the applicable accounting standards like AS 21 – Consolidated Financial Statements, AS 23 – Accounting for Investments in Associates in Consolidated Financial Statements and AS 27 – Financial Reporting of Interests in Joint Ventures
The Parent Company is also required to attach a separate statement containing the salient features of the financial statements of its subsidiaries in Form AOC-1
The Auditors of the holding companies shall also have access to the financials of the subsidiaries.
Exemptions from preparing CFS:
Rule 6 provides that a Company is not required to prepare CFS, if it meets the following conditions:
i. it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members having been intimated in writing and for which the proof of delivery is available with the Company, do not object to the company for not presenting CFS
ii. Companies whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India.
iii. Its ultimate or intermediate holding company files CFS with the ROC in compliance with the applicable accounting standards.
Penalty for Contravention:
If the Company violates the provision of this section, then its Managing Director, Whole-time Director, Chief Financial Officer or any other person authorized by board to comply with section and in absence of any of above, all the Directors of the Company shall be punishable with
– Imprisonment which may extend to 1 year or
– With fine which shall not be less than Rs. 50,000/- and may be extend to 5 lakh or
– With both