Study on Compliance of

Financial Reporting
Requirements
(Compiled from the records of Financial Reporting
Review Board)

Volume-III

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.

(This Third volume contains observations finalised between March, 2011 and
January, 2017. The observations finalised upto February, 2011 are contained
in Volume 1 and Volume 2.)

Published in : February, 2018

Committee/Department : Financial Reporting Review Board

E-mail : [email protected]

Website : www.icai.org

Price : ` 650 /-

ISBN : 978-81-8441-914-6

Published by : The Publṅication Department on behalf of

the Institute of Chartered Accountants of
India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications, Hospital

Road, Agra - 282 003.
 Foreword
I am delighted to note that Financial Reporting Review Board (FRRB) has
come up with the Third Volume of ‘Study on Compliances of Financial
Reporting Requirements’. The publication contains various instances of non-
compliances with the reporting requirements that have been noticed by the
Board during the course of review of the general purpose financial
statements of enterprises.
ICAI, as a regulator of the accounting and auditing profession in the country,
is dedicated towards promotion of best financial reporting practices in the
country. Accordingly, towards its objective to ensure sound financial
reporting practices and transparency in the financial statements safeguarding
the interest of the stakeholders, Institute has formed the Financial Reporting
Review Board in the year 2002. FRRB conducts the review of general
purpose financial statements of certain enterprises with the view to find non-
compliances with reporting requirements of Accounting and Auditing
Standards, CARO, Companies Act and other relevant statutes governing the
concerned entity. An advisory is issued to the concerned members for any
non-compliance noticed by the Board in the financial statement audited by
him to enable him to exercise greater care in performing his professional
assignments. If, however, the Board feels that the non-compliances observed
is serious and grave in nature, it refers the same to the relevant regulator(s).
I believe this publication would be of great help to the members in performing
their professional duties. I compliment CA. Babu Abraham Kallivayalil,
Chairman FRRB, CA. Anil Satyanarayan Bhandari, Vice Chairman FRRB,
and all members of the Board for their efforts in bringing out the publication.

Date: February 1, 2018 CA. Nilesh S. Vikamsey

Place: New Delhi President, ICAI
 Preface
In the current socio-economic environment, information is one of the most
powerful tools for the success of not only an individual but also large
organizations. Financial statement of an entity is the prime source of the
information on its financial health. The users of financial statements which
include shareholders, creditors, suppliers of funds and Government
authorities dependent on the information depicted in the financial statement
of the enterprises.
To maintain reliability and credibility, emphasis should be on accuracy,
transparency and adherence to accounting and reporting standards. Care
should be taken to ensure relevant regulations are met with in the
preparation and presentation of the financial statements. Being the premier
accounting body and regulator of auditing profession in the country, the
Institute of Chartered Accountants of India (ICAI) has been working towards
ensuring the best practices and transparency in the reporting of financial
statement of the enterprises.
The Financial Reporting Review Board (FRRB) of the ICAI was formed in the
year 2002, as an ombudsman to the financial reporting. The Board
undertakes the review of financial statements and auditor’s report thereon of
selected enterprises with the view to identify the non-compliances with the
reporting requirements of Accounting Standards, Standards on Auditing,
CARO, Schedule II & III to the Companies Act, 2013 and other reporting
requirements under the relevant statute governing the enterprise. The Board,
also informs the concerned auditor about non-compliances, if any, noticed
during the review of financial statement audited by him in order to enable him
to exercise greater caution while discharging his professional duties. The
Board has also been actively involved in updating the members on topics
related to financial reporting by bringing the publication as well as organising
the awareness programmes.
In past, the Board had brought out the two volumes of its publications ‘A
Study on Compliances of Financial Reporting Requirements’ with the
objectives to educate the members on various reporting requirements. This is
the third volume of the publication in form of compilation of observations on
various non-compliances with applicable statues, ASs, SAs, CARO,
Companies Act etc. that have been noticed by the Board in the recent
reviews carried out by the Board.
We are of the firm belief that this publication will further enhance the
knowledge and skills of the auditors as well as others who prepare financial
statements. It will not only educate the members about the principles as well
as disclosure requirements but also equip them with the required skills for
greater compliances of various regulatory statues, rules and regulations and
also enabled them in delivering quality services.
I take this opportunity to thank CA. Nilesh S. Vikamsey, President ICAI and
CA. Naveen N. D. Gupta, Vice-president ICAI for their support and guidance.
I, also, wish to place on record my sincere thanks to present and past
members of the FRRB for their valuable inputs on which we laid the
foundation of this publication.
I am thankful to my Council colleagues who are the strong pillars of the
Board during the year - CA. Anil S. Bhandari, Vice-chairman, FRRB, CA.
Dhinal A. Shah, CA. Shyam Lal Agarwal, Shri. Vijay Jhalani (Government
nominee), CA. Vijay Kumar Gupta, CA. M. P. Vijaykumar, CA. Sanjay
Vasudeva, CA. Ranjeet Kumar Agarwal, CA. Kemisha Soni and CA.
Nandkishore C. Hegde.
I also want to thank members of various Financial Reporting Review Groups
(FRRGs) as well as Technical Reviewers (TRs) for their huge contribution
and unparalleled support.
I also like to place on record my sincere thanks to CA. Sankar Datta,
Chennai and CA. Nalin Shah, Mumbai who has prepared the basic draft of
the publication based on the content provided by the Board and for sparing
time out of their pressing preoccupations. Without their support this
publication would not have been possible.
I would also wish to express my gratitude to CA. Aakanksha Kapoor,
Secretary, FRRB, CA. Ankita Mangla, CA. Chetna Gupta, CA. Rohit Ahuja,
CA. Ashish Tiwari and the team at FRRB Secretariat for their efforts in
bringing out the publication.

Date: February 1, 2018 CA. Babu Abraham Kallivayalil

Place: New Delhi Chairman
Financial Reporting Review Board

vi
Graphical Presentation of Accounting Standards
Deficiencies Observed: At a Glance
Deficiencies Observed: At a Glance

AS 1: Disclosure of Accounting Policies

viii
 Deficiencies Observed: At a Glance

AS 2 : Valuation of Inventories

ix
Deficiencies Observed: At a Glance

AS 3:Cash Flow Statements

x
 Deficiencies Observed: At a Glance

AS 5: Net Profit or Loss for the Period, Prior

Period Items and Changes in Accounting Policies

xi
Deficiencies Observed: At a Glance

AS 7: Construction Contracts

xii
 Deficiencies Observed: At a Glance

AS 9: Revenue Recognition

xiii
Deficiencies Observed: At a Glance

AS 10: Accounting for Fixed Assets

xiv
 Deficiencies Observed: At a Glance

AS 11: The Effects of Changes in Foreign

Exchange Rates

xv
Deficiencies Observed: At a Glance

AS 12: Accounting for Government Grants

xvi
 Deficiencies Observed: At a Glance

AS 13: Accounting for Investments

xvii
Deficiencies Observed: At a Glance

AS 15: Employee Benefits

xviii
 Deficiencies Observed: At a Glance

AS 16: Borrowing Costs

xix
Deficiencies Observed: At a Glance

AS 17: Segment Reporting

xx
 Deficiencies Observed: At a Glance

AS 18: Related Party Disclosures

xxi
Deficiencies Observed: At a Glance

AS 19: Leases

xxii
 Deficiencies Observed: At a Glance

AS 20: Earnings Per Share

xxiii
Deficiencies Observed: At a Glance

AS 21: Consolidated Financial Statements

xxiv
 Deficiencies Observed: At a Glance

AS 22: Accounting for Taxes on Income

xxv
Deficiencies Observed: At a Glance

AS 26: Intangible Assets

xxvi
 Deficiencies Observed: At a Glance

AS 27: Financial Reporting of Interests in

Joint Ventures

xxvii
Deficiencies Observed: At a Glance

AS 29: Provisions, Contingent Liabilities and

Contingent Assets

xxviii
 Contents

Foreword iii
Preface v
Deficiencies Observed: At a Glance vii
1. Observations on AS 1: Disclosure of Accounting Policies 1
2. Observations on AS 2:Valuation of Inventories 13
3. Observations on AS 3:Cash Flow Statements 25
4. Observations on AS 4: Contingencies and Events Occurring 66
After the Balance Sheet Date
5. Observations on AS 5: Net Profit or Loss for the Period, Prior 68
Period Items and Changes in Accounting Policies
6. Observations on AS 7: Construction Contracts 85
7. Observations on AS 9: Revenue Recognition 91
8. Observations on AS 10: Accounting for Fixed Assets 105
9. Observations on AS 11: The Effects of Changes in Foreign 112
Exchange Rates
10. Observations on AS 12: Accounting for Government Grants 134
11. Observations on AS 13: Accounting for Investments 139
12. Observations on AS 14: Accounting for Amalgamations 154
13. Observations on AS 15: Employee Benefits 162
14. Observations on AS 16: Borrowing Costs 184
15. Observations on AS 17: Segment Reporting 194
16. Observations on AS 18: Related Party Disclosures 209
17. Observations on AS 19: Leases 225
18. Observations on AS 20: Earnings Per Share 235

xxix
19. Observations on AS 21: Consolidated Financial Statements 258
20. Observations on AS 22: Accounting for Taxes on Income 269
21. Observations on AS 23: Accounting for Investments in 295
Associates in Consolidated Financial Statements
22. Observations on AS 24: Discontinuing Operations 298
23. Observations on AS 26: Intangible Assets 302
24. Observations on AS 27: Financial Reporting of Interests in Joint 334
Ventures
25. Observations on AS 28: Impairment of Assets 340
26. Observations on AS 29: Provisions, Contingent Liabilities and 343
Contingent Assets
27. Observations on the Companies Act 354
28. Observations on Companies (Auditor’s Report) Order 448
29. Observations on Standards on Auditing 480
30. Observations relating to Banking & Insurance Companies 497
31. Other Observations 513

xxx
 1
Observations on Accounting Standard (AS) 1:
Disclosure of Accounting Policies
S. Matters contained in the Observations
No Annual Report

1. From the Annual Report of a It may be noted that paragraph

company it has been noted that 24 of AS 1, requires that;
income from leasing business
has been shown as Income from “24. All significant accounting
Operations. It has been further policies adopted in the
noted from the Report on preparation and presentation
Corporate Governance that the of financial statements should
company was mainly engaged be disclosed.”
in the business of setting up/ As stated in the Report on
operating Industrial Corporate Governance, Leasing
Infrastructure. The company is a secondary business for the
was also engaged in related company for which the
activities involving leasing and accounting policy has been
providing services connected disclosed. However, no
with computer software and accounting policy has been
data processing. explicitly disclosed for
recognizing revenue as adopted
by it from its primary business
i.e. setting up and operating
industrial infrastructure.

It was viewed that the

accounting policy adopted by
the company for recognizing
revenue from its primary
business together with the
timing for recognition of such
revenue should have been
disclosed to comply with the

1
Study on Compliance of Financial Reporting Requirements

requirement of paragraph 24 of
AS 1.

2. In the Annual Reports of some It may be noted that Paragraph

companies, the accounting 11 of AS 1, states that:
policies regarding impairment of
assets, intangibles, deferred “11. The accounting policies
tax, subsidies and gratuity have refer to the specific
been stated as follows: accounting principles and the
methods of applying those
 Impairment losses, if any, principles adopted by the
on Fixed Assets (including enterprise in the preparation
revalued assets) are and presentation of financial
recognised in accordance statements.”
with the Accounting
Standard 28 ‘Impairment of It was observed that in some
Assets’ issued by Institute cases the companies have
of Chartered Accountants of merely mentioned in these
India (ICAI) and charged to accounting policies that they are
Profit and Loss Account.” in accordance with the
requirements of the relevant
 Intangible assets are
Accounting Standards (viz. AS
recognised and accounted
28, AS 26 and AS 22) as issued
at cost in accordance with
Accounting Standard 26 by the Institute. In case of
‘Intangible Assets’ issued subsidies the policy states that
by ICAI. the subsidies are recognised in
accordance with the relevant
 Deferred Tax Asset/Liability terms and conditions of the
has been provided for in the scheme and arrangement
books of accounts as per whereas for gratuity the policy
AS-22
states that gratuity is provided
 Subsidies granted by the as per the approval of the
government for providing Central Government and as per
telecom services in rural the Payment of Gratuity Act,
areas are recognised as 1972.
other operating income in
accordance with the It was viewed that such policies
relevant terms and only provide means to
conditions of the scheme understand these accounting
policies adopted by the

2
Observations on Accounting Standard (AS) 1: Disclosure of Accounting Policies

and arrangements. companies rather than providing

the accounting policies more
 In case of non member of explicitly, which will help the
the Gratuity Fund, the readers to understand the
gratuity is provided as per financial statements.
the approval of Central
Government and as per the Accordingly, the stated
payment of Gratuity Act, accounting policies are not in
1972, wherever applicable. accordance with the
requirements of AS 1.
Further, references should have
been made to the Accounting
Standards notified under the
Companies (Accounting
Standards) Rules, 2006 rather
than those issued by the
Institute of Chartered
Accountants of India.

3. From the Annual Report of few It may be noted that Paragraph

companies, it has been noted 11 of Guidance note on
that MAT credit entitlement of Accounting for Credit Availability
significant amounts has been in respect of Minimum
recognised in the financial Alternative Tax under Income-
statements with corresponding Tax Act, 1961, states as under:
recognition of the related asset
as shown under Long Term “…MAT Credit should be
Loans and Advances. recognised as an asset only
when and to the extent there
is convincing evidence that
the company will pay normal
income tax during the
specified period.”

Further, Paragraph 24 of AS 1
states as follows:

“24. All significant accounting

policies adopted in the
preparation and presentation
of financial statements should

3
Study on Compliance of Financial Reporting Requirements

be disclosed.”

Though the MAT Credit

Entitlement was significant
amount, the accounting policy
adopted for its recognition has
not been disclosed, which is not
in accordance with the
requirement of paragraph 24 of
AS 1.

It was, accordingly, viewed that

the accounting policy adopted
for its recognition should be
disclosed to understand that this
has been recognised based on
convincing evidence and that it
would be utilized within the
specified period.

4. In the Annual Report of a It was noted from the stated

company the accounting policy accounting policy that the cost,
on ‘Tangible Fixed Assets’ has inter alia, comprises of
been stated, as given below : borrowing costs if capitalisation
criteria are met. However, the
“Tangible fixed assets are
criteria used for capitalisation
stated at cost (or re-valued
have not been disclosed in the
amounts, as the case may be),
policy and it was not clear from
less accumulated depreciation
the stated policy as to whether
and impairment loss, if any.
the policy adopted in respect of
Cost comprises the purchase
borrowing costs was in
price, borrowing costs, if
compliance with the
capitalisation criteria are met,
requirements of AS 16.
and any attributable cost of
bringing the asset to its present Accordingly, it was viewed that
working condition for its the accounting policy adopted in
intended use.” respect of borrowing cost has
Further, it has been noted that not been explicitly disclosed as
no separate policy was stated required by paragraph 24 of AS
for borrowing cost. 1.

4
 Observations on Accounting Standard (AS) 1: Disclosure of Accounting Policies

5 Following note is appearing in It was noted that although the

the Notes to Financial Statement of Profit and Loss
Statements of a company as shows revenue from operations,
given in the Annual Report: the accounting policy as
adopted for recognizing such
“The Company has no revenue has not been disclosed.
manufacturing activity since
1992-93 and hence additional Further, the nature of operation
information regarding licensed from which revenue has been
capacity, installed capacity, generated is not clear from the
actual production and financial statements. It was
quantitative details of viewed that despite the fact that
production, sales and closing the company has no
stock in respect of the previous manufacturing activity since
year is not given.” 1992-93, revenue from
operations has still been
It was further noted that disclosed. This raises doubt with
revenue from operations has regard to the nature of income,
been shown in the Statement of which has also not been
Profit and Loss for the current disclosed.
year as well as for the previous
year. Accordingly, it was viewed as a
non compliance with paragraph
24 of AS 1 (non disclosure of
accounting policy) as well as
Revised Schedule VI to
Companies Act, 19561 (non-
disclosure of the nature of
income).

6 The accounting policy on foreign It may be noted that the

currency transactions as given Institute of Chartered
in the Annual Report of a Accountants of India has issued
company was as follows: an Announcement titled
’Accounting for Derivatives’
“Foreign currency dated 29-03-2008, which states
transactions as under:

1Subsequent to the observations of the Board, Revised Schedule VI has been withdrawn.
However, content is still relevant in terms of Schedule III to Companies Act, 2013.

5
Study on Compliance of Financial Reporting Requirements

… “In case an entity does not

follow AS 30, keeping in view
Any profit or lossarising on the principle of prudence as
settlement or cancellation of enunciated in AS 1, Disclosure
other derivative contracts of Accounting Policies, the entity
(swaps and currency options) is is required to provide for losses
recognised as income/expense in respect of all outstanding
for the year. The derivative derivative contracts at the
contracts outstanding at the balance sheet date by marking
year-end, are marked to its them to market.”
current market value and
gain/loss on such contracts, is It may further be noted that
recognised in the statement of Paragraph 17 of AS 1,
profit and loss (emphasis envisages principle of prudence
supplied).” as follows:

“a. Prudence

In view of the uncertainty

attached to future events,
profits are not anticipated
but recognised only when
realised though not
necessarily in cash.
Provision is made for all
known liabilities and losses
even though the amount
cannot be determined with
certainty and represents
only a best estimate in the
light of available
information.”

It was noted from the stated

accounting policy on foreign
currency transactions that not
only losses but also gains on
outstanding derivative contracts
were being recognised in the
Statement of Profit and Loss. It
was further noted that financial

6
Observations on Accounting Standard (AS) 1: Disclosure of Accounting Policies

statement does not state that

the enterprise has adopted AS
30, AS 31 and AS 32.

Accordingly, it was viewed that

recognizing gain on outstanding
derivative contract is against the
principle of prudence enunciated
in AS 1 as well as the above
stated ICAI announcement.

7. In the Annual Reports of few It may be noted that paragraph

companies it has been noted 25 of AS 1, provides that:
that certain accounting policies
viz. investments, other income, “25. The disclosure of the
foreign currency transactions, significant accounting
lease, provision for current tax, policies as such should form
impairment of assets and part of the financial
provision & contingent liabilities statements and the significant
have been disclosed in one note accounting policies should
titled ‘Significant Accounting normally be disclosed in one
Policies’, whereas other place.”
accounting policies viz. deferred It was observed that the
tax, inventory valuation, fixed accounting policies disclosed
assets and depreciation, have been scattered at various
revenue recognition, employee places in the financial
benefits, hedging contracts and statements. It was viewed that
employees stock option scheme all the accounting policies
have been given under the should be disclosed at one place
related notes annexed to the in the financial statements as
Balance Sheet and Statement of per the requirement of
Profit and Loss. paragraph 25 of AS 1.

8. In the Annual Report of a It was noted that ‘other

company it was noted that the operating income’ constitutes
revenue from operations 95% of the total income of the
comprises of (a) Income from company. However, the nature
real estate projects and (b) of such income as well as the
Other operating Income. accounting policy as adopted for
its recognition has not been

7
Study on Compliance of Financial Reporting Requirements

disclosed.

Accordingly, it was viewed as a

non compliance with the
requirements of paragraph 24 of
AS 1 (non disclosure of
Accounting Policy) as well as
Revised Schedule VI to
Companies Act, 19562 (non-
disclosure of the nature of
income).

9. From the Annual Report of a It was viewed that for a banking

banking enterprise it has been enterprise, accounting policy
noted that the particulars of relating to repo / reverse repo
securities purchased and sold transactions is important since it
under repo/reverse repo have is a monetary measure of RBI to
been disclosed by way of a note control inflation.
to the financial statements.
It was, therefore, viewed that
the recognition as well as
measurement principles in
respect of securities sold or
purchased under repo/reverse
repo should be disclosed
separately as per the
requirements of paragraph 24 of
AS 1.

10. In the Annual reports of certain It was observed that the policy
companies the accounting simply states the value at which
policy for Revenue Recognition revenue has been recognised
has been stated as follows: but does not state the point of
time when significant risk and
 Turnover includes sale of rewards in goods stand
services and service tax, transferred to the buyer or the
adjusted for discounts (net), point of time when the services
if any.

2Subsequent to the observations of the Board, Revised Schedule VI has been withdrawn.
However, content is still relevant in terms of Schedule III to Companies Act, 2013.

8
Observations on Accounting Standard (AS) 1: Disclosure of Accounting Policies

 Sales are net of discount, were rendered.

include applicable excise
duty, surcharge and other It was viewed that the policy
elements as are allowed toregarding timing of recognition
of revenue from sales and
be recovered as part of the
price but excludes VAT andservices is an important
Sales tax. accounting policy for any
company and should, therefore,
 Income from sale of be disclosed as per the
electricity generated by requirements of paragraph 24 of
wind mills and rental AS 1.
income from immovable
properties are recognised
on accrual basis.

 Jatropha seeds, Biofuel

(finished/semi finished) are
sold at prices determined
by the Board of Directors.

11. The Accounting policies It may be noted that paragraph

disclosed by certain companies 24 of AS 1, provides that:
in the Annual Report with regard
“24. All significant accounting
to accounting of income and
policies adopted in the
expenditure are set out below:
preparation and presentation
 All income and expenditure of financial statements should
items having a material be disclosed.”
bearing on the financial It was noted that only a common
statements are recognised policy of recognizing income and
on accrual basis. expenditure has been given and
that the accounting policy for
 Expenses and income are recognizing revenue including
accounted for on an the point of time when the
accrual basis. significant risks and rewards in
goods stand transferred to the
 Income and expenditure are
buyer, has not been stated.
recognised on accrual basis
except benefits on Special It was viewed that the revenue
import license premium, recognition policy should be
Sales tax set off, Duty separately disclosed stating
drawback and all cash explicitly the timing of

9
Study on Compliance of Financial Reporting Requirements

incentives, Claims recognition of revenue.

receivable and Government
Further, accounting of import
taxes, which have been
license benefits, duty drawback,
accounted for on cash
claims, cash incentives etc. on
basis.
cash basis is not in accordance
with the generally accepted
accounting principles.

12. From the Annual Report of Companies would generally

certain companies it has been have most of the
noted that no accounting assets/liabilities and
policies have been disclosed income/expenses listed in the
with regard to one or more of observation. Even interest,
the following: commission and royalty included
under other income could be
 Fixed assets significant. Accordingly, subject
to circumstances of a company,
 Inventories
all significant accounting policies
 Provisions and Contingent should be disclosed as adopted
Liabilities by it for preparation and
presentation of the financial
 Impairment of assets statements.
 Accounting of taxes on It was viewed that non-
Income disclosure of these accounting
policies is a major non-
 Revenue Recognition compliance with the requirement
 Lease of the AS 1.

 Employee Benefits

 Foreign Currency
Transactions

 Borrowing Costs

 Goodwill and other

intangible Assets

 Interest, Commission and

Royalty included under

10
Observations on Accounting Standard (AS) 1: Disclosure of Accounting Policies

other Income

13 From the Annual Report of a It was observed that certain

company it was noted that in the reimbursed energy charges
Statement of Profit and Loss have been set off against
income from services has been service revenue and certain
shown gross from which reimbursements received have
reimbursed energy charges been netted off against
have been deducted to arrive at infrastructure operating
the net revenue. Similarly, in the expenditure. Further, it was
note of Infrastructure Operating noted that amount involved was
Expenditure reimbursement material. However, the nature of
received has been shown as a such reimbursed
deduction. charges/receipts has not been
disclosed in the accounting
policy.

Accordingly, it was viewed that

the requirement of paragraph 24
of AS 1 has not been strictly
complied with.

14. The accounting policy regarding It was observed from the notes
employee benefits as given in to accounts that the company
the Annual Report of a has also made contribution to
company, reads as follows: provident fund but the related
accounting policy has not been
“Liabilities for gratuity and leave disclosed.
encashment are provided on the
basis of annual actuarial It was viewed that accounting
valuation at the year end and policies covering all types of
the management estimates for employee benefits should be
interim period keeping in view of disclosed as per the requirement
last actuarial valuation.” of paragraph 24 of AS 1.

15 From the Annual Report of a The stated accounting policy

company it has been noted that indicates that jatropha plantation
the company has been set up is a self constructed item of
for plantation. Further, seeds of property plant and equipment
the plants are used for (Bearer Plant). Since all

11
Study on Compliance of Financial Reporting Requirements

production of bio-diesel as a expenses are transferred to

viable renewable source of CWIP, it appears to be still in
energy. development stage. Accordingly,
any income generated from pre-
It was further noted from the harvest produce of bearer plant
accounting policies as disclosed is in the nature of income
in the financial statements that generated before the
all expenses incurred on commencement of commercial
cultivation and maintenance of operation and should be
plantation are transferred to deducted from the development
Capital Work in Progress for a cost.
period of 5 years and thereafter
these expenses are capitalised It has, however, been noted that
to be amortised over a period of the income earned from
25 years. immature crop has been
credited to Statement of Profit
and Loss, which is not in
accordance with the generally
accepted accounting principles
in India.

12
 2
Observations on Accounting Standard (AS) 2:
Valuation of Inventories
S. Matters contained in the Observation
No Annual Report

1. The accounting policies It may be noted that paragraph 5

regarding valuation of inventories of AS 2, provides that:
as disclosed in the Annual
Report of several companies are “5. Inventories should be
listed below : valued at the lower of cost and
net realisable value.”
 Stocks of Cards are valued
at Cost and on FIFO basis Further, paragraph 3.2 of AS 2
and include all applicable defines the term ‘Net Realisable
overheads in bringing the Value’ as follows :
inventories to their present“Net realisable value is the
location and condition. Workestimated selling price in the
in progress is valued at ordinary course of business,
Cost. less the estimated costs of
 Inventories are measured at completion and the estimated
cost. Cost is determined on costs necessary to make the
weighted average basis. sale.”

 Work - in - Progress is It was noted from the accounting

valued at direct raw material policies as disclosed in the
cost and appropriate cost of financial statements that except
completed process. for finished goods in a few cases
inventories have been valued at
 Raw materials are valued at cost or average cost. In other
average cost. Raw materials words ‘net realisable value’ has
at bonded warehouse stores, not been considered for the
spares, consumables, purpose of valuing the
packing material, coal & fuel inventories.
are valued at cost and

13
Study on Compliance of Financial Reporting Requirements

finished goods are valued at Accordingly, it was viewed that

cost or net realisable value the valuation of inventories in all
whichever is lower. these cases is not in line with the
requirement of paragraph 5 of AS
 Raw materials, Stores and 2.
spares and Stock-in process
are valued at weighted
average cost.

 Raw Materials lying at factory

and job work have been
valued at cost. Stocks in
Process have been valued at
Raw Materials Cost plus
proportionate of conversion
cost. Finished Goods lying at
factory have been valued at
Raw Material cost plus
conversion cost including
excise duty payable. Scrap
has been valued at net
realisable value. Stores &
Spares have been valued at
cost.

 Raw materials, Packing

materials and Stores &
Spares are valued at cost on
FIFO basis. Semi-Finished
Goods are valued at
estimated cost. Traded
goods and Finished Goods
are valued at lower of the
cost or net realisable value.

 Inventories, consist of blank

betacam tapes, are stated at
cost on First in First out
(FIFO) basis.

 Stocks of Raw Materials,

14
 Observations on Accounting Standard (AS) 2: Valuation of Inventories

Work-in-Progress and Stores

and Spares have been
valued at cost or under.

 Stores and maintenance

spares are valued at cost.
Empty packages are valued
at weighted average cost.
Stores and spares are valued
at weighted average cost.
Stores & spares in transit are
valued at cost.

 Raw Materials, construction

materials and stores and
spares are valued at
weighted average cost.

2. In the Annual Reports of a It may be noted that paragraph

number of companies the 26 read with paragraph 16 of AS
accounting policies regarding 2, states as follows:
valuation of inventories have
been stated as follows : “26. The financial statements
should disclose:
 Inventories are valued at
lower of cost or net (a) the accounting
realisable value. policies adopted in
measuring inventories,
 Inventories are valued at
including the cost formula
cost or market value,
used.”
whichever is lower. The
company has been following “16. The cost of inventories,
this generally accepted other than those dealt with in
accounting policy in
paragraph 14, should be
accordance with the
assigned by using the first-in,
Accounting Standard (AS 2) first-out (FIFO), or weighted
on valuation of Inventories. average cost formula. The
 Raw Materials, process formula used should reflect
stock and stores and spares the fairest possible
- valued at cost. approximation to the cost
incurred in bringing the items
 Finished goods are valued at of inventory to their present

15
Study on Compliance of Financial Reporting Requirements

cost or market price, location and condition.”

whichever is lower.
It was noted from the stated
 Raw materials, accounting policies of these
consumables, stores and companies that, although the
spares are valued at lower of accounting policy adopted for
cost or Net realisable value determining the value of
as certified by the inventories has been disclosed,
management. the cost formula adopted for
determining the cost has not
 Raw Materials lying at been disclosed.
factory and job works have
been valued at cost. Stores Accordingly, it was viewed that
&spares have been valued at the requirements of paragraph 26
cost. (a) of AS 2 have not been
complied with.
 Semi-finished goods are
valued at estimated cost.
Traded goods and finished
goods are valued at lower of
the cost or net realisable
value.

 Items of inventories are

measured at lower of cost or
net realisable value after
providing for obsolescence,
if any.

 Inventories of fuel oil,

spares, stores &
consumables on board of the
vessels are valued at lower
of cost or net realisable
value.

3. Accounting policy on valuation of It may be noted that paragraph 5

inventories as disclosed in the of AS 2, requires that:
Annual Reports of some
companies reads as under : “5. Inventories should be
valued at the lower of cost and
 Inventories are valued at

16
 Observations on Accounting Standard (AS) 2: Valuation of Inventories

cost or market value, net realisable value.”

whichever is lower. The
company has been following Further, paragraph 3.2 of AS 2,
this generally accepted defines the term ‘Net Realisable
accounting policy in Value’ as follows :
accordance with the ‘Net realisable value is the
Accounting Standard (AS 2) estimated selling price in the
on valuation of Inventories. ordinary course of business,
 Inventories are valued at less the estimated costs of
cost or market value completion and the estimated
whichever is lower. Cost costs necessary to make the
considered for valuation is sale.’
weighted average cost. It was noted from the stated
 Finished goods - valued at accounting policies as adopted
cost or market price, by these companies for valuation
whichever is lower. of inventories that the inventories
have been valued at lower of
 Trading inventories are cost and market value instead of
valued at cost or market net realisable value. It appears
value whichever is lower. that the estimated costs of
completion and the estimated
 Finished goods are valued at costs necessary to make the sale
cost, or market have not been reduced from the
value/Contract Price, estimated selling price for the
whichever is less…. purpose of inventory valuation.
 Raw materials and finished Accordingly, it was viewed that
goods are valued at cost or the valuation of inventories is not
market price, whichever is in line with the requirement of
lessor. Scrap is valued at paragraph 5 of AS 2.
estimated market price.

4. In the Annual Reports of few It may be noted that paragraph 7

companies following notes have of AS 2, provides that:
been given with regard to
accounting treatment of excise ’7. The costs of purchase consist
duty in inventory valuation : of the purchase price including
duties and taxes (other than
 The liability for excise duty those subsequently recoverable
on finished goods lying in by the enterprise from the taxing

17
Study on Compliance of Financial Reporting Requirements

stock at the close of the year authorities), freight inwards and

has not been provided for in other expenditure directly
the accounts and hence not attributable to the acquisition.
included in the valuation of Trade discounts, rebates, duty
inventory of such products. draw backs and other similar
However, the said liability, if items are deducted in
accounted, would have no determining the costs of
impact on profit for the year. purchase.’

 Raw material and finished It may be further noted that as

goods are valued net of per paragraph 18 of the
excise duty. But goods at Institute’s ’Guidance Note on
branches are valued at Accounting Treatment for Excise
inclusive of excise duty and Duty,’ the liability for excise duty
freight. arises when the manufacture of
the goods is completed; hence, it
 Liability for excise duty on is necessary to create a
finished goods is accounted provision for liability of unpaid
as and when they are excise duty on stocks lying at the
cleared from the factory factory or bonded warehouse.
premises. No provision is However, it appears from the
made in the account for notes that excise duty has
goods manufactured and neither been considered in the
lying in factory premises. valuation of inventories nor
provided for except for the
stocks lying at the branches.

Accordingly, it was viewed that

the requirements of paragraph 7
of AS 2 as well as paragraph 18
of the Guidance Note on
Accounting Treatment for Excise
Duty have not been complied
with.

5. From the note of inventories as It may be noted from the

given in the Annual Reports of clarification given in the
several companies it has been Guidance Note on ’Audit of
noted that the inventories have Inventories’ issued by the
been described as taken, valued Institute of Chartered
and certified by the Accountants of India that the use

18
 Observations on Accounting Standard (AS) 2: Valuation of Inventories

director/management’. of expression ’as taken, valued

and certified by the
In few annual reports even the director/management’ may lead
accounting policies have stated the users of financial statements
as follows : to believe that the auditors have
 The stock of paper, books & merely relied on the
magazines is as certified by management’s certificate without
the management. carrying out any other
appropriate audit procedures to
 Raw materials, satisfy themselves about the
consumables, stores and existence and valuation of
spares are valued at lower of inventories.
cost or net realisable value
as certified by the It may further be noted from the
management. above Guidance Note that the
duties and responsibilities of the
 Finished goods are valued at
auditors with regard to audit of
lower of cost or net
inventories are not diminished.
realisable value as certified
Thus, in order that the auditor’s
by the management.
role with regard to verification of
In another annual report the inventories is properly
following description has been appreciated by the users of the
given: financial statements, the auditors
should advise their clients to omit
 Inventories
the expression ’as taken, valued
(As taken, valued at cost or and certified by the
realisable value, whichever is director/management’, when
lower and certified by the describing inventories in the
Management). financial statements.’

6. From the Annual Reports of It may be noted that paragraph 6

some companies it has been of AS 2, provides that:
noted that different accounting
“6. The cost of inventories
policies have been adopted to
should comprise all costs of
determine the cost of inventories
purchase, costs of conversion
as given below :
and other costs incurred in
 Work in Process at raw bringing the inventories to
material cost. their present location and

19
Study on Compliance of Financial Reporting Requirements

 Cost of finished goods and condition.”

work in progress are
In the first case, work in progress
determined on estimated
has been valued only at raw
cost basis.
material cost, which indicates
 Inventories are valued at that the conversion cost has not
cost or net realisable value, been considered.
whichever is less. Cost is In the second case, cost of
determined by using the first finished goods and work in
in first out formula. Cost progress is determined on
comprises all. estimated basis and in the third
 Raw materials are valued at case, it states cost comprises all.
average cost. It is not clear from such
accounting policies whether all
 Inventories are stated at
applicable costs have been
lower of cost and net
considered or not.
realisable value. Cost is
determined on weighted In the fourth case, average cost
average/ first-in,first-out method has been used instead of
(FIFO) basis, as considered weighted average cost method
appropriate by the Company. as required under paragraph 16
of AS 2.
 Cost of inventories is
computed on weighted Accordingly it was viewed that
average / FIFO basis. the stated methods of
determining cost of inventories
are not in accordance with
paragraph 6 as well as
paragraph 16 of AS 2.
In the last two cases though cost
formula has been given it would
be more appropriate to disclose
which cost formula has been
used for which class of
inventories.

7. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 26 of AS 2, requires that:
the accounting policy on
valuation of inventories has not “26. The financial statements
been disclosed. should disclose:

20
 Observations on Accounting Standard (AS) 2: Valuation of Inventories

(a) the accounting policies

adopted in measuring
inventories, including the
cost formula used.”

Further paragraph 24 of AS 1,
requires that:

“24. All Significant accounting

policies adopted in the
preparation and
presentation of financial
statements should be
disclosed.”

Accordingly, it was viewed that

non-disclosure of accounting
policy on valuation of inventories
is not in compliance with the
requirements of paragraph 24 of
AS 1 as well as paragraph 26 (a)
of AS 2.

8. From the Annual Report of a It may be noted that paragraph 5

company, it has been noted that of AS 2, requires as follows:
short term provisions includes a
provision towards old inventory “5. Inventories should be
and the amount is significant. valued at the lower of cost
and net realisable value.”

It was observed that provision for

old inventory has been shown
under the head ‘short term
provisions’ instead of reducing it
from the carrying value of
inventories, which is not in line
with the requirements of
paragraph 5 of AS 2.

Further, it also raises doubt as to

whether the net realisable value

21
Study on Compliance of Financial Reporting Requirements

has been considered for

valuation of old inventories or
not.

9. From the Annual Report of a It may be noted that paragraph

company pertaining to Agro 3.1 of AS 2, provides as under:
Industry, it has been noted that
land has been shown as an item “3.1 Inventories are assets:
of inventories (earlier shown as
(a) held for sale in the
fixed asset), which has been
ordinary course of
valued at cost or net realisable
business;
value, whichever is lower.
(b) in the process of
Further the following note
production for such
appears in the financial
sale; or
statements :
(c) in the form of
’The company entered into an
materials or supplies
agreement with X Ltd. for the
to be consumed in the
purpose of development of the
production process or
commercial cum residential
in the rendering of
project in Mumbai. In accordance
services.”
with the agreement, the company
has to contribute its land and X From the note given in the
Ltd. is required to incur all the financial statements, it was
development expenses of the observed that the land (earlier
project with the understanding to recognised as fixed assets) has
share the ownership of the now been classified as
project in an agreed ratio. The inventories. However, during the
construction/development of the year the purpose for which it is
project was stayed by the intended to be used has been
Hon’ble Supreme Court of India stayed by Hon’ble Supreme
stating that the same land can be Court. Further, the management
used for the purpose of Agro was exploring possibility to use
Industry or any other permissible the land as per the current
industry under the current regulations. Having regard to the
regulations. The management is definition of inventories as per
exploring the possibilities to use paragraph 3.1 of AS 2 as given
the land in question as per the above the land in question

22
 Observations on Accounting Standard (AS) 2: Valuation of Inventories

permissible regulations cannot be considered as held for

(emphasis supplied).’ sale in the ordinary course of
business nor can it be
considered to be used in the
process of production.
Accordingly, its classification as
an item of inventories does not
appear to be correct.

10. Significant accounting policy on It was observed from the

inventory as disclosed in the accounting policy that import of
Annual Report of a company, materials is accounted on
inter alia, state that: receipt basis and not on accrual
basis. This is not in accordance
“Import of materials is accounted with the generally accepted
on receipt thereof at the factory.” accounting principles.

It was viewed that when the

materials are shipped by the
exporter the company should
recognize the liability and the
materials should be accounted
for as ‘Materials in Transit’.

11. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 26 of AS 2, requires that:
under note on inventories stores
& spares has been disclosed on “26. The financial statements
net basis. should disclose:

(a) the accounting policies

adopted in measuring
inventories, including the
cost formula used.”

It was not clear from the use of

the term ‘Net’ as to what has
been netted off against the
carrying value of Stores and
Spares. It was viewed that the

23
Study on Compliance of Financial Reporting Requirements

nature of adjustment should be

adequately disclosed for better
understanding of the financial
statements.

12. In the Annual Report of a It may be noted that the

company, the accounting policy accounting policies and
on inventories states that the explanatory notes that may be
cost of raw materials, attached form an integral part of
components and stores and the financial statements.
spares is determined on a
weighted average basis. In both the cases information
However, in the note of given in the accounting policies
inventories under the head raw contradict with the information
materials it has been stated as given in the note of inventories
‘valued at cost on FIFO method’. with regard to inventory
valuation. Consequently, it is not
In the Annual Report of another clear as to which method of
company, the accounting policy valuation these companies have
on inventories states that raw actually followed.
materials, stock in process,
finished goods and stores and It was accordingly viewed that
spares have been valued at cost such contradictory information
and that scrap has been valued should be avoided for better
at net realisable value. However, understanding of the financial
in the note of inventories it has statements.
been stated that scrap has been
valued at estimated market price
and that all other items have
been valued at cost or market
price, whichever is less.

24
 3
Observation on Accounting Standard (AS) 3:
Cash Flow Statements
S. Matter Contained in Annual Observations
No Report

1. From the Statement of Profit It may be noted that paragraphs

and Loss and the Cash Flow 20 and 30 of AS 3 respectively
Statement of a company read provides as follows:
with the notes to the accounts,
it was noted that Net profit for “20. Under the indirect method,
the year is inclusive of the net cash flow from operating
unrealised exchange rate activities is determined by
difference, interest and dividend adjusting net profit or loss for
income. the effects of:

(a) ….

(b) non-cash items such as

depreciation, provisions,
deferred taxes, and unrealised
foreign exchange gains and
losses; and (c) all other items
for which the cash effects are
investing or financing cash
flows.” (emphasis added)

“30. Cash flow from interest

and dividends received and
paid should be disclosed
separately. Cash flow arising
from interest paid and
interest and dividend
received in the case of
financial enterprise should be

25
Study on Compliance of Financial Reporting Requirements

classified as cash flow

arising from operating
activities. In the case of other
enterprises, cash flow arising
interest paid should be
classified as cash flow from
financing activities while
interest and dividends
received should be classified
as cash flow from investing
activities. Dividend paid
should classified as cash flow
from financing activities”.

The following non-compliances

were noticed in context of AS 3:

i) It was noted that the figure

of net profit which has been
used to determine the ‘cash
flow from operating
activities’, has been
derived after adjusting the
exchange rate difference
(as is evident from the
Statement of Profit and
Loss). However, being non-
cash item, such loss has
not been adjusted in the
Cash Flow Statement to
determine the ‘cash flow
from operating activities’,
as required by paragraph
20(b) of AS 3.

ii) It was further noted that for

determining the cash flow
from operating activities the
basis used is Net profit
including interest income

26
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

and dividend income. In

view of the requirement of
paragraph 30 of AS 3, it
was felt that in order to
separately disclose cash
flows arising from dividend
income and interest income
under ‘cash flow from
investing activities’, the
interest income and
dividend income credited in
the Statement of Profit and
Loss should have been
adjusted as required under
paragraph 20(c) of AS 3.
Further, after such
adjustment as per
paragraph 30 of AS 3, the
cash flows arising from
‘interest income’ and
‘dividend income’ should be
disclosed under the ‘cash
flow arising from investing
activities’. Hence, current
presentation of keeping the
dividend income and
interest income under profit
figures and therefore
showing it as ‘cash flow
from operating activities’ is
incorrect.

2. From the Cash Flow Statement It may be noted that paragraph

of a financial company it was 14 of AS 3, provides as
noted that the following items follows:
were disclosed as ’Cash Flow
from Financing Activities’ : “14. An enterprise may hold
securities and loans for dealing
or trading purposes, in which

27
Study on Compliance of Financial Reporting Requirements

 Loan repayments case they are similar to

inventory acquired specifically
 Loans disbursed for resale. Therefore, cash
flows arising from the purchase
and sale of dealing or trading
securities are classified as
operating activities. Similarly,
cash advances and loans
made by financial enterprises
are usually classified as
operating activities since they
relate to the main revenue-
producing activity of that
enterprise.(emphasis added)”

It was observed that since

company under review is a
financial enterprise, in terms of
paragraph 14 of AS 3, loans
made and repayment thereof
should have been classified as
‘cash flows from operating
activities’ rather than ‘cash
flows from financing activities’.

3. From the Annual Report of a It may be noted that as per

company it was noted that it introductory paragraph of AS 3,
was subsidiary of a listed the accounting standard is not
company, however, cash flow mandatory for Small and
statement was not prepared as Medium Sized Companies, as
part of its financial statements defined in the notification.
on the ground that it is a ’Small
and Medium Sized Enterprise’ Further it may be noted that
having regard to its turnover. paragraph 2(f) of the
Companies (Accounting
Standards) Rules, 2006, defines
Small and Medium Sized
Company as follows:

(f) “Small and Medium Sized

28
Observation on Accounting Standard (AS) 3: Cash Flow Statements

Company” (SMC) means, a

company-

(i) whose equity or debt

securities are not listed or
are not in the process of
listing on any stock
exchange, whether in India
or outside India;

(ii) which is not a bank,

financial institution or an
insurance company.

(iii) whose turnover (excluding

other income) does not
exceed rupees fifty crore in
the immediate preceding
accounting year;

(iv) which does not have

borrowing (including public
deposits) in excess of
rupees ten crore at any
time during the immediately
preceding accounting year;
and

(v) which is not holding or

subsidiary company of a
company which is not a
small and medium-sized
company.” (emphasis
added)

It was viewed that since the

company was a subsidiary of a
listed enterprise, it cannot be
considered as Small and
Medium Company in terms of
paragraph 2 (f) (v) of the

29
Study on Compliance of Financial Reporting Requirements

aforesaid Rules. Hence, AS 3

was mandatorily applicable on
the company.

4. From the Cash Flow Statement It may be noted that paragraph

given in the Annual Report of a 21 of AS 3, provides as follows:
company it has been noted that
movement in unsecured loans, “21. An enterprise should
deposits/advances, borrowing report separately major
and investment was disclosed classes of gross cash
on net basis. receipts and gross cash
payments arising from
investing and financing
activities, except to the extent
that cash flows described in
paragraph 22 and 24 are
reported on a net basis.”

It may be noted that movement

in unsecured loans/ borrowings
are cash flow arising under
financing activities and
movement in deposit/advances,
investments are cash flow
arising from investing activities.
It was noted that under the
head of ‘Cash Flow from
Financing Activities’ and ‘Cash
Flow from Investing Activities’,
the repayment/ proceeds have
been disclosed on net basis
although it was evident from the
notes to accounts that both
cash inflows as well as cash
outflows have occurred on
account of unsecured loans,
borrowings, advances, deposits
and investments. It was viewed
that, as per the aforesaid

30
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

requirement, such transactions

should be reported on gross
basis instead of net basis, by
providing separate figures of
cash flow received and paid
during the period.

5. From the Cash Flow Statement It may be noted that paragraph

given in the Annual Report of a 30 of the AS 3, provides as
non-financial company, it was follows:
noted that interest paid has
been shown under ‘Cash Flow 30. Cash flows from interest
from Operating Activities’ and dividends received and
whereas interest received has paid should each be
been shown under ‘Cash Flow disclosed separately. Cash
from Financing Activities’. flows arising from interest
paid and interest and
From the another Annual Report dividends received in the
it has been noted that dividend case of a financial enterprise
paid has been shown under should be classified as cash
‘Cash Flow arising from flows arising from operating
Investing Activities’ and activities. In the case of other
dividend received has been enterprises, cash flows
shown under ‘Cash Flow arising arising from interest paid
from Financing Activities’. should be classified as cash
flows from financing
activities while interest and
dividends received should be
classified as cash flows from
investing activities. Dividends
paid should be classified as
cash flows from financing
activities.

It was observed from the Cash

Flow Statement that the
enterprise has shown interest
paid as ‘Cash Flow from
Operating Activities’ and

31
Study on Compliance of Financial Reporting Requirements

interest received as ‘Cash Flow

from Financing Activities’. It was
viewed that since it is a non-
financial enterprise interest
paid is in the nature of ‘Cash
Flow from Financing Activities’
and not in the nature of ‘Cash
Flow from Operating Activities.’
Similarly, interest received is in
the nature of ’Cash Flow from
Investing Activities’ and not in
the nature of ’Cash Flow from
Financing Activities.’

With regard to dividend, it was

viewed that cash outflow due to
dividend paid should be shown
as ‘Cash Flow arising from
Financing Activities’ and
dividend income should be
shown as ‘Cash Flow arising
from Investing Activities’.

6. From the note on Cash and It may be noted that paragraph

Bank Balances given in the 45 of AS 3, provides as follows:
Annual Report of a company, it
has been noted that it included “45. An enterprise should
’margin money’, ’unpaid disclose, together with a
dividend account’, ‘fixed deposit commentary by management,
under lien’ and ‘earmarked the amount of significant
balances against gratuity’. cash and cash equivalent
balances held by the
enterprise that is not
available for use by it.”

It was observed that the

balance of ‘cash and cash
equivalents’ as reported in the
Cash Flow Statement is same
as that given under the Note on

32
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

‘Cash and Bank Balances’. It

was viewed that since margin
money as well as Unpaid
Dividend Account are not
readily available for use by it,
such facts should have been
disclosed by the management in
the Cash Flow Statement.

Accordingly, it was viewed that

omission of such information is
not in line with the disclosure
requirements of paragraph 45 of
AS 3.

7. From the Cash Flow Statement It may be noted that paragraph

given in the Annual Report of a 42 of AS 3, provides as
company it was noted that follows :
ONLY the Opening and the
Closing Balance of ’Cash and “42. An enterprise should
cash equivalents’, has been disclose the components of
disclosed. cash and cash equivalents
and should present a
reconciliation of the amounts
in its cash flow statement
with the equivalent items
reported in the balance
sheet.”

It was viewed that the

components of Cash and Cash
Equivalents has not been
disclosed in the Cash Flow
Statement as required under
paragraph 42 of AS 3.

8. From the Annual Report of a It may be noted that paragraph

company it was noted that the 42 of AS 3, provides that:
amount of ‘Cash and Cash
Equivalents’ disclosed in the “42. An enterprise should

33
Study on Compliance of Financial Reporting Requirements

Cash Flow Statement differed disclose the components of

from the amount disclosed in cash and cash equivalents
the note on Cash and Bank and should present a
Balances forming part of the reconciliation of the amounts
accounts. in its cash flow statement
with the equivalent items
reported in the balance
sheet.”

In the view of above and

considering the fact that the
balances disclosed under the
Cash Flow Statement and note
on Cash & Bank Balances do
not tally with each other, the
reconciliation should have been
provided as per the said
requirement.

9. From the Cash Flow Statement It was noted from the note on
given in the Annual Report of finance charges that interest
company, it was noted that net income has been netted off
interest has been shown as against interest charges to
’Cash Flow from Financing determine the final figure and
Activities.’ also that the same amount has
been reported as ’Cash Flows
arising from Financing
Activities’ in the Cash Flow
Statement. It was viewed that
netting off of interest received
against the interest paid is not
in line with the requirement of
paragraph 30 of AS 3.

It was also observed that as per

aforesaid requirement, in case
of non - financial entities, cash
flow on account of interest paid
is the ‘cash flow arising from

34
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

financing activities’ and cash

flow on account of interest
income is ‘cash flow arising
from investing activities’, hence
the gross interest paid and the
gross interest received should
have been shown separately
under ’Cash Flow from
Financing Activities’ and ’Cash
Flow from Investing Activities’
respectively.

10. The Cash Flow Statement of a It may be noted that paragraph

company seems to prima facie 30 of AS 3, provides as follows:
suggest that dividend paid by it
has been effectively disclosed “30. Cash flows from interest
as ’Cash Flow from Operating and dividends received and
Activities.’ paid should each be
disclosed separately. Cash
flows arising from interest
paid and interest and
dividends received in the
case of a financial enterprise
should be classified as cash
flows arising from operating
activities. In the case of other
enterprises, cash flows
arising from interest paid
should be classified as cash
flows from financing
activities while interest and
dividends received should be
classified as cash flows from
investing activities. Dividends
paid should be classified as
cash flows from financing
activities.”

It was noted that during the

35
Study on Compliance of Financial Reporting Requirements

current year dividend paid for

the preceding year has been
appropriated from the profit of
current year. It was noted that
such dividend has neither been
shown as liabilities under the
head ‘provisions’ nor it has
been separately shown in the
Cash Flow Statement.

Accordingly, it is not clear as to

whether the dividend has been
paid during the year or
outstanding as on Balance
Sheet date.

11. From the Cash Flow Statement It may be noted that paragraph
given in the Annual Report of a 30 of AS 3, provides as follows:
non-financial company, it has
been noted that ’interest and “30. Cash flows from interest
finance charges paid’ were and dividends received and
disclosed under ‘Cash Flow paid should each be
from Investing Activities’. disclosed separately. Cash
flows arising from interest
paid and interest and
dividends received in the
case of a financial enterprise
should be classified as cash
flows arising from operating
activities. In the case of other
enterprises, cash flows
arising from interest paid
should be classified as cash
flows from financing
activities while interest and
dividends received should be
classified as cash flows from
investing activities. Dividends
paid should be classified as

36
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

cash flows from financing

activities.”

It was noted from the Cash

Flow Statement that the interest
and finance charges paid have
been shown as ‘cash flow from
investing activities’. It was
viewed that in case of non-
financial entities, cash outflows
due to interest and finance
charges arises on financing
transactions of the enterprise,
therefore, they should be
presented as ‘cash flows from
financing activities’.

12. From the Cash Flow Statement It may be noted that clauses (e)
given in the Annual Report of a and (f) of paragraph 15 and 21
non-financial company, it has of AS 3, provide as follows:
been noted that ‘Decrease/
(increase) in long-term loans “15. The separate disclosure of
and advances’ were shown on cash flows arising from
NET basis under the head investing activities is important
’Cash Flow from Operating because the cash flows
Activities.’ represent the extent to which
expenditures have been made
for resources intended to
generate future income and
cash flows. Examples of cash
flows arising from investing
activities are:

(a) …

(b) …

….

(e) cash advances and loans

made to third parties (other than

37
Study on Compliance of Financial Reporting Requirements

advances and loans made by a

financial enterprise);

(f) cash receipts from the

repayment of advances and
loans made to third parties
(other than advances and loans
of a financial enterprise);”

“21. An enterprise should

report separately major
classes of gross cash
receipts and gross cash
payments arising from
investing and financing
activities, except to the extent
that cash flows described in
paragraph 22 and 24 are
reported on a net basis.”

It was noted from the Cash

Flow Statement that Decrease/
(increase) in long term loans
and advances has been
adjusted as working capital
changes under the head ‘cash
flow from operating activity’. It
was viewed that cash flow from
operating activities signifies
cash flows primarily occurring
due to principal revenue
generating activities of an
enterprise. However, long term
loans and advances are in the
nature of investing activity and it
cannot be considered as a part
of revenue generating activities.
Therefore, such cash flows
should not be shown under the
head ‘cash flow from operating

38
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

activities’.

Further, it was also noted that

such cash flows have been
shown on net basis. It was
viewed that separate figures of
gross receipts and repayments
of long term loans and
advances, should have been
shown as required under
paragraph 21 of AS 3.

Accordingly, it was viewed that

the requirements of AS 3 have
not been complied with.

13. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 6 of AS 3 requires as follows:
the amount of ‘Cash and Cash
Equivalents’ disclosed in the “6. Cash equivalents are held
Cash Flow Statement agreed for the purpose of meeting
with the amount shown as short-term cash commitments
‘Cash and Bank Balances in the rather than for investment or
Balance Sheet, which included other purposes. For an
deposits with maturity of more investment to qualify as a cash
than three months and more equivalent, it must be readily
also. convertible to a known amount
of cash and be subject to an
insignificant risk of changes in
value. Therefore, an investment
normally qualifies as a cash
equivalent only when it has a
short maturity of, say, three
months or less from the date of
acquisition. Investments in
shares are excluded from cash
equivalents unless they are, in
substance, cash equivalents; for
example, preference shares of
a company acquired shortly

39
Study on Compliance of Financial Reporting Requirements

before their specified

redemption date (provided there
is only an insignificant risk of
failure of the company to repay
the amount at maturity).”

From the above, it was viewed

that deposits with original
maturity of 3 months or less
should be considered as cash
and cash equivalents and
remaining deposits should be
classified as ‘other bank
balances’. However, it was
observed that the balance of
‘Cash and cash equivalents’ as
reported in the Cash Flow
Statement is same as that
reported under the note of
‘Cash and Bank Balances’
which indicates that the
‘deposits with maturity for more
than 12 months’ and ‘deposits
with maturity for more than 3
months’ but less than 12
months have also been
considered as a part of cash
equivalents. Hence, it was
viewed that cash and cash
equivalents as considered for
the cash flow statement is not in
line with the requirement of
paragraph 6 of AS 3.

14. From the Cash Flow Statement It may be noted that paragraphs
given in the Annual Report of a 17 and 40 of AS 3, inter alia,
company, it has been noted that provide as follows:
increase in share capital and
repayment of debts were shown “17. The separate disclosure of

40
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

as ’Cash Flow from Financing cash flows arising from

Activities.’ However, in terms of financing activities is important
a Scheme of Compromise because it is useful in predicting
approved by the Honorable claims on future cash flows by
High Court, shares were issued providers of funds (both capital
for cash to the investor and and borrowings) to the
shares were also issued to in enterprise. Examples of cash
lieu of conversion of debt. flows arising from financing
activities are:

(a) cash proceeds from issuing

shares or other similar
instruments;

(b) …

(c) …

“40. Investing and financing

transactions that do not
require the use of cash and
cash equivalents should be
excluded from a cash flow
statement.”

It was observed that the

company had issued share
capital during the year in terms
of scheme of compromise
approved by Hon’ble High
Court, which included issue of
shares in favour of an Investor
against equity share capital
brought in by them and also
issue of shares on conversion
of debt into equity.

It was viewed that conversion of

debt into equity is a non cash
item, therefore, such
transaction should be excluded

41
Study on Compliance of Financial Reporting Requirements

from the cash flow statement as

per the requirement of
paragraph 40 of AS 3 and only
those transactions which
involves receipt/payment of
cash should be reported in the
Cash Flow Statement as per the
requirement of paragraph 17 of
AS 3.

15. From the Cash Flow Statement It may be noted that paragraph
given in the Annual Report of a 20(a) and (c) of AS 3, provides
company, it was noted that,’ as follows:
(increase)/decrease in loans
and advances’ and ’increase/ “20. Under the indirect method,
(decrease) in current liabilities the net cash flow from operating
and provisions’ were disclosed activities is determined by
under the head ‘Cash Flow from adjusting net profit or loss for
Investing Activities’. the effects of:

(a) changes during the period

in inventories and
operating receivables and
payables;

(b) …

(c) all other items for which the

cash effects are investing
or financing cash flows.”

It was observed from the Cash

Flow Statement that Increase/
(decrease) in loans & advances
and (Increase)/ decrease in
current liabilities & provisions
have been adjusted as ‘cash
flow from investing activities’. It
was viewed that
increase/decrease in current

42
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

liabilities and provisions are

changes in the payables, which
should be adjusted to determine
‘cash flow from operating
activities’. Further, changes in
loans and advances, if not in
the nature of financing activity
or investing activity, should also
be adjusted to determine cash
flow from operating activity as
required under paragraph 20(a)
& (c) of AS 3.

16. From the Cash Flow statement It may be noted that paragraph
given in the Annual Report of a 18(b) of AS 3, provides as
company, it was noted that follows:
exchange fluctuation reserve &
hedging reserve have been “18. An enterprise should
adjusted to net profit before tax. report cash flows from
operating activities using
either:

(a) …

(b) the indirect method,

whereby net profit or loss is
adjusted for the effects of
transactions of a non-cash
nature, any deferrals or
accruals of past or future
operating cash receipts or
payments, and items of
income or expense
associated with investing or
financing cash flows.”

It was observed from Cash Flow

Statement that exchange
fluctuation reserve as well as
hedging reserve has been

43
Study on Compliance of Financial Reporting Requirements

adjusted to the Net profit before

tax to determine the ‘cash flow
from operating activities’. It was
further observed that such
reserves were not reflected in
the Statement of Profit and
Loss. It was viewed that the
company is following indirect
method for reporting cash flows
from operating activities
according to which profit after
tax is adjusted for calculating
cash flows from operations. It
was viewed that since such
reserves have not been routed
through the Statement of Profit
and Loss, accordingly, these
should not have been adjusted
for arriving at the operating
profits before working capital
changes in the cash flow
statement.

Accordingly, it was viewed that

the Cash Flow Statement has
not been prepared in
accordance with AS 3.

17. From the Annual Report of a It may be noted that as per

company which proposes to list introductory paragraph of AS 3,
its share on the stock exchange the accounting standard is not
had not included the Cash Flow mandatory for Small and
Statement as part of its financial Medium Sized Companies, as
statement on the ground that it defined in the notification.
is a small and medium sized
company. Further, it may be noted that
paragraph 2(f) of Companies
(Accounting Standards) Rules,
2006, defines Small and

44
Observation on Accounting Standard (AS) 3: Cash Flow Statements

Medium Sized Company as

follows:

(f) “Small and Medium Sized

Company” (SMC) means, a
company-

(i) whose equity or debt

securities are not listed
or are not in the process
of listing on any stock
exchange, whether in
India or outside India;
(emphasis added)

(ii) which is not a bank,

financial institution or an
insurance company.

(iii) whose turnover (excluding

other income) does not
exceed rupees fifty crore in
the immediate preceding
accounting year;

(iv) which does not have

borrowing (including public
deposits) in excess of
rupees ten crore at any
time during the immediately
preceding accounting year;
and

(v) which is not holding or

subsidiary company of a
company which is not a
small and medium-sized
company.” (emphasis
supplied)

It was observed from the

45
Study on Compliance of Financial Reporting Requirements

Director’s report that the

company under review is in the
process of listing, hence it was
viewed that it cannot be
considered as Small and
Medium Sized Company.
Hence, AS 3 was mandatorily
applicable on the company.
Non-preparation of Cash Flow
Statement is a non-compliance
of AS 3.

18 From the Annual Report of a It may be noted that paragraph

company, it was noted that the 25 of AS 3, provides as follows:
Cash and Bank balances
included balances in foreign “25. Cash flows arising from
currencies. However, there transactions in a foreign
was no adjustment shown in the currency should be recorded
Cash and Cash Equivalent for in an enterprise’s reporting
’exchange rate difference’ in the currency by applying to the
Cash Flow Statement. foreign currency amount the
exchange rate between the
reporting currency and the
foreign currency at the date
of the cash flow. A rate that
approximates the actual rate
may be used if the result is
substantially the same as
would arise if the rates at the
dates of the cash flows were
used. The effect of changes in
exchange rates on cash and
cash equivalents held in a
foreign currency should be
reported as a separate part of
the reconciliation of the
changes in cash and cash
equivalents during the

46
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

period.” (emphasis added)

It was observed from the note

of Cash and Bank Balances that
balances in EEFC account are
held in foreign currency,
however, the effect of changes
in exchange rates thereon has
not been reported as a separate
part of reconciliation of changes
in cash and cash equivalents
while reporting cash flows in
Cash Flow Statement. This is
not in accordance with the
requirement of paragraph 25 of
AS 3.

19 From the notes to accounts It may be noted that Paragraph

given in the Annual Report of 20 (b) of AS 3 provides as
some companies, the following follows:
has been noted:
“20. Under the indirect method,
 The provision for doubtful the net cash flow from operating
debts, advances written off activities is determined by
and unrealised foreign adjusting net profit or loss for
exchange gain has been the effects of:
reported in the Statement
of Profit and Loss. …

 Certain amount of (b) non-cash items such as

miscellaneous expenditure depreciation, provisions,
has been written off during deferred taxes, and
the year which includes unrealised foreign
preliminarily expenses and exchange gains and
deferred revenue losses; and
expenditure. (c) all other items for which
the cash effects are
investing or financing cash
flows.

47
Study on Compliance of Financial Reporting Requirements

…”

It was observed that although

non-cash items such as
provision for doubtful debts,
advances written off, unrealised
foreign exchange gain and
writing off miscellaneous
expenditure have been reported
in the Statement of Profit and
Loss, however, they have not
been adjusted against ‘Net
Profit before tax & extraordinary
items in the Cash Flow
Statement while deriving the
Cash Flow from Operating
Activities.

20 From the Cash Flow Statement It may be noted that paragraph

given in the Annual Report of a 15 (e) of AS 3, states as
non-financial company, it was follows:
noted that loans and advances
given to a subsidiary have been “15. The separate disclosure of
disclosed under “Cash Flow cash flows arising from
from Financing Activities.” investing activities is important
because the cash flows
represent the extent to which
expenditures have been made
for resources intended to
generate future income and
cash flows. Examples of cash
flows arising from investing
activities are:

(a) …

(b) …

(c) …

48
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

(d) …

(e) cash advances and loans

made to third parties
(other than advances and
loans made by a financial
enterprise);”

It was observed that the

company has given loans as
well as advance to the
subsidiary. It was noted that the
loans given to the subsidiary
have been disclosed under the
head ‘cash flow from financing
activity’ instead of disclosing it
under ‘cash flow from investing
activity’ as stated above in
Paragraph 15 (e) of AS 3.

21 From the note of advances and It may be noted that paragraph

the Cash Flow Statement given 34 of AS 3, provides as follows:
in the Annual Report of a
company, it has been noted that “34. Cash flows arising from
although the company had paid taxes on income should be
income tax during the year, no separately disclosed and
adjustment thereof was shown should be classified as cash
in the Cash Flow Statement. flows from operating
activities unless they can be
specifically identified with
financing and investing
activities.”

It was observed from the note of

Loans and Advances that
certain taxes have been paid in
advance during the reported
period, however, the Cash Flow
Statement reports the same as
Nil. Accordingly, it was viewed

49
Study on Compliance of Financial Reporting Requirements

that the cash flows arising due

to taxes have not been reported
correctly in the Cash Flow
Statement.

22 From the Cash Flow Statement It may be noted that paragraphs

given in the Annual Report of a 15 and 21 of AS 3, provide as
company, it was noted that follows:
under the head ’Cash Flow from
Investing Activities’ disclosure “15. The separate disclosure of
was made for purchase of fixed cash flows arising from
assets, net of reimbursements investing activities is important
under co-development because the cash flows
arrangements.’ represent the extent to which
expenditures have been made
for resources intended to
generate future income and
cash flows. Examples of cash
flows arising from investing
activities are:

a) Cash payments to acquire

fixed assets (including
intangibles). These
payments include those
relating to capitalised
research and development
costs and self constructed
fixed assets.

b) …

c) …

d) …

e) Cash advances and loans

made to third parties (other
than advances and loans
made by a financial

50
Observation on Accounting Standard (AS) 3: Cash Flow Statements

enterprise)

f) Cash receipts from the

repayment of advances and
loans made to third
parties(other than
advances and loans of a
financial enterprise);”

“21. An enterprise should

report separately major
classes of gross cash
receipts and gross cash
payments arising from
investing and financing
activities, except to the extent
that cash flows described in
paragraph 22 and 24 are
reported on a net basis.”

From the above, it was noted

that cash flows from investing
and financing activities should
be reported on gross basis until
or unless cash receipts or
payments are on behalf of
customers and their turnover is
quick involving short maturities
and large amounts. It was
viewed that loans given to third
parties or investment in fixed
assets cannot be considered to
be transactions with quick
turnover; hence, such cash
flows should be reported on
gross basis.

It was further noted that cash

flows on account of purchase of
fixed assets have been shown

51
Study on Compliance of Financial Reporting Requirements

on net of reimbursement basis.

It was observed from note of
Fixed assets that certain
addition of fixed assets has
been funded by co-development
partner. It was viewed that as
per AS 3 ‘cash flow arising from
investing activities’ indicate the
cash flows that represent extent
of expenditure which have been
made for resources intended to
generate benefit in future.
Hence, the investment made in
fixed asset should have been
reported on gross basis and the
portion by co-development
partner should be disclosed
under the head ‘Cash Flow from
Financing Activities’.

Thus, it was viewed that the

requirements of AS 3 have not
been complied with.

23 From the Cash Flow Statement It was noted from the Cash
given in the Annual Report of a Flow Statement that fixed
company it was noted that ’fixed assets lost due to robbery have
assets lost due to robbery’ been shown as cash outflow
were disclosed under the head under the head ‘Cash Flow from
’Cash Flow from Investing Investing Activities’. It was
Activities.’ viewed that loss of fixed assets
due to theft / robbery is a non-
cash transaction, hence, it
should have been excluded
from Cash Flow Statement as
explained in paragraph 40 of AS
3, reproduced below:

“40. Investing and financing

52
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

transactions that do not

require the use of cash or
cash equivalents should be
excluded from a cash flow
statement. Such transactions
should be disclosed
elsewhere in the financial
statements in a way that
provides all the relevant
information about these
investing and financing
activities.”

It was further noted that loss on

fixed assets lost in robbery has
already been adjusted to
determine ‘cash flow from
operations’. Hence, showing
separate cash outflow for same
loss which is a non-cash
transaction would be
unwarranted.

24 From the Cash Flow Statement It was noted from the note on
and note of Loans and short term loan and advance
Advances given in the Annual that inter corporate loan were
Report of a company, it was given to the holding company,
noticed that adjustment for however, cash flows arising
‘(Increase)/decrease in loans & thereon have not been
advances’, which include separately shown as Cash
corporate deposits, was made Flow from Investing Activities.
under the ‘cash flow from In fact, it has been shown as an
operating activities’ in cash flow adjustment of working capital
statement. under the head (increase)/
decrease in loans and advances
and other current assets to
determine Cash Flow from
Operating Activities. It was
viewed that being non-financial

53
Study on Compliance of Financial Reporting Requirements

enterprise, showing such cash

flows as part of operating
activities is not in line with
paragraph 15 of AS 3, which is
reproduced below:

“15. The separate disclosure of

cash flows arising from
investing activities is important
because cash flows represent
the extent to which
expenditures have been made
for resources intended to
generate future income and
cash flows. Examples of cash
flows arising from investing
activities are:

(a) …

(e) Cash advances and

loans made to third parties
(other than advances and loans
made by a financial
enterprise)”.

25 From the Cash Flow Statement It may be noted that paragraphs

given in the Annual Report of a 5.4 and 5.5 of AS 3, define
bank, it has been noted that net ‘operating activities’ and
’(Increase)/Decrease in ‘financing activities’ as follows:
Investments’ has been
disclosed under the head ’Cash “5.4 Operating activities are
Flow from Operating Activities.’ the principal revenue-
producing activities of the
Further, it has been noted from enterprise and other activities
the note on Investments that it that are not investing or
also includes ’Held to maturity’ financing activities.
investments.
5.5 Investing activities are the
acquisition and disposal of

54
Observation on Accounting Standard (AS) 3: Cash Flow Statements

long-term assets and other

investments not included in
cash equivalents”.

From the above, it was viewed

that cash flow from operating
activities signifies cash flows
primarily derived from main
revenue generating activities of
an enterprise.

It was noted from Cash Flow

Statement of the bank that cash
flows from investments have
been classified as ’Cash Flow
from Operating Activities’. It
was further noted from
accounting policy of
‘Investments’ that the
investments in subsidiary/ joint
ventures/ regional rural banks
are investments ‘Held to
maturity’. It was viewed that
only the cash flows arising from
purchase/sale of investments
which are in the nature of
‘available for sale and held for
trading’ should be classified as
‘Cash Flow from Operating
Activities’ and those acquired
on account of sale/ purchase of
‘held to maturity’ investments
should not be considered as
cash flow from revenue
generating activity of the bank
due to its long term nature.
Such activities are in the nature
of investing activities and

55
Study on Compliance of Financial Reporting Requirements

therefore should be classified

as ‘Cash Flow from Investing
Activities’.

26 From the Cash Flow Statement It may be noted that paragraphs

given in the Annual Report of a 5.1 and 5.2 of AS 3, define
company, it has been noted that ‘Cash’ and ‘Cash equivalents’
amount of Cash and Cash as follows:
Equivalents included ’interest
accrued on fixed deposits’. “5.1 Cash comprises cash on
hand and demand deposits
with banks.

5.2 Cash equivalents are

short term, highly liquid
investments that are readily
convertible into known
amounts of cash and which
are subject to an insignificant
risk of changes in value.”

From the above, it was viewed

that the cash and cash
equivalents includes the cash,
balances with banks, demand
deposits and investments that
are readily convertible into
known amounts of cash.

It was viewed that although

such income has been earned,
it is not due for payment as on
the Balance Sheet date. Hence,
it is neither cash nor cash
equivalent nor held as bank
balance. Therefore, its
disclosure under the head of
cash and cash equivalents is
not appropriate.

56
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

27 From the Cash Flow Statement It was observed that the

and the note of Cash and Bank balance of ‘Cash and Cash
Balances given in the Annual Equivalents’ reported in the
Report of a company, it has Cash Flow Statements is same
been noted that ’cash and cash as that reported in the balance
equivalents’ include fixed sheet as ‘Cash and Bank
deposits pledged as security Balance’. It was further noted
against loans and guarantees. that stated balance includes
‘Deposits pledged with bank
against borrowings and
guarantees issued’. It was
viewed that fixed deposits
pledged against borrowings or
guarantees issued cannot be
treated as ‘Cash equivalents’ as
defined in paragraph 5.2 of AS
3.

28 From the Cash Flow Statement It was noted from the Cash
given in the Annual Report of a Flow Statement that the
company, it was noted that aggregate amount of cash
ONLY the aggregate amount of outflows has been reported as
’Cash Flow from Investing ‘Cash Flow from Investing
Activities’ has been disclosed. Activities’. It was viewed that
the nature of activities that give
rise to such cash flows has not
been disclosed, though it is
required to be disclosed as per
the requirements of paragraph
21 of AS 3, as reproduced
below:

“21. As enterprise should

report separately major
classes of gross cash
receipts and gross cash
payments arising from
investing and financing
activities, except to the extent

57
Study on Compliance of Financial Reporting Requirements

the cash flows described in

paragraph 22 and 24 are
reported on net basis.”

29 From the Cash Flow Statement It was noted that the ‘Profit
and the Statement of Profit and before tax’ used for determining
Loss given in the Annual Report ‘Cash flow from operations’
of a company, it was noted that included ‘Profit on sale of
Profit before tax also included Investments’. It was further
profit on sale of investments. noted that such gain being item
of income associated with
investing activity, has not been
adjusted to determine
‘Operating Profit before Working
Capital Changes’ although
gross cash flow from sale of
investments have been
separately disclosed. This
presentation of Cash Flow
Statement is not in accordance
with requirements of paragraph
18(b) of AS 3 which states as
follows:

“18. An enterprise should

report cash flows from
operating activities using
either:

(a) …

(b) the indirect method,

whereby net profit or loss is
adjusted for the effects of
transactions of a non-cash
nature, any deferrals or
accruals of past or future
operating cash receipts or
payments, and items of
income or expense

58
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

associated with investing or

financing cash
flows(emphasis supplied)”.

30 From the Cash Flow Statement It may be noted that paragraph

and Statement of Profit and 15 (b) of AS 3, provides as
Loss given in the Annual Report follows:
of a company, it was noted that
company had purchased and “15. The separate disclosure of
sold some fixed assets during cash flows arising from
the year on which it had made investing activities is important
profit. because the cash flows
represent the extent to which
expenditures have been made
for resources intended to
generate future income and
cash flows. Examples of cash
flows arising from investing
activities are:

(a) Cash payments to acquire

fixed assets (including
intangibles)…;

(b) Cash receipt from disposal

of fixed assets (including
intangibles)…”

It was noted from the note on

fixed assets read with note on
‘other income’ that during the
year certain fixed assets were
sold. However, in the Cash
Flow Statement the cash flows
that occurred ONLY on account
on purchases of fixed assets
were reported. It was viewed
that paragraph 15(b) of AS 3
requires to separately report
cash flows pertaining to

59
Study on Compliance of Financial Reporting Requirements

acquisition and disposal of fixed

assets.

31 From the Cash Flow Statement It was noted that components

and notes to accounts given in of cash and cash equivalents
the Annual Report of a that have been disclosed in the
company, it was noted that the Cash Flow Statement, inter alia
amount of ’Cash and Cash include cash credit balances
Equivalent’ as disclosed in the which is part of secured
Cash Flow Statement has been borrowings as well as interest
arrived after considering the accrued and due which is
credit balance in ’cash credit classified as ‘other current
account’ and ’interest accrued liabilities’ in the balance sheet.
thereon.’ It was viewed that cash and
cash equivalents are
investments that are readily
convertible into known amounts
of cash. However, neither cash
credit balance nor interest
accrued & due are in the nature
of investments. Accordingly,
their inclusion as ‘Cash and
Cash Equivalents’ for the
purpose of Cash Flow
Statement is not in accordance
with the requirement of
paragraph 5.2 of AS 3.

32 From the Cash Flow Statement It may be noted that Paragraphs

of a non-financial company, it 21 and 30 of AS 3, provide as
has been noted that under follows:
’Cash Flow from Financing
Activities’, the loan amount was “21. An enterprise should
disclosed net of interest report separately major
received. classes of gross cash
receipts and gross cash
payments arising from
investing and financing
activities except to the extent

60
Observation on Accounting Standard (AS) 3: Cash Flow Statements

that cash flows described in

paragraphs 22 and 24 are
reported on a net basis.”

“30. Cash flows from interest

and dividends received and
paid should each be
disclosed separately. Cash
flows arising from interest
paid and interest and
dividends received in the
case of a financial enterprise
should be classified as cash
flows arising from operating
activities. In the case of other
enterprises, cash flows
arising from interest paid
should be classified as cash
flows from financing
activities while interest and
dividends received should be
classified as cash flows from
investing activities. Dividends
paid should be classified as
cash flows from financing
activities.”

It was viewed that as per

paragraph 30 of AS 3, in case
of non financial enterprise, cash
flows arising due to ‘interest
income’ are ‘cash flow arising
from investing activities’.
Hence, adjusting such income
to report cash flows occurring
under financing activities is not
a correct presentation of cash
flows occurring under these
activities.

61
Study on Compliance of Financial Reporting Requirements

33 From the Cash Flow Statement It may be noted that paragraph

of a company, it has been noted 40 of AS 3, provides as follows:
that the amount of ’Proceeds
from issue of shares’ shown “40. Investing and financing
under the head ’Cash Flow from transactions that do not
Financing Activities’ differed require the use of cash or
from the amount disclosed in cash equivalents should be
the Share Capital note. excluded from a cash flow
Similarly, there was a difference statement. Such transactions
in the amount shown as should be disclosed
‘repayment of loans.’ elsewhere in the financial
statements in a way that
provides all the relevant
information about these
investing and financing
activities.”

The following discrepancies

have been noted with regard to
Cash Flow Statement:

(i) It was noted from note

relating to Share Capital
that during the year the
shares were reported to be
issued for an amount
higher than that disclosed
in the Cash Flow
Statement under the ‘Cash
Flow from Financing
Activities’. It was viewed
that in case if balance
shares were issued for
consideration other than
cash, it should have been
disclosed separately in the
financial statements as
required by paragraph 40
of AS 3.

62
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

(ii) It was, further, noted from

note relating to Short Term
Borrowings that the
outstanding balance of Rs.
XX lakhs as at the end of
previous year has been
reduced to nil as at the
end of the current year,
which indicates that stated
borrowings were repaid
during the year. However,
in the Cash Flow
Statement the payments
reported against short
term borrowings under the
‘Cash Flow from Financing
Activities’ was less than
the opening balance of
short term borrowings. It
was viewed that if debt
had been repaid in a mode
other than cash viz shares
issued, the same should
be disclosed separately as
required in paragraph 40
of AS 3.

Accordingly, it was viewed that

the information relating to
transactions involving
significant amount have not
been properly disclosed and the
requirement of AS 3 has also
not been complied with.

34 From the Cash Flow Statement It may be noted that paragraph

of a financial company it has 17 of AS 3, provides as follows:
been noted that changes in
’borrowings’ (including debt “17. The separate disclosure of
cash flows arising from

63
Study on Compliance of Financial Reporting Requirements

raised for Tier II Capital) were financing activities is important

disclosed under ’Cash Flow because it is useful in predicting
from Financing Activities’. claims on future cash flows by
providers of fund (both capital
and borrowings) to the
enterprise. Examples of cash
flows arising from financing
activities are:

(a) cash proceeds from

issuing shares or other
similar instruments;

(b) cash proceeds from

issuing debentures, loans,
notes, bonds, and other
short or long-term
borrowings; and

(c) cash repayments of

amounts borrowed.”

It was noted from the Cash

Flow Statement that while
reporting Cash Flow from
Operating Activities, cash flows
from borrowings have been
included therein. It was further
noted from note of Borrowings
that there are borrowings in the
nature of capital instruments. It
was viewed that cash flow on
account of borrowings in case
of all enterprises whether
financial or non-financial
enterprises, should be
presented as cash flow from
‘financing activities’ as the
definition of ‘financing activities’
in AS 3 does not make any
distinction between financial

64
 Observation on Accounting Standard (AS) 3: Cash Flow Statements

and non-financial enterprises.

Accordingly, classifying cash
flows of borrowings as
‘operating activities’ is not line
with AS 3.

It may be noted that stated view

is also supported by the Expert
Advisory Opinion on Query No.
31 of Compendium of Opinions
Volume No. XXIX.

35. From the Note on Non-Current It may be noted that paragraph

Investments as well as its 37 of AS 3, provides that:
footnote, it has been noted that
during the year all the equity “37. The aggregate cash
shares in three enterprises flows arising from
were purchased, thus, acquisitions and from
acquiring wholly owned disposals of subsidiaries or
subsidiaries. It was further other business units should
noted from the cash flow be presented separately and
statement that the difference classified as investing
between opening and closing activities.”
balances of ‘investments in It was viewed that since such
subsidiaries’ have been shown flows results into acquisition of
as ‘purchase of investments’ in subsidiaries, it should have
the Cash Flow Statements. been presented separately
clearly indicating the nature of
cash flows or explained in
aforesaid requirement rather
than using generic head
‘purchase of investments’.

Accordingly, it was viewed that

the requirements of paragraph
37 of AS 3, have not been
complied with.

65
 4
Observations on Accounting Standard (AS) 4:
Contingencies and Events Occurring After the
Balance Sheet Date
S. Matters contained in the Observations
No Annual Report

1. In the Annual Report of a It may be noted that paragraph

company the following note is 9.2 of AS 4, states as follows:
appearing :
“9.2 If a contingent loss is not
“Cheques received from XYZ provided for, its nature and an
Marketing Services Pvt. Ltd. estimate of its financial effect
were dishonored during the year. are generally disclosed by way
The company has initiated legal of note unless the possibility
proceedings against the said of a loss is remote (other than
party u/s 138 of the Negotiable the circumstances mentioned
Instruments Act. The in paragraph 5.5). If a reliable
management is confident of estimate of the financial effect
recovery of the dues and hence cannot be made, this fact is
no provision is required.” disclosed.”

It was viewed that since the

company has initiated legal
proceedings against the party,
there was a possibility of
existence of a contingent loss
though the management was
confident of recovery of the
dues. Therefore, the
requirements of paragraph 9.2 of
AS 4 are applicable. It was
viewed that although nature of
contingent loss has been

66
Observations on Accounting Standard (AS) 4 : Contingencies…

disclosed, an estimate of its

financial effect has not been
disclosed in the note.

Accordingly, disclosure is not in

line with the requirements of
paragraph 9.2 of AS 4.

67
 5
Observations on Accounting Standard (AS) 5:
Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies
S. Matters contained in the Observations
No Annual Report

1. From the Annual Reports of It may be noted that paragraph 5

some companies, it has been of AS 5, provides as follows:
noted that the following items of
income and expenditure have “5. All the items of income and
been directly credited/debited to expense which are recognised
Reserves and Surplus: in a period should be included
in the determination of net
 Gain on commutation of profit or loss for the period
Sales Tax Deferral Loan unless an Accounting
Standard requires or permits
 Short provision for Bonus otherwise.”
 Provision for Income Tax It was noted that short provision
relating to earlier years for bonus and provision for
 Investment Written Off income tax relating to earlier
years have been directly debited
to Reserves and Surplus. Such
liability may have arisen either
as a result of error/omissions in
the preparation of financial
statements of one or more prior
periods or that there were
circumstances in the current
period that have determined the
liability in the current period
though related to previous

68
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

period. It was viewed that in

either case, these expenses
should be included in
determination of profit or loss of
the current period. Similarly,
investment written off is also an
expenditure of the current
period. With regard to gain on
commutation of sales tax
deferral loan, it may also be
noted that Query no. 21 of
Volume XXIII of the Expert
Advisory Committee of ICAI
provides that the credit arising
on premature repayment of
accumulated sales tax liability
should be credited to the
Statement of Profit and Loss of
the period, disclosing the nature
and amount distinctly.

Accordingly, it was viewed that

all these items should be
recognised in the Statement of
Profit and Loss as required
under paragraph 5 of AS 5.

2. From the Annual Report of a It may be noted that paragraph 8

company, it has been noted that of AS 5, provides that:
certain extra ordinary items have
been disclosed in the Cash Flow “8. Extraordinary items should
Statement under cash flow from be disclosed in the statement
operating activities. However, no of profit and loss as a part of
extra ordinary item has been net profit or loss for the
disclosed in the Statement of period. The nature and the
Profit and Loss. amount of each extraordinary
item should be separately
disclosed in the Statement of
Profit and Loss in a manner

69
Study on Compliance of Financial Reporting Requirements

that its impact on current

profit or loss can be
perceived.”

It was observed that whereas

certain extraordinary items have
been disclosed in the Cash Flow
Statement, no such disclosure
has been made in the Statement
of Profit and Loss and
consequently, its impact on the
current profit cannot be
perceived properly.

Accordingly, it was viewed that

the requirement of paragraph 8
of AS 5 has not been complied
with.

3. In the Annual Reports of some It may be noted that paragraph

companies following information 15 of AS 5, provides that:
have been disclosed with regard
to prior period items: “15. The nature and amount of
prior period items should be
 Prior period income – shown separately disclosed in the
under Other Income statement of profit and loss in
a manner that their impact on
 Priorperiod expenses – the current profit or loss can
shown under Selling and be perceived.”
Administration Expenses
It was noted that prior period
 Prior period expenses– income/ expenses/ adjustments
shown in Profit and Loss have been disclosed either in
Account the Statement of Profit and Loss
 Prior period adjustments or in the notes forming part
(Net) – shown below Profit thereof. However, the nature of
after Tax such income/expenses/
adjustments has not been
 Prior period income – disclosed as required by

70
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

included in revenue paragraph 15 of AS 5.

 Prior period expenses –

included in infrastructure
expenses

4. In the Annual Report of a It may be noted that paragraphs

company, prior period expenses 12 and 15 of AS 5, state as
and exceptional items have been follows:
shown as one line item in the
Statement of Profit and Loss. “12. When items of income
and expense within profit or
loss from ordinary activities
are of such size, nature or
incidence that their disclosure
is relevant to explain the
performance of the enterprise
for the period, the nature and
amount of such item should
be disclosed separately.”

“15. The nature and amount of

prior period items should be
separately disclosed in the
statement of profit and loss in
a manner that their impact on
the current profit or loss can
be perceived.”

It may be further noted that Part

II of Revised Schedule VI to
Companies Act, 19563 also
requires separate disclosure of
exceptional items.

Thus, it was viewed that ‘prior

period items’ and ‘exceptional
items’ should be shown as

3Subsequent to the observations of the Board, Revised Schedule VI has been withdrawn.
However, content is still relevant in terms of Schedule III to Companies Act, 2013.

71
Study on Compliance of Financial Reporting Requirements

separate line items in the

Statement of Profit and Loss.

Accordingly, it was viewed that

presenting prior period expenses
and exceptional items as one
line item in the Statement of
Profit and Loss is not in
accordance with the
requirements of AS 5 as well as
Revised Schedule VI to
Companies Act, 1956.

5. In the Annual Report of a It may be noted that paragraph

company, ‘Sundry Balances 4.3 of AS 5, states that:
written off’ has been disclosed as
prior period adjustment. “4.3 Prior period items are
income or expenses which
arise in the current period as a
result of errors or omissions
in the preparation of the
financial statements of one or
more prior periods”.

It was noted that the prior period

adjustments include the amount
of sundry balances written off. It
was viewed that sundry
balances recognised in prior
years but written off in the
current year should not be
considered as prior period item
because such writing off has not
arisen due to any error or
omission in preparation of
financial statements of prior
period/s. In fact there has been
a change in estimate or change
in circumstances due to which
company has decided to write

72
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

off these balances in the current

year.

Hence, it was viewed that

presenting sundry balances
written off as prior period
adjustment is not in line with the
requirement of AS 5.

6. In the Annual Report of a couple It may be noted that paragraph 5

of companies, the following of AS 5, provides as follows:
items of income/expenses have
been shown in the Statement of “5. All the items of income and
Profit and Loss under the head expense which are recognised
appropriations/ below the line: in a period should be included
in the determination of net
 Provision of earlier profit or loss for the period
years taxation unless an Accounting
Standard requires or permits
 Write back of debts and otherwise.”
sales tax dues
It was viewed that provision for
earlier years taxation is an
expense whereas write back of
debts and sales tax dues is an
income, both of which should be
included in the determination of
net profit for the period instead
of showing them as
appropriations/below the line,
which would result in
overstatement/ understatement
of current year’s net profit.

Further, it was not clear whether

such liability or reversal thereof
has arisen as a result of
error/omissions in the
preparation of financial
statements of one or more prior

73
Study on Compliance of Financial Reporting Requirements

periods in order to treat them as

prior period items. Even if these
items are considered as prior
period items, these should be
disclosed in the Statement of
Profit and Loss in a manner that
their impact on the current
year’s profit can be perceived
as per the requirements of
paragraph 15 of AS 5.

7. In the Annual Report of a It may be noted thatparagraph

company, profit from sale of its 12 of AS 5,provides that:
division has been shown as
‘short term capital gain’ under “12. When items of income
the head ‘Other Income’. and expense within profit or
loss from ordinary activities
are of such size, nature or
incidence that their disclosure
is relevant to explain the
performance of the enterprise
for the period, the nature and
amount of such items should
be disclosed separately.”

It was noted that paragraph 12

of AS 5 prescribes to show only
those items of income and
expenses separately, which are
of such size and nature that their
separate disclosure would better
explain the performance of the
enterprise. Further, paragraph
14 of AS 5 enumerates
circumstances which may give
rise to a need for separate
disclosure, which inter alia
include disposal of items of fixed
assets, disposals of long-term

74
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

investments, restructuring of the

activities of an enterprise etc.
Even Part II of Revised
Schedule VI to the Companies
Act, 19564 requires separate
disclosure of exceptional items.

Having regard to the nature of

the transaction and the
significant amount involved, it
was viewed that it should have
been disclosed as an
‘exceptional item’ as per the
requirements of paragraph 12 of
AS 5 as well as Part II of
Revised Schedule VI

It was further observed that the

profit on sale of the division has
been disclosed as short term
capital gain. It may be noted that
in accounting parlance any
excess of consideration over the
book value of an asset is either
a gain or profit. It is, accordingly,
viewed that such nomenclature
like short term capital gain
should be avoided.

8. From the Annual Reports of It may be noted that paragraphs

some companies, it has been 4.1 and 12 of AS 5, provide that:
noted that the following items of
income/expenses have been “4.1 Ordinary activities are
disclosed in the Statement of any activities which are
Profit and Loss as exceptional undertaken by an enterprise
items: as part of its business and
such related activities in

4Subsequent to the observations of the Board, Revised Schedule VI has been withdrawn.
However, content is still relevant in terms of Schedule III to Companies Act, 2013.

75
Study on Compliance of Financial Reporting Requirements

 Gain on Finance Lease which the enterprise engages

Arrangement in furtherance of, incidental
to, or arising from, these
 Write back of compensation activities.”
under employee stock
option scheme “12. When items of income
and expense within profit or
 Loss on fair valuation of a loss from ordinary activities
derivative contract are of such size, nature or
 Foreign Currency incidence that their disclosure
Translation Reserve written is relevant to explain the
off performance of the enterprise
for the period, the nature and
 Foreign Exchange amount of such items should
Fluctuation Difference be disclosed separately.”

 Gain on payment of FCCB It was observed that the

transactions referred to in these
 Tax impact on credit/charge cases have arisen from ordinary
in respect of exceptional activities of the enterprises.
items Further, the size of these
transactions does not warrant
their classification as
‘exceptional items’. Therefore, it
was viewed that presentation of
these transactions as
exceptional items is not in line
with the requirements of AS 5.

It was further noted that in one

case tax impact of exceptional
items has been separately
deducted under the head
‘exceptional items’. In other
words, their impact is not
considered when current tax and
deferred tax for the period are
measured and recognised. It
was viewed that the tax impact
of these items should be

76
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

included as tax expense in the

Statement of Profit and Loss as
prescribed in paragraph 4.3 of
AS 22, Accounting for Taxes on
Income, which is reproduced
below:

“4.3 Tax expense (tax saving)

is the aggregate of current tax
and deferred tax charged or
credited to the statement of
profit and loss for the period.”

Hence, all tax expenses incurred

on account of items appearing in
Statement of Profit and Loss
should be included under the
head ‘tax expense’.

9. In the Annual Report of a It may be noted that paragraphs

company, the following items 4.1 and 4.2 of AS 5, state as
have been disclosed as extra follows:
ordinary items:
“4.1 Ordinary activities are
 Profit on sale of one any activities which are
business unit to subsidiary undertaken by an enterprise
company. as part of its business and
such related activities in
 Capital loss arising from which the enterprise engages
disinvestment and winding in furtherance of, incidental
up of the wholly owned to, or arising from, these
subsidiary company. activities.

4.2 Extraordinary items are

income or expenses that arise
from events or transactions
that are clearly distinct from
the ordinary activities of the
enterprise and, therefore, are
not expected to recur

77
Study on Compliance of Financial Reporting Requirements

frequently or regularly.”

It was observed that the

reported gains /losses have
occurred due to disinvesting or
investing activities of the
enterprise which have been
described as ordinary activities
of the enterprise. Accordingly, it
was viewed that presenting such
gains or losses as extraordinary
items is not in line with the
requirements of AS 5.

However, circumstances which

may give rise to separate
disclosure of items of income
and expenses as listed in
paragraph 14 of AS 5 inter alia
include restructuring of the
activities of an enterprise and
the reversal of any provisions for
the costs of restructuring and
disposals of long-term
investments. Accordingly, it was
viewed that the reported
gains/losses should have been
disclosed as exceptional items
and not as extraordinary items.

10. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 32 of AS 5, provides that:
gratuity liability has been
recognised on payment basis. “32. Any change in an
During the year, under review accounting policy which has a
the company has changed its material effect should be
accounting policy from cash disclosed. The impact of, and
basis to accrual basis and has the adjustments resulting
determined the gratuity liability from, such change, if material,
should be shown in the

78
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

based on actuarial valuation. financial statements of the

period in which such change
is made, to reflect the effect of
such change. Where the effect
of such change is not
ascertainable, wholly or in
part, the fact should be
indicated. If a change is made
in the accounting policies
which has no material effect
on the financial statements for
the current period but which is
reasonably expected to have a
material effect in later periods,
the fact of such change
should be appropriately
disclosed in the period in
which the change is adopted’’.

It was noted from the accounting

policy disclosed in the current
year and that of the previous
year that the company has
changed its accounting policy for
recognition of gratuity liability.
However, no disclosure of such
change has been made in the
financial statements as per the
requirements of paragraph 32 of
AS 5.

11. In the Annual Report of a It was noted that a significant

company one of the notes on income has arisen due to price
accounts states as follows: difference on cancellation of
contracts and errors in the
“Miscellaneous income of Rs. records, which has been
XXX is on account of surplus as disclosed as ‘miscellaneous
difference of price on income’. It was viewed that the
cancellation of contracts due to income arising due to

79
Study on Compliance of Financial Reporting Requirements

non-supply of CMO by various cancellation of contracts is an

parties during the year and on income arising from ordinary
account of any possible error in activities; however, the income
records. The said surplus has arising from errors in records
been accounted for on the basis (presumably of earlier period/s)
of disclosure of income made by is a prior period item.
the company during action u/s.
132 of the Income Tax Act, Accordingly, the first part of the
1961.” income should have been
disclosed as exceptional item in
view of the significant amount
involved and the second part
should have been disclosed as
prior period income as per the
requirements of paragraphs 12
and 15 of AS 5.

12. In the Annual Report of a It may be noted that paragraphs

company, the following note 4.4 and 29 of AS 5, provide as
appears in the financial follows:
statements:
“4.4 Accounting policies are
“Presentation and disclosure the specific accounting
of financial statements principles and the methods of
applying those principles
During the year, the Revised
adopted by an enterprise in
Schedule VI notified under the
the preparation and
Companies Act, 1956, has
presentation of financial
become applicable to the
statements.”
Company, for preparation and
presentation of its financial “29. A change in an
statements. The adoption of accounting policy should be
revised Schedule VI does not made only if the adoption of a
impact recognition and different accounting policy is
measurement principles followed required by statute or for
for preparation of financial compliance with an
statements. However, it has accounting standard or if it is
significant impact on considered that the change
presentation and disclosures would result in a more
made in the financial appropriate presentation of

80
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

statements. The Company has the financial statements of the

also reclassified the previous enterprise.”
year figures in accordance with
the requirements applicable inIt was noted that preparation
the current year.” and presentation of the financial
statements in accordance with
The above note has been given the Revised Schedule VI to the
under the head ‘Change in Companies Act, 1956 has been
accounting policy’. regarded as a change in
accounting policy. It was viewed
that a change in the presentation
format of the financial
statements does not lead to
change in accounting principles/
policies.

It was viewed that although the

separate note is appropriate to
disclose the change in
presentation, however, it should
not be given as a change in
accounting policy.

13. From the Annual Report of a It may be noted that paragraphs

company, it has been noted that 4.2 and 4.3 of AS 5, define
the details of prior period ‘extraordinary items’ and ‘prior
expenses have been disclosed period items’ as follows:
as extraordinary items.
“4.2 Extraordinary items are
income or expenses that arise
from events or transactions
that are clearly distinct from
the ordinary activities of the
enterprise and, therefore, are
not expected to recur
frequently or regularly.”

“4.3. Prior period items are

income or expenses which
arise in the current period as a

81
Study on Compliance of Financial Reporting Requirements

result of errors or omissions

in the preparation of the
financial statements of one or
more prior periods.”

From the above, it may be noted

that whereas extraordinary items
arise from events that are clearly
distinct from ordinary activities of
an enterprise, prior period items
arise due to error or omission in
preparation of financial
statements of one or more prior
periods. In this case, all prior
period expenses have been
presented as extraordinary items
in the Statement of Profit and
Loss.

Accordingly, it was viewed that

presenting prior period expenses
as extra ordinary items is not in
line with the requirements of AS
5.

14. In the Annual Report of a It may be noted that paragraph

company, the following note on 4.3 of AS 5, defines ‘prior period
change in accounting policy has items’ as follows:
been given under Significant
Accounting Policies: “4.3. Prior period items are
income or expenses which
'Change in Accounting Policy arise in the current period as a
result of errors or omissions
… in the preparation of the
(ii) Plantation Development financial statements of one or
Expenditure more prior periods.”

The company has changed its It was noted that the company
accounting policy during the has changed its accounting
year under review with respect policy retrospectively with regard

82
Observations on Accounting Standards (AS) 5: Net Profit or Loss for the Period …

to expenditure incurred on to expenditure incurred on

cultivation and maintenance of cultivation and maintenance of
plantation. Prior to the year, all jatropha plantation. All expenses
expenses directly or indirectly directly or indirectly attributable
attributable to plantation activityto plantation activity, which were
were charged to revenue in the hitherto being charged off to
year in which they were revenue have been transferred
incurred. However, from the to capital work in progress
current year all expenses during the year under review.
directly or indirectly attributableSince the change in the
to plantation activity are accounting policy has been
transferred to Capital Work in made retrospectively the
Progress for a period of 5 years resulting adjustments have been
from the date of plantation. The disclosed as prior period items.
same are capitalised thereafter However, having regard to the
and amortised over a period of definition of prior period items it
25 years. was viewed that none of the
items which were shown as prior
This change in accounting policy period items, has arisen as a
has been carried out with result of errors or omissions in
retrospective effect since the preparation of the financial
inception and following items statements of one or more prior
have been disclosed as prior periods.
period items:
Accordingly, it was viewed that
a) Rs.xxx credited to the disclosure of such items as prior
Statement of Profit & period items is not in line with
Losson account of change the requirement of paragraph
in rate of depreciation; 4.3 of AS 5.
b) Rs xxx credited to It may also be noted that change
Statement of Profit& Loss in depreciation rates is a change
for change in accounting in accounting estimate and the
policy impact thereof on the profit for
the year should be separately
disclosed. It is further observed
that the change in depreciation
rates has been made with
retrospective effect. However, a

83
Study on Compliance of Financial Reporting Requirements

change in accounting estimate

can affect the current period
only or both the current period
and future periods as envisaged
in paragraph 24 of AS 5.
Further, paragraph 23 of AS 6,
Depreciation Accounting
provides:

“23. The useful lives of major

depreciable assets or classes
of depreciable assets may be
reviewed periodically. Where
there is a revision of the
estimated useful life of an
asset, the unamortized
depreciable amount should be
charged over the revised
remaining useful life.”

Accordingly, it was viewed that

the change in depreciation rates
with retrospective effect is not in
line with the requirements of
paragraph 24 of AS 5 as well as
paragraph 23 of AS 6.

84
 6
Observations on Accounting Standards (AS) 7:
Construction Contracts
S. Matter Contained in the Observations
No relevant Annual Report

1. In the Annual Report of a It may be noted that according

company engaged in real estate to the guidelines issued by the
business, the accounting policy Institute of Chartered
on revenue recognition as Accountants of India on
disclosed in the financial ’Accounting for Real Estate
statements was stated as below: Transactions’ there is a
rebuttable presumption that the
“Revenue Recognition: outcome of a real estate project
Income from real estate sales is can be estimated reliably and
recognised on the transfer of all that revenue should be
significant risks and rewards of recognised under the
ownership to the buyers and it is percentage completion method
not unreasonable to expect only when the events in (a) to
ultimate collection and no (d) prescribed therein are
significant uncertainty exists completed. The event prescribed
regarding the amount of in (b) states as follows:
consideration. However, if at the “When the stage of completion
time of transfer substantial acts of the project reaches a
are yet to be performed under reasonable level of
the contract, revenue is development. A reasonable level
recognised on proportionate of development is not achieved
basis as the acts are performed, if the expenditure incurred on
i.e. on the percentage of construction and development
completion basis. Revenues costs is less than 25% of the
from real estate projects are construction and development
recognised only when the costs as defined in paragraph
actual project costs incurred 2.2(c) read with paragraphs 2.3

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Study on Compliance of Financial Reporting Requirements

exceed 25% of the total to 2.5.”

estimated project costs
including land (emphasis It may further be noted that as
supplied)”. per the definition given in the
above paragraphs construction
and development costs would
not include land cost. However,
in the reported case the
accounting policy states that
revenue is recognised when the
actual project costs incurred
exceed 25% of the total
estimated project costs,
including land.

The company has considered

25% of the total project costs
including land cost whereas the
guidance note prescribes 25% of
construction and development
costs alone.

Accordingly, it was viewed that

the method adopted by the
company for revenue recognition
is strictly not in line with the
requirements of the guidance
note.

2. The accounting policy on It may be noted that paragraph

revenue recognition as given in 38 of AS 7, provides that:
the Annual Report of a
construction company, states as “38. An enterprise should
follows: disclose :

Revenue Recognition (a) The amount of contract

revenue recognised as
“In respect of construction revenue in the period;
contracts revenue is
recognised on ‘percentage (b) The methods used to
determine the contract

86
 Observations on Accounting Standards (AS) 7: Construction Contracts

of completion method.’ Price revenue recognised in

escalation claims and the period ;and
additional claims including
those under arbitration are (c) The methods used to
recognised as revenue when determine the stage of
they are realised or receipt completion of contracts
thereof are mutually settled in progress.”
or reasonably ascertained.” It was noted from the notes to
accounts that although the
company has complied with the
requirements of paragraphs 38
(a) and (b) of AS 7, it has not
complied with the requirements
of paragraph 38 (c) of AS 7 i.e.
methods used to determine the
stage of completion of contracts.

3. In the Annual Report of a It may be noted that paragraph

construction company, the 41 (a) of AS 7, requires the
following disclosures have been following disclosure:
made regarding ’Construction
Contracts’: “41. An enterprise should
present:
(a) (i) Contract Revenue
recognised (a) The gross amount due
from customers for
(ii) Method used to contract work as an
determine the contract asset;”
revenue recognised
and the stage of It was observed that although
completion of contracts various disclosures as required
in progress under AS 7 have been complied
with, the disclosure of gross
(b) Disclosures in respect of amount due from customers for
contracts in progress at the contract work has not been
year end: made.

(i) Aggregate amount of Accordingly, it is viewed that the

costs incurred and requirements of AS 7 have not
recognised profits

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Study on Compliance of Financial Reporting Requirements

(less recognised been fully complied with.

losses)

(ii) Advance received

(iii) Retention money

4. From the Annual Report of a It may be noted that paragraph

construction company, it has 38 (a) of AS 7, provides that:
been noted that Sale of
Products and Services and “38. An enterprise should
Revenues from Construction disclose:
Contracts (Gross) have been (a) the amount of contract
shown as one line item of revenue recognised as
income in the Statement of Profit revenue in the period;”
and Loss.
Further, according to paragraph
2 (A) of Part II of Revised
Schedule VI to the Companies
Act, 1956 requires that the
revenue from sales and gross
income from services rendered
should be shown separately in
the Statements of Profit and
Loss.

From the above, it was noted

that the income from sale of
products, income from services
rendered and the revenue from
construction contracts should be
disclosed separately. However,
it was noted from the Statement
of Profit and Loss that all income
arising from sale of products,
services rendered and
construction contracts have
been clubbed together to report
only aggregate income, which is
against the requirements of

88
 Observations on Accounting Standards (AS) 7: Construction Contracts

paragraph 38 (a) of AS 7 as well

as Revised Schedule VI to the
Companies Act, 19565.

5. In the Annual Report of a It may be noted that paragraphs

construction company, the 21 and 24 of AS 7, provide that:
following notes regarding
accounting policy on revenue “21. When the outcome of a
recognition and revenue from construction contract can be
operations have been estimated reliably, contract
disclosed: revenue and contract costs
associated with the
Accounting Policy for construction contract should
Construction Contracts be recognised as revenue and
expenses respectively by
Revenue from fixed price reference to the stage of
construction contracts are completion of the contract
recognised on the percentage of activity at the reporting date.
completion method, measured An expected loss on the
by reference to the percentage construction contract should
of cost incurred up to the year be recognised as an expense
end to estimated total cost for immediately in accordance
each contract. For the purpose with paragraph 35.”
of determining percentage of
work completed, estimates of “24. The recognition of
contract cost and contract revenue and expenses by
revenue are used. reference to the stage of
completion of a contract is
Computation of Revenue from often referred to as the
Operations percentage of completion
method. Under this method,
Particulars Year
contract revenue is matched
ended
with the contract costs
Contract Revenue: incurred in reaching the stage
of completion, resulting in the
Closing work-in- xxx reporting of revenue,
expenses and profit which can

5Subsequent to the observations of the Board, Revised Schedule VI has been withdrawn.
However, content is still relevant in terms of Schedule III to Companies Act, 2013.

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Study on Compliance of Financial Reporting Requirements

progress be attributed to the proportion

of work completed. This
Add: Contract xxx method provides useful
Receipts information on the extent of
xxx contract activity and
performance during a period.”
Less: Opening xxx
work-in-progress It was observed from the note
showing computation of revenue
Total xxx from operations that the income
from contract revenue has been
determined by adding the
closing work in progress to and
deducting the opening work in
progress from the contract
receipts, which is not consistent
with the accounting policy as
adopted by the company.
Revenue should have been
recognised based on the
percentage of work completed
rather than adjusting opening
and closing work in progress
with contract receipts which may
include advances towards initial
mobilisation activities.

Hence, it was viewed that

considering ’Contract Receipts’
as a basis for recognising
revenue is not as per the
requirements of paragraphs 21
and 24 of AS 7.

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 7
Observations on Accounting Standards (AS) 9:
Revenue Recognition
S. Matters contained in the Observations
No Annual Report

1. From the Annual Reports of It may be noted that paragraph

some companies, it has been 12 of AS 9, provides that:
noted that one of the items of
income as shown in the “12. In a transaction involving
Statement of Profit and Loss is the rendering of services,
income from advertisement and performance should be
ticket sales and the related measured either under the
accounting policy states as completed service contract
follows: method or under the
proportionate completion
‘Revenue from sale of tickets is method, whichever relates the
recognised when the tickets revenue to the work
have been sold. Advertisement accomplished. Such
revenue is recognised when performance should be
advertisements and net regarded as being achieved
realisation are confirmed.’ when no significant
uncertainty exists regarding
the amount of the
consideration that will be
derived from rendering the
service.”

It was noted that the enterprises

under review render services.
Therefore, revenue from sale of
tickets should be recognised as
per the completed contract
method. However, as per the

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Study on Compliance of Financial Reporting Requirements

accounting policy adopted by

these enterprises, the revenue
from sale of tickets is
recognised when tickets are
sold. It may be noted that tickets
are sold before the event takes
place. Accordingly, in case of
advance booking of tickets there
may be substantial time gap
between the sale of tickets and
actual event. Hence, such
revenue cannot be considered
to have been earned until and
unless the event has taken
place. However, in the given
case the enterprise does not
consider the happening of the
related event for recognition of
revenue. Same principle is
applicable to income from
advertisement as well. Thus,
recognising revenue as and
when tickets are sold and when
advertisements and net
realisations are confirmed is not
in line with the requirements of
AS 9.

2. The accounting policy of It may be noted that paragraph

revenue recognition as given in 7.1 of AS 9, provides that:
the Annual Report of a
company inter alia states that “7.1 Revenue from service
revenue from online educational transactions should be
services (if charged) is recognised as the service is
recognised upon receipt of performed, either by the
subscription fee (in case of non- proportionate completion
refundable) otherwise method or by the completed
apportioned over the service contract method.”

92
 Observations on Accounting Standards (AS) 9: Revenue Recognition

subscription period. It may also be noted that

illustrations B.5 and A.7 to AS 9
In the Annual Report of another lays down principles for
company, the following recognition of tuition fees and
accounting policy has been subscription fees respectively
disclosed: as follows:
“Revenue from online “5. Tuition Fees
educational services is
recognised upon receipt of Revenue should be
subscription fees. ...” recognised over the period
of instruction.”

“7. Subscription for

publications

Revenue received or billed

should be deferred and
recognised either on a
straight line basis over
time or, wherethe items
delivered vary in value
from period to period,
revenue should be based
on the sales value of the
item delivered inrelation to
the total sales value of all
items covered by the
subscription.”

From the above, it was viewed

that the period when services
are rendered should be
considered for recognition of
revenue. Accordingly, if revenue
is received it should be deferred
and recognised over the period
when services are rendered.

It was further viewed that

irrespective of whether the

93
Study on Compliance of Financial Reporting Requirements

subscription fee for online

educational services is
refundable or non-refundable,
revenue from the same should
be recognised apportioned over
the service period.

Accordingly, it was viewed that

the accounting policy followed
by these companies are not in
line with the requirements of AS
9.

3. From the Annual Report of a It may be noted that paragraph

company,it has been noted that 9.2 of AS 9, states that:
the company has recognised as
income the entire cost of “9.2 Where the ability to
garments destroyed by fire assess the ultimate collection
under other operating income withreasonable certainty is
(stock loss claim) based on lacking at the time of raising
filing of insurance claim. With any claim, e.g., for escalation
regard to partially damaged of price, export incentives,
stocks, the related inventory interest etc., revenue
has been valued at net recognition is postponed to
realisable value ascertained on the extent of uncertainty
the basis of the claim filed with involved. In such cases, it
the insurance company. may be appropriate to
Insurance claim against loss of recognise revenue only when
fixed assets has also been it is reasonably certain that
recognised based on the claim the ultimate collection will be
filed with the insurance made. Where there is no
company.The note further uncertainty as to ultimate
states that said income has collection, revenue is
been recognised as per the AS recognised at the time of sale
9. or rendering of service even
though payments are made by
installments.”

It was noted that insurance

claims do not fall within the

94
 Observations on Accounting Standards (AS) 9: Revenue Recognition

definition of ‘Revenue’ as given

in AS 9. However, it was viewed
that as in the case of sale of
goods or rendering of services,
the recognition of insurance
claims also requires that the
amount realisable is measurable
and it is not unreasonable to
expect ultimate collection.
Accordingly, recognising
insurance claims at the time of
filing the claims with the
insurance company without
considering the uncertainty
relating to its measurability and
collectability is not appropriate.
In such cases, revenue
recognition should be
postponed until the claims are
accepted/sanctioned by the
insurance company. It is also
supported by the Expert
Advisory Opinion on Query no.
18 of Compendium of Opinions
Volume No. XX.

Accordingly, it was viewed that

recognition of revenue either at
the time of filing of claims or on
actual receipt is not in line with
the requirements of AS 9.

4. In the Annual Reports of a It may be noted that paragraph

couple of companies, the 12 of AS 9, state as follows:
following accounting policies on
Revenue Recognition have “12. In a transaction involving
been disclosed: the rendering of services,
performance should be
 Revenue in the nature of measured either under the

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Study on Compliance of Financial Reporting Requirements

advisory services rendered completed services contract

towards finalisation of method or under the
power purchase proportionate completion
agreements, CDM services, method, whichever relate the
load management etc. is revenue to the work
recognised when the fees accomplished. Such
are determined under the performance should be
terms of respective regarded as being achieved
agreements. when no significant
uncertainty exists regarding
 Other services on the amount of the
completion of services and consideration that will be
billed. derived from rendering the
service.”

From the above, it was viewed

that revenue from services
should be recognised either
under proportionate completion
method or completed service
method. However, it was noted
from the stated policies that
revenue from various services
has been recognised when the
fees are determined under the
terms of the respective
agreements or when the
services are completed and
billed. It was viewed that neither
determination of fees nor billing
should be the criteria for
recognition of revenue from
services. Performance of
service should be the criteria for
revenue recognition.

Accordingly, it was viewed that

the requirements of AS 9 have
not been complied with.

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 Observations on Accounting Standards (AS) 9: Revenue Recognition

5. From the Annual Report of a It may be noted that the

company it has been noted that explanation to paragraph 10 of
although the company has AS 9, inter alia provides that:
shown gross sales less excise
duty on the face of the “10. The excise duty related
Statement of Profit and Loss, to the difference between the
the difference in excise duty on closing stock and opening
opening and closing stock of stock should be recognised
finished goods has not been separately in the statement of
disclosed. profit and loss, with
anexplanatory note in the
notes to accounts to explain
the nature of the two amounts
of excise duty.”

It was noted that the amount of

excise duty has been duly
reported and deducted from
sales in the Statement of Profit
and Loss, however, the
difference in excise duty on
opening and closing stocks of
finished goods has not been
disclosed separately in the
Statement of Profit and Loss nor
in any notes forming part
thereof.

Accordingly, it was viewed that

the disclosure requirement as
per the explanation to
paragraph 10 of AS 9 has not
been complied with.

6. The accounting policies It may be noted that paragraph

regarding recognition of 13 of AS 9, states that:
dividend income have been
disclosed as follows in the “13. Revenue arising from the
Annual Reports of some use by others of enterprise
resources yielding interest,

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Study on Compliance of Financial Reporting Requirements

companies: royalties and dividends

should only be recognised
 Dividend is accounted as when no significant
and when received. uncertainty as to
 Dividend income is measurability or collectability
considered on receipt basis exists. These revenues are
recognised on the following
 Income & Expenditures are bases:
recognised on accrual
basis except dividend on iii) Dividends from
shares and units of Mutual investments in shares:
Funds, which are when the owner’s right to
recognised on cash basis. receive payment is
established.”

It was observed that the

dividend income has been
recognised on receipt basis
while paragraph 13 of AS 9
requires recognition of dividend
income when the right to receive
payment is established.

Accordingly, it was viewed that

the recognition of dividend
income on receipt basis is not in
line with the requirements of AS
9.

7. The following accounting It may be noted that paragraph

policies on Revenue 24 of AS 1, requires as follows:
Recognition have been
disclosed in the Annual Reports “24. All Significant
of some companies: accounting policies adopted
in the preparation and
 Revenue (income) is presentation of financial
recognised when no statements should be
significant uncertainty as to disclosed.”
measurability or
Further, paragraph 11 of AS 9

98
 Observations on Accounting Standards (AS) 9: Revenue Recognition

collectability exists. states as follows:

 Revenue/Income and “11. In a transaction

Cost/Expenditure are involving the sale of goods,
accounted for on accrual performance should be
basis. regarded as being achieved
when the following conditions
 Sales are accounted for on have been fulfilled:
dispatch of products.
(i) the seller of goods has
transferred to the buyer
the property in the goods
for a price or all
significant risks and
rewards of ownership
have been transferred to
the buyer and the seller
retains no effective
control of the goods
transferred to a degree
usually associated with
ownership; and

(ii) no significant uncertainty

exists regarding the
amount of the
consideration that will be
derived from the sale of
the goods.”

It was observed in the first case

that revenue has been
recognised when there is no
uncertainty as to measurability
and collectability whereas in the
second case it simply states
accrual basis. However, in none
of these cases the timing of
recognition of revenue i.e. when
the enterprise has transferred

99
Study on Compliance of Financial Reporting Requirements

significant risk and reward to the

buyer has been disclosed. In
the last case also, it was not
clear whether significant risk
and rewards associated with the
ownership of goods stands
transferred when the products
are dispatched.

Thus, it was viewed that the

accounting policies for revenue
recognition as disclosed in the
financial statements are not in
line with the requirements of
paragraph 11 of AS 9 as well as
paragraph 24 of AS1.

8. In the Annual Reports of a It may be noted that paragraph

number of companies the 14.06 of GN(A) 5, ‘Guidance
following disclosures have Note on Terms Used in
been made on the face of the Financial Statements,’ defines
Statement of Profit and Loss the term ‘Revenue’ as follows:
and/ or in the notes to accounts
with regards to Sales: “The gross inflow of cash,
receivables or other
 In the note of sales, gross consideration arising in the
sales figure has been course of the ordinary
shown from which ‘Duties activities of an enterprise
and Taxes’ have been from the sale of goods, from
shown as a deduction. the rendering of services, and
from the use by others of
 Net Sales (i.e. net of excise enterprise resources yielding
duty) has been shown on interest, royalties and
the face of the Statement of dividends. Revenue is
Profit and Loss whereas measured by the charges
gross sales less excise duty made to customers or clients
has been shown in the note for goods supplied and
of Sales and Operational services rendered to them
Income. and by the charges and

100
 Observations on Accounting Standards (AS) 9: Revenue Recognition

 Sales have been reported rewards arising from the use

net of excise duty. The of resources by them. It
related accounting policy excludes amount collected on
states ‘Sales are reported behalf of third parties such as
net of trade discounts, certain taxes. In an agency
returns & rebates, Excise relationship, the revenue is
Duty and Sales Tax’. the amount of commission
and not the gross inflow of
 Sales including excise duty cash, receivables or other
have been shown on the consideration.”
face of the Statement of
Profit and Loss as well as in Further, explanation to
the note of Sales and Other paragraph 10 of AS 9, states
Income whereas excise that:
duty has been shown as an
expense in the note of “The amount of revenue from
Selling and Distribution sales transaction ( turnover)
Expenses. should be disclosed in the
following manner on the face
 Revenue from operations of the statement of profit &
(Gross) less Excise Duty/ loss:
Sales Tax has been shown
on the face of the Turnover (Gross ) xxx
Statement of Profit and Less: Excise Duty xxx
Loss. The related
Turnover (Net ) xxx”
accounting policy states
Sales are recognised on It may be noted from the above
dispatch of goods to definition and the explanation
customers. It includes that no taxes and duties other
‘Excise Duty & Sales Tax’. than excise duty should be
included in sales. It has,
 In the Statement of Profit
however, been observed in
and Loss, Revenue from
certain cases that sales include
operationshas been
sales tax, VAT etc. It has been
disclosed and in the related
further observed that some
note ‘Sale of goods – Gold
companies have not shown
and Jewellery’, has been
excise duty as a deduction from
disclosed. However, there
sales on the face of the
is no mention as to whether
Statement of Profit and Loss.
sales include excise duty or

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Study on Compliance of Financial Reporting Requirements

are net of excise duty. This has been either shown in a

note or netted with sales. In one
 Accounting policy on case, excise duty has been
Revenue Recognition states shown as an expense whereas
‘…Revenue from operations in another case there is no
includes sale of goods, mention as to whether sales
services, sales tax, service include excise duty or are net of
tax, excise duty and sales excise duty.
during trial run period,
adjusted for discounts (net), It was accordingly viewed that
Value Added Tax (VAT) and grossing up of sales with sales
gain / loss on tax, VAT etc. and disclosure of
corresponding hedge net sales or showing excise duty
contracts…” as an expense or not
mentioning whether sales
includes excise duty or not are
not in line with the requirements
of AS 9.

It was further noted from the

stated policy of the last case
under review that the revenue
from operations includes
gain/loss on corresponding
hedge contracts. It was viewed
that the sale transactions and
the hedging contracts
undertaken to cover the sale
transactions are two
independent transactions.
Accordingly, adjusting gain /loss
on hedging contracts against
revenue is also not in line with
AS 9.

9. The revenue recognition policy It may be noted that paragraph

as disclosed in the Annual 4.1 of AS 9, defines ‘revenue’
Report of a company includes as follows:
the following:
“4.1. Revenue is the gross

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 Observations on Accounting Standards (AS) 9: Revenue Recognition

‘Revenue recognition inflow of cash, receivables or

other consideration arising in
Profit on sale of Investment is the course of the ordinary
recognised as income in the activities of an enterprise
period in which the investment from the sale of goods, from
is sold/disposed off.’ the rendering of services, and
from the use by others of
enterprise resources yielding
interest, royalties and
dividends. Revenue is
measured by the charges
made to customers or clients
for goods supplied and
services rendered to them
and by the charges and
rewards arising from the use
of resources by them. In an
agency relationship, the
revenue is the amount of
commission and not the gross
inflow of cash, receivables or
other consideration”.
It was noted that policy for
recognising income from sale of
investments has been given
under ‘revenue recognition’
policy. It was viewed that such
presentation indicates that
income from ‘sale of
investments’ has been
considered as ‘revenue’ for the
enterprise.
However, from the above
definition it may be noted that
income from sale of investment
cannot be considered as an
ordinary activity of the

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Study on Compliance of Financial Reporting Requirements

enterprise. Such income is

neither generated from sale of
goods or services or from the
use of enterprise resources.
Accordingly, it was viewed that
disclosure of such accounting
policy under revenue
recognition policy is not in line
with the requirements of AS 9.

104
 8
Observations on Accounting Standard (AS) 10:
Accounting for Fixed Assets
S Matters contained in the Observations
No Annual Report

1. The accounting policy on Fixed It may be noted paragraph 24

Assets as disclosed in the and 14.2 of AS 106, provide as
Annual Reports of a couple of follows:
companies inter alia states as
follows: “24. Material items retired
from active use and held for
 Under utilized /Idle assets disposal should be stated at
are recorded at estimated the lower of their net book
realisable value. value and net realisable value
and shown separately in the
 Assets held for disposal are financial statements.”
stated at their estimated net
realisable value “14.2 Items of fixed assets
that have been retired from
active use and are held for
disposal are stated at the
lower of their net book value
and net realisable value and
are shown separately in the
financial statements. Any
expected loss is recognised
immediately in the profit and
loss statement.”

It was observed from the

accounting policies on fixed
assets that the under utilised/

6Observation is still relevant under paragraph 73 of AS 10 revised.

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 Study on Compliance of Financial Reporting Requirements

idle assets and assets held for

disposal are stated at estimated
realisable value. It was quite
likely that these assets were
stated at net realisable value
because their book values are
higher.

However, this should be clearly

stated in the policy (e.g the
carrying values of idle assets
and assets held for disposal are
written down to their estimated
realisable values) as per the
requirements of paragraph 24 of
AS 10.

2. In the Annual Report of a It may be noted that paragraphs

company the following note 27 and 37(iii)7 of AS 10,
appear with regard to Fixed provide as follows:
Assets:
“27. When a fixed asset is
‘Land and Buildings at certain revalued in financial
locations were re-valued on 1 st statements, an entire class of
October, 1982. Gross assets should be revalued, or
depreciation for the year the selection of assets for
includes depreciation on re- revaluation should be made
valued assets of Rs. xxx on a systematic basis. This
charged against Revaluation basis should be disclosed.”
reserve.’
“37. The following information
should be disclosed in the
financial statements:

(i) …..

(ii) …...

(iii) revalued amounts

7Observation still relevant under paragraphs 39 and 81 of AS 10 revised.

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 Observations on Accounting Standard (AS) 10: Accounting for Fixed Assets

substituted for historical

costs of fixed assets, the
method adopted to
compute the revalued
amounts, the nature of
any indices used, the
year of any appraisal
made, and whether an
external valuer was
involved, in case where
fixed assets are stated at
revalued amounts.”

It was observed that the

company has revalued land and
buildings at certain locations
while AS 10 requires that either
an entire class of assets should
be revalued or the basis for
selecting certain assets for
revaluation should be disclosed.
However, it was noted that the
company has not disclosed the
basis of selection of assets for
revaluation as required by
paragraph 27 of AS 10.

It was further observed that the

disclosures as required by
paragraph 37(iii) of AS 10 have
also not been made. Hence, it
was viewed that the
requirements of AS 10 have not
been complied with.

3. In the Annual Report of a It may be noted that paragraph

company the accounting policy 198 of AS 10, provides that:

8 Observation is still relevant under paragraph 33 and 34 of AS 10 (Revised)

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Study on Compliance of Financial Reporting Requirements

on fixed assets states as under: “19. The gross book value of a

fixed asset should be either
‘Fixed Assets are stated at cost/ historical cost or a revaluation
professional valuation less computed in accordance with
accumulated depreciation. Cost this Standard.”
includes freight, installation cost,
duties and taxes, interest on It appears from the stated
specific borrowings utilised for accounting policy that certain
financing the qualifying fixed assets have been revalued,
assets and other incidental which are stated at professional
expenses. (emphasis valuation. However, no
supplied)’ information has been provided
either in the accounting policy or
in the note of fixed assets as to
which assets have been
revalued.

Further, it has been noted that

no revaluation reserve has been
shown in the Balance Sheet.
Assuming there is a decrease in
the net book value arising on
revaluation of fixed assets then
such decrease should have
been charged to the Statement
of Profit and Loss as prescribed
in paragraph 30 of AS 10.
However, nothing has been
mentioned in the financial
statements in this regard.

It may also be noted that

paragraph 37(iii) of AS 10
requires the following
disclosures:

“(iii) revalued amounts

substituted for historical
costs of fixed assets, the
method adopted to compute

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 Observations on Accounting Standard (AS) 10: Accounting for Fixed Assets

the revalued amounts, the

nature of any indices used,
the year of any appraisal
made, and whether an external
valuer was involved, in case
where fixed assets are stated
at revalued amounts.”

It was observed that no such

disclosures have been made
except stating ‘at professional
valuation’.

Accordingly, it was viewed that

the requirements of AS 10, have
not been complied with.

4. In the Annual Report of a It may be noted that paragraph

company the following note 37(iii) of AS 109, provides
appears with regard to fixed follows:
assets:
“37. The following information
‘The Company revalued its should be disclosed in the
freehold land, buildings and financial statements:
plant & machinery. These
revaluations resulted in net (i) …
increase in value of assets by (ii)…
Rs xxx which was credited to
Revaluation Reserve.’ (iii) revalued amounts
substituted for historical
costs of fixed assets, the
method adopted to
compute the revalued
amounts, the nature of
any indices used, the
year of any appraisal
made, and whether an
external valuer was

9 Observation is still relevant under paragraph 81 of AS 10 (Revised).

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Study on Compliance of Financial Reporting Requirements

involved, in case where

fixed assets are stated at
revalued amounts.”

It was observed that except for

the revalued amounts
substituted for historical costs,
no other information as required
by the above paragraph has
been disclosed.

Accordingly, it was viewed that

the requirements of AS 10 have
not been complied with.

5. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 9.1 of AS 10 10provides that:
a significant amount has been
shown as additions to Site & “9.1 The cost of an item of
Land Development during the fixed asset comprises its
year under review and that no purchase price, including
depreciation has been charged import duties and other non-
in respect thereof. refundable taxes or levies and
any directly attributable cost
of bringing the asset to its
working condition for its
intended use; any trade
discounts and rebates are
deducted in arriving at the
purchase price.”

Further, examples of directly

attributable costs as given in
paragraph 9.1 of AS 10 include
cost of site preparation.

It may be noted that site

preparation would be required
for developing land as well as

10 Observation is still relevant under paragraph 18 of AS 10 (Revised)

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Observations on Accounting Standard (AS) 10: Accounting for Fixed Assets

construction of building and

installation of plant and
machinery.

Accordingly, it was viewed that

the site preparation costs
comprising mainly of uprooting
of any existing structure,
leveling, clearing and grading
incurred to prepare the land for
its intended use or for
construction thereon should be
suitably apportioned to land,
building and plant and
machinery and capitalised as
part of the costs of the
respective assets as per the
requirements of AS 10.

Accordingly, capitalizing site and

land development expenditure
under a separate head and not
charging
depreciation/amortisation on it is
not in line with the requirements
of AS 6 and AS 10.

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 9
Observations on Accounting Standard (AS) 11:
The Effects of Changes in Foreign Exchange
Rates
S. Matters contained in the Observations
No Annual Report

1. In the Annual Report of a It may be noted that paragraph

company, accounting policy of 11(a) of AS 11, provides as
foreign exchange transactions follows:
stated as follows:
“11. At each balance sheet
‘Transactions in foreign date:
currencies are recorded at the
rates prevailing on the dates of (a) Foreign currency
the transactions. Monetary monetary items should be
items denominated in foreign reported using the
currency are stated at closing rate. However, in
contracted rates as those are certain circumstances,
covered by forward contracts the closing rate may not
(emphasis supplied)’. reflect with reasonable
accuracy the amount in
reporting currency that is
likely to be realised from,
or required to disburse, a
foreign currency
monetary item at the
balance sheet date, e.g.,
where there are
restrictions on
remittances or where the
closing rate is unrealistic
and it is not possible to

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 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

effect an exchange of
currencies at that rate at
the balance sheet date. In
such circumstances, the
relevant monetary item
should be reported in the
reporting currency at the
amount which is likely to
be realised from, or
required to disburse,
such item at the balance
sheet date.”

It was observed from the policy

of foreign currency transactions
that foreign currency monetary
items have been recognised at
contracted rates, as those are
covered by forward contracts. It
was viewed that hedging
contracts (i.e. forward
contracts) are independent of
underlying contracts and
therefore both of them should
be recgonised independent of
each other. Hence recognizing
monetary item at contract rates
is against AS 11. They should
have been recognised at the
closing exchange rate
irrespective of the fact whether
risk against such items have
been hedged by forward
contracts.

2. From one of the notes to It may be noted that paragraph

accounts given in the Annual 13 of AS 11, provides as
Report of a company, it has follows:

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Study on Compliance of Financial Reporting Requirements

been noted that: “13. Exchange differences

arising on the settlement of
‘Expenditure in foreign monetary items or on
exchange is accounted at the reporting an enterprise’s
actual amount spent and monetary items at rates
provision for expenses to be different from those at which
paid in foreign currency has they were initially recorded
been made at the rate of during the period, or reported
exchange prevailing on the in previous financial
Balance Sheet date.’ statements, should be
recognised as income or as
expenses in the period in
which they arise, with the
exception of exchange
differences dealt with in
accordance with paragraph
15.”

It was noted that expenditure in

foreign exchange is accounted
at the actual amount spent i.e.
at the rate prevailing on the time
of settlement of transaction,
which indicates that exchange
difference arising on reporting
date on such monetary items
has not been recognised which
is against the requirement of
paragraph 13 of AS 11.

3. From the notes to the accounts It may be noted that paragraph

of a company, it has been noted 40(a) of AS 11, provides that:
that it incurred expenses and
earned income in foreign “40. An enterprise should
currencies. However, in the disclose:
Statement of Profit and Loss a. the amount of exchange
and notes to the accounts, there differences included in
was no disclosure of gain/loss the net profit or loss for

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 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

on exchange difference. the period; and...”

It was noted from the

information relating to value of
imports expenditure and
earnings in foreign currency that
the company has entered into
foreign exchange transactions
during the year; however, no
exchange gain or loss arising
from foreign exchange
fluctuation has been separately
disclosed in the Statement of
Profit and Loss and note to the
accounts.

Accordingly, it was viewed that

the requirements of paragraph
40 (a) of AS 11 have not been
complied with.

4. In the Annual Report of It may be noted that paragraph

company, accounting policy 36 of AS 11, provides as
relating to foreign transaction follows:
has been stated as follows:
“36. An enterprise may
‘Difference between the forward enter into a forward exchange
exchange contract rate and the contract or another financial
exchange rate as at the date of instrument that is in
settlement is recognised as substance a forward
income/expense and is exchange contract, which is
accounted for in the Statement not intended for trading or
of Profit and Loss.’ speculation purposes, to
establish the amount of the
reporting currency required or
available at the settlement
date of a transaction. The
premium or discount arising
at the inception of such a
forward exchange contract

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Study on Compliance of Financial Reporting Requirements

should be amortised as
expense or income over the
life of the contract. Exchange
differences on such a
contract should be
recognised in the statement
of profit and loss in the
reporting period in which the
exchange rates change. Any
profit or loss arising on
cancellation or renewal of
such a forward exchange
contract should be
recognised as income or as
expense for the period.”

It was noted from the accounting

policy relating to forward
exchange contract that although
the accounting policy as
adopted by company for
settlement of forward exchange
contract has been given, the
accounting policy adopted for
recognition of premium or
discount arising at its inception
and/ or at the
cancellation/renewal of such
contract have not been
disclosed. Therefore, it was
viewed that the accounting
policy relating to forward
currency transactions cannot be
considered as complete.

5. From the Annual Report of a It may be noted that paragraph

company, it has been noted 11 (b) of AS 11, provides as
from accounting policy on follows:
transaction in foreign currency

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 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

states as follows: “ 11.At each balance sheet

date:
‘Non-monetary items (fixed
asset and loans) (b) non-monetary items
denominated in a foreign which are carried in
currency are reinstated as terms of historical cost
at the date of the Balance denominated in a foreign
Sheet. The difference on currency should be
reinstatement is carried to reported using the
relevant non- monetary exchange rate at the date
items.’ of the transaction.”

It has been noted from the

accounting policy on transaction
in foreign currency about non-
monetary items that the non-
monetary items denominated in
a foreign currency are reinstated
as at the date of the Balance
Sheet instead of being reported
at the date of the transaction as
required under paragraph 11(b)
of AS 11.

Further, it was also noted that

loans are monetary items and
accordingly, the same has not
been covered with the non-
monetary items and accordingly,
accounting policy adopted for
the same is also not correct.

Thus, the requirements of AS 11

have not been complied with.

6. In the Annual Report of a It may be noted that paragraph

company, accounting policy 9 of AS 11, provides as follows:
relating to foreign currency
transactions has been stated as “9. A foreign currency
transaction should be

117
Study on Compliance of Financial Reporting Requirements

follows: recorded, on initial

recognition in the reporting
‘Transactions in Foreign currency, by applying to the
CurrencyForeign currency foreign currency amount the
transactions are recorded at the exchange rate between the
exchange rate prevailing as at reporting currency and the
the date of transactions except foreign currency at the date of
export sales which are recorded the transaction.”
at a rate notified by the customs
for invoice purposes. Such rate It was noted from accounting
is notified in the last week of the policy relating to transactions in
month and is adopted for foreign currency that the export
recording export sales of the sales have been recorded at a
next month. The exchange rate notified by the customs for
fluctuation arising as a result of invoice purposes instead of
negotiation of export bill is translating the same on
accounted for as difference in exchange rates prevailing on the
exchange rates.’ date of transactions.

Hence, it was viewed that the

accounting policy as adopted for
the recognition of export sales is
not in line with the principals
enunciated in paragraph 9 of AS
11.

7. It has been noted from the It may be noted that paragraph

accounting policy relating to 11(a) of AS 11, provides as
Foreign Currency transactions follows :
that these are accounted at the
rates prevailing on date of “11. At each Balance Sheet
transaction. ‘Yearend current date:
assets and year end liabilities (a) foreign currency
are translated at exchange rate monetary items should be
ruling on the date of the Balance reported using the
Sheet.’ closing rate…….”

It has been observed from the

accounting policy that all current

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 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

assets and liabilities as at the

end of the year are translated at
exchange rate ruling on the date
of Balance Sheet. However, as
per above mentioned
requirement, it is only the
monetary items which are
required to be translated at the
closing exchange rate and not
all the foreign currency assets
and liabilities which may include
non-monetary assets/ liabilities
as well. This is not in line with
AS 11.

8. It has been noted from the As per FAQ 14 of FAQs on AS

Balance Sheet of a company 11 Notification-Companies
which is reproduced below: (Accounting Standards)
Amendment Rules, 2009 issued
‘Balance Sheet by Ministry of Corporate Affairs,
II Application of Funds the ‘foreign currency monetary
item translation difference
(1) Fixed Assets account’ should be shown as a
separate line item in the Balance
(2) Investments Sheet, in line with treatment
(3) Current Assets, Loans & given to deferred tax asset
Advances /liability, i.e. after the head
‘Investments’ or after the head
(4) Foreign currency monetary of ‘Unsecured Loans’ as the
item case may be and separately
from current assets and current
Translation difference liabilities.
account’
Accordingly, it was viewed that
the presentation of ‘Foreign
currency monetary item
translation difference account’ is
not correct and it should be
shown after the head of

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Study on Compliance of Financial Reporting Requirements

‘Investments’.

9. From the Annual Report of a It was observed from the

company, it has been noted that Balance Sheet that “Foreign
the Balance Sheet of a company Currency Monetary Item
included “Foreign currency Translation Difference Account”
monetary item Translation has been disclosed which
difference account.” indicates that the company has
exercised the option of
accumulating the exchange
difference in the said account. It
was, accordingly, viewed that on
adoption of such policy,
additional disclosures are
required as prescribed in FAQ to
Q.23 in ‘Frequently Asked
Questions on AS 11 notification
–Companies (Accounting
Standards) Amendment Rules,
2009issued by Ministry of
Corporate Affairs which states
as follows:
“23…
Additional Disclosures are:
(a) That the company has
chosen to avail the option.
(b) Amount of amortisation
charged to the profit and
Loss Account.
(c) Amount remaining to be
amortised in the financial
statements of the period in
which such option is
exercised and in every
subsequent period so long
as the exchange

120
 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

differences remain
unamortised.
(d) Comparative figures should
be furnished based on last
audited figures.
(e) The effect of adjustment
(relating to amounts
previously recognised)
made through general
reserve or if no balance is
available through the
balance in opening
surplus/deficit in the Profit
and Loss Account.”

However, no such disclosures

have been made by the
company. It was further noted
that the amount relating to
foreign currency monetary item
translation difference has been
written off during the year but no
information relating to same has
been disclosed in notes to
accounts.

Hence, the requirements of AS

11 have not been complied with.

10. From a note relating to foreign It may be noted that paragraph

currency translation difference, 36 of AS 11, inter alia provides
the following has been noted : as follows:

‘Exchange difference in respect “36. Exchange differences on

of forward exchange contracts such a contract should be
to be recognised in the recognised in the statement
Statement of Profit and Loss in of profit and loss in the
subsequent accounting period reporting period in which the
exchange rates change. Any

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Study on Compliance of Financial Reporting Requirements

is……’ profit or loss arising on

cancellation or renewal of
such a forward exchange
contract should be
recognised as income or as
expense for the period.”

It was observed from the stated

note that a part of the exchange
difference on forward exchange
contract has not been
recognised. It was viewed that
as per paragraph 36 of AS 11,
exchange difference on forward
exchange contracts should be
recognised in the reporting
period in which the exchange
rate changes rather than
recognising them in the
subsequent periods.
Accordingly, it was viewed that
the requirements of AS 11 have
not been complied with.

11. In the Annual Report of It may be noted that paragraph

company, accounting policy 11 of AS 11, provides as
relating to foreign exchange follows:
transactions has been stated as
follows: “11. At each Balance Sheet
date:
‘Transactions involving foreign
exchange are translated into (a)…
Rupee in the basis of prevailing (b) foreign currency
exchange rates on the date of monetary items should be
transaction. Impact of reported using the
difference in exchange rate is closing rate…….
accounted in the year period in
which the transactions are (c) Non-monetary items
finally determined (emphasis which are carried in terms

122
Observations on Accounting Standard (AS) 11: The Effects of Changes in …

supplied)’. of historical cost

denominated in a foreign
currency should be
reported using the
exchange rate at the date
of the transaction; and

(d) …….”

It was noted from the stated

accounting policy that these are
recognised initially at the rate
prevailing on the date of the
transaction and subsequently,
difference is accounted only
when it is finally settled. It was
viewed that such foreign
currency transactions are not
accounted for according to their
nature viz. whether they are
giving rise to monetary items or
non-monetary items.

It was further noted that

paragraphs 13 and 14 of AS 11,
provide as follows:

“13. Exchange differences

arising on the settlement of
monetary items or on
reporting an enterprise’s
monetary items at rates
different from those at which
they were initially recorded
during the period, or reported
in previous financial
statements, should be
recognised as income or as
expenses in the period in
which they arise, with the

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Study on Compliance of Financial Reporting Requirements

exception of exchange
differences dealt with in
accordance with paragraph
15.”

“14. An exchange difference

results when there is a change
in the exchange rate between
the transaction date and the
date of settlement of any
monetary items arising from a
foreign currency transaction.
When the transaction is settled
within the same accounting
period as that in which it
occurred, all the exchange
difference is recognised in that
period. However, when the
transaction is settled in a
subsequent accounting period,
the exchange difference
recognised in each intervening
period up to the period of
settlement is determined by the
change in exchange rates
during that period.”

It was observed from the

accounting policy that exchange
difference arising was
accounted only when finally
determined. It was viewed that
the phrase ‘finally determined’
indicates as when finally settled.
It was viewed that exchange
difference on monetary items
should be recognised at each
reporting period as well as when
finally settled. Hence, the

124
 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

accounting policy to the extent

is again not in line with the
requirements of paragraph 13 of
AS 11.

12. From the Annual Report of a It may be noted that paragraph

company, accounting policy 46A of AS 11, provides that:
relating to Foreign Currency
Transactions has been stated as “46A.
follows: …
‘…The gain or loss relating to (2) To exercise the option
long term monetary items for referred to in sub-paragraph (1),
financing acquisition of capital an asset or liability shall be
assets is adjusted to the designated as a long-term
acquisition cost of such assets foreign currency monetary item,
and depreciated over their if the asset or liability is
remaining useful lives.’ expressed in a foreign currency
and has a term of twelve months
or more at the date of
origination of the asset or the
liability:
Provided that the option
exercised by the enterprise
shall disclose the fact of such
option and of the amount
remaining to be amortized in
the financial statements of the
period in which such option is
exercised and in every
subsequent period so long as
any exchange difference
remains
unamortized.(emphasis
supplied)”
It was noted that although the
fact of exercising the option
provided in paragraph 46A of

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Study on Compliance of Financial Reporting Requirements

AS 11 has been disclosed, the

amount remaining unamortised
as at the end of the period has
not been disclosed anywhere in
notes to accounts.
Accordingly, it was viewed that
the requirements of AS 11 have
not been complied with.

13. From the Annual Report of a The following discrepancies

company, accounting policy on have been noted with regard to
Foreign Currency Transactions foreign currency transactions:
has been stated as follows:
i It may be noted that
‘(i) Foreign currency paragraph 11 of AS 11,
transactions during the provides as follows:
year are accounted for in
the reporting currency at “11. At each balance
the exchange rates sheet date :
prevailing on the date of (b) Non-monetary
the respective transaction items which are
in accordance with the carried in terms of
Revised Accounting historical cost
Standard 11 for “The denominated in a
Effects of Changes in foreign currency
Foreign Exchange Rates” should be reported
Exchange difference using the exchange
arising on settlement of rate at the date of the
transactions and/ or transaction
restatements are dealt
with in the Statement of (c) non-monetary
Profit &Loss. Exchange items which are
difference arising on carried at fair value or
reporting \settlement of other similar valuation
long term foreign currency denominated in a
monetary items (other than foreign currency
depreciable non current should be reported
assets) at rates different using the exchange
from those at which they rates that existed

126
Observations on Accounting Standard (AS) 11: The Effects of Changes in …

are initially recorded when the values were

during the period which determined.”
were earlier being
recognised in the It was viewed from the
Statement of Profit &Loss above paragraph that
are now being foreign currency items are
accumulated in “Foreign classified into monetary
Exchange Translation items and non-monetary
Reserve” and would be items for application of AS
accounted for in the 11. However, it was noted
Statement of Profit &Loss from the stated accounting
in the year in which policy that although the
transaction is complete.’ accounting policy relating to
monetary items has been
disclosed, there is no
disclosure of the accounting
policy relating to non-
monetary items as required
by paragraph 11 of AS 11.

ii It was noted that exchange

difference on reporting long
term foreign currency
monetary items are being
accumulated in “Foreign
Exchange Translation
Reserve” as per the
requirements of clause (1)
to paragraph 46A of AS 11.
However, neither the fact of
exercising the option
provided in paragraph 46A
of AS 11 nor the amount
remaining unamortized as
at the end of the period has
been disclosed.

Accordingly, it was viewed that

the accounting policy adopted
for foreign currency transactions

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Study on Compliance of Financial Reporting Requirements

is not in line with AS 11.

14. It has been noted that significant The following discrepancies

accounting policy on Foreign were noted with regard to
Currency Transactions of a accounting policy on forward
company states as follows: exchange contracts:

‘(ii) In order to hedge its i It was noted from the

exposure to foreign exchange, reproduced paragraph that
the Company enters into company enters into
forward contracts. The forward contracts. It was not
Company do not hold derivative clear from the information
financial instrument for available as to whether
speculative purposes. Derivative forward contracts taken
financial instrument are initially were covered by AS 11 or
recorded at their fair value on AS 30 and the
the date of the derivative circumstances based on
transaction and are re- which derivative contracts
measured at their fair value at are differently treated under
subsequent balance sheet both the standards.
dates. Changes in the fair value
of derivatives that are ii It was also not clear from
designated and qualify as cash the stated policy as to
flow hedges are recorded as whether such contracts
equity. Amount deferred to were entered to hedge
equity are recycled in the foreign currency risk of
Statement of Profit and Loss in existing assets/ liabilities or
the period when the hedged its future transactions.
item is recognised in the Hence, it was not possible
Statement of Profit and Loss. to assess the nature of
transaction being covered
Hedge accounting is discounted by fair value hedge and
when the hedging instrument cash flow hedge are correct
expires or sold, terminated or or not.
exercised or no longer qualifies
for hedge accounting. Any iii From the disclosure made,
cumulative gain or loss on the it appears that the company
hedging instrument recognised had early adopted AS 30,
in equity is kept in equity until Financial Instruments:
Recognition and

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 Observations on Accounting Standard (AS) 11: The Effects of Changes in …

the forecast transactions occur. Measurement, AS 31,

If a hedged transaction is no Financial Instruments:
longer expected to occur, the Presentation and AS 32,
net cumulative gain or loss Financial Instruments:
recognised in equity is Disclosures but such fact
transferred to net Profit or Loss has not been disclosed.
for the year. Derivative Further, the extent to which
embedded in other financial AS 11 and AS 30 have
instrument or other host contract been opted is also not clear.
are treated as separate
derivatives when their risk and iv It was noted that only the
characteristics are not closely accounting treatment in
related to those of host contract respect of cash flow hedges
and the host contract are not has been disclosed.
carried at fair value with However, the types of
unrealised gain or losses contracts entered into and
reported in the Statement of the circumstances when it is
Profit and Loss.’ treated as cash flow hedge
or fair value hedge has not
been disclosed.

v Further, it was noted that

the determination of the
effectiveness of the hedge
as well as other related
disclosures have also not
been made.

Accordingly, it was viewed that

from the stated policy, it is not
clear whether AS 11 and AS 30
has been correctly adopted or
not.

15. From the accounting policies on It may be noted that paragraphs

‘Foreign Currency transactions’ 9 and 11 of AS 11, provide as
as given under Significant follow:
Accounting Policies of a
company,the following has been “9. A foreign currency
transaction should be

129
Study on Compliance of Financial Reporting Requirements

noted: recorded, on initial

recognition in the reporting
‘Investments are stated at cost. currency, by applying to the
Investments in shares of fully foreign currency amount the
owned foreign subsidiary are exchange rate between the
stated at cost and expressed in reporting currency and the
Indian rupees at the rate of foreign currency at the date of
exchange prevailing at the time the transaction.”
of actual remittance(emphasis
added)’. “11. At each balance sheet
date:
‘Transactions in foreign
currency are recorded in rupees (a) foreign currency monetary
by applying rate of exchange items should be reported
prevailing at the time of using the closing rate.
transaction and exchange
differences arising on However, in certain
settlements except for circumstances, the closing
acquisition of fixed assets which rate may not reflect with
are dealt with in the Statement reasonable accuracy the
of Profit &Loss. Unsettled amount in reporting
transactions are converted at currency that is likely to
the year-end rate and gain or be realised from, or
loss arising on such transaction required to disburse, a
is recognised in the Statement foreign currency monetary
of Profit & Loss except in item at the balance sheet
respect of exchange differences date, e.g., where there are
arising on repayment of restrictions on remittances
foreign currency liabilities or where the closing rate
incurred for acquiring fixed is unrealistic and it is not
assets which are adjusted in possible to effect an
the carrying cost of the exchange of currencies at
respective fixed that rate at the balance
assets(emphasis added)’. sheet date. In such
circumstances, the
relevant monetary item
should be reported in the
reporting currency at the
amount which is likely to
be realised from, or

130
Observations on Accounting Standard (AS) 11: The Effects of Changes in …

required to disburse, such

item at the balance sheet
date;

(b) non-monetary items which

are carried in terms of
historical cost
denominated in a foreign
currency should be
reported using the
exchange rate at the date
of the transaction; and

(c) non-monetary items which

are carried at fair value or
other similar valuation
denominated in a foreign
currency should be
reported using the
exchange rates that
existed when the values
were determined.”

It was noted that the investment

in shares of foreign subsidiary
has been recognised at the rate
prevailing at the time of actual
remittance of foreign currency
rather than recognising the
same at the rate prevailing on
the date of transaction.
Similarly, fixed assets acquired
in foreign currencies are initially
accounted at the rate of
exchange ruling on the date of
acquisition. However, the
differences are accounted on
repayment of foreign currency
liability. This prima facie
suggests that foreign currency

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Study on Compliance of Financial Reporting Requirements

liabilities for acquisition of fixed

assets are not translated at the
Balance Sheet date.

Accordingly, it was viewed that

requirements of AS 11 have not
been complied with.

16. The accounting policy for It may be noted that that

foreign currency transaction paragraph 46A of AS 11,
given in the Annual Report of provides as follows:
company reads as follows:
“46A. In respect of accounting
‘Foreign currency periods commencing on or after
transactions the 7th December 2006, (such
option to be irrevocable and to
Foreign currency transactions be applied to all such foreign
are accounted at the exchange currency monetary items), the
rate prevailing on the date of exchange differences arising on
transactions. Gains or losses reporting of long-term foreign
resulting from the settlement of currency monetary items at
such transaction and from the rates different from those at
translation of monetary assets which they were initially
and liabilities denominated in recorded during the period, or
foreign currency are recognised reported in previous financial
in the Statement of Profit and statements, in so far as they
Loss. In cases where they relate to the acquisition of a
relate to acquisition of fixed depreciable capital asset, can
assets, they are adjusted to be added to or deducted from
the carrying cost of such the cost of the asset and should
assets. (emphasis supplied)’ be depreciated over the balance
life of the asset, …”

It was noted from the stated

accounting policy that prima
facie all foreign exchange
differences related to acquisition
of any fixed asset in foreign
currency are adjusted to the

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Observations on Accounting Standard (AS) 11: The Effects of Changes in …

cost of such assets.

It was viewed that such

adjustment is permitted only if
such exchange difference has
arisen on long term foreign
currency monetary items
incurred for acquisition of a
depreciable fixed asset. It was
noted that in the given case
neither the stated accounting
policy nor the Balance Sheet
indicates existence of any
foreign currency monetary
items. Hence, adjustment of any
foreign exchange rate variation
to the cost of fixed asset was
observed to be not in line with
the requirements of AS 11.

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 10
Observations on Accounting Standard (AS) 12:
Accounting for Government Grants
S. Matters contained in the Observations
No Annual Report

1. From the Annual Reports of some It may be noted that paragraph

companies, it has been noted that 23 of AS 12, requires as follows:
the following subsidies have been
received by these companies as “23. The following should be
disclosed in the financial disclosed:
statements: (i) the accounting policy
 Capital Incentive Subsidy adopted for government
grants, including the
 Central Investment Subsidy methods of presentation
in the financial
 Special Capital Subsidy statements;
 Grant From National Highway (ii) the nature and extent of
Authority Of India (Equity government grants
Support) recognised in the financial
statements, including
grants of non-monetary
assets given at a
concessional rate or free
of cost.”

It was observed that these

companies are in receipt of
government grants in the nature
of capital grants. However, the
accounting policies as adopted by
these companies for recognising
such government grants have not

134
 Observations on Accounting Standard (AS) 12: Accounting for Government …

been disclosed.

Accordingly, it was viewed that

the requirements of paragraph 23
of AS 12 have not been complied
with.

2. In the Annual Reports of a It may be noted that paragraph

couple of companies following 14 of AS 12,inter alia, states that:
accounting policies on
government grants have been “14. Government grants related
disclosed : to specific fixed assets should
be presented in the balance
 Grants and Capital subsidy sheet by showing the grant as
from the government is a deduction from the gross
credited to Capital Reserve. value of the assets concerned
Further, in accordance with in arriving at their book value.
the guidelines issued by Alternatively, government
ICAI, proportionate amount to grants related to depreciable
the extent of depreciation fixed assets may be treated as
charged, is being transferred deferred income which should
to surplus in the Statement of be recognised in the profit and
Profit and Loss in case of loss statement on a systematic
grant received in relation to and rational basis over the
acquisition of any assets. useful life of the asset, i.e.,
such grants should be
 In case of depreciable
allocated to income over the
assets, the cost of the asset
periods and in the proportions
is shown at gross value and
in which depreciation on those
grant thereon is taken to
assets is charged...”
Capital Reserve which is
recognised as income in the It was noted from above that
Statement of Profit and Loss subsidy received against a
over the useful life period of depreciable asset is either shown
the asset. as deduction from gross value of
In both the cases a portion of the the asset to arrive at its book
grant has been transferred from value or treated as deferred
capital reserve to Statement of income which is recognised in the
Profit and Loss during the year Statement of Profit and Loss on a
systematic and rational basis

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Study on Compliance of Financial Reporting Requirements

under review. over the useful life of the asset.

However, in both the cases the

grants/subsidy has been credited
to capital reserve instead of
treating it as deferred income as
required by the above paragraph.

Accordingly, it was viewed that

the accounting policies adopted
by these companies for
recognition of government grants
are not in compliance with the
requirements of AS 12.

3. In the Annual Report of a It may be noted that paragraphs

company, the following 15 and 23(ii) of AS 12, state as
accounting policies on follows:
government grants have been
disclosed: “15. Government grants
related to revenue should be
a) The Company is registered recognised on a systematic
under the West Bengal basis in the profit and loss
Incentive Scheme 2000 & statement over the periods
2004 of the Director of necessary to match them with
Industries, Government of the related costs which they
West Bengal. Under the said are intended to compensate.
scheme the Company is Such grants should either be
entitled to receive Capital shown separately under ‘other
Investment Subsidy, Interest income’ or deducted in
Subsidy, Employment reporting the related expense.”
Generation Subsidy, and
Remission of Stamp Duty & “23. The following should be
Registration Fee. These shall disclosed:
be accounted for in the year (i) ……
of receipt and/or
crystallisation. (ii) the nature & extent of
government grants
b) The Company has been recognised in the financial
granted eligibility certificate statements, including

136
 Observations on Accounting Standard (AS) 12: Accounting for Government …

under the West Bengal grants of non-monetary

Incentives to Power Intensive assets given at a
Industries Scheme, 2005, concessional rate or free
promulgated by the of cost”.
Department of Commerce &
Industries, Government of It was observed from the
West Bengal. Under the said accounting policies that the
scheme, the Company is company was entitled to receive
entitled to receive incentive certain subsidies in the nature of
on energy charges, which ‘grants related to revenue’ viz.
has been accounted for in interest subsidy and incentive on
the books on accrual basis. energy charges. It may be noted
that according to paragraph 15 as
stated above such grants should
either be shown separately in the
Statement of Profit and Loss
under the head ‘other income’ or
deducted in reporting the related
expense. It was, however,
observed that such grants have
neither been shown under other
income nor deducted from the
related expense. Further,
although the nature and timing of
recognising the grants have been
disclosed, the extent of such
grants recognised in the financial
statements has not been
disclosed as required as per
paragraph 23(ii).

Accordingly, it was viewed that

the requirements of paragraphs
15 and 23(ii) of AS 12 have not
been complied with.

4. In the Annual Report of a It may be noted that paragraph

company the following 16 of AS 12, provides as follows:
accounting policy on government
“16. Government grants of the

137
Study on Compliance of Financial Reporting Requirements

grants has been disclosed: nature of promoters’

contribution should be credited
‘Government grants availed in the to capital reserve and treated
nature of capital investment as a part of shareholders’
subsidy and other subsidies funds.”
under the West Bengal Incentive
Scheme are treated as income of It was noted from the stated
the year on sanction of the same policy that capital investment
and shown separately in the subsidy which is in the nature of
Statement of Profit and Loss. promoters’ contribution has been
Subsidies in the natures of the credited to the Statement of Profit
revenue item are deducted from and Loss. However, according to
the respective expenditures.’ paragraph 16 as stated above
this subsidy should have been
The subsidy received during the credited to capital reserve and
year under review has been treated as a part of shareholders
disclosed under ‘other income’. funds.

It was, therefore, viewed that the

requirements of paragraph 16 of
AS 12 have not been complied
with.

138
 11
Observations on Accounting Standard (AS) 13:
Accounting for Investments
S. Matters contained in the Observations
No Annual Report

1. In the Annual Reports of a It may be noted that paragraph

number of companies the 32 of AS 13, provides that:
accounting policies with regard
to valuations of long-term “32. Investments classified as
investments have been stated long term investments should
as follows: be carried in the financial
statements at cost. However,
 Long-term investments are provision for diminution shall
carried at cost. No provision be made to recognise a
is being made for decline, other than temporary,
diminution in the value of in the value of the
investments as they are investments, such reduction
long-term investments. being determined and made
for each investment
 Non-current Investments individually.”
are stated at cost. No
provision for diminution in From the stated policies it is
value, if any, has been noted that in certain cases
made as these are long– provision for diminution in value
term investments and in the of long-term investments is not
opinion of the management made as these are long-term
any decline is temporary. investments or in the opinion of
the management any decline is
 Investments other than temporary or diminutions in
current investments, made value are not considered to be
by the company are of permanent nature. It was
intended to be held for long- viewed that presuming every
term; hence, diminutions in decline to be temporary or not
value of quoted investments

139
Study on Compliance of Financial Reporting Requirements

are generally not of permanent nature may not be

considered to be of correct. Based on prevailing
permanent nature. facts and circumstances one
may decide whether any decline
 Long-term investments are is a ‘temporary decline’ or ‘other
stated at cost. than temporary’ decline.
 Long-term Investments are In few cases the policy simply
stated at Cost and provision states that long-term
for diminution in value in the investments are valued at cost.
perception of the This indicates that provision for
management will only be diminution in value has not been
considered. considered. In one case,
 Long-term investments are provision is considered only on
stated at cost less the basis of management
provision, if any, for perception. In some other
permanent diminution in cases, long-term investments
value. are stated at cost less provision,
if any, for permanent diminution
 Long-term investments are in value. It was viewed that
carried at costs. Provision there is a difference between
for diminution in the value ‘permanent diminution in the
of long- term investments value of investments’ and ‘other
has been made as than temporary diminution in
applicable. value of investments’.

Accordingly, it was viewed that

the stated policies on valuation
of long term investments are not
in line with the requirements of
paragraph 32 of AS 13.

2. In the Annual Reports of some It may be noted that paragraph

companies the accounting 31 of AS 13, provides as
policies with regard to valuation follows:
of current investments have
been stated as follows: “31. Investments classified as
current investments should
 Current Investments are be carried in the financial
valued at cost or market statements at the lower of

140
Observations on Accounting Standards (AS) 13: Accounting for Investments

value, whichever is lower. cost and fair value determined

either on an individual
 Current investments are investment basis or by
stated at lower of cost and category of investment, but
net realisable value. not on an overall (or global)
 Current Investments, if any, basis.”
are carried at lower of costs From the stated accounting
and quoted/fair value, policies, it has been noted that
computed category-wise. in certain cases, the current
 Short-term Investments are investments have been valued
valued at lower of cost and at lower of cost and market
market value compared on value. In couple of other cases,
a scrip- wise basis. these were valued at lower of
cost and net realisable
 Current investments are value/quoted value. It was
valued at lower of cost or viewed that these companies
fair market value. have not considered fair value
of current investments. As per
paragraph 3.5 of AS 13, fair
value is defined as “the
amount for which an asset
could be exchanged between
a knowledgeable, willing
buyer and a knowledgeable,
willing seller in an arm’s
length transaction. Under
appropriate circumstances,
market value or net realisable
value provides an evidence of
fair value.”

Accordingly, it was viewed that

the market value of investment
does not always reflect its fair
value until or unless there is an
active market for such
investments. In the absence of
such information, adopting such

141
Study on Compliance of Financial Reporting Requirements

policy is considered to be not in

line with the requirements of
paragraph 31 of AS 13.

3. In the Annual Reports of few It may be noted that paragraph

companies it has been noted 35 (a) of AS 13, requires that:
that though these companies
have both non-current and “35. The following information
current investments of should be disclosed in the
significant amounts, the financial statements:
accounting policies adopted by (a) the accounting policies
them for valuation of such for determination of
investments have either not carrying amount of
been disclosed or have been investments;”
partly disclosed in the financial
statements. In the reported cases, it was
noted that these companies
have both non-current and
current investments of
significant amounts, however,
one company has not disclosed
any accounting policy for
determination of carrying
amounts of such investments
while the other companies have
disclosed accounting policies
only either with regard to long-
term investments or with regard
to current investments.

Accordingly, it was viewed that

the requirements of AS 13 have
not been complied with.

4. In the note on investments as It may be noted that paragraphs

given in the Annual Reports of a 26 and 35(e) of AS 13, provide
number of companies, that:
investments have been
classified in various ways as “26. An enterprise should
disclose current investments

142
Observations on Accounting Standards (AS) 13: Accounting for Investments

summarised below: and long term investments

distinctly in its financial
 Long-term investments in statements.”
wholly-owned subsidiaries.
“35(e) the aggregate amount
Current Investments. of quoted and unquoted
 Short term investments in investments, giving the
mutual funds (unquoted). aggregate market value of
quoted investments.”
 Unquoted and valued at
cost; It has been noted that in few
cases, the investments have not
Quoted and valued at cost. been classified as current
investments and long-term
 Non-current Investments investments. It has been further
and Current Investments. noted that in some cases
investments have not been
classified between trade
 Non-current Investments – investments and other
Quoted and Unquoted. investments. In few cases
aggregate value of unquoted
 Investments investments has not been
 Investments – Quoted and disclosed while in some other
Unquoted. cases market value of quoted
investments has not been
 Current Investments disclosed. In one case, it simply
(Unquoted) states Investments and nothing
else has been disclosed.
 Investments – Trade
(Quoted) and Trade In another case, investments
(Unquoted) have been classified as short-
term investments and long-term
 Non –Current Investments investments. It was viewed that
such classification is not in line
with the requirements of
paragraph 26 of AS 13, which
prescribes the classification of
investments as current and
long-term investments.

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Study on Compliance of Financial Reporting Requirements

Accordingly, it was viewed that

the stated classifications of
investments do not fully comply
with the requirements of AS 13
as well as paragraph 6k(i) of
Notes to General Instructions
for preparation of Balance Sheet
given under Revised Schedule
VI to the Companies Act, 1956.

5. In the Annual Reports of some It may be noted that paragraphs

companies, accounting policies 26, 31 and 32 of AS 13 provide
on investments have been as below:
disclosed as follows:
“26. An enterprise should
 Investments are stated at disclose current
cost. investments and long
term investments
 Investments are carried at distinctly in its financial
lower of cost or market statements.”
value and provision is made
to recognise any decrease “31. Investments classified as
in the carrying value, as current investments
applicable. Unquoted should be carried in the
investments are accounted financial statements at
at cost. lower of cost and fair
value determined either
on an individual
investment basis or by
category of investment,
but not on an overall (or
global) basis.”

“32. Investments classified as

long term investments
should be carried in the
financial statements at
cost. However, provision
for diminution shall be
made to recognise a

144
Observations on Accounting Standards (AS) 13: Accounting for Investments

decline other than

temporary, in the value of
the investments, such
reduction being
determined and made for
each investment
individually.”

From the above, it was noted

that the method of valuation of
investments depends upon the
nature of the investment i.e.
whether it is current investments
or long- term.

However, in one case, it was

observed that there is a blanket
policy of carrying all
investments at cost, and in the
other case, it states ‘at lower of
cost and market value and
provision is made to recognise
any decrease in the carrying
value, as applicable’. As
regards unquoted investments,
it is being carried at cost
regardless of the nature of such
investments.

It was viewed that valuing

investments without considering
the purpose and/or the period
for which these are intended to
be held is against the
requirements of AS 13. Further,
considering market value rather
than fair value is also not in line
with the requirement of AS 13.

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Study on Compliance of Financial Reporting Requirements

6. From the Annual Reports of It may be noted that paragraph

some companies it has been 35(c) of AS 13, requires
noted that Other Income inter following disclosures:
alia includes the following:
“35(c) the amounts included
 Profit on sale of in profit and loss statement
Investments for:

Less: Loss on sale of (i) Interest, dividends

Investments (showing separately
dividends from
 Dividend Income subsidiary companies),
and rentals on
 Gain of investments sold,
investments showing
net
separately such income
 Dividend Income on from long term and
current investments.
Investment in Subsidiaries Gross income should be
stated, the amount of
Investment in Associates
income tax deducted at
Other Investments source being included
under Advance Taxes
 Profit on sale of Paid.”
investments
(ii) profits and losses on
 Interest received disposal of current
investments and
 Interest-Others changes in the carrying
In the Annual Report of couple amount of such
of other companies one of the investments;
notes to accounts states as (iii) Profits and losses on
follows: disposal of long term
investments and changes
 Miscellaneous income
in the carrying amount of
includes income from
such investments.”
mutual fund investments
(non-trade) of Rs. xxx. It may be noted that paragraph
9.2.4 of General Instructions to
 Other Operational Treasury the Revised Schedule VI as
Income includes income given in ‘Guidance Note on the

146
 Observations on Accounting Standards (AS) 13: Accounting for Investments

from mutual fund operation Revised Schedule VI to the

of Rs. xxx, Profit on sale of Companies Act, 1956, also
investments of Rs.xxx and requires that:
Dividend income of Rs xxx.
“Other income items such as
interest income, dividend
income and net gain on sale of
investments should be disclosed
separately for Current as well as
Long-term Investments as
required by AS 13 “Accounting
for Investments…”

It may be noted from the above

requirements that dividend and
interest income from
investments as well as profit or
loss on disposal thereof should
be disclosed separately for
current investments and long-
term investments.

It was, however, observed that

in none of the reported cases
the nature of investment from
which dividend/interest income
and profit/loss from sale of
investment have arisen viz.
current investments and/ or long
term investments has been
disclosed.

Accordingly, it was viewed that

such presentation is not in line
with the requirements of AS 13
as well as Revised Schedule VI
to the Companies Act, 1956.

7. The note on Non-current It may be noted that paragraph

Investments (Long- term 3.1 of AS 13, states as follows:

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Study on Compliance of Financial Reporting Requirements

Investments) as given in the “3.1 Investments are assets

Annual Report of a company held by an enterprise for
states as follows: earning income by way of
dividends, interests, and
Additional contribution on rentals, for capital
account of Fair valuation appreciation, or for other
benefits to the investing
of Corporate Guarantee
enterprise. Assets held as
to the Lendors of its stock-in-trade are not
‘investments’.”
Subsidiary Companies*Rs xxx
From the above definition of
*Additional contribution
investments, it was viewed that
represents, the fair value of
such additional contribution
commission determined in terms
made for corporate guarantee
of AS 30 in respect of corporate
given to lenders of subsidiary
guarantee given by the
companies cannot be
company for financial facilities
considered to be an asset held
availed by its whollyowned
for earning income nor such
subsidiaries.
contribution appears to enhance
the company’s financial rights
on the subsidiaries. Hence, its
inclusion under the head
investment is not in line with the
requirements of AS 13.
It has further been observed
from the footnote to the note on
investments that such
contribution represents the fair
value of commission determined
in terms of AS 30 in respect of
corporate guarantee. It was
viewed that AS 13 does not
prescribe fair value of guarantee
to be considered as
‘investments’.

8. The following accounting policy It may be noted that paragraph

on investments has been

148
 Observations on Accounting Standards (AS) 13: Accounting for Investments

disclosed in the Annual Report 35 (a) of AS 13, requires that:

of a company:
“35. The following information
‘Investments are classified as should be disclosed in the
long-term and current on the financial statements:
basis of decision taken by the
Board of Directors at the time of (a) the accounting policies
making Investments.’ for determination of
carrying amount of
investments;

It was observed that as

disclosed in the accounting
policy the classification of
investments as current and
long-term investments is based
on the decision taken by the
Board of Directors. However,
the policy for determination of
carrying amount of
investments has not been
disclosed.

Accordingly, it was viewed that

the stated policy is not in line
with the requirement of
paragraph 35(a) of AS 13.

9. From the Annual Report of a It was noted from the stated

company, it has been noted that policy that cost includes interest
the accounting policy on on funds borrowed for
investment inter alia states that acquisition of investments. It
cost includes interest may be noted that AS 16
attributable to funds borrowed prescribes that borrowing cost
for acquisition of investments can be capitalised if it is directly
(equity instruments). attributable to acquisition of a
qualifying asset. Further,
qualifying asset has been
defined as an asset that
necessarily takes a substantial

149
Study on Compliance of Financial Reporting Requirements

period of time to get ready for

its intended use or sale.

It was viewed that equity

instruments are available for
their intended use or sale when
acquired and hence
capitalisation of borrowing cost
with the cost of investments is
against the principles of AS 16.

10. In the Annual Report of a It may be noted that paragraph

company, it has been noted that 17 of AS 13, provides that:
its investment in a wholly-owned
subsidiary has been stated at nil “17. Long-term investments are
value at the end of the year usually carried at cost.
under review while in the However, when there is a
previous year significant value decline, other than temporary, in
has been stated for which no the value of a long term
provision for diminution in value investment, the carrying amount
exists in the books although the is reduced to recognise the
accounting policy on decline. Indicators of the value
investments states that long- of an investment are obtained
term investments are stated at by reference to its market value,
cost, less provision for other the investee’s assets and
than temporary diminution in results and the expected cash
value, if any. flows from the investment. The
type and extent of the investor’s
It appears from the note to the stake in the investee are also
financial statements that taken into account. Restrictions
investment in wholly owned on distributions by the investee
subsidiary has been written off or on disposal by the investor
during the year and this writing may affect the value attributed
down has been done as part of to the investment.”
an internal restructuring. The
note further states thatover last It was noted from the note on
few years, the performance of investments as well as note to
the subsidiary was affected due the financial statements that the
to the recession which impacted investment in the subsidiary has
been written off during the year

150
 Observations on Accounting Standards (AS) 13: Accounting for Investments

the end customers resulting in under the review. It was further

falling revenues and operational noted from note that over last
losses. Subsequently, it has few years, the performance of
been decided to wind up this the subsidiary was affected due
subsidiary. to the recession, which resulted
in falling revenue and
operational losses.

It was viewed that an

appropriate provision against
the investments in the
subsidiary should have been
recognised in the years when
the indication of decline in value
of investment other than
temporary had arisen instead of
writing it off only when the
decision to wind up the
subsidiary has been taken.

Accordingly, it was viewed that

the requirements of AS 13 have
not been complied with.

11. In the Annual Report of a It has been noted that the

company cost of sales has been company was dealing in shares
shown as follows: as well as goods and therefore
closing stock comprises of both
Opening stocks goods and shares.
Add: Purchase of Goods
Add: Purchase of Shares With regard to shares held as
stock-in-trade, it was observed
Less: Closing Stock of Goods
from the stated accounting
Less: Closing Stock of Shares
policy that investments
classified as stock-in-trade were
valued at cost or market price
Further the related accounting whichever is lower.
policy is set out below:
It may be noted that paragraph
“…Securities acquired with the 1(c) of AS 2, Valuation of

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Study on Compliance of Financial Reporting Requirements

intention to trade considered as Inventoies and footnote 1 as

stock-in-trade. Investment given under AS 13, Accounting
classified as “stock-in-trade” are for Investment, provide as
valued at cost or market price, follows:
whichever is lower…”
AS 2

“1. This Standard should be

applied in accounting for
inventories other than: (c)
shares, debentures and other
financial instruments held as
stock-in-trade; and”

“Footnote 1 under AS 13
1 Shares, debentures and other
securities held as stock-in-trade
(i.e., for sale in the ordinary
course of business) are not
‘investments’ as defined in this
Standard. However, the manner
in which they are accounted for
and disclosed in the financial
statements is quite similar to
that applicable in respect of
current investments.
Accordingly, the provisions of
this Standard, to the extent that
they relate to current
investments, are also applicable
to shares, debentures and other
securities held as stock-in-trade,
with suitable modifications as
specified in this Standard.”

From the above, it was viewed

that the investments held as
stock-in-trade should be valued

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Observations on Accounting Standards (AS) 13: Accounting for Investments

on the basis of principles

prescribed for current
investments under AS 13.

It may further be noted that

paragraph 31 of AS 13, provides
that:

“31. Investments classified as

current investments should
be carried in the financial
statements at the lower of
cost and fair value determined
either on an individual
investment basis or by
category of investment, but
not on an overall (or global)
basis.”

It was therefore observed that

shares held as stock-in-trade
should have been valued at
lower of cost and fair value.
However, in the reported case,
such shares have been valued
at lower of cost and market
price.

It was viewed that it is not

always necessary that fair value
of investment is reflected by its
market value until or unless
there is an active market for
such investments. Accordingly,
the accounting policy as
adopted for valuation of shares
held as stock in trade is not in
line with the requirements of
paragraph 31 of AS 13.

153
 12
Observations on Accounting Standard (AS) 14:
Accounting for Amalgamations
S. Matters contained in the Observations
No Annual Report

1. From the note on fixed assets It may be noted that paragraph

given in the Annual Report of a 38 of AS 14, provides that:
company, it has been noted that
the fixed assets include Goodwill “38. The goodwill arising on
on Amalgamation, which is amalgamation should be
amortised over a period of five amortised to income on a
years. systematic basis over its
useful life. The amortisation
period should not exceed five
years unless a somewhat
longer period can be justified.”

It was observed that Goodwill on

Amalgamation has been
amortised over a period of five
years and that approximately
60% of the cost of goodwill has
been amortised till the previous
year. However, no amount has
been amortised during the
current year i.e. the year under
review.

It was, therefore, viewed that no

systematic basis of amortising
Goodwill on Amalgamation has
been followed, which is not in
line with the requirement of
paragraph 38 of AS 14.

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 Observations on Accounting Standard (AS) 15: Employee Benefits

2. From the note on accounting for It may be noted that paragraph

amalgamation as given in the 43 of AS 14, provides that:
Annual Report of a company, it
has been noted that various “43. For all amalgamations, the
disclosures have been given with following disclosures should
regard to amalgamations. be made in the first financial
Further, it has been noted that statements following the
accounting for amalgamations amalgamation:
has been done under the pooling (a) names and general nature
of interest method and the of business of the
number of equity shares issued amalgamating companies;
has been disclosed.
(b) effective date of
amalgamation for
accounting purposes;

(c) the method of accounting

used to reflect the
amalgamation; and

(d) particulars of the scheme

sanctioned under a
statute.”

It was observed from the

financial statements that
although various disclosures as
required under paragraph 43
have been made, the general
nature of business of the
amalgamating company has not
been disclosed.

It was further noted that the

amalgamation has been
accounted for under the pooling
of interest method, which
requires the following additional
disclosures as prescribed in

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Study on Compliance of Financial Reporting Requirements

paragraph 44 of AS 14:

“44. For amalgamations

accounted for under the
pooling of interests method,
the following additional
disclosures should be made in
the first financial statements
following the amalgamation:

(a) description and number

of shares issued, together
with the percentage of
each company’s equity
shares exchanged to
effect the amalgamation;

(b) the amount of any

difference between the
consideration and the
value of net identifiable
assets acquired, and the
treatment thereof.”

It was observed that althoughthe

number of equity shares issued
has been disclosed, the
percentage of each company’s
equity shares exchanged and the
accounting treatment of the
difference, if any, between the
consideration and the value of
net assets acquired has not been
disclosed.

Thus, it was viewed that the

disclosure requirements under
paragraphs 43 and 44 of AS 14
have not been fully complied
with.

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 Observations on Accounting Standard (AS) 15: Employee Benefits

3. A detailed note on the Schemes It may be noted that paragraph

of Amalgamation and 42 of AS 14, provides that:
Arrangement of the earlier years
as given in the Annual Report of “42. Where the scheme of
a company inter alia states as amalgamation sanctioned
follows: under a statute prescribes the
treatment to be given to the
‘Scheme of Amalgamation and reserves of the transferor
Arrangement of the earlier company after amalgamation,
years the same should be followed.
Where the scheme of
The Company, during the past amalgamation sanctioned
years, undertook variousunder a statute prescribes a
Schemes, including restructuring different treatment to be given
of ownership structure so as to to the reserves of the
align the interest of the transferor company after
shareholders. Accordingly, amalgamation as compared to
pursuant to the Schemes of the requirements of this
Amalgamation and Arrangement Standard that would have been
(“the Scheme”) under Sections followed had no treatment
391 to 394 of the Companies been prescribed by the
Act, 1956 approved by the scheme, the following
Hon’ble High Courts ofdisclosures should be made in
respective judicature, thethe first financial statements
company, during the respective following the amalgamation:
years, recorded all necessary
accounting effects, along with (a) A description of the
requisite disclosure in the notes accounting treatment given
to the accounts. The cumulative to the reserves and the
effects of the Schemes have reasons for following the
been disclosed: treatment different from
that prescribed in this
... Standard.
(i) General Reserves I of Rs. (b) Deviations in the
xxx representing the accounting treatment given
unadjusted balance being to the reserves as
the excessof assets over prescribed by the scheme
liabilities relatable to of amalgamation
Telecommunications sanctioned under the
Undertaking transferred to statute as compared to the

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Study on Compliance of Financial Reporting Requirements

and vested in the requirements of this

Company. Standard that would have
been followed had no
(ii) Reserve for Business treatment been prescribed
Restructuring of Rs xxx by the scheme.
representing the
unadjusted balance of (c) The financial effect, if any,
revaluation of investment arising due to such
in xxx Ltd … after deviation.
withdrawing an amount
equivalent to writing off It may be also noted that section
Infrastructure 211 of Companies Act 1956 ,
11
Passive
assets, … transferred to inter alia, states as below:
the Statement of Profit “ …
and Loss balance in
Reserve for Business (3B) Where the profit and
Restructuring shall be loss account and the balance
available to meet the sheet of the company do not
increased depreciation, comply with the accounting
costs, expenses and standards, such companies
losses including on shall disclose in its profit and
account of impairment of loss account and balance
or write down of assets sheet, the following, namely:-
etc.
a) the deviation from the
(iii) Additional depreciation accounting standards;
arising on fair value of the
assets has been adjusted b) the reasons for such
from General Reserve II deviation; and
and Provision for
c) the financial effect, if any,
Business Restructuring.’
arising due to such
deviation.”

It was viewed that if the effect of

a deviation from the treatment
prescribed by an Accounting
Standard continues in the
financial statements of the

11 Requirement is still relevant under Section 129(1) and (5) of Companies Act, 2013

158
Observations on Accounting Standard (AS) 15: Employee Benefits

subsequent periods, the financial

statements of those periods
should also comply with the
requirements of paragraph 42
read with the requirements of the
Companies Act, 1956. (It is also
supported by the Expert Advisory
Opinion on Query No 30 of
Compendium of Opinion Volume
XXXIV.)

Having regard to the above

requirements, the following
discrepancies have been noticed
between the accounting
treatment followed pursuant to
the court order and that
prescribed by the accounting
standard:
i. It was noted from Note (ii)
that the reserve created
from the revaluation of
investment has been utilised
to write off the passive
infrastructure assets.
However, the balance
transferred to write off such
assets has not been
disclosed.

ii. Further, it was noted from

Note (iii) that additional
depreciation arising on fair
value of the assets has been
adjusted against General
Reserve II and provision for
business restructuring.

It was viewed that utilisation

of reserve to write off fixed

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Study on Compliance of Financial Reporting Requirements

assets as well as adjustment

of additional depreciation
against reserve is not in line
with AS 10, ‘Accounting for
Fixed Assets’. Hence, a
description of the difference
between the accounting
treatments prescribed in the
Accounting Standard and
that followed by the
Company as well as the
financial impact thereof
should have been disclosed.

iii. As stated in note (i) the

excess of assets over
liabilities has been
transferred to General
Reserve in accordance with
the schemes approved by
the Hon’ble High Courts
whereas in terms of the
requirements of Paragraphs
17 and 37 of AS 14
‘Accounting for
Amalgamations’ the
difference should have been
treated as Capital Reserve.
However, a description of
the difference in the
accounting treatments has
not been disclosed.

Therefore, it was viewed that the

company has not complied with
the disclosure requirements of
paragraph 42 of AS 14.

4. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 38 of AS 14, provides that:
Fixed Assets include Goodwill of

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 Observations on Accounting Standard (AS) 15: Employee Benefits

a significant amount. “38. The goodwill arising on

amalgamation should be
amortised to income on a
systematic basis over its
useful life. The amortisation
period should not exceed five
years unless a somewhat
longer period can be justified.”
It was observed that no
accounting policy has been
disclosed with regard to the
accounting of goodwill. Hence, it
was not clear whether the
goodwill was internally generated
or has arisen on amalgamation.
Since internally generated
goodwill cannot be recognised, it
was assumed that it has arisen
on amalgamation.
It may be noted from paragraph
38 stated above that goodwill
arising on amalgamation should
be amortised over a period of
five years unless a somewhat
longer period can be justified.
However, it was observed that
the goodwill has neither been
amortised nor any reason for its
non amortisation has been
disclosed.
Accordingly, it was viewed that
the requirements of AS 1 [non
disclosure of accounting policy]
as well as AS 14 [non
amortisation of goodwill] have
not been complied with.

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 13
Observations on Accounting Standard (AS) 15:
Employee Benefits
S. Matters contained in the Observations
No Annual Report

1. Note forming part of Accounts It has been noted from the stated
regarding Employee Benefits note that no provision for gratuity
given in the Annual Report of a has been made on the pretext
company reads as follows: that none of the employees have
completed five years.

Answer to Question No. 14 of

ASB Guidance on Implementing
AS 15, Employee Benefits
(Revised 2005), issued by the
Accounting Standard Board,
states as follows:

“In this case, the employee’s right

to receive the benefit is
conditional on future employment
for a period of five years.
Although there is a possibility
that the benefit may not vest,
there is also a probability that the
employee would serve for the
minimum period of five years and
become eligible for gratuity. An
obligation exists even if a benefit
is not vested. The obligation
arises when the employee
renders the service though the
benefit is not vested. The
measurement of this obligation at

162
 Observations on Accounting Standard (AS) 15: Employee Benefits

its present value takes into

account the probability that the
benefit may not vest and this is
appropriately factored in the
calculation of the present value of
the defined benefit obligation. An
enterprise should, therefore,
create a provision in respect of
gratuity payable during the first
five years of service of an
employee.”

From the above, it was viewed

that the provision for gratuity
should be created irrespective of
the fact as to whether the
employees have completed or
not completed five years of
service.

2. From the Note on Employee It may be noted that Paragraph

Benefits given in the Annual 119 of AS 15, provides as
Report of a company, it has been follows:
noted that Leave Encashment
Benefit is provided for on the “119. An enterprise should
basis of an actuarial valuation. disclose information that
enables users of financial
From the Annual Report of statements to evaluate the
another companies, it has been nature of its defined benefit
noted that the accounting policy plans and the financial effects
relating to various employee of changes in those plans
benefits (defined benefits) have during the period.”
been disclosed and they are in
line with AS 15. Further, Paragraph 120 of AS 15
requires the companies to
disclose the information relating
to defined benefit plans in
accordance with the
requirements specified there
under.

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Study on Compliance of Financial Reporting Requirements

It has been noted that although

as per accounting policy there is
a defined benefit plan for leave
encashment, no disclosure has
been made with regard to same
as per the requirement of
paragraph 120 of AS 15.

It was further observed that

although the accounting policy
relating to various employee
benefits are disclosed, and they
are in line with AS 15, no
disclosure has been given in
respect of employee benefits in
the nature of defined benefits as
per the requirement of paragraph
120 of AS 15.

3. From the Note relating to It was noted from the objective

Employee Benefits given in the paragraph read with paragraph
Annual Report of a company that 94 of AS 15, which states as
it had not recognised past year’s follows;
liability in respect of gratuity and
leave encashment representing “The objective of this statement
liability of past years, which the is to prescribe the accounting
company intends to account on a and disclosure for employee
straight-line basis over three benefits. The Statements
years commencing the current requires an enterprise to
financial year. recognise:

(a) a liability when an employee

has provided service in
exchange for employee
benefits to be paid in the
future; and

(b) an expense when the

enterprise consumes the
economic benefit arising
from service provided by an

164
 Observations on Accounting Standard (AS) 15: Employee Benefits

employee in exchange for

employee benefits.

“94. In measuring its defined

benefit liability under
paragraph 55, an Enterprise
should recognise past service
cost as an expense on a
straight line basis over the
average period until the
benefits become vested. To the
extent that the benefits are
already vested immediately
following the introduction of,
or changes to, a defined
benefit plan, an enterprise
should recognise past service
cost immediately.”

It was viewed from the above that

the company should immediately
recognise past service cost.
However, if such benefit would
be vested in future, such past
service cost can be recognised
on straight line basis until the
benefits become vested. It was
viewed that neither gratuity nor
leave encashment benefit are of
the nature of later kind of
benefits; hence past service cost
in respect of them should be
recognised immediately.

4. The accounting policy for It has been noted that paragraph

employee benefits given in the 49 of AS 15,provides as follows:
Annual Report of various
companies, states as follows: “49. Accounting for defined
benefit plans is complex because

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Study on Compliance of Financial Reporting Requirements

 actuarial
Provision for gratuity is made assumptions are
in the accounts considering required to measure the
the Balance sheet date as obligation and the expense and
the notional date there is a possibility of actuarial
of
retirement. gains and losses. Moreover, the
obligations are measured on a
 Provision for leave discounted basis because they
encashment and gratuity are may be settled many years after
determined on estimated the employees render the related
basis in accordance with the service. While the Standard
rules of the company. requires that it is the
 Liability towards Gratuity responsibility of the reporting
has been provided as per enterprise to measure the
management's calculation obligations under the defined
base on the service benefit plans, it is recognised that
contracts. Provision has for doing so the enterprise would
been made for Leave normally use the services of a
Encashment on actual basis. qualified actuary.”

 For defined benefit scheme In view of above, it was felt

viz. gratuity, cost of that defined benefit plan requires
providing benefits is measurement of liability based on
determined on actual in actuarial assumption which is
accordance with the further explained under
provision of payment of paragraphs 73, 75 and 76 as
Gratuity Act, follows:
1975.(emphasis supplied) “73.Actuarial assumptions
comprising demographic
assumptions and financial
assumptions should be
unbiased and mutually
compatible........”

“75. Actuarial assumptions are

unbiased if they are neither
imprudent nor excessively
conservative.”

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Observations on Accounting Standard (AS) 15: Employee Benefits

“76.Actuarial assumptions are

mutually compatible if they reflect
the economic relationships
between factors such as inflation,
rates of salary increase, the
return on plan assets and
discount rates......”

It was noted that the said

paragraphs clearly states that
actuarial assumption should not
be excessively conservative and
it should reflect the economic
relationship between factors such
as inflation, rates of salary
increase etc. However, it was
noted that in the reported cases,
the liability for gratuity has been
determined on the premise that
the Balance Sheet date is the
notional date of retirement or
determined on estimated basis
according to the rules of the
company, which is against the
aforesaid requirement of actuarial
assumption. The Standard further
requires various disclosures
relating to actuarial valuation to
be made in terms of paragraph
120.

Further, in one case, it was also

observed that usage of the term
‘actual basis’ is not clear as to
whether the liabilities are being
measured when leaves are
earned or availed by the
employees. Thus, the stated

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Study on Compliance of Financial Reporting Requirements

policy is also considered to be

ambiguous.

5. From Note on Employee Benefits It may be noted that the

relating to Liability for recognition and measurement
superannuation fund given in the requirement of paragraph 45 of
Annual Report of a company, it AS 15, provides as follows:
has been noted that the same is
provided for on the basis of “When an employee has
premium paid to insurance rendered service to an
companyin respect of employees enterprise during a period, the
covered under Superannuation enterprise should recognise
Fund Scheme. the contribution payable to a
defined contribution plan in
exchange for that service:

(a) as a liability (accrued

expense), after deducting
any contribution already
paid. If the contribution
already paid exceeds the
contribution due for
service before the balance
sheet date, an enterprise
should recognise that
excess as an asset
(prepaid expense) to the
extent that the prepayment
will lead to, for example, a
reduction in future
payments or a cash
refund; and

(b) as an expense, unless

another Accounting
Standard requires or
permits the inclusion of
the contribution in the
cost of an asset (see, for
example, AS 10,

168
 Observations on Accounting Standard (AS) 15: Employee Benefits

Accounting for Fixed

Assets).”

It was observed that the liability

for superannuation fund was
being provided on the basis of
premium paid to insurance
company. However, it has not
been mentioned as to whether
the said premium is the
appropriate accrual of the liability
for the year or not. The company
has also not indicated as to
whether the scheme covers all
past as well as present liabilities
or it covers only the present
liability for the current year. It
was felt that in the absence of
specific mention to this effect, it
is possible that the scheme does
not cover past liabilities and/ or
that the premium charged is not
the appropriate accrual of the
liability for the year. It was
viewed that in such a case, the
company was required to create
a provision for past liability in the
books and/ or additional liability
for the year, as appropriate.
However, in case the company
has ignored this aspect, then it
would be contrary to paragraph
45 of AS 15.

6. The accounting policy for the The following discrepancies were

Employee Benefits given in the observed with respect to
Annual Report of a company Employee Benefits:
reads as follows:
(i) It was noted from the

169
Study on Compliance of Financial Reporting Requirements

‘Company's liability towards accounting policy for gratuity

Gratuity in respect of Directors on that although gratuity in
full time employment has been respect of all other
provided for and not funded. employees has been
Company's liability towards determined on an actuarial
Gratuity in respect of all other basis, in respect of directors
employees is worked out on the same basis has not been
actuarial basis. followed. It was viewed that
liability towards gratuity are in
Liability on account of leave the nature of defined benefit
salary has been provided for in obligation and hence non-
accordance with the scheme in determination of the liabilities
force.’ on actuarial basis is against
the requirement of AS 15.

(ii) As per AS 15, if the employer

provides retirement benefit
viz. gratuity, leave
encashment to its employees
then the company is required
to disclose certain information
as specified under paragraph
120 of AS 15, as reproduced
below:

“120. An enterprise should

disclose the information
about defined benefit plan
as mentioned in clause (a)
to (o)”

It was observed from the

accounting policy relating to
gratuity for employees other
than directors as well as Note
relating to accounting for
leave salary that the
company is providing
benefits in the nature of
defined benefits plans,

170
 Observations on Accounting Standard (AS) 15: Employee Benefits

accordingly, it was viewed

that the disclosures
requirements prescribed
under paragraph 120 of AS
15 should have been
complied with in context of
both liability for gratuity and
leave salary. However, it was
observed from Notes to
Accounts that no disclosures
have been made with regard
to the same. It is again a
non-compliance of AS 15.

7. Accounting policy on Employee As per answer to Q.9 in ASB

Benefits given in the Annual Guidance on Implementing AS
Report of a company, reads as 15, Employee Benefits, where
under: company provide for the
deficiency in the rate of interest
‘Defined contribution plans are on the contributions based on its
provident fund scheme and part return on investment as
of the pension fund scheme for compared to the rate declared for
eligible employees. The Employees Provident Fund then
Company's contribution to such provident fund would
defined contribution plans are tantamount to a guarantee of a
recognised in the Statement of specified rate of return. As per
Profit and Loss in the financial AS 15 where in terms of any plan
year to which they relate. the enterprise’s obligation is to
The Company makes specified provide the agreed benefits to
monthly contribution towards employees and the actuarial risk
employee provident fund and (that benefits will cost more than
pension fund to respective trusts expected) and investment risk
administered by the Company. fall, in substance, on the
The minimum interest payable by enterprise, the plan would be
the provident fund trust to the defined benefit plan.
beneficiaries every year is Accordingly, provident funds set
notified by the Government. The up by employers which requires
company has an obligation to interest shortfall to be met by the
employer would be in effect

171
Study on Compliance of Financial Reporting Requirements

make good the shortfall, if any, defined benefit plans in

between the return on accordance with the
investments of the trust and the requirements of paragraph 26(b)
notified interest rate.’ of AS 15.

In view of above, it was felt that

in the given case, shortfall in the
interest rate is met by the
company and accordingly, such
provident fund is a defined
benefit plan rather than defined
contribution.

8. From the Annual Reports of It may be noted that paragraph

some companies, it has been 120 of AS 15 prescribes various
noted that the companies have disclosures in relation to
provided for gratuity plan as well retirement benefits in the nature
as leave encashment. Further, it of defined benefit plans which
has been noted that the inter alia requires as follows:
companies have given certain
disclosures in pursuance to AS “120. An enterprise should
15. disclose the following
information about defined
benefit plans:

(a) the enterprises accounting

policy for recognizing
actuarial gains and losses;

(b)…

(c)…

(f) a reconciliation of the

present value of the
defined benefit obligation
in (c) and the fair value of
the plan assets in (e) to
the assets and liabilities
recognised in the balance

172
Observations on Accounting Standard (AS) 15: Employee Benefits

sheet, showing at least:

(i) the past service cost

not yet recognised in
the balance sheet
(see paragraph 94);

(ii) any amount not

recognised as an
asset, because of the
limit in paragraph
59(b);

(iii) the fair value at the

balance sheet date of
any reimbursement
right recognised as
an asset in
accordance with
paragraph 103 (with a
brief description of
the link between the
reimbursement right
and the related
obligation); and

(iv) the other amounts

recognised in the
balance sheet.

(i) the amounts included in

the fair value of plan
assets for:

(i) each category of the

enterprise’s own
financial instruments;
and

(ii) any property

occupied by, or other

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Study on Compliance of Financial Reporting Requirements

assets used by, the

enterprise.

(h) for each major category of

plan assets, which should
include, but is not limited
to, equity instruments,
debt instruments,
property, and all other
assets, the percentage or
amount that each major
category constitutes of
the fair value of the total
plan assets.

(n) the amounts for the

current annual period and
previous four annual
periods of:

(i) the present value of

the defined benefit
obligation, the fair
value of the plan
assets and the
surplus or deficit in
the plan;

(ii) the experience

adjustments arising
on:

(A) The plan liabilities

expressed either as
(1) an amount or (2) a
percentage of the
plan liabilities at the
balance sheet date;
and

(B) The plan assets

174
 Observations on Accounting Standard (AS) 15: Employee Benefits

expressed either as
(1) an amount or
(2) a percentage of
the plan assets at the
balance sheet date.

(o) the employer’s best

estimate, as soon as it
can reasonably be
determined, of
contributions expected to
be paid to the plan during
the annual period
beginning after the
balance sheet date.”

It was observed that although

certain disclosures related to
paragraph 120 have been made,
disclosures under paragraph 120
(a), (f), (h) (i), (n) and (o) have
not been made.

9. The accounting policy relating to It was noted from the accounting

employee benefits given in the policy of Gratuity that the
Annual Report of a company, accounting principles as adopted
reads as follows: by the company for recognition
and measurement of provision
‘Provision for Gratuity has been for gratuity have not been
made and is charged to disclosed viz whether they are
Statement of Profit and Loss. recognised on accrual basis;
Leave Encashment and other whether estimated on actuarial
Benefits are charged to revenue basis or otherwise.
on accrual basis.’
Further, it has been noted that
the provision for leave
encashment has been made on
accrual basis. It was viewed that
although it has been stated to
have followed accrual basis of

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Study on Compliance of Financial Reporting Requirements

accounting, whether such liability

has been determined on
actuarial basis or not was not
disclosed.

10. From the notes to accounts of a It may be noted that paragraph

company, it has been noted that 55 of AS 15, provides as follows:
in respect of its gratuity liability
funded through an insurance “55. The amount recognised as
company, it disclosed ‘Provision a defined benefit liability
for gratuity’ under the head of should be the net total of the
‘Provisions’ and ‘LIC Group following amounts:
Gratuity Account’ under the head (a) the present value of the
‘Loans and Advances’. defined benefit obligation
at the balance sheet date
(see paragraph 65);

(b) minus any past service

cost not yet recognised
(see paragraph 94);

(c) minus the fair value at the

balance sheet date of plan
assets (if any) out of
which the obligations are
to be settled directly (see
paragraphs 100-102).”

From the above, it was viewed

that defined benefit liability is
recognised at present value of
such obligations as at the
balance sheet date minus fair
value of plan assets as on that
date.

It was noted from the Balance

Sheet that whereas ‘Provision for
Gratuity’ relates to the present
value of obligations against

176
 Observations on Accounting Standard (AS) 15: Employee Benefits

gratuity, LIC Group Gratuity

account under the head ‘loans
and advances’ provides the fair
value of such assets as on that
date. Accordingly, it was viewed
that the two (provision for gratuity
and LIC group gratuity account)
had not been adjusted against
each other which is not in line
with the requirements of
paragraph 55 of AS 15.

11. The accounting policy of It was noted from note

Employee Benefits given in the regarding disclosure under AS
Annual Report of a Company, 15 on employee benefits that the
reads as follows: liabilities towards gratuity has
been estimated on actuarial
‘No provision has been made for basis; however, as per the
gratuity liability. Gratuity will be stated accounting policy it has
recognised in the year of its not been provided for but
payment.’ recognised when it is paid. It
was viewed that as per AS 15
the liabilities towards gratuity is
required to be recognised on
accrual basis. Hence, it was
viewed that merely estimating
the liabilities does not mean
compliance with the stated
standard.

12. From the note relating to It was noted that although the
employee cost given in the Contribution to PF & ESI has
Annual Report of a company it been charged to the Statement
has been noted that although it of Profit and Loss, the
included “Contribution to accounting policy as adopted by
Provident Fund and Employees the company for its recognition
State Insurance Scheme”, there has not been disclosed.
was no disclosure of the
accounting policy relating thereto. In the absence of the accounting

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Study on Compliance of Financial Reporting Requirements

Further, it was stated in the policy, it is not clear as to

accounting policy relating to whether the said contribution is
gratuity that the same is funded. an appropriate estimation of the
accrual of liability for the year or
not. Further, it also does not
indicate whether such estimation
covers all past liabilities or it
covers only the present liability
for the current year.

It was further noted from the

disclosures relating to the
gratuity liabilities that while the
present value of the stated
obligations have been described
as funded, fair value of plan
assets has been stated at nil
which indicates that no funds
have earmarked for the same.
Accordingly, it was viewed that
the details of disclosures
contradicts among themselves.

13. A note on ‘employee benefits’ It may be noted that paragraphs

given in the Annual Report of a 57, 58 and 64 of AS 15, provide
company, reads as below: as under;

“Provisions for the leave “57. An enterprise should

encashment & gratuity liabilities, determine the present
which are not funded, have been value of defined benefit
determined using the Projected obligations and the fair
Unit Credit method and are value of any plan assets
based on the results of the with sufficient regularity
Actuarial Valuation carried out as that the amounts
on 31st March 2008 in terms of recognised in the financial
the revised AS 15. Provision for statements do not differ
current year has been made materially from the
based on internal workings.” amounts that would be
determined at the balance
sheet date.”

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Observations on Accounting Standard (AS) 15: Employee Benefits

“58. The detailed actuarial

valuation of the present
value of defined benefit
obligations may be made
at intervals not exceeding
three years. However, with
a view that the amounts
recognised in the financial
statements do not differ
materially from the amounts
that would be determined at
the balance sheet date, the
most recent valuation is
reviewed at the balance
sheet date and updated to
reflect any material
transactions and other
material changes in
circumstances (including
changes in interest rates)
between the date of
valuation and the balance
sheet date. The fair value of
any plan assets is
determined at each balance
sheet date (emphasis
supplied).”
“64. The ultimate cost of a
defined benefit plan may be
influenced by many
variables, such as final
salaries, employee turnover
and mortality, medical cost
trends and, for a funded
plan, the investment
earnings on the plan assets.
The ultimate cost of the plan
is uncertain and this
uncertainty is likely to persist

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Study on Compliance of Financial Reporting Requirements

over a long period of time. In

order to measure the present
value of the post-
employment benefit
obligations and the related
current service cost, it is
necessary to:

(a) apply an actuarial

valuation method (see
paragraphs 65-67);

(b) attribute benefit to

periods of service (see
paragraphs 68-72); and

(c) make actuarial

assumptions (see
paragraphs 73-91).”

From the above, it was noted that

actuarial valuation is required to
be carried out regularly at
intervals not exceeding three
years and that to measure the
present value of defined benefit
obligation, it is necessary to
apply actuarial valuation method
attributing benefit to periods of
service and making relevant
actuarial assumption for future.
It was noted from the stated
policy that the last actuarial
valuation was carried out in
March 2008 and thereafter for
current year estimations, certain
internal working has been done.

It was, accordingly, observed that

basis of recognition of employee
benefit costs on internal workings

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 Observations on Accounting Standard (AS) 15: Employee Benefits

without determining the actual

present value regularly is not in
accordance with AS 15.

14. From the disclosure given in It may be noted that paragraph

pursuance to paragraph 120 of 120 (h) of AS 15 provides as
AS 15 given in the Annual follows:
Report, it has been noted that
under footnote, the plan assets “120. An enterprise should
are fully represented by balance disclose the following
with LIC of India. information about defined
benefit plans:

(h) for each major

category of plan
assets, which should
include, but is not
limited to, equity
instruments, debt
instruments,
property, and all
other assets, the
percentage or
amount that each
major category
constitutes of the fair
value of the total
plan assets.”

From the above, it was noted that

the company is required to
disclose the nature of instrument
in which plan assets are held by
it. It was noted that the ‘assets
under scheme of insurance’ has
been disclosed as a category of
plan assets held by it and it is
stated under footnote that plan

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Study on Compliance of Financial Reporting Requirements

assets are fully represented by

balance with LIC of India. It was
viewed that the insurance
company merely manages the
fund on behalf of the company. In
practice, insurance company also
holds equity fund, debt fund or
their combination against funds
of the company. Accordingly, the
nature of funds so held by
insurance company should have
been disclosed as per the
requirement of paragraph 120 (h)
of AS 15.

15. From the note relating to It was noted that all employees of
employee benefits expense of a the enterprise are on secondment
company, it has been noted that posting from holding company
Employee benefits include and employee benefits paid are
amount debited by the holding debited by holding company on it.
company towards leave,
superannuation and other It was viewed that AS 15 is
benefits of employees posted on applicable to all forms of
secondment basis from the employer-employee relationships.
holding company. There is no requirement for a
formal employer-employee
relationship. An employee may
provide services to an enterprise
on a full-time, part-time,
permanent, casual or temporary
basis. There are several factors
that need to be considered to
determine the nature of
relationship. It was viewed that in
given case, though the holding
company is legal employer of the
employee but in substance the
employees are rendering
services to the subsidiary

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 Observations on Accounting Standard (AS) 15: Employee Benefits

company and employee benefits

are being paid by the enterprise
to its employees, though final
obligations may be settled by the
holding company. It was
accordingly viewed that
considering the nature of
obligations borne by the
enterprise in respect of such
benefits, they should be
classified as defined benefits
and/or defined contribution plans
and accordingly related policy
should be disclosed and related
disclosures under paragraph 120
of AS 15 should be made.

16. It was observed from the Note It was noted that the employees
relating to “Employment benefits include defined
Expenses” of a company that contribution and defined benefit
only the aggregate amount of plans. However, the expense
“Salaries and Allowances” was incurred during the year against
disclosed. such plans was not disclosed
separately, as required under
paragraphs 47 and 120(g) of AS
15, as reproduced below:

“47. An enterprise should

disclose the amount
recognised as an expense for
defined contribution plans.”

“120(g) the total expense

recognised in the statement of
profit and loss…..and the line
item(s) of the statement of
profit and loss in which they
are included…”

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 14
Observations on Accounting Standard (AS) 16:
Borrowing Costs
S. Matters contained in the Observations
No Annual Report

1. One of the notes to accounts as It may be noted that paragraph 3

given in the Annual Report of a of AS 16, provides that:
company states as follows:
“3. Borrowing costs are
‘…Net cost of derivative interest and other costs
transaction of Rs. xxx is added incurred by an enterprise in
to cost of borrowing.’ connection with the borrowing
of funds.”

It was observed that the cost of

derivative transactions has been
added to the cost of borrowings.
It was viewed that cost of
derivative transaction is not a
borrowing cost as it is neither an
ancillary cost incurred in
connection with the arrangement
of borrowings nor it is an
exchange difference arising on
the amount of principal of the
foreign currency borrowings.
Therefore, derivative costs
should not be added to the cost
of borrowings as per the
requirement of AS 16.

2. In the Annual Reports of some It may be noted that paragraph

companies, the accounting 19 of AS 16 and paragraphs 9.4

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 Observations on Accounting Standard (AS) 16: Borrowing Costs

policy on borrowing costs has and 20 of AS 10, provide as

been stated as under: under:

 Borrowing costs include AS 16

interest, fees and other
charges incurred in “19. Capitalisation of
connection with the borrowing costs should cease
borrowing of funds and is when substantially all the
considered as revenue activities necessary to prepare
expenditure for the year in the qualifying asset for its
which it is incurred except intended use or sale are
for borrowing costs complete.”
attributed to the acquisition / AS 10
improvement of qualifying
capital assets and incurred “9.4 If the interval between the
till the commencement of date a project is ready to
commercial use of the commence commercial
asset and which is production and the date at
capitalised as cost of that which commercial production
asset. actually begins is prolonged,
all expenses incurred during
 Borrowing costs directly the period are charged to the
attributable to the profit and loss statement.”
acquisition or construction
of qualifying assets are “20. The cost of a fixed asset
capitalised as part of the should comprise its purchase
cost of the assets up to the price and any attributable cost
date the assets are put to of bringing the asset to its
use. Other borrowing costs working condition for its
are charged to the intended use.”
Statement of Profit & Loss
in the year in which they are It may be noted from the above
incurred. that capitalisation of borrowing
costs should cease when
 Expenditure during substantially all the activities
construction period necessary to prepare the
(including financing cost qualifying asset for its intended
relating to borrowed funds use or sale are complete i.e. the
for construction or asset is ready for its intended

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Study on Compliance of Financial Reporting Requirements

acquisition of qualifying use and that any costs incurred

fixed assets) incurred on thereafter should be charged to
projects under the Statement of Profit and Loss.
implementation are treated It was, however, observed from
as Pre-operative expenses, the stated accounting policies
pending allocation to the that the borrowing costs are
assets, and are included capitalised till the
under ‘Capital Work in commencement of commercial
Progress’. These expenses use/production/operations or up
are apportioned to fixed to the date the assets are put to
assets on commencement use. In one case, the policy
of commercial production. states ‘till the date of
capitalisation’. In this case, it is
 Fixed assets are shown at not clear what is the date of
cost or valuation less capitalisation– date when the
depreciation. Cost asset is ready for its intended
comprises of the purchase use or when it is put to use.
price and other attributable
expenses including cost of Accordingly, it was viewed that
borrowings till the date of the stated accounting policies on
capitalisation in the case borrowing costs are not in line
of assets involving with the requirements of AS 16
material investment and as well as AS 1012.
substantial lead time.

 In case of new projects and

in case of substantial
modernisation/ expansion at
existing units of the
company expenditure
incurred, including interest
on borrowings and financing
cost on specific loans prior
to commencement of
commercial production is
capitalised.

 Borrowing costs that are

12 Subsequent to the observation of the Board, AS 10 has been revised.

186
 Observations on Accounting Standard (AS) 16: Borrowing Costs

attributable to the
acquisition or construction
of qualifying assets are
capitalised as part of the
cost of such assets upto
the commencement of
commercial operations…

 Borrowing cost is charged

to the Statement of Profit
and Loss except meant for
acquisition of qualifying
assets, which is capitalised
till the date of commercial
use (emphasis supplied).

3. In the Annual reports of few It may be noted that paragraph

companies, borrowing costs in 23 of AS 16, states as follows:
the form of interest and finance
charges, including premium on “23.The financial statements
redemption of debentures of should disclose:
significant amounts have been (a) the accounting policy
disclosed in the notes forming adopted for borrowing
part of the Statement of Profit costs; and
and Loss. However, no
accounting policy on such (b) the amount of borrowing
borrowing costs has been costs capitalised during
disclosed. the period.”

Further, from the Annual Reports It may be noted from the above
of some other companies, it has that the accounting policy
been noted that though the adopted for borrowing costs as
accounting policy on borrowing well as the amount of borrowing
costs has been disclosed the costs capitalised during the
amount of borrowing costs period should be disclosed.
capitalised during the period has However, it was observed that in
not been disclosed in the some cases the accounting
financial statements. policy for borrowing cost has not
been disclosed. In some other

187
Study on Compliance of Financial Reporting Requirements

cases, though the accounting

policy on borrowing costs has
been disclosed, the amount of
borrowing costs capitalised has
not been disclosed.

Accordingly, it was viewed that

such non disclosure is not in line
with the requirements of
paragraph 23 of AS 16.

4. In the Annual Reports of some It may be noted that paragraphs

companies following accounting 3.2, 6, 19 and 23 of AS 16,
policies have been disclosed provide as follows:
with regard to capitalisation of
borrowing costs: “3.2 A Qualifying asset is an
asset that necessarily takes a
 Construction Period substantial period of time to
Expenses On Projects get ready for its intended use
of sale.”
a. …
“6. Borrowing costs that are
b. Financing cost incurred
directly attributable to the
during the construction
acquisition, construction or
period on loans
production of a qualifying
specifically borrowed
and utilised for asset should be capitalised as
projects is capitalised. part of the cost of that asset.”
Financing cost ”19. Capitalisation of
includes exchange rate
borrowing costs should cease
variation in relation to
when substantially all the
borrowings
activities necessary to prepare
denominated in foreign
the qualifying asset for its
currency.
intended use or sale are
c. Financing cost, if any, complete.”
incurred on general
borrowings used for “23. The financial statements
projects during the should disclose:
construction period is
(a) the accounting policy
capitalised at the
adopted for borrowing

188
 Observations on Accounting Standard (AS) 16: Borrowing Costs

weighted average cost. costs; and

 Fixed Assets (b) the amount of borrowing
costs capitalised during
... Interest on borrowing
the period.”
for acquisition of qualifying
asset is capitalised... It was observed in the reported
cases that borrowing costs
 Fixed assets
incurred in relation to
Fixed assets are stated at construction/acquisition of fixed
cost less accumulated assets for new projects or
depreciation and expansion of existing projects
accumulated impairment have been capitalised without
losses, if any. Cost considering whether such fixed
comprises of purchase price assets are qualifying assets that
and other directly necessarily take substantial time
attributable costs of to get ready for their intended
bringing the asset to its use as required by paragraphs
working condition for its 3.2 and 6 of AS 16.
intended use and includes
It was further observed that no
interest on moneys
separate accounting policy on
borrowed for
borrowing costs has been
construction/acquisition of
stated; rather the related
fixed assets up to the period
accounting policy has been
the assets are ready for
included in the accounting policy
use.
for Construction Period
 Fixed Assets expenses on projects or Fixed
assets, which is not strictly in
All fixed assets are stated line with the requirements of
at cost of acquisition less paragraph 23 of AS 16.
accumulated depreciation
and includes adjustment It may be noted from paragraph
arising from exchange rate 19 of AS 16 as stated above that
variations attributable to capitalisation of borrowing costs
fixed assets. In the case of should cease when substantially
fixed assets acquired for all the activities necessary to
new projects / expansion, prepare the qualifying asset for
interest cost on borrowings, its intended use or sale are
and other related expenses complete. However, in couple of

189
Study on Compliance of Financial Reporting Requirements

incurred upto the date of cases, it has been observed that

completion of project are the stated accounting policies do
capitalised. not explicitly indicate the point of
time up to which such borrowing
costs have been capitalised. In
the absence of such information,
it is not clear whether borrowing
costs have been capitalised only
up to the date when the assets
are ready for their intended use
or thereafter.

Accordingly, it was viewed that

the stated accounting policies
are not in compliance with the
requirements of AS 16.

5. The accounting policy on It may be noted that as per

borrowing costs as given in the paragraph 6 of AS 16, the
Annual Report of a company borrowing costs incurred directly
reads as below: in relation to acquisition,
construction or production of
‘Borrowing costs include qualifying assets can be
interest, amortisation of ancillary capitalised and that other
costs incurred and exchange borrowing costs should be
differences arising from foreign recognised as an expense in the
currency borrowings to the period in which they are
extent they are regarded as an incurred.
adjustment to the interest cost.
Costs in connection with the However, it was observed from
borrowing of funds to the extent the stated policy that borrowing
not directly related to the costs to the extent not directly
acquisition of qualifying assets related to the acquisition of
are charged to the Statement of qualifying assets are charged to
Profit and Loss over the tenure the Statement of Profit and Loss
of the loan.’ over the tenure of the loan as
against charging off as expense
when incurred.

Accordingly, it was viewed that

190
 Observations on Accounting Standard (AS) 16: Borrowing Costs

stated accounting policy is not in

compliance with the
requirements of AS 16.

6. The accounting policy on It may be noted that paragraphs

borrowing costs as given in the 6 and 12 of AS 16, provide as
Annual Report of a company follows:
reads as follows:
“6. Borrowing costs that are
‘Borrowing costs attributable to directly attributable to the
the fixed assets during acquisition, construction or
construction, renovation and production of qualifying asset
modernisation are capitalised. should be capitalised as part
Such borrowing costs are of the cost of that asset. The
apportioned on the average amount of borrowing costs
balance of capital work-in- eligible for capitalisation
progress for the year. Other should be determined in
borrowing costs are recognised accordance with this
as an expense in the period in Standard. Other borrowing
which they are incurred.’ costs should be recognised as
an expense in the period in
which they are incurred.”

“12. To the extent that funds

are borrowed generally and
used for the purpose of
obtaining a qualifying asset,
the amount of borrowing costs
eligible for capitalisation
should be determined by
applying a capitalisation rate
to the expenditure on that
asset. The capitalisation rate
should be the weighted
average of the borrowing
costs applicable to the
borrowings of the enterprise
that are outstanding during
the period, other than

191
Study on Compliance of Financial Reporting Requirements

borrowings made specifically

for the purpose of obtaining a
qualifying asset. The amount
of borrowings costs
capitalised during a period
should not exceed the amount
of borrowing costs incurred
during that period.”

It may be noted from paragraph

6 above that borrowing cost on
acquisition, construction or
production of qualifying asset
should be capitalised as part of
the cost of the asset. A
qualifying asset is an asset that
necessarily takes a substantial
period of time to get ready for its
intended use. However, from the
stated accounting policy, it is not
clear whether the related assets
are qualifying assets.

It was further noted from

paragraph 12 above that the
capitalisation rate should be the
weighted average of the
borrowing costs applicable to the
borrowings of the enterprise that
are outstanding during the
period, other than borrowings
made specifically for the purpose
of obtaining a qualifying asset
and that rate should be applied
to the expenditure on the
qualifying assets. However, it
was observed in the reported
case that borrowing costs have
been capitalised by apportioning

192
Observations on Accounting Standard (AS) 16: Borrowing Costs

such costs on the basis of

average balance of capital work-
in-progress. The policy is silent
on capitalisation rate adopted.

Accordingly, it was viewed that

accounting policy for borrowing
costs is not in line with the
requirements of paragraphs 6
and 12 of AS 16.

193
 15
Observations on Accounting Standard (AS) 17:
Segment Reporting
S. Matters contained in the Observations
No Annual Report

1. Segment information as It may be noted that paragraph

disclosed under Segment 40 of AS 17, states that:
Reporting in the Annual Reports
of some companies are stated “40. An enterprise should
below: disclose the following for each
reportable segment:
1. Segment Revenue
a) Segment revenue,
Segment Results classified into segment
revenue from sales to
Capital Employed external customers and
2. Segment Revenue segment revenue from
transactions with other
Segment Results segments;

3. Segment Revenue b) Segment result;

Segment Results c) Total carrying amount of

segment assets;
Segment Assets
d) Total amount of segment
Segment Liabilities liabilities;

e) Total cost incurred during

the period to acquire
segment assets that are
expected to be used during
more than one period
(tangible and intangible
fixed assets);

194
Observations on Accounting Standard (AS) 17: Segment Reporting

f) Total amount of expense

included in the segment
result for depreciation and
amortisation in respect of
segment assets for the
period; and

g) Total amount of significant

non-cash expenses, other
than depreciation and
amortisation in respect of
segment assets that were
included in segment
expense and, therefore,
deducted in measuring
segment result.”
It was observed from the
segment information disclosed in
the Annual Reports that some
companies have disclosed
capital employed instead of
separately reporting segment
assets and segment liabilities.
One company has disclosed only
segment revenue and segment
results while another company
has disclosed segment assets
and segment liabilities as well.
However, the information
required under paragraphs 40(e),
40(f) and 40(g) have not been
disclosed by any of these
companies.

Hence, it was viewed that the

disclosure requirements as per
paragraph 40 of AS 17 have not
been complied with.

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Study on Compliance of Financial Reporting Requirements

2. From the Annual Reports of a It may be noted that paragraph

couple of companies, it has been 48 of AS 17, provides as
noted that segment revenue follows:
alone has been disclosed as part
of the segment information “48. If primary format of an
relating to secondary reporting enterprise for reporting
segment (Geographical segment information is
Segment). business segments, it should
also report the following
From the Annual Report of information:
another company, it has been
noted that income arising outside (a) segment revenue from
India has been stated as external customers by
domestic income in the geographical area based
geographical segment report. on the geographical
location of its customers,
for each geographical
segment whose revenue
from sales to external
customers is 10 per cent
or more of enterprise
revenue;

(b) the total carrying amount

of segment assets by
geographical location of
assets, for each
geographical segment
whose segment assets are
10 per cent or more of the
total assets of all
geographical segments;
and

(c) the total cost incurred

during the period to
acquire segment assets
that are expected to be
used during more than one
period (tangible and

196
 Observations on Accounting Standard (AS) 17: Segment Reporting

intangible fixed assets) by

geographical location of
assets, for each
geographical segment
whose segment assets are
10 per cent or more of the
total assets of all
segment.”

It was noted from disclosures of

‘Segment Reporting’ that
although segment revenue as
required by paragraph 48(a) of
AS 17 has been disclosed, no
disclosure has been made with
respect of total carrying amount
of segment assets and the total
cost incurred during the period to
acquire segment assets, as
required under paragraph 48 (b)
and (c) of AS 17.

In other case, even in the

segment revenue income arising
outside India has been reported
as domestic income.

Accordingly, it was viewed that

the disclosure requirements
under paragraph 48 of AS 17
have not been complied with.

3. The notes regarding segment It may be noted that paragraph

reporting as given in the Annual 27 of AS 17, states that:
Reports of some companies are
stated below: “27. A business segment or
geographical segment should
 There are no separate be identified as a reportable
reportable segments as per segment if:
Accounting Standard 17, as

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Study on Compliance of Financial Reporting Requirements

the entire operations of the (a) its revenue from sales to

company relate to one external customers and
segment, viz. from transactions with
Agrochemicals. other segments is 10 per
cent or more of the total
 In accordance with revenue, external and
Accounting Standard 17, the internal, of all segments;
company’s activities broadly or
fall into the category of
specialty chemicals and (b) its segment result,
hence, the company has whether profit or loss, is 10
only one reportable per cent or more of)
segment.
i. the combined result of
 Considering the organisation all segments in profit,
structure, nature of products or
and risk and return profile
based on geographical ii. the combined result of
distribution, the tyre all segments in loss,
business is considered as a whichever is greater in
single segment. absolute amount; or

 The Company has identified (c) its segment assets are 10

manufacturing of automobile per cent or more of the
components as its sole total assets of all
primary segment. Thus, the segments.”
disclosure requirements as It was noted from Note on Sales
set out in Accounting and Operational Income as well
Standard 17 (AS-17) as from notes relating to
“Segment Reporting” are not earnings in foreign exchange
applicable. given in pursuance to paragraph
It has, however, been noted that 4D (e) of Part II of Schedule VI
all these companies have to the Companies Act, 195613
reported significant earnings in that there have been significant
foreign currency in the form of earnings in foreign exchange in
the form of export sales, which

13Subsequent to the observations of the Board, Schedule VI has been withdrawn. However,
content is still relevant in terms of Schedule III to Companies Act, 2013.

198
 Observations on Accounting Standard (AS) 17: Segment Reporting

export sales in the financial according to paragraph 27 of AS

statements. 17 constitutes a separate
reportable geographical
segment. However, no segment
reporting has been made in the
notes to accounts.

Accordingly, it was viewed that

the requirements of paragraph
27 of AS 17 have not been
complied with.

4. From the Annual Reports of a It was noted that explanation

number of companies, it has given under Paragraph 38 of AS
been noted that no disclosure 17, provides that:
has been made in the financial
statements with regard to “In case by applying the
segment reporting except in one definition of ‘business segment’
case where the following note and ‘geographical segment’ it is
was given as part of the Notes to concluded that there is neither
Accounts: more than one business segment
nor more than one geographical
 The segment reporting as segment, segment information
per AS-17 issued by as per this Standard is not
‘Institute of Chartered required to be disclosed.
Accountants of India’ is not However, the fact that there is
applicable. only one ‘business segment’ and
‘geographical segment’ is
disclosed by way of a note.”

It was observed from the notes

to accounts that except in one
case, neither any segment
reporting disclosures have been
made nor the fact that the
enterprise has only one
‘business segment’ and one
‘geographical segment’ has been
disclosed.

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Study on Compliance of Financial Reporting Requirements

With regard to given note on

segment reporting, it was viewed
that merely stating that ‘segment
reporting as per AS-17 is not
applicable’ is not sufficient
disclosure as per paragraph 38
of AS 17.

Accordingly, it was viewed that

the disclosure requirements of
paragraph 38 of AS 17 have not
been complied with.

5. Fromthe Annual Report of a It may be noted that paragraph

company, it has been noted that 53 of AS 17, states that:
inter-segment revenue has been
reported under the Segment “53. In measuring and
Reporting. reporting segment revenue
from transactions with other
segments, inter-segment
transfers should be measured
on the basis that the
enterprise actually used to
price those transfers. The
basis of pricing inter-segment
transfers and any change
therein should be disclosed
in the financial statements.”

It was observed that inter-

segment revenue has been
disclosed under the segment
reporting; however, the basis of
pricing of inter-segment transfer
has not been disclosed as per
the requirements of paragraph
53 of AS 17.

6. From the Annual Reports of few It may be noted that paragraph

companies, it has been noted 46 of AS 17, provides that:
that segment assets and

200
 Observations on Accounting Standard (AS) 17: Segment Reporting

segment liabilities do not match “46. An enterprise should

with the aggregate assets and present reconciliation between
liabilities as per the Balance the information disclosed for
Sheet and that no reconciliation reportable segments and the
has been provided in the aggregated information in the
segment reporting for the enterprise financial
differences in the reported statements. In presenting the
figures. reconciliation, segment
revenue should be reconciled
to enterprise revenue;
segment result should be
reconciled to enterprise net
profit or loss; segment assets
should be reconciled to
enterprise assets; and
segment liabilities should be
reconciled to enterprise
liabilities.”

It was noted from the disclosure

made under segment reporting
that the segment assets and
segment liabilities do not match
with the aggregate assets and
liabilities as given in the Balance
Sheet.

It was observed that though

there are differences in the
aggregate assets and liabilities
reported under segment
reporting with those as per the
Balance Sheet, no reconciliation
has been given to explain the
difference in figures.

Accordingly, it was viewed that

the information provided under
Segment Reporting is not in
accordance with the

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Study on Compliance of Financial Reporting Requirements

requirements of paragraph 46 of
AS 17.

7. In the Annual Report of a It may be noted that paragraph 4

company, the following note on of AS 17, provides that:
segment information has been
disclosed in the standalone “4. If a single financial report
financial statements: contains both consolidated
financial statements and the
‘Segment Information separate financial statements
of the parent, segment
Segment information is based on information need be presented
consolidated financial only on the basis of the
statements.’ consolidated financial
statements. In the context of
reporting of segment
information in consolidated
financial statements, the
references in this standard to
any financial statement items
should construe to be the
relevant item as appearing in
the consolidated financial
statement.”

It was observed from the note on

segment information given in the
standalone financials that
segment reporting is based on
the consolidated financial
statements whereas there is no
segment reporting in the
consolidated financial
statements. It was viewed that
paragraph 4 of AS 17 requires
segment information to be
prepared only on the basis of
consolidated financial
statements when the financial

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 Observations on Accounting Standard (AS) 17: Segment Reporting

statements contain both the

consolidated financial
statements and the separate
financial statements. However, it
does not mean that segment
information reported in separate
financial statements should be
on the basis of the consolidated
financial statements. Such
segment information prepared on
the basis of the Consolidated
Financial Statements should be
included in the Consolidated
Financial Statements and the
fact that the segment information
is given only in the Consolidated
Financial Statements should be
stated in the Standalone
Financial Statements.

Accordingly, it was viewed that

the requirements of paragraph 4
of AS 17 have not been complied
with.

8. A note relating to Segment It may be noted that while

Reporting as disclosed in the paragraph 5.1 defines the term
Annual Report of a company is ‘business segment’, paragraphs
stated below: 7 and 27 of AS 17, provide the
circumstances when a ‘business
‘Segment Information segment’ should be identified as
The Company is primarily a ‘reportable segment’, are as
engaged in a single segment i.e. follows:
Investment Activities. The risk “5.1 A business segment is a
and returns of the Company are distinguishable component of
predominantly determined by its an enterprise that is engaged
principal activity and the in providing an individual
Company’s activities fall within a product or service or a group
single business and

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geographical segment. of related products or services

Accordingly, no further and that is subject to risks and
disclosures are required as per returns that are different from
the Accounting standard 17 on those of other business
segment reporting notified by the segments. Factors that should
Companies (Accounting be considered in determining
Standards) Rules, 2006, (as whether products or services
amended)’ are related include:

It has, however, been noted that (a) the nature of the products
the company has consultancy or services;
income of significant amount as
shown under Other Operating (b) the nature of the
Income in the Note on Revenue production processes;
from Operations. (c) the type or class of
In the Annual Report of another customers for the
company, the following note has products or services;
been given with regard to (d) the methods used to
segment reporting: distribute the products or
‘The Company is primarily provide the services; and
engaged in the business of (e) if applicable, the nature of
Engineering, Procurement and the regulatory
Construction business (EPC). As environment, for example,
such, there is no other separate banking, insurance, or
reportable segment as defined public utilities.”
by Accounting Standard-17
‘Segment Reporting.’ “7. A single business segment
does not include products and
Here also following items of services with significantly
income have been shown as differing risks and returns. While
revenue from operations: there may be dissimilarities with
Sale of products respect to one or several of the
factors listed in the definition of
- Towers and structural business segment, the products
and services included in a
- Cables single business segment are
Turnkey contracts revenue expected to be similar with
respect to a majority of the

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 Observations on Accounting Standard (AS) 17: Segment Reporting

- Transmission and factors.”

distribution
“27. A business segment or
- Others geographical segment should
be identified as a reportable
segment if:

(a) its revenue from sales to

external customers and
from transactions with
other segments is 10 per
cent or more of the total
revenue, external and
internal, of all segments;
or

(b) its segment result,

whether profit or loss, is
10 per cent or more of)

i. the combined result

of all segments in
profit, or

ii. the combined result

of all segments in
loss, whichever is
greater in absolute
amount; or

(c) its segment assets are

10 per cent or more of the
total assets of all
segments.”

From the above, it was viewed

that the products or services
being produced/ rendered can be
considered to be belonging to
single business segment if
majority of the relevant factors

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including those listed above are

similar.

In the first case, it was observed

that while the note on segment
reporting states that the
company is engaged in only
investment activities, the note on
Revenue from Operations shows
consultancy income which
constitutes 52.36% of the total
revenue of the enterprise.
Accordingly, it was viewed that
company was engaged in
investment as well as
consultancy activities and they
can be regarded as related
activities. Hence, consultancy
activities would constitute a
separate reportable business
segment for which the required
segmental information should
have been disclosed.

In the second case, it was

observed that though the note on
segment reporting states that the
enterprise has only one business
viz. engineering, procurement
and construction segment, it has
reported revenue from turn-key
contracts as well as sale of
products constituting 70% and
29.55% of the total revenue from
operation respectively. It was
viewed that risks and rewards
associated with turnkey
contracts cannot be considered
to be same as that of sale of

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 Observations on Accounting Standard (AS) 17: Segment Reporting

products.

Accordingly, it was viewed that

the requirements of AS 17 have
not been complied with.

9. The notes relating to Segment It may be noted that the

Reporting as given in the Annual explanation given under
Report of a couple of companies paragraph 38 of AS 17, states
read as follows: as follows:

1. The business segment is the “In case by applying the

primary segment of the definitions of ‘business segment’
Company consisting of:- and ‘geographical segment’, it is
concluded that there is neither
i. Investment Activities more than one business segment
ii. Real Estate nor more than one geographical
segment, segment information
iii. Trading as per this Standard is not
required to be disclosed.
2. As per information given to
However, the fact that there is
us and to the best of our
only one ‘business segment’ and
knowledge, company is
‘geographical segment’ is
only manufacturing skelp,
disclosed by way of note.”
MS Pipes & GI Pipes,
therefore, segment It was observed from the note on
reporting in this case is not segment reporting that the
applicable. company has disclosed
information relating to business
3. The Company operates
segment but no information
only in one business
about existence or non-existence
segment viz. cement.
of geographical segment has
been disclosed. It was viewed
that if there exists only one
reportable geographical segment
then the fact should be disclosed
as explained in paragraph 38 of
AS 17.

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Accordingly, it was viewed that

the requirements of paragraph
38 of AS 17 have not been
complied with.

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 16
Observations on Accounting Standard (AS) 18:
Related Party Disclosures
S. Matters contained in the Annual Observations
No Report

1. From the ‘Related Party It may be noted that paragraph

Disclosures’ given in the Annual 23(ii) of AS 18, provides that:
Reports of some companies, it
has been noted that the names of “23. If there have been
the related parties as well as the transactions between related
transactions that have taken parties, during the existence of
place with such related parties a related party relationship, the
have been disclosed but the reporting enterprise should
nature of relationship with them disclose the following:
has not been disclosed. …
In certain cases, the names of (ii) a description of the
related parties have been relationship between the
disclosed along with their parties;”
designations viz. Managing
director, Whole time director. Based on the above, it was
viewed that non-disclosure of a
It has also been noted in few description of the relationship
cases, that the transactions (i.e. between the parties is not in line
remuneration) with the key with the requirement of paragraph
management personnel have not 23(ii) of AS 18. It was further
been disclosed under Related viewed that merely stating the
Party Disclosures; instead only a designation of the related parties
reference to the note on does not indicate the relationship
managerial remuneration has with the reporting entity.
been given.
It has also been observed that
remuneration paid to key

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management personnel has not

been reported under related party
disclosures. Only a reference to
the note on managerial
remuneration has been given. It
was viewed that a mere reference
to a note cannot be construed as
information itself.

2. From the ‘Related Party It may be noted that paragraph 23

Disclosures’ as given in the of AS 18, provides that:
Annual Report of a company, it
has been noted that the volume of “23. If there have been
transactions has been disclosed transactions between related
but the nature of transactions has parties, during the existence of
not been disclosed. a related party relationship, the
reporting enterprise should
disclose the following:

(iii) a description of the nature

of transactions;”

In view of the above, it was

observed that if any transaction
has taken place during the year
with a related party, the reporting
enterprise is required to disclose
a description of the nature of such
transactions.

Accordingly, it was viewed that

non-disclosure of the nature of
transactions is not in compliance
with the requirement of paragraph
23(iii) of AS 18.

3. From the Annual Reports of few It may be noted that paragraph 21

companies, it has been noted of AS 18, states that:

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 Observations on Accounting Standard (AS) 18: Related Party Disclosures

that these companies are “21. Name of the related party

subsidiaries of some other and nature of the related party
companies. However, the names relationship where control
of the holding companies have exists should be disclosed
not been disclosed in the irrespective of whether or not
‘Related Party Disclosures’. there have been transactions
between the related parties.”
From the Annual Report of
another company, it has been It may be noted from the above
noted that a wholly owned that where control exists the
subsidiary has been formed name of the related party and
during the year under review; nature of the related party
however, the name of the relationship should be disclosed
subsidiary has not been irrespective of whether or not
disclosed as a related party there have been any transactions
under the ‘Related Party between the related parties.
Disclosures’.
Accordingly, it was viewed that
non-disclosure of the names of
the holding companies or the
subsidiary company in the
‘Related Party Disclosures’ is not
in compliance with the
requirements of paragraph 21 of
AS 18.

4. From Notes to Accounts, Cash It may be noted that paragraph 23

Flow Statement, Director’s of AS 18, requires that:
Report, Corporate Governance
Report given in the Annual “23. If there have been
Reports of a number of transactions between related
companies, following information parties, during the existence of
has been noted with regard to a related party relationship, the
‘Related Party Disclosures’: reporting enterprise should
disclose the following:
 Advances given to directors;
(i) the name of the
 Application money received transacting related party;
from a key management
personnel for preferential (ii) a description of the

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allotment; relationship between the

parties;
 Equity shares allotted to key
management personnel on (iii) a description of the nature
conversion of warrants; of transactions;

 Dividend paid to the holding (iv) volume of the transactions

company; either as an amount or as
an appropriate proportion;
 Short-term loans given to
related parties; (v) any other elements of the
related party transactions
 Loans and advances given to necessary for an
as well as repaid by the understanding of the
subsidiary; financial statements;
 Remuneration paid to (vi) the amounts or
directors (key management appropriate proportions of
personnel); outstanding items
 Repayment of liabilities to a pertaining to related
related party; parties at the balance
sheet date and provisions
 Advances received from for doubtful debts due
holding company; from such parties at that
date; and
 Unsecured loans received
from related parties; (vii) amounts written off or
written back in the period
 Sale of a business unit to a in respect of debts due
fellow subsidiary; from or to related parties.”
 Repayment of loans by the It was noted from the above that if
subsidiary company. there have been transactions
between the related parties
during the existence of a related
party relationship, the reporting
entity should disclose the details
of such transactions.

It was viewed that all the

transactions observed in the

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 Observations on Accounting Standard (AS) 18: Related Party Disclosures

reported cases are in the nature

of related party transactions and
that although these transactions
have been reported in various
parts of the Annual Reports, no
disclosure has been made under
‘Related Party Disclosures’ as per
the requirements of paragraph 23
of AS 18.

5. From the Annual Reports of some It may be noted that paragraph 27

companies, it has been noted that read with explanation thereon of
in the ‘Related Party Disclosures’ AS 18, provides that:
transactions of similar nature
along with the values thereof “27. Disclosure of details of
have been disclosed on an particular transactions with
aggregate basis against each individual related parties would
type of related party. frequently be too voluminous to
be easily understood.
Accordingly, items of a similar
nature may be disclosed in
aggregate by type of related
party. However, this is not done in
such a way as to obscure the
importance of significant
transactions. Hence, purchases
or sales of goods are not
aggregated with purchases or
sales of fixed assets. Nor a
material related party transaction
with an individual party is clubbed
in an aggregated disclosure.

Explanation:

(a) Materiality primarily depends

on the facts and
circumstances of each case.
In deciding whether an item
or an aggregate of items is

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material, the nature and the

size of the item(s) are
evaluated together.
Depending on the
circumstances, either the
nature or the size of the item
could be the determining
factor. As regards size, for
the purpose of applying the
test of materiality as per this
paragraph, ordinarily a
related party transaction, the
amount of which is in excess
of 10% of the total related
party transactions of the
same type (such as
purchase of goods), is
considered material, unless
on the basis of facts and
circumstances of the case it
can be concluded that even
a transaction of less than
10% is material. As regards
nature, ordinarily the related
party transactions which are
not entered into in the
normal course of the
business of the reporting
enterprise are considered
material subject to the facts
and circumstances of the
case.”

It was observed that certain

material transactions have taken
place with the related parties.
However, the names of the
related parties with whom such
transactions have taken place

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 Observations on Accounting Standard (AS) 18: Related Party Disclosures

and the volume of each such

material transaction have not
been separately disclosed.

Accordingly, it was viewed that

the requirements of paragraph 27
of AS 18 have not been fully
complied with.

6. From the Annual Reports of some It may be noted that paragraph 14

companies, it has been noted that of AS 18, provides that:
the managing director or the
whole time directors or the “14. Key management
manager have not been identified personnel are those persons
as key management personnel who have the authority and
and consequently the responsibility for planning,
remuneration paid to them or any directing and controlling the
other transactions with them have activities of the reporting
not been disclosed under ‘Related enterprise. For example, in the
Party Disclosure’. case of a company, the
managing director(s), whole
From the Annual Report of time director(s), manager and
another company, it has been any person in accordance with
noted that although the Chief whose directions or
Operating Officer (COO) has instructions the board of
been reported as key directors of the company is
management personnel, the Chief accustomed to act, are usually
Executive Officer (CEO) who considered key management
appears to have the authority and personnel.”
responsibility for planning,
directing and controlling the From the above, it was viewed
activities of the company has not that managing director and/or
been identified as key whole time directors or manager
management personnel. generally have the authority and
responsibility for planning,
directing and controlling the
activities of the reporting
enterprise and are accordingly
considered key management
personnel. However, in the
reported cases, neither these

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directors/manager have been

identified as key management
personnel nor any transactions
with them have been disclosed as
related party transactions. In the
other reported case also, it was
observed that the COO has been
considered as key management
personnel but not the CEO.

Accordingly, it was viewed that

the disclosure requirements of AS
18 with regard to key
management personnel have not
been complied with.

7. From the Annual Reports of some It may be noted that paragraph 24

companies, it has been noted that of AS 18, provides as follows:
the corporate guarantees given to
banks / financial institutions for “24. The following are examples
credit facilities extended to the of the related party transactions in
subsidiaries and/or personal respect of which disclosures may
guarantees given by the directors be made by a reporting
(key management personnel) for enterprise:
loans taken from banks / a) purchases or sales of goods
financial institutions have not (finished or unfinished);
been disclosed as related party
transactions. b) purchases or sales of fixed
assets;

c) rendering or receiving of
services;

d) agency arrangements;
e) leasing or hire purchase
arrangements;

f) transfer of research and

development;

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 Observations on Accounting Standard (AS) 18: Related Party Disclosures

g) license agreements;

h) finance (including loans and

equity contributions in cash
or in kind);

i) guarantees and collaterals;

and

j) management contracts
including for deputation of
employees.

(emphasis supplied)”

From the above, it was viewed

that the corporate guarantees
given for credit facilities extended
to the subsidiaries and the
personal guarantees given by the
directors (key management
personnel) for loans taken by the
company should be disclosed as
related party transactions as per
the requirements of paragraph 24
of AS 18.

8. From the ‘Related Party It may be noted that paragraph 23

Disclosures’ as given in the (i) of AS 18, provides as follows:
Annual Reports of few
companies, it has been noted that “23. If there have been
although the nature of transactions between related
transactions and the volume parties, during the existence of
thereof have been disclosed, the a related party relationship, the
names of the related parties with reporting enterprise should
whom such transactions have disclose the following:
been taken place have not been (i) the name of the transacting
disclosed. related party;”
Further, it has been noted that the It was noted from the above that
balances outstanding at the the names of the related parties

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Study on Compliance of Financial Reporting Requirements

balance sheet date have been with whom transactions have

disclosed by the nature of taken place and from/to whom the
balances eg. Debtors, payable year end balances are due should
towards services etc.; however, be disclosed as part of the related
the names of the related parties party disclosure.
from/to whom such balances are
due have not been disclosed. Accordingly, it was viewed that
the non-disclosure of the names
of the transacting related parties
is not in line with the
requirements paragraph 23(i) of
AS 18.

9. From the ‘Related Party It may be noted that paragraph 3

Disclosures’ as given in the of AS 18, provides as follows:
Annual Reports of some
companies, it has been noted that “3. This Statement deals only with
the relationships with the related related party relationships
parties have been described as described in (a) to (e) below:
follows: (a) enterprises that directly, or
 Common Director; indirectly through one or
more intermediaries, control,
 Affiliates; or are controlled by, or are
under common control with,
 Related Party-Common the reporting enterprise (this
control exists; includes holding companies,
 Holding Company/ Enterprise subsidiaries and fellow
Controlled by the Holding subsidiaries);
Company; (b) associates and joint ventures
of the reporting enterprise
and the investing party or
venturer in respect of which
the reporting enterprise is an
associate or a joint venture;

(c) individuals owning, directly or

indirectly, an interest in the
voting power of the reporting

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Observations on Accounting Standard (AS) 18: Related Party Disclosures

enterprise that gives them

control or significant
influence over the enterprise,
and relatives of any such
individual;

(d) key management personnel

and relatives of such
personnel; and

(e) enterprises over which any

person described in (c) or (d)
is able to exercise significant
influence. This includes
enterprises owned by
directors or major
shareholders of the reporting
enterprise and enterprises
that have a member of key
management in common with
the reporting enterprise.”

It may be, however, noted that

paragraph 3 does not include any
nature of relationship as
‘Common Director’ or ‘Affiliates’.
It was, therefore, viewed that the
relationship with the related
parties is not clear from such
descriptions. Even in the other
two cases instead of reporting
‘Related Party-Common control
exists’ or ‘Enterprise Controlled
by the Holding Company’ it would
be more appropriate to describe
the relationship as ‘subsidiaries’
or ‘fellow subsidiaries’.

Accordingly, it was viewed that

the requirements of paragraph 3

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Study on Compliance of Financial Reporting Requirements

of AS 18 have not been complied

with.

10. The Related Party Disclosures as It may be noted that paragraph

given in the Annual Report of a 4.5 of ‘Master Circular –
bank include the following note: Disclosures in Financial
Statements – Notes to Accounts’
‘… dated July 2, 2012, issued by
Transactions with Related RBI, provides an illustrative
Parties: format for Related Party
Disclosures prescribing to
In terms of the RBI disclose related party
circular/guidelines regarding transactions in separate column
disclosure of related party for each nature of relationship
transactions where there is only and the footnote to the given
one entity in any category of format states as follows:
related parties, particulars of such
transactions have not been “Where there is only one entity in
disclosed. There have been no any category of related party,
transactions with subsidiaries of banks need not disclose any
Head Office.’ details pertaining to that related
party other than the relationship
with that related party.”

From the above, it was viewed

that the stated footnote provides
exemption from providing party-
wise details separately when
there is only single party in the
given category. In other words,
such footnote does not exempt
the bank from providing the
related party transactions on the
ground that there is only one
entity in a given category of
relationship.

It was observed that no related

party transactions have been
disclosed on the ground that

220
 Observations on Accounting Standard (AS) 18: Related Party Disclosures

there is only one entity in any

category of relationship. It was
viewed that the prescribed format
does not provide such
exemptions. Further, it was
observed that there are two
individuals described to be
holding KMP relationship with the
bank.

Accordingly, it was viewed that

the requirements of AS 18 as well
as ‘Master Circular– Disclosures
in Financial Statements– Notes to
Accounts’ issued by RBI have not
been complied with.

11. From the ‘Related Party It may be noted that paragraph

Disclosures’ in the Annual 23(vi) of AS 18, provides as
Reports of some companies, it follows:
has been noted that while the
volume of transactions with the “23. If there have been
related parties has been transactions between related
disclosed, the year end balances parties, during the existence of
due to/from the related parties in a related party relationship, the
respect of the loans and reporting enterprise should
advances received/given from/to disclose the following:
such parties or in respect of other (vi) the amounts or
payables or receivables have not appropriate proportions of
been disclosed. outstanding items
pertaining to related
parties at the balance
sheet date and provisions
for doubtful debts due
from such parties at that
date;

It was noted from the above that

the amounts outstanding at the

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Study on Compliance of Financial Reporting Requirements

balance sheet date should be

disclosed as part of the related
party disclosure. Accordingly, it
was viewed that non-disclosure of
the year end outstanding
balances due to/from the related
parties is not in compliance with
the requirements of paragraph
23(vi) of AS 18.

12. From the ‘Related Party It may be noted that paragraph 23

Disclosures’ as given in the of AS 18, inter alia, provides as
Annual Report of a company, it follows:
has been noted that the
transactions with the controlling “23. If there have been
companies and fellow transactions between related
subsidiaries have been disclosed parties, during the existence of
together in a single column. a related party relationship, the
reporting enterprise should
disclose the following:

i. the name of the transacting

related party;

ii. a description of the

relationship between the
parties;

iii. a description of the nature

of transactions;”

It was noted from the above that

transactions for each type of
relationship should be separately
disclosed under the related party
disclosures.

Accordingly, it was viewed that

disclosing transactions with
controlling companies and fellow
subsidiaries together under single

222
 Observations on Accounting Standard (AS) 18: Related Party Disclosures

column is not in line with the

requirements of paragraph 23 of
AS 18.

13. From the note on the ‘Related It was observed that use of
Party Disclosures’ as given in the expression ’as certified by the
Annual Report of a company, it management’ may lead the users
has been noted that the related of financial statements to believe
parties have been described “as that the auditors have merely
certified by the management”. relied on the management’s
certificate without carrying out
any other appropriate audit
procedures to satisfy themselves
about the existence and
disclosure of related party
transactions.

Accordingly, it was viewed that

use of such expression “as
certified by the management”
should be avoided while
describing related parties.

14. In the ‘Related Party Disclosures’ It may be noted that paragraph 3

as given in the Annual Report of a of AS 18, provides as follows:
company, the list of related
parties where control exists “3.This Statement deals only with
includes the name of an individual related party relationships
and the relationship has been described in (a) to (e) below:
stated as ‘Lessor’. (a) ….

(b) ….

(c) individuals owning, directly or

indirectly, an interest in the
voting power of the reporting
enterprise that gives them
control or significant
influence over the enterprise,

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Study on Compliance of Financial Reporting Requirements

and relatives of any such

individual;

(d) ….

(e) enterprises over which any

person described in (c) or (d)
is able to exercise significant
influence. This includes
enterprises owned by
directors or major
shareholders of the reporting
enterprise and enterprises
that have a member of key
management in common with
the reporting enterprise.”

It was noted from the above that

an individual in the capacity of a
lessor cannot exercise control or
significant influence over the
company.

Accordingly, it was viewed that

such description of relationship is
not in line with the requirements
of paragraph 3 of AS 18.

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 17
Observations on Accounting Standard (AS) 19:
Leases
S. Matters contained in the Observations
No Annual Report

1. From the Annual Reports of few It may be noted that paragraph

companies, it has been noted 25 of AS 19, provides as
that significant expenses in the follows:
nature of rent and hire charges
have been shown under “25. The lessee should make
Administration Expenses/Other the following disclosures for
Expenses. In the Annual operating leases:
Reports of a couple of other (a) the total of future
companies, lease rentals and minimum lease payments
rent, including lease rentals, under non-cancellable
have been shown under operating leases for each
operating expenses/overheads. of the following periods:
It has also been noted in some (i) not later than one
of the above cases that the year;
following notes have been given
with regard to lease payments (ii) later than one year
under non – cancelable Lease: and not later than
five years;
 Total lease rental of Rs. xxx
has been included under (iii) later than five years;
Operating expenses - Rent,
Taxes and Lighting in the (b) the total of future
Statement of Profit & Loss. minimum sublease
payments expected to be
 The Company’s leasing received under non-
arrangements are mainly in cancellable subleases at
respect of residential/office balance sheet date;

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Study on Compliance of Financial Reporting Requirements

premises and plant and (c) Lease payments

machinery. The aggregate recognised in the
lease rentals payable are statement of profit and
charged as rent under loss for the period, with
“overheads” except separate amounts for
otherwise treated. minimum lease payments
and contingent rents.
Lease rental obligation –
(d) Ageneral description of
Not later than one the lessee’s significant
year Rs xxx leasing arrangements
Later than one including, but not limited
year but not to, the following:

later than five (i) the basis on which

years Rs xxx contingent rent
payments are
Later than five considered
years Rs xxx
(ii) the existence and
 Lease Rental expenses are terms of renewal or
accounted on straight line purchase options
basis over the lease term. and escalation
clauses? and

(iii) restrictions
imposed by lease
arrangements, such
as those concerning
dividends and
further leasing.”

It is evident from the nature of

expenses as disclosed in the
financial statements, including
notes to accounts, that these
companies have taken certain
under non cancellable assets on
operating lease. It is, however,
observed that the disclosures

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 Observations on Accounting Standard (AS) 19: Leases

required under paragraph 25 of

AS 19 as applicable to such
leases have not been made in
the financial statements except
in one case where disclosure
under paragraph 25(a) alone
has been made.

Accordingly, it was viewed the

requirements of paragraph 25 of
AS 19 have not been complied
with.

2. From the Annual Reports of It may be noted that paragraphs

some companies, it has been 40 and 46 of AS 19,state as
noted that certain assets follows:
including land and residential
premises have been given “40. Lease income from
under non - cancellable operating leases should be
operating leases. recognised in the statement
of profit and loss on a
Further, it has been noted that straight line basis over the
in one case, the accounting lease term, unless another
policy adopted by the company systematic basis is more
with regard to leases has been representative of the time
disclosed and that in another pattern in which benefit
case following disclosure has derived from the use of the
been made in the notes to leased asset is diminished.”
accounts:
“46. The lessor should, in
Lease rental income - addition to the requirements
of AS 6, Depreciation
Not later than one year Rs xxx Accounting and AS 10,
Accounting for Fixed Assets,
Later than one year and the governing statute,
but not later than make the following
five years Rs xxx disclosures for operating
leases:
Later than five years Rs xxx
(a) for each class of assets,

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Study on Compliance of Financial Reporting Requirements

the gross carrying

amount, the accumulated
depreciation and
accumulated impairment
losses at the balance
sheet date; and

(i) the depreciation

recognised in the
statement of profit
and loss for the
period;

(ii) impairment losses

recognised in the
statement of profit
and loss for the
period;

(iii) impairment losses

reversed in the
statement of profit
and loss for the
period;

(b) the future minimum lease

payments under non-
cancellable operating
leases in the aggregate
and for each of the
following periods:

(i) not later than one

year;

(ii) later than one year

and not later than
five years;

(iii) later than five years;

228
Observations on Accounting Standard (AS) 19: Leases

(c) total contingent rents

recognised as income in
the statement of profit
and loss for the period;

(d) a general description of

the lessor’s significant
leasing arrangements;
and

(e) accounting policy

adopted in respect of
initial direct costs.”

It was observed that although

gross carrying amount of fixed
assets includes the assets given
on lease, the disclosures
required under paragraph 46 of
AS 19 have not been made in
the financial statements. It was
further observed in one case
that lease rental for not later
than one year, later than one
year but not later than five years
and later than five years have
been disclosed, however, the
rental income arising from such
lease has not been disclosed
either in the Statement of Profit
and Loss or in the related notes
to accounts, which is not in line
with the requirement of
paragraph 40 of AS 19.

Accordingly, it was viewed that

the requirements of paragraphs
40 and 46 of AS 19 have not
been complied with.

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Study on Compliance of Financial Reporting Requirements

3. The Statement of Significant It may be noted that paragraph

Accounting Policies as given in 18 of AS 19, states that:
the Annual Report of a company
includes the following: ”18. ...The depreciation policy
for a leased asset should be
‘Furniture & fixtures includes the consistent with that for
cost of Rs xxx towards interior depreciable assets which are
decoration and civil work for owned, and the depreciation
leased premises and recognised should be
depreciation rate adopted in calculated on the basis set
respect of these assets are at out in Accounting Standard
the rate of 10% under straight (AS) 6, Depreciation
line method.’ Accounting. If there is no
reasonable certainty that the
lessee will obtain ownership
by the end of the lease term,
the asset should be fully
depreciated over the lease
term or its useful life,
whichever is shorter.”

It was observed that the interior

decoration and civil work for
leased premises is depreciated
at an ad hoc rate of 10%
instead of depreciating the
same with reference to the
lease term of the related
premises or its useful life,
whichever is shorter.

Accordingly, it was viewed that

the requirements of paragraph
18 of AS 19 have not been
complied with.

4. The significant accounting It may be noted that paragraph

policy with regard to Leased 22 of AS 19, states as follows:
Equipment as given in the
“22. The lessee should, in

230
 Observations on Accounting Standard (AS) 19: Leases

Annual Report of a company addition to the requirements

reads as follows: of AS 10, Accounting for
Fixed Assets, AS 6,
‘Rental in respect of leased Depreciation Accounting, and
equipment acquired under the governing statute, make
financial lease is charged to the the following disclosures for
Statement of Profit and Loss.’ finance leases:
From the Annual Report of a) assets acquired under
another company, it has been finance lease as
noted that tangible fixed assets segregated from the
include leasehold building. In assets owned;
other words, the building has
been acquired under finance b) for each class of assets,
lease. the net carrying amount
at the balance sheet
date;

c) a reconciliation between
the total of minimum
lease payments at the
balance sheet date and
their present value. In
addition, an enterprise
should disclose the total
of minimum lease
payments at the balance
sheet date, and their
present value, for each of
the following periods:

i. not later than one

year;

ii. later than one year

and not later than
five years;

iii. later than five years;

d) contingent rents

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Study on Compliance of Financial Reporting Requirements

recognised as expense in
the statement of profit
and loss for the period;

e) the total of future

minimum sublease
payments expected to be
received under non-
cancellable subleases at
the balance sheet date;
and

f) a general description of
the lessee’s significant
leasing arrangements
including, but not limited
to, the following:

i. the basis on which

contingent rent
payments are
determined;

ii. the existence and

terms of renewal or
purchase options
and escalation
clauses; and

iii. restrictions imposed

by lease
arrangements, such
as those concerning
dividends,
additional debt, and
further leasing.

Provided that a Small and

Medium Sized Company, as
defined in the Notification,
may not comply with sub-

232
 Observations on Accounting Standard (AS) 19: Leases

paragraphs (c),(e) and (f).”

It was observed that although

the equipment and building
have been acquired under
finance leases, the disclosures
as set out above have not been
made in the financial
statements.

Accordingly, it was viewed that

the requirements of paragraph
22 of AS 19 have not been
complied with.

5. In the Annual Report of a bank It may be noted that paragraph

the accounting policy on leased 4.11 of Master Circular No.
assets states as follows: DBOD.BP.BC No.14
/21.04.018/2012-13 dated July
‘Lease income is recognised 2, 2012 regarding ‘Disclosure in
based on the internal rate of Financial Statements - Notes to
return method over the primary Accounts’ issued by RBI,
period of the leased assets and requires banks to comply with
accounted for in accordance the requirements of Accounting
with Guideline / Accounting Standards issued by the
Standard issued by the Institute Institute of Chartered
of Chartered Accountants of Accountants of India.
India (ICAI)
It may also be noted that
Depreciation is provided on preface to AS 19, Leases,
Straight Line Method at rates provides that “Accounting
prescribed under Schedule XIV Standard (AS) 19, ‘Leases’
of the Companies Act, 1956. comes into effect in respect of
Extra lease depreciation, in all assets leased during
accordance with the applicable accounting periods commencing
guidelines, is adjusted against on or after 1.4.2001 and is
the cost of Lease assets mandatory in nature from that
through lease equalisation date.” Accordingly, ‘Guidance
account. Note on Accounting for Leases’
issued by the ICAI in 1995, is

233
Study on Compliance of Financial Reporting Requirements

Provision for Non-Performing applicable in respect of assets

leased assets is made on the leased prior to 1.4.2001.
basis of IRAC norms applicable
to advances, as per RBI From the stated accounting
guidelines.’ policy, it appears that the bank
has adopted the accounting
treatment as per the Guidance
Note. It may be noted that the
principles given in Guidance
Note for assets acquired under
finance lease are different from
that envisaged under AS 19.

It was observed that the dates

when the related assets have
been taken on finance lease
have not been disclosed in the
accounting policy nor in the
notes to accounts, which may
appear to be against the
requirement of AS 19.

Accordingly, it was viewed that

the date of acquiring the assets
under finance lease should be
explicitly disclosed in the
accounting policy to avoid any
such possible non compliance.

234
 18
Observations on Accounting Standard (AS) 20:
Earnings Per Share
S. Mater contained in Annual Observations
No. Report

1. From the Annual Report of It may be noted that paragraph

company, it was noted that basic 8 of AS 20, provides as follows:
and diluted earnings per share
has not been disclosed on the “8. An enterprise should
face of Statement of Profit & present basic and diluted
Loss. However, the basic as well earnings per share on the face
as the diluted earnings per share of the statement of profit and
were disclosed in the Notes to loss account for each class of
Accounts and the Diluted EPS equity shares that has
has been reported as ‘Not different right to share in the
Applicable’. net profit for the period. An
enterprise should present
basic and diluted earnings per
share with equal prominence
for all periods presented.”

It has been noted that the

company has not disclosed
basic as well as diluted earnings
per share on the face of the
Profit and Loss Account
although the information relating
to the same has been disclosed
in the note.

Further, it has been noted from

the note on ‘Earnings Per Share’
that the diluted earnings per

235
Study on Compliance of Financial Reporting Requirements

share has been stated to be as

‘Not Applicable’.

It appears that the company has

stated Diluted EPS as ‘Not
Applicable’ either because there
are no potential equity shares or
potential equity shares (if any)
have an anti-dilutive impact.

It may be noted that paragraphs

26 and 41 of AS 20, state as
follows:

“26. For the purpose of

calculating diluted earnings
per share, the net profit or
loss for the period attributable
to equity shareholders and the
weighted average number of
shares outstanding during the
period should be adjusted for
the effects of all dilutive
potential equity shares.”

“41. Potential equity shares are

anti-dilutive when their
conversion to equity shares
would increase earnings per
share from continuing ordinary
activities or decrease loss per
share from continuing ordinary
activities. The effects of anti-
dilutive potential equity shares
are ignored in calculating diluted
earnings per share.”

As per above paragraphs, it was

viewed that in absence of
potential equity shares, both the

236
 Observations on Accounting Standard (AS) 20: Earnings Per Share

net profit or loss for the period

attributable to equity
shareholders and the weighted
average number of shares
outstanding during the period
will remain the same as that in
case of basic earnings per
share. Hence, if a company has
no potential equity shares then
its diluted EPS would be the
same as basic EPS.

Further, in case potential equity

shares have an anti-dilutive
effect, then such potential equity
shares are ignored for
calculating diluted EPS which
will result in diluted earnings per
share being equal to basic EPS.

Accordingly, stating the diluted

EPS as ‘Not Applicable’ is not in
line with the requirement of AS
20.

2. From the Annual Report of a It may be noted that paragraphs

company, it was noted that 4.4 and 4.5 of AS 20 define
although the Balance Sheet of a potential equity shares and
company showed ’Equity Share share warrants as follows:
Warrants’ as Sources of Fund,
the basic and diluted earnings “4.4. A potential equity share
per share have been disclosed is a financial instrument or
as the same amount. Further, other contract that entitles, or
the nominal value of shares has may entitle, its holder to
been disclosed only on the face equity shares.”
of the statement of Profit and “4.5 Share warrants or options
Loss and not in the Note giving are financial instruments that
computation of earnings per give the holder the right to
share.

237
Study on Compliance of Financial Reporting Requirements

acquire equity shares.”

Further, it has been noted that

paragraph 32 of AS 20,
provides as follows:

“32. For the purpose of

calculating diluted earnings
per share, the number of
equity share should be the
aggregate of the weighted
average number of equity
shares calculated in
accordance with paragraphs
15 and 22, and the weighted
average number of equity
shares which would be issued
on the conversion of all the
dilutive potential equity
shares into equity shares.
Dilutive potential equity
shares should be deemed to
have been converted into
equity shares at the beginning
of the period or, if issued
later, the date of the issue of
the potential equity shares.”

It was noted from the Balance

Sheet that certain equity share
warrants were outstanding as on
the Balance Sheet date. It was
viewed that equity share
warrants are financial
instruments that give the holders
the right to acquire equity
shares; therefore, they are
potential equity shares which
should be considered for the
purpose of determining diluted

238
 Observations on Accounting Standard (AS) 20: Earnings Per Share

earnings per share. However, it

has been noted from the note
that the basic as well as diluted
earnings per share have been
disclosed as same which
indicates that share warrants
have not been considered for
determination of diluted earnings
per share.

Further, it was noted that the

nominal value of shares has not
been disclosed in the given note
although disclosed on the face
of Statement of Profit and Loss.

Accordingly, it was viewed that

the requirement of AS 20 has
not been complied with.

3. In the Statement of Profit and It may be noted that paragraph 8

Loss and the computation of of AS 20, provides that:
earnings per share given in the
Notes to the Accounts, a “8. An enterprise should
company has disclosed present basic and diluted
“earnings per share.” earnings per share on the face
of the statement of profit and
loss for each class of equity
shares that has a different
right to share in the net profit
for the period. An enterprise
should present basic and
diluted earnings per share
with equal prominence for all
periods presented.”

It was observed from the face of

the Statement of Profit and Loss
as well as disclosure given in
context of AS 20 that only

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Study on Compliance of Financial Reporting Requirements

‘earning per share’ has been

disclosed, without stating
whether it is basic earnings per
share or diluted earnings per
share.

It was viewed that even if there

is no difference in the basic and
diluted EPS, to comply with the
requirement of AS 20, the basic
as well as diluted EPS should be
explicitly disclosed.

4. From the Notes to Accounts of It may be noted that paragraphs

the Annual Report, it was noted 8 and 48 (iii) of AS 20, provides
that a company has disclosed as follows:
the basic earnings per share and
has stated that it has been “8. An enterprise should
computed by dividing the profit present basic and dilutive
after tax by number of equity earning per share on the face
shares without disclosing the of the statement of profit and
amount of the profit after tax or loss of each class of equity
the number of equity shares. shares that has a different
right to share in the net profit
for the period. An enterprise
should present basic and
diluted earnings per share
with equal prominence for all
periods presented. ”

“48. ….

(ii)

a) the amounts used as

the numerators in
calculating basic and
diluted earnings per
share, and a
reconciliation of those

240
 Observations on Accounting Standard (AS) 20: Earnings Per Share

amounts to the net

profit or loss for the
period;

b) the weighted average

number of equity
shares used as the
denominator in
calculating basic and
diluted earnings per
share, and a
reconciliation of these
denominators to each
other; and

c) the nominal value of

shares along with the
earnings per share
figures.”

It was observed that although

the basic earnings per share has
been disclosed, neither the
diluted earnings per share has
been reported nor other
disclosures as required by
paragraph 48 of AS 20 have
been disclosed in the notes to
accounts.

Accordingly, it was viewed that

the requirements of AS 20 have
not been complied with.

5. In the Annual Report of some It may be noted that paragraph

companies, it was observed that 48(i) of AS 20, provides as
although Statement of Profit and follows:
Loss showed’ Exceptional /
Extraordinary Items’, the “48. In addition to disclosures
computation of basic and diluted as required by paragraphs 8, 9

241
Study on Compliance of Financial Reporting Requirements

earnings per share was made and 44 of this Standard, an

with the profit after tax inclusive enterprise should disclose the
of the ’Exceptional/Extraordinary following:
Items’.
(i) where the statement of
profit and loss includes
extraordinary items (within the
meaning of AS 5, Net Profit or
Loss for the Period, Prior
Period Items and Changes in
Accounting Policies), the
enterprise should disclose
basic and diluted earnings per
share computed on the basis
of earnings excluding
extraordinary items (net of tax
expense).”

It was noted from the Statement

of Profit & Loss as well as the
earnings per share note that the
company has computed the
earnings per share on the basis
of earnings including
extraordinary items as per the
requirement of paragraph 8 read
with paragraph 12 of AS 20. It is
not in line with the aforesaid
requirement of paragraph 48(i)
of AS 20.

However, the Earnings Per

Share computed on the basis of
earnings excluding extra
ordinary items has not been
disclosed as per the
requirements of paragraph 8
read with paragraph 12 of AS
20.

242
 Observations on Accounting Standard (AS) 20: Earnings Per Share

6. From the notes to the accounts It may be noted that the

given in the Annual Report of a disclosure requirement of
company, it was noted that only paragraph 48(ii)(b) of AS 20,
the weighted average number of provides as follows:
shares considered for basic and
diluted earnings per share has “48. In addition to disclosures
been disclosed. as required by paragraphs 8, 9
and 44 of this Statement, an
enterprise should disclose the
following:

(ii)

(b) the weighted average

number of equity shares
used as the denominator
in calculating basic and
diluted earnings per share,
and a reconciliation of
these denominators to
each other.”

It was observed from the

Earnings per share note that
although the company has
disclosed the weighted average
number of equity shares used
for determining the basic as well
as diluted earnings per share, it
has not disclosed the
reconciliation of the weighted
average number of equity shares
used as the denominator in
calculating the basic and diluted
earnings per share, as required
by Paragraph 48(ii)(b) of AS 20.

7. From the Annual Report of a It may be noted that

company, it has been noted that paragraphs 9 and 48 of AS 20,
company has shown negative provide as follows:
basic earnings per share in its

243
Study on Compliance of Financial Reporting Requirements

account and the computation of “9. This Standard requires an

the EPS without disclosing the enterprise to present basic
additional information required and diluted earnings per
to be disclosed in computation of share, even if the amounts
EPS. disclosed are negative (a loss
per share).”

“48. In addition disclosures as

required by paragraph 8,9 and
44 of this standard, an
enterprise should disclose the
following:

(i)…..

(ii)(a) the amount used as the

numerators in calculating
basic and diluted
earnings per share, and a
reconciliation of those
amounts to the net profit
or loss for the period;

(b) the weighted average

number of equity shares
used as the denominator
in calculating basic and
diluted earnings per
share, and a
reconciliation of these
denominators to each
other; and

(c) ………. "

It was noted that although

negative basic earnings per
share has been disclosed in the
Statement of Profit and Loss,
there is no disclosure in respect
of diluted earnings per share. It

244
 Observations on Accounting Standard (AS) 20: Earnings Per Share

was viewed that even if there

was no difference in the basic
and diluted EPS, to comply with
AS 20, the company should
have mentioned on the face of
the Statement of Profit and Loss
both basic as well as diluted
EPS.

Further, it was noted that

although the company has
disclosed the basic Earnings
Per Share along with nominal
value of the share in the
Statement of Profit and Loss , it
has omitted to disclose the
details of the numerator and
denominator of earning per
share any as required under
paragraph 48 (ii) (a) and (b) of
AS 20.

8. From the Annual Report of a It was noted from the Earning

company, it was noted that the per share note that although
only earnings per share on the calculation relating to basic and
face of statement of Profit and diluted earnings per share has
Loss although in the Notes to been disclosed, the nature of
the Accounts, it has disclosed earning per share i.e. basic and
’basic and diluted earnings per diluted has not been disclosed
share’ at the same amount. on the face of the Statement of
Profit and Loss, which is
against the requirement of
paragraph 8 of AS 20.

9. From the Annual Report of a It may be noted that paragraph

company, it was noted that 13(b) of AS 20, states as
although a company had issued follows:
Preference Shares, in the
computation of earnings per “13. The amount of preference

245
Study on Compliance of Financial Reporting Requirements

share disclosed in the Notes to dividend for the period that is

the Account, it has not made any deducted from the net profit for
adjustment for dividend payable the period is :
on the preference shares in
arriving at the profit after tax …
attributable to equity share (b) The full amount of the
holders. required preference
dividends for cumulative
preference shares for the
period, whether or not the
dividends have been
provided for. The amount
of preference dividends for
the period does not include
the amount of any
preference dividends for
cumulative preference
shares paid or declared
during the current period in
respect of previous period.”
(Emphasis Supplied)

It was noted that although the

company has issued non-
convertible cumulative
preference shares, the
preference dividend on the same
has not been adjusted against
the net profit/loss for the period
for determining the earning per
share which is contrary to the
aforesaid requirements of AS
20.

10. From the Statement of Profit and It was observed from the
Loss as well as Notes to the disclosure given in respect of
Accounts given in the Annual earning per share in notes to
Report, a company has accounts read with the
disclosed the basic and diluted Statement of Profit and Loss that

246
 Observations on Accounting Standard (AS) 20: Earnings Per Share

earnings per share without the nominal value of shares has

stating the nominal value of the neither been disclosed in the
share. Earnings per share note nor on
the face of the Statement of
Profit and Loss as per the
requirement of paragraph 48 (ii)
(c) of AS 20.

11. From the Annual Report of a It may be noted that paragraph

company, it has been noted that 15 of AS 20, inter alia provides
although the number of equity that:
shares outstanding at the
current Balance Sheet date had “15. For the purpose of
undergone a change compared calculating basic earnings per
to that of the previous Balance share, the number of equity
Sheet, for computation of EPS, shares should be the weighted
the number of weighted average average number of equity
equity shares was shown as the shares outstanding during the
same as the number of period.”
outstanding shares. Further, the It was noted that number of
company also had convertible equity shares outstanding has
warrants with an option to increased as on the current
convert these into shares and Balance Sheet date when
some of the warrants has been compared with last Balance
converted into equity shares Sheet date. Accordingly, it was
during the year. viewed that in such cases the
weighted number of shares
would be different from the
outstanding number of shares.
However, for the purpose of
calculating basic EPS, the
number of equity shares
outstanding as on the Balance
Sheet date has been considered
for its computation which is not
in line with aforesaid
requirement of paragraph 15 of
AS 20.

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Study on Compliance of Financial Reporting Requirements

Further, it was also viewed that

as per paragraph 26 of AS 20,
net profit or loss for the period
attributable to equity
shareholders and weighted
average number of shares
should be adjusted for the
effects of all dilutive potential
equity shares. It was noted that
some of the warrants were
converted into the equity shares
whereas the weighted average
number of shares considered for
the purpose of calculating
diluted EPS excluded in the
denominator the warrants that
were converted. It was viewed
that weighted average number of
shares considered for the
purpose of calculating diluted
EPS would change due to
effects of dilutive potential equity
shares.

Accordingly, it was viewed that

calculation of the Diluted EPS is
not in accordance with AS 20.

12. In the Annual Report of a It may be noted that paragraphs

company, it was observed from 4.4, 7 (a) and 32 of AS 20,
the Statement of Profit and Loss provides as follows:
and the Notes to the Account
that although it had issued “4.4. A potential equity share
Optionally Convertible is a financial instrument or
Preference Shares, the ’basic’ other contract that entitles, or
and ’diluted’ earnings per share may entitle, its holder to
were disclosed at the same equity shares.”
amount. “7. Examples of potential equity

248
Observations on Accounting Standard (AS) 20: Earnings Per Share

shares are:

(a) Debt instruments or

preference shares, that are
convertible into equity shares.”

“32. For the purpose of

calculating diluted earnings
per share, the number of
equity share should be the
aggregate of the weighted
average number of equity
shares calculated in
accordance with paragraphs
15 and 22, and the weighted
average number of equity
shares which would be issued
on the conversion of all the
dilutive potential equity
shares into equity shares.
Dilutive potential equity
shares should be deemed to
have been converted into
equity shares at the beginning
of the period or, if issued
later, the date of the issue of
the potential equity shares. “

It was observed from the note

relating to share capital that
convertible preference shares
have been issued which are
optionally convertible into equity
shares between three to twelve
years which has not yet elapsed
considering the date of
allotment. In the absence of any
other information in the financial
statements, it was viewed that
such convertible preference

249
Study on Compliance of Financial Reporting Requirements

shares are potential equity

shares which should be
considered for determination of
diluted earnings per share.

However, it was noted from the

Statement of Profit and Loss that
both the basic earnings per
share as well as diluted earnings
per share have been shown at
the same value which clearly
indicates that the convertible
preference shares have not
been considered for
determination of diluted earnings
per share. Accordingly, it was
viewed that the requirement of
AS 20 has not been complied
with.

13. In the Annual Report of a It was noted from the Statement

company, it was noted from the of Profit and Loss that three
Statement of Profit and Loss types of EPS have been
and the note relating to Earning disclosed - basic, diluted and
per share that EPS has been weighted. It was viewed that
disclosed as ’basic’, ’weighted paragraph 8 of AS 20 prescribes
average’ and ’diluted’. disclosure of only basic EPS and
diluted EPS but there is no
requirement to disclose
weighted EPS.

14. From the note on computation of It may be noted that paragraph

the earnings per share given in 48 (ii) of AS 20, inter alia
the Annual Report of a company, provides that;
it was noted that reference has
been made to ’average number “48…
of equity shares.’ (ii)

250
 Observations on Accounting Standard (AS) 20: Earnings Per Share

a) …

b) the weighted average

number of equity shares
used as the denominator
in calculating basic and
diluted earnings per
share, and a reconciliation
of these denominators to
each other; and

…“

It was noted that although the

company has disclosed the
calculation of earnings per share
in notes to accounts, the
terminology used for
denominator is “average number
of equity shares.” It may be
noted that as per the aforesaid
requirement, weighted average
number of equity shares should
be used to determine the basic
and diluted earnings per share.
Hence, the terminology used is
incorrect.

15. From the Annual Report of a It may be noted that paragraphs

company, it was noted that 8, 9 and 15 of AS 20,
although the company had respectively provide as follows :
issued shares during the years,
the computation of basic “8. An enterprise should
earnings per share was done on present basic and diluted
the basis of the number of earnings per share on the face
shares outstanding as at the end of the statement of profit and
of the year. loss account for each class of
equity shares that has
different right to share in the
net profit for the period. An

251
Study on Compliance of Financial Reporting Requirements

enterprise should present

basic and diluted earnings per
share with equal prominence
for all periods presented.”

“9. This Standard requires an

enterprise to present basic
and diluted earnings per
share, even if the amounts
disclosed are negative (a loss
per share).”

“15. For the purpose of

calculating basic earnings per
share, the number of equity
shares should be the weighted
average number of equity
shares outstanding during the
period.”

It was noted that although

certain equity shares have been
issued during the year, the
earning per share has been
computed with reference to the
number of shares outstanding as
at the end of the year rather
than considering the weighted
average number of shares
outstanding during the period as
required under paragraph 15 of
AS 20.

Further, it was noted that the

diluted earnings per share has
neither been disclosed on the
face of the Statement of Profit
and Loss nor in the notes to
accounts. It was viewed that
even if basic and diluted

252
 Observations on Accounting Standard (AS) 20: Earnings Per Share

earnings per share are same,

both of them should be
disclosed separately. Non-
disclosure of diluted earnings
per share is not in line with the
requirement of paragraph 9 of
AS 20.

16. From the Annual Report of a It may be noted that paragraphs

company, it was noted that 11, 12 and 13 of AS 20, provide
preference dividend has not as follows:
been added to determine the
loss attributable to equity “11. For the purpose of
shareholders for the calculating basic earnings per
computation of earnings per share, the net profit or loss for
sheet. the period attributable to
equity shareholders should be
the net profit or loss for the
period after deducting
preference dividends and any
attributable tax thereto for the
period.”

“12…The amount of preference

dividends and any attributable
tax thereto for the period is
deducted from the net profit for
the period (or added to the net
loss for the period) in order to
calculate the net profit or loss for
the period attributable to equity
shareholders.”

“13. The amount of preference

dividends for the period that is
deducted from the net profit for
the period is:

(a) …

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Study on Compliance of Financial Reporting Requirements

(b) the full amount of the

required preference
dividends for cumulative
preference shares for the
period, whether or not the
dividends have been
provided for. The amount of
preference dividends for the
period does not include the
amount of any preference
dividends for cumulative
preference shares paid or
declared during the current
period in respect of previous
periods. (emphasis
supplied)”

It was noted from the note that

the company has cumulative
preference shares. However, the
balance of ‘Loss after tax’ used
for determination of earning per
share for equity shareholders is
same as that in the Statement of
Profit and Loss. It was viewed
that the preference dividend has
not been added to determine the
loss attributable to equity
shareholders for computation of
earnings per share which is not
in line with the aforesaid
requirements of AS 20.

17. From the Annual Report of a It may be noted that co-

cooperative bank, it was noted operative banks are required to
that earnings per share figure comply with the disclosure
was not disclosed on the face of norms stipulated under
the statement of Profit and Loss Accounting Standards, issued by
and computation of EPS was not ICAI, until or unless RBI

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 Observations on Accounting Standard (AS) 20: Earnings Per Share

disclosed in the note to prescribes specific disclosure

Accounts. with regard to any accounting
standard.
It was noted that the bank is
required to present basic as well
as diluted earnings per share on
the face of the Statement of
Profit and Loss. Further, other
disclosures required under
paragraph 48 of AS 20 should
also have been made in the
notes to accounts.
However, in the given case, it
was noted that neither basic and
diluted earnings per share have
been shown on the face of
Statement of Profit and Loss nor
the details relating to
computation of earnings per
share are given in the Notes to
Accounts.
Accordingly, it was viewed that
the requirements of paragraphs
8 and 48 of AS 20 have not
been complied with.

18. In the Statement of Profit and It was observed that no

Loss and the notes to accounts information has been disclosed
given in the Annual Report of a with regard to Earning Per Share
company, there was no either in the Statement of Profit
disclosure of information relating and Loss or in the Notes to
to Earning per share. Accounts as required by
paragraphs 8 and 48 of AS 20.
Accordingly, it was viewed that
the disclosure requirements of
AS 20 have not been complied
with.

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Study on Compliance of Financial Reporting Requirements

19. A note on Earnings per Share It may be noted that

read with the note of Share paragraphs 8, 19 and 20 of AS
Capital as given in the Annual 20, provide as follows:
Report of a company indicated
that it had shares on which “8. An enterprise should
there were calls in arrear. present basic and diluted
earnings per share on the
face of the statement of profit
and loss for each class of
equity shares that has a
different right to share in the
net profit for the period. An
enterprise should present
basic and diluted earnings
per share with equal
prominence for all periods
presented.”

“19. Partly paid equity shares

are treated as a fraction of an
equity share to the extent that
they were entitled to participate
in dividends relative to a fully
paid equity share during the
reporting period.”

“20.Where an enterprise has

equity shares of different
nominal values but with the
same dividend rights, the
number of equity shares is
calculated by converting all
such equity shares into
equivalent number of shares of
the same nominal value.”

It was noted from note relating

to calculation of Earnings Per
Share that while calculating
EPS, the number of shares

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 Observations on Accounting Standard (AS) 20: Earnings Per Share

used as denominator was same

as stated in note of Share
Capital without adjusting the
fraction of shares on which calls
are in arrears. It indicates that
the denominator used to
determine earning per share is
not in accordance with
requirements of paragraph 20 of
AS 20.

20. The Statement of Profit and It may be noted that paragraph 9

Loss and the note on Earning of AS 20, provides as follows:
per share given in the Annual
Report of a company indicate “9. This Standard requires an
that since it has incurred loss enterprise to present basic
during the year, the EPS has and diluted earnings per
been disclosed as NIL. share, even if the amounts
disclosed are negative (a loss
per share).”

It was viewed that aforesaid

requirement envisages the
disclosure of even negative
basic and diluted earnings per
share. In the given case, it was
noted that losses have accrued
and hence during the year, the
basic and diluted earnings per
share have been reported at nil,
which is not in line with the
requirement of paragraph 9 of
AS 20.

257
 19
Observations on Accounting Standard (AS) 21:
Consolidated Financial Statements
S. Matters contained in the Observations
No Annual Report

1. In the Consolidated Financial It may be noted that paragraph

Statements of a company, the 20 of AS 21, requires that:
following note was appearing:
“20. Consolidated financial
‘Most of the accounting policies statements should be
of the reporting company and prepared using uniform
that of its subsidiaries are accounting policies for like
similar and are in line with transactions and other events
generally accepted accounting in similar circumstances. If it
principles in India. However is not practicable to use
since certain subsidiaries are in uniform accounting policies in
the business lines which are preparing the consolidated
distinct from that of the reporting financial statements, that fact
company and function in a should be disclosed together
different regulatory environment, with the proportions of the
certain policies in respect of items in the consolidated
investments, gratuity, financial statements to which
depreciation/ amortisation etc. the different accounting
differ.’ policies have been applied.”

It was noted from the given note

that although the fact that the
accounting policy followed by
the subsidiaries in respect of
investment, gratuity,
depreciation/ amortisation etc.
differ from that followed by the
parent company has been

258
 Observations on Accounting Standard (AS) 21: Consolidated Financial …

disclosed, however, neither the

proportion of these items in the
consolidated financial
statements to which these
different accounting policies
have been applied has been
disclosed nor the fact that it is
not practicable to do so has
been mentioned.

2. From the Annual Report of a It may be noted that paragraphs

company, it was noted from the 29(a) and 11 of AS 21, provides
“Related Party Disclosure” in as follows:
the Standalone Financial
Statements that it had acquired “29. In addition to disclosures
a subsidiary during the year. required by paragraph 11 and
However, from the 20, following disclosures
Consolidated Financial should be made:
Statements, it was noted that (a) in consolidated financial
the said subsidiary was neither statements a list of all
consolidated nor information subsidiaries including the
relating to it as a subsidiary name, country of
was disclosed. incorporation or
residence, proportion of
ownership interest and, if
different, proportion of
voting power held;”
“11. A subsidiary should be
excluded from consolidation
when:
(a) control is intended to be
temporary because the
subsidiary is acquired
and held exclusively with
a view to its subsequent
disposal in the near
future; or

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Study on Compliance of Financial Reporting Requirements

(b) it operates under severe

long-term restrictions
which significantly impair
its ability to transfer
funds to the parent. In
consolidated financial
statements, investments
in such subsidiaries
should be accounted for
in accordance with
Accounting Standard(AS)
13, Accounting for
Investments. The
reasons for not
consolidating a
subsidiary should be
disclosed in the
consolidated financial
statements.”

It was noted from related party

disclosure given in the
standalone financial statements
that the company had acquired
a subsidiary during the financial
year. It has also been noted that
during the year, certain
transactions have taken place
with the said subsidiary
company. However, the same
was neither included in the list
of entities the financials of which
have been consolidated nor any
note providing the reasons for
not consolidating the subsidiary
was disclosed as required under
paragraph 29(a) and paragraph
11 of AS 21 respectively.

3. The following disclosure was It was noted from perusal of the

260
Observations on Accounting Standard (AS) 21: Consolidated Financial …

noted in the notes of the Auditors’ Report that the

Consolidated Financial Auditors have confirmed that the
Statements as given in the consolidated financial
Annual Report of a company. statements have been prepared
in accordance with the generally
 ‘The financial statements of accepted accounting principles
foreign subsidiaries are of India. However, from the
general purpose financial stated note, it was noted that
reports which have been there is a list of foreign
prepared in accordance subsidiaries, whose financial
with generally accepted statements have been prepared
accounting principles and in accordance with generally
complies with other accepted accounting principles
requirements of the law of of the country in which they
the country in which the have been incorporated. It was
companies are viewed that such note clearly
incorporated. The financial indicates that financial
statements of the foreign statements of those subsidiaries
subsidiaries reflect total are prepared in accordance with
revenue of Rs. XXX and accounting principles other than
total expenses of Rs. YYY that followed by the parent and
and total assets of Rs. subsidiaries registered in India.
XXXX and total liabilities of It was further viewed that in
Rs. YYYY.(Emphasis case uniform accounting policies
added)’ were not followed in preparing
Further, one of the foreign consolidated financial
subsidiary has not adopted statements, the proportion of
Accounting Standard (AS) 30, items for which different
Financial Instruments: accounting policies were applied
Recognition and Measurement should have been disclosed as
and consequently has not required under paragraph 20 of
accounted for the fair valuation AS 21.
of forward contract entered into Further, it was also noted from
to hedge the overseas the given note that, one of the
Investments. subsidiary, is reported to have
not adopted AS 30 with regard
to accounting for forward
contracts and even the

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Study on Compliance of Financial Reporting Requirements

proportion of that item has been

disclosed.

It was observed that this

exemption is given only in case
if it is not practicable to use
uniform accounting policy.
However, in the absence of the
disclosure of the fact leading to
such inconsistency, it appears
that although it was practicable
for application of uniform policy
still, different policy was
adopted. It was, therefore,
viewed that the exemption used
is not in line with the
requirements of paragraph 20 of
AS 21.

4. From the Standalone and It may be noted that paragraph

Consolidated Financial 13 of AS 21, provides as
Statements of a company, it was follows:
noted that in the note of “Other
Current Assets” the amount of “13. In preparing consolidated
“Assets held for disposal” was financial statements, the
higher in the Standalone financial statements of the
Financial Statements than in the parent and its subsidiaries
Consolidated Financial should be combined on a line
Statements. by line basis by adding
together like items of assets,
liabilities, income and
expenses.”

It was observed that the amount

of “assets held for disposal” in
the standalone note of other
assets was much higher than
the amount disclosed in the
Consolidated schedule of other
assets. Paragraph 13 of AS 21

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 Observations on Accounting Standard (AS) 21: Consolidated Financial …

requires the similar items should

be combined on a line by line
basis by adding together like
items of assets. It prima facie
appears that a line by line
consolidation of “assets held for
disposal” has not been done.

5. From the note to Accounts given It may be noted that paragraph

in the Consolidated Financial 29(b)(ii) of AS 21, provides as
Statements of a company, it was follows:
noted that it had acquired two
subsidiaries during the year. “29. In addition to disclosures
required by paragraph 11 and
20, following disclosures
should be made:

(a) …

(b) in consolidated financial

statements, where
applicable:

(i) …

(ii) the effect of the

acquisition and disposal
of subsidiaries on the
financial position at the
reporting date, the
results for the reporting
period and on the
corresponding amounts
for the preceding
period.”

It was noted from Note relating

to Non Current Investments that
two entities had become
subsidiaries of the company
during the year. Hence,

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Study on Compliance of Financial Reporting Requirements

paragraph 29 of AS 21 is
applicable in respect of the
subsidiaries acquired. However,
it was noted that the required
disclosures in respect of the two
subsidiaries acquired were not
made.

6. From the Consolidated Balance It may be noted that paragraph

Sheet of a company, it was 25 of AS 21, provides as
noted that minority interest was follows:
disclosed as part of the
Shareholders fund. “25. Minority interests should
be presented in the
consolidated balance sheet
separately from liabilities and
the equity of the parent’s
shareholders. Minority
interests in the income of the
group should also be
separately presented.”

It was viewed that the

presentation of minority interest
as part of Shareholders’ fund
amounts to presenting it as
equity of the parent’s
shareholders which is not in
accordance with requirements of
paragraph 25 of AS 21.

7. A following note formed part of It may be noted that paragraph

the Notes in the Consolidated 20 of AS 21, provides as
Financial Statements of a follows:
company:
“20. Consolidated financial
‘Statutory information and notes statements should be
on accounts are disclosed in prepared using uniform

264
 Observations on Accounting Standard (AS) 21: Consolidated Financial …

separate financial statements of accounting policies for like

holding and subsidiary transactions and other events
companies. Since none of the in similar circumstances. If it
above notes have material effect is not practicable to use
on the consolidated financial uniform accounting policies in
statements, separate notes on preparing the consolidated
accounts have not been financial statements, that fact
furnished along with should be disclosed together
Consolidated financial with the proportions of the
Statements.’ items in the consolidated
financial statements to which
the different accounting
policies have been applied.”

It was noted that as per above-

mentioned requirement, if the
accounting policies adopted for
preparation of subsidiary
financials are not same as that
used for financials of holding
company then such fact should
be disclosed in the consolidated
financial statements together
with the proportions of the items
to which different accounting
policies have been applied.
However, in given case, in the
absence of accounting policy, it
cannot be judged that whether
such differentials have been
dealt in accordance with AS 21.

8. The Note on Consolidated It may be noted that paragraph

Financial Statements given in 22 of AS 21, provides as
the Annual Report of a follows:
company, states as follows:
“22. The results of operations of
‘The following subsidiary a subsidiary are included in the
companies/ companies consolidated financial

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Study on Compliance of Financial Reporting Requirements

controlled/ associates/ statements as from the date on

companies consolidated which parent-subsidiary
ceased to remain subsidiaries/ relationship came in existence.
controlled/ consolidated during The results of operations of a
the year…(emphasis subsidiary with which parent-
supplied)’ subsidiary relationship
ceases to exist are included in
the consolidated statement of
profit and loss until the date
of cessation of the
relationship…In order to
ensure the comparability of the
financial statements from one
accounting period to the next,
supplementary information is
often provided about the effect
of the acquisition and disposal
of subsidiaries on the financial
position at the reporting date
and the results for the reporting
period and on the corresponding
amounts for the preceding
period. (emphasis Supplied)”

From the above, it was noted

that the results of a subsidiary is
consolidated only till the date
such relationship ceases to
exist.

It was noted from the stated

note that certain subsidiaries
have ceased to remain as
subsidiaries during the year.
However, the treatment followed
for their consolidation viz.
whether financials of such
enterprises have been
consolidated till date of

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 Observations on Accounting Standard (AS) 21: Consolidated Financial …

cessation or otherwise has not

been disclosed.

Accordingly, it was viewed that

the requirements of AS 21 have
not been complied with.

9. From the Consolidated notes to It may be noted that paragraph

account given in the Annual 29(a) of AS 21, provides as
Report of a company, it was follows.
noted that it has disclosed only
the names of the subsidiaries “29. In addition to disclosures
consolidated by it. required by paragraph 11 and
20, following disclosures
should be made:

(a) in consolidated financial

statements a list of all
subsidiaries including the
name, country of
incorporation or
residence, proportion of
ownership interest and, if
different, proportion of
voting power held;...”

It was noted from reproduced

disclosure given in the
Consolidated Financial
Statements that although the list
of subsidiaries held has been
disclosed, neither the country
of their incorporation nor
proportion of ownership interest
held in them were disclosed as
required by paragraph 29(a) of
AS 21.

10. From the Standalone and the It may be noted that paragraph
Consolidated Financial 13 of AS 21, provides as

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Study on Compliance of Financial Reporting Requirements

Statements of a company, it was follows:

noted that auditors’
remuneration disclosed in both “13. In preparing consolidated
financial statements was same. financial statements, the
financial statements of the
parent and its subsidiaries
should be combined on a line
by line basis by adding
together like items of assets,
liabilities, income and
expenses. In order that the
consolidated financial
statements present financial
information about the group
as that of a single enterprise,
the following steps should be
taken:

…”

It was noted that amount of

auditors’ remuneration reported
in the Consolidated Financial
Statements was same as that
reported in the Standalone
Financial Statements. It was
viewed that if the principles of
consolidating subsidiaries with
the enterprise were done on
‘line by line’ basis, the amount
incurred by the Consolidated
entities on the auditors
remuneration should have
been aggregated with the
expenditure incurred by the
reporting company as required
by paragraph 13 of AS 21.

268
 20
Observations on Accounting Standard (AS) 22:
Accounting for Taxes on Income
S Matter contained in Annual Observations
No report

1. In the Annual Report of a It may be noted that paragraph

company, Net Deferred Tax 31 of AS 22, provides as
Liabilities/ (Assets) was disclosed follows:
in Balance Sheet as follows:
“31. The break-up of deferred
(Rs. in lakhs) tax assets and deferred tax
liabilities into major
Deferred Tax Assets components of the respective
On accounts of Provision for balances should be disclosed
contingency in the notes to accounts.”

Deferred Tax Liability It was observed from the

Schedule of Net Deferred Tax
On accounts of depreciation Liabilities/ (Assets) that
although a significant amount
On accounts of others had been recognised as the
deferred tax liabilities ‘on
account of others’, however, the
nature of such ‘other’ was not
disclosed. Accordingly, it was
viewed that the requirements of
paragraph 31 of AS 22 has not
been complied with.

2. Presentation of Deferred tax It may be noted that the

liability on the face of the Balance explanation given under
Sheet as given in the Annual paragraph 30 of AS 22, provides

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Study on Compliance of Financial Reporting Requirements

Report of a company: as follows:

Reserve &Surplus “30. Deferred tax assets (net

of the deferred tax liabilities,
Deferred Tax Liability if any, in accordance with
Loan Funds paragraph 29) is disclosed on
the face of the balance sheet
Secured Loans separately after the head
‘Investments’ and deferred tax
Unsecured Loans liabilities (net of deferred tax
assets, if any, in accordance
with paragraph 29) is
disclosed on the face of the
balance sheet separately after
the head ‘Unsecured Loans’.”

It was noted from the face of the

Balance Sheet that deferred tax
liability has been shown after
the head of ‘Reserve & Surplus’
instead of disclosing the same
after the ‘Unsecured Loans’.

Accordingly, it was viewed that

the presentation of ‘Deferred
Tax Liabilities’ on the face of
Balance Sheet is not in line with
the requirements of AS 22.

3. From the Statement of Profit and It may be noted that paragraph

Loss of a company, it was noted 9 of AS 22, provides as follows:
that “provision for taxation” was
shown as an “appropriation” of “9. Tax expense for the
net profit. period, comprising current tax
and deferred tax, should be
included in the determination
of the net profit or loss for the
period.”

In view of the above

270
 Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

requirements, it was noted that

income tax should be included
for the determination of net
profit of the period; however, in
the given case, the same has
been shown as appropriation of
profits which is not in line with
the requirements of AS 22.

4. In the Annual Report of a It was noted that instead of

Company, Note on Deferred Tax giving components of deferred
Liability was stated as under: tax liabilities, it was merely
stated that it comprises of
‘Note on Deferred Tax Liability opening balance of deferred tax

Deferred Tax Liability xx liabilities. It was viewed that

such disclosure does not give
As per last year information about the major
Balance Sheet xx” components comprising
deferred tax liabilities, which is
not in line with the requirements
of paragraph 31 of AS 22.

5. In the Balance Sheet of a It may be noted that paragraph

company, both the Deferred Tax 29 of AS 22, provides as
Liabilities and Deferred Tax follows:
Assets have been shown
separately on the face of the “29. An enterprise should
Balance Sheet. offset deferred tax assets and
deferred tax liabilities if:

(a) the enterprise has a

legally enforceable right
to set off assets against
liabilities representing
current tax; and

(b) the deferred tax assets

and the deferred tax
liabilities relate to taxes
on income levied by the

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Study on Compliance of Financial Reporting Requirements

same governing laws.”

In view of the above, it was felt

that an enterprise is required to
disclose on the face of the
Balance Sheet either the
‘Deferred Tax Assets’ or the
‘Deferred Tax Liabilities’ after
setting-off the two balance
against each other.

However, it has been noted that

both the ‘Deferred Tax Assets’
and ‘Deferred Tax Liabilities’
have been shown separately on
the face of the Balance Sheet.
In other words, the ‘Deferred
Tax Assets’ and ‘Deferred Tax
Liabilities’ have not been set-off
against each other for their
presentation in the Balance
Sheet as required by paragraph
29 of AS 22.

6. From the Annual Report of a It was observed that no deferred

Housing Finance company, it was tax liability has been recognised
observed from the note of on special reserve created
Reserves and note relating to under 35(10)(viii) of the IT Act.
Deferred tax that while it had
made a transfer to “Special It was noted from the Statement
Reserve” created under section of Profit and Loss that although
35(10)(viii) of the Income Tax Act, the current tax has been
1960, the note on components of determined considering the
Deferred Tax Liabilities did not deduction available under
include the deferred tax liability Section 36(10)(viii) of Income
arising on such transfer. Tax Act, while providing the
policy and related disclosure of
Deferred Tax neither the policy
states to have considered the
aforesaid deduction nor the

272
 Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

components of DTA/DTL shows

any DTL made with respect to
the same.

In view of EAC opinion on

Query No.18 of Compendium of
Opinions, Vol. 26, it was viewed
that the company is required to
create deferred tax liability on
the special reserve created and
maintained under section
36(1)(viii) of the Income-tax Act,
1961, irrespective of the fact
that withdrawal of the reserve
may or may not happen since
the company is capable to
withdraw the reserve resulting
into reversal of the difference
between accounting income and
taxable income (i.e., timing
difference).

7. The accounting policy with regard It may be noted that paragraphs

to deferred taxation given under 13, 15 and 17 of AS 22, provide
note of Significant Accounting as follows:
policies as given in the Annual
Report of a company, states as “13. Deferred tax should be
follows: recognised for all the timing
differences, subject to the
‘Taxation consideration of prudence in
respect of deferred tax assets
b. Deferred Tax: as set out in paragraphs 15-
In accordance with Accounting 18.”
Standard 22 – “Accounting for “15. Except in the situations
Taxes on Income”, the deferred stated in paragraph 17,
tax for the timing differences is deferred tax assets should be
measured using the tax rates and recognised and carried
tax laws that have been enacted forward only to the extent that
or substantially enacted at the there is a reasonable certainty
Balance Sheet date. Deferred tax

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Study on Compliance of Financial Reporting Requirements

assets arising from the timing that sufficient future taxable

differences are recognised only income will be available
on the consideration of against which such deferred
prudence.’ tax assets can be realised.”

“17. Where an enterprise has

unabsorbed depreciation or
carry forward of losses under
tax laws, deferred tax assets
should be recognised only to
the extent that there is virtual
certainty supported by
convincing evidence that
sufficient future taxable
income will be available
against which such deferred
tax assets can be realised.”

It was noted from the

accounting policy as well as
note relating to taxation that
although the deferred tax assets
arising from timing differences
have been recognised on the
consideration of prudence, it
has not been stated whether
such prudence was reasonably
certain or not that sufficient
future taxable income would be
available against which such
deferred tax assets would be
realised.

Accordingly, it was viewed that

in the absence of such
information with regard to
recognition of deferred tax
assets, the accounting policy
cannot be considered to be in
line with AS 22.

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 Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

8. In the Annual Report of a It may be noted that paragraph

company, the accounting policy 32 of AS 22 provides as follows:
on taxation, reads as under:
“32. The nature of the
‘Current Income tax and fringe evidence supporting the
benefit tax is measured at the recognition of deferred tax
amount expected to be paid to assets, should be disclosed,
the tax authorities in accordance if an enterprise has
with Indian Income Tax Act, unabsorbed depreciation or
1961. carry forward of losses under
tax laws”
Deferred tax is measured based
on the tax rates and the tax laws It was noted from the note
enacted or substantively enacted providing the components of
at the balance sheet date. deferred tax asset and deferred
Deferred tax assets are tax liability that the company
recognised only to the extent that had unabsorbed depreciation
there is reasonable certainty that and carry forward of business
sufficient future taxable income losses against which deferred
will be available against which tax had been recognised,
such deferred tax assets can be accordingly the above-
realised. In situations where the mentioned provisions of AS 22
company has unabsorbed were applicable. However, it
depreciation or carry forward tax was noted that the nature of
losses, all deferred tax assets are evidence, based on which such
recognised only if there is virtual deferred tax assets was
certainty supported by convincing recognised had not been
evidence that they can be disclosed which is not in line
realised against future taxable with the requirements of
profits. Unrecognised deferred paragraph 32 of AS 22.
tax assets of earlier period are
re-assessed and recognised to
the extent that it has become
reasonably certain that future
taxable income will be available
against which such deferred tax
assets can be realised.’

9. In the Annual Report of company, It may be noted that paragraph

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Study on Compliance of Financial Reporting Requirements

the accounting policy on taxation, 11 of Guidance note on

reads as under: “Accounting for credit in respect
of Minimum alternative tax”,inter
‘a) Current Tax is determined at alia, provides as follows:
the amount of tax payable in
respect of taxable income for the “MAT credit should be
period, computed with relevant recognised as an asset only
tax rules and tax laws. In case of when and to the extent there is
tax payable as per provisions of convincing evidence that the
MAT under Section 115 JB of the company will pay normal income
Income Tax Act, 1961, Deferred tax during the specified period.”
MAT Credit Entitlement is
separately recognised as It was noted from the stated
advance. accounting policy that it is silent
whether MAT credit entitlement
b) Deferred tax is recognised has been recognised, if there
subject to the consideration of exists any convincing evidence
prudence, on timing differences, to demonstrate that the
being the difference between company will pay normal tax
taxable and accounting income during the specified period. In
that originate in one period and the absence of such reference
are capable of reversal in one or in the accounting policy, it is
more subsequent periods.’ observed that stated accounting
policy is not in line with
Guidance Note on Accounting
for credit in respect of Minimum
alternative tax.

10. In the Annual Report of company, It may be noted that paragraph

the accounting policy on Income 4.3 of AS 22, provides as
tax, reads as under: follows:

‘Tax expense comprises of “4.3. Tax expense (tax

current income tax. Current savings) is the aggregate of
income tax is measured at the current tax and deferred tax
amount expected to be paid to charged or credited to the
the tax authorities in accordance statement of profit and loss
with the Indian Income Tax Act, for the period.”
1961. Deferred income taxes are
recognised for the future tax It was noted from the stated

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consequences attributable to policy on income tax that tax

timing differences between the expense comprises of only
financial statement determination current income tax. It was
of income and their recognition viewed that as per paragraph
for tax purposes. …(emphasis 4.3 of AS 22, tax expense is the
supplied)’ aggregate of current tax and
deferred tax, accordingly, such
statement was viewed to be not
in line with the requirements of
AS 22.

11. In the Annual Report of company, It may be noted that from

the note relating to provision for paragraph 13 of AS 22, provides
taxation reads as follows: as follows:

‘In the absence of book/ tax “13. Deferred tax should be

profits or losses and consequent recognised for all the timing
impact of the timing differences differences, subject to the
on the same, provision for consideration of prudence in
deferred taxes and current respect of deferred tax assets
income tax has not been made.’ as set out in paragraphs 15-
18.”

It may further be noted that as

per the clarification given in
response to Question 9(ii) of
Background Material for
Seminars on Accounting
Standard (AS) 22, Accounting
for Taxes on Income , issued by
the Institute, states as follows:

“(ii) … It may, however, be

added that the deferred tax
liability recognised at the
balance sheet date will give rise
to future taxable income at the
time of reversal thereof.
Accordingly, in the present
case, in respect of tax losses of

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the company, which can be

carried forward at the balance
sheet date, deferred tax asset
can be recognised to the extent
that the reversal of the deferred
tax liability will give rise to
sufficient future taxable income
against which such deferred tax
asset can be realised.”

From the above, it was viewed

that deferred tax should be
recognised for all the timing
differences. The fact that there
are no tax profits or book profits
does not exempt the company
from recognition of deferred
taxes. As regards recognition of
deferred tax asset, it should be
recognised based on principles
of prudence stated therein.
However, as per the clarification
in response to Question 9 (ii), it
was viewed that deferred tax
liability recognised at the
balance sheet date gives rise to
future taxable income at the
time of reversal. Hence,
deferred tax assets to the extent
of deferred tax liability should
be recognised. In the given
case, it was viewed that
depreciation is giving rise to
deferred tax liability. Hence,
DTL as well as DTA should
have been recognized as per
the requirements of AS 22..

12. In the Annual Report of a It may be noted that paragraph

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company, Note relating to 31 requires the break up of

Deferred Tax Liability reads as deferred tax assets and
under: deferred tax liabilities balances,
accordingly, it was viewed that
‘Deferred tax liability is on the term ‘balances’ signify that
account of timing difference of paragraph 31 requires break up
depreciation.’ of DTA or DTL as shown in the
Balance Sheet rather than the
amount expensed in the
Statement of Profit and Loss.
However, it was noted from
stated Note that it provides
break up of only the deferred
tax liability that has been
created during the year rather
than providing the break up of
entire balance being carried
forward. Accordingly, it was
viewed that the requirement of
paragraph 31 of AS 22 have not
been complied with.

13. The note relating to income-tax It may be noted that paragraph

given in the Annual Report of a 13 of AS 22, provides as
company reads as follows: follows:

‘Income tax comprises current tax “13. Deferred tax should be

and deferred tax. Current tax is recognised for all the timing
determined in accordance with differences, subject to the
the provisions of Income Tax Act, consideration of prudence in
1961. respect of deferred tax assets
as set out in paragraphs 15-
Deferred tax charge or credit is 18.”
recognised on timing difference
between taxable incomes and It was noted that as per the
accounting income that originate clarification given in response to
in one period and are capable of Question 9(ii) of Background
reversal, subject to consideration Material for Seminars on
of prudence, in one or more Accounting Standard (AS) 22,

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Study on Compliance of Financial Reporting Requirements

subsequent periods. Deferred tax Accounting for Taxes on Income

assets and liabilities are , issued by the Institute, states
measured using the tax rates and that;
tax laws that have been enacted
“(ii) … It may, however, be
or substantively enacted by the
balance sheet date.’ added that the deferred tax
liability recognised at the
It was further noted that the balance sheet date will give rise
company has brought forward to future taxable income at the
losses but no DTA has been time of reversal thereof.
recognised. Accordingly, in the present
case, in respect of tax losses of
the company, which can be
carried forward at the balance
sheet date, deferred tax asset
can be recognised to the extent
that the reversal of the deferred
tax liability will give rise to
sufficient future taxable income
against which such deferred tax
asset can be realised.”

From the above, it was viewed

that deferred tax should be
recognised for all the timing
differences that are capable of
reversal in one or more
subsequent period. Further, it is
virtually certain that taxable
income would accrue at the time
of reversal of deferred tax
liability. Hence, deferred tax
assets on carried forward losses
should be recognised to the
extent of deferred tax liability as
on the balance sheet date.

It was noted that, in the given

case, during the given financial
year depreciation as well as

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

amortisation on tangible assets

and intangible assets
respectively would have given
rise to deferred tax liability
(DTL). It was further noted that
the company has brought
forward losses which would give
rise to the deferred tax asset
(DTA). However, neither
deferred tax liability nor
deferred tax assets have been
recognised during the period. It
was viewed that the deferred tax
assets at least to the extent of
deferred tax liability should have
been recognised. It may be
argued that such accounting
treatment would have again
given NIL balance of DTA/DTL
on the Balance Sheet but nil
balance does not exempt the
company either from recognition
of DTA/ DTL in the Balance
Sheet or from providing the
details of DTA/DTL. Hence, non
recognition of DTA/DTL and non
disclosure of breakup of
components of DTA/ DTL is not
in line with the requirements of
AS 22.

14. In the Annual Report of a It may be noted that paragraph

company, the accounting policy 20 of AS 22, provides as
on Taxation reads as follows: follows:

‘Provision for Taxation is “20. Current tax should be

ascertained on the basis of measured at the amount
assessable profit computed in expected to be paid to
accordance with the provisions of (recovered from) the taxation

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Income Tax Act, 1961 & tax authorities, using the

advices, wherever considered applicable tax rates and tax
necessary…’ laws.”

It was noted from the stated

accounting policy that provision
for tax is estimated based on
Income Tax laws as well as
certain tax advices wherever
considered necessary. It was
viewed that AS 22 does not
prescribe to follow income tax
advices which involve
interpretation of income tax
laws. Hence, estimating
provision on the basis of such
advices cannot be considered to
be in line with paragraph 20 of
AS 22.

15. From the Annual Report of a The following discrepancies

company, it was noted that the have been noted with regard to
Deferred Tax Liability of a AS 22:
company comprised of ‘Deferred
liability on Fixed Assets’ and i. It was observed from the
‘Provision for Gratuity’. break up of deferred tax
liability that it has been
recognised in context of
fixed assets. It was viewed
that the nature of
transaction(s) on which
deferred tax liability has
been arisen for fixed asset
is not clear from the stated
disclosures viz whether
such deferred tax liability
has been recognised on
account of difference in
depreciation on fixed assets
or it is a tax effect on sale of

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

fixed assets. The amount

involved being significant, it
was viewed that the
nomenclature used should
be clear enough to indicate
the nature of component of
DTL.

ii. It may be noted that

paragraph 11 and 13 of AS
22 , provides as follows:

“11. An example of tax

effect of a timing difference
that results in a deferred tax
asset is an expense
provided in the statement of
profit and loss but not
allowed as a deduction
under Section 43B of the
Income-tax Act, 1961. This
timing difference will
reverse when the deduction
of that expense is allowed
under Section 43B in
subsequent year(s).”

“13. Deferred tax should

be recognised for all the
timing differences,
subject to the
consideration of prudence
in respect of deferred tax
assets as set out in
paragraphs 15-18.”

It was observed that

deferred tax liability has
also been recognised
against provision for

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Study on Compliance of Financial Reporting Requirements

gratuity. It was viewed that

provision for gratuity is an
expense which is provided
every year in the statement
of profit and loss based on
services rendered by the
employee but it is not
allowed as a deduction, as
per Section 43B of the
Income-tax Act, 1961,
Accordingly, it would result
in deferred tax asset only.

Accordingly, it was viewed that

treating provision for gratuity as
deferred tax liability is not in line
with AS 22.

16. In the Annual Report of a It was noted that paragraphs 7

company, it was observed from and 13 of AS 22, provide as
the components of deferred tax follows:
liability that the ‘deferred tax
liability has been created on “7. ...the total depreciation
‘difference in depreciation and charged on machinery for
amortisation in block of assets as accounting purposes and the
per Income Tax and books of amount allowed as deduction for
account’ in the current year was tax purposes will ultimately be
the same as that in the previous the same, but periods over
year. which the depreciation is
charged and the deduction is
allowed will differ….”

“13. Deferred tax should be

recognised for all the timing
differences, subject to the
consideration of prudence in
respect of deferred tax assets
as set out in paragraphs 15-
18.”

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

From the above, it was noted

that the total amount of
depreciation charged for
accounting purpose and tax
purpose mayultimately become
same but during the useful life
of asset timing difference
wouldarise on which deferred
tax should be recognised.

It was noted in the given case

that the deferred tax liability
recognised in the current year
due to difference in depreciation
for accounting purpose vis-a-vis
tax purpose is the same as that
recognised in the previous year
which indicates that deferred tax
liabilities have not been
adjusted for timing difference
arising due to depreciation
charged in the current year for
accounting vis-a-vis tax
purpose. Accordingly, it was
viewed that the requirements of
AS 22 have not been complied
with.

17. It was noted from the It may be noted that paragraph

Consolidated Financial 29 of AS 22, provides as
Statements given in the Annual follows:
Report of a company having
several subsidiaries that in the "29. An enterprise should
Consolidated Balance Sheet, Net offset deferred tax assets and
Deferred Tax was disclosed on deferred tax liabilities if:
the face of it. (a) the enterprise has a
legally enforceable right
to set off assets against
liabilities representing

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Study on Compliance of Financial Reporting Requirements

current tax; and

(b) the deferred tax

assets and the deferred
tax liabilities relate to
taxes on income levied
by the same governing
taxation laws."

From above, it was noted that

deferred tax liabilities and
deferred tax assets can be set
off against each other only when
the enterprise has legal
enforceable right to set them off
against each other. It was noted
that in given case, the Deferred
Tax Assets reported in the
Consolidated Balance Sheet
has been determined by
adjusting deferred tax asset of
one enterprise against Deferred
Tax Liabilities of other
enterprises. It was viewed that
there is no legal enforceable
right to set off DTA of one
enterprise against DTL of
another. Hence, reporting such
balances on net basis is not in
accordance with AS 22.

18. From the note of Reserve and It may be noted that principles
Surplus given in the Annual for recognizing ‘deferred tax’
Report of a company, it has been and the definition of ‘timing
noted that it had accounted for difference’ as given in
Deferred Tax Asset on Cash Flow paragraphs 13 and 4.6 of AS
Hedge Reserve against the 22, provide as follows:
liability created in the said
Reserve. “13. Deferred tax should be
recognised for all the timing

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

differences, subject to the

consideration of prudence in
respect of deferred tax assets
as set out in paragraph 15-
18.”

“4.6 Timing differences are

the differences between
taxable income and
accounting income for a
period that originate in one
period and are capable of
reversal in one or more
subsequent periods.”

It was noted from the note of

Reserves & Surplus that
balance of cash flow hedge
reserve is stated to be net of
deferred tax assets. It was
noted that AS 22 stipulates
recognition of deferred tax for
only the timing differences
which arises when there is
difference in taxable income and
accounting income for the
period which originate in one
period and would reverse in
subsequent period. It was noted
in the given case that gain or
loss on cash flow hedge has
directly been adjusted into
reserves. In other words, gain or
loss on such hedging
arrangement has not been
routed through the Statement of
Profit and Loss. It was viewed
that such balance would impact
the Statement of Profit and Loss

287
Study on Compliance of Financial Reporting Requirements

only when hedged forecast

transaction would occur. So
effectively, till the final
transaction takes place neither
the accounting income nor
taxable income will be affected.
Hence, such adjustment cannot
be considered to be giving rise
to any timing difference on
which deferred tax should be
recognised.

19. In the Annual Report of a It may be noted that paragraph

company, Note on Deferred Tax 17 of AS 22, provides as
Asset reads as follows: follows:

‘Deferred tax asset has been “17. Where an enterprise has

recognised on account of unabsorbed depreciation or
unabsorbed depreciation and carry forward of losses under
business loss of the current year. tax laws, deferred tax assets
The management is of the should be recognised only to
opinion that there is a virtual the extent that there is virtual
certainty against which such certainty supported by
deferred tax will be realised, in convincing evidence that
view that its ability to continue as sufficient future taxable
a going concern depending on income will be available
the successful outcome of the against which such deferred
management plan’. tax assets can be realised.”

Explanation:

1. … On the other hand, a

projection of the future
profits made by an
enterprise based on the
future capital
expenditures or future
restructuring etc.,
submitted even to an
outside agency, e.g., to a

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

credit agency for

obtaining loans and
accepted by that agency
cannot, in isolation, be
considered as convincing
evidence”.

From the above, it was viewed

that, if an enterprise has
unabsorbed depreciation or
carry forward losses, deferred
tax assets on such deductions
should be recognised only if it is
virtually certain, supported by
convincing evidence, that
sufficient future taxable income
would be available to realise it.
However, a projection to future
profit made by an enterprise
cannot, in isolation, be
considered as convincing
evidence.

In the given case, it was noted

that future projection was the
basis to consider virtual
certainty of sufficient future
taxable income which is not in
line with the requirements of AS
22.

20. In the Annual Report of company, It may be noted that the

note relating to Deferred tax Announcement XXIV:
liabilities (Net), reads as follows:
‘Disclosures in cases where a
Court/Tribunal makes an order
‘Pursuant to the Order of the sanctioning an accounting
Hon’ble High Court, reversal of treatment which is different from
the deferred tax liability for the that prescribed by an
year has been credited to Accounting Standard’ issued by

289
Study on Compliance of Financial Reporting Requirements

Securities Premium Account.’ the Institute of Chartered

Accountants of India states as
follows:

“…In view of the above, if an

item in the financial statements
of a Company is treated
differently pursuant to an Order
made by the Court/Tribunal, as
compared to the treatment
required by an Accounting
Standard, following disclosures
should be made in the financial
statements of the year in which
different treatment has been
given:

1. A description of the
accounting treatment made
along with the reason that
the same has been adopted
because of the Court/
Tribunal Order.

2. Description of the difference

between the accounting
treatment prescribed in the
Accounting Standard and
that followed by the
Company.

3. The financial impact, if any,

arising due to such a
difference.”

It was noted from the stated

note that although disclosure
required under paragraph 1 and
3 of the above Announcement
has partially been made by

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

disclosing the nature of non-

compliance and its
quantification. However, neither
its impact on the financial
statements is clearly given nor a
description of the difference
between the accounting
treatment in the Accounting
Standard vis-a-vis that followed
has been disclosed .

Accordingly, it was viewed that

the requirements of
Announcement XXIV:
‘Disclosures in cases where a
Court/Tribunal makes an order
sanctioning an accounting
treatment which is different from
that prescribed by an
Accounting Standard’ has not
been complied with.

21. In the Annual Report of company, It may be noted that paragraphs

Statement of Profit & Loss and 13 and 14 of ‘Guidance note on
Note relating to Short Term Accounting for Credit Available
Provision, stated as under: in respect of Minimum Alternate
Tax’ issued by ICAI state as
PROFIT & LOSS STATEMENT follows:
Particulars Current Previ “13. Where a company
Year ous recognises MAT credit as an
Year assets on the basis of the
consideration specified in
MAT Credit XXX Nil paragraph 11 above, the same
Entitlement should be presented under the
head ‘Loans and Advances’
Note: Short Term Provisions since, there being a convincing
evidence of realization of the
Particulars Current Previ
asset, it is of the nature of a
ous

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Study on Compliance of Financial Reporting Requirements

Year Year pre-paid tax which would be

adjusted against the normal
Provision for income tax during the specified
Income Tax period. The assets may be
reflected as ‘MAT credit
entitlement’.

14.In the year of set-off of

credit, the amount of credit
availed should be shown as a
deduction from the ‘Provision for
Taxation’ on the liabilities side
of the balance sheet. The
unavailed amount of MAT credit
entitlement, if any, should
continue to be presented under
the head ‘Loans and Advances’
if it continues to meet the
considerations stated in
paragraph 11 above.”

It was noted that the MAT credit

entitlement has been shown in
the Statement of Profit and
Loss. It was viewed that in case
if it is being created then the
‘MAT credit entitlement’ has not
been separately shown in the
Balance Sheet as required
under paragraph 13 and in case
if it is being availed then neither
its presentation is in accordance
with paragraph 14 of ‘Guidance
note on Accounting for Credit
Available in respect of Minimum
Alternate Tax’ nor the ‘MAT
credit entitlement’ asset of
previous year has been shown
separately in the Balance Sheet.

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Observations on Accounting Standard (AS) 22: Accounting for Taxes on Income

Accordingly, it was viewed that

the requirements of ‘Guidance
note on Accounting for Credit
Available in respect of Minimum
Alternate Tax’ have not been
complied with.

22. In the Annual Report of a It may be noted that paragraph

company, the Accounting Policy 11 of “Guidance note on
on Provision for Current Deferred Accounting for Credit Available
Tax, reads as follows: in respect of Minimum
Alternative Tax under the
‘In accordance with the Guidance Income-tax Act, 1961” inter alia
Note issued by Institute of states that:
Chartered Accountants of India,
the Company recognises MAT “MAT credit should be
Credit as an asset only to the recognised as an asset only
extent the probability exists that when and to the extent there is
the Company will become liable convincing evidence that the
to pay normal Income Tax during company will pay normal income
the specified period as per tax during the specified period.”
provision of the Income Tax Act,
1961’. It was noted that, as per the
stated policy, MAT credit is
recognised as an asset on the
basis of degree of certainty i.e.
if it is more likely than not that
the company will become liable
to pay normal income tax
whereas as per the Guidance
Note, it should be recognised
only when convincing evidence
is available that the company
will pay normal income tax.

Accordingly, it was viewed that

the accounting policy to
recognise MAT credit on the
basis of probabilty is not in line
with the requirements of the

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Study on Compliance of Financial Reporting Requirements

Guidance Note on Accounting

for Credit Available in respect of
Minimum Alternative Tax under
the Income Tax Act, 1961.

294
 21
Observations on Accounting Standard (AS) 23:
Accounting for Investments in Associates in
Consolidated Financial Statements
S. Matters contained in Annual Observations
No Report

1. Note relating to Other Income It may be noted that paragraph 7

read with Note relating to Non- of AS 23, provides that:
Current Investments in the
Consolidated Financial “7. An investment in an
Statements given in the Annual associate should be
Report of a company, states as accounted for in consolidated
follows: financial statements under the
equity method except when:
Note: Other Income
a) the investment is acquired
Dividend Income On and held exclusively with
a view to its subsequent
Investment in Associates disposal in the near
Note: Non-Current future; or
Investments b) the associate operates
Unquoted Equity Instruments under severe long-term
(Fully Paid up) restrictions that
significantly impair its
Investment in Associates ability to transfer funds to
the investor”.
ABC Ltd.
From the above, it was viewed
that the Consolidated Financial
Statements should be prepared
using the equity method except
in the above mentioned two

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Study on Compliance of Financial Reporting Requirements

conditions.

Further, it was noted that the

equity method has been defined
under paragraph 3.8 of AS 23,
as follows:

“3.8 The equity method is a

method of accounting whereby
the investment is initially
recorded at cost, identifying
any goodwill/capital reserve
arising at the time of
acquisition. The carrying
amount of the investment is
adjusted thereafter for the
post acquisition change in the
investor’s share of net assets
of the investee. The
consolidated statement of
profit and loss reflects the
investor’s share of the results
of operations of the investee.”

From the above, it was noted

that in case an associate does
not fall in the exceptional
circumstances defined in
paragraph 7 of AS 23, then on
consolidation of the financials of
an associate, it is investor’s
share in the results of the
associate that is included in the
Consolidated Statement of Profit
and Loss.

In the given case, it was noted

from the Standalone Financial
Statements that although the
company holds investments in an

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Observations on Accounting Standard (AS) 23: Accounting for Investments …

associate, in Consolidated
Statement of Profit & Loss, the
dividend on such investment has
been recognised as income. It
was viewed that in the absence
of any information that such
investments in associate falls
under the exceptions as per
paragraph 7 states above, equity
method of accounting should
have been adopted for
consolidating its results. Hence,
company’s share in the
associate company’s result of
operation should have been
recognised in Consolidated
Statement of Profit and Loss
instead of recognizing the
dividend income on such
investments.

Accordingly, it was viewed that

neither the Consolidated
Financial Statements have been
prepared as per the equity
method nor has been stated that
the associate company meets
the prescribed exceptional
conditions.

Accordingly, it was viewed that

the requirement of AS 23 has not
been complied with.

297
 22
Observations on Accounting Standard (AS) 24:
Discontinuing Operations
S. Matters contained in the Observations
No Annual Report

1. In the Annual Report of a It may be noted that paragraph

company, Note on Business 23 of AS 24, provides as
Sale on Slump Sale Bases, follows:
reads as under:
“23. When an enterprise
‘Business Sale on Slump Sale disposes of assets or settles
Bases liabilities attributable to a
discontinuing operation or
During the year, the Company enters into binding
transferred one of its business agreements for the sale of
as ongoing business, on slump such assets or the settlement
sale basis to its holding of such liabilities, it should
company as per the terms of include, in its financial
Business Transfer Agreement statements, the following
(BTA) for a total consideration information when the events
which was lower than the net occur:
business assets value. As a
result, the Board of Directors of (a) for any gain or loss that
the company is looking for is recognised on the
alternative business plans disposal of assets or
including supporting the settlement of liabilities
execution of the upcoming attributable to the
projects for the group discontinuing operation,
companies in its domain as a (i) the amount of the pre-
service. In view of this, the tax gain or loss and (ii)
Going concern Assumption is income tax expense
not affected.’ relating to the gain or

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Observations on Accounting Standards (AS) 24: Discontinuing Operations

loss; and

(b) the net selling price or

range of prices (which is
after deducting expected
disposal costs) of those
net assets for which the
enterprise has entered
into one or more binding
sale agreements, the
expected timing of
receipt of those cash
flows and the carrying
amount of those net
assets on the balance
sheet date”.

“32. The disclosures required

by paragraphs 20, 23, 26, 28,
29 and 31 should be
presented in the notes to the
financial statements except
the following which should be
shown on the face of the
statement of profit and loss:

(a) …

and

(b) the amount of the pre-tax

gain or loss recognised
on the disposal of assets
or settlement of liabilities
attributable to the
discontinuing operation
(paragraph 23 (a)).”

It was noted that the company

has stated that it has entered
into a Business Transfer

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Study on Compliance of Financial Reporting Requirements

Agreement with the holding

company for a total
consideration which is lower
than the book value of the
business assets transferred.
Hence, it was viewed that the
loss was incurred by the
company due to such business
agreement. However, it was
noted from the financial
statements that neither the loss
arising on such business
transfer has been recognised in
the Statement of Profit and Loss
as required under paragraph 32
(b) of AS 24 nor any other note
explaining the accounting
treatment as adopted by the
enterprise to recognise the
same has been disclosed as
required under paragraph 23 (a)
of AS 24.

Accordingly, it was viewed that

the requirements of AS 24 have
not been complied with.

2. In the Annual Report of a It may be noted that paragraph

company, Note on Discontinuing 20 (h) of AS 24, provides as
operation reads as under: follows:

‘Discontinuing Operation “20. An enterprise should

include the following
The Company has transferred information relating to a
one of its business Units by discontinuing operation in its
way of Slump Sale to a wholly- financial statements
owned subsidiary of the beginning with the financial
Company for a consideration of statements for the period in
Rs. XXX, as a result of which which the initial disclosure
the current year’s figures of

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Observations on Accounting Standards (AS) 24: Discontinuing Operations

Assets & Liabilities are not event (as defined in

strictly comparable with that of paragraph 15) occurs:
the previous year.’
…

(h) the amounts of net cash

flows attributable to the
operating, investing, and
financing activities of the
discontinuing operation
during the current
financial reporting
period.”

It was observed that although

the disclosure with respect to
discontinuing operations has
been provided under the
relevant note, but the
information relating to net cash
flows attributable to the
operating, investing, and
financing activities of the
discontinuing operations that
have occurred during the
reported period were not
disclosed as required by
paragraph 20 (h) of AS 24

Accordingly, it was viewed that

the requirements of AS 24 have
not been complied with.

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 23
Observations on Accounting Standard (AS) 26:
Intangible Assets
S. Matters contained in the Observations
No. Annual Report

1. The accounting policy on It may be noted that AS 26

Research and Development requires classification of
Expenditure and Miscellaneous expenses incurred on Research
Expenditure of a Company reads and Development activities
as follows: phase-wised i.e. those which
have been incurred during
‘Research and Development research phase are classified
Research and Development as ‘Research Expenditure’ and
expenditure on the proposed those which have been incurred
projects is accumulated for during development phase be
writing off in future years. classified as ‘Development
Research and Development Expenditure’. It was noted that
expenditure incurred during the expenditure incurred during the
year on software development, phase should be recognised as
product development, product an expense in the Statement of
testing, etc. is charged to Profit & Loss immediately, and
revenue. expenditure which have been
incurred during the
Miscellaneous Expenditure development phase should be
recognised as an Intangible
Preliminary expenses viz. Asset, if the recognition criteria
Research and Development given in paragraph 44 of AS 26
Expenditure are amortised over are satisfied.
a period of 5 years’.
Accordingly, it was viewed that
Research & Development
expenditure that meets the
criteria of paragraph 44 of AS

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 Observations on Accounting Standard (AS) 26: Intangible Assets

26 should be recognised as an
‘intangible assets’. However, it
has been noted from the
accounting policy on Research
& Development that the
expenditure on proposed
projects has been accumulated
and the policy on Miscellaneous
Expenditure says R&D
expenditures are amortized
over a period of 5 years which
indicates that R&D
expenditures have been treated
as ‘deferred revenue
expenditure’ which is contrary
to AS 26. It was further noted
from the accounting policy of
Research & Development that
the expenditure on software
development, product
development, product testing,
etc. has been charged to the
Statement of Profit & Loss. It
appears from the stated policy
that Research and
Development expenditures
have not been classified
between research phase and
development phase as required
by AS 26.

2. From the Annual Report of a It may be noted that paragraph

company, it was noted that ‘ERP 10 of AS 26, provides as
Software’ had been included follows:
under the sub-head “Capital
Work-in-Progress’ with the “10. In some cases, an asset
opening balance and additions may incorporate both intangible
during the year had been and tangible elements that are,
transferred and had nil value at in practice, inseparable. In

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the Balance Sheet date’ determining whether such an

asset should be treated under
AS 10, Accounting for Fixed
Assets, or as an intangible asset
under this Statement, judgement
is required to assess as to which
element is predominant. For
example, computer software for
a computer controlled machine
tool that cannot operate without
that specific software is an
integral part of the related
hardware and it is treated as a
fixed asset. The same applies to
the operating system of a
computer. Where the software is
not an integral part of the related
hardware, computer software is
treated as an intangible asset.”

It was noted from the note on

Fixed Assets that opening
balance of capital work-in-
progress included ERP software
which has been completed
during the year and hence, it
was stated at nil value as at the
end of the year. However, no
intangibles are shown separately
which indicates that the same
has been clubbed with other
components of fixed assets.
However, it was viewed from the
above stated details that when
earlier the expenditure was
disclosed under the head of
software it indicated that
software was not an integral part
of the related hardware, hence it

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 Observations on Accounting Standard (AS) 26: Intangible Assets

should have been treated as

intangible asset in terms of
paragraph 10 of AS 26.

3. The accounting policy on It may be noted that paragraph

‘Deferred Revenue Expenditure’ 6.2 and 56 of AS 26 provides as
given in the Annual Report of a follows:-
company reads as follows:-
“6.2 An asset is a resource:
‘This includes expenditure
incurred on factory license fees, (a) controlled by an
trade mark fee and rental paid enterprise as a result of
for pre-commencement of retail past events; and
stores, factories, seed marketing (b) from which future
expenses, public/capital issue economic benefits are
expense, preliminary expenses, expected to flow to the
product development expenses enterprise.”
and software development
expenses, which have amortized “56. In some cases, expenditure
over the life period of concerned is incurred to provide future
item in accordance with the AS economic benefits to an
26 (Intangible Assets) issued by enterprise, but no intangible
the ICAI’ asset or other asset is acquired
or created that can be
recognised. In these cases, the
expenditure is recognised as an
expense when it is incurred. For
example, expenditure on
research is always recognised
as an expense when it is
incurred (see paragraph 41).
Examples of other expenditure
that is recognised as an
expense when it is incurred
include:

(a) expenditure on start-up

activities (start-up costs),
unless this expenditure is

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Study on Compliance of Financial Reporting Requirements

included in the cost of an

item of fixed asset under AS
10. Start-up costs may
consist of preliminary
expenses incurred in
establishing a legal entity
such as legal and secretarial
costs, expenditure to open a
new facility or business (pre-
opening costs) or
expenditures for
commencing new operations
or launching new products or
processes (pre-operating
costs);

(b) …..

(c) …...

(d) ……”

Further, paragraph 2 of the

Announcement of the Council
XIX ‘Applicability of Accounting
Standard (AS) 26, Intangible
Assets, to Intangible items’
published in ‘The Chartered
Accountant’, November 2003,
states that:

“2. An issue has been raised as

to what should be the treatment
of the expenditure incurred on
intangible items, which were
treated as deferred revenue
expenditure and ordinarily
spread over a period of 3 to 5
years before AS 26 became
mandatory and which do not

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Observations on Accounting Standard (AS) 26: Intangible Assets

meet the definition of an ‘asset’

as per AS 26. The examples of
such items are expenditure
incurred in respect of lump sum
payment towards a Voluntary
Retirement Scheme (VRS),
preliminary expenses etc. In this
context , it is clarified as below:

(i) The expenditure incurred

on intangible assets
(referred to paragraph 2
above) after the date AS 26
became/becomes
mandatory (1-4-2003 or 1-
4-2004, as case may be)
would have to be expensed
when incurred since these
do not meet the definition of
an ‘asset’ as per AS 26.

(ii) In respect of the balances

of the expenditure incurred
on intangible items
(referred to in paragraph 2
above) before the date AS
26 became/ becomes
mandatory, appearing in the
Balance sheet as on 1-4-
2003 or 1-4-2004, as case
may be, paragraphs 99 and
100 of AS 26 are
applicable.”

From the above, it was viewed

that in case expenditure meets
the definition of the term ‘asset’
and the recognition criteria
thereof, the same should be
capitalised as part of the cost of

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that asset, otherwise, such

expenditure should be expensed
in the Statement of Profit and
Loss in the year in which the
expenditure is incurred.

It was noted that expenditure

incurred on factory license fees,
trade mark fee, seed marketing
expenses, public/capital issue
expenses, preliminary expenses
and rental paid for pre-
commencement of retail stores,
factories has been treated as
deferred revenue expenditure
which are being amortised over
the life of the concerned items.

It was viewed that the

expenditure incurred on rental
paid for pre-commencement of
retail stores, factories, seed
marketing expenses,
public/capital issue expenses,
preliminary expenses cannot be
considered to be a ‘resource’
being controlled by the
enterprise and hence, such
expenses do not meet the
criteria of the term ‘asset’ and
therefore, they can not be
treated as asset. Accordingly,
any such expenditure incurred
after 1-4-2006 i.e. after AS 26
become mandatory should be
expensed as and when it is
incurred.

With regard to factory license

fees, trade mark fees, it was

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 Observations on Accounting Standard (AS) 26: Intangible Assets

viewed that these expenditure

gives rise to intangible assets.
Accordingly, they should be
disclosed under the head of
‘intangible assets’ rather than
‘deferred revenue expenditure’.

With regard to software

development expense and
product development expense, it
was viewed that if it meets the
definition of asset as stated in
paragraph 6.2 of AS 26, the
same should also be recognised
as an ‘intangible asset’,
otherwise it should be expensed
in the Statement of Profit and
Loss in the year in which the
expenditure is incurred.

4. In the Annual Report of certain It was noted that paragraph 90

companies, following have been of AS 26, provides as follows:
noted:-
“90. The financial statements
 The Fixed Assets Schedule should disclose the following
of a company includes for each class of intangible
“Technical Know-how” assets, distinguishing
capitalised . between internally generated
intangible assets and other
 Fixed Asset Schedule intangible assets:
includes Intellectual Property
Rights under the sub-head (a) the useful lives or the
‘Intangible Assets.’ amortisation rates used;

(b) the amortisation methods

used;”

It was noted from the schedule

of fixed assets that although the
enterprise possess intangible

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assets in the nature of

’Technical Know-how’,
‘Intellectual Property Rights’, yet
the accounting policy adopted by
the company for their valuation
and amortisation viz. the
amortisation method, the
amortisation rates or useful lives
used had not been disclosed as
required by paragraph 90 of AS
26.

Accordingly, it was viewed that

the requirements of AS 26 have
not been complied with.

5. From the Annual Report of a It may be noted that Paragraphs

company, it was noted that 62 and 63 of AS 26, provide as
Fixed Assets of a company follows:
includes ’Intellectual Property
Rights’ with the net book value “62. After initial recognition,
being the same in the current an intangible asset should be
year and in the previous year. carried at its cost less any
accumulated amortisation and
any accumulated impairment
losses.

63. The depreciable amount of

an intangible asset should be
allocated on a systematic
basis over the best estimate of
its useful life. There is a
rebuttable presumption that
the useful life of an intangible
asset will not exceed ten years
from the date when the asset
is available for use.
Amortisation should
commence when the asset is

310
 Observations on Accounting Standard (AS) 26: Intangible Assets

available for use”.

It was noted from the Note on

Fixed Assets that the company
possess intellectual property
rights which are being carried
forward at the same value which
prima facie indicates that the
said asset has not been
amortized which is not in line
with the requirements of AS 26.

6. In the Annual Report of a It may be noted that paragraphs

company, the accounting policy 6.2 and 56 of AS 26, inter alia
on Fixed Asset reads as follows provide as follows :
:
“6.2 An asset is a resource:
‘Intangible Assets-Work-in-
progress – EPC sub contract (a) controlled by an
work time by EPC Contractors enterprise as a result of
relating to the construction of past events; and
project (BOT) and other direct (b) from which future
expenditure/income (including economic benefits are
preliminary and pre-operative) expected to flow to the
relating to the Project are enterprise.”
included in Intangible assets -
Work-in-progress. (emphasis “56. In some cases, expenditure
added)’ is incurred to provide future
economic benefits to an
enterprise, but no intangible
asset or other asset is acquired
or created that can be
recognised. In these cases, the
expenditure is recognised as an
expense when it is incurred. For
example, expenditure on
research is always recognised
as an expense when it is
incurred (see paragraph 41).

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Study on Compliance of Financial Reporting Requirements

Examples of other expenditure

that is recognised as an
expense when it is incurred
include:

(a) expenditure on start-up

activities (start-up costs), unless
this expenditure is included in
the cost of an item of fixed asset
under AS 10. Start-up costs may
consist of preliminary expenses
incurred in establishing a legal
entity such as legal and
secretarial costs, expenditure to
open a new facility or business
(pre-opening costs) or
expenditures for commencing
new operations or launching new
products or processes (pre-
operating costs).

…”

It was noted from the stated

accounting policy of ‘intangible
assets’ that the preliminary and
pre-operative expenditure
relating to the project have been
capitalised while paragraph 56
of AS 26 explicitly provides to
expense the start up costs such
as preliminary expenses in the
year in which they are incurred.

It was viewed that although

preliminary and pre-operative
expenses may provide economic
benefits in the future they do
not give rise to any resource
which can be controlled by the

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 Observations on Accounting Standard (AS) 26: Intangible Assets

enterprise, and hence such

expense do not meet the criteria
of the term ‘assets’.

Accordingly, such expenditure

incurred should be expensed as
and when it is incurred.

7. It was noted from note on Fixed It may be noted that paragraph

Asset of a company that Fixed 90 of AS 26, provides as
Assets includes ‘goodwill’ at cost follows:
which was entirely written off
during the year. “90. The financial statements
should disclose the following
for each class of intangible
assets, distinguishing
between internally generated
intangible assets and other
intangible assets:

(a) the useful lives or the

amortisation rates used;

(b) the amortisation methods

used;

(c) the gross carrying

amount and the
accumulated amortisation
(aggregated with
accumulated impairment
losses) at the beginning
and end of the period;

(d) a reconciliation of the

carrying amount at the
beginning and end of the
period showing:...”

It was noted from the note of

fixed assets that the

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amortisation of goodwill up to
previous year was nil, it
indicates that the total amount of
goodwill is written off during the
year under review only.
However, no accounting policy
with regard to amortisation of
goodwill has been disclosed,
which is contrary to the
requirements of paragraph 90 of
AS 26.

8. From the Note on Fixed Asset in It may be noted that paragraphs

the Annual Report of a company, 90 (a) and (b) of AS 26, require
it was noted that Fixed Assets that :
also includes intangible assets
i.e. Navision Software and “90. The Financial statements
Computer Software. It was, should disclose the following
further, noted that the for each class of intangible
accounting policy on Intangible assets, distinguishing
Assets read as follows: between internally generated
intangible assets and other
‘Intangible Assets are intangible assets:
recognised by the Company only
if it is probable that the future (a) the useful lives or the
economic benefits that are amortisation rates used;
attributable to the assets will (b) the amortisation methods
flow to the enterprise and the used;
cost of the same can be
measured reliably. (c) the gross carrying
amount and the
Intangible assets are amortized accumulated amortisation
on a systematic basis over its (aggregated with
useful life and the amortisation accumulated impairment
for each period will be losses) at the beginning
recognised as an expense’. and end of the period;

(d) a reconciliation of the

carrying amount at the

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 Observations on Accounting Standard (AS) 26: Intangible Assets

beginning and end of the

period showing:”

It has been noted from the note

of Fixed Assets that the
company also holds intangible
assets viz. Navision Software
and Computer Software. It was
observed that no information has
been provided in the financial
statements or in the notes to
accounts as to whether these
are internally generated or
otherwise. Further, no disclosure
regarding ‘useful life of the
assets’ and ‘amortisation
method used’ for such intangible
assets has been given in the
financial statements.
Accordingly, it was viewed that
the requirements of paragraphs
90 (a) and (b) of AS 26 have not
been complied with.

9. The paragraph related to It may be noted that paragraph

Research and Development 96 of AS 26, requires that:
given under the Chairman’s
message in the Annual Report “96.The financial statements
read as follows: should disclose the aggregate
amount of research &
‘It is pertinent to note that the development expenditure
Company owns several patents recognised as an expense
and several applications for during the period.”
patents are also pending for
approval. Being a technology It was noted from the facts of the
focused company; the Company Chairman’s Message that the
has established R & D centers in company has established
India and abroad and incurred research and development
the expenses on Research and centres in different locations
nationally and internationally and

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Study on Compliance of Financial Reporting Requirements

Development’. incurred expenditures on

research and developments;
however, no separate disclosure
for the amount recognised in the
financial statements has been
made as required under
aforesaid paragraph.

Further, it was also observed

that the accounting policy
followed by the company with
respect to recognition of the
research & development
expenditure has also not been
disclosed.

10. The accounting policy of fixed It may be noted that paragraphs

assets given in the Annual 44, 53 and 83 of AS 26,
Report of a company read as provides that an internally
follows: generated asset can be
capitalised if it meets the
‘Intangible assets are identified criteria as laid in paragraph 44
when they are expected to of AS 26 and the cost, so
provide future enduring capitalised comprises of
economic benefits. The assets expenditure that are directly
are identified in the year in attributable for making the asset
which the relevant asset is put ready for its intended use.
to use. (emphasis added)’ Further, paragraph 83 of AS 26
lays the principle of impairment
which are with reference to date
when intangible is available for
use.

It was noted from the stated

accounting policy of fixed assets
that the intangible assets are
identified in the year in which the
relevant asset is put to use. It
was viewed that this is not in line

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 Observations on Accounting Standard (AS) 26: Intangible Assets

with requirement of AS 26 which

requires recognition with
reference to the date when an
intangible asset is available for
use rather than when it is put to
use.

Accordingly, it was viewed that

the requirements of AS 26 have
not been complied with.

11. It was noted from the Balance It was noted that the closing
Sheet of a company that the balance of the Miscellaneous
Miscellaneous Expenditure (to expenditure for the financial year
the extent not written off or 20XX and 20XX is same, which
adjusted) as at 31st March, 20XX indicates that the said
was the same as in the expenditure has not been
immediately preceding year. amortised during the financial
year under review. Further, it
was noted that neither the
amortisation policy nor the
information regarding
miscellaneous expenditure (viz.
nature of such expense, year of
incurrence) has been disclosed
in the financial statements.

In the absence of such

information, it could not be
ascertained as to whether the
said miscellaneous expenditure
was incurred before 1.4.2004 or
after 1.4.2004. It was viewed
that in case, it was incurred
before 1.4.2004, it should be
amortised as per original
accounting policy of the
company, provided the total
period of amortisation does not

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exceed ten years, otherwise it

should have been expensed as
and when incurred. However,
non- amortisation of such
expenses during the year
indicates that the accounting
treatment adopted by the
company is not in line with the
requirements of paragraph 99 of
AS 26.

12. It was noted from the accounting It was noted that as per the
policy on Intangible Assets of a stated policy, Technical know-
company that Intangible Assets how is amortized over the useful
were stated at cost of acquisition life of the underlying plant. It
less accumulated amortisation. was viewed that such policy
Technical know-how is indicates that the useful life of
amortised over the useful life of technical know-how has not
the underlying plant. been considered for
Amortisation was done on determination of its amortisation
straight line basis. period, which is an important
element to determine its
amortisation policy as explained
in paragraph 69 of AS 26
reproduced below:
“69. If control over the future
economic benefits from an
intangible asset is achieved
through legal rights that have
been granted for a finite
period, the useful life of the
intangible asset should not
exceed the period of the legal
rights unless:
(a) the legal rights are
renewable; and
(b) renewal is virtually
certain.”

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 Observations on Accounting Standard (AS) 26: Intangible Assets

It was further viewed that

intangible assets should be
amortised over its useful life or
the life of underlying assets or
over the period of 10 years,
whichever is earlier. In case if it
is more than 10 years, then the
reason should be described for
determining the useful life higher
than 10 years as prescribed
below:
“94. The financial statements
should also disclose:
(a) If an intangible assets is
amortized over more than
10 years, the reasons why
it is presumed that the
useful life of an intangible
asset will exceed ten
years from the date when
the asset is available for
use. In giving reasons,
the enterprise should
describe the factors(s)
that played a significant
role in determining the
useful life of the asset.”
Hence, it was viewed that the
stated policy adopted for the
technical know-how is not in line
with the requirements of AS 26.

13. The Accounting Policy on It may be noted that paragraphs

Research and Development 41 and 44 of AS 26, provide as
expenditure as given in the follows:
Annual Report of a company
states as follows: Research Phase

‘Revenue expenditure is charged “41. No intangible asset

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Study on Compliance of Financial Reporting Requirements

to the Statement of Profit and arising from research (or from

Loss and capital expenditure the research phase of an
resulting into enduring benefits internal project) should be
is added to the cost of the fixed recognised. Expenditure on
assets in the year in which it is research (or on the research
incurred’. phase of an internal project)
should be recognised as an
expense when it is incurred. “

Development Phase

“44. An intangible asset

arising from development (or
from the development phase
of an internal project) should
be recognised if, and only if,
an enterprise can demonstrate
all of the following:

a) the technical feasibility of

completing the intangible
asset so that it will be
available for use or sale;

b) its intention to complete

the intangible asset and
use or sell it;

c) its ability to use or sell

the intangible asset;

d) how the intangible asset

will generate probable
future economic benefits.
Among other things, the
enterprise should
demonstrate the
existence of a market for
the output of the
intangible asset or the
intangible asset itself or,

320
Observations on Accounting Standard (AS) 26: Intangible Assets

if it is to be used
internally, the usefulness
of the intangible asset;

e) the availability of
adequate technical,
financial and other
resources to complete
the development and to
use or sell the intangible
asset; and

f) its ability to measure the

expenditure attributable
to the intangible asset
during its development
reliably.”

It was noted from the stated

accounting policy with regard to
Research & Development
expenses that the revenue
expenditures on research and
development has been charged
to the Statement of Profit and
Loss and the capital
expenditure on research and
development has been added to
the cost of fixed assets.

It was viewed that the

expenditure on research and
development phase should be
classified as, expenditure either
on research phase or
development phase, instead of
classifying the total expenditure
on the basis of their nature viz.
revenue and capital expenditure.
The expenditure on research

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phase should be expensed as

and when it is incurred and
expenditure on development
phase should be capitalised if,
and only if, such expenditure
meets the conditions as laid
under paragraph 44 of AS 26.

Further, it was viewed that the

expenditure on research phase
and development phase should
be accounted as per the
provision of paragraphs 41 and
44 of AS 26.

14. The accounting policies on It may be noted that paragraphs

Intangible Assets and 6.7 , 63 , 68 and 69 of AS 26,
Amortisation as given in the provide as follows:
Annual Report of a company,
read as follows: “6.7 Amortisation is the
systematic allocation of the
‘INTANGIBLE ASSETS depreciable amount of an
intangible asset over its
Cost of Right of Way for laying useful life.”
pipelines is capitalised as
Intangible Asset and being “63. The depreciable amount
perpetual in nature, is not of an intangible asset should
amortised’. be allocated on a systematic
basis over the best estimate
a. …” of its useful life. There is a
‘Amortisation of Intangible rebuttable presumption that
Assets the useful life of an intangible
asset will not exceed ten
e. Intangible Assets including years from the date when the
technical/process licenses are asset is available for use.
amortised on a straight line Amortisation should
basis over a period of ten years commence when the asset is
or life of the underlying available for use”.
plant/facility, whichever is
“68. The useful life of an

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 Observations on Accounting Standard (AS) 26: Intangible Assets

earlier’. intangible asset may be very

long but it is always finite.
Uncertainty justifies estimating
the useful life of an intangible
asset on a prudent basis, but it
does not justify choosing a life
that is unrealistically short.”

“69. If control over the future

economic benefits from an
intangible asset is achieved
through legal rights that have
been granted for a finite
period, the useful life of the
intangible asset should not
exceed the period of the legal
rights unless:

a. the legal rights are

renewable; and

b. renewal is virtually
certain.”

The following discrepancies

have been noted with regard to
Intangible Assets:

i It was noted that the cost of

right of way is capitalised
as intangible item but is not
being amortized
considering it to be
perpetual in nature. It was
viewed that as per AS 26,
the useful life of the right of
way may be very long but it
is not infinite; accordingly,
the depreciable amount
should be allocated on a

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Study on Compliance of Financial Reporting Requirements

systematic basis over the

best estimate of its useful
life which can be
determined based on
technical, legal and
economic factors.
Accordingly, it was viewed
that non- amortisation of
the cost of right of way is
not in line with AS 26. This
is also supported by EAC
opinion published in ‘The
Chartered Accountants’,
September 2013.

ii It was noted that amongst

the intangibles held, the
company possess technical
/ process licenses which as
per the stated policy are
being depreciated over a
period of 10 years or life of
the underlying plant/ facility
whichever is earlier. It was
viewed that such policy
indicates that the useful life
of technical/ process
license i.e. license period
has not been considered
for determination of its
amortisation period, which
is an important element to
determine its amortisation
policy as explained in
paragraph 69 of AS 26.
Accordingly, it was viewed
that the accounting policy
as adopted for amortizing
intangible assets

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 Observations on Accounting Standard (AS) 26: Intangible Assets

specifically in context of
technical/ process license
is not in line with the
requirement ofAS 26.

15. From the accounting policy It may be noted that paragraph

relating to useful life of 94 (a) of AS 26, provides as
intangible assets given in the follows:
Annual Report of a company, it
was noted that the Franchise “94. The financial statements
Rights (useful life 25 years) were should also disclose:-
disclosed to continue in (a) if an intangible asset is
perpetuity. However, the useful amortised over more than
life was determined as 25 years ten years, the reasons
based on the expected term that why it is presumed that
franchise would continue to the useful life of an
contribute to the net cash inflows intangible asset will
of the company. exceed ten years from the
date when the asset is
available for use. In giving
these reasons, the
enterprise should
describe the factor(s) that
played a significant role in
determining the useful life
of the asset;”

It has been noted that the

company has simply stated that
considering the fact that the
franchise rights will continue in
perpetuity, it has estimated the
useful life of the franchise rights
as 25 years. It was, further,
observed from the franchisee
agreement that the period of the
said agreement will continue in
perpetuity. The terms of the
purchase agreement also

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provide for additional

consideration which will be
payable after completion of 10
years i.e. 20XX onwards for an
amount which will be equal to
20% of the franchisee income
received in respect of those
years.

It was viewed that if the

enterprise was of the firm view
that it would be able to exercise
such rights for 25 years and
therefore, it has adopted an
accounting policy of amortizing
such rights over a period of 25
years, it should also estimate the
amount of additional fees that
would be payable by it for such
rights and, accordingly, the total
cost of such rights should be
capitalised and amortized.

However, in the given case, it

appears that it has neither
included the consideration
payable for the period of 25
years in the cost of franchisee
rights nor has it disclosed the
amount of commitments payable
against such franchisee rights
for the additional 15 years. Thus,
the treatment of franchisee fees
as adopted by the enterprise is
not in line with the requirements
of AS 26.

16. It was noted from the Note on It may be noted that the term
Intangible Assets given in the ‘intangible assets’ has been

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 Observations on Accounting Standard (AS) 26: Intangible Assets

Annual Report of a company that defined in paragraph 6 of AS 26,

these included the amount as follows:
invested in “preference shares of
subsidiaries. “6. An intangible asset is an
identifiable non-monetary
asset, without physical
substance, held for use in the
production or supply of goods
or services, for rental to
others, or for administrative
purposes.”

Accordingly, an asset without

physical substance is classified
as intangible asset. In the extant
case, it was observed that while
the right to hold and use an
asset may be classified as
‘intangible asset’, payment made
for investment in preference
shares of subsidiary is not an
intangible asset. It was felt that
reason for its inclusion under the
head intangible asset rather than
investment should have been
disclosed. It was further viewed
that perhaps a different
nomenclature would have better
explained its nature.
Accordingly, it was viewed that
the classification of investments
in preference shares of
subsidiary company as
‘intangible assets’ is not in line
with the requirements of AS 26.

17. It was noted from the accounting It may be noted that paragraph
policy relating to amortisation of 94 of AS 26, provides as
intangible assets given in the follows:
Annual Report of a company that

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“Indefeasible Right of “94. The financial statements

Connectivity” is amortized over should also disclose:
15-20 years.
(a) if an intangible asset is
amortised over more than
ten years, the reasons
why it is presumed that
the useful life of an
intangible asset will
exceed ten years from the
date when the asset is
available for use. In
giving these reasons, the
enterprise should
describe the factor(s) that
played a significant role
in determining the useful
life of the asset;

…”

It was noted from the stated

policy relating to amortisation of
‘Indefeasible Right of
Connectivity’ that it has been
amortized over a period
exceeding 10 years; however,
the reason for presuming such
long useful life has not been
disclosed.

Accordingly, it was viewed that

the requirements of AS 26 have
not been complied with.

18. It was observed from the It may be noted that paragraph

accounting policy relating to 62 of AS 26, provides as follows:
fixed assets in the Annual
Report of a company that “62. After initial recognition,
Telecom Licenses are stated at an intangible asset should be

328
 Observations on Accounting Standard (AS) 26: Intangible Assets

the fair value less accumulated carried at its cost less any
amortisation. accumulated amortisation and
any accumulated impairment
losses.”

It was noted from the stated

accounting policy that the
telecom licenses have stated to
be valued at fair value which is
contrary to the requirement of
paragraph 62 stated above.

19. The Accounting policy relating It may be noted that paragraphs

to Research and Development 40, 41 and 44 of AS 26, provide
expenses given in the Annual as follows:
Report of a company reads as
follows: “40. If an enterprise cannot
distinguish the research phase
‘Research & Development from the development phase of
expenses incurred up-to the an internal project to create an
development stage are intangible asset, the enterprise
capitalised and will be written off treats the expenditure on that
over a period of five years from project as if it were incurred in
the year in which the plants bear the research phase only.”
fruits’.
“41. No intangible asset
arising from research (or from
research phase of an internal
project) should be recognised.
Expenditure on research (or
on the research phase of an
internal project) should be
recognised as an expense
when it is incurred.”

“44. An Intangible asset

arising from development (or
from the development phase
of an internal project) should
be recognised if, and only if,

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an enterprise can demonstrate

all of the following:

(a) the technical feasibility of

completing the intangible
asset so that it will be
available for use or sale;

(b) its intention to complete

the intangible asset and
use or sell it;

(c) its ability to use or sell

the intangible asset;

(d) how the intangible asset

will generate probable
future economic benefits.
Among other things, the
enterprise should
demonstrate the
existence of a market for
the output of the
intangible asset or the
intangible asset itself or,
if it is to be used
internally, the usefulness
of the intangible asset;

(e) the availability of

adequate technical,
financial and other
resources to complete the
development and to use
or sell the intangible
asset; and

(f) its ability to measure the

expenditure attributable
to the intangible asset

330
 Observations on Accounting Standard (AS) 26: Intangible Assets

during its development

reliably.”

From the above, it was noted

that research and development
expenditure should be classified
into the expenditure on research
phase and that on development
phase. While the expenditure on
research phase should be
recognised as and when
incurred, expenditure on
development phase should be
recognised as an intangible
asset, only if the recognition
criteria specified in paragraph 44
of AS 26 are satisfied.

In the given case, it was noted

that all research and
development expenses have
been capitalised without
classifying them into research
and development phase.
Moreover, the criteria defined in
paragraph 44 of AS 26 i.e.
existences of technical feasibility
of completing the intangible,
ability to generate economic
benefits in future are not at all
applied to capitalize the
expenditure.

20. It was observed from the It may be noted that paragraphs

significant accounting policy 63 and 94(a) of AS 26, provides
relating to Depreciation / as follows:
Amortization as given in the
Annual Report of a company that “63. The depreciable amount
Brand Value is amortized over of an intangible asset should
be allocated on a systematic

331
Study on Compliance of Financial Reporting Requirements

twenty years, being the useful basis over the best estimate
life certified by independent of its useful life. There is a
valuer. rebuttable presumption that
the useful life of an intangible
asset will not exceed ten
years from the date when the
asset is available for use.
Amortisation should
commence when the asset is
available for use”.

“94. The financial statements

should also disclose:

(a) if an intangible asset is

amortised over more than
ten years, the reasons
why it is presumed that
the useful life of an
intangible asset will
exceed ten years from the
date when the asset is
available for use. In
giving these reasons, the
enterprise should
describe the factor(s) that
played a significant role
in determining the useful
life of the asset;

It was noted from the stated

policy that the entity has
adopted the policy of amortizing
brand over a period of twenty
years, being the useful life of
brand certified by independent
valuer. It was noted that
Paragraph 63 of AS 26
prescribes adoption of rebuttable
presumption that useful life of an

332
Observations on Accounting Standard (AS) 26: Intangible Assets

intangible asset cannot exceed

ten years. It was further noted
that in case, if the useful life of
the intangible assets is
presumed to exceed ten years,
the reasons why it has been so
presumed along with description
of factors that played a
significant role in determining
the useful life of the asset
should be disclosed.

It was viewed that in given case,

neither the reasons for such
presumption nor the factors
based on which the life of the
brand was determined to be
twenty years have been
disclosed.

According it was viewed that the

requirements of AS 26 have not
been complied with.

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 24
Observations on Accounting Standard (AS) 27:
Financial Reporting of Interests in Joint Ventures
S. Matters contained in the Observations
No Annual Report

1. From the Annual Report of a It may be noted that paragraph

company having interest in 53 of AS 27, provides as
jointly controlled entities, it was follows:
noted that it had disclosed only
its interest in the assets and “53. A venturer should
liabilities of the jointly controlled disclose, in its separate
entitites. financial statements, the
aggregate amounts of each of
the assets, liabilities, income
and expenses related to its
interests in the jointly
controlled entities.”
It was observed that although
the interest in the assets and
liabilities with respect to the
jointly controlled entities has
been disclosed, the aggregate
amount of income and expenses
related to such interests in
jointly controlled entities have
not been disclosed as per the
above stated requirements.

2. Disclosure made by a company It may be noted that

relating to Joint Ventures given paragraphs 49 and 52 of AS
in the Consolidated Financial 27, provides as follows:
Statements in its Annual
Report, which is reproduced “49. A venture should
disclose the information

334
Observations on Accounting Standard (AS) 27: Financial Reporting of Interests …

below: required by paragraphs 50,

51 and 52 in its separate
Interest in Joint Ventures financial statements as well
as in consolidated financial
statements.”
S. Name Countr Percen “52. A venturer should
No y of tage of disclose a list of all
. Incorpo Voting
joint ventures and
ration power
description of interests
in significant joint
Joint
Ventur
ventures. In respect of
e XX XX jointly controlled
entities, the venturer
should also disclose
the proportion of
ownership interest,
name and country of
incorporation or
residence.”
It was noted that although a list
of all joint ventures as well as
percentage of voting power of
the company has been
disclosed in the Consolidated
Financial Statements, however,
no such information has been
provided in the Standalone
Financial Statements as
specifically required under
paragraph 49 of AS 27.

3. In the Annual Report of a It may be noted that paragraphs

company, from the note of 52 and 53 of AS 27, provides as
Related Party Disclosures, it follows:
was noted that only the names
of its joint ventures has been “52. A venturer should
disclosed. disclose a list of all joint
ventures and description of
interests in significant joint
ventures. In respect of jointly

335
Study on Compliance of Financial Reporting Requirements

controlled entities, the

venturer should also disclose
the proportion of ownership
interest, name and country of
incorporation or residence.
53. A venturer should
disclose, in its separate
financial statements, the
aggregate amounts of each of
the assets, liabilities, income
and expenses related to its
interests in the jointly
controlled entities.”
It was noted that although, it
has disclosed the names of the
joint venture companies,
however, description of the
company’s interest in joint
ventures has not been disclosed
as required under paragraph 52
of AS 27. Further, the
disclosures with regard to
assets, liabilities, income and
expenses as required under
paragraph 53 of AS 27 have
also not been made.

4. In the Consolidated Financial It may be noted that paragraph

Statements given in the Annual 28, 32 and 36 of AS 27,
Report of a company, it had provides as follows:
disclosed its interests in several
joint ventures under the note of “28. In its consolidated
Non-current Investments. financial statements, a
venturer should report its
interest in a jointly controlled
entity using proportionate
consolidation except :
(a) an interest in a jointly
controlled entity which is

336
Observations on Accounting Standard (AS) 27: Financial Reporting of Interests …

acquired and held

exclusively with a view to
its subsequent disposal
in the near future; and
(b) an interest in a jointly
controlled entity which
operates under severe
long-term restrictions
that significantly impair
its ability to transfer
funds to the venturer.
Interest in such a jointly
controlled entity should be
accounted for as an
investment in accordance
with Accounting Standard
(AS) 13, Accounting for
Investments.”
“32. Under proportionate
consolidation, the venturer
includes separate line items for
its share of the assets,
liabilities, income and expenses
of the jointly controlled entity in
its consolidated financial
statements. For example, it
shows its share of the inventory
of the jointly controlled entity
separately as part of the
inventory of the consolidated
group; it shows its share of the
fixed assets of the jointly
controlled entity separately as
part of the same items of the
consolidated group.”
“36. Any excess of the cost to
the venturer of its interest in a
jointly controlled entity over its

337
Study on Compliance of Financial Reporting Requirements

share of net assets of the jointly

controlled entity, at the date on
which interest in the jointly
controlled entity is acquired, is
recognised as goodwill, and
separately disclosed in the
consolidated financial
statements. When the cost to
the venturer of its interest in a
jointly controlled entity is less
than its share of the net assets
of the jointly controlled entity, at
the date on which interest in the
jointly controlled entity is
acquired, the difference is
treated as a capital reserve in
the consolidated financial
statements. Where the carrying
amount of the venturer’s interest
in a jointly controlled entity is
different from its cost, the
carrying amount is considered
for the purpose of above
computations.”
From the above, it was noted
that the interest in joint venture
should be reported in the
Consolidated Financial
Statements using the
proportionate consolidation
method where the venturer
should include separate line
items for its share of the assets,
liabilities, income and
expenditure of joint venture and
accordingly eliminates the
corresponding investments in
joint venture from the
investment note. It was noted
from the Consolidated Financial
Statements that investments in

338
Observations on Accounting Standard (AS) 27: Financial Reporting of Interests …

the joint venture entitites had

not been eliminated, which
indicates that such joint
ventures were not
proportionately consolidated as
prescribed in the aforesaid
requirements of AS 27.

339
 25
Observations on Accounting Standard (AS) 28:
Impairment of Assets
S. Matters contained in the Observations
No Annual Report

1. In the Annual Report of a It may be noted that paragraph

company, the accounting policy 101 of AS 28, provides as
for impairment of assets was follows:
given as follows:
“101. The increased carrying
‘An asset is treated as impaired amount of an asset due to a
when the carrying cost of assets reversal of an impairment loss
exceeds its recoverable value. should not exceed the carrying
An impairment loss is charged to amount that would have been
the Statement of Profit and Loss determined (net of
in the year in which an asset is amortisation or depreciation)
identified as impaired. The had no impairment loss been
impairment loss recognised in recognised for the asset in
prior accounting period is prior accounting periods.”
increased/ reversed where
there has been change in the It was noted from the stated
estimate of recoverable value. accounting policy that the
The recoverable value is the impairment loss was reversed
higher of the assets’ net selling when there was any change in
price and value in use. the estimates of recoverable
(emphasis supplied)’ value. It was viewed that the
accounting policy adopted for
reversal of impairment loss
earlier recognised was not
disclosed. Accordingly, it was not
clear whether the carrying
amount was determined after
providing amortisation/

340
 Observations on Accounting Standard (AS) 28: Impairment of Assets

depreciation as if no impairment
loss was computed.

Accordingly, it was viewed that

the accounting policy for
impairment of assets cannot be
considered to be in line with the
requirement of AS 28.

2. One of the notes forming part of It may be noted that paragraph

Accounts given in the Annual 22 of AS 28 states as follows:
Report of a company, states as
follows: “22. If there is no binding sale
agreement or active market for
’The impairment loss had been an asset, net selling price is
determined on the basis of net based on the best information
selling price (determined on available to reflect the amount
the basis of expected salvage that an enterprise could
value) in respect of CGUs obtain, at the balance sheet
representing specific process date, for the disposal of the
plants and other individual asset in an arm’s length
assets. The impairment loss had transaction between
been recognised owing to the knowledgeable, willing parties,
prevalent market conditions of after deducting the costs of
the product which was to be disposal. In determining this
manufactured from specific amount, an enterprise considers
process plants and conditions of the outcome of recent
the individual assets. (emphasis transactions for similar assets
supplied)’ within the same industry. Net
selling price does not reflect a
forced sale, unless management
is compelled to sell immediately.
(emphasis supplied)”

It was noted from the stated note

that in the given case,
impairment loss has been
determined on the basis of the
net selling price which in turn
has been derived based on the

341
Study on Compliance of Financial Reporting Requirements

expected salvage value. It was

viewed that the term ‘salvage
value’ is generally referred to as
estimated value that an asset will
realise upon its sale at the end of
its useful life.

It was viewed that as per

aforesaid requirement of AS 28,
net selling price should be
determined based on the value
that can be obtained as on the
Balance Sheet date which
cannot be considered to be an
end of useful life of an asset
until and unless the assets would
not be in use after the reporting
date. Accordingly, it was viewed
that considering expected
salvage value for determining
impairment loss is not in
accordance with the
requirements of AS 28.

342
 26
Observations on Accounting Standard (AS) 29:
Provisions, Contingent Liabilities and Contingent
Assets
S. Matters contained in the Observations
No. Annual Report

1. From the Annual Report of a It may be noted that the

company, it has been noted from definition of the term ‘provision’
accounting policy on Revenue as defined in paragraphs 10.1
Recognition that no provision and 10.2 of AS 29, provides as
has been made for possible follows:
returns or expenses during the
warranty period. “10.1 A provision is a liability
which can be measured only
by using a substantial degree
of estimation.”

“10.2 A liability is a present

obligation of the enterprise
arising from past events, the
settlement of which is
expected to result in an
outflow from the enterprise of
resources embodying
economic benefits.”

It was noted that obligation in

respect of sales return can be
estimated reliably on the basis
of past experience and other
relevant factors and a provision
in respect of sales returns
should be recognised;

343
Study on Compliance of Financial Reporting Requirements

otherwise, the company should

postpone the recognition of
revenue on such sales.

In light of above, it was viewed

that the requirements of either
AS 29 or AS 9 have not been
complied with.

2. From the Annual Report of It may be noted that paragraph

company, it has been noted that 12 of AS 29 , provides as
from notes relating to Long-term follows:
Provisions and Short-term
Provisions that “Provision for “12. Provisions can be
Expenses” has been included distinguished from other
under these heads. liabilities such as trade payables
and accruals because in the
measurement of provisions
substantial degree of estimation
is involved with regard to the
future expenditure required in
settlement. By contrast:

(a) trade payables are liabilities

to pay for goods or services
that have been received or
supplied and have been
invoiced or formally agreed
with the supplier; and

(b) accruals are liabilities to pay

for goods or services that
have been received or
supplied but have not been
paid, invoiced or formally
agreed with the supplier,
including amounts due to
employees. Although it is
sometimes necessary to
estimate the amount of

344
Observations on Accounting Standard (AS) 29: Provisions, Contingent Liabilities.

accruals, the degree of

estimation is generally
much less than that for
provisions.”

From the above, it was noted

that provisions are made for
those liabilities, the
measurement of which involves
substantial degree of estimation
and which will be settled in
future. Expenses are generally
considered as accrued against
services that have been
received but not settled.
Therefore, it was viewed that the
disclosure of unpaid expenses
under the head of provisions is
not in accordance with
paragraph 12 of AS 29.

3. Note relating to Contingent It may be noted that paragraph

Liabilities given in the Annual 68 of AS 29, provides as follows:
Report of a company, states as
follows : “68. Unless the possibility of
any outflow in settlement is
‘The Company has so far remote, an enterprise should
exported XXX MT of white disclose for each class of
sugar The Company is hopeful contingent liability at the
of fulfilling its balance export balance sheet date a brief
obligations. In the unlikely event description of the nature of
of not fulfilling the export the contingent liability and,
obligation, the Company has to where practicable:
pay the amount of duty
concession availed in respect of (a) an estimate of its financial
its imports along with interest.’ effect, measured under
paragraphs 35-45;

(b) an indication of the

uncertainties relating to

345
Study on Compliance of Financial Reporting Requirements

any outflow; and

(c) the possibility of any

reimbursement.”

It was noted that although the

indication of uncertainties
involved has been disclosed if
export obligation was not met,
however, the estimate of its
financial effect as to the value of
duty concession availed along
with interest which it might have
to repay has not been given.
Accordingly, it was viewed that
the requirements of paragraph
68 has not been complied with.

4. One of the Significant It may be noted that paragraphs

Accounting Policies given in the 10.2, 10.6, 14, 35 and 36 of AS
Annual Report of a company 29, provide as follows:
state as follows:
“10.2 A liability is a present
‘10: ELECTRICITY obligation of the enterprise
arising from past events, the
Fuel surcharge and electricity settlement of which is
duty collected by the State expected to result in an
Electricity Board provisionally outflow from the enterprise of
are not ascertainable with resources embodying
reasonable certainty and as economic benefits.”
such not provided for in the
accounts. The differential “10.6 Present obligation -an
amount is accounted for as and obligation is a present
when determined by the Board.’ obligation if, based on the
evidence available, its
existence at the balance sheet
date is considered probable,
i.e., more likely than not”.

“14. A provision should be

346
Observations on Accounting Standard (AS) 29: Provisions, Contingent Liabilities.

recognised when:

(a) an enterprise has a

present obligation as a
result of a past event;

(b) it is probable that an

outflow of resources
embodying economic
benefits will be required
to settle the obligation;
and

(c) a reliable estimate can be

made of the amount of the
obligation.

If these conditions are not

met, no provision should be
recognised.”

“35. The amount recognised

as a provision should be the
best estimate of the
expenditure required to settle
the present obligation at the
balance sheet date. The
amount of a provision should
not be discounted to its
present value.”

“36. The estimates of outcome

and financial effect are
determined by the judgment of
the management of the
enterprise, supplemented by
experience of similar
transactions and, in some
cases, reports from independent
experts. The evidence
considered includes any

347
Study on Compliance of Financial Reporting Requirements

additional evidence provided by

events after the balance sheet
date.”

From the above, it may be noted

that if there exists a present
obligation, a reliable estimate of
the amount of obligation can be
made by the management based
on past experience of similar
transaction. Thus, for
recognition of provision, it is a
reliable estimate and not a
certain estimate which is
required.

It was noted from stated

accounting policy that since the
company was not able to
ascertain with reasonable
certainty, the provisional fuel
surcharge and electricity duty
that would be collected by the
State Electricity Board, same
have not been provided for. It
was viewed that fuel surcharge
and electricity duty are present
obligations of the company
which should be provided for
based on past experience as per
AS 29.

5. From the Annual Report of a It may be noted that principles

company, a Note relating to regarding reversal of provisions
Scheme of Arrangement reads are stated in paragraph 52 of AS
as follows: 29,states as follows;

‘Company has a liability of Rs “52. If it is no longer probable

xxx under Scheme of that an outflow of resources
Arrangement, which has not embodying economic benefits

348
Observations on Accounting Standard (AS) 29: Provisions, Contingent Liabilities.

been claimed by the parties. The will be required to settle the

liability has been written back to obligation, the provision
the Statement of Profit and Loss should be reversed.”
during the current financial year.
This will be paid as and when From the above, it was noted
claimed by the parties.’ that provision should be
reversed when it is no longer
probable that outflow of
resources would be required to
settle the obligation. However, in
the given case, it was noted
from the stated note that the
liabilities will be paid as and
when claimed which indicates
that the probability of outflow of
resources still exists. Hence,
writing back of the provision is
not in accordance with the
requirements of AS 29.

6. From the Annual Report of a It may be noted that paragraphs

company, it has been noted as 68 and 71 of AS 29, state as
follows: follows:

‘The Company has not provided “68. Unless the possibility of

for moping up of subsidy on raw any outflow in settlement is
materials of fertilizer in terms of remote, an enterprise should
office Memorandum issued by disclose for each class of
the Ministry of Chemicals & contingent liability at the
Fertilizers, Govt. of India, which balance sheet date a brief
is being reconsidered and description of the nature of
decided not to effect recovery till the contingent liability and,
a policy in this regard is where practicable:
formulated. This has
strengthened the management’s a) an estimate of its financial
view for not providing the same.’ effect, measured under
paragraphs 35-45;

b) an indication of the
uncertainties relating to

349
Study on Compliance of Financial Reporting Requirements

any outflow; and

c) the possibility of any

reimbursement.”

“71. where any of the

information required by
paragraph 68 is not disclosed
because it is not practicable
to do so, that fact should be
stated.”

From the above, it was noted

that while disclosing details of
contingent liabilities an estimate
of its financial effect should be
given unless it is not practical to
do so. In the later case, the fact
should be, accordingly,
disclosed. It was noted from the
stated note that although
contingent liability has been
disclosed, neither the financial
effect of the same nor the fact
that it is not practicable to
quantify the same has been
disclosed as required under
paragraphs 68 and 71 of AS 29.

7. In the Annual Report of a It was noted from the

company, Clause (xv) given in reproduced abstract of CARO
Annexure to Auditor’s Report Report that the company had
reads as follows: given irrevocable guarantees to
bank/ financial institutions for
‘(xv) In our opinion, the company loans taken by others. As on the
has given irrevocable Balance Sheet date, although
guarantees for loans taken by the banks/ financial institutions
others from the banks or had claimed a huge liability
financial institutions and a including interest against those
liability including interest of Rs. guarantees, the company had

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Observations on Accounting Standard (AS) 29: Provisions, Contingent Liabilities.

xxx has been claimed which the not acknowledged it as debt on

company has not acknowledged the ground that the company
as debt on the ground that the was taken over by a buyer.
company was taken over by a Such liabilities claimed had
buyer but the liability on this simply been shown as
account has also been shown in contingent liability. It was viewed
Contingent Liability.’ that, in the given case, when the
Balance Sheet was prepared by
the enterprise as a going
concern with no other disclosure
that entity had been taken over
by the third party, it prima facie
indicates that the liabilities being
claimed by banks or financial
institutions are present
obligations of the entity itself as
on the Balance Sheet date as a
result of past events. Hence, it
was viewed that the provision for
amounts claimed should have
been recognised since it meets
criteria of ‘provision’ laid in
paragraph 14 of AS 29.

8. In the Annual Report of a It may be noted that paragraph

company, one of notes in Notes 68 of AS 29, provides as follows:
to Accounts states as follows :
“68. Unless the possibility of
‘In accordance with Accounting any outflow in settlement is
Standard 29, the following are remote, an enterprise should
considered as Contingent disclose for each class of
Liabilities: contingent liability at the
balance sheet date a brief
a. Sales tax, service tax, description of the nature of
customs, wealth tax, and the contingent liability and,
income tax demands where practicable:
together with penalties
under appeal. (a) an estimate of its financial
effect, measured under
b. Guarantees given by

351
Study on Compliance of Financial Reporting Requirements

bankers for performance of paragraphs 35-45;

contracts & others.’
(b) an indication of the
uncertainties relating to
any outflow; and

(c) the possibility of any

reimbursement.”

It was noted from the

reproduced note that although
the nature of various contingent
liabilities as on the Balance
Sheet date have been disclosed
along with aggregate financial
effect of all such liabilities, the
aforesaid requirement also
requires the disclosure of the
financial effect of each class of
nature of contingent liability,
which has not been done. It has
been further noted from Note b
that guarantees given by
bankers for the performance of
contracts have been disclosed
as contingent liabilities of the
company. It was viewed that
guarantees given against own
performance of the company do
not give rise to any contingent
liability because the company in
any case holds an obligation to
perform the event against which
guarantee is given which is also
supported by paragraph 8.8.7.2
of Guidance Note on Revised
Schedule VI to the Companies
Act, 1956. Hence, such

352
Observations on Accounting Standard (AS) 29: Provisions, Contingent Liabilities.

performance guarantees do not

meet the definition of
‘Contingent Liabilities’ given in
paragraph 10.4 of AS 29.

Accordingly, it was viewed that

the requirements of AS 29 have
not been complied with.

353
 27
Observations on the Companies Act1
S. Matters contained in the Observations
No. Annual Report

1. It was observed from the note It may be noted that Paragraph

relating to Finance Costs given 3 and 4 of ‘General Instructions
in the Annual Report of a for preparation of Statement of
company that “interest income Profit And Loss’ given in Part II
from trade dues” was deducted of the Revised Schedule VI to
from Interest Expense. Further, the Companies Act, 1956,
the significant accounting policy provides that:
to interest stated that “Interest
Income earned on trade dues is Finance costs shall be classified
netted against interest expense as:
under finance cost.” (a) Interest expense;

(b) Other borrowing costs;

(c) Applicable net gain/loss on

foreign currency
transactions and
translation.”

Other Income shall be classified

as:

(a) Interest Income ( in case of

a company other than a
finance company);

(b) Dividend Income;

1Subsequent to the observations of the Board, Companies Act, 2013 has been notified.
However, content is still relevant in terms of Companies Act, 2013.

354
 Observations on the Companies Act

(c) Net gain/loss on sale of

investments

(d) Other non-operating

income (net of expenses
directly attributable to such
income).”

In view of above, it was felt that

the interest expense and interest
income should be disclosed
separately, the interest income
from trade dues should be
disclosed under the head ‘other
income’ rather than netting off it
against finance cost.

2. In the Annual Report of a It may be noted that as per

company Note on Finance w.r.t. clause 3 of ‘General Instruction
reads as follows: for the Preparation of Statement
of Profit & Loss’ for Part II,
(Rs. in Lacs) Revised Schedule VI of the
Companies Act, 1956, finance
Particulars March March
costs are to be bifurcated as
31, 31,
follows:
20XX 20XX
“(A) Interest expense
Interest --- ---
(B) Other borrowing costs
Debentures --- ---
(C) Applicable net gain/loss
on foreign currency
transactions and
-Fixed --- --- Translation”
Loans,
Buyer's It may further be noted from
Credit, Paragraph 9.5.5 of Guidance
Short note on Revised Schedule VI to
Term, etc. the Companies Act, 1956 that
‘other borrowing costs’ refers to
commitment charges, loan

355
Study on Compliance of Financial Reporting Requirements

- Others --- --- processing charges, guarantee

charges, loan facilitation
charges, discounts/premium on
borrowings, other ancillary costs
- Bank and --- --- incurred in connection with
other borrowings, or amortization of
finance such costs, etc.
Charges However, it was noted that ‘bank
and other finance charges’
which are in the nature of ‘other
borrowing costs’ have been
classified as ‘interest expense’.

Accordingly, it was viewed that

the classification of ‘bank and
other finance charges’ is not
strictly in line with the
requirements of Part I, Revised
Schedule VI to the Companies
Act, 1956.

3. It was observed from note It may be noted that as per

relating to Related Party paragraph 4.1.7 of General
Disclosures given in the Annual Instruction for preparation of
Report of a company that the Balance Sheet as per Revised
amounts of corporate Schedule VI, there is an explicit
guarantees given on behalf of requirement to use the same
related parties were disclosed in unit of measurement uniformly
foreign currencies. throughout the financial
statements and notes thereon.

It was observed that whereas in

the given case the financial
statements have been reported
in rupees, certain transactions
under related party disclosures
have been reported in terms of
US dollars (USD), Australian
Dollars (AUD) and Japanese

356
 Observations on the Companies Act

Yens (JPY).

Accordingly, it was viewed that

presentation of information is
not in line with the requirements
of Part I, Revised Schedule VI to
the Companies Act, 1956.

4. Note relating to Trade It may be noted that Note 6 (P)

Receivables as given in the (i) of ‘General Instructions for
Annual Report of a company Preparation of Balance Sheet’
reads as follows: given in Part I of the Revised
Schedule VI to the Companies
More than 6 months -- -- Act, 1956, inter alia, requires
disclosure of trade receivables
Other Receivables -- -- as follows:

Total -- -- “(i) Aggregate amount of Trade

Receivables outstanding for a
period exceeding six months
from the date they are due for
payment should be separately
stated.”

It was noted that as per the

Revised Schedule VI to the
Companies Act, 1956,
aggregate amount of Trade
Receivables outstanding for a
period exceeding six months
should be reported from the date
when they become due for
payment. However, it was
observed from the note on trade
receivables that the company
has reported Trade Receivables
for a period more than six
months. It was viewed that it is
not clear from the note whether
the amount classified as six

357
Study on Compliance of Financial Reporting Requirements

months is from the date of trade

receivables or from the date the
trade receivable is due for
payment. In other words, it may
be possible that at one point of
time a transaction may be a
trade receivable but amount may
not be due on it. Hence, such
transaction may be classified as
a trade receivable for the above
mentioned purpose of
presentation in Part I, Revised
Schedule VI without considering
the time when payments fall due
with them.

Accordingly, it was viewed that

the requirement of Part I,
Revised Schedule VI to the
Companies Act, 1956 has not
been complied with.

5. It was observed from the Notes It may be noted that note 6 (c)
relating to Long-term borrowings (vi) of ‘General Instructions for
given in the Annual Report of a preparation of Balance Sheet’,
company that long term Part I, Revised Schedule VI to
borrowings were comprised of the Companies Act, 1956,
vehicle loans and unsecured requires following disclosures in
inter-corporate loans. respect of Long - Term
Borrowings:

“(vi) Terms of repayment of term

loans and other loans shall be
stated.”

It may further be noted that

paragraph 8.3.1.18 of Guidance
Note on the Revised Schedule
VI to the Companies Act, 1956,

358
 Observations on the Companies Act

provides that:

“8.3.1.18 Disclosure of
repayment terms should include
the period of maturity with
respect to the Balance Sheet
date, number and amount of
instalments due, the applicable
rate of interest and other
significant relevant terms if any.”

It was noted from the note on

long-term borrowing that the
company has taken vehicle
loans as well as unsecured
loans. It was viewed that vehicle
loans are in the nature of term
loans but the disclosures omit to
mention the rate of interest at
which such loans have been
taken as required by Guidance
Note on Revised Schedule VI.

Similarly, in respect of
unsecured loans from body
corporate, it was noted that
although the amount of
outstanding liability as at the
end of the year, the rate of
interest on such loans have
been disclosed, the repayment
terms of the loan including the
period of maturity, number and
amount of installments have not
been disclosed.

6. Note relating to Revenue in the It may be noted that Note 4 of

Annual Report of a company ‘General Instructions for
reads as follows: preparation of Statement of
Profit and Loss’, Part II, Revised

359
Study on Compliance of Financial Reporting Requirements

Sales of Products --- Schedule VI of Companies Act,

1956, states as follows:
Other Sales & ---
Services “4. Other Income

Other Income shall be classified

Other Income ---
as :
Total ===
a) Interest Income (in case
of a company other than a
finance company;

b) Dividend Income;

c) Net Gain or Loss on

Sale of Investments;

d) Other non-operating
income (net of expenses
directly attributable to such
income).”

It was noted from the note

relating to Revenue that it
includes significant amount of
other income, the classification
of which is not given as
aforesaid. Thus, the nature of
incomes comprising it, is not
clear as to whether it includes
interest, dividend or gain on sale
of investments or any other non-
operating income, if so, to what
extent.

7. The Note an other current It may be noted that note 6 (G)

liabilities given in the Annual of ‘General Instructions for
Report of a company reads as preparation of Balance Sheet’ of
follows: Abstracts of Note 2 Part I, Revised Schedule VI to
relating to Other Current the Companies Act, 1956,
Liabilities as given on Page 81 requires Other Current Liabilities

360
 Observations on the Companies Act

of the Annual Report, which to be presented in the format as

states as follows: prescribed below:

Note-2 “(G) Other Current Liabilities

Other Current Liabilities The amounts shall be classified

as:
As at to 31st
(a) Current maturities of long-
March, 20XX
term debt;
Other (b) Current maturities of finance
Liabilities lease obligations;

(c) Interest accrued but not due

on borrowings;

(d) Interest accrued and due on

borrowings;

(e) Income received in advance;

(f) Unpaid dividends;

(g) Application money received

for allotment of securities
and due for refund and
interest accrued thereon;

(h) Unpaid matured deposits

and interest accrued
thereon;

(i) Unpaid matured debentures

and interest accrued
thereon;

(j) Other payables (specify

nature).

…”

From the above it was viewed

361
Study on Compliance of Financial Reporting Requirements

that current liabilities should

either be classified in one of the
heads as suggested from (a) to
(i) or the other payables may be
shown specifying their nature.

It was noted, from the stated

abstract that the nature of ‘other
liabilities’ has not been
disclosed which is against the
requirements of Revised
Schedule VI to the Companies
Act, 1956.

8. It was observed from note It may be noted that Trade

relating to Current Investments Investments has been defined in
given in the Annual Report of a paragraph 8.7.2.1 of ‘Guidance
company that investment in note on the Revised Schedule VI
money market was disclosed as to the Companies Act, 1956’
‘Trade Investment.’ issued by ICAI as follows:

“The term “trade investments” is

defined neither in Revised
Schedule VI nor in Accounting
Standards. The term "trade
investment" is, however,
normally understood as an
investment made by a company
in shares or debentures of
another company, to promote
the trade or business of the first
company.”

In view of above, it was viewed

that investment in money market
cannot be classified as ‘Trade
Investment’ and accordingly, the
classification adopted for money
market investment was viewed
to be incorrect.

362
 Observations on the Companies Act

9. It was observed from the note It may be noted that Clause

relating to Share Capital in the 5(viii)(d) of ‘General Instructions
Corporate Governance Report of for preparation of Statement of
a company that shareholders Profit and Loss’ given in Part II
comprised non-residents and of the Revised Schedule VI to
foreign institutional investors. the Companies Act, 1956,
provides that:

“5. Additional information

A Company shall disclose by

way of notes additional
information regarding aggregate
expenditure and income on the
following items:-

(viii) (d) The amount remitted

during the year in foreign
currencies on account of
dividends with a specific
mention of the total number of
non-resident shareholders, the
total number of shares held by
them on which the dividends
were due and the year to which
the dividends related;”

It was noted from the

‘Shareholding Pattern’ given in
the ‘Corporate Governance
Report’ that shares are held by
non- resident shareholders as
well as foreign institutional
investors also, which indicates
that the dividend paid during the
year my have been remitted in
foreign currency also and as
such the same should have

363
Study on Compliance of Financial Reporting Requirements

been disclosed as required by

paragraph 5 (viii)(d) of General
Instructions for preparation of
Statement of Profit and Loss
given in Part II of the Revised
Schedule VI to the Companies
Act, 1956.

10. It was observed from Note on It may be noted that note 6 (G)
Short Term Provisions given in of ‘General Instructions for
the Annual Report of a company preparation of Balance Sheet’ of
that it included ‘Provision for Part I, Revised Schedule VI to
Excise Duty.’ the Companies Act, 1956,
requires Other Current Liabilities
to be presented in the format
prescribed below:

“(G) Other Current Liabilities

The amounts shall be classified

as:

(a) Current maturities of long-

term debt;

(b) Current maturities of

finance lease obligations;

(c) Interest accrued but not

due on borrowings;

(d) Interest accrued and due

on borrowings;

(e) Income received in

advance;

(f) Unpaid dividends;

(g) Application money received

for allotment of securities
and due for refund and

364
 Observations on the Companies Act

interest accrued thereon;

(h) Unpaid matured deposits

and interest accrued
thereon;

(i) Unpaid matured

debentures and interest
accrued thereon;

(j) Other payables (specify

nature).

Other Payables may be in the

nature of statutory dues such as
Withholding taxes, Service Tax,
VAT, Excise Duty etc ”

It was noted that the provision

for excise duty has been
disclosed as short term
provision. It was viewed that the
liability for excise duty arises
when the manufacture of the
goods is completed, although
the recovery of the duty is
deferred till the goods are
removed from the factory or the
bonded warehouse. Accordingly,
it is in the nature of payable
rather than a provision. Similar
view is also supported by Note 6
(G) of ‘General Instructions for
preparation of Balance Sheet’ of
Part I Revised Schedule VI to
the Companies Act, 1956 which
prescribes to disclose statutory
dues, including excise duty,
under the head ‘other payables’.

365
Study on Compliance of Financial Reporting Requirements

11. From the Annual Report of a It may be noted that ‘General

company it was noted that the Instructions for Preparation of
cash flow statement and Note on Balance Sheet’ given in Part I of
Fixed Assets reads as follows:- the Revised Schedule VI to the
Cash Flow Statement for the Companies Act, 1956, requires
Year ended March 31, 20XX disclosure of fixed assets as
follows:
For the For the
year year “(1) Non-current assets
ended ended
(a) fixed assets
31.03.20 31.03.20
XX XX i Tangible assets
Rs.in Rs.in ii Intangible assets
lakhs lakhs
iii Capital work-in-
B. Cash progress
flow from
iv Intangible assets
investing
under development
activities
It may also be noted that
Purchase
paragraph 8.7.1.1 of Guidance
of fixed
Note on the Revised Schedule
assets
VI to the Companies Act, 1956
Sale states as follows:
proceeds
“8.7.1.1 Tangible Assets
of fixed
assets The company shall disclose
the following in the Notes to
NOTE -12 – FIXED ASSETS Accounts as per 6(I) of Part I
of the Revised Schedule VI.
Gross block
(i) …
Partic Bala Addit Othe Bala
ulars nce ions rs nce (ii) …
as at (Del adju as at
01. etion stme 31. (iii) A reconciliation of the
04. s) nts** 03.2 gross and net carrying
20X 0XX amounts of each class of

366
 Observations on the Companies Act

X assets at the beginning and

end of the reporting period
Tangib showing additions, disposals,
le
acquisitions through
assets
: business combinations and
other adjustments and the
Land* related depreciation and
impairment losses/reversals
Lease shall be disclosed
hold separately.”
land
i It was noted from the note
Buildin on fixed assets that there is
gs a single column indicating
Additions / (Deletion) to
Lease
hold fixed assets, thereby
buildin indicating that reported
gs figures in column are net
figures. It was noted from
Plant the Cash Flow Statement
& that during the year cash
machi flows have occurred on
nery
purchase as well as sale of
Furnit fixed assets. Accordingly, it
ures was viewed that additions
and as well as deletion of fixed
fixture assets should have been
s reported separately. In the
absence of such information
Lease the gross value of fixed
hold
assets purchased and sold
improv
ement cannot be ascertained.
s
ii It may be noted that
Office Paragraph 5 of General
equip Instructions for Preparation
ments of Balance Sheet and
Statement of Profit and Loss
Vehicl 131. - - 104. of a Company in Addition to

367
Study on Compliance of Financial Reporting Requirements

es 84 59 the Notes Incorporated

Above the Heading of
Total 75,4 420. 75.8 Balance Sheet under, Given
41.8 33 - 62.1
in Revised Schedule VI to
4 7
the Companies Act, 1956,
It was observed from the Note states as follows:
on Fixed Assets given in the “Except in the case of the
Annual Report of a company first Financial Statements
that the following details were laid before the Company
given in respect of cost of the (after its incorporation) the
various classes of fixed assets: corresponding amounts
(1) Opening Balance (comparatives) for the
(2)Additions / (Deductions) (3) immediately preceding
Other Adjustments and (4) reporting period for all items
Closing Balance. shown in the Financial
Statements including notes
shall also be
given.”(emphasis added)

It was noted that comparative

figures of the previous year
relating to opening balance of
fixed assets, addition of fixed
assets during the year,
depreciation charged for each
class of fixed assets have not
been disclosed. Instead, such
information is given on the
aggregate for the previous year,
which is not in line with the
requirement of the Revised
Schedule VI to the Companies
Act, 1956.

12. The Note relating to Revenue It may be noted that Paragraph

from Operations given in the 9.1.7 given under ‘Guidance
Annual Report of a company Note on Revised Schedule VI to
states as follows: the Companies Act, 1956’ states

368
 Observations on the Companies Act

Revenue from Operations that :

Sale of products “9.1.7 The term “other operating

(Gross) revenue” is not defined. This
would include Revenue arising
Sale of services - Job from a company’s operating
work, etc., activities, i.e. either its principal
or ancillary revenue –generating
Other operating activities, but which is not
revenues revenue arising from sale of
products or rendering of
Revenue from services...”
operations (Gross)
It was noted that details of sale
Less: Excise Duty on of product has been shown
revenue from separately under Note of
operations revenue from operation. It was
further noted that under the
Revenue from details of products sold, export
operations (Net) benefit has been shown as a
separate line item. It was viewed
It was further noted that Note on that the revenue in the nature of
details of product sold reads as export incentives is revenue that
follows: neither arise due to sale of
product or by rendering of
(Rs. in Crores)
service but it is arising due to its
operations. Hence, it was
Particulars Year
viewed that instead of disclosing
ended
it as a part of the sale of
31-03- products, it should have been
20XX disclosed as other operating
revenue.
Export benefit ---

13. From the Annual Report of a It was noted that exchange

company it was noted that difference on foreign currency
foreign currency gain/loss was transactions and translation has
considered as cost of material been included as material cost.
and as such debited in It was viewed that foreign

369
Study on Compliance of Financial Reporting Requirements

statement of Profit & Loss. currency fluctuation, that arises

after the foreign currency
Net loss/(gain) on foreign transaction took place, is an
currency transactions includes independent event. It does not
Rs. XXX considered as cost of arise due to purchases of raw
material consumed charged to material Hence, it should be
the Statement of Profit and shown separately instead of
Loss. clubbing it with the cost of raw
material consumed.

Accordingly, it was viewed that

the presentation of information
is not in accordance with the
requirements of Part II, Revised
Schedule VI to the Companies
Act, 1956.

14. It was observed that Note It may be noted that Paragraph

relating to Loans and advances 6 (L) of ‘General instructions for
given in the Annual Report of a the preparation of Balance
company reads as follows : Sheet’ given under Part I of the
Revised Schedule VI to the
Unsecured (considered good Companies Act, 1956, provides
unless otherwise stated) that:
Non- Curren “6. A Company shall disclose
current t the following in the Notes to
Accounts:
As at As at
31st 31st L. Long-term loans
March, March,
(i) Long-term loans and
20XX 20XX
advances shall be
Capital — classified as:
advances (a) Capital Advances;
Advances — (b) Security Deposits;
recoverable
in cash or in (c) Loans and advances to
kind or for related parties (giving

370
 Observations on the Companies Act

value to be details thereof);

received
(d) Other loans and
Other loans — advances (specify
and nature).”
advances
It was noted from the Note of
Advance tax ‘Loans and advances’ that the
and tax heads like ‘Advance recoverable
deducted at in cash or in kind or for value to
source (net be received’ and ‘other loans
of provision) and advances’ have been used
to show the aggregate dues
under respective heads. It was
viewed that various items
included under each such head
should have been disclosed
nature wise as required under
paragraph 6 (L) of General
instructions for preparation of
Balance Sheet as given under
Part I of the Revised Schedule
VI to the Companies Act, 1956.

15. It was observed from a note It may be noted that Part I of the
relating to Other current Revised Schedule VI to the
liabilities given in the Annual Companies Act, 1956, provides
Report of a company that it to disclose current liabilities in
included “Trade Payables for the following manner:
goods and services.”
(4) Current liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

(d) Short-term provisions

It was noted that Trade Payable

371
Study on Compliance of Financial Reporting Requirements

for goods and services have

been disclosed under the head
‘other current liabilities’ Instead
of disclosing it as ‘current
liabilities’ as per the requirement
of Revised Schedule VI to the
Companies Act, 1956.

16. It was observed from a foot note It may be noted that Paragraph
given to Note on Long term 3 of ‘General Instructions for
Borrowings in the Annual Report preparation of Balance Sheet
of a company that these given in Part I of the Revised
included amounts payable Schedule VI to the Companies
during the next financial year. Act, 1956, provides that:

“ 3. A liability shall be classified

as current when it satisfies any
of the following criteria:

(a) …

(b) …

(c) It is due to be settled within

twelve months after the
reporting date; or

(d) …

All other liabilities shall be

classified as non-current.”

It was noted that from footnote

given under note relating to
long term borrowings, that these
are obligations on principal of
long term borrowings which are
due to be repaid in the next
financial year, i.e. within 12
months after the reporting date.
Hence, it was viewed that the

372
 Observations on the Companies Act

said amount should have been

disclosed as current liability
rather than disclosing it by a foot
note under Long term
Borrowings.

17. It was observed from note It may be noted that ‘General

relating to Other Current Instructions for Preparation of
Liabilities given in the Annual Balance Sheet’ given in Part I of
Report of a company that it the Revised Schedule VI to the
includes ‘Sundry Creditors for Companies Act, 1956, requires
Goods.’ disclosure of current liabilities as
follows:

“(4) Current liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

(d) Short-term provisions”

It may also been noted that

paragraph 8.4.1 of Guidance
Note on the Revised Schedule
VI to the Companies Act, 1956
states as follows:

“A payable shall be classified as

'trade payable' if it is in respect
of amount due on account of
goods purchased or services
received in the normal course of
business. As per the Old
Schedule VI, the term 'sundry
creditors’ included amounts due
in respect of goods purchased
or services received or in
respect of other contractual

373
Study on Compliance of Financial Reporting Requirements

obligations as well. Hence,

amounts due under contractual
obligations can no longer be
included within Trade payable…”

It was noted that sundry

creditors for goods have been
classified under the broad head
‘other current liabilities’. It was
viewed that sundry creditors for
goods, being trade payables,
should be shown separately
from ‘other current liabilities’.

18. It was observed from the note It may be noted that Note 6 (P)
relating to Trade Receivables of ‘General Instructions for
given in the Annual Report of a Preparation of Balance Sheet’
company that it included given in Part I of the Revised
“Provisional Tariff Receivable.” Schedule VI to the Companies
Act, 1956, inter alia, requires
disclosure of trade receivables
as follows:

(i) Aggregate amount of Trade

Receivables outstanding for
a period exceeding six
months from the date they
are due for payment should
be separately stated.

(ii) Trade receivables shall be

sub-classified as:

(a) Secured, considered

good;

(b) Unsecured considered

good;

(c) Doubtful.

374
 Observations on the Companies Act

It was noted that “Provisional

Tariff Receivable” has been
shown as trade receivable,
however, it has not been
classified into those outstanding
for a period exceeding six
months or others as well as
whether they are considered
good or doubtful, secured or
unsecured which is required to
be disclosed as per Note 6 (P)
of ‘General instructions for the
preparation of Balance Sheet’
given under Part II, Revised
Schedule VI to the Companies
Act, 1956.

19. It was observed from the note It may be noted that Note 6 (L)
relating to Long Term Loans and of ‘General Instructions for
Advances given in the Annual Preparation of Balance Sheet’
Report of a company that these given in Part I of the Revised
included security deposits with Schedule VI to the Companies
Government Department and Act, 1956, inter alia requires
Public Bodies and Security disclosure of Long-term loans
Deposits with Others. and advances as follows:

“L. Long-term loans and

advances

(i) Long-term loans and

advances shall be
classified as:

(a) Capital Advances;

(b) Security Deposits;

(c) Loans and advances to

related parties (giving

375
Study on Compliance of Financial Reporting Requirements

details thereof);

(d) Other loans and

advances (specify
nature).

(ii) The above shall also be

separately sub-classified
as:

(a) Secured, considered

good;

(b) Unsecured, considered

good;

(c) Doubtful.

…”

It was noted that long term loans

and advances have been
classified into Security Deposit
with Government Departments
and Security Deposit with
others. However, it is not clear
as to whether they are
considered good or doubtful
which is required to be disclosed
as per Note 6 (L) of ‘General
instructions for the preparation
of Balance Sheet’ given under
Part II, Revised Schedule VI to
the Companies Act, 1956.

20. From the Annual Report of a The following discrepancies

company it was noted that Notes have been noted with regard to
on ‘Revenue from operation’ and presentation and disclosure of
purchases as well as Director’s ‘Revenue from operations’:
Reports reads as follows:-
i. Paragraph 2 of ‘General

376
 Observations on the Companies Act

Revenue from Operations Instructions for preparation

of Statement of Profit And
Particula For the For the Loss’ given in Part II of the
rs year year Revised Schedule VI to the
ended ended Companies Act, 1956,
March March provides that:
31, 20XX 31,
201XX “In respect of a company
other than a finance
Sales --- --- company revenue from
operations shall disclose
Commissi --- separately in the notes
on --- revenue from :-
Income
(a) sale of products;
Total --- ---
(b) sale of services;

(c) other operating

revenues;

It was noted from the

Director’s Report that the
company is engaged in
financial service activity as
well as in consultancy
business which prima facie
indicates that it has income
from services. Further, the
note relating to ‘Revenue
from Operations’ and note
relating to ‘Purchases’
indicate that the company is
engaged in selling as well as
purchasing products which
prima facie suggests that it
has trading income from
sale of products. However, it
was noted from the
bifurcation of ‘Revenue from

377
Study on Compliance of Financial Reporting Requirements

Operation’ that the revenues

from sale of products and
from sale of services have
been clubbed together and
shown under the head
‘Sales’.

ii. It may be noted that

Paragraph 5 (ii)(a) and (iii)
of ‘General instructions for
the preparation of Statement
of Profit and Loss’ given
under Part II, Revised
Schedule VI to the
Companies Act, 1956,
provides as follows :

“5. Additional Information

A Company shall disclose by

way of notes additional
information regarding
aggregate expenditure and
income on the following
items:-

(i) …

(ii) a) …

b) In the case of trading

companies, purchases
in respect of goods
traded in by the
company under broad
heads.

c)…

d)…

378
 Observations on the Companies Act

e)…”

It was viewed that “broad heads”

refers to broad categories of
goods purchased in case of
trading companies..

However, in the given case,

although the company was
involved in trading activities no
disclosure was given about the
broad heads of trading goods
held by it.

21. It was observed from the note Paragraph 6 (K)(i) of General

related to Investments as given Instructions for Preparation of
in the Annual Report of a Balance Sheet given under Part
company that Non-current I of the Revised Schedule VI to
Investments were classified the Companies Act, 1956
under the head ‘Investment in requires the investments to be
Subsidiaries’ and ‘Investment in discloused as “Trade” or “Other.”
Associates.’ However, it was noted, in the
given case, although equity
Non-Current Investments instruments have been classified
(Rs in Lacs) as investment in subsidiary and
investment in associates,
Particulars 2011 2010 whether they are trade
-12 -11 investment or other investment
has not been disclosed as
Unquoted Equity required by Part I of Revised
Instruments Schedule VI to the Companies
(Fully Paid up) Act, 1956.

Investment in
Subsidiaries

Investment in
Associates

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Study on Compliance of Financial Reporting Requirements

22. It was observed from the note It may be noted that paragraph
relating Cash and Bank 8.8.4 of ‘Guidance Note on
Balances in the Annual Report Revised Schedule VI to the
of a company that it includes Companies Act, 1956 inter alia
’Deposits with maturity for more provides that:
than 12 months.’
“…Banks deposits with more
than twelve months maturity will
also need to be separately
disclosed under the sub-head
‘Other bank balances’. The non-
current portion of each of the
above balances will have to be
classified under the head “Other
Non-current assets” with
separate disclosure thereof”.

It was noted from the given note

that ‘Deposits with maturity for
more than 12 months’ have
been shown under the subhead
‘Other Bank Balances’ as
‘Current Assets’. It was viewed
that classification of such
deposits under current assets
indicates that it is realisable
within a period of 12 months.
However, if it includes certain
deposits which are realisable
after twelve months then the
same should have been
disclosed as “other non-current
assets”

23. It was observed from the note It was noted from the note
relating to Revenue from relating to Revenue from
Operations given in the Annual Operations that ’profit on sale of
Report of a company that it assets’ has been disclosed
included “Profit on sale of under the head of ‘other

380
 Observations on the Companies Act

Assets.” operating revenue’ rather than

disclosing under the head ‘Other
income’. It was viewed that sale
of asset cannot be considered
as operations of the company,
same is also clarified in
paragraph 9.1.8 of Guidance
Note on the Revised Schedule
VI to the Companies Act, 1956
reproduced below:

“9.1.8 To take other examples,

sale of Fixed Assets is not an
operating activity of a company,
and hence, profit on sale of fixed
assets should be classified as
other income and not other
operating revenue…”

24. It was observed from the note It may be noted that Note 6(L)(a)
relating to Short term loans and of ‘General Instructions for
advances, read with the note preparation of Balance Sheet’ of
relating to Estimated amount of Part I, Revised Schedule VI of
contracts remaining to be Companies Act, 1956, states as
executed on capital and other follows;
account Assets, given in the
Annual Report of a company “L. Long term loans and
which prima facie suggest that advances:
“capital advances” have been (a) Capital Advances”
included in short term loans and
advances. It was noted from the note
relating to ’Capital Commitment’
Note that capital advances have
prima facie been disclosed
under as ‘short-term loans and
advances.

It was observed that capital

advances are advances given

381
Study on Compliance of Financial Reporting Requirements

for procurement of fixed assets

which are non-current assets.
Generally, the companies do not
expect to realise them in cash.
Rather, over a period, these
advances get converted into
fixed assets which, by nature,
are non-current assets. Hence,
capital advances should be
treated as non-current assets
and not to be classified as short-
term or current assets.

Accordingly, it was viewed that

the capital advances should
have been shown under the
head of long term loans and
advances instead of disclosing
under short term loans and
advances, as required by Part I,
Revised Schedule VI to
Companies Act, 1956.

25. The note relating to Long term It may be noted that Note 6(L)(c)
loans and advances given in the of ‘General Instructions for
Annual Report of a company preparation of Balance Sheet’ of
reads as follows: Part I, Revised Schedule VI of
Companies Act, 1956, states as
Long term loans and follows;
advances
“L. Long term loans and
Loans and advances advances:
to related parties
(c) Loans and advances
Unsecured, to related parties
considered good (giving details
thereof)”(emphasis
added)

It was noted from the note

382
 Observations on the Companies Act

relating to Long term loans and

advances that although loans
and advances have been given
to related parties, the details
thereof have not been disclosed
as required by Note 6(L)(c) of
‘General Instructions for
preparation of Balance Sheet’ of
Part I, Revised Schedule VI to
Companies Act, 1956.

26. In the Annual Report of a It may be noted that paragraph 3

company, note on Trade of ‘General Instructions for
payable and MSME Disclosure preparation of Balance Sheet
reads as follows: and Statement of Profit and
Loss of a Company in addition
Trade Payables to the notes incorporated above
the heading of balance sheet’ as
Particulars XX- XX-
given in ‘Guidance Note on the
YYYY YYYY
Revised Schedule VI to the
Companies Act, 1956’ states as
Due to
follows:
Micro,
Small and “...Each item on the face of the
Medium Balance Sheet and Statement of
Enterprises Profit and Loss shall be cross
referenced to any related
Due to
information in the Notes to
Others
Accounts.”
MSME Disclosure: It was noted that both the
Details of dues to micro and appended notes contain
small enterprises as defined information relating to Micro &
under MSMED Act, 2006: Small & Medium Enterprises, no
cross reference has been made
in the related notes as required
by the Revised Schedule VI

27. The statement of Profit and Loss It may be noted that the format

383
Study on Compliance of Financial Reporting Requirements

of a company reads as follows: of Statement of profit and loss

account as prescribed under
Particulars Curre Previo the Revised Schedule VI to the
nt us Companies Act, 1956 is as
Year Year
follows:
XX-YY XX-YY
Particulars Curren Previ
EXPENSES
t Year ous
---- 20XX- Year
YY 20XX-
Total YY
Expenses
I. Revenue XXX XXX
Earning from
before operations
Exceptional
Items, II. Other XXX XXX
Interest, Tax income
&
Depreciation III. Total XXX XXX
Revenue (I +
Exceptional
II)
Items

Profit on IV.
Slump Sale Expenses:
XXX XXX
Earnings Cost of
before materials
Interest, Tax consumed
XXX XXX
&Depreciation
Purchases of
Depreciation Stock-in-
and Trade
Amortization Changes in
Expenses inventories
of finished
Finance Costs goods work- XXX XXX
in progress
Profit Before and Stock-
Tax in-Trade XXX XXX
Employee
benefits

384
 Observations on the Companies Act

expense

Finance
costs

Depreciation
and

amortization
expense

Other
expenses

Total
expenses

V. Profit
before
exceptional
and
extraordinary
items and
tax

(III-IV)

VI. XXX XXX

Exceptional
items

VII. Profit XXX XXX

before
extraordinary
items and
tax (V - VI)

It was observed from the above

mentioned format that the
depreciation cost and finance
cost should be charged off
before adjusting exceptional
items. However, it was noted
from the Statement of Profit and

385
Study on Compliance of Financial Reporting Requirements

Loss that the exceptional item

i.e. profit on slump sale has
been adjusted before charging
off depreciation cost and finance
cost. Such presentation of
information is considered to be
not in line with the format
prescribed under the Revised
Schedule VI to the Companies
Act, 1956.

28. Note on Cash and Cash It may be noted that paragraph 6

Equivalents in the Annual (Q) of ‘General Instructions for
Report of a company reads as Preparation of Balance Sheet’
follows: given under Part I of the
Revised Schedule VI to the
Cash and Cash Equivalents Companies Act, 1956, interalia,
provides that:
As at
31.03.20XX “Cash and Cash Equivalents

Balance with --- (i) Cash and Cash Equivalents

Banks shall be classified as:

Balance with banks include (a) Balances with banks;

restricted bank balances of Rs (b) Cheques, drafts on
XXX and time deposit with hand;
banks with a maturity of more
than 12 months Rs. YYY (c) Cash on hand;

(d) Others (specify

nature).

(v) Bank deposits with more

than 12 months maturity
shall be disclosed
separately.”

It may also be noted that

386
 Observations on the Companies Act

paragraphs 6.4 and 8.8.4 of

Guidance Note on the Revised
Schedule VI to the Companies
Act, 1956 states as follows:

“6.4 … Accordingly, the conflict

should be resolved by changing
the caption “Cash and cash
equivalents” to “Cash and bank
balances,” which may have two
sub-headings viz., “Cash and
cash equivalents” and ”Other
bank balances.” The former
should include only the items
that constitute Cash and cash
equivalents defined in
accordance with AS 3 (and not
the Revised Schedule VI), while
the remaining line-items may be
included under the latter
heading.

“8.8.4 … Other bank balances”

would comprise of items such as
balances with banks to the
extent of held as margin money
or security against borrowings
etc, and bank deposits with
more than three months
maturity. Banks deposits with
more than twelve months
maturity will also need to be
separately disclosed under the
sub-head ‘Other bank balances’.
The non-current portion of each
of the above balances will have
to be classified under the head
“Other Non-current assets” with
separate disclosure thereof.”

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Study on Compliance of Financial Reporting Requirements

It was noted that the balances

with bank include time deposit
with banks with a maturity of
more than 12 months and
disclosed under the head cash
and cash equivalent instead of
disclosing it under the head
“Other bank balances”. Further,
it was observed that non-current
portion of time deposits, if any,
has not been disclosed
separately under the head
“Other Non-Current Assets.”

29. In the Annual Report of a It may be noted that Note 6 (U)

company Note on share capital of ‘General Instructions for
contained following description preparation of Balance Sheet’
of preference shares: given in Part I of the Revised
Schedule VI to the Companies
Description of the rights, Act, 1956, requires that;
preferences and restrictions
attached to each class of “The amount of dividends
shares proposed to be distributed to
equity and preference
Preference shares: The shareholders for the period and
Preference Shares shall be, the related amount per share
subject to profitability and at the shall be disclosed separately.
discretion of the Board of Arrears of fixed cumulative
Directors, entitled to a dividends on preference shares
cumulative annual dividend @ shall also be disclosed
5%. These preference Shares separately.”
carry preferential right in respect
of dividends and also carry It may further be noted that as
preferential right in regard to per explanation given under
repayment of capital in case of section 87 (2) (b) of the
winding up. Preference Shares Companies Act, 1956, dividend
are redeemable at the end of shall be deemed to be due on
five years from XX May, 20XX--- preference shares in respect of
------at Rs. 150 per share.” any period, whether or not

388
 Observations on the Companies Act

dividend has been declared by

the company on the day
immediately following such
period.

It was noted from note 3(d) that

preference shareholders are
entitled to a cumulative annual
dividend @ 5 %. Accordingly, it
was viewed that the dividend on
cumulative preference shares
were due on the day
immediately on elapse of the
respective periods irrespective
of the fact that the dividend has
been declared or not. Further, it
was also noted that the
company has been incurring
losses since last 3 financial
years (as evident from the
director’s report), however, it
was viewed that the obligation to
pay dividends on cumulative
preference shares would still
arise. Therefore, the arrears on
cumulative preference shares
should have been disclosed
separately.

30. It was noted from the Annual It may be noted that Note 6 (G)
Report of a company that note of ‘General Instructions for
on Long Term Borrowings reads Preparation of Balance Sheet’
as follows: given in Part I of the Revised
Schedule VI to the Companies
Note no-3(Rs. In lakhs) Act, 1956, inter alia requires
disclosure of other current
31st 31st
March March liabilities as follows:
, 20XX , 20XX
“G. Other Current Liabilities

389
Study on Compliance of Financial Reporting Requirements

Long-Term --- --- The amounts shall be classified

Borrowings as :

Secured:- --- --- (a) Current maturities of long

term debt”
From banks --- ---
It was noted from stated note
Indian rupees --- that there were certain long term
loan from --- borrowings as on the balance
HDFC Bank sheet date; however, current
Ltd. maturity of such borrowings has
not been disclosed under the
Foreign --- ---
Currency loan head of ‘other current liability’. It
from DBS was noted from repayment
Bank Ltd. terms that such debts are
repayable in quarterly
--- installments. Therefore, it was
--- viewed that a portion of long
term borrowings is due for
Note : payment within twelve months of
(1) Rupee Loan from HDFC the reporting date which has not
bank been distinctly shown under the
head ‘Other current liabilities’.
Repayment terms :
20 equal quarterly
Installments

(2) Foreign Currency Loans from

DBS Bank Ltd.

Repayment terms :
18 equal quarterly Installments

31. It was observed from the note It was noted that the MAT
relating to short term loans and credit entitlement has been
advances given in the Annual classified as current asset and
Report of a company that the the amount reported is same as
amount of the “MAT Credit that reported as at the end of
Entitlement was the same in the the last year. It was viewed that
current year as it was in the the stagnant figure shows that

390
 Observations on the Companies Act

previous year. MAT credit entitlement has not

been classified as current or
non-current based on expected
period of its realisation. It was
viewed that in case, if it is
expected to be realised i.e.
timing of its reversal is beyond
one year then it should be
disclosed as non- current asset.

32. It was noted that Accounting It may be noted that Note 6 (L)
Policy on fixed Assets of a (i) of ‘General Instructions for
company reads as follows: Preparation of Balance Sheet’
given in Part I of the Revised
Tangible Fixed Assets Schedule VI to the Companies
All fixed assets are stated at Act, 1956, inter alia, requires
cost less accumulated disclosure of Long-term loans
depreciation. Cost is inclusive of and advances as follows:
freight, duties, levies and any “L. Long-term loans and
directly attributable cost of advances
bringing the assets to their
present working condition. (i) Long-term loans and
advances shall be
Capital Work-in-Progress classified as:
represents cost of fixed assets
that are not yet ready for their (a) Capital Advances;
intended use as at the Balance
sheet date and includes (b) Security Deposits;
advances paid. (emphasis (c) Loans and advances to
added) related parties (giving
details thereof);

(d) Other loans and

advances (specify
nature). (emphasis
added)”

It was noted from the stated

accounting policy that the capital

391
Study on Compliance of Financial Reporting Requirements

work-in-progress includes the

capital advances paid.

It was viewed that capital

advances should be included in
long-term loans & advances
rather than the capital work in
progress. Such inclusion is not
in line with the requirement of
Part I of the Revised Schedule
VI to the Companies Act, 1956.

33. From the accounting policy on It may be noted that ‘General

intangible assets of a company it Instructions for Preparation of
was noted that then Intellectual Balance Sheet’ given in Part I of
Property Rights (IPR) and the Revised Schedule VI to the
Software Licenses which have Companies Act, 1956, requires
been separately paid for and put disclosure of Fixed Assets as
to use are shown under “Fixed follows:
Assets” in the Balance sheet.
(1) Non-current assets
Expenses incurred for software
product development are (a) Fixed assets
expensed as incurred unless (i) Tangible assets
technical and commercial
feasibility of the project is (ii) Intangible assets
demonstrated, future economic
benefits are probable, the (iii) Capital work-in-progress
Company has an intention and (iv) Intangible assets under
ability to complete and use or
sell the software and the costs development
can be measured reliably. Such
expenses and the advances It was noted from the accounting
paid for acquiring intellectual policy on Intangible Assets that
property rights & licenses for expenses incurred for acquiring
Projects under development intellectual property rights &
on balance sheet date are licenses for projects that are
shown under Capital Work in under development, have been
Process. shown under capital work-in-

392
 Observations on the Companies Act

(emphasis added) process.

It was viewed that the head

‘Intangible assets under
development’ better represents
such nature of assets rather
than the head ‘capital work-in-
process’, which is generally
used to signify ‘tangible assets’.

34. Notes on ‘operating cost’ and It may be noted that Note 5 of

‘Employee Benefits’ given in the General instructions for
Annual Report of a company Preparations of Statement of
reads as follows: Profit and Loss given under Part
II, Revised Schedule VI to
Operating Costs Companies Act, 1956 provides
A. 1) Employee Cost that:

2) Other Manpower Cost 5. Additional Information

B. Supplies & Services A company shall disclose by

way of notes additional
Employee Benefit expenses information regarding aggregate
expenditure and income on the
Salaries and wages following items:
Contribution to provident and “(i) (a) Employee Benefits
Other funds Expense [showing separately (i)
Staff welfare expenses salaries and wages, (ii)
contribution to provident and
other funds, (iii) expense on
Employee Stock Option Scheme
(ESOP) and Employee Stock
Purchase Plan (ESPP), (iv) staff
welfare expenses].”

It was observed from the

appended Notes of Operating
cost and Employee Benefit
expenses that under both heads

393
Study on Compliance of Financial Reporting Requirements

employee costs have been

disclosed as a separate line
item, thereby, indicating that
these expenses have been
functionally classified rather
than on the basis of their nature.

It was viewed that such

presentation is not in line with
the requirement of Part II,
Revised Schedule VI to the
Companies Act, 1956 which
prescribes to classify various
items of income and expenditure
on the basis of their nature
rather than functional
classification.

35. It was observed from the note As per paragraph 6 (D) of

relating to Trade Payables given ‘General Instructions for
in the Annual Report of a Preparation of Balance Sheet’
company that it includes the given under Part I of the
sub-heads “Current Liabilites” Revised Schedule VI to the
and “Sundry Creditors amongst Companies Act, 1956 provides
others. that:

“Other Long Term

Liabilities

Other Long term Liabilities

shall be classified as:

(a) Trade payables

(b) Others”

It was noted that as per

prescribed format of
balance sheet, long term
liabilities should be sub
classified as trade payable

394
 Observations on the Companies Act

and others. It was observed

that under the head trade
payables a sub-head used
is ‘Sundry Creditors’. It was
viewed that the head
‘Sundry Creditors’ may
include dues other than that
in the nature of trade
payable. viz payables in
respect of statutory
obligations like contribution
to provident fund or other
contractual obligations that
might not have resulted
from purchase of goods or
services Thus, the scope of
sub-head ‘sundry creditors’
is wider than the broad head
‘Trade payable’ which is
incorrect presentation of
information.

36. It was observed from a footnote It may be noted that note 6 (c)
to the Note relating to long-term (vii) of ‘General Instructions for
borrowings given in the Annual preparation of Balance Sheet’,
Report of a company that it had Part I, Revised Schedule VI to
made disclosures in respect of the Companies Act, 1956,
default in repayment and loan to requires following disclosures in
various lenders in the respect of Long - Term
aggregate. Borrowings:

“(vi). Period and amount of

continuing default as on the
Balance Sheet date in
repayment of loans and interest
shall be specified separately in
each case.”

It was noted from the note on

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Study on Compliance of Financial Reporting Requirements

long term borrowing that the

company has taken term loans
from banks as well as from
financial institution and
defaulted in their repayment.

However, disclosures with

regard to default have not been
separately given for each loan.
Moreover, the loan and interest
have been clubbed together. It
was viewed that both
components should have been
separately disclosed for each
case of continuing defaults as
required under Part I, Revised
Schedule VI to the Companies
Act, 1956.

37. Note on Non-current Investment The following discrepancies

in the Annual Report of a have been noted with regard to
company reads as under: disclosures and presentations of
Investments:
Note : Non-Current
Investments 1. Paragraph 6 (K) of ‘General
Instructions for Preparation
As at As at of Balance Sheet’ as given
March March under Part I, the Revised
31,20X 31, Schedule VI to the
X 20XX Companies Act, 1956
provides that:
Investment
in Equity “Non-current investments
Shares of
(i) Non-current
Subsidiary
investments shall be
Companies
classified as trade
(Unquoted, investments and other
Fully Paid investments and further
classified as:

396
 Observations on the Companies Act

Up) (a) Investment

property;
…
(b) Investments in
Investment Equity Instruments;
in
Preference (c) Investments in
Shares of preference shares
Subsidiary
(d) Investments in
Company
Government or trust
(Unquoted, securities;
Fully Paid
(e) Investments in
Up)
debentures or
… bonds;

(f) Investments in
40,00,000,
Mutual Funds;
1%
Cumulative (g) Investments in
Redeemable partnership firms
Preference
Shares of (h) Other non-current
Rs. 10 each investments
at a premium (specify nature)
of Rs. 115
Under each classification,
per share
details shall be given of
Investment names of the bodies
in Equity corporate (indicating
Shares of separately whether such
Joint bodies are (i) subsidiaries,
Venture (ii) associates, (iii) joint
ventures, or (iv) controlled
(Unquoted, special purpose entities) in
Fully Paid whom investments have
Up) been made and the nature
and extent of the investment
… so made in each such body
corporate (showing

397
Study on Compliance of Financial Reporting Requirements

separately investments
which are partly-paid).

…(emphasis supplied)”

1. It was noted that although

the investments have been
sub classified based on
whether they are invested in
equity/preference shares of
subsidiary company, and/or
joint venture, however, the
nature of such investment
has not been disclosed i.e.
whether it is trade
investments or other
investments.

2. It was noted that the

company has made
investments in equity shares
as well as preference
shares of certain subsidiary
companies. Although, the
names of subsidiary
companies in whose equity
investments have been
made have been disclosed,
however, the names of
subsidiary companies in
whose preference share
investments have been
made have not been
disclosed.

38. It was observed from notes It may be noted that note 6 (L)
relating to Long-term Loans and and (R) of ‘General Instructions
Advances and Short-term Loans for preparation of Balance
and Advances given in the Sheet’, Part I, Revised Schedule
Annual Report of a company VI to the Companies Act, 1956

398
 Observations on the Companies Act

that these included “Other Loans requires classification of long

and Advances.” term as well as short term loans
and advances as follows:

“L. Long-term loans and

advances

(i) Long- term loans and

advances shall be
classified as:

(a) Capital Advances

(b) Security Deposits

(c) Loans and advances to

Related Parties

(d) Other Loans and

Advances (specify
nature)

…”

“R. Short-term loans and

advances

(i) Short-term loans and

advances shall be
classified as:

(a) Loans and Advances to

related Parties (giving
details thereof)

(b) Others (specify

nature)” (emphasis
added)

From the abovementioned

requirements, it was noted that
nature of loans and advances
classified under the head

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Study on Compliance of Financial Reporting Requirements

‘others’ needs to be specified. It

was noted that although both the
long-term loans and advances
and the short-term loans and
advances include ‘Other loans
and advances’, their nature have
not been disclosed.

39. It was observed from Note on It may be noted that Note 6

‘Long term Provisions’ given in (P)(iii): Trade Receivables of
the Annual Report of a company ‘General Instructions for
that these included “Provision Preparation of Balance Sheet’,
for Bad Debts.” It was also Part I, Revised Schedule VI to
observed that in the note the Companies Act,
relating to “Trade Receivables”, 1956interalia prescribes
no receivables were disclosed adjustment of provision for bad
as doubtful. and doubtful debt against the
relevant head as stated below:

(iii) Allowance for bad and

doubtful loans and
advances shall be
disclosed under the
relevant heads
separately.

…”

It was noted that in the given

case, provision for bad debts
has been shown under the head
‘long term provision’ instead of
adjusting it against relevant
head of trades receivable as
prescribed in the aforesaid
requirement. Further, although
the Revised Schedule VI
requires the disclosure of trade

400
 Observations on the Companies Act

receivables considered doubtful

of recovery, yet in the note
relating to Trade Receivables all
receivables were disclosed as
good.

40. From the Annual Report of a It may be noted that as per the
company it was noted that Institute's "Guidance Note on
‘unclaimed dividend’ was the Revised Schedule VI to the
disclosed as ‘Other Current Companies Act, 1956'', the
Liabilities’ current liabilities towards
dividend yet to be paid should
be shown as ‘Unpaid dividends’
instead of ‘Unclaimed dividend’
as given in the extent case.

41. It was observed from the Note It may be noted that paragraph
on Short-term loans and 8.8.6 of the Institute’s Guidance
advances given in the Annual Note on the Revised Schedule
Report of a company that these VI to the Companies Act, 1956,
includes “Advance premium on states as follows:
foreign exchange options.”
“8.8.6 Other current assets
(specify nature)
'This is an all-inclusive heading,
which incorporates current
assets that do not fit into any
other category e.g. unbilled
Revenue, unamortised
premium on forward
contracts, etc." (emphasis
added)
It was viewed that advance
premium on foreign exchange
options has been shown under
the head “Short-term loans and
advances” instead of "Other
Current Assets" as prescribed
under the aforesaid requirement.

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Study on Compliance of Financial Reporting Requirements

42. It was observed from the Note It may be noted that note ’Form
on Other Current Liabilities of Balance Sheet’ given on Part
given in the Annual Report of a I of Revised Schedule VI to the
company that these includes Companies Act, 1956’reads as
various provisions under the follows:
sub-head “Short-term
provisions.” PART I – FORM OF BALANCE
SHEET

(4) Current liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

(d) Short-term provisions”

It was noted that other current

liabilities and short term
provisions are two separate
heads of Current Liabilities.
However, it was noted that short
term provisions have been
disclosed under Note of Other
Current Liabilities rather than
showing it as a separate line
item.

43. It was observed from the note It may be noted that Paragraph
relating to Share Capital given in 6(A) of ‘General Instructions for
the Annual Report of a company Preparation of Balance Sheet’
that the information given was given in Part I, Revised
incomplete. Schedule VI to the Companies
Act, 1956 requires to make
certain disclosures with regard
to Share Capital. It was noted
that while some disclosures are
given under the note relating to
Share capital, neither any

402
 Observations on the Companies Act

disclosures relating to rights,

preferences and restrictions
attached to each class of share
was disclosed nor information
about the shareholders holding
more than 5 percent of shares
have been disclosed as required
by Paragraph 6(A)(e) and
6(A)(g) which states as follows:

“6. A Company shall disclose

the following in the Notes
to Accounts:

(a) …

(e) the rights, preferences

and restrictions attaching
to each class of shares
including restrictions on the
distribution of dividends
and the repayment capital.

(g) shares in the company

held by each shareholder
holding more than 5
percent shares specifying
the number of shares held.”

44. It was observed from the It was noted that on face of

Statement of Profit and Loss statement of Profit and Loss two
given in the Annual Report of a separate line items ‘revenue
company that under the head from operations’ and ‘other
Income, “Revenue from operating revenues have been
Operations and “Other operating given whereas the format
revenues” were shown prescribed under Part II,
separately. Revised Schedule VI to
Companies Act, 1956 requires

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Study on Compliance of Financial Reporting Requirements

only one line item ‘Revenue

from Operations’. It was viewed
that ‘other operating income’
should form part of ‘revenue
from operations’ as prescribed
in General Instructions for
preparation of statement of
Profit and Loss when its
Paragraph 2(A) states as
follows:

“2. (A) In respect of a company

other than a finance company
revenue from operations shall
disclose separately in the notes
revenue from

(a) sale of products;

(b) sale of services;

(c) other operating revenues;.

Accordingly, it was viewed that

the requirements of Part I,
Revised Schedule VI to the
Companies Act, 1956 have not
been complied with.

45. It was observed from a footnote It may be noted that paragraph

to the note relating to Other 7.1.3 of Guidance note on
Long Term Liabilities given in Revised Scheduled VI to the
the Annual Report of a company Companies Act, 1956 states as
that the “Other long-term follows:
liabilities” included a loan in
respect of which the lender had “7.1.3 A liability shall be
forfeited the bank deposits due classified as current when it
to a default. satisfies any of the following
criteria:

404
 Observations on the Companies Act

(a) ….

(b) ….

(c) ….

(d) the company does not have

an unconditional right to
defer settlement of the
liability for at least twelve
months after the reporting
date. Terms of a liability
that could, at the option of
the counterparty, result in
its settlement by the issue
of equity instruments do
not affect its classification.

All other liabilities shall be

classification as non-
current.”

It was noted that liabilities

disclosed as ‘Others’ under
‘Other Long term Liabilities’
include a loan in respect of
which certain Fixed Deposits
have been forfeited due to
default in payment. It was
viewed that being the matter
under dispute it is evident that in
given case the company does
not have unconditional right to
defer the settlement of stated
Liabilities and accordingly, its
disclosure under long term
liabilities is not in accordance
with the requirements of the
Revised Schedule VI to
Companies Act , 1956.

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Study on Compliance of Financial Reporting Requirements

46. From the Annual Report of a It may be noted that pursuant to

company it was noted that the requirements of Note 6(B)(i)
‘Reserve and surplus includes of General Instructions for
the closing balance of ‘Foreign preparing Balance Sheet’’ of
Currency Monetary Item Part I, Revised Schedule VI to
Translation Difference Account.’ the Companies Act, 1956, the
movement under each specified
head of ‘Reserves & Surplus’ is
required to be disclosed when it
states as follows:

“6. ….

B. Reserves & Surplus

(i) …

(Additions and deductions

since last Balance Sheet to
be shown under each of
the specified heads)”

It was noted that in given case

under the head ‘Foreign
Currency Monetary Item
Translation Difference Account’
only the closing balances have
been disclosed. However,
movements that led to change in
such balance, as required by the
Revised Schedule VI have not
been disclosed.

47. It was observed from the note It may be noted that Paragraph
relating to Other “Long-term 6D of ‘General Instructions for
Liabilites” that these included Preparation of Balance Sheet’,
“Trade Deposits and Others.” Part – I of the, Revised
Schedule VI to the Companies
Act, 1956 requires following
disclosure for Other Long-term

406
 Observations on the Companies Act

Liabilities:

“D. Other Long term Liabilities:

Other Long term Liabilities shall

be classified as:

(a) Trade Payable

(b) Others”

It was noted that under the head

‘Other Long term Liabilities’
dues of trade deposits have
been clubbed with other dues
which is against the
requirements of Revised
Schedule VI. Moreover, it was
viewed that the other dues may
include the amount of trade
payables, dues payables in
respect of statutory obligations
like contribution to provident
fund, purchase of fixed assets,
contractually reimbursable
expenses, interest accrued on
trade payables which should
have been disclosed separately
on the basis of their nature as
per the aforesaid requirement of
the Revised Schedule VI to the
Companies Act, 1956.
Accordingly, the nature of dues
included under the head ‘Others’
should have been specified
separately from trade deposits.

48. It was observed from the note It was noted from the note
relating to Non-current relating to ‘Non - Current
Investments given in the Annual Investments’ that Investments in
Report of a company that subsidiaries have been

407
Study on Compliance of Financial Reporting Requirements

investments in equity shares of classified as non - trade

subsidiaries were classified as investments. It was viewed that
“Non-trade .” investment in subsidiary is
generally made for expanding
and facilitating the business of
the company and as such, it
cannot be regarded as non-trade
investments It may be
mentioned that similar view has
been given in Paragraph 8.7.2.1
of ‘Guidance note on the
Revised Schedule VI to the
Companies Act, 1956’ issued by
ICAI which defines ‘trade
investments’ as follows:

“…The term "trade

investment" is, however,
normally understood as an
investment made by a
company in shares or
debentures of another
company, to promote the
trade or business of the
first company.”

Accordingly, the investment in

subsidiary companies should
have been classified as trade
investment instead of as non-
trade investments.

49. From the Note on other Paragraph 5 of General

Expenses in the Annual Report instructions for Preparations of
of a company it was noted that Statement of Profit and Loss
‘Staff Welfare Expenses’ were given under Part II, Revised
included in ‘Other Expenses’. Schedule VI to Companies Act,
1956, provides that:

408
 Observations on the Companies Act

5. Additional Information

A company shall disclose by

way of notes additional
information regarding aggregate
expenditure and income on the
following items:

“(i) (a) Employee Benefits

Expense [showing
separately (i) salaries and
wages, (ii) contribution to
provident and other funds,
(iii) expense on Employee
Stock Option Scheme
(ESOP) and Employee
Stock Purchase Plan
(ESPP), (iv) staff welfare
expenses] (emphasis
supplied).”

It was noted that staff welfare

expense has been shown under
the head ‘other expense’’ where
as the Revised Schedule VI
explicitly requires this to be
disclosed under ‘employee
benefit expense’.

Accordingly, it was viewed that

such presentation is not in line
with the requirement of Part II,
Revised Schedule VI to the
Companies Act, 1956.

50. Footnote given under Note on It may be noted that Paragraph

Long-term Borrowings in the 6(C)(ii) and (iii) of ‘General
Annual Report of a company Instructions for preparation of
reads as follows:- Balance Sheet’, Part I, Revised
Schedule VI to the Companies

409
Study on Compliance of Financial Reporting Requirements

‘Term Loans availed from banks Act, 1956 requires the following
and others are secured by disclosures in respect of Long
hypothecation of specific assets Term Borrowings:
comprising plant and equipment
and vehicles acquired out of the “C. Long-Term Borrowings
said loans and personal …
guarantee of a director.’
(ii) …Nature of security shall
be specified separately in
each case.

(iii) Where loans have been

guaranteed by directors or
others, the aggregate
amount of such loans under
each head shall be
disclosed.”

It was noted that in the given

case, a general statement about
the nature of security given
against loans from banks and
others has been given in
aggregate rather than disclosing
nature of security specifically for
each case. It was further noted
that the amount of loans
guaranteed by director has also
not been disclosed.

51. Abstract of note relating to It may be noted that note 6 (F)

Short-term Borrowings as given of ‘General Instructions for
in the Annual Report of a preparation of Balance Sheet’,
company, which states as Part I, Revised Schedule VI to
follows: the Companies Act, 1956,
requires following disclosures in
Short Term Borrowings respect of Short-Term
Borrowings:
Secured
“F. Short Term Borrowings

410
 Observations on the Companies Act

Loans (i) Short-term borrowings

shall be classified as:
From Banks
(a) Loans repayable on
Unsecured demand
Loans
from banks
From
Financial from others
Institutions
(b) Loans and advances
Inter from related parties
Corporate
Deposits (c) Deposits.

Loans from (d) Other loans and

Subsidiaries advances (specify
nature)
Inter
Corporate (ii) Borrowings shall further
Deposits be sub-classified as
from related secured and unsecured.
parties Nature of security shall
be specified separately
Loan from
in each case.”
others
The following discrepancies
were observed with regard to
disclosures of short-term
borrowings:

1. It was noted that the nature

of securities given against
secured loans taken from
banks have not been
disclosed.

2. From the abovementioned

requirement, it was viewed
that the short term
borrowings should either be
classified in one of heads as

411
Study on Compliance of Financial Reporting Requirements

suggested from (a) to (c) or

it should be classified as
‘other loans and advances’
specifying their nature. It
was noted from the given
abstract that short term
borrowings include ‘loan
from others’; however, the
nature of such borrowings
has not been specified.

52. It was observed from the note It may be noted that paragraph
relating Short-term loans and 8.8.6 of the Institute’s Guidance
advances given in the Annual Note on the Revised Schedule
Report of a company that these VI to the Companies Act, 1956,
included “Advance premium on states as follows:
foreign exchange options.”
“8.8.6 Other current assets
(specify nature)

'This is an all-inclusive heading,

which incorporates current
assets that do not fit into any
other category e.g. unbilled
Revenue, unamortised
premium on forward
contracts, etc." (emphasis
added)

It was viewed that advance

premium on foreign exchange
options has been shown under
the head “Short-term loans and
advances” instead of "Other
Current Assets" as prescribed
under the aforesaid requirement.

53. It was observed from the note It may be noted that Note 6 (L)
relating to Long term loans and of ‘General Instructions for
advances given in the Annual Preparation of Balance Sheet’

412
 Observations on the Companies Act

Report of a company that these given in Part I of the Revised

included “Balances with Schedule VI to the Companies
Government authorities.” Act, 1956interali, requires
disclosure of Long-term loans
and advances as follows:

“L. Long-term loans and

advances

(iii) Long-term loans and

advances shall be
classified as:

(a) Capital Advances;

(b) Security Deposits;

(c) Loans and

advances to
related parties
(giving details
thereof);

(d) Other loans and

advances (specify
nature).

It may also be noted that

paragraph 8.7.3 of the
Institute’s Guidance Note on the
Revised Schedule VI to the
Companies Act, 1956 states as
follows:

“Other loans and advances

should include all other items in
the nature of advances
recoverable in cash or kind such
as Prepaid expenses, Advance
Tax, CENVAT Credit receivable,
etc, which are not expected to

413
Study on Compliance of Financial Reporting Requirements

be realized within the next

twelve months or operating
cycle whichever is longer from
the Balance Sheet date.”

It was noted from above that

advances given to government
authorities may comprise of
different nature of balances held
with different government
authorities viz income tax,
CENVAT, etc. Hence the
breakup of the aggregate
balance should be disclosed as
per their nature rather than
disclosing the aggregate
balance with (different)
government authorities.

54. It was noted from the Balance It may be noted that Note 6 (G)
Sheet of the company that there (g) of General Instructions for
was “Share Application Money Preparation of Balance Sheet
Pending the Allotment” given in Part I of the Revised
Schedule VI to the Companies
Act, 1956, requires as follows:

G. Other Current Liabilities

(g) Application money received

for allotment of securities and
due for refund and interest
accrued thereon. Share
application money includes
advances towards allotment of
share capital. The terms and
conditions including the number
of shares proposed to be issued,
the amount of premium, if any,

414
 Observations on the Companies Act

and the period before which

shares shall be allotted shall be
disclosed. It shall also be
disclosed whether the company
has sufficient authorized capital
to cover the share capital
amount resulting from allotment
of shares out of such share
application money. Further, the
period for which the share
application money has been
pending beyond the period for
allotment as mentioned in
document inviting application for
shares along with the reason for
such share application money
being pending shall be
disclosed. Share application
money not exceeding the issued
capital and to the extent not
refundable shall be shown under
the head Equity and share
application money to the extant
refundable i.e., the amount in
access of subscription or in case
the requirements of minimum
subscription are not met, shall
be separately shown under
‘Other current liabilities’

As regards presentation of
information relating to share
application money, it was noted
that whereas share application
money due for refund is shown
as ‘other current liabilities’,
those pending for allotment are
shown as separate line item
under the broad head

415
Study on Compliance of Financial Reporting Requirements

‘Shareholders funds’. It was

further noted that paragraph 6
(G) (g) also requires to disclose
other information relating to
share Application Money which
is also applicable on that
pending for allotment viz. terms
and conditions, including the
number of shares proposed to
be issued, the amount of
premium, if any, and the period
before which shares shall be
allotted, whether the company
has sufficient authorized capital
to cover the share capital
amount resulting from allotment
of shares out of such share
application money and the
period for which the share
application money has been
pending beyond the period for
allotment as mentioned in
document inviting application for
shares along with the reason for
such share application money
being pending shall be
disclosed.

In the given case it was noted

that there is share application
money pending for allotment;
however, none of the
information relating to it.

55. Note on ‘Other Income’ given in It may be noted that Paragraph

the Annual Report of a company 2(A) of General Instructions for
reads as follows: Preparation of Statement of
Profit and Loss of Part II,
Other Income Revised Schedule VI to the

416
 Observations on the Companies Act

Profit/(Loss) on --- --- Companies Act, 1956 provide as

Trading of follows:
Shares/Mutual Fund
“2(A). In respect of a company
other than a finance company
Total --- ---
revenue from operations shall
disclose separately in the notes
revenue from

(a) sale of products;

(b) sale of services;

(c) other operating revenues;

Less:

(d) Excise duty.”

It was noted that the note

relating to other income that it
includes profit generated from
trading of shares and mutual
funds. It was noted from the
Directors ‘Report that during the
year, company was stated to be
primarily engaged in real estate
and investment activities.
Accordingly, it was viewed that
any revenue generated from
investment activities viz. profit
from trading of shares or mutual
fund units is its principal activity.
Hence, it should be disclosed as
‘other operating revenue’ rather
than under ‘Other Income’.

56. It was observed from the It may be noted that Paragraph

footnote to the note relating to: 6R (i) of ‘General Instructions for
‘Short term loans and Advances’ Preparation of Balance Sheet’
given in the Annual Report of a given in Part I of the Revised

417
Study on Compliance of Financial Reporting Requirements

company that “Other advances” Schedule VI to the Companies

includes amount receivable Act, 1956, provides as under:
from related party.
“Short-term loans and advances

(i) Short-term loans and

advances shall be
classified as:

(a) Loans and advances

to related parties
(giving details
thereof);

(b) Others (specify

nature).”

It was noted from that amount

receivable from related party
has been disclosed by way of
footnote to it rather than
showing it as a separate line
item as per requirement of
Revised Schedule VI.

Accordingly, it was viewed that

the presentation of short terms
loans and advances is not in
accordance with the
requirements of Part I, Revised
Schedule VI to the Companies
Act, 1956

57. It was observed from the note It may be noted that paragraph
relating to Cash & Bank 6(Q)(iii) of General Instructions
Balances given in the Annual for preparation of Balance Sheet
Report of a company that “some of Revised Schedule VI to the
of the fixed deposit receipts are Companies Act, 1956 states as
deposited with Banks against follows:
borrowings and guarantees
“Balances with banks to the

418
 Observations on the Companies Act

issued.” extent held as margin

money or security against
the borrowings,
guarantees, other
commitments shall be
disclosed separately.”

It was noted that the fixed

deposits pledged with banks
against borrowings and
guarantees issued have not
been disclosed separately as
per above mentioned
requirement and the amount
thereof has also not been
disclosed in the note.

58. From the Annual Report of a It may be noted that Note 5 (viii)
company it was noted that Short (b) of ‘General Instructions for
Term Borrowings also includes Preparation of Statement of
interest bearing foreign currency Profit and Loss’ given in Part II,
loans. Revised Schedule VI to the
Companies Act, 1956, requires
certain additional disclosures
stated as follows:

“Additional Information

A company shall disclose by

way of notes additional
information regarding aggregate
expenditure and income on the
following items:-

(viii) The profit and loss account

shall also contain by way of a
note the following information,
namely:

419
Study on Compliance of Financial Reporting Requirements

a) …

b) Expenditure in foreign
currency during the
financial year on account of
royalty, know-how,
professional and
consultation fees, interest,
and others matters;”

It was noted from note of short

term borrowings that there were
certain foreign currency loans
both in previous year as well as
at the end of current year. It
was, accordingly, viewed that
the interest must have been
serviced on such loans either in
the previous year or in the
current year in foreign currency.
However, in note relating to
expenditure in foreign currency,
no such interest payments have
been disclosed.

59. It was observed from the note The following discrepancies

relating to “Employment were noted with regard to
Expense” given in the Annual presentation of information
Report of a company that the relating to employee benefit
aggregate amount of such expenses:
expense was disclosed under
the head “Salaries and other i) It may be noted that
allowances.” Paragraph 5 of General
Instructions for Preparation
of Statement of Profit and
Loss given under Part II,
Revised Schedule VI to
Companies Act, 1956,
requires disclosure of
additional information that,

420
 Observations on the Companies Act

inter alia, provides as follow:

5. Additional Information

A company shall disclose by

way of notes additional
information regarding
aggregate expenditure and
income on the following
items:

“(i) (a) Employee Benefits

Expense [showing
separately (i) salaries
and wages, (ii)
contribution to
provident and other
funds, (iii) expense on
Employee Stock
Option Scheme
(ESOP) and
Employee Stock
Purchase Plan
(ESPP), (iv) staff
welfare expenses]

It was noted from the stated

accounting policy of‘
employee benefits’ that
there were defined
contribution plans as well as
gratuity plan. However, it
was noted from the note
relating to ’Employment
expenses’ that only an
aggregate amount has
been shown under the head
‘’salary and other
allowances’’. The expense
incurred against defined

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Study on Compliance of Financial Reporting Requirements

contribution plan & other

funds, staff welfare, etc. as
required by the Revised
Schedule VI was neither
disclosed by way of
separate line item nor in
notes to account.

60. It was observed from the note It may be noted that paragraph
relating to Trade Receivables 6(P)(ii) of General Instructions
given in the Annual Report of a for preparation of Balance Sheet
company that these included of Revised Schedule VI to the
Trade Receivables classified as Companies Act, 1956 states as
“Others” follows

“P. Trade Receivables

(ii) Trade receivables shall

be sub-classified as:

(a) Secured, considered

good;

(b) Unsecured considered

good

(c) Doubtful.”

It was noted that trade

receivables shown as ‘Others’
(i.e. due for a period of more
than six months) have not been
classified whether they are
considered good or doubtful as
per aforesaid requirement.

61. The Balance Sheet of a It may be noted that the format

company reads as follows: of Balance Sheet as prescribed
in Part I, Revised Schedule VI
Balance Sheet as at 31st March to the Companies Act, 1956
prescribes the presentation of

422
 Observations on the Companies Act

20XX ‘Deferred Tax Assets’ as follows:

Amount Amount “II. ASSETS

(Rs.) (Rs.)
(1) Non-current assets
As at As at (b) Non-current
investments
31st 31st
March, March, (c) Deferred tax assets
20XX 20XX (net)

Non- (d) Long-term loans and

current advances”
assets
Further, it may be noted that
… ‘Explanation’ to Paragraph 30 of
AS 22 also prescribes the
Non- --- --- presentation of Deferred tax
current assets on face of balance sheet
investme when it states as follows:
nts
Explanation:
Long- --- --- “Deferred tax assets (net of
term the deferred tax liabilities, if
loans any, in accordance with
and paragraph 29) is disclosed on
advances the face of the balance sheet
separately after the head
Deferred --- ---
‘Investment’ and deferred tax
tax
liabilities (net of the deferred
assets
tax assets, if any, in
(Net)
accordance with paragraph
29) is disclosed on the face of
the balance sheet separately
after the head ‘Unsecured
Loans’.”

It was noted from the

reproduced abstract of the
Balance Sheet that ‘Deferred tax

423
Study on Compliance of Financial Reporting Requirements

assets (net)’ has been

presented after the head ‘Long-
term loans and advances’
instead of presenting it
immediately after the Non-
current investments.

Accordingly, it was viewed that

the presentation of ‘Deferred tax
assets (net)’ and ‘Long- term
loans and advances’ is not in
line with the requirements of
Part I, Revised Schedule VI to
the Companies Act, 1956 and
AS 22.

62. It was observed from the note It was noted from the appended
relating to Other non-current note relating to Other non-
assets given in the Annual current assets that advance tax
Report of a company that these has been disclosed under the
included “Advance Tax.” head ‘Other Non-Current
Assets’. It was viewed that
advance tax cannot be
considered as ‘non-current
asset’ as it is in substance
advance which should be
disclosed under ‘loans and
advances’ instead of ‘other non-
currents’.

63. From the Annual Report of a It may be noted that Note 2 (A)
company it was observed from of ‘General Instructions for
Notes on ‘Other Income’ that it preparation of Statement of
includes ‘Sales of Scrap’. Profit and Loss, Part II, Revised
Schedule VI to the Companies
Act, 1956, requires following
disclosures in respect of
Revenue from Operation:

424
 Observations on the Companies Act

“2. (A) In respect of a company

other than a finance company
revenue from operations shall
disclose separately in the notes
revenue from

(a) Sale of products;

(b) Sale of services’

(c) Other operating revenues;

Less:

(d) Excise duty”

It was noted from the note

relating to “Other Income” that it
included income from sale of
scrap. It was viewed that the
entity under review is a
manufacturing enterprise. Thus,
although such income does not
arise on sale of enterprise’s
products, it is ancillary to the
company’s operating activity.
Thus, revenue from scrap arises
due to manufacturing operations
and should, therefore, be
classified as ‘other operating
revenue’.

64. Note relating to ‘Operating It may be noted that Paragraph 2

Cycle’ given in the Annual of General Instructions for
Report of a company reads as Preparation of Balance Sheet of
follows: Revised Schedule VI to
Companies Act, 1956 as follows:
Operating Cycle
“2. An operating cycle is the
…In case of long-term contracts, time between the acquisition of
the time between acquisition of assets for processing and their

425
Study on Compliance of Financial Reporting Requirements

assets for processing and realization in Cash or cash

realization of the entire proceeds equivalents. Where the normal
under the contracts in cash or operating cycle cannot be
cash equivalent exceeds one identified, it is assumed to have
year. Accordingly for a duration of 12 months.”
classification of assets and
liabilities related to such It was viewed that where an
contracts as current, duration of enterprise is engaged in multiple
each contract is considered as businesses, the operating cycle
its operating cycle. could be different for each line of
business. Hence, an enterprise
should assess operating cycle of
each business and accordingly
classify the assets and liabilities
of the respective businesses into
current and non-current.

It was noted that in the given

case, duration of each contract
has been considered as
operating cycle for that contract.
It was, accordingly noted that,
each contract was considered as
a separate product line. It was
viewed that operating cycle is
determined for the enterprise as
a whole and accordingly, its
assets and liabilities are
classified into current and non-
current so that liquidity as well
as solvency and revenue
generating capacity of the
enterprise is evident from the
face of the Balance Sheet itself.

It was viewed that the entity’s

presumption that each contract
constitutes separate product line
indicates inadequate efforts

426
 Observations on the Companies Act

being made to determine

operating cycle. Accordingly, it
was viewed that the policy to
determine operating cycle is not
correct.

It may be mentioned that the

same view is also supported by
Expert Advisory Opinion on
Query no. 27 of Compendium of
opinions Volume No. XXXIII.

65. It was observed from the note It was noted from the appended
relating to Long Term notes that trade deposits have
Borrowings given in the Annual been classified as ‘long term
Report of a company that these borrowings’. It was observed
included “Trade Deposits.” that trade deposits are not in the
nature of borrowings; hence,
showing them under the head
‘long term borrowings’ rather
than as a part of “Other Non-
current / Current liabilities” is not
in line with the requirements of
Revised Schedule VI to the
Companies Act, 1956.

66. It was observed from the note It may be noted that ‘director’
relating to Other Expenses given has been defined as key
in the Annual Report of a management personnel in AS 18
company that these included when it states as follows:
“Directors’ Remuneration.”
14. Key management personnel
are those persons who have the
authority and responsibility for
planning, directing and
controlling the activities of the
reporting enterprise. For
example, in the case of a
company, the managing

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Study on Compliance of Financial Reporting Requirements

director(s) whole time

director(s), manager and any
person in accordance with
whose directions or instructions
the board of directors of the
company is accustomed to act,
are usually considered key
management personnel.

Explanation

A non-executive director of a
company is not considered as a
key management person under
this Standard by virtue of merely
his being a director unless he
has the authority and
responsibility for planning,
directing and controlling the
activities of the reporting
enterprise. The requirements of
this Standard are not applied in
respect of a non-executive
director even enterprise, unless
he falls in any of the categories
in paragraph 3 of this Standard.

From the above, it was viewed

that a non- executive director
may not be an employee of an
organization but a whole time or
a part time director having
authority and responsibility for
planning, directing & controlling
activities of an enterprise is
considered as an employee of
the organization and
remuneration is paid to them.

In the given case, it was

428
 Observations on the Companies Act

observed that Directors’

Remuneration presented under
the head ‘Other Expenses’ has
been paid to managing director,
whole time director of the
enterprise. Accordingly, it was
viewed that Directors’
Remuneration is employees
cost, which should have been
included an ‘employee benefit
expenses’ rather than ‘other
expenses’ and the prescribed
disclosures relating to
“employee benefit expenses”
should have been made.

67. It was observed from the note It may be noted that Paragraph
relating to Other Expenses given 5 (vi)(d)&(e) of ‘General
in the Annual Report of a instructions for the preparation
company that these included of Statement of Profit and Loss’
“Rent, Rates & Taxes.”, given under Part II, Revised
Schedule VI to the Companies
Act, 1956, requires separate
disclosure of ‘rent’ and ‘rates
and taxes’ when it states as
follows:

“5. Additional Information

A Company shall disclose by

way of notes additional
information regarding aggregate
expenditure and income on the
following items:-

(vi) Expenditure incurred

on each of the following
items, separately for each

429
Study on Compliance of Financial Reporting Requirements

item:

(c ) Rent

(d) …

(e) …

(f) …

(g) …

(h) Rates and Taxes,

excluding taxes on
income.

...”

However, in the given case, it

was observed that rent, rates
and taxes were clubbed together
as a single line item instead of
being shown separately as
required by the Revised
Schedule VI.

68. It was observed from the note It may be noted that Note 6 (R)
relating to Short Term Loans of ‘General Instructions for
and Advances given in the Preparation of Balance Sheet’
Annual Report of a company given in Part I, Revised
that these included ’Advances Schedule VI to the Companies
Recoverable in cash or in kind Act, 1956inter alia requires
or for value to be received.’: disclosure of Short-term loans
and advances as follows:

“R. Short-term loans and

advances

Short-term loans and

advances shall be

430
 Observations on the Companies Act

classified as:

- Loans and advances to

related parties (giving
details thereof)

- Others (specify
nature).”

It was noted from the note that a

significant amount of advance
has been shown under a
separate line item ’advances
recoverable in cash or in kind or
for value to be received’. It was
viewed that this was a wider
nomenclature which does not
indicate the nature of advances
included therein. It was viewed
that the nature of loans and
advances included under the
stated line item need to be
specified separately.

69. In the Annual Report of a It may be noted that Note

company it was observed from 6(K)(iii) of ‘General Instructions
the Notes on ‘Investments’ that for preparation of Balance
the fact whether investments are Sheet’ given in Part I, Revised
quoted or unquoted had not Schedule VI to the Companies
been disclosed. Act, 1956interalia requires
following disclosures in respect
of non-current investments:

“6.

(K) Non- current Investments

(iii) The following shall

431
Study on Compliance of Financial Reporting Requirements

also be disclosed:

(a) Aggregate amount of

quoted investments
and market value
thereof;

(b) Aggregate amount of

unquoted
investments;”

It was noted that enterprise held

long term investment in
subsidiaries but whether these
are quoted or unquoted was not
disclosed.

70. It was noted from the Annual It was observed that the
Report of a company that the financial statements do not
Director’s Report read with Note include any Statement of Profit
on Accounting Policies and and Loss.
Auditor’s Remuneration stated
as follows: It may be noted that DCA
Circular letter no. 2/17/64-PR
Director’s Report dated 29-01-1964 issued by the
Department of Company Affairs
Your Company is in preoperative clearly states that “Every
stage and has prepared company should render to its
statement of expenditure shareholders an account of its
incurred on the project till 31st expenditure and income even
March, 20XX though they may have been
Accounting Policy on Fixed incurred or received during the
Assets period of construction. It is no
doubt true that a company does
Intangible Assets- Work in not really commence its
progress- EPC sub contract business operations till the
work done by EPC Contractors period of construction is over.
relating to the construction of There will of course be no
project (BOT) and other direct objection if such account is
expenditure / income (including called “Development Account”,

432
 Observations on the Companies Act

preliminary and pre-operative) “Expenditure During

relating to the Project are Construction Account” or by any
included in intangible assets- other suitable name so long as
work-in-progress.” these accounts give details of
the revenue expenditure and
income during the period
covered, in the manner required
by Part II of Schedule VI to the
Act. Sub-section (3) of Section
210 makes it quite clear that it is
mandatory for every company to
prepare a “Profit and Loss
Account” from the date of its
incorporation.”

Further, it was noted from note

relating to auditor’s
remuneration and accounting
policy on intangible assets that
the company has incurred
certain expenses viz. audit fees,
preliminary expenses during the
period.

It was viewed that preliminary

expenses which are of revenue
nature may provide economic
benefits in the future but it does
not give rise to any resource
which can be controlled by the
enterprise, and hence they do
not meet the recognition criteria
given under paragraph 56 of AS
26. Accordingly, these
expenditure incurred should be
expensed as and when it is
incurred.

In view of above, it was felt that

although the company has

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Study on Compliance of Financial Reporting Requirements

incurred certain expenses which

need to be recognised in the
Statement of Profit and Loss,
however, no Statement of Profit
and Loss Account was prepared.

71. From the Annual Report of a It may be noted that pursuant to

company, Note 3 relating to the requirements of Note 6(A)(i)
Share Capital in the Annual of ‘General Instruction for
Report of a company which preparing Balance Sheet’ of Part
stated as under: I, Schedule III to the Companies
Act, 2013, a company inter alia
‘d) Aggregate number of requires to disclose:
bonus shares issued,
shares issued for “6. A company shall disclose
consideration other than the following in the Notes
cash’ to Accounts:

Equity Shares allotted as A. Share Capital

fully paid bonus shares by
capitalisation of general For each class of share capital
reserve (different classes of preference
shares to be treated separately);
Equity Shares allotted as
fully paid up pursuant to …
scheme of amalgamation (i) For the period of five years
Equity shares allotted as immediately preceding the
fully paid up pursuant to date as at which the
scheme of arrangement Balance Sheet is prepared:

 Aggregate number and

class of shares allotted
as fully paid up
pursuant to contract(s)
without payment being
received in cash.

 Aggregate number and

class of shares allotted
as fully paid up by way

434
 Observations on the Companies Act

of bonus shares.

 Aggregate number and

class of shares bought
back.”

It was noted that the details of

aggregate number of bonus
shares, shares issued other than
cash have been disclose;,
however, it is not clear whether
the aggregate number of bonus
shares issued, shares issued for
consideration other than cash
pertains to period of five years
immediately preceding the
reporting date or not as
required by the Companies Act,
2013. In the absence of such
information, reader would not be
able to understand whether the
reported figures are related to
previous five financial years or
not.

72. From the Note of Fixed Assets It may be noted that Note 4 of
given in the Annual Report of a Schedule XIV of the Companies
company, it has been noted that Act, 1956 states that:
it has transferred all its fixed
assets during the year pursuant “Where during any financial
to a Business Transfer year, any addition has been
Agreement. made to any asset, or where any
asset has been sold, discarded,
demolished or destroyed, the
depreciation on such asset shall
be calculated on pro-rata basis
from the date of such addition
or, as the case may be, up to
the date on which such a asset
has been sold, discarded,

435
Study on Compliance of Financial Reporting Requirements

demolished or destroyed”.

From the above, it was viewed

that in case any fixed asset has
been sold, during the year then
the depreciation on such asset
upto the date of such
sale/transfer should be
calculated on pro rata basis.
However, in the given case, it
was noted that although all the
assets were transferred during
the year, depreciation charged
on such assets was reported as
Rs. Nil in the Note of Fixed
Assets.

Accordingly, it was viewed that

depreciation up to the date of
transfer has not been provided
for, which is not in line with the
aforesaid requirements of
Schedule XIV to the Companies
Act, 1956.

73. From Significant Accounting It may be noted that Note 4 of

Policy relating to Depreciation Schedule XIV to the Companies
given in the Annual Report of a Act, 1956, provides that;
company, the following has been
noted:-. “Where, during any financial
year, any addition has been
‘i. At pro-rata rates on the made to any asset, or where any
basis of assets put into use asset has been sold, discarded,
in the First /Second half of demolished or destroyed, the
the year on Straight Line depreciation on such assets
Method in accordance with shall be calculated on a pro rata
Schedule XIV of the basis from the date of such
Companies Act, 1956. addition or, as the case may be,
up to the date on which such
ii. In respect of new projects at asset has been sold,

436
 Observations on the Companies Act

pro-rata rates from the discarded, demolished or

month from which the assets destroyed.”
are put into use on Straight
Line Method in accordance From the above it was viewed
with Schedule XIV of the that in case any fixed asset has
Companies Act, 1956. been purchased during the year
(emphasis supplied)’ then the depreciation on such
asset is charged from date of
such addition on pro rata basis.
However, in the given case, it
was noted from the stated policy
that depreciation on fixed assets
purchased has been provided on
a pro-rata basis depending upon
whether it is purchased in the
first/second half of the year and
in respect of new projects based
on the month when it is used.

Accordingly, it was viewed that

depreciation has not been
provided as per the aforesaid
requirements of AS 6.

74. Significant accounting policy It may be noted that Note 4 to

relating to depreciation given in Schedule XIV to Companies
the Annual Report of a company Act, 1956, provides that:
states as follows:-
“4. Where during any financial
‘Depreciation on additions is year, any addition has been
calculated pro rata from the made to any asset, or where
following month of addition. any asset has been sold,
(emphasis supplied)’ discarded, demolished or
destroyed, the depreciation on
such asset shall be calculated
on pro-rata basis from the
date of such addition or, as
the case may be, up to the date
on which such a asset has been
sold, discarded, demolished or

437
Study on Compliance of Financial Reporting Requirements

destroyed. (emphasis supplied)”

It was noted that whereas

Schedule XIV prescribes
computation of depreciation
from the date of addition, in the
given case, depreciation has
been calculated from the
following month of addition.

Accordingly, it was viewed that

the computation of depreciation
on additional fixed assets is not
in line with the requirements of
Schedule XIV of the Companies
Act, 1956.

75. It has been noted from the It was noted that the Balance
Annual Report of a company Sheet, the Statement of Profit
that the Balance Sheet, the and Loss and the Notes to
Statement of Profit and Loss Accounts have neither been
and the Notes to Accounts were signed by the Directors of the
neither signed by the Directors Company nor the Auditors.
of the Company nor the
Auditors. It may be noted that Section 215
of the Companies Act, 19562
inter alia, provides that:

“215. Authentication of Balance

Sheet and profit and loss
account- (1) Save as provided
by sub-section (2), every
balance sheet and every profit
and loss account of a company
shall be signed on behalf of the
Board of Directors-

(i) …

2Observation is still relevant under Section 134 of Companies Act, 2013.

438
 Observations on the Companies Act

(ii) in the case of any other

company, by its manager
or secretary, if any, and by
not less than two directors
of the company one of
whom shall be a managing
director where there is
one.”

It was viewed that since the

Balance Sheet and the
Statement of Profit and Loss are
attached to the Auditor’s Report
which contains opinion on them,
the auditor should have also
signed and authenticated these
statements in a similar manner,
i.e. signing and stating his
membership number.

Accordingly, it was viewed that

the requirements of Section 215
(1) and 216 to the Companies
Act, 1956 have not been
complied with.

76. From the Balance Sheet and It may be noted that Section 215
Statement of Profit and Loss (1) of the Companies Act, 1956
given in the Annual Report, the 3states as follows:

following has been noted:

“215. Authentication of
Director Director balance sheet and profit
and loss account

(1) Save as provided by

sub- section (2), every
balance sheet and every
profit and loss account of a

3Observation is still relevant under Section 134 of Companies Act, 2013

439
Study on Compliance of Financial Reporting Requirements

company shall be signed

on behalf of the Board of
directors…”

From the given abstract of the

Balance Sheet and Statement of
Profit and Loss, it was viewed
that in the absence of statement
“For & on behalf of the Board of
Directors” it prima facie appears
that the directors have signed
the documents in their individual
capacity which does not meet
the requirements of section 215
(1) to the Companies Act, 1956
to get these documents signed
on behalf of the Board of
Directors.

77. It has been noted from the It may be noted that Section
Schedule relating to Reserves 78(2) of the Companies Act,
and Surplus given in the Annual 1956 4provides that :
Report of a company that it had
written off expenses on issue of “The securities premium account
share, including exchange may, notwithstanding anything in
difference, from the Securities sub- section (1), be applied by
Premium account. the company-

(a) in paying up unissued

securities of the company to
be issued to members of the
company as fully paid bonus
securities;

(b) in writing off the preliminary

expenses of the company;

4 Observation is still relevant under section 52 of Companies Act, 2013

440
 Observations on the Companies Act

(c) in writing off the expenses

of, or the commission paid
or discount allowed on, any
issue of securities or
debentures of the company;
or

(d) in providing for the premium

payable on the redemption
of any redeemable
preference securities or of
any debentures of the
company.”

It was noted that as per Section

78, securities premium account
may be utilized inter alia for
writing off expenses of issuing
debentures and the premium
payable on their redemption.
Accordingly, it was noted that
exchange difference arising on
the same is not eligible for being
written off. However, in the
given case, the securities
premium account has been
utilized to write off the exchange
difference which is in
contravention of the provisions
of Section 78 (2) of the
Companies Act, 1956.

78. From the Annual Report of a It may be noted that Section

company Significant Accounting 209(3)(b) of the Companies Act
Policy relating to ‘Accounting of 19565 Inter alia provides that:
Income/Expenditure’ reads as
follows: “Proper books of account shall
not be deemed to be kept with

5 Observation is still relevant under section 128 of Companies Act, 2013

441
Study on Compliance of Financial Reporting Requirements

‘All income and expenditure respect to the matters specified

items having a material bearing therein-
on the financial statements are
recognized on accrual basis (b) If such books are not kept on
except in the case of leave accrual basis and according to
encashment, dividend income, the double entry system of
debenture interest and interest accounting.”
receivable from/ payable to It was noted that certain items of
government on tax refunds/ late income & expenditure such as
payment of taxes, duties/ levies leave encashment, dividend
which are accounted for on income, debenture interest,
cash basis.(emphasis added)’ have been recognised on cash
basis. It was viewed that
recognizing income or expenses
on cash basis is not in line with
the requirement of Section 209
(3) (b) of the Companies Act,
1956 which requires
maintenance of books of
accounts on accrual basis.

Hence, the stated policy is not in

line with the requirements of
Companies Act, 1956.

79. It has been noted from the note It may be noted that as per
relating to Managerial explanation to subsection 4 of
Remuneration given in the Section 198 of the Companies
Annual Report of a company Act, 1956 6"remuneration"

that it excludes benefit under shall inter alia includes;

Employee Stock Option Scheme
(a) …
of the Company.
(b) any expenditure incurred by
the company in providing
any other benefit or amenity
free of charge or at

6Observation is still relevant under section 2 (78) and section 197 of the Companies Act,
2013

442
 Observations on the Companies Act

a concessional rate to any of

the persons aforesaid.
…”
It was noted that the explanation
to Section 198 provides to
include in managerial
remuneration any expenditure
incurred by the company in
providing any benefits or
amenities to the employee either
free of charge or at concessional
rate.
It was viewed that Employee
Stock Option Scheme are issued
to employees at concessional
rate which involves expenditure
on the part of the company;
therefore, the balance should be
included in ‘managerial
remuneration.’ However, the
given note indicates to have
excluded the same.
Accordingly, it was viewed that
reported disclosure of
managerial remuneration is not
as per the provisions of Section
198 of the Companies Act, 1956.

80. It has been noted from the note It may be noted that clause 1 of
relating to Managerial Section 309 of the Companies
Remuneration given in the Act,1956,7 provides that:
Annual Report of a company
that it includes the gratuity to the “The remuneration payable to
extent of contribution and leave the directors of a company,
including any managing or

7Observation is still relevant under section 2 (78) and section 197 of the Companies Act,
2013

443
Study on Compliance of Financial Reporting Requirements

encashment on payment basis. whole-time director, shall be

determined, in accordance with
and subject to the provisions of
section 198 and this section,
either by the articles of the
company, or by a resolution or,
if the articles so required, by a
special resolution, passed by the
company in general meeting
{and the remuneration payable
to any such director determined
as aforesaid shall be inclusive of
the remuneration payable to
such director for services
rendered (by him in any other
capacity).(emphasis supplied)”

It was viewed that the said

clause requires to include
remuneration payable for the
services rendered by the
director of the company
including managing or whole
time director. Accordingly,
remuneration to the directors
should include gratuity and
leave encashment on payable
basis or accrual basis rather
than on payment basis.

Accordingly, it was viewed that

the requirement of Part II of
Schedule VI to the Companies
Act, 1956 has not been strictly
complied with.

81. From the Annual Report of a It may be noted that sub-section

company, it has been noted from (1) read with sub section (4) of
Schedules of Liabilities and Section 205A of the Companies

444
 Observations on the Companies Act

Cash and Bank Balances which Act, 1956 8provides that:

states as follows:
“205A. (1) Where, after the
LIABILITIES commencement of the
Companies (Amendment) Act,
March 31, 1974, a dividend has been
20xx declared by a company but has
not been paid [or claimed]
Unclaimed xxx within [thirty] days from the date
dividends* of the declaration, to any
shareholder entitled to the
*There are no amounts due and payment of the dividend, the
outstanding to be credited to the company shall, within seven
Investor Education and days from the date of expiry of
Protection Fund.” the said period of [thirty] days,
transfer the total amount of
dividend which remains
unpaid[or unclaimed] within the
said period of [thirty] days, to a
CASH AND BANK BALANCES special account to be opened by
the company in that behalf in
March
any scheduled bank, to be
31, 20xx
called “Unpaid Dividend Account
of… Company Limited /
Cash on hand xx
Company (Private) Limited”.
Balances with [Explanation: In this sub-
Scheduled Banks: section, the expression
On Current “dividend which remains unpaid”
Accounts xx means any dividend the warrant
in respect thereof has not been
On Deposit encashed or which has
Accounts xx otherwise not been paid or
claimed.]”
On Margin
Money As per above, the dividend

8Observation is still relevant under section 123 and section 124 of the Companies Act,
2013

445
Study on Compliance of Financial Reporting Requirements

Accounts xx declared should be deposited in

the separate bank account
Balances with non within 30 days of such
scheduled banks declaration and in case if it is
not deposited a penalty will be
On Current
xx imposed on the company.
Account
It was noted from the schedule
of liabilities that certain amount
of dividend was unpaid and
therefore, was shown as
unclaimed dividend. However, it
was further noted from the
schedule of Cash and Bank
balances that the said amount
has not been separately
disclosed. It indicates that either
such amount has not been
deposited in separate bank
account and there is a non-
compliance under section 205 A
of the Companies Act, 1956.

It was further viewed that in

case, if the amount has been
deposited but not separately
shown in the Schedule of Cash
and Bank Balances then again it
is a non-compliance of
paragraph 45 of AS 3 which
requires that the amount of cash
and cash equivalent balances
held by the company that are
not available for use by it should
be disclosed separately along
with commentary of
management.

82. A Note relating to ‘Basis of It was observed that while

446
 Observations on the Companies Act

preparation of significant explaining the basis of preparing

accounting policies’ given in the the financial statements a
notes to financial statements in reference to the accounting
the Annual Report of a company standards has been made.
states as under:
It may be noted that the
‘Basis of Accounting Standards have
preparation of
significant been notified vide Notification
accounting
policies no. G.S.R. 739 (E) dated 7th
December, 2006 by Central
The financial statements have Government in exercise of
been prepared under the power conferred by Section
historical cost convention on 642(1)(a) of Companies Act.,
accrual basis in accordance with 1956.9
Generally Accepted Accounting
Principles (GAAP). Accounting Accordingly, it was viewed that
Standards and the relevant the accounting standards should
provisions of the Companies be referred as notified under
Act, 1956. (emphasis Companies (Accounting
supplied)’ Standard) Rules 2006 rather
than as issued by ICAI.
…

9Observations is still relevant under section 133 and section 469 of Companies Act, 2013

447
 28
Observations on Companies (Auditor’s Report)
Order (CARO)1
S. Matters contained in the Observations
No. Annual Report

1. In pursuance to the requirement It may be noted that clause

of paragraph 4 (i)(a) of CARO, 4(i)(a) of CARO, 2003, requires
2003, the auditors have reported the auditors to comment on:
in one of the following ways:
“Whether the company is
 The Company has maintaining proper records
maintained reasonable showing full particulars,
records showing full including quantitative details and
particulars, including situation of fixed assets.”
quantitative details and
situation of fixed assets. It was observed that in the first
case, the auditor has reported
 The Company has generally that the company has
maintained proper records maintained reasonable records.
showing full particulars It was viewed that such reporting
including quantitative details does not clearly indicate whether
and situation of fixed assets proper records are being
(emphasis supplied). maintained or not.

In the second case, the usage of

the word ‘generally’ by the
auditor gives an impression that
there might exist certain
instances where proper records
of fixed assets have not been
maintained. It was viewed that in

1Subsequent to the observations of the Board, CARO,2003 has been withdrawn.

However, content is still relevant in terms of Companies (Auditor’s Report) Order, 2016.

448
 Companies (Auditor’s Report) Order (CARO)

such conditions, the auditor is

under the obligation to report the
deficiencies.

Accordingly, it was viewed that

the stated reports are
ambiguous and cannot be
considered to be strictly in line
with the requirements of clause
4(i)(a) of CARO, 2003.

2. In certain other cases pursuant It may be noted that Paragraph

to the requirements of 4(i)(b) of CARO, 2003 requires
paragraphs 4(i)(b) and 4(i)(c) of the auditor to comment on:
CARO, 2003, the auditors have
reported as follows: “Whether these fixed assets
have been physically verified by
 As explained to us, fixed the management at reasonable
assets are physically verified intervals; whether any material
by the management at discrepancies were noticed on
reasonable intervals in a such verification and if so,
phased manner in whether the same have been
accordance with a properly dealt with in the books
programme of physical of account.”
verification.
Further, Paragraph 45(f) of the
 We are informed that no Statement on CARO, 2003,
material discrepancies were issued by the Institute, states
noticed on such verification. that;

 As informed, no material “45(f) ...The Auditor has,

discrepancies were noticed therefore, to use his judgment to
on such verification. determine whether a
discrepancy is material or not.”
 The management, at the
end of the year, has It was observed that the auditor
physically verified the fixed has used the words ‘we are/
assets and we have been have been informed’ or ‘as
informed that no material informed …’or ‘as explained to
discrepancies were noticed us’ or ‘as certified to us’, which
indicates that he has not used

449
Study on Compliance of Financial Reporting Requirements

on such verification... his judgement to determine

whether a discrepancy is
 As explained to us, the fixed material or not. Keeping in view,
assets have been physically the requirement of paragraph 45
verified by the management (f), the duty is cast upon the
at reasonable intervals, auditor to express his opinion as
which, in our opinion, is to whether the discrepancy
reasonable, looking to the noticed is material or not.
size of the company and the However, in the reported cases
nature of its business. the auditors do not appear to
 According to information and have exercised their judgment to
explanation given to us and report on this paragraph.
as certified to us, the
management during the year
physically verified the
assets...

 As informed to us, the fixed

assets have been physically
verified by the management
during the year as per
phased programme of
physical verification of fixed
assets. As informed, no
material discrepancies
between the book records
and the physical inventory
have been noticed.

3. In pursuance to the requirement It was observed in both the

of paragraph 4 (i)(b) of CARO, cases that the auditors have
reported on the reasonableness
2003, the auditor has reported in
either of the following ways: of the frequency of physical
verification of fixed assets but
 As informed to us, the are silent about the result of
management in accordance such verification i.e. whether any
with a phased program of material discrepancies have
verification adopted by the been noticed on such
company has physically verification, and if so, whether
verified a major portion of

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 Companies (Auditor’s Report) Order (CARO)

these assets. In our opinion the same have been properly

the frequency of verification dealt with in the books of
is reasonable. account.

 We are informed that the Hence, it was viewed that the

company physically verifies auditor has not strictly complied
its assets over a three year with the requirements of clause
period, … In our opinion, 4(i)(b) of CARO, 2003.
this periodicity of physical
verification is reasonable
having regard to the size of
the company and the nature
of its assets. In accordance
with this policy, the company
has physically verified
certain fixed assets during
the year.

4. In pursuance to the requirement It may be noted that paragraph

of paragraph 4 (ii)(a) of CARO, 23 of “Guidance Note on Audit of
2003, the auditor has reported Inventories” issued by the
as follows: Institute of Chartered
Accountants of India, provides
‘The inventory (excluding stocks as under;
with third parties) has been
physically verified during the “23. Where significant stocks of
year by the management. In our the entity are held by third
opinion, the frequency of parties, the auditor should
verification is reasonable.’ examine that the third parties
are not such with whom it is not
proper that the stocks of the
entity are held. The auditor
should also directly obtain from
the third parties written
confirmation of the stocks held.
Arrangements should be made
with the entity for sending
requests for confirmation to such
third parties. Similarly, the
auditor should also obtain

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confirmation from such third

parties for whom the entity is
holding significant amount of
stocks.”

It was observed that the stocks

lying with third parties have not
been physically verified by the
management and it was not
clear from the report whether
any confirmations have been
obtained from third parties for
the stocks held by them.

Hence, it was viewed that the

auditor’s reporting in pursuance
to clause 4(ii)(a) of CARO, 2003
cannot be considered to be
complete.

5. In pursuance to the It may be noted that paragraphs

requirements of paragraph 4 (ii) 4 (ii) (a) and (c) of CARO, 2003
of CARO, 2003, the auditor has require the auditor to comment
reported as follows: on:

‘As explained to us the stocks of “(a) whether physical verification

work in progress has been of inventory has been conducted
physical verified by the at reasonable intervals by the
management. According to the management.”
information & explanations given
us, no discrepancies were “(c) Whether the company is
noticed on physical verification maintaining proper records of
of work in progress.’ inventory and whether any
material discrepancies were
noticed on physical verification
and if so, whether the same
have been properly dealt with in
the books of account.”

It was observed that though the

auditor has commented that

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 Companies (Auditor’s Report) Order (CARO)

inventories have been physically

verified by the management, he
has not commented as to
whether such verification has
been conducted at reasonable
intervals.

It was further observed that with

regard to paragraph (c), the
auditor has commented that no
discrepancies have been noticed
on physical verification;
however, he has not commented
as to whether the company was
maintaining proper records of
inventory.

Accordingly, it was viewed that

the reporting requirements of
paragraphs 4(ii)(a) and 4(ii)(c) of
CARO, 2003 have not been
strictly complied with.

6. In pursuance to the It may be noted that paragraph

requirements of paragraphs 4 47(c) of the Statement on
(ii)(a) and 4(ii)(c) of CARO, CARO, 2003, issued by the
2003, the auditors have reported Institute states that;
in either of the following ways:
“Physical verification of
 As explained to us, inventories is the responsibility
inventories were physically of the management of the
verified by the management company which should verify all
at reasonable intervals material items at least once in a
during the year. In our year and more often in
opinion and according to the appropriate cases. It is,
information and explanations however, necessary that the
given to us, the Company auditor satisfies himself that the
has maintained proper physical verification of
records of its inventories. As inventories has been conducted
explained to us, no material at reasonable intervals by the

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discrepancies were noticed management and that there is

on physical verification of adequate evidence on the basis
inventories as compared to of which the auditor can arrive at
the book records. such a conclusion. For example,
the auditor may examine the
 As explained to us, the
documents relating to physical
inventories of the Company
verification conducted by the
at all its locations (except
management during the year as
stock lying with third parties
also at the end of the financial
and in transit) have been
year covered by the auditor’s
physically verified by the
report.”
management at reasonable
intervals. It was viewed from above
paragraph that the duty is cast
upon the auditor to satisfy
himself that the physical
verification of inventory has
been done by the management
and/ or no material
discrepancies have been noticed
on such verification. However, it
was noted from the reported
cases that the auditors have
reported based on the
explanation provided by the
management. It was viewed that
use of phrase ‘as explained to
us’ indicates that the auditors
have simply relied on the
explanation of the management
rather than using his own
judgment to report under these
paragraphs.
Accordingly, it was viewed that
the auditor’s report in these
cases is not in line with the
requirements of paragraphs
4(ii)(a) and 4(ii)(c) of CARO,
2003.

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 Companies (Auditor’s Report) Order (CARO)

7. In pursuance to the It was observed from the

requirements of paragraph 4 (ii) financial statements of these
of CARO, 2003, the auditors companies that in the first case,
have reported in one of the the company has held
following ways: inventories at the beginning of
the year and during the year
 The Company does not have while in the second case, the
any inventory. company has held inventories at
 The nature of the company the yearend as well.
does not require it to hold In view of the above
inventories and as such observations, it was felt that the
clause 4 (ii) of CARO is not aforesaid clauses are applicable
applicable. in all the reported cases.
However, the auditors have
either reported that the
Company does not have any
inventory or that these clauses
are not applicable.

Accordingly, it was viewed that

the reporting requirements of
clause 4 (ii) of CARO, 2003
have not been complied with.

8. In pursuance to the requirement It may be noted that paragraph 4

of paragraph 4 (ii)(c) of CARO, (ii) (c) of CARO, 2003 requires
2003, the auditor has reported the auditor to report on:
as follows:
“Whether the company is
‘The Company has implemented maintaining proper records of
inventory system w.e.f. 20xx and inventory and whether any
is in process of strengthening material discrepancies were
the same. Discrepancies noticed noticed on physical verification
on physical verification have and if so, whether the same
been properly dealt in the books have been properly dealt with in
of accounts.’ the books of account”;

It may be noted from the above

that there are two distinct

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Study on Compliance of Financial Reporting Requirements

requirements. The auditor is

required to report firstly on the
maintenance of inventory
records and secondly whether
material discrepancies, if any,
have been properly dealt with in
the books of account.

It was observed from stated

report that an inventory system
has been implemented;
however, the auditor has not
stated whether proper records of
inventory are maintained under
the implemented system.

Further, with regard to

discrepancies noticed on
physical verification, it was
observed that the auditor has
not reported as to whether such
discrepancies are material or
not.

Accordingly, it was viewed that

the reporting requirements of
paragraph 4(ii)(c) of CARO,
2003 have not been strictly
complied with.

9. In pursuance to the requirement It may be noted that as per

of paragraph 4 (iii) of CARO, paragraph 4(iii) of CARO, 2003,
2003, the auditor has reported the auditor is required to
as under: comment on:

‘According to the information “(iii) (a) Has the company

and explanation provided to us granted any loans, secured or
and as per the records examined unsecured to companies, firms
by us, as at 31st March, 20xx, or other parties covered in the
Company has granted interest register maintained under
free unsecured loans amounting section 301 of the Act. If so, give

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 Companies (Auditor’s Report) Order (CARO)

to Rs. xxx to two of its wholly the number of parties and

owned subsidiaries covered in amount involved in the
the register maintained under transactions, and
section 301 of the Companies
Act, 1956. The maximum (b) Whether the rate of interest
balance outstanding during the and other terms and conditions
year amounting to Rs. xxx. In of loans given by the company,
our opinion, other terms and secured or unsecured, are prima
conditions of such loan are facie prejudicial to the interest of
prima facie not prejudicial to the the company; and
interest of the company.’ (c) Whether receipt of the
principal amount and interest are
also regular; and

(d) If overdue amount is more

than rupees one lakh, whether
reasonable steps have been
taken by the company for
recovery/payment of the
principal and interest;”

It was noted that although the

auditor has reported in
pursuance to paragraph 4(iii) (a)
and (b) of CARO, 2003 he had
omitted to comment on
paragraphs (iii) (c) and (d) of the
order.

Accordingly, it was viewed that

the reporting requirements of
paragraph 4(iii) of CARO, 2003
have not been fully complied
with.

10. In pursuance to the requirement Paragraph 50 (b) of Statement

of paragraph 4 (iii)(a) of CARO, on the Companies (Auditor’s
2003, the auditor has reported Report) Order, 2003 issued by
as follows: the Institute states that :

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Study on Compliance of Financial Reporting Requirements

’To the best of our knowledge “50. (b)…The clause covers not
and as per our verification of the only the loan granted during the
books and records, the company year but covers all loans
has neither provided any including opening balances…”
guarantee nor taken any loan
to/from companies, firms and From the above, it was observed
other parties covered under that repayment of loan by the
section 301 of the Companies managing director is a
Act 1956. transaction covered under
Section 299 of the Companies
However, it has been noted from Act, 1956. Accordingly, the
the related party disclosures that same should be reported in the
the loan given to the managing register maintained under
director during the previous year Section 301 of the Act. However,
has been repaid during the the auditor has reported that the
year.’ company has neither provided
any guarantee nor taken any
loan to/from companies, firms
and other parties covered under
section 301 of the Companies
Act, 1956.

Accordingly, it was viewed that

the reporting requirement of
paragraph (iii) of CARO, 2003
has not been strictly complied
with.

11. In pursuance to the Paragraph 50(f) of Statement on

requirements of paragraph 4 the Companies (Auditor’s
(iii)(a) of CARO, 2003 the Report) Order, 2003 issued by
auditors have reported in one of the Institute, inter alia provides
the following ways: that:

 During the year the “…Since the Order does not

company had given clarify what constitutes “amount
unsecured loan to thirteen involved” it would be proper if
seven parties covered in the the auditor discloses the
register maintained under maximum amount involved
Section 301 of the during the year in the

458
 Companies (Auditor’s Report) Order (CARO)

Companies Act, 1956. The transactions covered by this

maximum amount involved clause. While commenting upon
during the year was Rs. xxx. this clause, the auditor may also
consider whether the year-end
 The Company has taken balance should also be
unsecured loans from one disclosed in his audit report.”
party covered in the register
maintained under section It was observed in first two
301 of the Act. The total cases that although the
amount involved is Rs. xxx. maximum amount/amount
Further the Company has involved has been stated, the
also granted unsecured year-end balance has not been
loans to 4 companies reported.
covered in the register
maintained under section It was viewed that the maximum
301 of the Act. The total balance as well as the year-end
amount involved is Rs. xxx. balance should be reported
under this paragraph as
 The Company has given recommended by the Institute.
loans/advances to its wholly
owned subsidiaries during It was further observed in the
the year. In respect of the first case that the number of
said loans/advances, the parties has been stated to be
maximum amount thirteen seven. This appears to
outstanding at any time be a typographical error, which
during the year is Rs xxx should be avoided.
and the year ending balance In the third case, though the
is Rs. xxx. auditor has reported maximum
balance as well as year end
balance, he has not reported the
number of parties to whom loans
have been given. Accordingly, it
was viewed that the reporting
requirement of paragraph
4(iii)(a) has not been fully
complied with.

12. In pursuance to the requirement The following discrepancies

of paragraph 4 (iii) of CARO, have been noted with regard to
2003, the auditor has reported paragraph 4(iii) (a) (b) and (d) of

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Study on Compliance of Financial Reporting Requirements

as follows: CARO, 2003:

‘According to the information (i) The auditor has not reported

and explanations given to us, the number of parties to
during the period under review, whom the loans have been
the company has granted loan to granted which is against the
Subsidiaries listed in the requirement of paragraphs 4
Register maintained under (iii) (a) of CARO, 2003.
Section 301 of the Companies
Act, 1956. The outstanding (ii) It was noted that the auditor
balance as on 31st March 20xx is is silent on paragraph 4 (iii)
Rs xxx and the maximum (d) of CARO, 2003, which
amount involved during the requires him to report on
period is Rs.xxx. There are no overdue amount, if any and
stipulated terms and condition whether reasonable steps
on either the interest rate or the have been taken by the
repayment schedule. However, company for
the rate of interest and the recovery/payment of the
interest free nature where principal and interest. In
applicable and other terms and case there is no overdue
conditions of such loans are not, amount, the auditor should
prima facie, prejudicial to the have stated that fact.
interest of the company. As (iii) It was further noted that
there is no written repayment while reporting for
schedule, we are unable to paragraph 4 (iii) (b), the
comment as to whether the auditor has reported that
payment of principal amount is since there are no written
regular.’ terms and conditions for
repayment and interest on
loans, terms and conditions
of loan are prima facie not
prejudicial to the interest of
the company. It was viewed
that merely because there
are no written terms and
conditions for repayment
and interest, it may not be
appropriate to conclude that
loans granted are prima

460
 Companies (Auditor’s Report) Order (CARO)

facie not prejudicial to the

interest of the entity.

Accordingly, it was viewed that

the auditor has not complied
with the reporting requirement of
paragraph 4(iii) of CARO, 2003.

13. In pursuance to the requirement It may be noted that pursuant to

of paragraph 4 (vi) of CARO, paragraph 4(vi) of CARO, 2003,
2003 the auditor has reported as the auditor is required to report
follows: on:

‘The Company has not accepted “In case the company has
deposits from the public, under accepted deposits from the
the directives issued by the public, whether the directives
Reserve Bank of India and the issued by the Reserve Bank of
provisions of the section 58A India and the provisions of
and 58AA of the Act and the section 58A, 58AA or any other
rules framed there under. relevant provisions of the Act
However, temporary loans have and the rules framed there under
been taken from employee where applicable have been
welfare trust without adequate complied with. If not, the nature
records.’ of contraventions should be
stated; if an order has been
passed by Company Law Board
or National Company Law
Tribunal or Reserve Bank of
India or any court or any other
Tribunal, whether the same has
been complied with or not.”

It was noted that while reporting

on aforesaid requirement of
CARO, 2003, the auditor has
reported about inadequate
records for temporary loans
taken from employee welfare
trust. The context in which such
fact has been included in the

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Study on Compliance of Financial Reporting Requirements

aforesaid clause is not clear. It

was viewed that in case these
temporary loans fall within the
purview of sections 58A or 58AA
of the Act, it should have been
reported clearly. However, if
these loans fall outside the
purview of the said sections, the
auditor should not have reported
such loans under this clause.

Accordingly, the auditor’s report

on the said clause is considered
to be ambiguous.

14. In pursuance to the requirement It may be noted that pursuant to

of paragraph 4 (viii) of CARO, the requirement of clause 4(viii)
2003, the auditor has reported in of CARO, 2003, the auditor
either of the following ways: requires to comment on:

 The Central Government “Where maintenance of cost

has prescribed records has been prescribed by
maintenance of cost the Central Government under
records under section clause (d) of sub-section (1) of
209(1)(d) of the section 209 of the Act, whether
Companies Act, 1956. As such accounts and records have
explained to us such been made and maintained.”
records are at the advance
stage of preparation. In the first case, It was observed
that while reporting in pursuance
 We have broadly reviewed to clause 4 (viii), the auditor has
the cost records given the status ‘as explained to
maintained by the him’ which indicates that he has
Company relating to not examined the facts being
Construction/BOT/manufa reported and had simply relied
cturing activities. We have on the explanation of the
not made an examination management regarding the
of the cost records maintenance of cost records.
required to be maintained Accordingly, it was viewed that
under Companies (Cost the audit procedures as adopted

462
 Companies (Auditor’s Report) Order (CARO)

Accounting Records) by him are not adequate.

Rules, 2011 in respect of
their accuracy and In the second case, the auditor
completeness as the has only commented about the
Company is in the process cost records but omitted to
of obtaining the comment about the cost
compliance report of the accounts whether it has been
cost accountant. made and maintained or not.

Accordingly, it was viewed that

the reporting obligations of
paragraph 4(viii) of CARO, 2003
has not been properly complied
with.

15. In the Annexures to the auditors’ It may be noted that paragraph

reports of some companies, it 4(ix)(b) of CARO, 2003 requires
has been noted from the reports the auditor to report on:
given pursuant to paragraph
4(ix)(b) of CARO, 2003 that “In case dues of Income Tax/
while commenting on the Sales Tax/ Service Tax/
statutory dues which have not Customs Duty/ Wealth Tax/
been paid on account of dispute Excise Duty/ Cess have not
the auditors in certain cases been deposited on account of
have not reported the period to any dispute, then the amount
which such dues relate. Further, involved and the forum where
in a few cases the forum where dispute is pending shall be
the dispute is pending has not mentioned.”
been reported. Further, paragraph 64(g) of
Statement on the Companies
(Auditor’s Report) Order, 2003,
issued by the Institute states
that the information required
under this clause may be
reported in the following format:

Statement of Disputed Dues

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Study on Compliance of Financial Reporting Requirements

Na Nat Am Peri For

me ure oun od um
of of t to
the the (Rs. whi whe
Stat Due ) ch re
ute s the dis
am put
oun e is
t pen
rela din
tes g

It was observed that although

the statute, forum where dispute
is pending and the amount of
dues which were not deposited
on account of any dispute has
been disclosed but the period to
which the amount relates has
not been disclosed as required
under paragraph 64(g) of
Statement on the Companies
(Auditor’s Report) Order, 2003,
issued by the Institute.

Accordingly, it was viewed that

the auditor has not complied
with the reporting requirements
of clause 4(ix)(b) of CARO,
2003.

16. In pursuance to the requirement It was noted that the auditor has
of paragraph 4 (ix) of CARO, reported on statutory dues in
2003 the auditor has reported as arrears for a period of more than
follows: six months; however, as per the
requirement of paragraph 4 (ix)
“According to the information (b) the auditor is required to
and explanations given to us, no report on all disputed statutory
disputed amounts payable in dues irrespective of the period of
respect of income tax, wealth outstanding.
tax, sales tax custom duty,

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 Companies (Auditor’s Report) Order (CARO)

excise duty and cess were in Hence, it was viewed that the
arrears, as at 31st March 20xx reporting requirement of
for a period of more than six paragraph 4(ix)(b) of CARO,
months from the date on which 2003 has not been complied
they are payable.” with.

In another case also the auditor

has reported disputed dues
(though wrongly stated as
undisputed dues), which are in
arrears for a period of more than
six months.

17. In pursuance to the Pursuant to the requirement of

requirements of paragraph paragraph 4(ix)(a) of CARO,
4(ix)(a) of CARO, 2003, some 2003, an auditor is required to
auditors have reported as report on:
follows:
“Is the company regular in
 Undisputed statutory dues depositing undisputed statutory
including Provident Fund, dues including provident fund,
Income tax and Service tax, investor education protection
Works Contract Tax & fund, employees’ State
Employers contribution to Insurance, Income tax, sales
ESIC (ESIC) have been tax, wealth tax, service tax,
generally regularly customs duty, excise duty, cess
deposited in many cases and other statutory dues with the
with the appropriate appropriate authorities and if
authorities except that there not, the extent of the arrears of
have been delays in outstanding statutory dues as at
payments of Works Contract the last day of the financial year
Tax Act in few cases. concerned for a period of more
than six months from the date
 The company is not regular they became payable, shall be
in depositing with indicated by the auditor.”
appropriate authorities
undisputed statutory dues It was observed that in the first
such as provident fund, ESI, case the auditor has not
income tax, sales tax, reported on the regularity of
customs duty, excise duty depositing Investor Education

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Study on Compliance of Financial Reporting Requirements

and other material statutory and Protection Fund, Wealth tax,

dues applicable to it. Customs duty, Sales Tax, Excise
duty and Cess. In the second
 According to the information case the auditor has not
and explanations given to commented on wealth tax and
us, the company has been service tax while in the third
generally depositing case he has not commented on
undisputed statutory dues excise duty and cess.
with few delays including
Employees Provident Fund, It was viewed that the auditor
Employees' State Insurance, should specifically comment on
Investor Protection fund, each of the stated statutory
Income Tax, Sales Tax, dues. In case some of these
Wealth Tax, Service Tax, statutes are not applicable, that
Customs Duty, TDS, fact should be mentioned in the
Professional Tax and any report.
other statutory dues with the
appropriate authorities Hence, it was viewed that the
during the year. There have reporting requirement of
been significant delays in paragraph 4(ix)(a) of CARO,
large number of cases. 2003 has not been complied
with.

18. In pursuance to the Pursuant to the requirement of

requirements of paragraph paragraph 4(ix)(b)of CARO,
4(ix)(b) of CARO, 2003 some 2003, an auditor is required to
auditors have reported in one of report on:
the following ways:
“(b) In case dues of Income Tax/
 According to information and Sales Tax/ Service Tax/
explanation given to us Customs Duty/ Wealth Tax/
there are no dues relating to Excise Duty/ Cess have not
sales tax, wealth tax, been deposited on account of
income tax, service tax etc. any dispute, then the amount
which have not been involved and the forum where
deposited on account of any dispute is pending shall be
dispute. mentioned.”

 According to the information It was observed that in the first

and explanations made case, the auditor has not
available to us and on reported whether there have

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 Companies (Auditor’s Report) Order (CARO)

the basis of examination of been any dues relating to

records of the Company, the customs duty, excise duty and
dues of Excise Duty, Sales cess while in the second case,
Tax and Income Tax as at he has not commented on dues
31st March 20xx which have relating to service tax, customs
not been deposited on duty and wealth tax. In the third
account of any dispute are case, the auditor has not
as follows … commented on income tax dues
though disputed income tax
 According to the information cases have been separately
and explanation given to us reported. In the fourth case, the
there are no dues of sales auditor has commented only on
tax, customs duty, wealth sales tax dues.
tax, excise duty and cess
which have not been It was viewed that the stated
deposited as on 31st March, clause requires the auditor to
20xx with the appropriate report on all statutory dues
authorities on account of stated therein. In case, some of
any dispute … these statutes are not applicable
that fact should be mentioned in
 According to information and the report.
explanations given to us and
the records of the company Hence, it was viewed that the
examined by us, the reporting requirement of
particulars of dues of sales paragraph 4(ix)(b) of CARO,
tax as at 31st March 20xx 2003 has not been complied
which have not been with.
deposited on account of a
dispute are …

19. In the Annexures to the auditors’ Pursuant to paragraph 4(ix)(a) of

reports of some companies, it CARO, 2003 an auditor is
has been noted from the reports required to comment on:
given pursuant to paragraph
4(ix)(a) of CARO, 2003 that “Is the company regular in
while commenting on the extent depositing undisputed statutory
of the arrears of outstanding dues including Provident Fund,
statutory dues as at the last day Investor Education and
of the financial year concerned Protection Fund, Employees’
for a period of more than six State Insurance, Income Tax,

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Study on Compliance of Financial Reporting Requirements

months from the date they Sales Tax, Wealth Tax, Custom
became payable the auditors Duty, Excise Duty, Cess and any
have not reported the period to other statutory dues with the
which such dues relate, due appropriate authorities and if
date and date of payment of not, the extent of the arrears of
such arrear dues. outstanding statutory dues as at
the last day of the financial year
concerned for a period of more
than six months from the date
they became payable, shall be
indicated by the auditor.”

Further, paragraph 63(r) of

Statement on the Companies
(Auditor’s Report) Order, 2003,
issued by the Institute, provides
that the information required
under the said clause may be
reported in the following format:

Statement of Arrears of
Statutory Dues Outstanding
for More than Six Months

Na Na A Pe Du Da
m tur m rio e te
e e ou d Da of
of of nt to te Pa
th th (R wh y
e e s.) ic m
St Du h en
at es th t
ut e
e a
m
ou
nt
rel
at
es

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 Companies (Auditor’s Report) Order (CARO)

It has been noted from the

auditor’s report that although the
name of the statue, nature of
dues and the amount
outstanding have been stated
the period to which the dues
relate, due date and date of
payment (if any) have not been
reported.

Hence, it was viewed that the

auditors have not strictly
complied with the reporting
requirements of paragraph
4(ix)(a) of CARO, 2003.

20. In pursuance to the requirement It was observed that the auditor

of paragraph 4 (ix) of CARO, has reported only about the
2003 the auditor has reported as undisputed statutory dues as
follows: required under paragraph 4(ix)
(a) of CARO, 2003 but has
 According to the records of omitted to report on disputed
the Company, undisputed statutory dues as is required
statutory dues including vide clause 4 (ix) (b) of CARO,
Provident Fund, Investor 2003. In case there are no
Education and Protection disputed statutory dues, the
fund, Employees State auditor should state that fact in
Insurance, Income tax, the report.
Sales Tax, Wealth Tax,
Service Tax, Custom Duty, Accordingly, it was viewed that
Excise Duty, Cess and other the auditor has not complied
statutory dues have been with the reporting requirement of
generally regularly paragraph 4(ix) of CARO, 2003.
deposited with appropriate
authorities.

 According to the information

and explanations given to
us, no undisputed amounts
payable in respect of the

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Study on Compliance of Financial Reporting Requirements

aforesaid dues were

outstanding as at March 31,
20XX for a period of more
than six months from the
date of becoming payable.

21. The Accounting Policy on Paragraph (ix)(a) of CARO, 2003

‘Employee Benefits’ as given in requires an auditor to report on:
the Annual Report of a company
states as follows: “Is the company regular in
depositing undisputed
a. The company does not statutory dues including
contribute to provident fund. provident fund, investor
education protection fund,
b… employees’ State Insurance,
c. Long Term Employee benefits Income tax, sales tax, wealth
and retirement benefits are tax, service tax, custom duty,
not accrued. The expense excise duty, cess and other
will be recognised in the statutory dues with the
year of payment. appropriate authorities and if
not, the extent of the arrears
It has been noted that the of outstanding statutory dues
auditor has not given any report as at the last day of the
in context of paragraph 4 (ix) (a) financial year concerned for a
of CARO, 2003, which is in period of more than six
context of regularity in months from the date they
depositing the undisputed became payable , shall be
statutory dues including indicated by the auditor.”
provident fund, investor
education protection fund, and It was noted that the auditor has
employees’ State Insurance not commented on the above
laws, even though the company clause. The fact that the
has not contributed to provident company does not contribute to
fund. provident fund itself is a violation
of the relevant statute, which
should have been reported by
the auditor.

Accordingly, it was viewed that

the reporting requirement of

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 Companies (Auditor’s Report) Order (CARO)

paragraph 4(ix)(a) of CARO,

2003 has not been complied
with.

22. In pursuance to the requirement It may be noted that paragraph

of paragraph 4 (ix)(a) of CARO, 63 (c) of the Statement on
2003 the auditor has reported as Companies (Auditors Report)
follows: Order, 2003 issued by the
Institute states as follows;
‘(ix) According to the information
& explanation given to us, during “63. (c) …Any sum, which is to
the year the company is not be regularly paid to an
having any statutory liabilities appropriate authority under a
whether undisputed or disputed statute (whether Central, State
as regards to the Provident or Local or foreign) applicable to
Fund, Investor Education & the company, should be
Protection Fund, Employees considered as a “statutory due”
State Insurance, Wealth Tax, for the purpose of this clause. In
Service Tax, Income Tax, Sales other words, obligation to pay a
Tax, Custom Duty, Excise Duty, statutory due is created or arises
Cess and other material out of a statue, rather than being
statutory dues, therefore, the based on an independent
provisions of clause 4(ix) of the contractual or legal
Companies (Auditor’s Report) relationship…”
Order, 2003 are not applicable
to the company.’ Though the auditor has reported
that clause 4(ix) (a) of CARO,
2003, is not applicable to the
company, it has been observed
from the financial statements
that the company has
contributed to provident and
other funds of employees. It has
also incurred expenditure on
rent, professional fees and audit
fees, which are liable for tax
deduction at source. Therefore,
it may not be correct to state
that the company is not liable to

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Study on Compliance of Financial Reporting Requirements

pay such statutory dues.

Hence, it was viewed that the

reporting requirement of clause
4(ix) (a) of CARO, 2003 has not
been complied with.

23. In pursuance to the requirement It may be noted that paragraph

of paragraph 4 (ix)(b) of CARO, 64(g) of Statement on the
2003, the auditor has reported Companies (Auditor’s Report)
service tax demands relating to Order, 2003, issued by the
various years, which have not Institute states that the
been deposited on account of information required under this
dispute. clause may be reported in the
following format:

Statement of Disputed Dues

Na Nat Am Peri For

me ure oun od um
of of t to
the the (Rs. whi whe
Stat Due ) ch re
ute s the disp
amo ute
unt is
rela pen
tes din
g

Itwas noted that the auditor has

reported that the service tax
demands relate to various years
instead of stating the specific
period to which such demands
relate as required by the
suggested format.

Accordingly it was viewed that

the reporting requirement of
paragraph 4 (ix) (b) of CARO,

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 Companies (Auditor’s Report) Order (CARO)

2003 has not been strictly

complied with.

24. In pursuance to the requirement In both the cases, it was

of paragraph 4 (ix) of CARO, observed that the information
2003 the auditor has reported provided in the financial
income tax demands of Rs xxx statements contradicts with that
not deposited on account of reported by the auditors under
dispute; however, no such CARO, which should be
income tax demands have been avoided.
disclosed as contingent liability
nor any provision has been
made therefore.

In another case, the auditor has

reported that the company has
generally been regular in
depositing undisputed dues,
including Provident Fund,
Investor Education and
Protection Fund, Employees’
State Insurance, etc. although
there are no employee costs
recognised in the Statement of
Profit and Loss.

25. In pursuance to the requirement It may be noted that pursuant to

of paragraph 4 (xi) of CARO, paragraph 4 (xi) of CARO,
2003, the auditors have reported 2003an auditor is required to
in either of the following ways: report on the following:

 Based on our audit “Whether the company has

procedure and on the defaulted in repayment of dues
information and explanation to a financial institution or bank
given by the management, or debenture holders? If yes, the
the company has not period and amount of default to
provided for payment of be reported.”
interest on the dues payable
to banks and financial It was observed in the first case
institutions. As informed to that although the auditor has

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Study on Compliance of Financial Reporting Requirements

us, the company is in stated that the company has

process of one time defaulted in repayment of dues
settlement with the said to banks and financial
banks and financial institutions he has not reported
institutions. the period and amount of default
as required by the above
 As per the information and paragraph.
explanations made available
to us, the Company has In the second case, it was noted
been generally regular in that the auditor has used the
repayment of dues to phrase ‘generally regular’ while
financial institutions or reporting on repayment of dues.
banks for the period ending It was viewed that usage of
31st March, 20XX. such phrase indicates that there
have been instances of defaults.
However, the auditor has
neither reported the period nor
the amount of default.

Accordingly, it was viewed that

the reporting requirements of
clause 4 (xi) of CARO, 2003
have not been complied with.

26. In pursuance to the requirement Pursuant to the requirement of

of paragraph 4 (xvi) of CARO, paragraph 4 (xvi) of the
2003 the auditors have reported Companies (Auditor’s Report)
in either of the following ways: Order 2003, an auditor is
required to report on:
 Based on our audit
procedures and on the “Whether the term loans were
information given by the applied for the purpose for which
management, we report that the loans were obtained.”
company has not raised any
term loans during the year. It was noted that in the first
case, the auditor has reported
 Other clauses of the order that the company has not raised
are not applicable to the any term loans during the year
company. while in the second case, he has

474
 Companies (Auditor’s Report) Order (CARO)

reported that the said clause is

not applicable to the company.
However, it was observed from
the note on borrowings that both
the companies have obtained
term loans from banks.

Accordingly, it was felt that the

auditors have not complied with
the reporting requirements of
paragraph 4(xvi) of CARO, 2003.

27. In pursuance to the requirement Paragraph 3 of the Statement on

of paragraph 4 (xv) of CARO, the Companies (Auditor's
2003 the auditor has reported as Report) Order, 2003, issued by
follows: the Institute, states that:

‘According to the information “3…the auditors should exercise

given to us, the company has their professional judgement and
given corporate guarantee to experience on various matters
Banks for the loans taken by on which they are required to
group companies. Further, we report under the Order.”
have been informed by the
Company that the same is not It was observed that while
prejudicial to the interest of the reporting in pursuance to the
Company.’ requirements of clause 4 (xv) of
CARO, 2003, the auditor has
reported based on what he has
been informed by the
management rather than
exercising his own judgment.

It was viewed that use of the

phrase ‘informed by the
Company’ does not relieve him
from his duty to adopt suitable
verification procedures for the
stated clause and to exercise his
judgment in order to report on

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Study on Compliance of Financial Reporting Requirements

the said requirement of CARO,

2003.

Accordingly, it was viewed that

the reporting requirement of
paragraph 4(xv) of CARO, 2003
has not been complied with.

28. In the Annexure to the auditors’ In the first case, it should be

report in the Annual Reports of a noted that CARO, 2003 has
couple of companies the been issued by the Central
auditors have reported as Government and not by the
follows: Company Law Board.

 As required by the In the second case, it should be

Companies (Auditors' noted that the 2004 order is only
Report) Order 2003, as an amendment order which
amended by Companies suggest some changes in the
Auditors' Report) Order Companies (Auditor’s Report)
2004, issued by the Order, 2003. Accordingly, the
Company Law Board in auditor should refer to
terms of Section 227 (4A) of Companies (Auditor’s Report)
the Companies Act, 1956. Order, 2003 instead of
Companies (Auditor’s Report)
 As required by the (Amendment) Order, 2004.
Companies (Auditors
Report) (Amendment) Order, Accordingly, it was viewed that
2004 issued by the Central such types of mistakes should
Govt. of India be avoided.

29. In pursuance to the requirement Paragraph 4(xxi) of CARO, 2003

of paragraph 4 (xxi) of CARO, requires the auditor to report on:
2003 the auditor has reported as
follows: “(xxi) Whether any fraud on or
by the Company has been
“The Company is not sick noticed or reported during the
company under the Provision of year. If yes, then the nature and
the Sick Industrial Companies the amount involved is to be
(Special Provisions) Act, 1985.” indicated.”

476
 Companies (Auditor’s Report) Order (CARO)

It was observed that the auditor

has reported pursuant to the
requirements of MAOCARO,
1988 and not as per the
requirements of CARO, 2003.

Accordingly, it was viewed that

the auditor has not complied
with the reporting requirements
of CARO, 2003.

30 From the Annexure to the Set out below are the

. auditors’ reports as given in the observations with regard to the
Annual Reports of some reported cases:
companies, it has been noted
that: (i) Clause 4 (ix) (b) requires the
auditor to report only those
 While reporting pursuant to dues that have not been
clause (ix) (b) of CARO, deposited on account of
2003, the auditor has dispute. However, in this
reported some disputed case the auditor has
dues which have already reported some disputed
been paid. dues, which have already
been paid.
 Pursuant to clause (iii)(a) of
CARO, 2003 the company (ii) The auditor has reported
has granted loan to one that the company has
party covered in the granted loans to one party
register maintained under instead of two parties.
section 301 of the Act ….
However, in the details, he (iii) Here again the auditor has
has reported two parties reported that the company
who have been given has granted loans to
loans. companies covered in the
Register maintained under
 The Company has granted section 301 although the
loan to company covered in company has granted loans
the Register maintained to a non - company also.
under section 301 of the
(iv) Paragraph reference has

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Study on Compliance of Financial Reporting Requirements

Companies Act, 1956. been wrongly given as 4

instead of 3.
 Annexure referred to in
Paragraph 4 of our Report In all the reported cases, it was
of even date. – is the title viewed that although these
used for the CARO report. appear to be typographical
errors or errors of oversight,
such errors should be avoided
while drafting the report under
CARO, 2003.

31. In pursuance to the requirement Paragraph 4(iii) (a) of CARO,

of paragraph 4 (iii) (a) of CARO, 2003 requires an auditor to
2003, the auditor has reported report on:
as follows:
“Has the company either granted
‘In our opinion and according to or taken any loans, secured or
the information and explanation unsecured to/from companies,
given to us, the Company has firms or other parties covered in
not entered loan transactions to the register maintained under
which provisions of Section 297 section 301 of the Act. If so, give
and 299 of Companies Act, 1956 the number of parties and
are applicable. Therefore, the amount involved in the
provisions of clause (iii) of transactions.”
paragraph 4 of the Order are not
applicable to the Company.’ It was observed that the auditor
has reported loan transaction to
which provisions of Section 297
and 299 of the Companies Act,
1956 are applicable. In other
words, the auditor has reported
loans covered by Sections 297
and 299 whereas CARO
requires the auditor to report
whether loans have been
granted or taken to/from parties
covered in the register
maintained under section 301 of
the Companies Act, 1956. It may

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Companies (Auditor’s Report) Order (CARO)

be further noted that Section 297

does not cover any loan
transaction.

Hence, it was viewed that

reporting requirements of clause
4(iii) of CARO, 2003 has not
been complied with.

479
 29
Observations on Standards on Auditing
S.N. Matters contained in the Observations
Annual Report

1. From the Auditors’ Report as It may be noted that footnote 26

given in the Annual Report of a given with reference to
company, it has been noted that Paragraph A 36 of SA 700
the auditor has not given the (Revised), Forming an Opinion
firm’s registration number in the and Reporting on Financial
audit report signed on 31 Statements, inter alia provides
August, 201X. that :

“The Council of the ICAI, at its

292nd meeting held in January
2010, decided to require the
members of the ICAI to include,
in addition to the other
requirements relating to
signature on the audit report, as
prescribed under the relevant
Standard on Auditing, the
registration number of the firm
as allotted by ICAI, in the audit
reports signed by them… The
Council further decided to make
this requirement effective for all
attestation reports/ certificates
issued on or after 1st October,
2010.”

From the above, it has been

noted that the firm’s registration
number should be mentioned in
the audit report signed on or

480
 Observations on Standards on Auditing

after 1st October, 2010.

However, in the reported case it
was observed that the firm
registration number has not
been mentioned in the audit
report though signed on 31
August 2011.

Accordingly, it was viewed that

the requirement of SA 700 has
not been complied with.

2. Abstract of the Auditor’s Report It may be noted that Standard

as given in the Annual Report of on Auditing (SA) 700 (Revised),
a company reads as follows: Forming an Opinion and
Reporting on Financial
“We have audited the
Statements is applicable from
accompanying financial
the period beginning on or after
statements of XXX Ltd...
April 1, 2011. Further, as per
Management is responsible for the illustrative format of
the preparation of these Auditor’s Reports on Financial
financial statements that give a Statements an auditor is
true and fair view of the required to present the audit
financial position and financial report duly divided under
performance of the Company… different headings viz
‘management responsibility for
Our responsibility is to express the financial statements’,
an opinion on these financial ‘Auditor’s Responsibility’,
statements based on our ‘Opinion’, ‘Report on other legal
audit… and regulatory requirements’.
An audit involves performing
It was noted in the given case
procedures to obtain audit
that the suggested headings of
evidence about the amounts
different paragraphs defining
and disclosures in the financial
separate elements of the audit
statements…
report have not been given
We believe that the audit though the audit report relates
evidence we have obtained is to financial year 2012-13.
sufficient and appropriate to
provide a basis for our audit Accordingly, it was viewed that
the requirement of SA 700 has

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Study on Compliance of Financial Reporting Requirements

opinion. not been complied with.

In our opinion and to the best of
our information and according to
the explanations given to us…”

3. Abstract of Auditor’s Report It may be noted that in the

given in the Annual Report of a Opinion Paragraph of Appendix
banking company reads as to SA 700,’Forming an opinion
follows: and Reporting on Financial
Statements’, the phrase
“6. In our opinion and to the ‘profit/loss’ has been used to
best of our information and indicate the situations when the
according to the explanation given format may be used.
given to us, the said accounts However, in practice the
together with the notes thereon enterprise either earns profit or
give the information required by incurs loss in any financial year.
the Banking Regulations Act, Therefore, the auditor should
1949 as well as Companies Act, express his opinion either on
1956, in the manner so required profit or loss, as the case may
for the banking companies and be. A reader of the financial
give a true and fair view in statements may get confused
conformity with the accounting on reading ‘profit/loss’.
principles generally accepted in
India: Accordingly it was viewed that
such type of reporting should be
… avoided.
(ii) In the case of the Profit and
Loss Account of the profit/loss
for the year ended on that date;
(emphasis supplied)”

4. Paragraph 4(d) of the Auditor’s It may be noted that Paragraph

Report as given in the Annual 36 of SA 700, Forming an
Report of a company reads as Opinion and Reporting on
under: Financial Statements, provides
as follows:
“4. As required by section
227(3) of the Act, we report “36. When expressing an
unmodified opinion on financial

482
 Observations on Standards on Auditing

that: statements prepared in

accordance with a compliance
(a) In our opinion, the Balance framework, the auditor’s opinion
Sheet, Statement of Profit shall be that the financial
and Loss and Cash Flow statements are prepared, in all
Statement comply with the material respects, in accordance
Accounting Standards with the applicable financial
referred to in subsection reporting framework.”
(3C) of section 211 of the
Companies Act, 1956.” From the above, it was noted
that an auditor can express
unmodified opinion on the
financial statements only if its
financial statements have been
prepared in accordance with
applicable financial reporting
framework. However, in this
case, it was noted that the
financial statements do not
comply with the requirements of
various accounting standards as
notified under the Companies
(Accounting Standards) Rules,
2006, viz, AS 3, AS 10, AS 11,
AS 15, AS 16, AS 18, AS 19,
AS 28 and AS 29.Despite so
many non-compliances,the
auditor has expressed an
unmodified opinion.

Accordingly, it was viewed that

the requirements of Section
227(3) of Companies Act, 19561
as well as SA 700have not been
complied with.

1.Subsequent to the observations of the Board, the Companies Act, 2013 came into force
which replaced the erstwhile Companies Act, 1956. However, content is still relevant in
terms of Companies Act, 2013.

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Study on Compliance of Financial Reporting Requirements

5. In the Annual Report of a bank It may be noted that Paragraph

the title of the Audit Report has 21 of SA 700, Forming an
been stated as “AUDITOR’S Opinion and Reporting on
REPORT”. Financial Statements, reads as
follows:
“21. The auditor’s report shall
have a title that clearly indicates
that it is the report of an
independent auditor.”
It was observed that the auditor
has given the report without
stating whether it is an
independent auditor’s report or
not.
Accordingly, it was viewed that
the requirement of paragraph 21
of SA 700 has not been
complied with.

6. From the Auditor’s Report given It was noted from the

in the Annual Report of a introductory paragraph that the
company, it has been noted that financial statements comprise of
although the auditor has the Balance Sheet, Statement of
expressed his opinion on the Profit and Loss, summary of
true and fair view of the Cash significant accounting policies
Flow Statement he has not and other explanatory
referred the Cash Flow information. In other words,
Statement in his opening or Cash Flow Statement has not
introductory paragraph which been referred to as part of the
reads as follows: financial statements.

“We have audited the Paragraph 23 of SA 700 states

accompanying financial that the opinion section (i.e. the
statements of XXX Ltd which first section) of the auditor’s
comprise the Balance Sheet as report shall identify the title of
at March 31, 20XX, and the each statement that comprises
Statement of Profit and Loss for the financial statements.
the year ended, and a summary It may be further noted that

484
 Observations on Standards on Auditing

of significant accounting policies Paragraph 3.4 of Revised

and other explanatory Preface to the Statements of
information.” Accounting Standards issued by
the Institute of Chartered
Accountants of India in 2004
states as follows:
The term ”General Purpose
Financial Statements” includes
balance sheet, statement of
profit and loss, a cash flow
statement (wherever applicable)
and statements and explanatory
notes which form part thereof,
issued for the use of various
stakeholders, Governments and
their agencies and the public…”
From the above, it was viewed
that in the introductory
paragraph the auditor should
have included Cash Flow
Statement as part of the
financial statements to comply
with the reporting requirements
of SA 700.

7. Paragraph (1) of the auditor’s It was noted from the auditor’s

report as given in the Annual report that the auditor has
Report of a company states as referred to Statement of Profit
follows: and Loss as “relative Profit and
Loss Account. It was viewed
“We have audited the attached that there is no such term either
Balance Sheet of XXX Limited in the Companies Act or in the
as at March 31, 20XX and the Standards on Auditing and that
relative Profit and Loss Account use of such term in the audit
and the Cash Flow Statement report should be avoided.
for the year ended on that date
all of which we have signed
under reference to this report.”

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Study on Compliance of Financial Reporting Requirements

8. In the Annual Report of a It may be noted that “Guidance

company, it has been noted that Note on Preparation of Financial
the Significant Accounting Statements on Letter-heads and
Policies and Notes to Accounts stationery of Auditors” issued by
have been given on the the Institute of Chartered
letterhead of the audit firm. Accountants of India, clarifies as
follows:

“The Research Committee’s

attention has been drawn to the
fact that financial statements of
some enterprises are prepared
on letter-heads and stationery of
their auditor carrying the latter’s
names and address. The
Committee wishes to point out
that the above practice is liable
to be misinterpreted and, as
such, should be avoided. The
members are, therefore,
requested to note and follow the
above recommendation.”

It was observed that the

accounting policies followed and
notes to accounts have been
given on the letter head of the
audit firm.

The practice of preparing the

financial Statements on the
stationery of the firm is against
the aforesaid recommendation
of the Institute.

9. From the Annual Report of a It was noted that the place of

company, it has been noted that signature of the auditor’s report
the auditor has signed the audit is different from the place of
report at one place while he has signature of the financial
signed the financial statements statements. It was possible that

486
 Observations on Standards on Auditing

on the same day at a different the financial statements are

place. signed by the directors at a
different location. It was viewed
that when these are signed by
the auditors along with the audit
report both should be signed at
the same location.

Hence, signing auditor’s report

at one place and financial
statement at another place is
not appropriate.

10. In the Annual Report of a It appears from the above that

company the note regarding the identification of related
related party disclosures has parties and the existence of
been stated as follows: their relationship as well as the
transactions that have taken
“Related Parties and place with them have been
transactions with them as reported on the basis of the
specified in Accounting information available with the
Standard 18 “Related Parties company and that the same
Disclosures” issued by ICAI has have been relied upon by the
been identified and given below auditor. It was viewed that
on the basis of information usage of the phrase ‘relied upon
available with the company and by the auditor’ may lead the
the same have been relied upon users of financial statements to
by the auditors.” believe that the auditor has
merely relied on the information
provided by the management
without applying appropriate
audit procedures to verify the
existence of such relationship
and the transactions with such
parties.

It may be noted that paragraph

7 of SA 500, Related Parties
requires the auditor to perform

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Study on Compliance of Financial Reporting Requirements

certain procedures for

identifying the names of all
known related parties while
reviewing the information
provided by the management
rather than only relying on the
information provided by the
management.

It was viewed that if the auditor

has performed all the necessary
audit procedures to conclude
that the related party
relationship disclosed is correct
then the auditor should not use
such phrases. Accordingly, it
was viewed that the requirement
of SA 500 has not been
complied with.

11. The ‘Opinion’ paragraph and The facts stated in the audit
‘Report on other Legal and report clearly indicate that the
Regulatory Requirements’ in the financial statements have not
Auditor’s Report as given in the been prepared in accordance
Annual Report of a company with applicable financial
read as follows: reporting framework. For
instance, non-provision of
Opinion interest is a non-compliance
“In our opinion and to the best with AS 16 and amounts
of our information and involved are material. Hence,
according to the explanations expressing unqualified opinion
given to us, the financial in this case is not in line with the
statements give the information requirement of paragraph 16 of
required by the Act in the SA 700, Forming an Opinion
manner so required and give a and Reporting on Financial
true and fair view in conformity Statements, which states as
with the accounting principles follows:
generally accepted in India: “16. The auditor shall express

488
 Observations on Standards on Auditing

(b) In the case of the Balance an unmodified opinion

Sheet, the state of affairs when the auditor
of the Company as at concludes that the
March 31, 20xx; financial statements are
prepared, in all material
(c) In the case of the Profit respects, in accordance
and Loss Account, the loss with the applicable
for the year ended on that financial reporting
date; and framework.”
(d) In the case of the Cash It was further noted that the
Flow Statement, the cash auditor has expressed
flows for the year ended on unqualified opinion and has
that date. raised issue in the paragraph
Report on Other Legal and ‘Report on other Legal and
Regulatory Requirements: Regulatory requirements’ with
regard to adopting going
“2. The banks, financial concern basis for preparing
institutions and other financial statements. It was
lenders have filed legal viewed that the company was
cases against the company primarily governed by the
for recovery of outstanding Companies Act 1956; hence
loans and interest thereon. reporting such important fact
No provision has been under ‘Report on other Legal
made in these accounts for and Regulatory requirements’ is
additional interest, penal neither in line with paragraph 19
interest, liquidated damages and 20 of SA 570 going concern
etc. amounting to Rs. xxx nor with SA 700, which is
as claimed by the above reproduced below:-.
lenders at various legal
forums. The same has been “19. If adequate disclosure is
shown as contingent liability made in the financial
in notes to accounts statements, the auditor shall
attached to the said express an unmodified opinion
accounts. Company and include an Emphasis of
however had been providing Matter paragraph in the
interest on the above loans auditor’s report to:
on a basis as considered (a) Highlight the existence of a
appropriate by the material uncertainty relating

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Study on Compliance of Financial Reporting Requirements

management but up to 31st to the event or condition

March, 20xx. However, the that may cast significant
company has stopped doubt on the entity’s ability
providing interest on all to continue as a going
loans from banks and concern; and to
financial institutions
whether secured or (b) Draw attention to the note
unsecured w.e.f. in the financial statements
01.04.20XX on the ground that discloses the matters
that these loans would set out in paragraph 18.
have been declared NPA 20. If adequate disclosure is not
by them. Interest made in the financial
amounting to Rs. xxx up statements, the auditor shall
to the current year ended express a qualified or adverse
31st March, 20XX has not opinion, as appropriate (See SA
been provided but the 705 9). The auditor shall state in
same has also been the auditor’s report that there is
included in contingent a material uncertainty that may
liability (emphasis cast significant doubt about the
supplied). entity’s ability to continue as a
3. These financial statements going concern. ”
have been prepared on a It was observed that the auditor
going concern basis. The has neither included the going
Company has incurred an concern issue as an ‘Emphasis
operating loss during the of Matter’ nor expressed any
year. The company is ‘qualified opinion’.
passing through a severe
liquidity crisis and is unable Accordingly, it was viewed that
to honour its commitment to the requirements of SA 700
lenders, preference have not been complied with.
shareholders, suppliers and
employees. The bankers,
financial institutions and
other lenders have taken
legal action for recovery of
their dues. Several petitions
for winding up of the
company have been filed by

490
 Observations on Standards on Auditing

the creditors and lenders.

The company is contesting
these petitions or is settling
such petitions out of courts.
The company is in the
process of restructuring its
business and also trying to
identify alternative source of
finance. In the absence of
adequate financial support
this basis would be invalid.
Provision would then have
to be made for any loss that
might arise when the
company’s assets are
realised.

We further report that, the

effect of our remarks in
paragraph 2 and 3 could not
be readily ascertained.”

12. From the Annual Report of a The following discrepancies

company, it has been noted that have been observed with
the auditor has expressed his respect to Auditor’s Report:
opinion on the financial
i) The opinion on the financial
statements under the heading
statements has been given
“Auditor’s Responsibility’. It has
under ‘Auditor’s
been further noted that under
Responsibility’ paragraph. It
the heading ‘Report on other
may be noted that an
Legal and Regulatory
auditor is required to
Requirements’ the auditor has
express opinion in a
reported as under:
separate section as per
… paragraph 34 of SA 700,
which states as follows:
“Accounting Standard 15 on
Employee Benefits, the “34. The auditor’s report
company has been providing for shall include a section with
gratuity liability on an ad-hoc the heading “Opinion”.
basis but not as stipulated by

491
Study on Compliance of Financial Reporting Requirements

the standard (Refer Note In case the auditor modifies

29.2.ii)” the audit opinion he should
use the heading “Qualified
Opinion”, “Adverse Opinion”
or “Disclaimer of Opinion”,
as appropriate, for the
opinion paragraph.
(Paragraph 22 of SA 705)
Accordingly it was viewed
that expressing opinion
under ‘Auditor’s
Responsibility’ paragraph is
not in line with the
requirements of SA 700
(Revised) and SA 705.
ii) The auditor has reported
that the gratuity liability
recognised is not as per AS
15. It was viewed that it is a
vague information for the
reader, since it is not clear
whether the auditor only
intends to report it as an
emphasis of matter or to
modify his report. It may be
noted that Paragraph 6(a)
of SA 705, Modifications to
the Opinion in the
Independent Auditor’s
Report, states as follows:
“6 The auditor shall modify
the opinion in the auditor’s
report when:
(a) The auditor concludes
that, based on the
audit evidence
obtained, the financial
statements as a whole

492
 Observations on Standards on Auditing

are not free from

material misstatement.”
It may also be noted that
while explaining nature of
material misstatements
paragraph A4 of
‘Application and Other
Explanatory Material’ to SA
705 states as follows:
“A4. In relation to the
appropriateness of the
accounting policies
management has selected,
material misstatements of
the financial statements
may arise when:
(a) The selected
accounting policies are
not consistent with the
applicable financial
reporting framework.”
In view of the non-
compliance with AS 15, the
auditor should have
modified his opinion.
Accordingly, it was viewed that
the auditor has not complied
with the requirements of SA 700
(Revised) and SA 705 while
expressing opinion on the
financial statements.

13. One of the paragraph of It was noted from the Auditor’s

Auditor’s Report and Notes to Report that without qualifying
the accounts as given in the opinion, the auditor has referred
Annual Report of a bank to certain matters. In other
respectively read as follows: words, the auditor has laid
emphasis on those matters. It

493
Study on Compliance of Financial Reporting Requirements

“Auditor’s Responsibility may be noted that Paragraph 7

of SA 706, Emphasis of Matter
6. Without qualifying our Paragraphs and Other Matter
opinion, we refer to:- Paragraphs in the Independent
c) Note no. XX regarding Auditor’s Report, states as
provision of Pension follows :
and Gratuity.” “9. When the auditor includes an
Notes to Accounts Emphasis of Matter paragraph
in the auditor’s report, the
XX. Unamortised Pension and auditor shall:
Gratuity Liabilities
(a) Use the heading “Emphasis
During the FY 20XX-XX, the of Matter”, or other
Bank has incurred a liability
appropriate heading;
amounting Rs. xxx on account
of reopening of pension option (b) Include in the paragraph a
Rs. xxx and enhancement of clear reference to the
Gratuity Ceiling Rs. xxx. The matter being emphasised
Bank has amortised the said and to where relevant
liability over a period of five disclosures that fully
years commencing from FY describe the matter can be
20XX-XX in terms of RBI found in the financial
circular no. DBOD.
statement; and
BP.BC.80/21.04.018/2010-11
dated 9th February 2011. (c) Indicate that the auditor’s
Accordingly, Rs. xxx opinion not modified in
(Representing one fifth of Rs. respect of the matter
xxx) has been charged to emphasised.”
Statement of Profit and Loss
during the current financial It was further noted that
year. The detailed break-up is Paragraphs 3 and 4 of the
as under …. Announcement on ‘Manner of
Reporting by the Auditors on
Prudential Regulatory
Treatment Prescribed by RBI in
Respect of Pension and Gratuity
Liability of Public Sector Banks’
issued by ICAI on March
23,2011 specifically relating to
matters emphasised by Auditor

494
 Observations on Standards on Auditing

states as follows:
“3. On a consideration of the
matter, the Council of the
Institute decided that since
the accounting treatment
for such expenditure is
prescribed under the
prudential regulatory
framework of the Regulator,
the auditors need not
qualify their audit report on
account of this. The matter
should, however, be
brought out by the auditors
in the audit report by way of
an“ Emphasis of Matter
Paragraph” in accordance
with the Standard on Audit
(SA) 706, “Emphasis of
Matter Paragraphs and
Other Matter Paragraphs in
the Independent Auditor’s
Report, provided the matter
of departure from the
requirements of AS 15
pursuant to the aforesaid
circular of RBI is
appropriately disclosed,
with quantification, by the
bank by way of the notes to
the accounts in the
financial
statements(emphasis
supplied).
“4. An illustrative Emphasis of
Matter Paragraph in the
audit report is as follows:
“Emphasis of Matter

495
Study on Compliance of Financial Reporting Requirements

Without qualifying our opinion,

we draw attention to Note X to
the financial statements, which
describes deferment of pension
and gratuity liability of the bank
to the extent of Rs. YYY
pursuant to the exemption
granted by the Reserve Bank of
India to the public sector banks
from the application of the
provisions of Accounting
Standard (AS) 15, Employee
Benefits vide its circular no.
DBOD.
BP.BC/80/21.04.018/2010-11 on
Re-opening of Pension Option
to Employees of Public Sector
Banks and Enhancement in
Gratuity Limits – Prudential
Regulatory Treatment.”
In view of the above, it was
observed that in the reported
case, the auditor has not
reported emphasis of matters as
required in SA 706. He has also
not followed the Announcement
issued by the Institute and has
neither quantified the pension
and gratuity liabilities nor has
mentioned anything about the
exemption granted by
RBI/departure from AS 15 in his
report.
Accordingly, it was viewed that
the requirements of SA 706
have not been complied with.

496
 30
Observations Relating to Banking & Insurance
Companies
S. Matter contained in Annual Observations
No. Report

1. Balance Sheet of a Bank reads It may be noted that as per Section

as follows: 56(s) of the Banking Regulation
Act, 1949, Balance Sheet and
Previo Property Current Profit and Loss Account of the co-
us and Year operative bank should be prepared
Year Assets in the forms set out in the Third
Schedule to Banking Regulation
--- 1- Cash --- Act, 1949.
and
Bank Further, it may be noted that
Balanc section 56(w)(zl) of Banking
es Regulation Act, lays down the
format of the Third Schedule
2- Balanc applicable on co-operative banks
es with which prescribe that Cash and
Other Balance with other banks should
Banks be shown in the following format:

“PROPERTY AND ASSETS

1. Cash

In hand and with Reserve Bank

[the National Bank], State Bank

of

India, State Co-operative Bank

and Central Co-operative Bank

497
Study on Compliance of Financial Reporting Requirements

……………………………………
….

2. Balances with other banks

(i) Current deposits

(ii) Savings bank deposits

(iii) Fixed deposits”

The following discrepancies were

noticed with respect to
presentation of ‘Cash’ and
‘Balances with other banks’:

1. It was noted that an aggregate

balance of cash and bank
balances has been disclosed
without sub-classifying it for
giving details of cash balances
with RBI, SBI, State Co-
operative Bank and Central Co-
operative Bank.

2. It was further noted that an

aggregate balance of ‘balances
with other banks’ has been
disclosed without classifying it
as given in prescribed format
viz. current deposits, Saving
bank deposits and Fixed
deposits.

Accordingly, it was viewed that

presentation of ‘cash and bank
balance’ and ‘balances with other
banks’ is not in line with the format
prescribed in ‘The Third Schedule’
given under Part V of the Banking
Regulation Act, 1949.

498
 Observations Relating to Banking & Insurance Companies

2. The Schedule on Investments It may be noted from Form A: Form

given in the Annual Report of a of balance-sheet of the Third
bank is as follows: Schedule given in Part V of the
Banking Regulation Act, 1949 that
INVESTMENTS Investments should be shown in
following format:
Previou Particul Current
s Year ars Year PROPERTY AND ASSETS

--- vi) In --- Rs. P. Rs. P.

Central
4. Investments
& State
Govt. (i) In Central and State
Securiti Government securities (at
es book value)…………..
vii) Face value Rs
Other
Investm Market value Rs.
ents
…

(iv) Other investments (to be

Specified)

The following discrepancies have

been noted with regard to format
followed for disclosure of
Investments:

1. It was noted from the schedule

of Investments that Investments in
Central and State Government
securities have been disclosed,
however, the face value and
market value of the same as per
the prescribed format have not
been given.

2. It was noted from the schedule

of Investments that as per the
prescribed format the nature of

499
Study on Compliance of Financial Reporting Requirements

other investments is to be
specified, however, such details
have not been disclosed.

3. Schedule on Deposits and It may be noted from Form A: Form

Other Accounts given in the of balance-sheet of the Third
Annual Report a Co-operative Schedule given in Part V of the
Bank reads as follows: Banking Regulation Act, 1949 that
Deposits and other accounts
DEPOSITS AND OTHER should be shown in following
ACCOUNTS format:
Previo Particular Curren CAPITAL AND LIABILITIES
us s t Year
Year Rs. P. Rs. P.

4. Deposits and other accounts:

1) TERM
DEPOSITS (i) Fixed deposits*
--- ---
a) From (a) Individuals”
Individuals
(b) Central Co-operative
b) From
Institutions Banks……………

2) (c) Other societies…..

SAVINGS (ii) Savings bank deposits-
BANK
DEPOSITS (a) Individuals**

a) From (b) Central Co-operative

Individuals
Banks……………
b) From
Institutions (c) Other societies…..

(iii) Current deposits……

3) TERM
DEPOSITS (a) Individuals**
a) From (b) Central Co-operative
Individuals
Banks……………

500
 Observations Relating to Banking & Insurance Companies

b) From (c) Other societies…..

Institutions
(iv) Money at call and short
Notice

It was noted that deposits and

other account in Schedule C have
been classified as those taken
from Individuals and Institutions. It
was viewed that as per prescribed
format different nature of deposits
need to be classified into received
from Individuals, Central Co-
operative Banks and Other
societies. However, from the given
abstract, it is not clear whether
deposits received from Institutions
includes deposits received from
Central Co-operative Banks or
from Other society or else.

4. Schedule on Borrowings as It may be noted from Form A: Form

given in the Annual Report of a of balance-sheet of the Third
Co-operative Bank reads as Schedule given in Part V of the
follows: Banking Regulation Act, 1949 that
Borrowings should be shown in
BORROWINGS following format:
Prev Particular Curren “CAPITAL AND LIABILITIES
ious s t Year
Year Rs. P. Rs. P.

5. Borrowings
1) SIDBI
Refinance (i) From Reserve Bank [the
--- ---
National Bank] of
2) FCY
India/State/Central Co-
Borrowings
operative Bank
-USD
(a) Short-term loans, cash
3) Long
credits and over-drafts-…
Term

501
Study on Compliance of Financial Reporting Requirements

(Subordina (b) Medium-term loans

ted)
Deposits …

(c) Long-term loans

(ii) From the State Bank of India

(a) Short-term loans, cash

credits and over-drafts-…

(b) Medium-term loans

(c) Long-term loans

(ii) From the State Government

(a) Short-term loans, cash

credits and over-drafts-…

(b) Medium-term loans

(c) Long-term loans

…”

It was noted that borrowings have

not been classified as per the
format prescribed in Form A- form
of Balance Sheet, ‘The Third
Schedule of Banking Regulation
Act, 1949’.

5. Note relating to ‘Corporate It may be noted that paragraph

Information’ given in the Annual 10(5) of Non-Banking Financial
Report of an NBFC states as (Non-Deposit Accepting or
Holding) Companies Prudential

502
 Observations Relating to Banking & Insurance Companies

follows: Norms (Reserve Bank) Directions,

2007 requires as follows:
“The company is classified with
effect from XX-XX-XXXX as “(5) Every systemically important
Non-Deposit taking Asset non-deposit taking non-banking
Financing Company.” financial company shall disclose
the following particulars in its
Balance Sheet

 Capital to Risk Asset Ratio

(CRAR)

 Exposure to real estate

sector, both direct and
indirect, and

 Maturity pattern of assets and

liabilities”

It was noted from the appended

note the company has been
classified as Non-Deposit taking
Asset Financing during the year
and hence above Paragraph was
applicable to it as at the Balance
Sheet date. However, no such
disclosures were found in the
financial statements of the said
period. Accordingly, it was viewed
that the requirements of Non-
Banking Financial (Non-Deposit
Accepting or Holding) Companies
Prudential Norms (Reserve Bank)
Directions, 2007 have not been
complied with.

6. Schedule on Other Income It may be noted that Schedule 14

given in the Annual Report of a of Form B: Form of Profit and Loss
bank reads as follows: Account of the ‘Third Schedule’
given in Part V of the Banking
OTHER INCOME Regulation Act, 1949 prescribes

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Study on Compliance of Financial Reporting Requirements

Profit on sale --- --- presentation of ‘Other Income’ in

of investments the following format:
(net)
SCHEDULE 14
Profit on --- --- Other Income
exchange
transactions Year Year
(net) ended ended
on 31- on 31-
3…..(Cu 3…..(
rrent Previo
Year) us
Year)

II. Profit on
sale of
investment

Less: Loss
on sale of
investment
s

V. Profit on
exchange
transaction
s Less:
Loss on
exchange
transaction
s

From the above, it was noted that

both profit and loss on sale of
investments or exchange
transactions are required to be
shown separately. It was noted
from reproduced details of ‘other
income’ that profit from sale of
investments and exchange

504
 Observations Relating to Banking & Insurance Companies

transactions have been disclosed

on net basis instead of disclosing
profit and loss on such
transactions on gross basis.

7. Schedule on Borrowings given It may be noted that Schedule 4 of

in the Annual Report of a Bank Form A: Form of Profit and Loss
reads as follows: Account of the Third Schedule,
Part V, Banking Regulation Act,
“SCHEDULE 4 1949 prescribes to present
Borrowings Borrowings in the following format:
I. Borrowings in India SCHEDULE 4:

II. Borrowings outside Borrowings

India
Year Year
III. Perpetual Tier – I ended ended
(IPDI) Bonds Series - 1 on 31- on 31-
3….. 3…..
IV. Subordinated Debts (Curre (Previo
nt us
A. i) Subordinate Year) Year)
Debts/Bonds
Forming Tier-II I.
Capital Borrowing
s in India
ii) Hybrid
Debts/Bonds (i) Reserve
Forming Tier – II Bank of
Capital India

Secured borrowings (ii) Other

included in above” Banks

(iii) Other
Institutions
and
agencies

II.
Borrowing

505
Study on Compliance of Financial Reporting Requirements

s outside
India

Total

Secured
borrowings
included in
I & II
above –
Rs.

It was noted from reproduced note

that borrowings have been divided
into four categories viz. Borrowings
in India, Borrowings outside India,
Perpetual Tier-I (IPDI) Bonds
Series-1 and Subordinated Debts.
It was viewed that above-
mentioned format requires to
classify borrowings into two broad
categories i.e. Borrowings in India
and Borrowings outside India and
different nature of debts are
required to be sub-classified
depending on its source.
Accordingly, it was viewed that
Perpetual Tier – I Bonds and
Subordinated Debts would have
been taken either in India or from
outside India. Hence, those debts
should have been appropriately
classified rather than showing
them as separate categories.

8. From the Accounting Policy on It may be noted that Paragraph

‘Income’ read with the Note on 4(1) of Non-Banking Financial
‘Income from Operations’ given (Non-Deposit Accepting or
in the Annual Report of an Holding) Companies Prudential
NBFC it was noted that Norms (Reserve Bank) Directions,

506
 Observations Relating to Banking & Insurance Companies

Incomes have been accounted 2007 requires as follows:

for on accrual basis except in
the case where amount “Income from investments
receivable could not be 4. (1) Income from dividend on
determined with reasonable shares of corporate bodies and
accuracy. units of mutual funds shall be
taken into account on cash basis”

It was noted that income from

operations includes ‘Dividend from
shares’ and ‘Dividend from Mutual
funds’ which as per stated policy
has been recognized on accrual
basis. It was noted from the
aforesaid requirement that as per
specific regulation governing the
recognition principle of enterprises;
it should be recognized on cash
basis.

9. The Accounting Policy on It may be noted that Paragraph

Investment given in the Annual 6(2) of Non-Banking Financial
Report of a Bank stated as (Non-Deposit Accepting or
follows: Holding) Companies Prudential
Norms (Reserve Bank) Directions,
Long Term Investments are 2007 requires as follows:
stated at cost less provision for
diminution in value other than “Accounting of investments
temporary if any. Current
investments are valued at cost 6.
or below cost as the case may (2) Quoted current investments
be. shall, for the purposes of valuation,
be grouped into the following
categories, viz…
(a) equity shares,
(b) preference shares,
(c) debentures and bonds,
(d) Government securities

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Study on Compliance of Financial Reporting Requirements

including treasury bills,

(e) units of mutual fund, and
(f) others.
Quoted current investment for
each category shall be valued at
cost or market value whichever is
lower.”
It was noted from the stated policy
that current investments are stated
to be valued at cost or below cost
as the case may be. It was viewed
that in the given case appropriate
nomenclature was not used for
disclosure of method of valuation
of investment.

10. The Directors’ Report given in It was noted that paragraph 5.6 of
the Annual Report of a bank Master Circular dated July 2, 2012
states that the Provision on Disclosure in Financial
Coverage Ratio increased Statements - Notes to Accounts
sharply from 47% in the issued by RBI states as follows:
previous year to 61% in the
current year. “5.6 Provisioning Coverage
Ratio (PCR)
The PCR (ratio of provisioning to
gross non-performing assets)
should be disclosed in the Notes to
Accounts to the Balance Sheet.”
It was noted that although the
Directors’ report provides the
information about sharp increase
in Provision Coverage Ratios, no
such information has been
disclosed about the same in Note
to Accounts as per above
mentioned requirement.

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 Observations Relating to Banking & Insurance Companies

11. From the Annual Report of a It may be noted that as per

General Insurance Company, it Paragraph 2.2 of the Master
was noted that Schedule on Circular on Preparation of
Investment, Schedule on Loans Financial Statements General
and Cash Receipt and Payment Insurance Business dated October
Account reads as follows: 2012 states as follows;

Schedule -8- Investments “All insurers are required to furnish

the Cash Flow Statement as per
Long Term the Direct Method…” An abstract
Investments of the Performa Cash Flow
Statement is given in Annexure as
below:
Government A. Cash Flows from the
securities and Operating Activities:
Government
guaranteed B. Cash Flows from the
--- ---
bonds including Investing Activities:
Treasury Bills
1. Purchase of fixed assets

2. Proceeds from sale of

Other fixed assets
Approved 3. Purchases of investments
Securities --- ---
4. Loans disbursed
…
5. Sales of investments
Schedule 9: Loans
6. Repayments received
Loans 7. Rents/Interests/ Dividends
received
Security-Wise-
Classification 8. Investments in money
market instruments and
Secured in liquid mutual
funds
(a) On
mortgage of 9. Expenses related to
Property investments

509
Study on Compliance of Financial Reporting Requirements

(aa) In India --- --- 10. Net cash flow from

investing activities
(bb) Outside --- ---
C. Cash Flows from the
India
Financings Activities:
(b) On Shares --- --- …
Bonds Govt.
Securities (emphasis added)“

(c) On Others --- --- From the above, it was noted that
(Govt. if cash flow statement is prepared
Guaranteed under Direct method then cash
Loans) flows arising due to loan
disbursement or investment made
Unsecured --- --- in money market instruments and
in liquid mutual funds are to be
Total --- --- shown as a part of cash flow from
investing activities.
Receipt and Payment
Account (Cash Flow It was observed from the schedule
Statement) of investments and that the entity
held investments in money market
Cash Flow instruments namely government
from the securities and Government
Investing guaranteed bonds including
Activities Treasury Bills. However, it was
observed that they were not shown
Purchase of --- --- separately in the cash flow
fixed assets statement as a part of cash flow
from investing activities as per the
Proceeds from format prescribed in Annexure III
sale of fixed given under Master circular on
assets --- ---
preparation of financial
statements- General Insurance
Purchase of --- ---
business.
investments
(net)

Sale Value of --- ---

Investments

510
 Observations Relating to Banking & Insurance Companies

Rents/Interests/ --- ---

Dividends
received

Expenses --- ---

relating to
investment

Net Cash Flow --- ---

from the
Investing
Activities

12. It was noted from Schedule on It was noted that as per the format
Premium Earned (Net) given in prescribed under Part V, Schedule
the Annual Report of an B given under IRDA (Preparation
Insurance company that it had of Financial Statements and
earned “Premium from Auditor’s Report of Insurance
Reinsurance Accepted outside Companies) Regulations, 2002,
India” and “Commission on Schedule 12: ‘Advances and Other
Reinsurance Accepted outside Assets’, inter alia prescribe to
India”. include the following:

“Advances

Other Assets

Agents’ Balances

Foreign Agencies Balances

…”

It was noted that whereas

schedule of premium earned and
commission indicates business
taking place from outside India still
foreign agencies balances have

511
Study on Compliance of Financial Reporting Requirements

not been shown separately.

Accordingly, it was viewed that the

requirements of Part V, Schedule
B given under IRDA (Preparation
of Financial Statements and
Auditor’s Report of Insurance
Companies) Regulations, 2002
have not been complied with.

13. Note relating to Premium It may be noted that Paragraph 2.5

Deficiency given in the Annual of the Master Circular on
Report of an Insurance Preparation of Financial
company, which reads as Statements General Insurance
below: Business dated October 2012,
provides that:
The Gross Direct unearned
premium is arrived at 1/12 “Premium deficiency shall be
basis and the same is applied shown as a separate line item in
on Net Premium to arrive at Net the reportable segmental revenue
Unearned Premium. The net account.”
premium is compared with the
Net incurred claims (including It was noted from reproduced note
claims related cost) and where that in extant case there was
the net incurred claims is more premium deficiency in respect of
than 100% the premium Motor DR pool and Aviation
deficiency is calculated on the segments. However, no such
excess over 100% of Net separate line item is evident from
incurred Claims on Net segmental revenue account of
Unearned Premium and the Motor DR pool and Aviation
same is calculated for each segments.
portfolio and is recognized in Accordingly, it was viewed that the
the books only when there is an requirements of Master Circular on
overall deficiency on all Preparation of Financial
portfolios. Statements General Insurance
Business dated October 2012 have
not been complied with.

512
 31
Other Observations
S. Matters contained in the Observations
No Annual Report

1. In the Annual Report of a It may be noted that Section 22

company, a note relating to of Micro, Small and Medium
MSMED reads as under: Enterprise Development
(MSMED) Act, 2006 while laying
‘Based on available information, disclosure requirements with
presently, there are no amounts respect to amount due to micro,
payable to parties mentioned in small and medium enterprises
the Micro, Small and Medium reads as follows:
Enterprises Development Act,
2006.’ “Where any buyer is required to
get his annual accounts audited
under any law for the time being
in force, such buyer shall furnish
the following additional
information in his annual
statement of accounts, namely:

i. the principal amount and the

interest due thereon (to be
shown separately)
remaining unpaid to any
supplier as at the end of
each accounting year;

ii. the amount of interest paid

by the buyer in terms of
section 18, along with the
amounts of the payment
made to the supplier beyond
the appointed day during
each accounting year;”

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Study on Compliance of Financial Reporting Requirements

iii. the amount of interest due

and payable for the period
of delay in making payment
(which have been paid but
beyond the appointed day
during the year) but without
adding the interest specified
under this Act;
…”

From the above, it was noted

that apart from giving information
about the dues at the year end,
the disclosure with regard to
clause (ii) and (iii) of section 22
of Micro, Small and Medium
Enterprise Development Act,
2006 are also required.

2. In the Annual Report of a It may be noted that Section 22

company, a note on Current of Micro, Small and Medium
Liabilities & Provisions stated as Enterprise Development Act,
under: 2006 provides as follows:

CURRENT LIABILITIES & “Where any buyer is required to

PROVISIONS get his annual accounts audited
under any law for the time being
Creditors for Capital Goods in force, such buyer shall furnish
the following additional
Creditors for Materials information in his annual
statement of accounts, namely:-
Creditors for Expenses
(i) the principal amount and
Creditors for Others
the interest due thereon (to
be shown separately)
remaining unpaid to any
supplier as at the end of
each accounting year;

(ii) the amount of interest paid

by the buyer in terms of

514
 Other Observations

section 18, along with the

amounts of the payment
made to the supplier
beyond the appointed day
during each accounting
year;

(iii) the amount of interest due

and payable for the period
of delay in making
payment (which have been
paid but beyond the
appointed day during the
year) but without adding
the interest specified under
this Act;

(iv) the amount of interest

accrued and remaining
unpaid at the end of each
accounting year; and

(v) the amount of further

interest remaining due and
payable even in the
succeeding years, until
such date when the
interest dues as above are
actually paid to the small
enterprise, for the purpose
of disallowance as a
deductible expenditure
under section 23.”

It was noted that the amount

outstanding to Micro, Small and
Medium Enterprise and related
disclosures are required to be
shown separately under the Note
of Current liabilities and
Provisions as per Part I,

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Study on Compliance of Financial Reporting Requirements

Schedule VI to the Companies

Act, 19561. However, it was
noted that various disclosures as
required under Section 22 of
MSMED Act have not been
reflected in Notes to Accounts.

3. In the Annual Report of It was noted that although

company, a note relating to principal amount due was
Trade Payable stated as under: disclosed but other aforesaid
disclosures from (i) to (v) of
TRADE PAYABLES section 22 of MSMED Act, 2006.
were not disclosed.

Accordingly, there is a non

Due to Micro compliance of MSMED Act,
Small and Medium 2006.
Enterprise

4. In the Annual Report of a It may be noted that the

company, there was no mention disclosures required by section
of any dues to Micro, Small and 22 of MSMED Act, 2006. stand
Medium Enterprises. at nil then the fact should be
disclosed in the financial
statements so that the reader
may appreciate the dues to
MSMED enterprises.

It was noted that none of the

aforesaid information is given in
relation to MSMED enterprises
in Notes to Accounts.

5. In the Annual Report of It was noted from the note

company, Note relating to relating to Finance Cost that
Finance Cost stated as under: interest received from Banks and
Others has been deducted from

1 Subsequent to the observations of the Board, Revised Schedule VI has been

withdrawn. However, content is still relevant in terms of Schedule III to Companies
Act, 2013.

516
 Other Observations

Finance Costs interest expenses. It was viewed

that such set off is possible only
Interest Expenses on if interest expenses and interest
incomes being set off relates to
-Working Capital same fund. It was observed from
reproduced note that while
-Term Loans interest expenses are incurred
on various nature of loans which
-Suppliers Credit
will not generate any interest
income. Hence, it was viewed
-Advance from Directors
that the stated interest income
Less: Interest received from cannot be considered to belong
Banks and Others(emphasis to same source on which
supplied) borrowing costs have been
incurred. Accordingly, it was
viewed that interest expense and
interest income should be
disclosed separately.

6. In the Annual Report of a It was noted from the appended

Company, note on Investments, notes that there are employee
Loans & Advances and stock option plans which are
Employee Stock Compensation being administered through
respectively, which reads as ESOP Trust.
under:
It may be noted that SEBI
Note on Investments: (Employee Stock Option Scheme
And Employee Stock Purchase
Shares of the company held Scheme) Guidelines, 1999,
by ESOP trust (quoted) states as follows:

“22A.1 In case of ESOS/ESPS

(a) Other Investments include
current and administered through a Trust,
unquoted
investments of the ESOP the accounts of the company
Trust of Rs. XXX. shall be prepared as if the
company itself is administering
Note on Loans and advances the ESOS/ESPS.”
(Unsecured and considered
good, unless otherwise From the above, it was viewed
stated): that such ESOS trust should be

517
Study on Compliance of Financial Reporting Requirements

Advances recoverable in considered to be administered

cash or in kind or for value to by the company itself. However,
be received it was noted that certain
advances have been given to
(a) Advances recoverable in the Trust, which have been
cash or in kind or for value utilised to purchase equity
to be received include shares of the company and such
amounts due from advances given are shown under
employees to the ESOP the head ‘advances’ as if given
Trust. to third party. Further, it was
noted that the shares of the
Note on Employee stock company held by the Trust have
compensation: been disclosed as ‘Investments’.
It was viewed that since
The Board of Directors approved
considering trust being
the Employee Stock Option Plan
administered by the Company, it
(‘ESOP Plan 2000’) for the grant
cannot be considered as a
of stock options to the
separate entity. Hence,
employees of the Company and
advances given to Trust should
its subsidiaries/joint venture
be eliminated against the
company. A Compensation
advances taken from the
Committee has been
company in the books of Trust
constituted to administer the
and the shares held by the Trust
plan through a trust
should be described as Shares
established specifically for
held in trust for employees under
this purpose, called the ABC
ESOP Scheme under the head
Limited Employee Welfare
‘Investment in shares of the
Trust (ESOP Trust).
company and it should be
The ESOP Trust shall make presented as a deduction from
additional purchase of equity Share capital as also suggested
shares of the Company using in the Expert Advisory Opinion -
the proceeds from the loan Query no. 2, Compendium of
obtained from the Company, Opinions, Volume No. XXXIII.
other cash inflows from allotment
Accordingly, it was viewed that
of shares to employees under
the accounting treatment
the ESOP Plan and shall
followed for presentation of
subscribe, when allotted to such
ESOP plans is not in line with
number of shares as is
SEBI guidelines.
necessary for transferring to the

518
 Other Observations

employees. The ESOP Trust

may also receive shares from
the promoters for the purpose of
issuance to the employees under
the ESOP Plan. The
Compensation Committee shall
determine the exercise price
which will not be less than the
face value of the
shares…(emphasis supplied)

7. From the Annual Report of a It was noted from the appended

company, it was observed from a note that the company has
note relating to ‘Unhedged disclosed the details of
foreign currency exposure’ that unhedged foreign currency
the amount was disclosed in exposure in rupee terms only. It
Indian Rupees. was viewed that the underlying
foreign currency amount should
also be disclosed alongwith the
same.

8. From the Annual Report of a It was noted that salary payable

company, the note relating to and advance from customers
Other current liabilities is have been disclosed under the
reproduced as under: head of ‘statutory liabilities’. It
was viewed that salary payable
Statutory liabilities is a liability against services
received from employee but not
-Salary Payable
yet settled and advances from
-Advances from Customers customer are liabilities against
which either services or goods
would be provided in the future.
Accordingly, it was viewed that
nature of liabilities cannot be
considered to be in the nature of
statutory liabilities.

9. From the Annual Report of a It was noted from the appended

company, Note on Fixed Assets note on Fixed Assets that it
includes Capital work-in-

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Study on Compliance of Financial Reporting Requirements

is reproduced as under: progress the nature of which has

not been disclosed as to whether
Fixed Assets it is tangible or intangible.
a) Tangible Assets It was observed from the
directors’ report wherein it has
b) Intangible Assets been stated that the company
has developed 4 laning of
c) Capital work – in – progress highway on Design, Build,
Finance, Operate and Transfer
(DBFOT) basis. It was
accordingly, noted that the
company has entered into
service concession agreement. It
was viewed that under service
concession agreement, the
company does not posses
ownership rights to the assets. In
fact, they receive the right to use
the assets for certain stipulated
period. It was viewed that such
construction, is undertaken by
the company, as an obligation to
acquire right to use such asset.
Hence, costs incurred on
construction of lanes is the cost
incurred to acquire those rights.

Accordingly, it was viewed that

the right to use asset should be
shown as intangible assets
under development instead of
disclosing the same as Capital
work-in-progress.

10. From the Note relating to ‘Non- It was noted from the appended
current Investments’ given in the note relating to ‘Non-Current
Annual Report of a company, it Investments’ that Investments in
was observed that investments National Savings Scheme have
in ‘National Savings Scheme’ been classified as trade

520
 Other Observations

were disclosed as being in the investments. It was viewed that

nature of ‘Trade Investments.’ trade investments are normally
the investment in share or
debenture of another company
to promote the trade or business
of the investor entity.

It was viewed that investment in

National Saving Scheme cannot
be considered to promote trade
or business. Hence, its
classification as trade
investment is not correct.

11. In the Annual Report of a It was noted from the Note

company, the note relating to
relating to Reserve and Surplus
Reserves and Surplus reads as
that the unclaimed amount due
follows: on redemption of preference
shares has been disclosed as
‘Capital Reserve represents Capital Reserve. It was viewed
unclaimed amount due on that unclaimed liability is payable
redemption of Preference on demand, company does not
shares.’ have any right to defer its
settlement. Further, balance held
as capital reserve is not
available for distribution.

Hence, classification of
unclaimed amount due on
redemption of preference shares
as ‘capital reserve’ is not correct.

12. In the Annual Report of a It was noted that the foreign

company, Note on Other Income exchange loss in the current and
stated as follows: the previous year was reported
under the head ‘other income’ as
Other Income negative figure. It was further
noted that the reported foreign
Income from current
exchange loss was a significant
investment in mutual
loss due to which aggregate
funds
amount of ‘other income’ was

521
Study on Compliance of Financial Reporting Requirements

Profit on sale of fixed also, reported in negative. It

assets was viewed that a loss is an
expense by nature as explained
Interest received in Paragraph 78 of ‘Framework
for the Preparation and
Foreign exchange Presentation of Financial
gain/(loss) Statements’, as reproduced
below:
Miscellaneous income
“78. Losses represent other
items that meet the definition of
expenses and may, or may not,
arise in the course of the
ordinary activities of the
enterprise. Losses represent
decrease in economic benefits
and as such they are no different
in nature from other expenses.
Hence, they are not regarded as
a separate element in this
Framework.

Accordingly, it was viewed that

the foreign exchange losses
should have been disclosed as
an expense in the Statement of
Profit and Loss instead of
clubbing it with other incomes.

13. It was noted from note on It was viewed that advances

inventories that inventory paid against any inventory does
balance has been determined not give rise to inventory which
after adjusting advances paid may be recognised in books.
against them. Accordingly, if inventory has
been increased by the amount of
advances given, is an incorrect
accounting treatment. Further,
the amount involved was
significant as compared to the
size of the company. Hence a

522
 Other Observations

proper note should have been

given to support such
adjustment.

Accordingly, it was observed that

neither the treatment adopted is
as per Indian GAAPs nor the
financial statement contains
relevant information for reader to
understand the nature of
transaction.

523