03 May 2011
Dear Nitin I am giving here some information about your questions, this is taken by different source (The Hindi Business Line) coz I would not explain you, I think this would Help Yoy.
Annexed vs attached
These terms have significantly different meanings in the Companies Act. So is the case with `approval' and `adoption', says P. S. Kumar
THE words `annexed' and `attached' are synonymous in common parlance but have significantly different meanings in the Companies Act, 1956, with reference to annual accounts cropping up at various places in the Act. According to Section 227 (2), an audito r shall make a report to the members of the company on the accounts examined by him, and on every balance-sheet and profit and loss (P&L) account and on every other document declared by the Act to be part of, or annexed to, the balance-sheet or P&L accou nt. Therefore, the main distinction, as a rule of thumb, is that any document which is `annexed' to a balance-sheet is an auditable document whereas a document that is `attached' is not and, hence, outside the purview of audit.
The following summarises the scheme of the Act, as to what is annexed and what is attached to a balance-sheet:
Annexed: P&L account (Section 216); list of investments (Section 372 (10)); and any information required to be given by the Act, allowed and given in the form
of notes or documents (Section 211(6)).
Attached: Particulars required to be given in the case of subsidiaries (Section 212(1)); auditor's report (Section 216); and directors' report (Section 217(1)).
While the above rule holds good generally, in the case of directors' report, Section 222 provides an exception -- any reference in the Act to documents annexed or required to be annexed shall not include a directors' report, provided any information that is required to be given in the accounts may be given in the directors' report and if given in the directors' report, it shall render the directors' report `annexed'.
The auditors, therefore, will have to consider the information given in the directors' report for the purposes of their report and to that extent, the directors' report will become an auditable document.
A case in point is a demand on the company contested by it, which would be in the nature of a contingent liability. While Schedule VI to the Act requires the information to be disclosed in a note to the balance-sheet, the directors may, if they consider the issue to be vital, deal with it in the directors' report rather than in the notes to the accounts. Once this is done, the directors may opt not to disclose the matter again in the notes to the accounts. This is a recommended procedure as repetition is tedious and serves no purpose.
On the other hand, if a full disclosure is made in the directors' report and an abridged version is given in the notes to the account, there is an element of risk. Dealing with a highly sensitive matter in two different places in two different versions c arries with it its own risks, especially in these times when commas and full stops (or absence of them) are ferociously fought over. Therefore, a suggested course of action is, when notes to accounts are prepared, to include a statement drawing the read ers' attention to the fact that the matter has already been dealt with in the directors' report. If this is done, then the directors' report becomes an auditable document albeit to the extent of the particular matter dealt with in the directors' report.
In annual accounts, this provision is rarely invoked or taken advantage of. One may refer to ITC Ltd's annual accounts for the year ended March 31, 2001. ITC chose to discuss a high excise duty demand in an exhaustive manner in the directors' report with a suitable reference to the notes to accounts and dealt with it in note (v) of notes to accounts in the following manner.
``The status on excise matters, which is treated as an annexure to these accounts, are as outlined in this year's report of the directors under the Excise section. In the opinion of the directors, the Company does not accept any further liability.''
Approval and adoption
According to the scheme of things in the Act, under Section 215 (3), the balance-sheet and P&L account have to be approved by the board of directors and signed on their behalf before they are submitted to the auditors for their report thereon. Under the provisions of Section 217 (3), the board of directors are obliged to give an addendum to their report (that is, the directors' report) on every reservation, qualification and adverse remark contained in the auditor's report.
If the full procedure is to be followed, the directors will necessarily have to hold a further directors' meeting to consider the audit report and the addendum to the directors' report, which is time consuming and expensive, or at the very least pass a c ircular resolution which again is time consuming. Therefore, in order to remedy this situation, the Department of Company Affairs (DCA), in a pragmatic move, has come out with an advice to the corporate sector to the effect that the auditors and the man agement should function in a harmonious manner and the auditors may make available their remarks on the accounts to the board of directors at the time of approval of accounts which would enable them to respond to the auditor's remarks, thereby avoiding t he need to hold another meeting (Letter No. 8/22 (215)/76 -- CL-V dated August 16, 1978).
While the directors `approve' accounts, it is the annual general meeting (AGM) that `adopts' the accounts. The Act also contemplates situations where an AGM may not adopt the accounts. Under Section 220 (2), if the AGM of a company before which a balance -sheet is laid does not adopt the balance-sheet, or the meeting is adjourned without adopting the balance-sheet, or if the AGM of a company for any year has not been held, a statement of that fact and of the reasons for it has to be filed along with the balance-sheet filed with the Registrar of Companies (RoC).
This raises an interesting question as to the authenticity of the accounts in the subsequent year when the closing balances contained in the un-adopted accounts become the opening balances of the subsequent year. According to the Expert Advisory Committe e of the Institute of Chartered Accountants of India, there is no bar against a company preparing the accounts for the subsequent years with the opening balances incorporated from the un-adopted accounts.
However, it would be the duty of the auditors to refer to that fact in the report of the subsequent year (Expert Advisory Committee Opinions, Volume I, page 268). Presumably, once the accounts of the subsequent year are adopted by the members in the AGM, there would no longer be a need to make a remark in the following years' reports.
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