In today's globalization and diversified businesses, it is very common to have several associates, Joint Ventures & Subsidiaries companies and various other forms of business formats, wherever applicable. When it comes to present Financial Statements, it would not be prudent if an Entity prepares its Financial Statements using its own business activities only without taking effect of its involvement with such investments in its subsidiaries, associates or JV etc. Hence, Consolidated Financial Statements should be the one which truly reflects all transactions/ natures of investments in different activities etc.
There is some interpretational difference when it comes to define who should present these Consolidated Financial Statements between Companies Act 2013 and the standards as notified by the MCA called Ind-As.
Let's have a quick look about the requirement/ reference of such matter as per companies act and relevant accounting standard-
Companies act 2013
Section 129 Financial Statement -
(3) Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed:
Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.
Explanation- For the purposes of this sub-section, the word subsidiary shall include associate company and joint venture.
Consolidated financial statements – "The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity".
- Group- "A parent and its subsidiaries"
- Parent- "An entity that controls one or more entities"
- Subsidiary- "An entity that is controlled by another entity".
It is very clear about the differences in these underlying requirements comparing between these two definitions (mentioned above) which can be summarized as below –
As per the companies act 2013, it says Consolidated Financial Statements are required to be prepared even there is no subsidiary company i.e. ONE OR MORE which could either be an associate or JV, hence even an entity is having only associate or JV will required to be prepared its Consolidated Financial Statements, However to remove this ambiguity MCA had issued some circular to provide some limited period relaxation but there is no change in law as of now,
On the other hand, accounting standards i.e. Ind-As says "Consolidated Financial Statements" are being prepared when there is a group and group means one or more subsidiary which is controlled by another entity and here the control means as per Ind-As 110- "Consolidated Financial Statements". It specifically exclude the cases where there is no subsidiary and only either associate or JV exists then there is no specific need to prepare any Consolidated FS,
This could bring more confusion towards use of equity accounted balances which are to be used while preparing Consolidated Financial Statements if required by the Companies act (even there is no subsidiary) however it is mentioned in Ind-AS 28 related to Equity accounted balances to be used in case of Associates/ JV, there must be a parent for which such Consolidated financials are being made,
As per the core objective of IFRS/ Ind-AS, Consolidated FS is the only financial which should be prepared unless there is a requirement defined by a local law to present a Separate Financial Statement, however Consolidated Financial Statements (as per Ind-AS 110) will be prepared only when there is at least one Subsidiary Company,
Where Consolidated Financial statements are being prepared as per the requirement of Companies act and rest other which are being made based on Ind-AS 110 will create some ambiguity for all interested parties and for many investors within the Industry,
Readers will appreciate about the main objective of the standard/ laws and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices. Any Law related views are purely an interpretation by author and should not be construed as exhaustive in nature.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
The author can also be reached at firstname.lastname@example.org