07 November 2023
As per Companies Act, 2013 a company which is a holding or subsidiary or associate of a company incorporated outside India may be required to follow a different financial year for consolidation of its accounts and may apply to Central Government who may allow any period as Financial year whether or not the period is a year. (From ICAI material) My questions are:
1) Why will an associate company need to consolidate its FS with another company? 2) Why will the Holding company(Foreign company) in India need to follow a financial for its subsidiary outside India? Doesn't the subsidiary always follow the holding company? 2) What is meant by "any period" is taken as a financial year? Will even few months be taken as a year? If so, can any date be the balance sheet date? If an example of this is provided it will really help me .
06 July 2024
1. Consolidation of Financial Statements by an Associate Company: • An associate company, as defined under the Companies Act, 2013, is a company in which another company has significant influence but not control, generally represented by holding between 20% to 50% of the voting rights. • According to accounting standards (Ind AS or Indian Accounting Standards under Companies Act, 2013), when a company holds significant influence over another (like in the case of an associate), it is required to prepare consolidated financial statements. • Consolidated financial statements provide a comprehensive view of the financial position, performance, and cash flows of a group of companies (the parent and its subsidiaries or associates) as a single economic entity. • This requirement ensures transparency and accountability by presenting a true and fair view of the financial health of the entire group, including associate companies. 2. Financial Year for Holding Company in India with Subsidiary Abroad: • The requirement for a holding company (foreign company) in India to follow a financial year for its subsidiary outside India stems from the need to align financial reporting and consolidation requirements across jurisdictions. • While the subsidiary abroad may follow local regulations or the financial year cycle of its jurisdiction, for consolidation purposes, the holding company often needs to adjust its financial reporting to include the subsidiary’s results. • This alignment ensures that the consolidated financial statements accurately reflect the financial position and performance of the entire group, regardless of geographical location. 3. “Any Period” as a Financial Year: • The Companies Act, 2013 provides flexibility in determining the financial year for companies, including holding, subsidiary, or associate companies. It states that the Central Government may allow any period as a financial year, whether or not it is a full year. • This provision allows companies to choose a financial year that best suits their operational needs or aligns with global reporting standards, even if it’s less than a full year. • For example, a company may adopt a financial year of 15 months or 18 months to transition its reporting period, or it may choose to start its financial year on a non-traditional date (e.g., July to June instead of April to March). • The balance sheet date, in such cases, can vary based on the chosen financial year, ensuring that financial reporting remains consistent and meets regulatory requirements.
In summary, the provisions under the Companies Act, 2013 regarding financial year flexibility aim to facilitate effective financial reporting and consolidation across multinational entities while ensuring compliance with local and international accounting standards. These provisions offer companies the ability to optimize reporting structures and timelines to better reflect their economic activities and improve transparency in financial disclosures.
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