Is it mandatory to prepare and submit cash flow statement for unlisted public companies and private companies, whether small or midsized in nature?
Important sections and rules forming base for the opinion:
- Section 2(40) of the Companies act, 2013 defining the term “financial statements”
- Section 2(85) of the Companies act, 2013 defining the term “small companies”
- Section 2(62) of the Companies act, 2013 defining the term “One person company”
- Section 129 of the Companies act, 2013 containing provisions in respect of “financial statements”.
- Section 133 of the Companies act, 2013 containing provisions in respect of prescription of accounting standards for accounting purposes.
- Schedule III of the Companies act, 2013 prescribing the form for financial statement for different class or classes of companies.
- The Companies (Removal of Difficulties) Order, 2015 dated 13/02/2015 making changes in definition of small company i.e. replacing the word “or” with “and”.
- The Companies (Indian Accounting Standards) Rules, 2015 vide notification no. G.S.R.111 (E) dated 16/02/2015.
- General circular no. 15/2013 dated 13/09/2013 regarding clarification on the notification dated 12/09/2013 for commencement notification.
- The Companies (Accounts) rules, 2014
- The Companies (Accounts) Amendment Rules, 2014.
- The Companies (Accounts) Amendment Rules, 2015.
- The Companies (Accounts) Second Amendment Rules, 2015.
- The Companies (Accounting Standards) Rules, 2006 vide notification no. G.S.R.739 (E) dated 07/12/2006
- Announcement of The Institute of Chartered Accountants of India (ICAI) regarding harmonization of various differences between the accounting standards issued by the ICAI and the accounting standards notified by the central government
Companies Act, 1956 neither defined the term financial statements nor contained any specific provisions for preparation of cash flow statement. It was through section 211 of Companies act, 1956 which dealt with the provisions for form and contents of balance sheet and profit and loss account and it provided that form for preparation of balance sheet and profit and loss statement was to be as specified in schedule VI and furthermore every profit and loss account and balance sheet of the Company shall comply with accounting standards i.e. standards of accounting recommended by the ICAI as may be prescribed by the central government in consultation with the National advisory Committee on Accounting standards established for such purposes.
In this regard Central Government vide notification no. G.S.R.739 (E) dated 07/12/2006 prescribed the Companies (Accounting Standards) Rules, 2006.
In these rules term “general purpose financial statements” was defined as “General Purpose financial Statements” include balance sheet, statement of profit and loss, cash flow statement (wherever applicable), and other statements and explanatory notes which form part thereof.
These rules has classified entities into two levels, viz. Small and medium –sized Companies (SMC’s) as defined in rules and Companies other than SMC’s.
Non SMC’s were required to comply with all the Accounting standards in their entirety, while certain exemptions/ relaxations have been given to SMC’s. These levels were different as per the levels announced by the ICAI before the notification came into force. To harmonize the differences ICAI vide its announcement titled as “harmonization of various differences between the accounting standards issued by the ICAI and the accounting standards notified by the central government” has decided to continue to have three levels instead of two as per the Government notification.
And as such cash flow statement started becoming part of financial statements to the Companies wherever criteria as prescribed in the accounting standard were met.
In the accounting standard-3 “Cash flow statements” it is provided that “this accounting standard is not mandatory for Small and medium sized Companies, as defined in the notification.
Now as per the new Companies act, 2013 the term “financial statements” has been defined under section 2(40) as “financial statement” in relation to a company, includes-
- A balance sheet as at the end of the financial year;
- A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure for the financial year;
- Cash flow statement for the financial year;
- A statement of changes in equity, if applicable; and
- Any explanatory note annexed to, or forming part of, any document referred to in sub-clause(i) to sub-clause(iv):
Provided that the financial statement, with respect to one person Company, small company and dormant company, may not include the cash flow statement.
Small company as per new Companies act, 2013 is defined under section 2(85) as:
‘‘Small company’’ means a company, other than a public company,—
- paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and
- turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
Section 129 of the new companies act, 2013 provides that the financial statements shall give a true and fair view of the state of affairs of the Company, or companies, comply with the accounting standards notified under section 133 of the Companies act, 2013 and shall be in form or forms as may be provided for different class or classes of companies in schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards.
Further section 133 of the Companies act, 2013 provides that the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by ICAI in consultation with National Financial Reporting Authority.
Now when the new companies act, 2013 commencement notification was brought into force accounting standards were not prescribed under section 133 and as such ministry issued a general circular no.15/2013 dated 13/09/2013 which inter-alia provided that till the standards of accounting or any addendum thereto are prescribed by the Central government in consultation and recommendation of the NFRA, the existing standards notified under the Companies Act, 1956 shall continue to apply.
Furthermore ministry has issued notification no.G.S.R.239 (E) dated 31/03/2014 by which Companies accounts (rules), 2014 were made effective from 01.04.2014. In these rules rule 7 states that the standards of accounting as specified under the Companies act, 1956 shall be deemed to be the accounting standards until accounting standards are specified by the central government u/s 133 of the Companies Act, 2013.
Also as per the Companies (Indian Accounting Standards) Rules, 2015 inserted vide notification no. G.S.R.111 (E) dated 16/02/2015, rule 3 provides that a company which follows the accounting standards specified in Annexure to the Companies (Accounting Standards) Rules, 2006 shall comply with such standards only and not the standards specified in Annexure to these rules.
Now the question arises that in the absence of prescription of form of Cash Flow statement in Schedule III to the Companies Act, 2013 as required by Section 129 of the Act, can the preparation of Cash flow statement , by the entities which are not required by Accounting standards to prepare the same, is mandatory ?
In my view such a construction of the provisions is not proper. Section 129 says:
- financial statements shall give a true and fair view of the state of affairs of the Company, or companies,
- comply with the accounting standards notified under section 133 of the Companies act, 2013
- shall be in form or forms as may be provided for different class or classes of companies in schedule III
Therefore if I am satisfying these three conditions, then my financial statements shall be in accordance with the law.
AS 3 which deals with the Cash flow statement is not mandatory for medium and small sized companies. Small and medium-sized company (SMC) as defined in clause 2(f) of the Companies (Accounting Standard) Rules, 2006 means a company-
- 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;
- which is not a bank, financial institution or an insurance company;
- whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;
- which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and
- which is not a holding or subsidiary company of a company which is not a small and medium-sized company
Explanation: For the purposes of clause (f), a company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.
Thus in respect of entities which are small and mid sized companies as per above definition, if cash flow statement is not prepared , Balance sheet and profit and loss are prepared in the form prescribed in Schedule III to the Act and the Balance sheet and profit and loss account so prepared comply to the Accounting standards prescribed and applicable as per old Companies Act, 1956,I will be in full compliance of the Companies Act, 1956.
By simple definition clause, in the absence of prescription of form as required by Section 129 of the Act, preparation of Cash flow statement can not be made mandatory to the entities which are otherwise excluded under accounting standard to prepare the same. Such a construction will not be a reasonable one and will be lead to absurd results and will be conflicting as various clauses of these accounting standards (for example AS -15 employee benefits, AS-20 earning per share) and other accounting standards in totality like AS-17 (segment reporting) are not applicable to small and mid sized companies.