To Consolidate or not to Consolidate

Rule 6 in the Companies Accounts Rules deal with manner of consolidation of accounts. The rule states that “The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards.”

The MCA has recently amended the Company Accounts Rules whereby a new proviso has been added in the Rule 6. The proviso states that “Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1st April 2014.”

Question 1
Whether the above proviso exempts companies from preparing CFS or the exemption relates only to manner of preparing CFS?

Author’s View
The exemption relates only to the manner of preparing CFS and not the preparation of CFS itself. To support this view, the following two arguments can be made:

• The requirement to prepare CFS is arising from the Companies Act 2013. Rule 6 deals only with the manner of preparing CFS, i.e., preparation of CFS as per notified AS and Schedule III. Hence, the exemption relates only to the manner of preparation of CFS. Thus, a company covered under the above proviso can prepare CFS as per any acceptable framework, say, IFRS, instead of CFS as per notified accounting standards/Schedule III. A company covered under the proviso can also prepare CFS as per any other GAAP (other than Ind AS where the dates are those prescribed by the roadmap) say, US GAAP for filing with the Registrar of Companies (ROC). But if the company also needs to comply with the listing agreement requirements, they permit either Indian GAAP or IASB IFRS.

• Hence, for a listed company, in order to meet both ROC requirements and listing requirements, the option is either Indian GAAP or IASB IFRS (for one year). However, a company cannot avoid preparing CFS.

• Presently, there are few companies who are currently preparing IASB IFRS CFS as per the option given in the listing agreement. If these companies are required to prepare Indian GAAP CFS for year ended March 2015, they will have to transit from IASB IFRS to Indian GAAP for March 2015. In March 2016, these companies will move to Ind AS (i.e., IFRS converged standards) once Ind AS become voluntarily applicable for financial years beginning on or after 1st April 2015. It is understood that the MCA has added this proviso in the rules to avoid this flip flop.

Question 2
Whether the exemption discussed above is available for companies which have overseas subsidiaries only or a company having both Indian and foreign subsidiaries can also use this exemption?

Author’s View
The proviso is based on companies having one or more overseas subsidiaries. It does not matter whether a company has Indian subsidiary or not. In other words, this proviso can be used both by companies having (a) only foreign subsidiary/ies and (b) companies having both Indian and foreign subsidiary/ies.

Question 3
Whether the exemption is available only for one year or it will be available going forward also?

Author’s View
The proviso uses the words “only for the financial year commencing on or after 1st April 2014.” Hence, this exemption is available only for one year, for example financial year ending 31st March 2015 or 31st December 2015.

Question 4
Section 129(3) of the 2013 Act requires that a company having one or more subsidiaries will, in addition to separate financial statements (SFS), prepare CFS. Hence, all companies, including non-listed and private companies, having subsidiaries need to prepare CFS. Whether the comparative numbers need to be given in the first set of CFS presented by an existing group?

Author’s View
Schedule III states that except for the first financial statements prepared by a company after incorporation, presentation of comparative amounts is mandatory. In contrast, transitional provisions to AS 21 exempt presentation of comparative numbers in the first set of CFS prepared even by an existing group.

One view is that there is no conflict between transitional provisions of AS 21 and Schedule III. AS 21 gives one exemption that is not allowed under the Schedule III. Hence, presentation of comparative numbers is mandatory in the first set of CFS prepared by an existing company. This interpretation is taken on the basis that when there are two legislations; one of which imposes a more stringent requirement, the stringent requirement would apply.

The other view is that Schedule III is clear that in case of any conflict between Accounting Standards and Schedule III, Accounting Standards will prevail over the Schedule III. Hence, exemption given under AS 21 can be availed by an existing group which prepares CFS for the first time. In other words, an existing Group preparing CFS for the first time need not give comparative information in their first CFS prepared under AS 21.

Both the views appear acceptable.

Question 5
Consider that a non-listed company is preparing CFS in accordance with AS 21 for the first time. It has acquired one or more subsidiaries several years back. Is the company required to go back at the date of acquisition of investment for calculating goodwill/ capital reserve on acquisition?

Authors view
Goodwill/ capital reserve arising on acquisition of subsidiary should be calculated with reference to the date of acquisition of investment in subsidiary. Thus, determining goodwill for an acquisition that took place many years ago may be very challenging. The transitional provisions to AS 21 exempt a company, which is preparing CFS for the first time, from presenting comparative information. There is no exemption from the requirement to determine goodwill/ capital reserve. Hence, any goodwill/ capital reserve arising on acquisition should be determined at the acquisition date.

Let us assume that a company has acquired a subsidiary more than 10 years back, which should have resulted in goodwill arising on the acquisition. Under Indian GAAP, a company is allowed to amortise goodwill over its useful life, say, 5 to 10 years. Alternatively, the company may only test the goodwill for impairment. In this case, the company may argue that in the past, it has amortised goodwill over its useful life, say, 5 to 10 years. Consequent to amortisation, the net carrying value of goodwill on the date of first preparation of CFS is zero. The corresponding impact of goodwill amortisation has gone into profit or loss of the earlier periods and impacts the cumulative retained earnings at the date of first preparation of CFS. The application of this view obviates the need to go back in history for computing goodwill arising on acquisition. However, it impacts the amount of retained earnings and net worth on the transition date. If a company does not wish to have such impact and desires to disclose goodwill amount, it needs to go back in the history for calculating goodwill/ capital reserve arising on acquisition.

In the case of acquisitions made in recent history, say, in past 3-4 years, it may not be possible to take a view that the goodwill is fully amortised. In this case, the company will need to go back in history to determine goodwill arising on acquisition. The amount of goodwill reflected in the first CFS will depend on the company’s policy for goodwill amortisation with respect to past years.

To ensure that goodwill is not carried at amount higher than its recoverable amount, the company will have to test if goodwill is impaired at the transition date in accordance with AS 28 Impairment of Assets.