Background
With respect to voluntary
revision of financial statements, following is the provision of The Companies
Act, 2013 (as amended).
131.(1)
If it appears to the directors of a company that— (a) the financial statement
of the company; or (b) the report of the Board, do not comply with the
provisions of section 129 or section 134, they may prepare revised financial
statement or a revised report in respect of any of the three preceding
financial years after obtaining approval of the Tribunal on an application made
by the company in such form and manner as may be prescribed and a copy of the
order passed by the Tribunal shall be filed with the Registrar…….
The MCA notified section
131 of the Act dealing with voluntary revision of financial statements on 1
June 2016 and the section is applicable from the notification date. In
accordance with the section, if it appears to the directors of a company that
its financial statement or the board report do not comply with the requirements
of section 129 (dealing with preparation of financial statements, including
compliance with accounting standards) or section 134 (dealing with aspects such
as signing of financial statements and preparation of the board report), then
directors may prepare revised financial statements or a revised report for any
of the three preceding financial years after obtaining the National Company Law
Tribunal (NCLT) approval. The section and related rules prescribe the procedure
to be followed in such cases. The procedure include:
– The company will make an application to the NCLT in prescribed
manner.
– Before passing any orders for revision, the NCLT will notify the
Central Government and the Income tax authorities and will consider
representations received, if any.
– The company will file a copy of the NCLT order with the
Registrar.
– Detailed reasons for revision of financial statements or report
will also be disclosed in the board’s report in the relevant financial year in which such revision is being made.
Ind AS 1 Presentation of
financial statement and Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
A company may decide to
change one or more accounting policies followed in the preparation of financial
statements or change classification of certain items or correct an error in
previously issued financial statements. In these cases, Ind AS 8/ 1 requires
that comparative amounts appearing in the current period financial statements
should be restated.
In the case of an error,
there may be rare circumstances when the impact of error in financial
statements is so overwhelming that they may become completely unreliable. In
such cases, the company may need to withdraw the issued financial statements
and reissue the same after correction. The auditor may also choose to withdraw
their audit report. However, in majority of cases, the impact of error will not
be so overwhelming requiring withdrawal of already issued financial statements.
Rather, the company will correct the error in subsequent financial statements.
Ind AS 8 requires that comparative information presented in subsequent
financial statements will not be the same as originally published. Those
numbers will be restated/ updated to give effect to the correction of the
error. Similar treatment applies for change in accounting policy or
reclassification. The subsequent financial statements in which correction is
made will also include appropriate disclosures to explain impact of the
changes.
Issue
Whether restatement of
comparative amounts in subsequent financial statements is tantamount to
revision of financial statements? Consequently, whether such restatement will
trigger compliance with section 131 of the Act?
Author’s View
Section 131 of the Act is
triggered only in cases where the company needs to withdraw previously issued
financial statements and re-issue the same. For example, this will be required
when the impact of error on previously issued financial statements is so
overwhelming that they have become completely unreliable.
Section 131 will not be
triggered in cases related to restatement of comparative information appearing
in the current period financial statements. This view can be supported by the
following key arguments:
– Restatement of comparative information appearing in subsequent financial
statements is not tantamount to change or revision or reissuance of
previously issued financial statements. If one reads section 131 carefully, it
is about preparing (and consequently reissuing) revised financial statements,
at the behest of the board of directors. It cannot be equated to restating
comparative numbers for errors or changes in accounting policies where there is
no revision or reissuance of already issued financial statements. There
is a change in the comparative numbers in subsequent financial statements; but
there is no revision or reissuance of already issued financial
statements.
– Section 131 can be triggered only if
the previously issued financial statements were not in compliance with section
129. In the case of a change in accounting policy or reclassification, there
was no such non-compliance in previously issued financial statements. Hence,
section 131 does not apply. The Ind AS 8 requirement to restate an error in
subsequent financial statements is the same as change in accounting
policy/reclassification. Hence, section 131 should apply in the same manner for
correction of errors as well.
