Section 128: Books of Account (BOA) and Financial Statements (FS) Requirements

Co to Prepare BOA:

Every company (co) must create and maintain Books of Account and Financial Statements annually at its Registered Office (RO).

These records should provide a true and fair view of the company's state of affairs, including branches, and explain all transactions.

Accrual Basis and Double Entry System:

BOA must be kept on an accrual basis and follow the double entry system of accounting.

They may be kept elsewhere in India if approved by the Board of Directors (BoD), with proper notification to the Registrar of Companies (RoC).

Electronic Mode (E-mode) Option:

Companies can keep BOA in electronic mode, subject to prescribed rules.

Features of accounting software used must include an unalterable audit trail for transactions.

Features of Accounting Software:

Accounting software used after 1/4/2022 should have:

Recording audit trails for all transactions.
Prevention of disabling audit trails.
Retaining BOA in its original format.
Information received from branches must remain unaltered.

Storage and Retrieval of E-records:

E-records must be accessible in India and capable of being displayed in a legible form.
Proper systems for storage, retrieval(पुनर्प्राप्ति), display, and printout of e-records should be in place.
E-records cannot be disposed of unless permitted by law, and backups must be kept in servers physically located in India.

Annual Reporting to RoC:

Companies must report the following annually:

Location of the service provider.
Edit log of changes made in BOA.
Date of changes.
Internet Protocol (IP) address of the service provider.

Branch Office Compliance:

If a company has branch offices in or outside India, it complies with Section 128 if:

Proper BOA at branches are maintained.

Summarized returns are periodically sent to the company's RO or another designated place.
Remember, compliance with these rules ensures transparent financial reporting and accountability.

Section 128: Inspection of Books of Account (BOA) and Consequences of Contravention

BOA Open for Directors' Inspection:

BOA can be inspected by directors only.

If maintained within India or outside, directors are entitled to examine the records.

Assistance during Inspection:

Officers and employees of the company must assist during inspections as per Section 3.

BOA Maintenance and Access:

BOA should be kept in good order and open for inspection at the Registered Office (RO) or another designated place in India during business hours.

Directors can request specific financial information for a defined period, and the company must provide it within 15 days.

Penalties for Contravention:

In case of a violation, the Managing Director (MD), Whole Time Director (WTD) in charge of finance, or General Finance Officer (GFO) may be fined.
The fine can range from Rs. 50,000 to Rs. 5 lakhs for insurance or banking companies.

Example: If a company fails to keep its books in order or refuses a director's legitimate request (वैध अनुरोध) for financial information, the responsible executives may face penalties.

Section 129: Financial Statements (FS)

Compliance and True View:

Financial Statements must comply with Accounting Standards (AS) and present a true and fair view of the company's state of affairs.
The format is as notified under Section 133 and specified in Schedule III.

Example: A company's financial statements should accurately represent its financial health and conform to recognized accounting standards.

Applicability and Exceptions:

Applicable to insurance companies and others as charged by the Board of Directors (BoD).
Exceptions for specific categories like electricity companies.
FS should not be deemed inaccurate if it doesn't disclose matters not required by law.

Example: An electricity company may follow different reporting rules based on the Electricity Act, 2003, and not necessarily the general FS requirements.

Understanding and complying with these sections ensures transparency in financial reporting and imposes consequences for non-compliance.

Section 2: Presentation of Financial Statements (FS) at AGM

FS Presentation at AGM:

At every Annual General Meeting (AGM), the Board of Directors (BoD) must present the Financial Statements (FS) for the financial year (FY).

Example: In the AGM, the directors of a company share and discuss the financial performance and position of the company through the presented FS.

Section 3: Consolidated Financial Statements (CFS)

Preparation of CFS:

If a company has one or more subsidiaries, it must prepare Consolidated Financial Statements (CFS) in addition to its FS, following the prescribed manner.

The CFS, along with FS, is presented at the AGM.

Example: A parent company with multiple subsidiaries creates a CFS, combining its financials with those of its subsidiaries for a comprehensive overview.

Rules for CFS:

CFS should be made following Schedule III provisions and Applicable Accounting Standards (AS).

If not required to prepare CFS under AS, compliance with Schedule III is sufficient.

Exceptions apply if the subsidiary is wholly or partially owned, not listed, and files CFS with the Registrar of Companies (RoC) as per Indian Accounting Standards (Ind AS).

Example: A company, ABC Ltd, wholly owns XYZ Pvt Ltd. If XYZ Pvt Ltd communicates to all members and they have no objections, and XYZ Pvt Ltd files CFS with RoC, ABC Ltd may not need to present CFS.

Application of Holding Company Rules:

Provisions for the preparation, adoption, and audit of FS by a holding company also apply to the CFS mentioned in Section 3.

Disclosure of Non-compliance:

If FS deviate (विचलन) from Accounting Standards, the company must disclose:
The deviation from AS.
Reasons for the deviation.
Financial effects, if any, of the deviation.

Example: If a company follows different accounting rules than the standard, it must explain why and reveal any financial impacts.

Exemptions and Contraventions:

The Central Government (CG) can exempt certain classes of companies from complying with this section in the public interest.

Contravention of this section can lead to penalties, with responsibility falling on officers like

Whole Time Director (WTD),
Managing Director (MD),
Chief Financial Officer (CFO),
or any person charged by the Board of Directors (BoD).

Example: Failure to prepare and present CFS as required may result in penalties, including fines or imprisonment, as specified in the section.

Section 129A: Periodical Financial Results

Periodical Financial Reporting for Unlisted Companies:

The Central Government (CG) can instruct certain classes of unlisted companies to regularly prepare and get approval for financial results.
The Board of Directors (BoD) must complete an audit or limited review as prescribed.

Example: ABC Ltd, an unlisted company, may be required to submit its quarterly financial results for government scrutiny.

Section 130: Re-opening of Accounts on Court's or Tribunal's Orders

Re-opening of Accounts Conditions:

A company cannot re-open its Books of Account (BOA) or recast (या पुनर्रचना) its Financial Statements (FS) unless the Income Tax Authority (ITA) files an application with the Court or Tribunal.

The Court/Tribunal must provide notice to CG, ITA, SEBI, etc., allowing them to present their case before making any decisions.

Example: The Income Tax Authority may request to re-open a company's accounts if they suspect fraudulent practices in the preparation of earlier accounts.

Section 131: Voluntary Revision of FS or Board's Report (after Tribunal's Approval)

Voluntary Revision Procedure:

If directors believe that the FS or Board's Report doesn't comply with Section 129 or 134, they may apply to the Tribunal for permission to revise.

After Tribunal approval, the revised accounts and Board's report are filed with the Registrar of Companies (RoC) within 30 days, accompanied by the prescribed fees.

Example: If ABC Ltd's directors realize that their financial statements don't align with legal requirements, they may voluntarily seek approval to revise and correct them.

Important Points:

The Tribunal considers representations from the Central Government (CG) and Income Tax Authority (ITA) before approving any revisions.

Revised FS or reports can only be prepared/filed once a year, and the reasons for revision must be disclosed in the Board's report.

Example: ABC Ltd, after obtaining approval from the Tribunal, revises its financial statements to align with legal requirements, disclosing the reasons in the annual Board's report.

Section 2: Alteration of Financial Statements (FS) or Reports of Previous Financial Years (FYS)

Limitations on Alterations:

When copies of previous FS or reports have been sent to members, delivered to the Registrar, or presented in general meetings, alterations are restricted.

Revisions are allowed only for correcting non-compliance with Section 129 or 134 and making necessary consequential alterations.

Example: ABC Ltd, after distributing its annual report to shareholders, can only revise it to correct errors in compliance with legal requirements.

Section 3: Application to Tribunal for Revision - Concept Clarification

Application to Tribunal Clarification:

Application to the Tribunal for revision is limited to once a year for each - FS and Board of Directors (BoD) report.

If a company revised its FS in December 2022, it can submit another application to revise the BoD report in March 2023.

Example: XYZ Ltd applied to the Tribunal to revise its financial statements in July 2022. In January 2023, they applied to revise the Board report.

Section 132: Constitution of National Financial Reporting Authority (NFRA)

Establishment of NFRA:

The Central Government (CG) can establish the National Financial Reporting Authority (NFRA) through notification to regulate accounting and auditing (A&A) standards.

Example: The government establishes NFRA to oversee and regulate financial reporting practices.

Functions of NFRA:

NFRA is responsible for making recommendations to CG on formulating A&A policies and standards, monitoring compliance, enforcing standards, and overseeing the quality of services related to compliance.

Example: NFRA may recommend to the government the formulation of new accounting standards to enhance transparency.

Constitution of NFRA:

NFRA consists of a Chairperson appointed by CG and up to 15 members, part-time and full-time, with expertise in accountancy, auditing, finance, or law.

Example: The Chairperson of NFRA is an expert in auditing, while other members bring diverse expertise in finance and law.

Section 38: Executive Body of NFRA

Executive Body Composition:

NFRA has an executive body, including the Chairperson and full-time members, for the efficient discharge of its functions.

The Chairperson and members must declare no conflict of interest, avoid association with audit firms during their appointment, and for two years after ceasing.

Example: The executive body, led by the Chairperson, ensures the smooth functioning of NFRA and maintains independence from audit firms.

Section 4: Investigative Powers of NFRA

Investigative Authority:

NFRA has the authority to investigate professional or other misconduct under the Chartered Accountants Act, 1949, either on its own initiative or referred by the Central Government (CG).

If NFRA initiates an investigation, no other institution can start or continue proceedings in the same matter.

Example: NFRA might investigate an auditing firm for professional misconduct related to financial reporting.

Powers Equivalent to Civil Court:

NFRA has powers comparable to a civil court, including the ability to summon individuals, examine them under oath, and inspect company documents at any location.

The authority can issue commissions for witness examinations or document inspection.

Example: NFRA, during an investigation, can summon auditors, examine them under oath, and inspect the books of accounts at the company's premises.

Penalties for Misconduct:

If professional misconduct is proven, NFRA can impose penalties, ranging from Rs. 1 lakh to five times the fees received for individuals and Rs. 5 lakhs to ten times the fees for firms.

Example: NFRA may penalize an auditing firm for professional misconduct by imposing a fine based on the fees received.

Debarment Orders:

NFRA has the authority to debar members or firms from certain roles or activities, including appointments as auditors or performing valuations.

Example: NFRA may bar an auditor (एक लेखा परीक्षक को रोकें) from being reappointed for a certain period due to proven professional misconduct.

Additional Points of NFRA

Annual Reporting and Forwarding to CG:

NFRA submits an annual report to the Central Government, detailing its activities during the fiscal year.
CG lays (rakhna) these reports before each House of Parliament.

Example: NFRA annually reports its activities to the government, providing transparency on its regulatory functions.

Rule 3 of NFRA Rules - Classes Governed by NFRA:

NFRA monitors specific classes of companies or bodies corporate, including listed companies, unlisted public companies with significant financial presence, insurance companies, banking companies, electricity companies, and entities referred by CG in public interest.

Example: ABC Ltd, a listed company with substantial financial operations, falls under the monitoring purview of NFRA.

Reporting by Business Corporations (BC):

BCs, governed by NFRA, must inform NFRA within 15 days of appointing an auditor.

NFRA stops governing if a BC's public share capital or total outstanding loans and borrowings fall below the specified limit for three consecutive years.

Example: XYZ Corp, a business corporation, notifies NFRA about its auditor's appointment within 15 days of the auditor's selection.

Section 133: CG Prescribing Accounting Standards (AS)

Prescribing Accounting Standards:

The Central Government (CG) has the authority to prescribe Accounting Standards (AS) or any addendum to them.

AS may be recommended by the Institute of Chartered Accountants of India (ICAI) under the Chartered Accountants Act, 1949, and after considering the recommendations of the National Financial Reporting Authority (NFRA).

Example: CG can specify how companies should present financial information, ensuring consistency and transparency across various businesses.

Transition Provision:

Until NFRA is established as per Section 132, CG can prescribe AS based on ICAI recommendations and consult with the National Advisory Committee on Accounting Standards (NACAS) under the previous law (Companies Act, 1956).

Example: Before NFRA's formation, the government relies on NACAS recommendations to set accounting standards.

Section 134: Financial Statements, Board's Report, etc.

Approval and Signing of Financial Statements (FS):

The Financial Statements, including Consolidated Financial Statements (CFS), must be approved by the Board of Directors (BoD) before signing by the chairperson.

The signing can be done by the Chairperson if authorized by the BoD or by two directors (one being the Managing Director), along with the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Company Secretary (CS). For a One Person Company (OPC), one director's signature is sufficient.

Example: Before submitting financial statements to auditors, the Board of XYZ Ltd approves and signs them, ensuring accountability.

Auditor's Report Attachment:

Every set of FS must include the auditor's report.

Example: ABC Corp attaches the auditor's report to its financial statements, providing an independent assessment of its financial health.

Board's Report Inclusion in FS:

In the FS presented at the General Meeting (GM), a Board's report should be attached.

The Board's report covers various aspects such as financial performance, corporate social responsibility (CSR), dividends, reserves, and policies.

Example: XYZ Inc includes a comprehensive Board's report in its financial statements, outlining the company's financial and non-financial performance, and future strategies.

Accounts of Company In Corporate Law (Part 1)