Indian corporates have a new Companies Law to comply with effect from FY 2014-15. It is said that any new act brings along with it some uncertainties and reservations. One of the impacts of the New Companies Act 2013 is the requirement for preparing consolidated financial statements for every company having at least one Subsidiary, Associate, or Joint Venture (Section 129(3) of the Companies Act, 2013). Hitherto the mandate for preparing consolidated statements was only applicable to listed entities as per clause 32 of the listing agreement.
In this blog, let’s examine the rationale behind section 129(3) of the Companies Act, 2013 asking for consolidated financial statements. In a versatile economy, the corporate structures get complex. Such complex structures are set up for ease of administration, expanding operations in various geographies, availing tax exemptions/benefits, etc. If the stakeholders view only the standalone financial statements then the spirit of the financial numbers reported gets diluted.
There is a signification amount of story that cannot be communicated in the standalone financial statement. A Standalone financial statement fails to reflect the performance and health of other companies in the group. To arrive at an aggregate view would be a challenge for regulators and other stakeholders. Through a consolidated financial statements, transparency can be achieved and the group-level financial numbers can be disclosed to all stakeholders.
There was a provision under the erstwhile Company’s Act, which required attaching the balance sheet and income statement of the Subsidiary, however, this information would be found somewhere in notes to accounts and would not explicitly reflect on the face financials of the company. Consolidated financial statements would ensure the completeness of data and paint the larger picture of the company’s operations.
In an environment in which governance is getting stricter even the company management would like to get a consolidated view to assessing risk at the group level for framing decisions rather than analyzing the performance based on individual entities. The consolidated financial statement also helps in negating the effects of inter-company transactions thus preventing companies from the possibility of misstatement in the financial report.
All these challenges perhaps have compelled the New Companies Act 2013 to make consolidation mandatory.