UNIT:III

Credible financial statements

http://articles.economictimes.indiatimes.com/2010-0526/news/27585336_1_international-accounting-standards-board-ifrs-sme-sector
When the phased implementation of the International Financial Reporting Standards (IFRS)
begins next year, the small and medium enterprises (SME) will be exempt. But large Indian
companies will have to compulsorily prepare their financial statements in compliance with
IFRS. By 2014, listed companies across all sectors including banking and non-banking
financial services will have to cast their accounts as per the IFRS requirement.
The roadmap notified by the government states that the globally-accepted, and rigorous,
accounting standards may be adopted by smaller businesses on an optional basis. Given the
complexities and costs involved in implementing the new standard, the natural response of
the SME sector would be to delay its adoption till it becomes compulsory.
Besides, there is no apparent incentive to adopt IFRS, especially when it involves huge
expenditure in training people and overhauling the company's operational and information
technology processes. That apart, there are concerns that new accounting standards would
depress valuation of businesses.
Yet, that should not deter the SME sector from embracing an accounting standard that is
globally accepted and is more rigorous than those followed now. In any case, the
International Accounting Standards Board has prescribed a lighter version of IFRS for the
SME sector, mostly companies that do not have capital market exposure but need to give
users, such as lenders, of their financial statement a fair view of the company's short-term
cash flows, liquidity and solvency.
Voluntary adoption of the new accounting standard would make financial statements of the
SME sector comparable with those of similar entities elsewhere and more transparent. This
would be particularly useful when partnerships are sought to be forged with entities overseas
or when businesses need to raise funds.
The rigorous requirements of the IFRS, both the full and lighter version, would also serve to
improve a company's credibility, and that could help them access funds at lower cost. Rather
than wait for the government to take a view, small businesses with big ambitions should
follow the larger companies in adopting the new accounting standard.
Government provides clarity on consolidated financial statement
The government today said that provisions of consolidated financial statement in the new
companies law would not be applicable for the current fiscal on corporates that do not have
any subsidiaries but have joint ventures, among others.

In this regard, the Corporate Affairs Ministry has made amendments to Companies
(Accounts) Rules, 2014 under the new companies law.
According to the Ministry, the rule pertaining to consolidated financial statement would not
be applicable on certain entities for the current financial year ending March 31, 2015.
This rule would not "apply for the financial year commencing from the April 1, 2014 and
ending on the March 31, 2015, in case of a company which does not have a subsidiary or
subsidiaries but has one or more associate companies or joint ventures or both, for the
consolidation of financial statement in respect of associate companies or joint ventures or
both, as the case may be".
The Ministry is implementing the Companies Act, 2013. Further, the Ministry in a statement
said that "nothing in this rule shall apply in respect of preparation of consolidated financial
statement by an intermediate wholly- owned subsidiary, other than a wholly-owned
subsidiary whose immediate parent is a company incorporated outside India".
Separately, the Ministry said that a trustee representing Real Estate Investment Trust ( REIT)
or Infrastructure Investment Trust (InvITs) can be a partner in a Limited Liability Partnership
(LLP).
The Ministry's observation has come after clarifications were in this regard.
"The matter has been examined in consultation with the Law Ministry and it is clarified that
for the purposes of these trusts it is not barred for a trustee, being a body corporate, to hold
partnership in an LLP in its name without the addition of the statement that it is a trustee," it
said in a separate statement.
To attract more investments into the country's real estate and infrastructure sectors, the
government has recently introduced REITs and InvITs.