Financial statements are crucial documents that provide an insight into a company's financial position and performance. Prepared annually, these statements are required to comply with the Companies Act 2013, which governs their preparation, presentation, and filing. This article will delve into the various aspects of financial statements as mandated by the Companies Act 2013, including their definition, components, preparation, signing, and other relevant details.
Defining Financial Statements as Per the Companies Act 2013
According to Section 2(40) of the Companies Act 2013, financial statements consist of the following elements:
1. Balance sheet 2. Profit and loss account, or in case of a non-profit organization, an income and expenditure account for the year 3. Cash flow statement 4. Statement of changes in equity 5. Any annexure forming a part of the financial statements
These statements provide a comprehensive view of a company's assets, liabilities, shareholders' equity, revenues, and expenses, which are essential for stakeholders to make informed decisions about their investments in the company.
Components of Financial Statements
Balance Sheet
The balance sheet is a snapshot of a company's financial position at the end of a financial year. It provides a summary of the company's assets, liabilities, and shareholders' equity, which helps assess its financial health.
Profit and Loss Account
The profit and loss account, sometimes referred to as the income statement, presents the company's revenues, expenses, and net profit or loss for a given financial year. This account is vital for understanding the company's operational performance and profitability.
Cash Flow Statement
The cash flow statement offers a summary of a company's cash inflows and outflows during a financial year. It is categorized into three sections: operating activities, investing activities, and financing activities. This statement is crucial for evaluating the company's liquidity and cash management.
Statement of Changes in Equity
The statement of changes in equity, also known as the statement of shareholders' equity, showcases the changes in a company's equity components during a financial year. These components may include share capital, retained earnings, reserves, and other equity items.
Annexure
Any relevant notes or supporting documents that form a part of the financial statements are referred to as annexures. These documents provide additional information and clarification on the items mentioned in the financial statements.
Preparation of Financial Statements
The Companies Act 2013 mandates that financial statements be prepared in accordance with Schedule III of Section 129. This schedule provides a prescribed format for the presentation of financial statements, which ensures consistency and comparability across different companies. The prepared financial statements should be laid before the shareholders at the company's annual general meeting (AGM).
Signing of Financial Statements
As per Section 134 of the Companies Act 2013, financial statements must be signed by the following individuals:
6. Chairperson of the company (if authorized by the board of directors) or 7. By any two directors of the company, one of whom should be a managing director, and 8. Chief Executive Officer, Company Secretary, or Chief Financial Officer of the company (based on their appointment within the company)
The signed financial statements are then submitted to the auditors, who prepare an auditor's report that is attached to the financial statements.
Adoption and Circulation of Financial Statements
Financial statements must be adopted by the company at the annual general meeting (AGM), which should be held within six months from the end of the relevant financial year, i.e., by September 30th. After signing, the financial statements, including any consolidated financial statements, are circulated along with the following documents:
9. The auditor's report 10. Any notes or annexures 11. The board's report
Board's Report Content
The board's report is an essential document that accompanies the financial statements. It includes information such as:
12. Corporate social responsibility (CSR) policy and initiatives 13. Address of the company's website 14. Statement of the company's affairs 15. Details of contracts or arrangements with related parties (in Form No. AOC-2) 16. Director's responsibility statement 17. Information on energy conservation, technology absorption, and foreign exchange 18. Policy on remuneration and director's appointment 19. Adverse remarks from secretarial auditors or internal auditors, along with the board's response 20. Details of fraud reported by auditors 21. Statement of annual evaluation 22. Declaration by independent directors 23. Number of board meetings held 24. Details of guarantees, loans, or investments made by the company 25. Reserves and dividend paid
Requirement of Directors' Signatures
At least two directors, one of whom should be a managing director, must sign the financial statements. In case a company has only one director, that director should sign the statements.
Mandatory Signature of Company Secretary
As per Section 134(1), if a company has appointed a whole-time company secretary, their signature is mandatory on the financial statements. Additionally, if a company has appointed a chief executive officer or chief financial officer, their signatures are also required. If a company does not have a CFO and a CS, only the chairman can sign the financial statements. If the company does not have a chairperson or if they have not been authorized by the board, the financial statements should be signed by two directors, one of whom should be the managing director, and the CFO (if they are a director).
Signing of Financial Statements in One Person Company (OPC)
In the case of a one-person company (OPC), the financial statements should be signed by the sole director.
Electronic Signing of Financial Statements
Financial statements can also be signed electronically using the digital signatures of the directors, chief executive officer, company secretary, chief financial officer, and statutory auditors.
Date of Signing of Financial Statements
The date of signing the financial statements, including the balance sheet, profit and loss account, cash flow statement, and other supporting documents, should either be before or on the actual date of signing the auditor's report.
Signing Dates of Financial Statements by Directors and Auditors
After the directors sign the financial statements, they are sent to the auditors for signing. It is common for auditors and directors to sign the financial statements at different places and dates. As a result, the date of signing by the auditors might differ from the date of signing by the directors. Once the financial statements are signed by both the directors and the auditors, they are adopted by the shareholders at the company's AGM.
Approval of Financial Statements
As per Section 134(1), the financial statements must be approved by the board of directors in a board meeting and signed on behalf of the board.
Revision of Financial Statements
A company is allowed to file a revised financial statement once every financial year. After receiving an order from the tribunal, the company can file a revised financial statement with the Registrar of Companies (ROC), along with a copy of the order, provided that the company can revise the financial statements for any of the previous three financial years.
There are two types of revisions: compulsory and voluntary. Compulsory revisions occur when accounts are found to be fraudulent, misleading, or incorrect, while voluntary revisions can be requested if the financial statements were not prepared according to the law.
Conclusion
In summary, financial statements are a crucial component of a company's financial reporting and are governed by the Companies Act 2013. Companies must adhere to the act's provisions regarding the preparation, signing, adoption, and circulation of financial statements to avoid penalties and ensure compliance with corporate governance norms. By understanding and implementing the requirements of the Companies Act 2013, companies can provide accurate and transparent financial information to their stakeholders, fostering trust and confidence in their financial performance.
