FINANCIAL REPORTING�IN INDIA

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DEVELOPMENT OF ACCOUNTING IN INDIA

The development of accounting in India can be traced back to the Vedic period. The Vedas are the oldest sacred texts of Hinduism and date back to around 1500 BCE. They contain references to various aspects of accounting, such as the keeping of accounts, the use of ledgers, and the use of double-entry bookkeeping (Rao, 2010). During the medieval period, accounting in India was developed further by the Muslim rulers who introduced various accounting practices from the Middle East. For example, the Mughal Emperor Akbar introduced the double-entry bookkeeping system (Rao, 2010). In the modern era, accounting in India was influenced by the British colonial rule. The British introduced various accounting practices and standards, such as double-entry book keeping and accrual accounting. After independence, the Government of India established the Institute of Chartered Accountants of India (ICAI) in 1949 to regulate the accounting profession in the country. Currently, the accounting profession in India is regulated by the ICAI and the Companies Act, 2013. The ICAI sets the accounting standards that must be followed by all entities in India. These standards are known as the Accounting Standards (AS) issued by the ICAI. The Companies Act, 2013 contains the legal framework for the preparation of financial statements by companies in India.

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FINANCIAL REPORTING

Financial reporting is the process of producing the reports ,called statements, that disclose an organization’s financial status to management , investors and government.

Financial statements are a collection of reports about an organization’s financial results , conditions, and cash flows

They are useful for

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• To derive financial ratios that can indicate the condition of the business.
• To determine the ability to generate cash,and sources and uses of that cash.

INTRODUCTION

India is a federal state with unitary bias ,this is perhaps why, unlike in the USA , there is no separate company law for any state in India.

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Corporate financial reporting in India is governed primarily by one Central Act i.e The Companies Act ,2013

Another body that has a major influence in reshaping Indian financial reporting is the Securities and Exchange Board of India (SEBI) . The Companies Act 2013 ,The Income Tax Act ,1961 together provide the legal framework of Corporate reporting in India.

OVERVIEW OF ACCOUNTING AND FINANCIAL REPORTING PRACTICES

The accounting and financial reporting practices in India are governed by the Companies Act of 1956(2013) (the ‘ACT’), which is considered to be the primary legislation governing companies in India. The Companies Act requires all the companies to prepare their financial statements in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) and to disclose certain information in their financial statements.

The main financial statements required by the Companies Act are

• Balance Sheet – A balance sheet depicts the value of economic resources controlled by an enterprise, as well as the liquidity and solvency of an enterprise. This is used to evaluate the ability of the enterprise in meeting its financial responsibilities.
•  Statement of Profit and Loss – Portrays the outcome of the functioning of the organization.
•  Cash Flow Statement – Outlines the way of determination of income, as well as its usage.
•  Notes and Schedules – Provide supplementary information explaining different modules of financial statements. A few examples can be risks and unreliability affecting an enterprise, accounting policies etc.

The balance sheet provides a snapshot of a company's financial position at a particular point in time, while the profit and loss account and cash flow statement provide information on a company's financial performance and cash flows over a period of time.

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• The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. SEBI has issued the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the "Listing Regulations") which requires listed companies to prepare and disseminate their financial statements in compliance with the GAAP in India.

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• Listed companies are also required to prepare and disseminate a separate set of financial statements in compliance with the International Financial Reporting Standards (IFRS) as notified by the Ministry of Corporate Affairs (MCA). The MCA has notified the Companies (Indian Accounting Standards) Rules, 2015 (the "Rules") which prescribes the application of IFRS in India. In terms of the Rules, all companies, other than those falling under the small and medium enterprises (SMEs) category, are required to prepare their financial statements for the financial year beginning on or after 1st April, 2016 in compliance with IFRS.

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• The Companies Act, 2013 (the "Act") and the Accounting Standards notified under the Act, as amended from time to time, require every company to prepare and present its financial statements in compliance with the generally accepted accounting principles in India ("GAAP"). The Ministry of Corporate Affairs (the "MCA") has been issuing accounting standards since the early 1990s.

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• In February 2015, the MCA issued 31 accounting standards (Ind AS) which are converged with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). These 31 Ind AS are applicable to all companies, except those which are exempt from compliance with Ind AS as per the transitional provisions.
• Audit in India is a statutory requirement and is carried out to ensure that the financial statements of the company are in compliance with the Companies Act, 2013. The audit is carried out by a practicing Chartered Accountant or a Cost and Works Accountant. Auditing in India is regulated by the Chartered Accountants Act, 1949 and the Companies Act, 2013. The Institute of Chartered Accountants of India (ICAI) is the statutory body for regulating the profession of Chartered Accountants in India. The ICAI is empowered to make regulations for the profession. The ICAI has issued various standards on auditing which are binding on all members of the Institute.

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FILING OF ANNUAL REPORTS

According to Section 137, subsection (1), one copy of the financial statements, including consolidated financial statement, if any, together shall be filed with the registrar along with the all documents. Statements shall be duly adopted at the annual general meeting of the company.

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LIMITATIONS

1. Lack of timely and accurate reporting: Financial statements in India are often released several months after the end of the reporting period, making them outdated by the time they are released. In addition, there have been instances of companies manipulating their financial statements to paint a rosier picture of their financial health.

2. Lack of transparency: Indian companies are not required to disclose as much information as their counterparts in developed markets. This lack of transparency makes it difficult for investors to make informed investment decisions.

3. Lack of independent oversight: The Securities and Exchange Board of India (SEBI), the regulator of the capital markets in India, does not have the same level of independence as its counterparts in developed markets. This lack of independence raises concerns about the efficacy of SEBI’s regulations and its ability to protect investors.

4. Volatile currency: The Indian rupee is a volatile currency, which can make it difficult for investors to properly value Indian companies.

5. High levels of corruption: Corruption is rampant in India, and this corruption can extend to the financial reporting of companies. This makes it difficult for investors to trust the financial statements of Indian companies.

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CONTENTS OF FINANCIAL REPORTING

• BALANCE SHEET
• STATEMENT OF PROFIT AND LOSS ACCOUNT
• NARRATIVE DISCLOSURE
• CASH FLOW STATEMENT
• SUPPLEMENTARY STATEMENTS
• AUDITORS REPORT
• DIRECTORS REPORT

BALANCE SHEET-�THE BALANCE SHEET IS A STATEMENT THAT SHOWS THE FINANCIAL POSITION OF THE BUSINESS. IT RECORDS THE ASSETS AND LIABILITIES OF THE BUSINESS AT THE END OF THE ACCOUNTING PERIOD AFTER THE PREPARATION OF TRADING AND PROFIT AND LOSS ACCOUNTS

STATEMENT OF P&L -THE PROFIT AND LOSS (P&L) STATEMENT IS A FINANCIAL STATEMENT THAT SUMMARIZES THE REVENUES, COSTS, AND EXPENSES INCURRED DURING A SPECIFIED PERIOD.�

NARRATIVE DISCLOSURES

• Narrative accounting disclosures are an integral part of the corporate financial reporting package. They are deemed to provide a view of the company “through the eyes of management”. The narratives represent management's construal of corporate events and are largely discretionary. 
• In most cases, narrative disclosures are presented in textual forms where in more emphasis is laid on words than on figures.

CASH FLOW STATEMENT

• A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period. 
• The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.
• The cash flow statement is typically broken into three sections:

Operating activities detail cash flow that’s generated once the company delivers its regular goods or services, and includes both revenue and expenses. 

Investing activities include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt. 

Financing activities detail cash flow from both debt and equity financing.

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SUPPLEMENTARY STATEMENTS-

• A supplementary statement is a supporting schedule that expands upon the information in an organization's income statement, balance sheet, or statement of cash flows. For example, a supplementary statement could identify the major classifications of inventory or fixed assets that were only stated in the balance sheet in summary form. These statements are typically attached to a set of financial statements when the statements are being distributed outside of the organization; they are rarely attached to internal distributions.

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AUDITORS REPORT-

• An Audit Report describes the financial condition and internal accounting controls by an independent auditor.
• For any enterprise, the audit report is a key deliverable which shows the end results of the entire audit process. The users of financial statements like Investors, Lenders, Customers, and others base their decisions and plans on audit reports of any enterprise. An auditor’s report describes the audited financial statements in the introductory paragraph. The scope paragraph gives a brief on the nature of the audit. The auditor expresses their opinion in the opinion paragraph.

DIRECTORS REPORT-

• The directors of a company are responsible for its management and are accountable to the shareholders. The director's report is prepared by the board of directors and presented to the shareholders at the annual general meeting. It provides an overview of the company’s performance and activities during the year. The director’s report must include a statement of the directors’ responsibilities regarding the financial statements and the report of the auditors. It must also contain a statement of the directors’ opinion on the current concern basis of the company. The director's report is prepared under the Companies Act and its regulations. It must be signed by at least two directors, including the chairman or the managing director. 

Contents Of Director’s Report �

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• A statement about the directors’ responsibilities regarding the financial statements and the report of the auditors
• A statement of the directors’ opinion on the current concern basis of the company
• An overview of the company’s performance and activities during the year
• A description of the principal risks and uncertainties faced by the company  
• A review of the company’s financial position and prospects
• A statement of the amount of any remuneration and benefits paid or accrued to the directors during the year 
• The names of the directors who served on the board during the year
• Change in share capital 
• Comments by the board for remarks given by the auditors in audit reports.  

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REGULATORY AUTHORITIES

IN INDIA

companies act ,2013

The Companies Act lays down the detailed provisions regarding the maintenance of books of accounts and the preparation and presentation of annual accounts and also prescribes the mechanism for issuance of accounting standards.

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It specifies the roles and responsibilities of directors and also the matters to be reported upon by them in the annual reports of the companies.

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The act extensively deals with the qualification ,appointment ,removal ,rights ,duties ,and liabilities of auditors and provide contents of annual reports

Also regulates the information and disclosure requirements of financial reporting in India

Income tax act ,1961

Income tax act ,1961

Section 44AB

Tax audit is mandatory for every company carrying on business or profession and fulfilling certain conditions

DISCLOSURE REQUIREMENTS

The disclosure requirements in India are governed by the Companies Act, 2013 and the accounting standards issued by the Institute of Chartered Accountants of India (ICAI). The disclosure requirements in India are broadly in line with the International Financial Reporting Standards (IFRS).

Disclosure requirement

Constitution of National Financial Reporting Authority (Sec. 132)

This Section provides that the Central Government may by notification constitute the NFRA

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• to advice on Accounting Standards (AS) & Auditing Standards(SA),

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• to monitor, enforce, compliance and overseeing the quality of service of associated professionals.

Requirements Of Financial Statements Section 129 ,

• The FS shall give a true and fair view and comply with the AS & shall be in the form as provided in Schedule III.

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• No provision of this section shall apply to Insurance Company, Banking Company or any Company engaged in the generation or supply of electricity, or to any other class of Company for which a form of financial statement has been specified in or under the Act governing such class of Company.

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• The Financial Statements shall be prepared and laid before at the every Annual General Meeting of the Company by the Board of Directors

• Where a Company has one or more subsidiaries (Subsidiary include Associate Company and Joint Venture), Company shall in addition to its own financial statements prepare a consolidated Financial Statement of all the subsidiaries in the same manner as the Company prepare its own Financial Statement, which shall also be laid before the Annual General Meeting of the Company.

• If financial statements do not comply with accounting standards, then Company shall disclose in financial statements the deviation from accounting standards, reason for such deviation and financial effect due to such deviation

Regulatory framework of corporate financial reporting in india

section “128 -138” of Indian Companies Act deal with the accounts of companies registered under Indian Companies Act ,2013

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The Institute of Chartered Accountants of India (ICAI)

is the national professional accounting body of India..

It was established on 1 July 1949 as a body corporate

 under the Chartered Accountants Act, 1949 enacted by

the Parliament  to regulate the profession of Chartered Accountancy i

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Objective

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Institution of chartered accountant of india

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firstly

The ICAI also regulates the reporting and disclosure requirements in two ways

It requires its members to ensure compliance with all the accounting standards issued by it ..

SECONDLY

THE ICAI HAS ALSO CONSTITUTED THE FINANCIAL REPORTING REVIEW BOARD (FRRB).

REVIEWS FINANCIAL STATEMENTS OF CERTAIN SELECTED ENTERPRISES WITH A VIEW TO CHECK COMPLIANCE WITH ACCOUNTING STANDARDS

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BRING SOME RELIEF NOT ONLY FOR FOREIGN COMPANIES IN INDIA BUT ALSO FOR INDIAN MULTINATIONALS LISTED ON STOCK EXCHANGES IN COUNTRIES THAT HAVE ALREADY ADOPTED IFRS.

ADOPTION OF IFRS FROM 2011

CONCLUSION..

CONCLUSION

The regulatory framework of financial reporting is very important in determination of the form and contents of financial reports.The regulatory frame work on which financial reporting in India is based may vary across border and within the same country across various types of business organisations. In India companies are required to present &publish financial statements as per revised scheduled VI.