FINANCIAL STATEMENT AND BOARD'S REPORT UNDER NEW COMPANY LAW

[Dr. Sanjiv Agarwal]

Statutory Provision (Section134)

(1)  The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the Chairman where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and Chief Executive Officer, if any, if he is a director in the company and by Chief Financial Officer and company secretary of the company, or, in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.

(2)  The auditors’ report shall be attached to every financial statement.

(3)  There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include -

(a)  the extract of the annual return as provided under sub-section (3) of section 92;

(b)  number of meetings of the Board;

(c)  Directors’ Responsibility Statement;

(d)  a statement on declaration given by independent directors under sub-section of section 149;

(e)  in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;

(f)   explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made -

(i)   by the auditor in his report; and

(ii)  by the company secretary in his secretarial audit report;

(g)  particulars of loans, guarantees or investments under section 186;

(h)  particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;

(i)   the state of the company’s affairs;

(j)   the amounts, if any, which it proposes to carry to any reserves;

(k)  the amount, if any, which it recommends should be paid by way of dividend;

(l)   material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;

(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;

(n)  a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;

(o)  the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;

(p)  in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;

(q)  such other matters as may be prescribed.

 (4)  The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

(5)   The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that -

(a)  in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b)   the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;

(c)   the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d)   the directors had prepared the annual accounts on a going concern basis; and

(e)   the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively;

Explanation. - For the purposes of this section, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

(f)   the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

 (6)  The Board’s report and any annexures thereto under sub-section (3) shall be signed by its Chairman if he is authorised by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.

 (7)   A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of -

(a)  any notes or documents which are required to be attached to the financial statement in pursuance of section 129;

(b)  the auditor’s report; and

(c)  the Board’s report referred to in sub-section (3).

(8)  If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Legislative history

The corresponding sections in Companies Act, 1956 are section 215, 216 and 217 which dealt with as under –

Section 215     Authentication of balance sheet and profit and loss account

Section 216     Profit and loss account to be annexed and auditor's report to be attached to balance sheet

Section 217     Board's report

Scope

This section corresponds to Section 215, 216 and 217 of the Companies Act, 1956 and seeks to provide that the financial statements including consolidated financial statements should be approved by the Board of Directors before they are signed and submitted to auditors for their report. The auditor’s report is to be attached to every financial statement. A report by the Board of Directors containing details on the matters specified, including directors responsibility statement, shall be attached to every financial statement laid before company. The Board’s report and every annexure has to be duly signed. A signed copy of every financial statement shall be circulated, issued or published along with all notes or documents, the auditor’s report and Board’s report. The provision also provides for penal provisions for the company and every officer of the company ,in case of any contravention.

Section 134 deals with financial statements as well as board's report. This module covers provisions relating to the financial statements.

The financial statements including consolidated financial statement for submission to the auditor for his report thereon should be signed on behalf of the Board atleast by the Chairperson or by two directors, out of which one shall be the Managing Director and the Chief Executive Officer, Chief Financial Officer and the Company Secretary of the company. However, in case of one person company , it is required to be signed only by one director.

Provisions no longer required  

• In the Law, no distinction has been made between a Company and Banking Company for the purpose of signing of the Balance Sheet.
• The provisions under the Companies Act, 1956 which allow only one of the Directors to sign the financial statements, with explanations and reasons for non compliance with the provisions of signing of financial statements by minimum two Directors has been dispensed with.
• Following disclosures as provided under the Companies Act, 1956 are no longer required to be disclosed in Directors Report:

(i)        Reasons for the failure of completion of buy back in the time period specified .

(ii)       Details of employees, who are in receipt of remuneration, which is not less than the prescribed rate of remuneration

Requirements as to financial statements

• Financial statement of the company including consolidated financial statements, if applicable, should be approved by the Board of Directors, before such statements are signed.
• Financial statement should be signed on behalf of the board by atleast
  • chairperson of company, duly authorised board, or
  • two directors of whom one should be the managing director, and
  • chief executive officer, if he is director, chief financial officer and company secretary, if any in the company
  • One person company's financial statements shall be signed by only one director.
  • Such sign is required for submission of financial statements to the auditor for his report.
  • Auditors report is required to be attached to every financial statement.
  • Board report shall be attached to the statements laid before the company in general meeting.
  • Signed copy of financial statements (including cash flow statement) shall be issued / circulated / published alongwith copy of –
    • notes to accounts forming part of financial statements
    • auditors report thereon
    • board's report

 Penal provisions

Any contravention of provisions of Section 134 is punishable to the following extent –

a)    company is punishable with fine of not less than rupees fifty thousand but which may extend upto rupees twenty five lakhs, and

b)    every officer in default is punishable with –

(i)    imprisonment upto a term of three years, or

(ii)   monetary fine from fifty thousand rupees to rupees five lakh, or

(iii)  both (i) and (ii) above

Rules to be prescribed

Rules  are being prescribed for :

a)    form of financial statements (schedule III)

b)    matters to be included in Board's report