Top Ways to Quickly Review Financial Statements
Are you a finance professional gearing up for the annual filing process? One crucial task that takes precedence during this time is carefully examining the
financial statements of a company. Whether you are an accountant, auditor, or finance professional, conducting a thorough review of financial statements is essential for a smooth and error-free filing process. In this article, we will explore a quick and efficient approach to reviewing financial statements. After reading this article you can streamline the review process and ensure accuracy, transparency, and adherence to the legal requirements of annual filing.
Let’s dive in and discover the key steps to effectively review financial statements:
- The very first step is to understand the definition of financial statements. According to Section 2 (40) of the Companies Act, 2013, Financial Statement comprises various components and each component plays a vital role in presenting a comprehensive picture of the company’s financial performance and position.
Balance Sheet: The first essential component is the Balance Sheet, which provides a snapshot of the company’s financial position at the end of the financial year. It reflects the assets, liabilities, and shareholders’ equity, giving stakeholders an overview of the company’s financial health.
Profit & Loss Account: Next, we have the Profit & Loss Account (or Income and Expenditure Account for non-profit organizations). This statement outlines the income generated and expenses incurred during the financial year, ultimately indicating the company’s profitability or loss.
Cash Flow Statement: For most companies, a Cash Flow Statement is also required, except for One Person Companies, Small Companies, and Dormant Companies. The Cash Flow Statement demonstrates the inflow and outflow of cash throughout the financial year, providing valuable insights into the company’s liquidity and cash management.
The Statement of Changes in Equity: Furthermore, if applicable, the Statement of Changes in Equity should be included. This document showcases the changes in the company’s equity over the financial year, including contributions, withdrawals, profits, and losses. It helps stakeholders understand the shifts in the company’s ownership and financial structure.
Lastly, any other explanatory documents accompanying the aforementioned items should be included to provide additional context and clarification.
Now, quickly it can be confirmed that the financial statements are complete, incorporating all the relevant components as per their definition and applicability. Careful examination and adherence to these requirements contribute to accurate and compliant financial reporting, ensuring transparency and trustworthiness for stakeholders.
By meticulously reviewing the financial statements and verifying the presence of each item, professionals can fulfill their obligations under the Companies Act, 2013, and facilitate the annual filing process smoothly.
- Financial Statements must Comply with Section 12 (3) of the Companies Act, 2013: Taking a conservative approach, financial statements can be considered official publications and they should prominently contain the following details of the company:
- Corporate Identity Number
- Registered Address
- Telephone number, fax number (if applicable)
- Email and website addresses
The above-listed details are reflected on the face of the financial statements. So, It helps is help in the quick review of Financial Statements to ensure adherence to the requirements outlined in the said section of the Act.
- The signing of the Financial Statements: Another crucial aspect to review financial statements is considering the signing of financial statements. Section 134 (1) of the Companies Act, 2013 states that the financial statements should be signed by:
- The Chairman (if authorized by the board), OR Two directors, one of whom is the managing director (if applicable)
- Additionally, the financial statements should also be signed by the following key officers, if appointed by the company:
a) Chief Executive Officer (if appointed)
b) Chief Financial Officer (if appointed)
c) Company Secretary (if appointed)
It is important to note that for One Person Companies, the financial statements can be signed by a director.
- Check the Sequence of Signing: In addition to the signing of the Financial Statements, it is crucial to ensure that the sequence of signing is accurate. This ensures compliance with the requirements outlined in section 134(1) of the companies act, 2013. Paying attention to the order of signing is essential to maintain the integrity and validity of the financial statements. The date of signing by the board or Key Management Personnel (as per Section 134 (1) of the Companies Act, 2013) should precede the auditor’s signing date.
Also verify the details of the signatories, including their positions and relevant information such as Director Identification Number (DIN) and Permanent Account Number (PAN) to avoid any clerical error.
- Key Limits to Check for Compliance:
A. Section 186 of the Companies Act, 2013: Focus on this section while reviewing the assets side of the balance sheet. It has specified the limit for making loans, investments, or providing guarantees by the company.
Ensure that the total loan and investment do not exceed the specified limit of the section ie.
60% of paid-up share capital, free reserves, and securities premium account, OR
100% of free reserves and securities premium account,
Whichever is more.
The section also states that the above-said limits can be extended through a special resolution of the company.
However, it is worth mentioning that Section 186(11) exempts certain entities from these limits. Banking companies, insurance companies, housing finance companies, and companies financing industrial enterprises or providing infrastructural facilities from the abovementioned limits.
While reviewing the asset side of the balance sheet, it is crucial to thoroughly assess the company’s loans, investments, and guarantees to ensure compliance with the prescribed limit of section 186, careful evaluation and adherence to these provisions contribute to sound financial management and regulatory compliance.
B. Section 185 of the Companies Act, 2013: Pay attention to this section while reviewing the asset side of the balance sheet. This section specifically prohibits companies to provide loans to their directors. However, there are exceptions, subject to certain conditions.
According to section 185, the loan can be provided to “any person in whom any of the directors are interested” after passing a special resolution . It is important to note that the “person in whom any of the directors are interested” is defined within the section itself. It includes the following categories:
a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than twenty-five percent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act by the directions or instructions of the Board, or of any director or directors, of the lending company.
It is advisable to refer to the actual text of section 185 to gain a detailed understanding of its provisions. For further clarification and to ensure compliance, it is recommended to review the section directly using the following link:
Section 185. Loan to Directors, etc.
Notified Date of Section: 12/09/2013
185. Loan to Directors, etc.
1[(1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—
(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.
(2) A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—:
(a) a special resolution is passed by the company in general meeting:
Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and
(b) the loans are utilised by the borrowing company for its principal business activities.
Explanation.-For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means—:
(a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such Directors, together; or
(c) any body corporate, the Board of Directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or Directors, of the lending company.
(3) Nothing contained in sub-sections (1) and (2) shall apply to—
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or
(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]
(4) If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—:
(i) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
(ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and
(iii) the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.]
Amendment
1. Substituted by the Companies (Amendment) Act,2017- - Amendment Effective from 7th May 2018
Original Omitted Content- 2,3&4[185. (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its Directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:
Provided that nothing contained in this sub-section shall apply to–
(a) the giving of any loan to a managing or whole-time director–
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.
1[(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]
Explanation.–For the purposes of this section, the expression “to any other person in whom director is interested” means–
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
5&6[(c) any private company of which any such director is a director or member;]
(d) any body corporate at a general meeting of which not less than twentyfive per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such Directors, together; or
(e) any body corporate, the Board of Directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or Directors, of the lending company.
(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.]
Amendment
1.Inserted by Companies (Amendment) Act, 2015 and is effective from 29th May, 2015
Exceptions/ Modifications/ Adaptations
2. In case of private company - Section 185 shall not apply to a private company-
(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
(c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section. - Notification dated 5th june, 2015.
3. In case of Nidhi company - Section 185 shall not apply , provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note. - Notification dated 5th june, 2015.
4. In case of Government company - Section 185 shall not apply to Government Companyin case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security under the section. - Notification dated 5th june, 2015.
5. In case of Specified IFSC Public Company - In Sub-section (1) of section 185, in the Explanation, for clause (c), the following clause shall be substituted, namely:-
“(c) any private company of which any such director is a director or member in which director of the lending company do not have direct or indirect shareholding through themselves or through their relatives and a special resolution is passed to this effect;”. -Notification Dated 4th January, 2017.
6. In case of Specified IFSC Private Company - In Sub-section (1) of section 185, in the Explanation, for clause (c), the following clause shall be substituted, namely:-
“(c) any private company of which any such director is a director or member in which director of the lending company do not have direct or indirect shareholding through themselves or through their relatives and a special resolution is passed to this effect;”. -Notification Dated 4th January, 2017.
C. Fund source of the Company: When analysing the liability side of the balance sheet, it is crucial to focus on Section 73 of the Companies Act, 2013. This section outlines specific guidelines regarding the acceptance of funds by the company. To expedite the review process of Financial Statements, consider the following key points:
Loan from Directors: The company is permitted to accept loans from directors and other companies. However, it is important to ensure that a declaration is made stating that the funds provided by the directors are not sourced from the borrowing, loans or deposits from others.
Loan from Companies: The Company is permitted to accept loans from other companies.
Loan from Relative of Directors: Allowed to only private companies. Further, declaration that the funds provided by the them are not sourced from the borrowing, loans or deposits from others.
Loan from Shareholders: Loans from shareholders are only allowed for private companies.
Loan from Individuals and Partnership Firms: Loans from individuals and partnership firms are not allowed and are considered as deposits. If the company does not accept deposits, these items should be removed from the balance sheet to avoid penal actions.
Rule 2 of the companies (acceptance of deposits) rules, 2014, itself provides the list of the funds which are not considered deposits and permissible for companies to avail fund. For more detailed understanding you are advisable to read the respective rule from the following link.
https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/rules.html
D. Borrowing limit of the company: Additionally, the borrowing limit of the company is important to review as it is determined by Section 180(1)(c) of the Companies Act, 2013.This section outlines the specific provisions regarding the maximum amount of fund that the company can borrow.
To ensure compliance with the Section 180(1)(c) , it is important to verify that the company’s borrowed funds do not exceed the aggregate of the following:
Paid-up share capital
Free reserves,
Securities Premium
If the borrowing exceeds the above said limit, It is required that the company has obtained shareholders’ approval by passing special resolution to comply with the requirement of the said Section .
All the above points are sufficient for a quick review of financial statements and an error-free annual filing process. By ensuring the above compliances, the financial statements can be reviewed from the perspective of mandatory compliances of the Companies Act, 2013 , which are apparent from financial statements and empower you to make informed decisions.
Remember, staying compliant is not just a professional responsibility; it is a strategic advantage in the ever-evolving landscape of corporate governance. Join us on this journey of compliance and financial statement analysis to pave the way for successful annual filings. Stay tuned for our upcoming articles, where we will unravel the intricacies of the Companies Act, 2013, and provide expert insights to guide you through the compliance maze.
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