Every company deals with a number of daily business operations. The financial operations that take place during a venture are also included in these activities. The financial activities of a company are also recorded, just like the other operations. Financial statements so provide a summary of a company’s financial performance. Financial statements are the records of financial transactions maintained in books. Financial Statements are the formal written documentation of ongoing corporate operations. Although they may be generated for any time period, financial statements are most frequently created at the end of a month, or a quarter, or a year.
Any business that has been formed under the Companies Act of 2013 must provide its annual financial statements in accordance with Schedule III and Section 129 of the Act. The yearly financial statement must be created and filed since it is a real representation of the company’s financial health and condition of affairs.
What is a Financial Statement?
The Section 2(40) of the Companies Act of 2013 explain the term Financial Statement, and it includes the below mentioned:
- Balance Sheet;
- Profit and Loss account or Income and Expenditure account (as the case may be);
- Cash Flow Statement;
- Statement of changes in Equity (if applicable)
- Explanatory Note
In case of a one person company, dormant company and a small company, there is no need for the preparation of the cash flow statement.
Financial Statements Types on the Basis of Period
The two categories of financial statements are as follows:
- Once a financial year, annual financial statements are prepared.
- According to SEBI rules, listed companies must prepare quarterly financial statements.
Explanation of Section 129 of Companies Act, 2013
A company must publish an annual financial statement, according to Section 129 of the 2013 Companies Act. These are utilized as proof of the company’s actions and are recognized as business documents. According to Section 129 of the Companies Act of 2013 (the Act), the financial statements of the Company shall be prepared in accordance with Schedule Ill of the Act and shall offer a true and fair representation of the Company’s state of affairs and comply with all relevant accounting standards.
Sub Clause (1) – Section 129 of Companies Act, 2013
The following fundamental legal conditions must be met by a company’s financial statements in line with section 129(1) of CA, 2013:
- Financial Statements must present a fair and accurate/true picture of the financial situation of a company or companies.
- The financial statement complies with Schedule III’s obligations and the accounting guidelines outlined in Section 133 of the Act.
The following companies are exempt from adhering to the fundamental legal criteria outlined in section 129’s subsection (1):
- Insurance Company;
- Banking Company;
- Electricity Company;
- Any other class of companies that fall under the purview of the CA, 2013 or for whom a specific financial statement format has been established.
Sub Clause (2) – Section 129 of Companies Act, 2013
The annual financial statement which is prepared by company in accordance with Schedule III and other Act regulations is to be presented by the Board of Directors at the company’s Annual General Meeting (AGM) in accordance with Section 96 of the Act, according to Section 129(2).
Sub Clause (3) – Section 129 of Companies Act, 2013
According to section 129’s sub-section (3), a company that has one or more subsidiaries is required to produce and present a Consolidated Financial Statement (CFS) at the annual general meeting. Joint ventures and associate companies are also considered subsidiaries. In Rule 6 of the 2014 Companies (Accounts) Rules, the Central Government outlines how to consolidate a company’s accounts.
As a result, Schedule III and the relevant accounting rules must be followed while making the CFS. Companies who are exempt from the accounting standards’ requirement to prepare CFS must only prepare CFS in accordance with Schedule III. This implies that a company with a subsidiary, affiliate, or joint venture in India or abroad must compile a CFS for each fiscal year in accordance with AS and in the format specified in Schedule III.
Sub Clause (4) – Section 129 of Companies Act, 2013
Similar to those of their managing company, the consolidated financial statements of associate or the subsidiaries companies will have to be prepared, adopted, and audited.
Sub Clause (5) – Section 129 of Companies Act, 2013
Every company that files a consolidated financial statement or financial statement is expected to adhere to the pertinent Accounting Standards established by the Ministry of Corporate Affairs (MCA) since the regulators place a high value on compliance. Companies that deviate from the established accounting standards are required by Section 129(5) to report this information in their financial statements. They must also give the justifications for the deviations as well.
Sub Clause (6) – Section 129 of Companies Act, 2013
The central government’s discretionary powers are discussed in Section 129(6). The Central Government has the authority to exclude any class or classes of enterprises from adhering to specific norms and standards for the compilation of their financial accounts. The Central Government may take this action in suo moto upon notification from certain kinds of companies or upon their application. Such an exception may be either unconditional or subject to specified criteria, and it must be justified appropriately.
Companies Which Are Not Required To Comply With Legal Requirements Under Section 129 Of Companies Act, 2013
According to Section 129(1), companies that financial statements are prepared in accordance with direct rules of the Central Government or a specific Act of Parliament are exempt from the terms of this Section. For instance, enterprises involved in banking, insurance, or the production, supply, or distribution of energy are exempt from the rules of Section 129 of Companies Act, 2013. The financial statements of a company will not be regarded as incomplete or deceptive for failing to present a truthful picture of its financial situation if it has chosen not to reveal information which is not statutorily obliged to be disclosed.
Section 129 (1) will apply in following of the cases:
- The Insurance Act of 1938 and the Insurance Regulatory and Development Authority Act of 1999 for insurance companies apply to these businesses
- The Banking Regulation Act of 1949, which governs financial institutions
- For businesses involved in the provision or distribution of energy, there is the Electricity Act of 2003
- The rules outlined in such legislation will apply in the compilation of financial statements for any other class of firms subject to special statutes
Schedule III to the Companies Act, 2013
Every business registered under the Act must compile its Statement of Profit and Loss, Balance Sheet, and Notes to the Financial Statements in accordance with the guidelines set forth in Schedule III of the Companies Act, 2013. The disclosure obligations under the previous Schedule VI to the Companies Act of 1956 had to be strengthened in order to be consistent with the announced accounting standards.
As a result, on February 28, 2011, the Ministry of Corporate Affairs published a revised version of Schedule VI under Notification No. S.O. 447(E). For the company’s financial statements to be prepared for the fiscal year beginning on or after April 1, 2011, the Revised Schedule VI to the firms Act, 1956, was applicable. According to the 2013 Companies Act, this is included under Schedule III.
Penalty for Non Compliance of Section 129 of Companies Act, 2013
If the Company violates the terms of this section, the MD, WTD, CFO, or any other individual designated by the board to do so will be held accountable. If none of the aforementioned individuals are present, all of the Company’s Directors will be held accountable.
- The imprisonment may extend to one year or more
- The fine shall be not less than fifty thousand or can be extended up to one lakh rupees
- Both
Amendment in the Section 129 of Companies Act, 2013
Companies (Amendment) Act, 2017
In section 129 of the principal Act, for sub-section (3), the following sub-section shall be substituted, namely:—
(3) Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2)[1]
Proviso (1) –A financial statement of the company is to be attached along with a separate statement which contains the saline features of the financial statements of the subsidiary or subsidiaries, associate company or companies in the form which is prescribed.
Proviso (2) – The Central Government will further also can provide for consolidation of accounts of the companies in the manner which is prescribed.
Companies (Amendment) Act, 2020
Section 129A of Companies Act
A new Section was added after the Section 129 of Companies Act, which is Section 129A,
The Section states that:
The Central Government can ask that a specific class or classifications of unlisted companies
- To produce the company’s financial results on a regular basis and in the format that may be stipulated;
- Obtaining the Board of Directors’ consent before concluding an audit or restricted examination of such periodic financial data in accordance with any applicable regulations; and
- Submit a copy to the Registrar within 30 days after the conclusion of the pertinent term, along with any costs that may be imposed.
Conclusion
For managing and keeping a company’s financial activities accountable, financial statements are crucial. This evaluation of a company’s financial performance is made up of four statements: the balance sheet, income statement, cash flow statement, and equity statement. The Companies Act of 2013 mandates that companies produce these financial statements in line with Schedule III, ensuring accountability and conformity to accounting principles. These disclosures can be used by banks, investors, and regulators to assess a company’s soundness and liquidity, make educated decisions, and uphold financial transparency. Business leaders who disregard the legal requirements outlined in Section 129 of the Companies Act may face penalties.
Frequently Asked Questions
Balance sheets, income statements, cash flow statements, and equity statements are the common financial statements.
Financial statements are defined as the balance sheet, profit and loss account (or income and expenditure account), cash flow statement, statement of changes in equity (if applicable), and explanatory notes, in accordance with Section 129.
Quarterly financial statements, which are required by SEBI regulations for listed firms, can be divided into annual financial statements, which are prepared once a financial year, and annual financial statements.
The annual financial report must be presented at the company’s Annual General Meeting (AGM) by the Board of Directors.
A CFS must be prepared and presented at the AGM by any company that has one or more subsidiaries, including joint ventures and associate firms. Rule 6 of the 2014 Companies (Accounts) Rules outlines the specifics.
Businesses that depart from accepted accounting rules are required to disclose the variations and explain them in their financial statements.
Failure to comply can result in up to a year in jail, a fine between 50,000 and 1 lakh rupees, or both. The Managing Director (MD), Whole-Time Director (WTD), Chief Financial Officer (CFO), or other authorized people are in charge.
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