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FIRST RECONCILE THE NEEDS OF SEBI AND COMPANIES ACT
Shardul Shroff
In the era of globalisation it is necessary to move toward international standards.
International Accounting Standard, IAS 21, provides that the parent company must present a consolidated financial statement. SFAS 94 of the US provides that all majority-owned subsidiaries are to be consolidated, unless control over them is expected to be temporary or control does not reside with the majority owner. SFAS 144 has eliminated the “temporary control” exception.
In the UK, FRS 2, on acco-unting for subsidiary undertakings, all undertakings must be consolidated, except where significant long-term restrictions hinder exercise of rights of the reporting company over the assets or management of the undertaking, or the undertaking is held exclusively for resale.
FRS 5, reporting the substance of transactions, includes ‘quasi subsidiaries’ in consolidated accounts.
In India, S.212, Companies Act requires attachment of financial statements of subsidiaries to the balance sheet of the holding company. ICAI has issued AS 21, “Consolidated Financial Statements” for acco-unting periods commencing on or after April 1, 2001. Sebi has made compliance with AS 21 mandatory for listed holding companies. The purpose is a fair presentation when one enterprise in the group has a controlling financial interest in other enterprises. Exceptions are allowed where the parent is to dispose of the subsidiary soon, or the subsidiary operates under severe long-term restrictions that impairs its ability to transfer funds to the parent.
However, AS 21 itself does not demand consolidation. A parent company preparing consolidated statements should present the same in addition to its separate financial statements. Thus, if the parent company were to prepare separate statements anyway, the intention of presenting consolidated statements is lost. Unfortunately, the recently released concept paper on the Companies Act by the company affairs ministry does not throw much light on these issues.
While the proposed Section 52 provides that a holding company is given an option to prepare consolidated accounts, the proposed Section 53(4) gives the impression that it is mandatory for the holding company to prepare consolidated accounts.
Whilst Sebi requires consolidation of accounts, the Companies Act at present, and even in the proposed concept paper, does not require consolidation of accounts. Therefore, separate balance sheets are to be prepared and published.
It is, therefore, necessary that before making any such requirement mandatory, there is a reconciliation of Sebi requirements and provisions of the Companies Act.
The writer is managing partner, Amarchand Mangaldas, Delhi
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