Guidance Note on Financial Statements for Non-Corporate Entities wef April 1, 2024

Guidance Note on Financial Statements of Non-Corporate Entities covering periods beginning on or after April 1, 2024.

Summary: The Institute of Chartered Accountants of India (ICAI) has issued a Guidance Note on Financial Statements for Non-Corporate Entities, effective from April 1, 2024. This note aims to standardize and improve the financial reporting quality for various non-corporate structures like sole proprietorships, partnerships, trusts, and societies, particularly those engaged in commercial activities. The document emphasizes that sound financial reporting is essential for stakeholders, including investors and lenders, to rely on financial information. The Guidance Note outlines the applicability of Accounting Standards (AS) to non-corporate entities, classifying them into four levels (Level I, II, III, and IV) based on turnover and borrowings. Level I entities must fully comply with all AS, while Level II, III, and IV (Micro, Small, and Medium Sized Entities – MSMEs) are granted certain exemptions. The note also provides standard formats for Balance Sheets and Statements of Profit and Loss for these entities, detailing the components of each statement, such as assets, liabilities, owner’s funds, income, and expenses. Additionally, it clarifies the requirements for cash flow statements, noting that MSMEs are encouraged but not mandated to prepare them. The document also addresses audit requirements for non-corporate entities under various statutes, including tax audits.

Background

A financial reporting system supported by strong governance, high quality standards, and firm regulatory framework is the key to economic development. The sound financial reporting emphasises the trust that investors and other stakeholders like lenders, grantors, etc. place in financial reporting information. Thus, it is very essential that financial reporting of an entity should be comparable, transparent, complete and unbiased.

 Financial information needs of Non-Corporate Entities

In case of the Non-Corporate entities, considering the wide spectrum of role and responsibilities performed by them, undoubtedly there are wide users/stakeholders of the financial information of these Non-Corporate entities. The users could be present and potential investors, employees, lenders, suppliers, other trade creditors, customers. Further, in case of some Non-Corporate entities the users of financial information are similar to the corporate sector, e.g., many statutory corporations or authorities raise substantial financial resources from capital and financial markets. Therefore, the investors or lenders of such Non-Corporate entities have similar financial information needs as that of corporate investors.

 Applicability of Accounting Standards

commercial, industrial or business activities. Exclusion of an entity from the applicability of the Accounting Standards is permissible only if no part of the activity of such entity is commercial, industrial or business in nature. Even if where a very small proportion of the activities of an entity were considered to be commercial, industrial or business in nature, the Accounting Standards would apply to all its activities including those, which are not commercial, industrial or business in nature.

At present, there are three sets of Accounting Standards:

(i) Indian Accounting Standards (Ind AS) for specified class of companies;

(ii) Accounting Standards (AS) notified under Companies (Accounting Standards) Rules, 2021, for companies other than those following Ind AS;

(ii) Accounting Standards (AS) prescribed by ICAI for entities other than companies.

Indian Accounting Standards (AS) prescribed by ICAI for entities other than companies.

ICAI, keeping in view the fact that the Accounting Standards (AS) notified under Companies Act will only be applicable to the companies, announced the scheme for applicability of Accounting Standards (AS) issued by ICAI to non-company entities. In this regard, the criteria for classification of non-company entities as decided by ICAI is given in Appendix A.

It may be noted that for the purpose of applicability of Accounting Standards (AS), entities are classified into four categories viz., Level I, Level II, Level III and Level IV non-company entities. Level I non-company entities are required to comply fully with all the AS. Level IV, Level III and Level II non-company entities are considered as Micro, Small and Medium Sized Entity (MSMEs) that have been granted certain exemptions/relaxations by the ICAI. The applicability of AS and exemptions/ relaxations thereof for MSMEs are given in Appendix A.

Audit of Financial Statements

For non-corporate entities, if audit of financial statements is required under a statute, the Auditor shall conduct the audit and issue the Auditors’ Report in accordance with the Standards on Auditing issued by the ICAI. For the purpose of tax audit, the auditor should issue a report taking into consideration the “Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961” issued by the ICAI.

In case of tax audit under section 44AB of the Income-tax Act, 1961, it is pertinent to note that the auditor is required to conduct audit of financial statements to give a true and fair view thereon and report the same in Form 3CB. Along with the Report in Form 3CB, they have to state true and correct view of particulars annexed in Form 3CD.

Objectives and Scope of Guidance Note

Non-Corporate Entities- A wide spectrum of entities

All Business or Professional Entities, other than Companies incorporated under Companies Act and Limited Liability Partnerships incorporated under Limited Liability Partnership Act are considered to be Non-Corporate entities. Corporate or Company form of legal structure is the most commonly used one for commercial or business activities. Entities for business, commercial or other economic and social activities can be established under variety of structures and the most common structures are as follows:

(a) Sole proprietorship firms

(b) Hindu Undivided Family

(c) Partnership Firms

i) Registered Partnership Firms

ii) Unregistered Partnership Firms

(d) Association of Persons

i) Partnership firms not covered above

ii)Body of Individuals

iii)Resident welfare Association

(e) Society registered under any law for the time being in force

(f) Trust (private or public) registered under any law for the time being in force or unregistered.

(g) Statutory Corporations, Autonomous bodies and Authorities

(h) Any form of organisation that is engaged fully or partially in any Business or Professional activities.

In June 2022, the Accounting Standard Board of ICAI has issued the Technical Guide on Financial Statements of Non-corporate Entities to deal with applicability of Accounting Standards to the non-corporate entities and recommending formats of the financial statements for the Non-Corporate entities.

The Accounting Standards Board has now prescribed the formats for the presentation of the financial statements of Non-corporate Entities in the form of Guidance Note, which were earlier issued as a part of Technical Guide. The objective is to standardise the formats of financial statements for these entities and to enhance the quality and comprehensiveness of the financial reporting by these entities.

Effective Date

This Guidance Note is effective for financial statements covering periods beginning on or after April 1, 2024. The Technical Guide on Financial Statements of Non-Corporate Entities stands superseded by this Guidance Note.

Financial Statements

What are the financial statements?

Financial statements form part of the process of financial reporting. A complete set of financial statements normally includes:

• a balance sheet,
• a statement of profit and loss,
• a cash flow statement (where applicable) and
• those notes and other statements and explanatory material that are an integral part of the financial statements.

The notes also include significant accounting policies as required by applicable Accounting Standards. They may also include supplementary schedules and information based on or derived from, and expected to be read with, such statements. The objective of financial statements is to provide information about the financial position, performance and cash flows of an entity.

8. Balance Sheet

Information about financial position is provided through balance sheet. The elements directly related to the measurement of financial position in the balance sheet are assets, liabilities and equity.

Items included in the Balance Sheet

As per the Framework for the Preparation and Presentation of Financial Statements, issued by the ICAI: 49. The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

(a) An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.

(b) A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

(c) Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

The formats of financial statements prescribed in the Guidance Note use the term ‘owners’ funds’ in place of ‘equity’ considering that some of the items of ‘owners’ funds may not strictly meet the definition of ‘equity’.

Statement of Profit and Loss

Statement of Profit and Loss is one of the three important elements of the financial statements used for reporting an entity’s financial performance over a specific accounting period. It is also known as the ‘Income Statement’ or ‘Profit & Loss Account’. The Statement of Profit and Loss primarily focuses on an entity’s income and expenses during a particular period.

As per the Framework for the Preparation and Presentation of Financial Statements, issued by the ICAI:

i. Profit is frequently used as a measure of performance or as the basis for other measures, such as return on investment or earnings per share. The elements directly related to the measurement of profit are income and expenses. The recognition and measurement of income and expenses, and hence profit, depends in part on the concepts of capital and capital maintenance used by the enterprise in preparing its financial statements.

Income and expenses are defined in the Framework as follows: (a) Income is increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. (b) Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Cash Flow Statements

As per Accounting Standard (AS) 3, Cash Flow Statements, a cash flow statement, when used in conjunction with the other financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.

For non-company entities, AS 3 provides that financial statements of Micro, Small and Medium Sized Enterprises (Level IV, Level III and Level II non-company entities), may not include cash flow statements, i.e., preparation of cash flow statement is not mandatory. Such entities are, however, encouraged to comply with this standard.

The cash flow statement reconciles the income statement with the balance sheet in three major business activities. The three components of the cash flow statement are listed below.

Operating Activities

Operating activities are the principal revenue-product activities of the enterprise and their activities that are not investing or financing activities. These transactions are also includes wages, income tax payments, interest payments, rent and cash receipts from the sale of a product or service.

Investing Activities

Investing Activities are the acquisitions and disposal of long-term assests and other investments not included in cash equivalents. Cash payments to acquire assets or cash receipts from disposal of assets, cash advances and loans made to third parties or cash receipts from repayment of advances and loans made to third parties are included in this category.

Financing Activities

Financing activities are activities that result in changes in the size and composition of the owners’ capital and borrowings of the enterprise. Financing activities include debt issuance, loans and repayment of debt.

Formats of Financial Statements for Non-corporate Entities

The financial statements should give true and fair view of the state of affairs of the entity, comply with the applicable Accounting Standards and shall be in the form as provided hereafter.

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET AND STATEMENT OF PROFIT AND LOSS OF A NON-CORPORATE ENTITY

(a) These formats shall apply for preparation of Balance Sheet and Statement of Profit and Loss of a non-corporate entity. Where compliance with the requirements of the relevant statute including Accounting Standards as applicable to the Non-Corporate entity require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head or sub-head or any changes, inter se, in the financial statements or statements forming part thereof, the same shall be made and the formats shall be modified accordingly.

(b) This Guidance Note uses terminology that is suitable considering the nature and business of non-corporate entities in general. However, certain non corporate entities may need to amend the descriptions used for particular line items in the formats of financial statements and for the financial statements themselves, e.g., Association of Persons may need to use terminology “members’ funds” instead of “owners’ funds”.

The disclosure requirements specified in the formats are in addition to and not in substitution of the disclosure requirements specified in the Accounting Standards issued by the Institute of Chartered Accountants of India. Additional disclosures specified in the Accounting Standards shall be made in the notes to accounts or by way of additional statement unless required to be disclosed on the face of the Financial Statements. Similarly, all other disclosures as required by the relevant statute shall be made in the notes to accounts in addition to the requirements set out in these formats.

(i) Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required (a) narrative descriptions or disaggregation of items recognised in those statements; and

(ii) information about items that do not qualify for recognition in those statements.

(iii) Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notes to accounts. In preparing the Financial Statements including the notes to accounts, a balance shall be maintained between providing excessive detail that may not assist users of financial statements and not providing important information as a result of too much aggregation.

(iv)  Depending upon the Total Income of the Non-Corporate entity, the figures  appearing in the Financial Statements may be rounded off as given below:—

(v) Once a unit of measurement is used, it should be used uniformly in the Financial Statements.

Except in the case of the first Financial Statements prepared by the Non Corporate entity (after its incorporation) the corresponding amounts (comparatives) for the immediately preceding reporting period for all items shown in the Financial Statements including notes shall also be given

For the purpose of this format, the terms used herein shall be as per the applicable Accounting Standards.

Note:—This part set-outs the minimum requirements for disclosure on the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as “Financial Statements” for the purpose of the Format) and Notes. Line items, sub-line items and sub-totals shall be presented as an addition or substitution on the face of the Financial Statements when such presentation is relevant to an understanding of the Non-Corporate entity’s financial position or performance or to cater to industry/sector-specific disclosure requirements or when required for

compliance with the amendments to the relevant statutes or under the Accounting Standards.

PART-1- Form of BALANCE SHEET

Notes

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET

An asset shall be classified as current when it satisfies any of the following criteria:

(a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle;

(b) it is held primarily for the purpose of being traded;

(c) it is expected to be realized within twelve months after the reporting date; or

(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

All other assets shall be classified as non-current.

An operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. Where the normal cycle cannot be identified, it is assumed to have a duration of 12 months.

A liability shall be classified as current when it satisfies any of the following criteria:

• it is expected to be settled in the company’s normal operating cycle;
• it is held primarily for the purpose of being traded;
• it is due to be settled within twelve months after the reporting date; or
• the Non-Corporate entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non-current.

A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.

A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.

A Non-Corporate entity shall disclose the following in the Notes to Accounts:

PART-II- Form of STATEMENT OF PROFIT AND LOSS

Criteria for classification of Non-company Entities as decided by the Institute of Chartered Accountants of India

Level I Entities

Non-company entities which fall in any one or more of the following categories, at the end of the relevant accounting period, are classified as Level I entities:

• Entities whose securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.
• Banks (including co-operative banks), financial institutions or entities carrying on insurance business.
• All entities engaged in commercial, industrial or business activities, whose turnover (excluding other income) exceeds rupees two-fifty crore in the immediately preceding accounting year.
• All entities engaged in commercial, industrial or business activities having borrowings (including public deposits) in excess of rupees fifty crore at any time during the immediately preceding accounting year
• Holding and subsidiary entities of any one of the above.

Level II Entities

Non-company entities which are not Level I entities but fall in any one or more of the following categories are classified as Level II entities:

• All entities engaged in commercial, industrial or business activities, whose turnover (excluding other income) exceeds rupees fifty crore but does not exceed rupees two-fifty crore in the immediately preceding accounting year.
• All entities engaged in commercial, industrial or business activities having borrowings (including public deposits) in excess of rupees ten crore but not in excess of rupees fifty crore at any time during the immediately preceding accounting year.
• Holding and subsidiary entities of any one of the above.

Level III Entities

Non-company entities which are not covered under Level I and Level II but fall in any one or more of the following categories are classified as Level III entities:

• All entities engaged in commercial, industrial or business activities, whose turnover (excluding other income) exceeds rupees ten crore but does not exceed rupees fifty crore in the immediately preceding accounting year.
• All entities engaged in commercial, industrial or business activities having borrowings (including public deposits) in excess of rupees two crore but does not exceed rupees ten crore at any time during the immediately preceding accounting year.
• Holding and subsidiary entities of any one of the above.

Level IV Entities

Non-company entities which are not covered under Level I, Level II and Level III are considered as Level IV entities.

Applicability of Accounting Standards to Non-company Entities

• Applicability of the Accounting Standards to Level 1 Non- company entities.

Level I entities are required to comply in full with all the Accounting Standards.

Applicability of the Accounting Standards and exemptions/relaxations for Level II, Level III and Level IV Non-company entities

For this refer the PDF File attached to the article.