ICAI Guidance Note on Financial Statements for Non-Corporates

GUIDANCE NOTE ON FINANCIAL STATEMENTS OF NON CORPORATE ENTITY – A CONCEPTUAL INSIGHT

In this article, I will be dealing with some of the important conceptual background with respect to Guidance Note on Financial Statement (FS) presentation for Non-Corporate Entity (NCE) published by ICAI. The Guidance Note was published on August 2023 and it is effective for Financial Statements covering on or after 01.04.2024. Before issuance of Guidance Note, ICAI has published Technical Guide on this matter on June 2022. The Technical Guide stands superseded by this Guidance Note.

Background

FS should be prepared in compliance with both Accounting Standards (AS) and “FRAMEWORK for preparation and presentation of FS”. Users of FS need financial information of reporting entities to make various economic decisions. In the case of Companies, formats for FS are specifically provided under Schedule III of the Companies Act, 2013. In the case of Non Corporate Entities (NCE) the users are similar to corporate sectors. Extent or Size of economic and financial activities of NCEs has grown over a period of time. However there is no common format for FS for NCE. Hence ICAI published this Technical Guide and Guidance Note.

Before getting into the Guidance Note, it is important to remember what is Framework and Accounting standards (AS) for FS.

Framework

The Framework was issued by Accounting Standard Board of ICAI in July 2000.

Framework (paragraph 1) sets out the concepts that underlie the preparation and presentation of FS for external users. It assist prepares of FS in applying AS. It assist auditors in forming an opinion as to whether FS confirms with AS. It also assists users in interpreting the FS.

Objective of Framework is to provide information about financials that is useful to wide range of users and meet the common needs of most users. It is the Framework which speaks about who are the users of FS, namely investors, employees, lenders, creditors, customers, government and public. Please note that investors include potential investors also. Framework further speaks about fundamental accounting assumption, and what are the qualitative characteristics of FS namely understandability, relevance, reliability and comparability. Framework defines the elements of FS (i.e. assets, liabilities, income, expense and equity) and the recognition and measurement of those elements.

Framework speaks about what is Financial Position, what is Financial Performance, what is Cash flow. It also speaks about notes, supplementary schedules, other information and additional information that is relevant to the needs of user’s disclosures about the risks and uncertainties affecting the enterprise.

True and Fair View of FS : Framework for FS in Paragraph 46, states that the application of the principal qualitative characteristics and of appropriate AS normally results in financial statement that convey what is generally understood as true and fair view of such information.

In nutshell, Framework speaks about the broad structure of FS.

Accounting Standards (AS)

Accounting Standards deals with recognition, measurement, presentation of events and transactions and the disclosures. AS are set of principles providing a standardized way of describing the entity’s financial position and performance. AS can be broadly divided into asset based (AS 2,10,13,16,19,26,28), liability based (15,19), revenue based (7,9), items impacting the FS (4,5,11,22), presentation and disclosure based (1,3,17,18,20,24,25) Consolidated FS (21,23, 27) and other AS (12,14).

In nutshell, one can say that Framework is like civil structural Framework and AS are like various rooms which are fit into the structure to give a beautiful building or house to live in. Framework is like proper human Skelton and muscle mass and AS are like various organs which are fit inside to form a beautiful human being. Framework is broader, bigger and overall concept and AS are specific concept. So only when the FS complies with both Framework and AS, it becomes a useful FS for users.

Technical Guide and Guidance Note oN FS OF NCE

Technical Guide (TG)

ICAI issued Technical Guide recommending the formats of FS so that entities can communicate their financial performance and position in a standardized format, thereby enhancing their comparability.

Guidance Note

For enhancing the quality and comprehensiveness of FS and to prescribe authoritative guidance for the effective implementation, the ASB has upgraded the Technical Guide into Guidance Note.

Mandatoriness of Technical Guide of NCE

Technical Guide is recommendatory in nature. The words used in TG are also evident for this.

Mandatoriness of Guidance Note of NCE

Conclusive answer is yes, mandatory. Why and how, read on.

ICAI has given clarification regarding the authority of Guidance Note in Paragraph I.5 of “Announcement of Council regarding status of various documents issued by ICAI”. It is clarified that ‘Guidance Notes’ are primarily designed to provide guidance to members on matters which may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are recommendatory in nature. There are two classifications of Guidance Notes, one relating to auditing matter and the other one relating to accounting matter. It is also mentioned that a member should ordinarily follow recommendations in a Guidance Note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so. Similarly, while discharging his attest function, a member should examine whether the recommendations in a Guidance Note relating to an accounting matter have been followed or not. If the same have not been followed, the member should consider whether keeping in view the circumstances of the case, a disclosure in his report is necessary. Hence if the client has not followed the Guidance Note on FS of NCE, the auditor should consider disclosure in his report.  Hence, in effect, the Guidance Note has mandatory impact.

Framework for FS is mandatory. AS are mandatory. Standards on Auditing are mandatory. While doing attest function, the auditor has to form opinion on whether FS are prepared in accordance with the applicable Financial Reporting Frameworks (SA700 Paragraph 10). So Guidance note prepared based on Framework and Accounting Standards becomes in effect mandatory. In continuance to that explanation, I would like to say that Technical Guide itself is in effect mandatory since TG is also based on mandatory Framework and AS, even though TG per se is recommendatory in nature. That means everything was already mandatory even at least from July 2000 (i.e. the month of issue of Framework).

Conclusion

Guidance Note on NCE is a very important announcement brought in by ICAI. NCEs mainly MSMEs are growth engine of Indian economy and hence their FS should give true and fair view for the users. The FS should comply with not only AS but also broad Framework. Guidance note on Accounting matters mandates auditors to examine whether recommendations in Guidance Notes have been followed or not, and if not followed, the auditors should consider a disclosure in his report.     The content of this article is the personal views of the author as a knowledge sharing initiative for discussion purpose and not professional advice and author assumes no responsibility for the use of this information.

The author can be reached at sivaraman004@gmail.com