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Non-compliance pointed out in the Annual Reports of various companies related to (AS) Accounting standards used in the preparation and presentation of financial statements.


1. Cash flows arising from transactions in a foreign currency should be recorded in reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow.

An exchange rate that approx. the actual rate may be used if the result is the same.

Since exchange rate variation had not been disclosed as an extraordinary item in the profit and loss account, the disclosure of the same as an extraordinary item in the cash flow statement was totally inappropriate.

2. AS 3 requires that interest paid/ Financial expenses (which include interest paid) to be shown as the Cash Flow from Financing Activities.

3. AS 3 requires that the interest received should be shown as the Cash Flow from Investing Activities.

4. In case the Fixed deposits were convertible into cash in a short period of time, these should have been classified as a part of cash and cash equivalents.

In case these were not convertible into cash in a short period of time, these were of the nature of investment and should have been disclosed as Cash Flow from Investing Activities.

Points to be considered in Annual Report Preparation of Companies - PART II

5. No direct cash flow receipt/ payment takes place on account of General reserve and, therefore, there may not be any proceeds from General reserve, which required a disclosure in the cash flow statement.

6. Cash proceeds from issuing shares should be a part of financing activities and not from investing activities.

7. Proceeds from long term borrowings and repayment of these borrowings reported at net figure which is contrary to the requirements of AS 3. Companies should separately report a major class of gross cash receipts and gross cash payments arising from investing activities and financing activities.

8. The company should disclose the Cash flows from issue of IPO and Premium thereon under the head of Cash flows from Financing Activities instead of disclosing the same under the head of Cash flows from Investing Activities.


1. Company required to estimate the interest due and create a provision in respect of. Non-creation of the provision for interest is contrary to AS 4, Contingencies and Events Occurring After the Balance Sheet Date.

2. Events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company.

Date of finalization of accounts could not be construed as the date when the financial statement has been approved by the Board unless the date of signing the Auditors’ Report is considered as the date of finalization of accounts.

Accounting policy as adopted by the company was considered to be not in line with AS 4.

3. As per AS-4 Company could not make a provision for an unknown liability, the company has to bifurcate loans and advances into — those considered as good, and those considered as bad or doubtful loans, so that a provision be adjusted against loans and advances that are considered as doubtful or bad.

4. In case arbitration awards are in favour or against the company, the amount involved is a contingency for the company. Since the decision has been received through an arbitration process, the occurrence of such a loss is probable. Also, it is related to the earlier years, it is an adjusting event within the meaning of AS 4,

A creation of provisions for contingent losses and concerning events occurring after the balance sheet date, is required to create a provision in respect of the loss. Non-creation of a provision for the loss is contrary to AS 4.

5.  If the company identified amount as doubtful which clearly indicates that the company may not be able to recover these dues. In such a case, it does not make any difference that the amount of loss was not ascertainable since the companies are creating provisions for certain other expenses also on an estimated basis.

Non-creation of the provision in respect of doubtful debts and advances is contrary to AS 4.

6. Companies cannot avoid making provisions for loss that has taken place merely on the ground that the amount was not ascertainable since the companies are creating a provision for certain other expenses also on the estimated basis.

Non-creation of the provision in respect of debts is contrary to AS 4.

7. The liability in respect of warranty cost in the year in which the claim actually arises, the company is not creating any provision for warranties given on the products sold. It was felt that the liability in respect of warranty arises as soon as the company sells the product. It is contrary to the accrual basis of accounting and AS 4.

8. The management has not indicated the reason for which it considers all overdue outstanding debtors to be fully recoverable. In the absence of such a justification, the management’s opinion that debts are good and fully recoverable does not seem to be incorrect.

9. When the realization of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.

The eligibility certificate received which is a contingent gain of the company, which cannot be recognized. Accordingly, recognizing sales tax exemption in excess of the eligibility certificate received is contrary to AS 4.

10. Non-provisioning also impacts the profit or loss for the period and such non-provision may not give a true and fair view of the profit or loss of the company for the period.

11. The total amount of income tax, which had not been deposited on account of disputes, was a contingency as per AS 4, which was applicable at that time.

Accordingly, the company should disclose the total amount for income tax, under the heading ‘Contingencies and commitments’, unless the remaining amount had already been provided for in the books.

Also Read: Points to be consider in preparation of Annual Report – PART I

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April 2024