Tightening the Screws on Certifying Financial Statements for Partnership Firms, Sole Proprietorship, etc. (Non-corporate Entities)
1.Introduction
The release of the guidance note by Institute of Chartered Accountants of India on financial statements of non-corporate entities serves to provide clarity and standardization in accounting practices for entities that are not structured as corporations. Non-corporate entities include partnerships, proprietorships, trusts, and other forms of organizations that are not incorporated under company law. These entities often have unique reporting requirements and accounting treatments compared to corporate entities. The guidance note aims to address these specific needs, offering guidance on how such entities should prepare and present their financial statements in compliance with relevant accounting standards. This article aims to provide overview of applicability of such provisions in the guidance note to various types of non-corporate entities
2. Defining Non-Corporate Entities
The term “Non-Corporate Entities” is broad, encompassing all business or professional entities that are not companies incorporated under the Companies Act or Limited Liability Partnerships (LLPs). This includes traditional structures like:
- Sole Proprietorships
- Partnership Firms (registered or unregistered)
- Hindu Undivided Families (HUFs)
- Associations of Persons (AOPs)
- Bodies of Individuals (BOIs)
- Trusts (private, public, registered, or unregistered)
- Statutory Corporations (established under central or state law)
- Autonomous bodies or authorities
- Any other organization wholly or partly engaged in business or professional activity, provided it’s not a company or LLP.
Limited Liability Partnerships (LLPs)
are explicitly scoped out of the definition of Non-Corporate Entities because they are considered a corporate form of entity.
The Guidance Note issued by the Institute of Chartered Accountants of India in August, 2023 is effective for financial statements covering periods beginning on or after April 1, 2024. Consequently, for the financial year 2024-25 onwards, entities covered by this Guidance Note must adhere to its recommendations. This may supersede the earlier Technical Guide issued in June 2022.
It’s crucial to note that the Guidance Note provides formats and guidance to be followed unless any specific format or principle is prescribed by the relevant Statute, Regulator, or Authority governing the entity. For instance, entities governed by the Maharashtra Public Trust Rules, 1951, or educational institutions and political parties for which ICAI has issued specific guidance, would follow those prescribed formats instead.
Compliance with Accounting Standards is essential as they provide the principles for recognition, measurement, presentation, and disclosure of financial information, leading to the preparation of financial statements that present a true and fair view. Non-compliance with applicable Accounting Standards means the financial statements are not deemed to have complied with AS, and the auditor may report such deviations.
3. Categorization of Non-Corporate Entities
Recognizing the diverse nature and scale of non-corporate entities, ICAI has categorized them into four levels to determine the extent of applicability of Accounting Standards. Not all Accounting Standards, or all paragraphs within them, are equally applicable to every non-corporate entity. This tiered approach provides necessary relaxations for smaller entities. The summary of the entity classification is as under:
| Entity Level | Criteria (Any one of the following) | Accounting Standard Applicability |
| Level I | Securities are listed or in process of listing on a recognized Stock Exchange. OR It is a bank or financial institution. OR Turnover (excluding other income) exceeds ₹250 Crores in the immediately preceding accounting year. OR
Borrowings (including public deposits) exceed ₹50 Crores at any point during the immediately preceding accounting year. OR It is a holding or subsidiary of a Level I entity. |
Full compliance with all Accounting Standards. |
| Level II | Entities not covered in Level I, but whose turnover (excluding other income) exceeds ₹50 Crores but does not exceed ₹250 Crores. OR
Borrowings (including public deposits) exceed ₹10 Crores but do not exceed ₹50 Crores. OR It is a holding or subsidiary of a Level II entity. |
Certain exemptions/relaxations are provided in specific AS (e.g., AS 15, AS 19). |
| Level III | Entities not covered in Level I or II, but whose turnover (excluding other income) exceeds ₹10 Crores but does not exceed ₹50 Crores. OR
Borrowings (including public deposits) exceed ₹2 Crores but do not exceed ₹10 Crores. OR It is a holding or subsidiary of a Level III entity. |
Further exemptions/relaxations compared to Level II (e.g., in AS 15). |
| Level IV | Entities not covered in Level I, II, or III.
This category is the residual one, typically with turnover less than ₹10 Crores and borrowings less than ₹2 Crores. |
Maximum exemptions/relaxations (e.g., AS 3, 17, 18, 20, 21, 23, 24, 25, 27 not applicable; AS 15, 22 have exemptions). |
When an entity’s classification changes (e.g., moving from Level III to Level II), the new level’s requirements apply from the beginning of the accounting period. However, financial figures for the previous year are generally not required to be restated merely due to the upward re-evaluation of the entity level.
4. Following Accounting Standards need to be followed by all entities (Principle + Disclosure requirements):
- AS 1 – Disclosure of Accounting Policies
- AS 2 – Valuation of Inventories
- AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
- AS 9 and AS 7 – Revenue Recognition and Construction contracts
- AS 12 – Accounting for Government Grants
- AS 16 – Borrowing Costs
- The summary of applicability of accounting standard to non-corporate entities (subject to conditions and notes in guidance note) is as under:
| AS | AS Description | Level I | Level II | Level III | Level IV |
| AS 1 | Disclosure of Accounting Policies | Yes | Yes | Yes | Yes |
| AS 2 | Valuation of Inventories | Yes | Yes | Yes | Yes |
| AS 3 | Cash Flow Statements | Yes | No | No | No |
| AS 4 | Contingencies and Events Occurring After the Balance Sheet Date | Yes | Yes | Yes | Yes |
| AS 5 | Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies | Yes | Yes | Yes | Yes |
| AS 7 | Construction Contracts | Yes | Yes | Yes | Yes |
| AS 9 | Revenue Recognition | Yes | Yes | Yes | Yes |
| AS 10 | Property, Plant & Equipment | Yes | Yes | Disclosures Exemptions | Disclosures Exemptions |
| AS 11 | The Effects of Changes in Foreign Exchange Rates | Yes | Yes | Disclosures Exemptions | Disclosures Exemptions |
| AS 12 | Accounting for Government Grants | Yes | Yes | Yes | Yes |
| AS 13 | Accounting for Investments | Yes | Yes | Yes | Disclosures Exemptions |
| AS 14 | Accounting for Amalgamations | Yes | Yes | Yes | No |
| AS 15 | Employee Benefits | Yes | Certain Exemptions | Certain Exemptions | Certain Exemptions |
| AS 16 | Borrowing Costs | Yes | Yes | Yes | Yes |
| AS 17 | Segment Reporting | Yes | No | No | No |
| AS 18 | Related Party Disclosures | Yes | Yes | No | No |
| AS 19 | Leases | Yes | Disclosures Exemptions | Disclosures Exemptions | Disclosures Exemptions |
| AS 20 | Earnings Per Share | Yes | No | No | No |
| AS 21 | Consolidated Financial Statements | Yes | No | No | No |
| AS 22 | Accounting for Taxes on Income | Yes | Yes | Yes | Current Tax Provisions |
| AS 23 | Accounting for Investments in Associates in Consolidated Financial Statements | Yes | No | No | No |
| AS 24 | Discontinuing Operations | Yes | Yes | No | No |
| AS 25 | Interim Financial Reporting | Yes | No | No | No |
| AS 26 | Intangible Assets | Yes | Yes | Yes | Disclosures Exemptions |
| AS 27 | Financial Reporting of Interests in Joint Ventures | Yes | No | No | No |
| AS 28 | Impairment of Assets | Yes | Disclosures Exemptions | Disclosures Exemptions | Disclosures Exemptions |
| AS 29 | Provisions, Contingent Liabilities and Contingent Assets | Yes | Disclosures Exemptions | Disclosures Exemptions | Disclosures Exemptions |
5. Presentation of Financial Statements: Towards Standardization
A key contribution adopting to recommended format of Financial Statements of Non -Corporate Entities is the prescription of standardized formats for the Balance Sheet and the Statement of Profit and Loss. These formats are largely aligned with Schedule III of the Companies Act, albeit with terminology suitable for non-corporate entities. The formats are illustrative and can be modified to comply with applicable Accounting Standards or relevant statutes.
Here are some key areas and required disclosures:
a. Balance Sheet
The Balance Sheet format typically presents the entity’s financial position as at a specific date, categorized into Owners’ Funds and Liabilities, and Assets.
| Item | Key Presentation & Disclosure Requirements | Relevant Standard/Guidance |
| Owners’ Funds | Detailed breakdown including Owners’/Partners’ Capital Account, Current Account, and
Reserves and Surplus (e.g., General Reserve, Revaluation Reserve). Terminology can be adapted (e.g., “Members’ Funds” for AOPs). |
ASs, Guidance Note Instruction |
| Borrowings | Classified as Long-term (Non-Current) or Short-term (Current) liabilities based on repayment terms (within or beyond 12 months).
Detailed disclosures required in Notes to Accounts, including Secured vs. Unsecured. Term Loans vs. Loans on Demand. Loans from related parties. Details of security provided. Repayment terms. Cash Credit limits are generally short-term. Documentation is key for classifying loans from relatives. |
ASs, Guidance Note Formats & Notes.
Classification criteria from AS. AS 18 for related parties. |
| Provisions | Classified as Long-term (Non-Current) or Short-term (Current) liabilities.
Key areas include Employee Benefits (e.g., gratuity, pension). AS 15 on Employee Benefits is applicable to all entity levels (Level 1-4), though with certain exemptions for Level 2, 3, and 4 regarding actuarial valuation and disclosure, particularly for entities with fewer than 50 employees. Other Provisions (e.g., for sales returns, warranties), requiring application of AS 29. |
AS 15, AS 29, Guidance Note Instruction & Notes. |
| Trade Payables | Separate disclosure is mandated for outstanding dues to Micro, Small, and Medium Enterprises (MSMEs) within the Notes to Accounts.
Disclosure of interest due to delayed MSME payments and Disallowances u/s 43B of the Income Tax Act. |
MSME Act, Guidance Note Formats & Notes. |
| Other Liabilities | Includes current maturities of long-term borrowings and finance lease obligations,
Interest accrued (but not due and due), Income received in advance, Unearned revenue, and Statutory liabilities like GST payable and TDS payable. |
Guidance Note Formats & Notes. |
| Assets | Presented under Non-Current Assets and Current Assets.
Categories include Tangible Assets, Intangible Assets, Capital Work in Progress (CWIP), Intangible Assets Under Development. |
ASs, Guidance Note Formats. AS 10 for PPE, AS 26 for Intangibles. |
| Investments | Classified as Current or Non-Current, and quoted or unquoted.
Must be valued in accordance with AS 13 (Accounting for Investments), moving away from historical cost in certain cases. For quoted investments, market value disclosure is required. Level 4 entities have a limited exemption from disclosing the market value of unquoted investments. |
AS 13, Guidance Note Formats & Notes. |
| Loans & Advances | Classified as Current or Non-Current.
Disclosures include secured/unsecured, considered good/doubtful. Allowances for doubtful receivables/advances should be created. Loans/advances to related parties must be disclosed. Capital Advances should be separately disclosed. |
AS 18, Guidance Note Formats & Notes. |
| Inventories | Valued as per AS 2.
Disclosure of Goods in Transit (GIT) is specifically required. Provision for obsolete stock should be made. |
AS 2, Guidance Note Formats & Notes. |
| Trade Receivables | Requires detailed disclosure in Notes to Accounts, including aging analysis.
Provision for doubtful receivables should be made (Allowance for Doubtful Receivables). |
Guidance Note Formats & Notes. |
b. Statement of Profit and Loss
The Statement of Profit and Loss shows the financial performance of the entity over a period. The format includes presentation of Revenue from Operations, Other Income, various expense categories, exceptional and extraordinary items, tax expense, and profit/loss.
| Item | Key Presentation & Disclosure Requirements | Relevant Standard/Guidance |
| Tax Expense | Must be accounted for as per AS 22 (Accounting for Taxes on Income).
Requires provision for Current Tax for all entity levels (Level 1-4). Deferred Tax (both assets and liabilities) arising from timing differences also needs to be accounted for as per AS 22, except Level 4 entities are exempted from accounting for deferred tax. |
AS 22, Guidance Note Formats & Notes. |
| Finance Costs | Interest and other borrowing costs.
Interest cost on borrowings taken specifically for the acquisition, construction, or production of a qualifying asset must be capitalized as part of the cost of that asset until it is ready for its intended use. |
AS 16 (Borrowing Costs), Guidance Note Formats & Notes. |
| Expenses | Various expense categories are to be disclosed.
Material items (based on a percentage of turnover or a threshold limit) require separate disclosure. |
ASs, Guidance Note Formats & Notes. |
| Other Income | Disclosure of different sources of other income. | Guidance Note Formats & Notes. |
| Futures & Options Accounting | For settled transactions, only the net profit or loss derived should be recorded in the books.
For unsettled positions, guidance suggests valuing closing stock at the lower of cost or market value and disclosing it as an asset. Monetary items should be reported at closing rates as per AS 11. |
AS 11, Guidance Note discussion. |
c. General instructions stipulate that:
- Notes to Accounts are an integral part of the financial statements and must provide detailed breakdowns and additional disclosures required by AS or statutes.
- Cross-referencing between the face of the Balance Sheet/P&L and the Notes is required.
- Comparative figures for the previous reporting period must be presented.
- Entities also have the option to round off figures in their financial statements based on their turnover, provided the chosen unit is applied uniformly.
6. Implications for Auditors
As auditors, the Guidance Note places a clear responsibility on Chartered Accountants. When auditing the financial statements of non-corporate entities, we must ensure that they are prepared in accordance with the applicable Accounting Standards and the formats prescribed by the Guidance Note. Our audit should be conducted in accordance with the Standards on Auditing (SAs) issued by ICAI. If the management of the entity does not prepare the financial statements in compliance with the applicable Accounting Standards or the recommendations of the Guidance Note regarding accounting matters, the auditor must advise the management. If non-compliance persists and is material, the auditor has a duty to make adequate disclosures in the audit report or even qualify the audit report, depending on the nature and materiality of the non-compliance. Auditors should also be vigilant about the mandatory disclosure in the Notes to Accounts if a non-corporate entity claims any exemptions under the Guidance Note, specifying their MSME level (Level II, III, or IV) and the specific exemptions availed.
7. Conclusion
The Guidance Note on Financial Statements of Non-Corporate Entities represents a crucial step towards standardizing and enhancing the quality of financial reporting for a large segment of the Indian economy. By prescribing clear formats, reinforcing the applicability of Accounting Standards based on a tiered classification, and detailing disclosure requirements, it aims to improve comparability and transparency, benefiting both the entities and the users of their financial statements.
- Key Links:
Reference for Accounting Standards: https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/accounting-standards.html#
Guidance Note of ICAI: https://resource.cdn.icai.org/75516asb61093-a.pdf
Illustrative Format of Financials for Non-Corporate Entities: https://resource.cdn.icai.org/75640asb61187a.xlsx
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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.
The above article is written by Sairam Khond and CA Shravan Suratwala. The authors can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com.
Sairam Khond is currently pursuing his Chartered Accountancy course and is currently completing internship with S.M. Suratwala & Co., Chartered Accountants, Pune.
CA Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 10+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation and Assurance. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course.
Author Bio
Now there are only two categories- Large Entities and MSME as per ICAI Announcement in November 2024
Very helpful and useful information !!
Easy to get clarity on new guidelines in a crux.