CA Amresh Vashisht
Under the 1956 Act, companies were generally not permitted to revise or restate financial information presented in their financial statements except in a case of Material misstatement due to Occurrence of fraud or error and are reported as a ‘prior period adjustment’ in the financial statements of the year / period in which such misstatements are discovered. In the opinion of the Department of Company Affairs and as per the GN on Revision/Rectification of Financial Statements issued by the ICAI way back in August 1983, after the financial statements and audit report have been adopted by the members, the financial statements should not be re-opened/rectified under any circumstances. In 1987, the department opined that for meeting technical requirements of taxation laws, the accounts can be reopened.
Way back in 2012, SEBI wished to have restatement of financial statements of listed companies, where the auditors had issued a qualified opinion. However, the requirement to restate was not falling in line with the provisions of the 1956 Act. Now the same have been made possible with an enabling legal framework for authorities to apply for restatement of a company’s financial statements.
ON THE INITIATIVE OF THE STATUTORY AUTHORTIES
A new provision in the companies act is introduced by way of section 130. As per section , the Statutory bodies by any one or more approach the Tribunal or the court when the accounts of the company were prepared in a fraudulent manner or the affairs of the company were mismanaged thereby casting a doubt on reliability of the financial statements to reopen the accounts of the company. Such statutory bodies are
a) the Central Government, or
b) the Income-tax authorities, or
c) the Securities and Exchange Board of India (SEBI), or
d) any other statutory regulatory body or authority or
e) any person concerned.
So, A company shall not re-open its books of account and not recast its financial statements, unless an application in this regard is made by the above mention stake holders and an order is made by a court of competent jurisdiction or the Tribunal to the effect the relevant earlier accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.
Before passing any order under this section, the Court or the Tribunal, as the case may be, shall give the notice to-
a) the Central Government,
b) the Income-tax authorities,
c) the Securities and Exchange Board,
d) any other statutory regulatory body or authority concerned
and shall take into consideration the representations, if any, made by Central Government or the income tax authorities, Securities and Exchange Board or the body or authority concerned .
Without prejudice to the provisions contained in this Act the accounts so revised or re-cast shall be final. Director’s report of the year in which such provisions are invoked, should provide for the reasons or circumstances in which such revisions were warranted. , there is no time restriction to revision initiated by a statutory regulatory authority. The impact could be significant if the restatement is ordered of a period, many years into the past, as a restatement in one year will have a cascading effect on the following years.
VOLUNTARY RESTATEMENT ON APPLICATION BY THE BOARD OF DIRECTORS
Section 131 prescribes that the financial statements or Board’s report can be restated on the initiative of the Board of directors of the company, if it appears to the directors of a company that the financial statement of the company or the report of the Board, do not comply with the provisions of section 129 or section 134. The board of Directors may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar.
The Tribunal shall give the notice to the Central Government and the Income tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section. However such revised financial statement or report shall not be prepared or filed more than once in a financial year and also that the detailed reasons for revision of such financial statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such revision is being made.
In a case, Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or laid before the company in general meeting, the revisions must be confined to the correction in respect of which the previous financial statement or report do not comply with the provisions of section 129 or section 134; and the making of any necessary consequential alternation.
CENTRAL GOVERNMENT EMPOWERED TO MAKE RULES FOR VOLUNTARY RESTATEMENT
The Central Government may make rules as to the application of the provisions of this Act in relation to revised financial statement or a revised director’s report and such rules may, in particular to make different provisions according to which the previous financial statement or report are replaced or are supplemented by a document indicating the corrections to be made and make provisions with respect to the functions of the company’s auditor in relation to the revised financial statement or report. It also requires the directors to take such steps as may be prescribed.
FILING OF RESTATED FINANCIAL STATEMENTS
Under the old provisions of the Companies Act 1956, It has been clarified through Circular: No. 1/2003, dated 13-1-2003 that a company could reopen and revise its accounts even after their adoption in the annual general meeting and filing with the Registrar of Companies in order to comply with technical requirements of any other law to achieve the object of exhibiting true and fair view. The revised annual accounts would be required to be adopted either in the extraordinary general meeting or in the subsequent annual general meeting and filed with the Registrar of Companies.
Many companies have been filing their annual accounts under section 220 more than once resulting into filing/availability of more than one such account in the Registry for a particular financial year. The matter has been examined in the Ministry in detail and it has been concluded that keeping in view the provisions of section 220 of the Act read with Ministry’s General Circular 1/2003, a company cannot lay more than one set of annual accounts for a particular financial year unless it has reopened/revised such annual accounts after their adoption in the Annual General Meeting on the grounds specified in Ministry’s circular Number 1/2003. It was directed that ROCs should keep a watch on such kinds of repeat filings of annual accounts and such accounts should not be accepted except in accordance with provisions of section 220 read with Ministry’s General Circular 1/2003.
MEETING TECHNICAL REQUIREMENTS OF TAXATION LAWS
The Department of Company Affairs was always of an opinion that for the purpose of requirements of taxation laws, the financial statement can be revising after adoption of the final accounts. The department has reiterated its stand vide its circular dated 28.7.1987 that for meeting technical requirements of taxation laws, the accounts can be reopened.
Now in the present circumstances where the restatement is backed by the judicial pronouncement, still the taxation implications of restatement will require to understand the impact on MAT as a result of change in the reported profits to be considered for MAT purposes. Voluntarily filing a revised income tax return is also time bound affair and at some juncture it shall not be able to cope with the compliance of the Income Tax.