The Companies Act,2013 is a broad detailed legislation which basically governs the incorporation, dissolution, and functioning of the company. Mainly, it focuses on the pellucidity by way of detailed disclosures.
Financial statement, Board’s report,etc has been mentioned under section 134 of Chapter IX of Companies Act,2013.
Financial reporting is necessary for companies as it provides the details of the state of a company and its compliance with financial, corporate social responsibility and accounting standards. Director’s report which is to be filed by all Public and Private limited companies at the end of the financial year. Basically, this report is prepared by the Board of Directors of the company and should be attached to every financial statement. The main aim which fulfills this motive is that it outlines the financial state of the company. The financial statement provides a summary of the company’s assets, Liabilities and shareholder’s equity.
Section 2(40) of the Companies Act,2013 states that the financial statement includes the subsequent items:
- Balance Sheet.
- Profit and loss account, or in the case of a nonprofit organization, an income and expenditure account for the year.
- Cash flow statement
- Statement in respect of changes in equity, and
- Annexure forming a part of the budget.
Financial statement is required to be prepared so that the shareholders can get an idea about the financial position and operation of the corporation. This information is utilized by the shareholders to gather information about the company’s performance and hence can make decisions whether to take a position in such a company or not.
The company is required to adopt the financial statement within the Annual General Meeting (AGM). The AGM could be held within 6 months from the end of the relevant financial year. After signing the financial statement, if any, shall be circulated together with a copy to each stakeholder.
The financial statement of the corporation shall be prepared in accordance with Schedule III of Section 129 of the companies act,2013 and such plan must be laid before the shareholders at the AGM of the corporation.
WHO SHOULD SIGN THE FINANCIAL STATEMENT?
According to Section 134 of the Companies act,2013 financial statement would be signed by the following persons-
- Chairperson of the corporation (if he is authorized by the board of directors)
- Any 2 directors of the corporation (one of which should be a managing director)
- Chief Executive officer/ Company Secretary/ Chief financial officer of the corporate (which is based on the appointment within the corporation)
The Board’s report is a communication between the Board of Directors of the company and the shareholders. Basically, the communication is about the financial performance of the company in the current reporting period and also the economic policies impact on the company and industry. Usually, the directors in the report share their perspective and vision for the next financial year.
The provisions of section 134 of the companies act,2013 lays down the minimum disclosures by the companies in the Board’s report. Rules 8 and 8A of the companies (accounts) rule,2014 also provides certain disclosures in the Board’s Report.
As per Rule 8 of the Companies(account)rule,2014 the board report is to be prepared on the basis of financial statements only. Report shall contain a section wherein the associated companies, the performance of subsidiaries, and joint venture companies shall be mentioned.
WHAT SHALL BOARD REPORT CONTAIN?
- Number of Board Meetings-
Section 134(3) clause(b) states that the number of board meetings held in the financial year shall be disclosed in the Board report.
- Responsibility Statement of Director-
Directors’ responsibility statement is a very important disclosure which is mostly based on 3 elements-
- Establishment and maintenance of mechanisms
- Competency of the mechanisms
- Effectiveness of the mechanisms
Details of the fraud that has been reported by the auditor must be disclosed in the board report i.e.- the estimated amount of fraud, description and nature of the fraud.
- Declaration Statement by Independent director-
All the independent director submits a statement declaring that she/he meets the criteria mentioned /s 149(6) of the Companies Act. This statement needs to be provided at the first board meeting where he participates as the director.
- Committee of Nomination and Remuneration-
Some of the companies which come u/s178(1) are to constitute a nomination and remuneration committee of three or more non-executive directors. Thus, the committee shall lay down the criteria for qualification, policy relating to the remuneration of the directors, independence of directors and many more things.
- Remarks by the Board-
The BOD is required to provide their comments and explanations for the remarks made by the Auditor of the company in his report, and Company Secretary in the secretarial audit report.
- Loans and investment-
The report of the board must disclose all the information of the loans given by the company, the investments which has been made by the company and all the guarantees by the company u/s186 of companies act,2013. Also, the reason/purpose for which such a loan or guarantee is given has to be mentioned.
- Party transactions-
The board report must contain the particulars of any contracts or arrangements that have been entered into with related parties referred to in section 188 of the companies act,2013. According to the Rule 8(2) of Companies (accounts) rules,2014, the particulars of related party contracts or arrangements shall be in the Form AOC-2.
- Company affairs-
The Board report must disclose the position of the company affairs, it must underline the situations affecting the company’s business, operational changes, development, etc.
- Declaration of Dividend-
According to Section 123 of the companies act, the dividend can only be declared by the company- Out of profits earned by the company for the financial year and the money provided by the government for the purpose of declaring a dividend in pursuance of a guarantee given by the government.
All companies need to prepare the director’s report, except for the “One Person Company” (OPC) and small companies. The small companies and OPC’s need to file the abridged director’s report as per Rule 8A of the Companies (Accounts) Amendment Rules,2018.
Basically, OPC means a company which has only one person as a member. OPC can have minimum 1 director and maximum 15 directors. And;
Small company means a private company having paid-up share capital of which does not exceed Rs.50 lakhs; and turnover of which as per P&L A/c for the immediately preceding financial year does not exceed Rs.2 Crores.
The commencement of Section 134 was from 01.04.2014 as notified by the Ministry of Corporate Affairs (MCA).
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