11.1 Financial Statements Of Companies Flashcards
What is a company?
Define as per Companies Act.
According to Prof. Haney, a company is “an incorporated association, which is an artificial person created by law, having a seperate entity, with a perpetual succession and a common seal.”
Section 2(20) of Companies Act 2013 - company means a company incorporated under the Companies Act 2013 or any previous company law.
Maintenance of Books -
• change of place of maintenance of books
• books maintained at branch office
• Section 128(3) - inspection of books
• Section 128(5) - period of maintenance
By default books should be maintained at registered office, if the Board of Directors decide to maintain books at any other place, such decision must be informed to the Registrar of Companies within 7 days of making such decision
If a company has branch offices, the books maybe kept at the branch office provided, the branch sends summarised returns periodically to the registered office.
The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches.
Section 128(3) - BoA and other such documents maintained by company within India should be open for inspection at its registered office/such other place in India by any Director during business hours. If financial information is maintained outside India, copies of such statements should be maintained and produced for inspection by any Director.
Section 128(5) - BoA along with vouchers should be maintained for a period of not less than 8 financial years by an existing company. If company has been in existence for less than 8yrs, then books and vouchers should be maintained from incorporation.
Maintenance of Books of Accounts by a Company. What, where, why, how and by who?
Section 128 of Companies Act, 2013 -
What? - books of accounts and all other relevant books, papers and financial statements for every financial year
Where? - prepare and keep at registered place of business
Why? - to give true and fair view of state of affairs of company
How? - on accrual basis and as per double entry system of accounting. In physical or electronic mode
Who? - books should explain transactions effecting registered office, branches and branch offices if any
Final Accounts. What are they and what do they include?
Section 129 of the Companies Act, 2013 - at the AGM, the Board of Directors should lay financial statements before the company:
Financial Statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and other external parties.
Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia include -
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account (or statement of Income and Expenditure for not-for-profit companies)
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable;
(v) any explanatory note annexed to, or forming part of, any document referred to in (i) to (iv)
Financial Statements of OPC, small company and dormant company, may not include the cash flow statement. Even private companies, if they are start-ups may not include cash flow statement.
Financial Statements should give a true and fair view of the state of affairs of the company as at the end of the financial year.
Section 92 - Annual Return. Who should sign, when should it be filed?
Section 92 of Companies Act -
Every company should prepare an annual return in the form prescribed by the Act. It should be signed by a Director and the company secretary (if no CS, then a CS in practice)
For One Person Company and Small Company, return should be signed by CS (if no CS, then by Director)
The return should be filed with Registrar within 60 days from day on which Annual General Meeting is held.
If an AGM is not held, then within 60 days from the date in which it should’ve been held along with statement showing reasons why it was not held.
Statutory books to be maintained by a company under various sections of the Act [8+6]
85 - Register of Charges
88 - Register of Members
88 - Register of Debenture-holders and other Security holders
118 - Minute Books
170 - Register of directors and key managerial personnel and their shareholding
186 - Register of Loans and Investments by Company
187 - Register of Investments of the company held in its own name
189 - Register of Contracts, or arrangements in which directors are interested
Registers and documents relating to the issue of shares are:
(i) Share Application and Allotment Book
(ii) Share Call Book
(iii) Certificate Book
(iv) Register of Members
(v) Share Transfer Book
(vi) Dividend Register
When can dividend be declared/paid?
Section 123(1)
No dividend should be declared or paid by a company for any financial year except-
(a) Out of the profits of the company for that financial year arrived at after providing for depreciation in accordance with the provisions of section 123(2)
(b) Out of the profits for any previous financial years arrived at after providing for depreciation in accordance with the provisions of that sub section and remaining undistributed
(c) Out of both the above
d) Out of the money provided by the Central Government or any State Government for the payment of dividend by the Company in pursuance of any guarantee given by that government
Provided that no dividend should be declared or paid by a company from its reserves other than free reserves.
Dividends cannot be declared except out of profits.
Capital cannot be returned to the shareholders by way of dividend.
Distributable profits.
Dividend is a return on investment made in the share capital of a company, distinct from return on borrowed capital, interest.
Commercially, dividend refers to share of profits of a company distributed among its members. Distribution of dividends may or may not entail release of assets by the company, it is a distribution which involves payment of cash.
Bonus shares allotment does not entail release of company’s assets. The shareholder only receives pro-rata allotment of fresh shares and not money.
Dividend has an inclusive definition in the Act. It includes and makes no distinction between interim and final dividend.
Interim dividend
Declaration of a dividend presupposes that there is a trading profit or a surplus available for distribution, arrived at after providing for depreciation on assets, not only for the year in which the profits were earned but also for any arrears of depreciation of the past years, calculated in the manner prescribed by Section 123(2).
Section 124(3) further states that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared:
Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend should not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.
Payment of dividend [out of reserves]
A company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject to the fulfilment of the following conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014:
- The rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year: provided that this sub-rule should not apply to a company, which has not declared any dividend in each of the 3 preceding financial years.
- The total amount to be drawn from such accumulated profits should not exceed 10% of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
- The amount so drawn should first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.
- The balance of reserves after such withdrawal should not fall below 15% of its paid up share capital as appearing in the latest audited financial statement.
- No company should declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.
Declaring of Dividend
As per Section 123 of the Companies Act, 2013, Board of Directors of a company may declare dividend including interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend should not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.
The amount of the dividend, including interim dividend, should be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
No dividend should be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and should not be payable except in cash:
Provided that nothing in Section 123 should be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company:
Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
Dividend on
- Preference shares
- Partly paid shares
- Calls in Advance
Preference Shares - Holders of preference shares are entitled to receive a dividend at a fixed rate before any dividend is declared on equity shares. But such a right can be exercised subject to there being profits and the Directors recommending payment of the dividend.
Partly Paid Shares - A company may if so authorised by its Article, pay a dividend in proportion to the amount paid on each partly paid share (Section 51 of the Companies Act, 2013)
Calls in Advance - do not rank for payment of dividend
Payment of Dividend
As per Section 124 of the Companies Act, 2013:
- Where a dividend has been declared by a company but has not been paid or claimed within 30 days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company should, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
- The company should, within a period of 90 days of making any transfer of an amount under this section to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed.
- If any default is made in transferring the total amount or any part thereof to the Unpaid Dividend Account of the company, it should pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of 12% per annum and the interest accruing on such amount should ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them.
- Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed.
- Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section which remains unpaid or unclaimed for a period of 7 years from the date of such transfer should be transferred by the company along with interest accrued, if any, thereon to the Fund “Investor Education and Protection Fund” established section 125 and the company should send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fund and that authority should issue a receipt to the company as evidence of such transfer.
- All shares in respect of which unpaid or unclaimed dividend has been transferred to “Investor Education and Protection Fund” should also be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed: Provided that any claimant of shares transferred above should be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed.
- If a company fails to comply with any of the requirements of this section, the company will be punishable with fine which will not be less than ₹5 Lakh but which may extend to₹25 Lakh and every officer of the company who is in default will be punishable with fine which will not be less than ₹1 Lakh but which may extend to ₹5 Lakh.
Books maintained in electronic form
The information in the electronic record of the document shall be capable of being displayed in a legible form.
There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law;
Provided that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.
The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement-
(a) the name of the service provider;
(b) the internet protocol address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.
Explanation.- For the purposes of this rule, the expression “electronic mode” includes “electronic form” as defined in section 2(1)(r) of Information Technology Act, 2000 and also includes an “electronic record” as defined in section 2(1)(t) of the Information Technology Act, 2000 and “books of account “ shall have the meaning assigned to it under the Act.
Where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India.
Periodic financial statements
The Central Government may, require such class or classes of unlisted companies [small company, OPC, dormant or private(start-up)], as may be prescribed,—
(a) to prepare the financial results of the company on such periodical basis and in such form as may be prescribed;
(b) to obtain approval of the Board of Directors and complete audit or limited review of such periodical financial results in such manner as may be prescribed; and
(c) file a copy with the Registrar within a period of thirty days of completion of the relevant period with such fees as may be prescribed.
