Archive for category: Corporate Laws

By Beni Agarwal (beni@vinodkothari.com)

Introduction

For the group enterprises, as the Companies Act provides, there is a requirement to prepare and present Consolidated Financial Statements. However there are a certain number of conditions which if satisfied may exclude a subsidiary from consolidation for preparation of consolidated financial statements. This article talks about one such restriction which deals with severe and long term restrictions. The purpose of the article is to throw more light and provide clarity to the meaning of “severe” and “long term” restrictions.

Background

Companies Act 2013, section 129(3) states that where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2). Schedule III of Companies Act 2013, provides that the financials should be prepared in accordance with the applicable Standards.

Hence, it is the requirement of companies act to prepare consolidated financial statements where there is a parent company and the economic activities of the group is presented in the financial statements. For the preparation of Consolidated Financial Statements, presentation is as per Schedule III and as per the rules stated in Accounting Standard 21( AS 21). The disclosure and presentation requirements as per schedule III are in addition to and not in substitution of the Accounting Standards.

The Standard lays down the rules for the preparation and presentation of Consolidated Financial Statements of the group enterprise under the control of the parent. These are in addition to the Standalone Financial Statements. Now the question arises as to what is the meaning of “control” that builds the subsidiary and holding relationship?

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