Rule 6 of the Companies (Accounts) Rules 2014 deals with consolidation of Accounts. This rule got its power from second proviso to sub – section (3) of Section 129.
According to Section 129(3), 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).
Second Proviso to sub – section (2) of Section 129 provided that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.
This is optional on the part of government to prescribe under second proviso a manner of consolidation because term used is “may”. But when option is exercised, the manner as prescribed shall be binding.
Rule 6 of the Companies (Accounts) Rules 2014 prescribes this manner. The Original Rules 6 prescribed that the consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards. In case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.
In short, a company shall consolidate financial statements in accordance with Schedule III and accounting standards if applicable.
Thereafter government bring some amendments in line of’ “nothing in this rule shall apply” to certain companies.
When a proviso to Rule 6 says, rule shall not apply to certain company, this make situation where central government has not exercise option to prescribe manner under second proviso to Section 129(3) in respect of these certain companies.
At first, it seems for consolidation of financial statements such companies are free to adopt any manner other that manner prescribed in Rule 6. But in all these cases, all these certain companies are required to consolidate of financial statements.
Now, question arise, which manner these certain companies shall use to consolidate financial statements under Section 129(3).
I read Section 129(3) again:
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).
I find terms “in the same form and manner as that of its own” significant. From sub – section 129(3), I move to sub – section 129(2) and then sub – section 129(1).
I read Section 129(1) along with its first proviso:
The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III. Provided that the items contained in such financial statements shall be in accordance with the accounting standards.
This makes me clear that all companies shall prepare financial statements as per Schedule III and in accordance with Accounting Standards.
When I read Section 129(3) with Section 129(1), consolidated financial statements shall be prepare financial statements as per Schedule III and in accordance with Accounting Standards only.
This is a legal round trip going nowhere. Combined reading of Section 129 and Rule 6 just suggest that Rule 6 say nothing, prescribe nothing and exempt nothing. Every holding company, irrespective of what rule 6 says, need to consolidate financial statements in accordance with Schedule III and Accounting standards.
This is an update in my views as expressed on 14th April 2015 here.
Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.
Pingback: SUBSIDIARIES AND CONSOLIDATION OF ACCOUNTS | AishMGhrana
In case where a Company was subsidiary (not a WOS) only for part of the Finncial Year and as on the date of closing (31-03-2015) the Company ceased to be a subsidiary. whether the erst while holding Company still has to consolidate the Accounts of subsidiary while finalising its accounts for 2014-15?
Considering Balance sheet is as on date exercise, I do not see such requirement.
Law also does not require such consolidation specifically.
Our Auditors are of the view that even though a company ceases to be a subsidiary at the end of the year, the holding company requires to consolidate accounts ( line by line ) of the subsidiary company under the question as regards the p & L for the period till it was its subsidiary and as regards balance sheet it doesn’t require line by line but effect of p & l to be given in reserves & surplus. Kindly reconfirm your views.Thanks.
In case, your auditor may share basis of their views, I may revisit my interpretation and views.
Further, practically how will it be possible to consolidate, I have my limitation of knowledge. Please, share that also if possible.
Once the holding Company has disposed off the shares in subsidiary company and realised the price (with or without profit) and accounted for it and the Subsidiary – holding Company relationship has ceased to exist as on 31-03-2015 then how it would be required OR possible to Consolidate the accounts of subsidiary, either as per COMPANIES ACT, ACCOUNTING STANDARD OR LISTING AGREEMENT? Is it possible to account the profit or loss on sale of investment in subsidiary as well as to consolidate the accounts at the same time?
I understand, you replied it for Ashok Shah’s query.
Para 22 of AS 21 is relevant in the matter. only P&L is to be consolidated up to the date it ceased to be subsidiary. Any excess or short fall in realised value of investment is to be accounted in the P&L.
However, In case of a Listed Company the Listing Agreement Clause 41 also need to be complied for consolidation.
It seems that the Listing Agreement conditions are not alligned with the AS -21.
LikeLiked by 1 person
If a company( which is a wholly owned subsidiary) is having an associate, then whether it is required to prepare consolidated financial statements of the company and associate?
But insurance company,Banking company company or company engaged in generation/supply of electricity or any other class of company shall make financial statement in form as has been specified under the act governing such company….wich means provision of consolidation are not applicable to these company?
Yes. correct observation.
Whether a company which has only associates i.e. no subsidiaries/joint-ventures etc, is that company required to prepare CFS ?
Pingback: Index of Companies Law Posts | AishMGhrana
Pingback: Amendment in Companies Accounts rules, 2016 | AishMGhrana
If a company having foreign subsidiary as on 31st match 2015, is there any exemption for holding company from preparation of consolidated statement.