Every Holding Company to Consolidate Financial Statements

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.

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