Tag Archives: Accounting Standards

Small and Medium Sized Company


My law teacher told me in law class, human is a social animal. Yesterday I found, modern human is social media animal. Last two days, we received a flood of social media messages claiming change in definition of small and medium enterprises. Only a fine reader can point out misunderstanding caused by this statement.

We need to understand interplay of the Companies Act, 2013, Micro, Small and Medium Enterprises Development Act, 2006 and newly notified the Companies (Accounting Standards) Rules, 2021.

No Government can change even a single alphabet in an Act of Parliament by way of notification of a Rule unless power is given specifically. Definition of the small companies is given in the definition clause Section 2(85) of the Companies Act, 2013:

 “Small company” means a company, other than a public company, —

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under Section 8; or

(C) a company or body corporate governed by any special Act.

The definition under this definition clause is applicable wherever word “small company” in the Companies Act, 2013. This definition may be amended by the Companies (Specification of definitions Details) Rules, 2014 or any amendment therein. No amendment in this general definition may be made by the Companies (Accounting Standards) Rules, 2021 or its earlier version.

Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014 with effect from 1 April 2021 amends the definition of Small Company saying that For the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act, paid up capital and turnover of the small company shall not exceed rupees two crores and rupees twenty crores respectively.

The final definition of small company under Section 2(85) read with Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014 with effect from 1 April 2021 is hereunder:

 “Small company” means a company, other than a public company, —
(i) paid-up share capital of which does not exceed two crores rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed twenty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under Section 8; or
(C) a company or body corporate governed by any special Act.

Any change in the definition of small company, more than ten crore and one hundred crore respectively for paid up capital and turnover shall require an amendment to the Companies Act, 2013.

This definition in the Companies Act, 2013 is applicable for all purposes of the Companies except (a) the accounting practices therein and (b) benefits provided by the Government to MSMEs.

The Companies (Accounting Standards) 2021 deals with the presentation of company accounts.

The term enterprises mentioned in Accounting Standards and the Companies (Accounting Standards) Rules is specific and restricted only to companies not any other form of enterprises. It is not applicable to all industrial undertaking, business concerns or other establishments except companies.

The Companies (Accounting Standards) 2021 defines Enterprises in Rule 2(d):

“Enterprise” means a ‘company’ as defined in clause (20) of section 2 of the Act.

Thereafter the Companies (Accounting Standards) Rules 2021 defines “Small and Medium Sized Company (SMC)” not small and medium enterprises (SME). Definition of small enterprises and medium enterprises is given in the Micro, small and Medium Enterprises Development Act, 2006 as amended time to time. We have already discussed this definition in details here earlier.

The definition of “Small and Medium Sized Company (SMC)” in Rule 2(e) of the Companies (Accounting Standards) Rules 2021 is hereunder:

“Small and Medium Sized Company” (SMC) means, a company-

  • whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;
  • which is not a bank, financial institution or an insurance company;
  • whose turnover (excluding other income) does not exceed two hundred and fifty crore rupees in the immediately preceding accounting year;
  • which does not have borrowings (including public deposits) in excess of fifty crore rupees at any time during the immediately preceding accounting year; and
  • which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

Explanation. – For the purposes of this clause, a company shall qualify as a Small and Medium Sized Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

For different purposes a company may either be:

  • Small Company or not;
  • Small and medium sized company or not;
  • Micro enterprises or small enterprises or medium Enterprises or none of these three.

It all depends upon relevant definition for the time being in force. One company may fall in one or more or none of these categories. Simple check points are:

Small CompanySmall and Medium Sized CompanyMicro Small and Medium Enterprise
Paid up CapitalTurnoverInvestment in Plant and Machinery
TurnoverBorrowing —

The companies (Accounting Standards) Rules 2021 has limited applicability with respect to applicability of accounting standards in relation to books of account of companies. These rules come into effect from the date of publication which is 25 June 2021 not on its issue date which is 23 June 2021. Further Rule 3(2) made it clear that accounting standards notified under these rules comes into effect retrospectively from 1 April 2021.

APPLICABILITY FORM NFRA – 1


To file or not to file NFRA – 1 still a puzzle. It seems thumb rule, if you as body corporate file Form ADT-1, do not file NFRA – 1. We will try to understand the NFRA Rules, 2018, NFRA FAQs and the Form NFRA – 1.

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National Financial Reporting Authority (NFRA) and its Duties


Section 132 of the Companies Act, 2013 is the point of debate and hope for corporate governance. It paves way for constitution of National Financial Reporting Authority – a super-regulatory for statutory auditors – Chartered Accountants. Optimists see it as predecessor of a future super-regulator for self regulatory statutory professional organizations – Institute of Chartered Accountants of India regulating chartered accountants and statutory auditors, Institute of Cost Accountants of India (earlier Institute of Cost and Works Accountants of India) regulating cost and management accountants and cost auditors, and Institute of Company Secretaries of India regulating company secretaries and secretarial auditors. We earlier discussed the provision of original Section 132 earlier here.

In this post, we will discuss Duties of NFRA under Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13th November 2018. Powers of NFRA to investigate and disciplinary proceeding shall be discussed in next post.

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YEARS’ ‘second’ AMENDMENT IN ACCOUNTS RULES


Ministry of Corporate Affairs placed on its web site a DRAFT notification on 4th September 2015 which proposed to amend the Companies (Accounts) Rules, 2015 with effect from date of publication of this notification in the official Gazette.

We will discuss here, provisions proposed to be amended by this notification:

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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).

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SUBSIDIARIES AND CONSOLIDATION OF ACCOUNTS


As we have discussed earlier here, Section 129(3) discuss about consolidation of accounts.

Where a company has any subsidiary, the company shall prepare a consolidated financial statement of the company and of all subsidiaries in the same form and manner as that of its own.  The consolidated financial statement shall also be laid before the annual general meeting along with own financial statement.

The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiaries.

Under this section, the word subsidiary shall include associate company and joint venture.

Form of Statement containing salient features of financial statements of subsidiaries [Rule 5]

According to Second Proviso to Section 129(3) discussed earlier here, where a company has any subsidiary, the company shall prepare a consolidated financial statement of the company and of all subsidiaries in the same form and manner as that of its own.  The consolidated financial statement shall also be laid before the annual general meeting along with own financial statement.

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MAINTENANCE OF BOOKS OF ACCOUNT


The Companies (Accounts) Rules 2014 came into force from 1st April 2014. These rules first time recognised electronic mode for keeping of books of account.

Notice of address at which books of account are to be maintained [Rule 2A]:

As we discussed earlier here according to Section 128 of the Companies Act 2013, every company shall prepare and keep at its registered office books of accounts and other relevant books and papers and financial statement for every financial year. These books must give a true and fair view of the state of affairs of the company and its branch offices. These books must explain the transactions effected both at the registered office and its branches.  These books shall be kept on actual basis and double entry system of accounting.

These books or some of these books may be kept at a place other than registered office at the decision of the Board of Directors after filing with the Registrar of Companies a notice in writing giving full address of that place.

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BOOKS OF ACCOUNTS


The Financial Statements of a company is most important document until recent past, when non – financial reporting started to gain its momentum. This is a reporting of growth in business in monetary units.

BOOK OF ACCOUNTS (SECTION 128):

Every company shall prepare and keep at its registered office books of accounts and other relevant books and papers and financial statement for every financial year. These books must give a true and fair view of the state of affairs of the company and its branch offices. These books must explain the transactions effected both at the registered office and its branches.  These books shall be kept on actual basis and double entry system of accounting.

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NATIONAL FINANCIAL REPORTING AUTHORITY


(UPDATE: on 30th August 2013: Companies Bill became the Companies Act, 2013 (Act 18 of 2013). Post updated accordingly)

One of the foremost step for improving corporate governance since birth of concept of corporate governance is improving quality of accounting and auditing of companies. Audit Committee is one of these measures, which has been taken to improve standard of financial reporting. But concerns related to quality of financial reporting are not new. We can trace these concerns in earlier legislation, all earlier versions of the Companies Act in general and the Chartered Accountants Act, 1949. Without going deep in these laws, we simply say; what was otherwise need to enact such Act to regulate a profession of accounting and auditing, standardizing whole process of accounting and auditing.

The National Financial Reporting Authority is a quasi – judicial body to regulate matters related to accounting and auditing. With increasing demand of non – financial reporting, I may safely predict, a National Business Reporting Authority to regulate standards of all kind of reporting, financial as well as non – financial, from companies in near future.

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