Companies Act 2013 Begining of a New Era

Companies Act 2013: Beginning of a new era

B | Companies Act 2013

1Beginning of a new era |

Dear reader,

We are delighted to share with you our new publication Companies Act 2013: Beginning of a new era.

be addressed through appropriate changes in the rules,

the MCA to continue engaging with constituents as it has been

Ernst & Young LLP

| Companies Act 2013

Financial Reporting 4

Board report 6

Disclosures required 6

Preparation of board report 6

Depreciation 20

Audit and auditors 30Appointment of auditors 30

Rotation of auditors 32

Contents

Beginning of a new era |

Related parties transactions 46

reconstruction

4 | Companies Act 2013

of this Act applicable to the preparation, adoption and

mutatis mutandis


criteria prescribed in accounting standards for use of different

National Financial Reporting

standards for adoption by auditors


Board reportDis

Change in the nature of business, if any

resigned during the year

during the year

Practical perspectives

present MD&A either separately in the annual report or as part



Disclosure regarding median remuneration


earning, if they were arranged in an ascending or descending

addition to the disclosures required as per the Managerial


and those related to strategic and operational aspects of the

year shall include, in the report by its Board of directors,


Companies


the purposes of a particular section for interpreting another

strategic and operational business decisions, including whether

share capital of `


mutatis mutandis, to

The Guidance Note on Audit of Consolidated Financial Statements

fact that part of the audit of the group was carried out by other

Other key perspectives


,


mutatis mutandis, apply

the


mutatis mutandis

prepare and present CFS in accordance with AS 21. Keeping


prepare CFS under Indian GAAP. Will this position continue

net worth of `


mutatis mutandis


Place separate audited accounts in respect of each of its subsidiary on its website, if any

statements prepared as per local GAAP for this purpose.


foreign subsidiaries prepared in accordance with their local

the purposes of preparing CFS.


a separate statement containing the salient features of the

in accordance with Indian GAAP or the local GAAP of the

mutatis mutandis


DepreciationAmendments in Schedule II to the 2013 Act

Minimum vs. indicative rates

Continuous process plant

for which there is no special depreciation rate otherwise

BOT assets

an asset is used in double shift depreciation will increase by

uses the asset on triple shift basis during any subsequent year,

in the opening balance of retained earnings where


depreciate the asset using either 10 year life prescribed in

total cost of the asset and useful life of that part is different

II. How does component accounting interact with AS 6


Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets

is no change in Part A and it still requires depreciation to be

, states


declaration related issues, reference is drawn to discussion

AS 6 useful life.

to retained earnings in accordance with the transitional

Tax effect of expenses/income adjusted directly against the reserves and/or Securities Premium Account.”

depreciation

out of surplus(emphasis added)


Section 123 of the 2013 Act dealing with declaration of

publication for discussion on the issue related to charging

Utilization of securities premium

Writing off debentures and preference share issue


otherwise, or


any other instrument of a company evidencing a debt, whether

(emphasis added)

and any other securities of a company, whether constituting a (emphasis added)

particularly onerous, if one considers it together with the

2013 Act

Nil Nil

Nil

NA


Re-opening of accounts on the court/tribunal’s order


presented to the directors who authenticated the original


Appointment of auditors

The draft rules required that if the board does not agree

it is stated that the board will record reasons for its

Audit and auditors

consider only order or pending proceeding relating to


committee need to consider order/pending proceeding relating to matters of professional conduct against the

committee cannot recommend such person for appointment

The Audit Rules state that if the appointment of auditor is

appointment of auditor or will it follow the procedures relating

whose accounts are subject to audit by an auditor


Rotation of auditors

share capital of ``

share capital of ``


entities, or to listed entities and public interest entities, such as,

the purposes of this Act to be a subsidiary of a public


share capital of `20 crore or more on 1 April 2014. It needs

` `

`

on approach to be followed if there is a change in the threshold


guarantee or securit

`

`

connection with indebtedness of any third person to the

`


Practical perspectives`1

`

`

Business relationship



refers to aspects such as ordinary course of business and

and conditions of the transaction are standard or the

criterion related to indebtedness beyond prescribed

its partners or through its parent, subsidiary or associate

for business relationship is not only restricted to the audit



of its partners or through its parent, subsidiary or associate

An auditor is not allowed to enter into any new


Management services


Fraud reporting

The auditor will forward his report to the board or the

mutatis mutandis, to a cost auditor

``

Practical issues and perspectives

The procedure prescribed for fraud reporting is a step in the


report on all cases of suspected fraud to the Central

that an

reasons”

conclusion, then the auditor needs to further probe the


parties, the auditor is not required to report directly to the

The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. An auditor


transactions

partner

director and1

professional capacity

professional capacity


also a subsidiary

Related parties under “enabling clause” (clause (ix))

or

prescribed under the draft rules, will result in a long list

Common directorship

or holds along with his (emphasis

added).

He has recently been appointed as independent director

Companies 1st (Removal


other entity is an associate of the third entity

The entity is controlled or jointly controlled by a

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

They are husband and wife, or

Daughter


Companies

the concerned clause for identifying related party is not

related party as both the criteria for identifying a public

Public Public

Nil Nil

Nil Nil

ABCNo

Whether ABC is related party to No, if ABC is a public


Company S

50% 50% 30%

Company A

Company Z Company H

Diagram 1


transactionsrelated parties with respect to “selling or otherwise disposing


The 2013 Act

ordinary course of business other than transactions

of whether they are in the ordinary course of business and

entered into the ordinary course of business, and


Criteria Board Rules Draft rules

Paid-up share capital threshold ` `

``

worth`1,000,000

shareholders either the transaction has to be in the ordinary

ordinary course of business and it has been entered into on an

resolution of disinterested shareholders based on the criteria,

corporate assets and abuse in related party transactions.”


Audit Committee approval, if applicable1

Board of Director’s approval

Listed company?

Board’s approval and special resolution of disinterested

shareholders is required.

Special resolution of disinterested

shareholders is required.

Special resolution of disinterested

shareholders is not required.

Neither board’s approval nor special resolution of

disinterested shareholders is required.

Disclosure in the board report - Refer Form AOC-2

Related party transactions

NO

NO NO

NO

NO

Has the transaction been entered into by the company

in its ordinary course of business?

Has the transaction been entered into on arm’s length

basis?

YesYes

YesYes

No

Is the share capital of the company below prescribed

limit?

Is the transaction amount within prescribed threshold

(refer table 5)?

Yes

Yes

1Under the 2013 Act, non-listed companies, which do not meet the prescribed criteria, are not required to constitute Audit Committee. In such case, Audit Committee approval requirement does not apply.

Is the related party transac-tion material (RC49)?


related party transactions to be by the Audit

with a related party to any director, or is authorised by any

special resolution of disinterested shareholders, will be obtained


Related parties not entitled to vote

on the special resolution. It is clear that P is not entitled

resolution.

Public shareholding

29%Parent P

51%

Investor A 20%

SubsidiaryS

Diagram 3


Special resolution in case of wholly owned subsidiaries

concerning special resolution of disinterested shareholders, if

Master agreements

With regard to the Audit Committee/Board/disinterested


Non-reciprocal relationship

Ordinary course of business

Related Parties

restructurings or acquisitions

Transactions with offshore entities in jurisdictions with

returns


cases where related party transaction is not falling under either

building thereon just to lease the entire building to its

third parties

Arms’ length

purpose of the TP guidelines is to ensure that there is no


between two related parties that is conducted as if they

contracting parties has not affected the transaction and its

Policy on dealing with related parties on its website and in the annual report


This disclosure regarding related party transactions in the board


Loans to directors and

instructions of the board, or of any director or directors,


companies

disclose the details of such loans or guarantee or security or

or guarantee on behalf of its wholly owned subsidiary

Omnibus resolution


Investment in mutual funds

loans, guarantee and security refer to person as well as body

Foreign currency loans

Loan between fellow subsidiaries

act on behalf of its parent and apply all the restrictions of the

Loan from foreign parent


Transitional requirements


` ``

Constitution of CSR committee

of these three directors, at least one director should be an

Corporate social responsibility

the board, in its report, needs to specify the reasons for not


Scope/ applicability

`


`

this purpose.

average net

the

average


CSR expenditure and its accounting

Also, there does not appear to be any legal obligation on

The Framework for the Preparation and Presentation of Financial Statements

Expenses

assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to

The Chartered Accountant


furnished by the querist, it is not clear as to whether there is any legal or contractual obligation for afforestation,


` `

`

of trust in the Guidance Note on Accounting for Employee Share-based Payment.requires consolidation of only those controlled entities which


Transitional requirements

` ` `

` `` `

`


4

Corporate

(I) Strategy:

(II) Performance:

(III) Risk:

(IV) People:


Woman director

Draft Rules

` `

` `

the criteria for appointment of woman director in non-listed

capital of `

but does not include any other amount received in respect of such shares, by whatever name called (Emphasis added)


Independent directors

Particulars Draft rules

All listed companies

Two

Criteria – either of the following

` `

` `

Aggregate outstanding loans, debentures and deposits

` `

independent director at the earliest but not later than the


Board of subsidiary companies

Meaning:

Nominee directors:

Stock options:

Limit on number of directorship:

in which a person can be appointed as a director cannot

Tenure and rotation requirement:

Limitation of liability:director will be held liable, only in respect of such acts of


Audit Committee

Board Rules Draft Rules

` `

`1 No such criterion

Aggregate outstanding loans, or borrowings, or debentures or deposits

` `

separately and deposits separately or they should be considered

` `and outstanding deposits of `


Nomination and Remuneration Committee

Board Rules Draft Rules

` ` NA

`1 No such criterion NA

Aggregate outstanding loans, or borrowings, or debentures or deposits

` ` NA


Vigil mechanism

`

` periodically bring to the attention of the board of the listed

resolution


Internal audit

Particulars Accounts Rules Draft rules

` `

` No such criteria

year` `

` `

`

year`


property and all assets, tangible and intangible,

Mergers,

reconstruction

This will prohibit creation of any treasury shares under the


Glossary

1 Crore 10 Million

100 Crore 1 Billion

Annual General Meeting AGM

Depreciation Accounting

Accounting for Fixed Assets

The Effects of Changes in Foreign Exchange Rates

Consolidated Financial Statements

Accounting for Investments in Associates in Consolidated Financial Statements

Interim Financial Reporting

Intangible Assets

Financial Reporting of Interests in Joint Ventures

Provisions, Contingent Liabilities and Contingent Assets

Financial Instruments: Recognition and Measurement

Continuous Process Plant CPP

Generally Accepted Accounting Principles GAAP


Related Party Disclosures

Ministry of Corporate Affairs MCA

The Auditor’s Responsibilities Relating To Fraud In An Audit Of Financial Statements

Related Parties

Transfer Pricing guidelines TP guidelines


Ahmedabadnd

Bengaluru6th th th

th

th

Chandigarh1st

Chennaith & 7th

Hyderabad

Hitech City, Madhapur

Kochith

Kolkata

rd

Mumbai14th

th

NCR

10th

6th

4th th

Puneth

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Companies Act 2013 Begining of a New Era

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