Regulation of financial reporting of incorporated entities: formula sheet

Key formulas

Core reporting chain

Books of account → financial statements → board approval and signing → audit → AGM → filing with Registrar

Use this order as the skeleton for any descriptive answer on the framework.

Overriding objective

Financial statements must give a true and fair view and comply with notified accounting standards

This is the central test in section 129. Schedule III format applies alongside it.

Books of account

Accrual basis + double entry + kept at registered office (or other place notified to Registrar)

Section 128. Books must explain transactions and show the true position.

Components of financial statements

Balance sheet + statement of profit and loss + cash flow statement + statement of changes in equity (where applicable) + notes

Certain small or exempt companies may not need a cash flow statement. State this as an exemption, not the general rule.

Schedule III structure

Division I: Accounting Standards; Division II: Ind AS; Division III: NBFCs following Ind AS

Balance sheet items are split into equity and liabilities, and assets, each into current and non-current.

Group accounts

Consolidated financial statements are prepared in addition to standalone ones when the company has subsidiaries, associates or joint ventures

Stated in plain terms. The exact conditions and exemptions are in the Act and rules.

Net worth test for Ind AS

Net worth ≥ ₹250 crore → Ind AS mandatory

Applies to companies not already covered by the listing rule. Holding, subsidiary, joint venture and associate companies of a covered company also follow Ind AS. Check the latest rules.

Listing rule

Listed (or in process of listing) on a recognised stock exchange, other than SME exchanges → Ind AS

Listing status brings the company in regardless of net worth. SME exchange listing alone does not.

Voluntary adoption rule

Voluntary Ind AS adoption → must continue; no return to AS

The choice is one-way. Once adopted, Ind AS applies to all later periods.

Standard-setting chain

ICAI / NFRA → recommend → Central Government (MCA) → notifies

Standards have legal force under the Companies Act 2013 only after notification.

Appointment term

Auditor appointed by members at AGM for 5 years: from the conclusion of one AGM to the conclusion of the sixth AGM

Appointment is by members, not by the board, apart from the first auditor and casual vacancies. Ratification at each AGM is no longer required.

Rotation of individual auditor

Individual: maximum 1 term of 5 consecutive years

Applies to listed companies and prescribed classes of companies (unlisted public companies with paid-up capital of ₹10 crore or more, private companies with paid-up capital of ₹50 crore or more, and companies with bank or institutional borrowings of ₹50 crore or more). During the 5-year cooling-off period the individual cannot be appointed as auditor of the company.

Rotation of audit firm

Firm: maximum 2 terms of 5 consecutive years (10 years)

Followed by a cooling-off period of 5 years. During it, the firm and any firm with a common partner cannot be appointed as auditor of the company.

Prohibited services

No accounting, internal audit, investment advisory, etc. for the audited company

Applies also to the holding and subsidiary companies. Learn the idea: no self-review.

Audit report opinion

Financial statements give the information required by the Act in the manner required and a true and fair view of the state of affairs, profit or loss and cash flows

The auditor gives an opinion, not a guarantee. The directors remain responsible for preparing the accounts.

NFRA role

NFRA = standards recommendation + monitoring + enforcement + audit quality review

Remit covers listed companies and prescribed large unlisted companies.

Core principle of listed company disclosure

Listed company duty = Companies Act duties + SEBI LODR additional duties

LODR adds to the Companies Act. It does not replace it.

Reporting frequency

Financial results: quarterly and annual (to stock exchanges)

Quarterly results are reviewed by the auditor; annual results are audited. The exact time limits are set by SEBI and can change, so check the current rule.

Related party transaction control

Audit committee approval → board oversight → shareholder approval if material

Related parties cannot vote on the resolution for approval of their own material transactions. Materiality thresholds are set by SEBI.

Event disclosure

Material event → prompt disclosure to stock exchanges

Timing depends on the type of event. Say 'promptly' unless a time limit is given.

Purpose test

Disclosure aim = equal information + timely information + protection of investors

Use this to structure any 'why' answer.

Reporting hierarchy for insurers

Insurance Act + IRDAI regulations + Companies Act + accounting standards

Specific IRDAI rules prevail over general rules for insurance items. Other matters follow the general law.

Main statements

Revenue Account (Policyholders' Account) + Profit and Loss Account (Shareholders' Account) + Balance Sheet + Receipts and Payments Account

General insurers prepare revenue accounts by class of business. Use the IRDAI formats.

Life insurer surplus idea

Surplus = Income (premiums + investment income) − Outgo (claims + expenses + commission) − Increase in policy liabilities

A simplified view to explain why the actuarial valuation drives the result. Not a prescribed formula.

Role split

Management prepares; Appointed Actuary values liabilities; Auditor reports

The auditor relies on the actuary's certified liability figures and does not re-do the valuation.

Quick revision

• Company law sets the duty to keep accounts, prepare financial statements and file them.
• Accounting standards decide how items are recognised, measured and presented.
• Ind AS is the Indian set of standards converged with international standards; know that it applies in stages based on company type and size.
• Convergence aims at comparable statements that investors can trust.
• An audit gives an independent opinion on whether the statements give a true and fair view.
• Auditor independence is the core safeguard; rules limit conflicts of interest.
• Auditors report to the owners, not to the management.
• SEBI listing rules add disclosure duties for listed companies, including timely reporting.
• Disclosure reduces the information gap between managers and investors.
• Insurers follow company law and also IRDAI rules on reporting.
• Always link a rule to the problem it solves and the party it protects.
• Check the exact condition for each rule: who it applies to and when.

Common mistakes

• Saying the auditor prepares or approves the financial statements. Fix: Remember: management and the board prepare and approve. The auditor only reports an opinion on them.
• Treating Schedule III as a set of accounting rules for recognition and measurement. Fix: Schedule III sets presentation and disclosure format. Recognition and measurement come from accounting standards.
• Saying NFRA notifies accounting standards. Fix: NFRA recommends. The Central Government notifies. ICAI develops draft standards.
• Treating Ind AS as identical to IFRS. Fix: Say Ind AS is converged with IFRS, with some carve-outs where India differs.
• Saying the directors appoint the statutory auditor. Fix: Remember the first auditor and casual vacancies are the exceptions. Normally members appoint at the AGM. In listed and prescribed public companies, the audit committee recommends the appointment.
• Mixing up the rotation limits for individuals and firms. Fix: Write it as 5 for a person, 5+5 for a firm, then a five-year break. Check you apply it only to companies the rules cover.
• Saying LODR replaces the Companies Act for listed companies. Fix: Write that listed companies must follow both. LODR adds to the Companies Act.
• Applying LODR to unlisted private companies. Fix: Always check whether the securities are listed before applying LODR.
• Saying insurers follow only the Companies Act 2013. Fix: State that IRDAI regulations add insurer-specific formats and disclosures on top of company law.
• Giving the auditor the job of valuing policy liabilities. Fix: The Appointed Actuary values the liabilities. The auditor relies on the actuary's certificate and reports on the accounts.

Exam tips

• For descriptive questions, write the chain of steps in order. Examiners give marks for sequence and for naming the responsible party.
• In MCQs, watch for options that assign the wrong role, such as auditor versus board, or presentation versus measurement.
• Use section numbers only when sure. A correct plain-words rule is safer than a wrong number.
• Link the topic to the user of accounts. Say why shareholders, lenders and regulators need the information.
• Write exemptions with their condition, for example certain companies may be exempt, not all companies.
• Write the applicability test in order: listing, net worth, group link. Examiners award marks for each test.
• Name each body with one verb: ICAI develops, NFRA recommends, Government notifies.
• In written answers, mention carve-outs when you say convergence, to show you know it is not full adoption.