[Music] [Music] welcome students so this is our final lecture and we are discussing the process of financial reporting after this we'll be closing the discussion on this particular subject so after this long journey of you can call it as say 59 lectures now this is a last step 60th so we'll be having a discussion on it and then for the detailed reference you can refer to that different sources and the largely when we talk about the financial reporting you can use the important say provisions you can refer to that important provisions of Indian Companies Act 1956 and amendments done in different at different times say it in 2000 2013 and then you can refer to the income tax act also and some important provisions are there given to and then the other things we I'll be talking to you that you have to refer to for the detailed reference of the financial reporting so we will talking about the objectives and financial statements in the last lecture on the last part of discussion and then some other things important related to the financial reporting are say characteristics of a coherent financial reporting framework so to make a important reporting interesting and important the reporting means all the financial statements we are preparing and using for the reporting they should be transparent means that is a one important requirement that there should be transparent enough there should not be any hidden information anything which is concealed from the shareholders or from the lenders or from the say the suppliers or anybody yes that should be avoided comprehensive it should include as much as information so that by reading given the first two pages that is of the balance sheet and income statement you can be clear about to the maximum things and you not need to look at anything more beyond that and consistent consistency is the most important component of the financial reporting because consistency if consistency is not maintained it is not allowed also not to being consistent and some time if consistency is not maintained then it is very difficult to understand the information given say for example we normally talk about the consistency with regard to the depreciation charging methods so when you charge that depreciation if you talk about the concept of depreciation we couldn't get that time here otherwise I could have this discuss with you the concept of depreciation also so if you want to calculate the depreciation to be charged on the fixed assets you have almost ten methods to charge that depreciation though every methods is giving you the same amount of depreciation for that given period of time say for example one machine is depreciating in ten years then at the end of that tenth year the residual value will also come as same the depreciation amount will also come as a same and appreciate the method the asset will be depreciated finally to the extent we want to depreciate at all that is equal to the end of his technical value but the annual values may be different the annual amount of that depreciation may be different so we are using the different method to commonly use methods are like a straight line method that is SLM and written down value method is that wdv methods so when you use the straight-line method here depreciation amount remains the same all through the years for example it is ten thousand ten thousand and it is ten thousand but in case of the original non value method it changes first year it will be ten thousand next year it may be nine thousand next year it may be eight thousand one hundred like that so value of the depreciation changes so it means in the first year if you are using the straight-line method and the fourth year onwards you started suddenly change the method from the say a straight-line method to that return on value method it means the consistency is broken that consistency should not be broken and we should remain consistent for some reason if some changes are required then on the same page of where that depreciation figure is given or being given in the profit and loss account they're on the same page by putting a line drawing a line on the as a footnote you should give a note there that there is a change in the depreciation method detailed a discussion about that has been that is explanation and calculations have been given in the schedule number this appended to the profit and loss account so that disclosures are important normally method should not be changed but if it is required to be changed then say the disclosure is important so consistency is a very important characteristic of the better financial reporting then we talked about that there are some barriers also but because we have the different evaluation methods in that case valuation techniques are different so some company uses some techniques some company use these other techniques and even the country wise also the valuation is are the different say for example devaluation of inventory now you talk about the valuation of inventory there are different methods like before then we have a FIFO and then we have average cost method so different methods are there so different companies different use different methods of valuation so missus similar information cannot be worked out so these are the barriers then standard sitting approach means when you talk about the standard setting approach in the different countries because we are not a verdict we are not in the world accounting system so when the standard setting approach you talk about India has a different standard Pakistan has different standards u. s. has different standards UK has different standards and we are referring and trying to converge with the IFRS international financial reporting standards but that will take time so in that case the figures are different the total reporting process is different and similarly you talk about the measurement that is Miss how you to measure the different items and it means the focus should be on the balance sheet or in the income statement means both the statements are equally important one is reporting the profit or loss situation and another is reporting the financial position so they should be looked at with the equal importance but sometime we are only looking at the balance sheet lying more emphasis on the balance sheet less on the profit and loss account so some kind of the barriers are there in the financial reporting which should be recorded and which should be avoided I would like to say so then we talk about the other important things when you talk about the other things then the disclosure of the relevant accounting policies that is also very very important while we talk about the financial reporting process say important points that companies are required to disclose their accounting policies and estimates in the nodes through the financial statements means we I told you that there are the three components one is the profit and loss account balance sheet and then the schedules schedules are nodes so in their notes what are the policies being followed how what are the standards being followed how the calculations have been done details should be given in the schedules then companies also discuss in the management commentary those policies that management deems most important what is a say some in a brief manner what is the strategy of the form or what is that what are the important policies say for example the policies with regard to employees policies with regard to payment of dividend policy with regard to transferring of the say part of the profit to reserves some brief analysis and discussion also remains many of the policies are discussed in both the management commentary and in the notes of the financial statements and finally companies also disclose informations about changes naturally as I told you that if you are changing the method of depreciation or the changing your method of inventory valuation in that case you have to disclose it where you are changing that figure or you are giving that change the figure that has to be given by putting a line after that is that the last part of the page where that figure is given that by drawing a line as a footnote you have to give the detail the description why there is a change in the current year's figure as compared to previous sales figure because we have changed the method of depreciation we have changed the method of inventory valuation and that is the reason why this difference is occurring now we talk about that important role in the better financial reporting is of the two important bodies one is of the standard-setting bodies and second is of the regulatory bodies right standard-setting bodies and the regulatory bodies so first role in this process comes up of the standard setting bodies and if you talk about the standard setting bodies every country has a standard sitting body and in this case say for example you talk about that India in India the standard setting bodies one ICAI Institute of Chartered Accountants of India stand set the standards for financial reporting in India there how the financial reporting has to be done apart from that that the government central government also has some their own standards they have also developed some standards under the Indian Companies Act under the Indian Companies Act also same standards are dealt by the gummit also Ministry of Corporate Affairs but generally the main responsibility of developing the standards for that financial reporting in India are with the ICA for example you talk about the u.
s. now us in u. s.
there is a body like u. s. FASB that is United States Financial Accounting Standards Board they make the standards for us and likewise the different countries have their own standard setting bodies and to harmonize and to coordinate among as these bodies there is a one standard body which is called as AI ASB and IASB is setting the standards which are called as IFRS and they are the international financial reporting standards now little that background and discussion about the IASB International Accounting standard board actually we have called an International Accounting standard board but before that it was ia se International Accounting standard committee it was International Accounting standard committee this committee came into being in 1973 before 1990 73 the financial reporting at the international level was quite fragmented every country was moving his own direction but then the leading institutes of US and UK they came forward in 1973 and they decided that to guide that reporting rather than an international level especially for the multinational companies or for the exporters and others we should have some kind of the standards and for that we should have some standard setting body so these leading national level bodies they set up this body which say true as Delta the international standards facilitating the international trade by the multinational companies and they set this body in 1973 so this body was called as International Accounting Standards Committee and since 1973 till 2001 this company was in a distance and during this period of 1973 to 2001 they gave 41i a s they gave 41 IAS International Accounting Standards and from 1st April 2000 that this was converted into from 2001 onwards after 2001 this body was reconstituted reorganized and was renamed as IAS be International Accounting standard board and this started functioning a missus started this came into existence and started functioning from 1st April 1st April 2001 so after 1st April 2001 IAS is called as IAS B and the name of their standards is also changed and earlier it was called as International Accounting Standards and this is he has given 41 standards so far they are still in practice they are used and then when it was converted from is e to ie ASV then they also started giving the further standards and so far and whatever the standards are now given by the iasb they are called under a different name and they are called as international financial reporting standards and so far I EAS V has given us the 16 IFRS so total standards are 50 men plus 16 that is 57 and IES we keep on developing some new standards also as an event the problems come up to say go for say to deal with the different aspects of financial reporting especially at the international level so this is the one part that we have the standard setting bodies at the country level and second important role in the financial reporting is of the regulatory authorities and regularly authorities say for example in regulatory authorities in the different countries different regulatory authorities are there so if you talk about the regulatory authorities who has an eye and watch upon the reporting process of the corporates in India so first name comes is a savvy Security and Exchange Board of India this is the first regulator which is important regulator especially for the joint stock companies who are using the share capital and who are issuing the shares to the general public and using the share capital so they are the first regulator Sebby apart from that some other abilities are also there were their own lists country say RBI also is to some extent acts as a regulator then Registrar of Companies is another place that also acts as a it means a restorer of companies where the company is registered RAC they also act as a regulator so different regulators are there but the main regulator if you talk about that role is played by in case of the company form of organization joint stock companies semi is the most important regulator every country has their own say regulatory authorities and they play the regulatory role so the if you talk about the connecting role between the regulator and the standard-setting body is that the standard-setting body gives a directions and guidelines and implementation of those guidelines the regulator's power is that he can ensure that whatever the standards adult where the standard setting body they are being followed they are being observed and financial reporting is being done on the basis of the prevalent or extent financial reporting financial accounting or the financial reporting standards so we will say some important developments about the financial reporting standards are all the many countries have adopted IFRS not all the countries have done so far means many countries are moving from the national accounting to international accounting but still it is taking time say for example in India we have say two kinds of the standards earlier we used to call our standards as AAS that is the accounting standards we had about 32 standards and now we have changed the name say there's a s which are similar to IFRS we have converged with the IFRS and we are using the same standards in India also as they are the IFRS but those standards which are little different for them now we are calling under different name and they are called as in s in Accounting Standards so it is there are processes going on a time to come that both the say standards will same in that case everybody will use the IFRS but the time has not come financial reporting standards both IFRS and home-country GAAP continue to evolve for various reasons including changes in economic activity improvement of district standards and convergence between the International and the home country standards so currently both are in existence but when we are becoming more advanced we are mr.
more nearer to each other in the rest of the world and when the business world boundaries are shrinking or eliminating then may be possible that means we have only one type of standards and everybody has converged with the IFRS but the time has not come so far and analysts and analysts needs to understand whether and how differences in the financial reporting standards affect comparability in the cross sectional analysis that is the intelligence of the analyst he has to look at that from the country standards point of view also and by using the international standards also and then he has to give his own opinion that how this company is doing and how its position or the performances then if we talk about that good global convergence of the Accounting Standards still there is a difference means as I told you that even you talk about that most of the economies are converging with the or most of the national economies are converging with the IFRS but still those differences are existing so for example we talk about us now if you compare the convergence of the US GAAP and that sa bit the IFRS still that difference is there though the US has converged to a larger extent IFRS but still the gap is remaining and complete convergence is not possible means that some country level differences will also be there so if you talk about the country level differences say in u. s. you talk about there is a method of valuing inventory which is called as Lefou so as per I of iris means under IFRS use the benefi is not allowed last in first out it's not permissible but the newest refer is the most important method and they value their elementary on the basis of reform because the problem in u.
s. is the structural because the companies then they have to value the inventory so and if you want to take the income tax advantage if they want to reduce their income tax liability in that case they have to use Lefou and miss that income tax liability can be reduced advantage of income tax can be taken by the US companies provided their own her say reporting processes based upon value for and in their own internal or maybe the external reporting process on the basis of the company's acts they are used only for them they can claim the income tax advantage so it means if the US government has to do nicely for them they have to make the change in the Income Tax Act so that they have to make it that you use any method of inventory valuation and you prepare your company's statement by using leaf or any other method you will be given the income tax advantage but that difference always remains and that change the government is not ready to make in u. s.
so even you can merge but some problems will be there and some differences will be there here are some examples of the regulatory authorities we were talking about in India we have the SEBI that is a Security and Exchange Board of India say Australia it has it is the Australian Securities and Investment Commission financial services and marketed authority in Belgium and Japan is financial services agency similarly Nigeria Security and Exchange Commission of Nigeria so these different regulators are there after that RBI is also a regulator and then the Registrar of Companies orsa regulator to some extent then these regulators have formed international organization which is called as IO SCO international of securities commissions and they have created this organization just to remain a closer to each other so they're to share their regulatory process with the other countries means India to share with other countries draw good benefits from their system and dope they can draw good benefits from our system so the ACTA investor protection can be maximized and overall stability can be ensured in the economic system or in the financial system of that country so for that we are regularly meeting at the international level and they have formed the association also so that financial system improves and the financial system improves reporting will improve and reporting improves then investors safe lender a safe supplier is safe so there's a job of the regulator now we'll talk about quickly about the components of the financial reporting in India when you talk about the components of financial reporting in India they are divided into five parts first one is the legal requirements of financial reporting they are described under the Indian Companies Act and under the Indian income tax Indian Companies Act 1956 and a man much done in 2000 and then in 2013 and in Income Tax Act Indian income tax act that is 1961 so under these two acts the financial reporting processes carried on and second is the financial reporting the requirement is are during to the accounting standards and guidance notes of the ICAI that is again important requirement if you talk about the reporting process and third is say ensuring adhering to the IAS and IFRS if you are dealing internationally you for a national company only then there is no problem you can be doing your job by following only the local standards Indian standards but if you are dealing in any way with that if you are transferring your product from India to other country also multinational companies a subsidiary is working here they are manufacturing the product here and they are selling it to the said even their holding company back in their home country so it means they are indulging into an international trade and for them observance of the IAS and IFRS is important requirements of the Stock Exchange's is the another component which again the part of the regulatory network and then some other trends which are really important for us say for example having that say information in the financial statements about corporate governance similarly about the corporate social responsibility similarly about the environmental protection where the companies are doing so having this additional information in the financial statements again is the important requirement so these are the five broad components under which the financial reporting process in India can be studied can be understood and can be divided now we are running short of time better still I would like to go through missile I like to share with you the some important provisions of the Indian companies act that is 2019 56 amendments done in 2013 and some important provisions are some relevant sections which are useful for Indian reporting process is we will be talking about to the extent we could talk here and that is say books of accounts who should be kept on first requirement is under the section 2:09 subsection three and four books of account should be kept on accrual basis we all know that and according to double entry system of accounting what we learned in detail about that and companies are required to preserve their financial statements of one year for minimum next eight years this is the requirement of this section secondly are the requirements of section 210 describes this section describes the duty of boards of directors to lay before the annual general meeting the balance sheet and the profit and loss account of the complete income statement should not predate six months you should not be six months old when you are preparing that the income statement it should be latest it should be prepared after the last operating day after taking into consideration that total information with regard to expense and income you should not be old information you should be latest information and the the provision here it kept is that is it should not be at least six months old and it may be miss you one way at one point of time you can prepare it not only for one accounting period it can be for the one and half year 18 months it can be prepared but for us the useful information will be only for say 12 months but we can get to know that what is happening in the past six months or what is going to happen in that what has happened in the past six months means current 12 months and past six months so total is the 18 months information can be get there section 200 a level deals with the forms and contents of the profit and loss account and balance sheet it means ultimately and this section provides should use 6 of the Act 2 provide format for the balance sheet and profit and loss account it means ultimately the objective of initial reporting is what that the company should be reporting true and fair view of their performance this is the objective of preparing these statements ability elements this is objective of getting these statements audited from the independent Chartered Accountants certified Chartered Accountants miss everything for operating loss accounted balance you should not be night like septums computers balance sheets that Ramna Raju is getting it window dressed with the help of the auditors who had bought the auditors from the Price Waterhouse Cooper these two guys and they were say misappropriating in that case the purpose of the financial reporting is defeated then section 215 requires that balance sheet in profit and loss account must be signed by the company secretary and at least two directors and if there is no company secretary then apart from two directors must be signed by and in designated secretary whom it may be manager even and last is that section 2016 of the Act requires that profit and loss accounts should be an exit to the balance sheet more the things should be put together apart from that the third is now also mandatory that is the cash flow statement now there are some additional regions with regard to section 17 217 of the Indian Companies Act and these are the important points quickly I'll read out for you that is the state of company of years it must explain in detail amount proposed to be transferred to the reserves how much that should be clearly given amount recommended as dividend there should be clearly given material changes affecting the financial position of the company between the end of the financial layer and at the date of the report and changes that have occurred in the nature of company's business during the financial year that details should be there names of the employees who have received an aggregate around duration in excess of rupees 12 lakhs per annum under Section 17 217 subsection 2 a a which was introduced in the company's amendment act 2000 the section was added so that it can be made out to whom the salaries more than one lakh per month has been paid who are those people and why the amount has been paid their names and details should be there a report on conservation of energy technology absorption and foreign exchange earnings and the use that should be there are reference to benefits expected from the contracts yet to be executed and lastly changes in the types of business scatter out by the company so these some further information should also be there in that shape in the in the in the income statement as well as in the balance sheet apart from the profit and loss position financial position and a cash flow position some additional information is also required under the financial reporting and some other element sections are section 224 it requires that every company shall at each annual general meeting a point and auditor most important thing an auditor or auditors to the hold office from the say conclusion of that meeting to the conclusion of the next meeting so for one full year beginning of the year and till the end of them next year may be that accounting period you have to appoint the auditors and Section 226 is that those auditors have to be the Chartered Accountants who are Chartered Accountants under the Chartered Accountants Act 1949 and who are qualified to be appointed as auditors of the company they are only the qualified Chartered Accountants there are qualified auditors and section 2 27 says powers and duties of auditors should be properly means then defined under section 27 if somebody is appointed as a or dictator of the company it means he knows what are his powers and duties in addition in addition to the ABAB the provision of section two thousand five two two zero eight of the Indian Companies Law 1956 and for their amendments dealing with payment of dividends also have a bearing on the financial statements and reporting of the company so some important provisions I am quickly taking up with you then regions of the Indian Income Tax Act that is two important sections are there section 44 a B requires all the companies in India to have tax audit as d'etre means you have any form of organization it is important timber mandatory for the company form of organization if it is a joint-stock company but if it is a sole proprietor of it is a partnership firm even then for them the mandate it means this tax audit is mandatory the provisions of this section actually require for every one whosoever is carrying on the business or profession and fulfilling certain condition to get his accounts audited before the specified date and then last is section 145 deals with methods of accounting provisions of this section requires assessees to maintain the books of accounts under the cash system of accounting for the mercantile system of accounting but only one system of accounting not hybrid of the two say for example in India for the businesses other than banking they are allowed to follow the mercantile system of accounting or the accrual system of accounting but the banking sector banking organization in India they have to compulsively follow the cash system of accounting so in which ever category you fall whether you follow the cash system of accounting or you follow the mercantile system of accounting but you have to have only one system you cannot have that part of the statements are on cash and part of the statements are on mercantile accrual and you are creating a high hybrid kind of a system that is not allowed then financial standards and reporting I see I has depth thirty two accounting standards so far so they are irrelevant for which are mr.
