Mohan R. Lavi

Mohan R. Lavi on the recommendations about changes to the company law provisions on accounting

AT THE outset, the necessity of the Irani Committee to comment on almost every major subject in the present Companies Act seemed needless. The Committee could have probably suggested areas where major reforms were called for and given a comment that the other provisions were being retained since no major revisions were called for.

There can be no doubts that the Institute of Chartered Accountants of India (ICAI) has done seminal work in introducing Accounting Standards in India.

Implementation of these Standards should be best left to the ICAI with the Companies Act acting as a support to prevent deviations by levying penalties. Just like the Concept Paper, the Committee also supports the National Committee on Accounting Standards (NACAS) as the " instrument" to implement the Accounting Standards. The ICAI is not going to like this too much and it would be in the fitness of things to leave the matter to it. Elsewhere, the Committee talks about providing sops to small business units which the ICAI has done almost two years back.

Annual reports of companies would become a bit thinner since the Committee recommends consolidation of holding company and subsidiary company accounts and no requirement to publish the balance-sheet of the subsidiary separately. Talking about preserving records of companies, the Committee grants a rebate of one year — companies need to preserve records for seven years instead of eight as of now with a view to bring the provisions on a par with the Income-Tax Act.

In 2005, the Committee gives a thumbs-up sign for maintaining accounts on an accrual and double-entry system. This was present in the present Companies Act and hence the need to reiterate the point again seems unnecessary. The cash flow statement is set to become mandatory for all companies which is a good suggestion since the shareholder would know the sources and utilisation of funds by companies.

Decades after India has become used to March 31 as the financial year, the Committee runs a small debate and reaches the same conclusion — March 31 would be the financial year.

The Committee has altered the scheme proposed in the Concept Paper that the first financial year should be within six months from zero date — it is now proposed at three months which gives the impression that this exercise was done looking at the provisions of the Concept Paper than from zero-base which would have been ideal since we would have had two independent opinions about the law and one could choose the best.

After Enron and SOX, the CFO owns the responsibility for the financial statements and could face the guillotine for misstatements. The Committee follows the same path and mandates a whole lot of people to certify the financials.

The Committee falls in line with the e-age by recommending electronic copies of the financial statements to stakeholders. Directors would be advised not to have any transactions with even a remote "related party" since the Committee postulates the Director' Responsibility Statement should include that the related party transactions and have been entered into at arm's length, and if not, the relationships of the directors in such transactions along with the amounts involved have been disclosed as a part of the Director's Report along with management justification thereof.

At long last, the two sets of existing rules relating to declaration of dividend out of reserves and transfer of profit to reserve get the axe.

With the current focus on infrastructure, the Committee did not want to be left behind and expects the company law to provide a framework that recognises rates of depreciation for infrastructure projects where such rates are prescribed by the statutory regulator for the sector concerned.

With so much of knowledge material on hand relating to simplifying the mammoth Companies Act, it is time to get into action and implement the measures.

(The author is a Hyderabd-based chartered accountant.)

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