Understanding Financial Reporting Standards for Non-Corporate Entities in India

Introduction

Financial reporting is essential for portraying an entity's activities, financial position, and performance accurately. The information provided through financial statements is critical for stakeholders—including investors, lenders, and grantors—enabling informed decision-making. High-quality financial reporting should be comparable, transparent, complete, and unbiased.

The significance of non-corporate entities has grown, especially with the Indian government's efforts to enhance public service infrastructure through the Public-Private Partnership model. This has led to an increase in such entities in both private and public sectors, thereby expanding their financial operations.

I. Overview of Financial Statements

Financial statements are crucial components of financial reporting. A full set typically consists of:

• Balance Sheet: Outlines the financial position by detailing assets, liabilities, and equity.

• Statement of Profit and Loss: Summarizes income and expenses over a specified period.

• Cash Flow Statement: Reconciles the income statement with the balance sheet by categorizing cash flows into operating, investing, and financing activities.

• Notes and Explanatory Material: Essential for interpreting financial statements, these notes outline significant accounting policies as required by applicable Accounting Standards.

Additionally, financial statements may include supplementary schedules and information to provide further clarity on the entity's financial position, performance, and cash flows.

Mandatory Comparative Figures

Financial statements must present comparative figures for the previous year, as single-year presentations do not comply.

II. Understanding Non-Corporate Entities

Non-corporate entities are business or professional structures that are not incorporated under the Companies Act. Common forms include:

1. Sole Proprietorship
2. Hindu Undivided Family (HUF)
3. Partnership Firms (registered and unregistered)
4. Associations of Persons (including various informal partnerships and resident welfare associations)
5. Societies formed under applicable legislation
6. Trusts (both private and public), irrespective of registration status
7. Any organization engaged in business or professional activities that are not exclusively charitable.

III. Applicability of Accounting Standards to Non-Corporate Entities

The Institute of Chartered Accountants of India (ICAI) categorizes non-corporate entities into four levels based on the applicability of accounting standards:

Level I: Large Entities

Entities in this category include:

• Those with listed securities or those preparing to list.
• Banks, financial institutions, and insurance companies.
• Entities with a turnover exceeding Rs. 250 Crores in the previous financial year.
• Entities with borrowings exceeding Rs. 50 Crores at any point in the past year.
• Subsidiaries or parent companies of the above entities.

Level II: Medium Entities

Entities classified here have:

• A turnover exceeding Rs. 50 Crores but not exceeding Rs. 250 Crores in the last year.
• Borrowings exceeding Rs. 10 Crores but not exceeding Rs. 50 Crores.
• Subsidiaries or parent companies of the above.

Level III: Small Entities

Entities in this category possess:

• A turnover exceeding Rs. 10 Crores but not greater than Rs. 50 Crores.
• Borrowings exceeding Rs. 2 Crores but not exceeding Rs. 10 Crores.
• Subsidiaries or parent companies of the above.

Level IV: Micro Entities

This group includes non-corporate entities that do not qualify for Levels I, II, or III.

Compliance with Accounting Standards

Level I entities must comply with all Accounting Standards fully. Selected accounting standards for Levels II, III, and IV are outlined in the table below:

AS Name	Level II	Level III	Level IV
AS 1 - Disclosure of Accounting Policies	Applicable	Applicable	Applicable
AS 2 - Valuation of Inventories	Applicable	Applicable	Applicable
AS 3 - Cash Flow Statements	Not Applicable	Not Applicable	Not Applicable
AS 4 - Contingencies and Events Occurring After the Balance Sheet Date	Applicable	Applicable	Applicable
AS 5 - Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies	Applicable	Applicable	Applicable
AS 7 - Construction Contracts	Applicable	Applicable	Applicable
AS 9 - Revenue Recognition	Applicable	Applicable	Applicable
AS 10 - Property, Plant and Equipment	Applicable	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 11 - Effects of Changes in Foreign Exchange Rates	Applicable	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 12 - Accounting for Government Grants	Applicable	Applicable	Applicable
AS 13 - Accounting for Investments	Applicable	Applicable	Applicable with disclosures exemption
AS 14 - Accounting for Amalgamations	Applicable	Applicable	Not Applicable
AS 15 - Employee Benefits	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 16 - Borrowing Costs	Applicable	Applicable	Applicable
AS 17 - Segment Reporting	Not Applicable	Not Applicable	Not Applicable
AS 18 - Related Party Disclosures	Applicable	Not Applicable	Not Applicable
AS 19 - Leases	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption
AS 20 - Earnings Per Share	Not Applicable	Not Applicable	Not Applicable
AS 21 - Consolidated Financial Statements	Not Applicable	Not Applicable	Not Applicable
AS 22 - Accounting for Taxes on Income	Applicable	Applicable	Applicable only for current tax provisions
AS 23 - Accounting for Investments in Associates	Not Applicable	Not Applicable	Not Applicable
AS 24 - Discontinuing Operations	Applicable	Not Applicable	Not Applicable
AS 25 - Interim Financial Reporting	Not Applicable	Not Applicable	Not Applicable
AS 26 - Intangible Assets	Applicable	Applicable	Applicable with disclosures exemption
AS 27 - Financial Reporting of Interests in Joint Ventures	Not Applicable	Not Applicable	Not Applicable
AS 28 - Impairment of Assets	Applicable with disclosures exemption	Applicable with disclosures exemption	Not Applicable
AS 29 - Provisions, Contingent Liabilities and Contingent Assets	Applicable with disclosures exemption	Applicable with disclosures exemption	Applicable with disclosures exemption

V. General Instructions for Preparing Financial Statements

• Compliance with recommended formats for the Balance Sheet and Statement of Profit and Loss is essential for non-corporate entities.

• The disclosure requirements in these formats should complement those mandated by applicable Accounting Standards from the ICAI.

• All relevant statutory disclosures must be included in the notes to accounts.

• Corresponding figures for the prior reporting period must accompany all financial statements.

• Notes to accounts should provide additional context and narrative descriptions where necessary.

• Each item in the financial statements must refer to related notes for clarity, maintaining a balance between excessive detail and essential information.

• Financial statement figures may be rounded according to the following criteria:

  • Total Income Below 100 Crores: Round to the nearest hundreds, thousands, lakhs, or millions.
  • Total Income 100 Crores or More: Round to the nearest lakhs, millions, or crores.

VI. Closing Remarks

The initiative by the Accounting Standards Board (ASB) to standardize financial statement formats signifies a meaningful advancement for non-corporate entities. This guidance is expected to improve the clarity of communication regarding financial performance and position, thereby enhancing comparability across various entities.