Consolidation of Accounts of Section 8 Company

For a Section 8 Company, transparency and accountability are key to fulfilling its non-profit mission. Consolidation of accounts ensures all financial activities across branches or subsidiaries are accurately combined into one clear report. As per the Companies Act, 2013, this process strengthens financial reporting, boosts donor confidence, and supports legal compliance. In this article, you will get detailed information on the consolidation of the accounts of Section 8 Company.

What is Consolidation of Accounts?

Consolidation of accounts means combining the financial statements of a parent company and its subsidiaries into a single, unified set of financial statements. This gives a complete and transparent view of the overall financial position and performance of the entire group as if it were a single entity. For Section 8 Companies (non-profits), consolidation is important when they control or significantly influence other organisations. It helps maintain financial clarity, ensures proper utilisation of funds, and meets statutory compliance under Section 129 of the Companies Act, 2013, and Indian Accounting Standard (Ind AS) 110.

Legal Provisions for Consolidation

The following details include the legal provisions for consolidation:

1. Section 129 of the Companies Act, 2013

According to Section 129(3) of the Companies Act, 2013, if a company has one or more subsidiaries, it must prepare consolidated financial statements (CFS) along with its standalone financial statements. These consolidated accounts must be in the same format and follow applicable accounting standards. This provision applies to all companies, including Section 8 Companies, when they have subsidiaries or control over other entities.

2. Indian Accounting Standard (Ind AS) 110 – Consolidated Financial Statements

Ind AS 110 issued by the Institute of Chartered Accountants of India (ICAI) provides detailed rules and guidelines for preparing consolidated financial statements. According to Ind AS 110:

• A parent company is required to present consolidated financial statements that include all subsidiaries it controls.
• Control refers to the authority to direct or influence the financial and operational decisions of another business entity or organisation.
• All intra-group transactions must be eliminated in the consolidated accounts.

3. Schedule III of the Companies Act, 2013

As per Schedule III, companies must follow a prescribed format for financial statements, including notes and disclosures. When preparing consolidated statements, companies must ensure that the format remains consistent and clearly reflects both the parent and subsidiary positions.

When is Consolidation Required for Section 8 Companies?

As per Section 129(3) of the Companies Act, 2013, a Section 8 Company is required to prepare consolidated financial statements if it:

• Has one or more subsidiaries, associate companies, or joint ventures.
• Exercises control over another entity, either directly or indirectly.
• Holds the majority of voting rights or controls the board or financial decisions of another entity.

Even if the other entity is also a not-for-profit or is engaged in charitable work, the parent Section 8 Company must consolidate its financials to give a complete and true financial picture.

Step-by-Step Process for Consolidation of Accounts

Here is a step-by-step guide to help you understand how to consolidate accounts effectively and correctly.

Step 1: Identify the Need for Consolidation

Start by identifying whether your Section 8 Company:

• Has one or more subsidiary companies
• Exercises control or significant influence over another organisation
• Is part of a joint venture or associate company structure

If any of these apply, consolidation is mandatory under the Companies Act, 2013.

Step 2: Gather Financial Information

Collect the latest and audited financial statements of the:

• Holding (parent) company
• All subsidiaries
• Joint ventures or associate companies (if applicable)

Ensure that all financials are prepared for the same reporting period, i.e., the same financial year.

Step 3: Standardise Accounting Policies

Check whether the financial statements of all entities follow the same accounting policies and accounting standards. If not, adjustments must be made to align them before consolidation. This step ensures consistency and comparability across all entities being consolidated.

Step 4: Eliminate Intra-Group Transactions

Remove the effects of any transactions between the parent and subsidiary or among subsidiaries. These may include:

• Inter-company sales or purchases
• Loans, advances, or interest transactions
• Inter-company profits or losses
• Dividends from subsidiaries to the parent company

This prevents double counting and shows a true and fair view of the group’s performance.

Step 5: Adjust for Non-Controlling Interests (NCI)

If the parent company does not own 100% of the subsidiary, the portion of equity and profits that belong to other shareholders is shown as Non-Controlling Interest (NCI) in the consolidated balance sheet. This ensures proper representation of ownership.

Step 6: Combine Line-by-Line Items

Merge the assets, liabilities, income, and expenses of the parent and subsidiaries line-by-line. This means each corresponding item is added together across all entities.

For example:

• Cash of parent + cash of subsidiary = consolidated cash
• Total revenue = revenue from all entities combined (minus internal transactions)

Step 7: Prepare Consolidated Financial Statements

After all adjustments, prepare the final Consolidated Balance Sheet, Statement of Profit & Loss, and Cash Flow Statement as per Schedule III of the Companies Act, 2013.

These statements must:

• Clearly disclose consolidated figures
• Provide notes to accounts for transparency
• Mention the names of subsidiaries and the percentage of holding
• Explain any deviations or exceptions

Step 8: Approval and Audit

The consolidated financial statements must be approved by the Board of Directors of the parent Section 8 Company. After approval, they are audited by the statutory auditor, just like standalone accounts.

Step 9: Filing with MCA

File the consolidated financial statements along with the Board’s Report and Auditor’s Report in Form AOC-4 CFS on the MCA Portal within the prescribed due date.

Required Disclosures in Consolidated Statements

The details below include the required disclosures in consolidated statements:

1. List of Subsidiaries, Associates, and Joint Ventures

Names of all subsidiary companies, joint ventures, and associate companies must be disclosed.

Include details such as:

• Country of incorporation
• Percentage of ownership or voting rights held
• Nature of relationship (subsidiary, associate, or joint venture)
• Any changes during the reporting period (e.g., new subsidiaries or closures)

2. Basis of Consolidation

Clearly explain:

• The method used to consolidate (line-by-line, equity method, etc.)
• The accounting policies applied
• Whether there are any deviations in accounting standards or policies between the parent and subsidiaries

This helps readers understand how figures were combined.

3. Non-Controlling Interest (NCI)

Show the portion of equity and profits/losses attributable to minority shareholders (i.e., those not controlled by the parent company). NCI must be separately presented in both the Balance Sheet and Statement of Profit and Loss.

4. Intra-Group Eliminations

Disclose that inter-company transactions (like sales, purchases, loans, dividends, etc.) were eliminated during consolidation. Helps avoid double-counting and shows a clean financial picture.

5. Significant Restrictions

Mention any legal, contractual, or regulatory restrictions on subsidiaries, especially those that may affect the group’s access to their assets or ability to manage them freely.

6. Contingent Liabilities and Commitments

Disclose any group-level legal claims, guarantees, or liabilities that are not recognised but may become liabilities in the future.

7. Impairment of Investments

If the value of an investment in a subsidiary or associate is reduced, disclose the reason for impairment loss.

8. Events After the Reporting Period

Mention significant events that happened after the financial year-end but before the approval of financial statements, if they affect group entities.

9. Related Party Transactions

Disclose transactions between the parent and subsidiaries or among group companies, including:

• Remuneration to directors
• Grants or funds transferred
• Services exchanged

Follow Ind AS 24 for related party disclosures.

10. Auditor’s Report

• Attach a consolidated auditor’s report covering all group entities.
• Highlight any qualifications, remarks, or observations made by auditors.

Auditor’s Role in Consolidated Accounts

Here are the key roles and responsibilities of the auditor in consolidated accounts:

1. Verification of Consolidation Process

The auditor must ensure that the consolidation is done in line with Indian Accounting Standard (Ind AS) 110. This includes:

• Checking whether the company has properly identified its subsidiaries, associates, or joint ventures.
• Verifying that the consolidation method (line-by-line, equity method, etc.) is applied correctly.
• Confirming consistency in accounting policies across all entities in the group.

2. Examination of Financial Statements of Subsidiaries

The auditor needs to examine the audited financial statements of all subsidiaries and associates. If another auditor has audited the subsidiary’s accounts, the principal auditor must review their work and rely on their report, as per SA 600 (Using the Work of Another Auditor) issued by the ICAI.

3. Review of Intra-Group Transactions

The auditor must check whether intra-group transactions (such as inter-company sales, loans, dividends, etc.) are correctly identified and eliminated during consolidation. Failure to eliminate such transactions can lead to inflated revenue or asset values.

4. Reporting on Non-Controlling Interests (NCI)

The auditor must verify the correct calculation and presentation of NCI—the portion of equity and profits belonging to shareholders outside the parent company.

5. Evaluation of Disclosures and Compliance

The auditor should confirm that all necessary disclosures are made in the consolidated financial statements, such as:

• List of subsidiaries and associates
• Basis of consolidation
• Related party transactions (as per Ind AS 24)
• Contingent liabilities
• Events after the reporting period

This ensures compliance with Schedule III of the Companies Act, 2013 and applicable Ind AS standards.

6. Issuing the Consolidated Audit Report

• After completing the audit procedures, the auditor issues a consolidated audit report.
• This report includes their opinion on whether the financial statements present a true and fair view of the group’s financial position.
• If any significant issues or irregularities are found, the auditor must mention them through qualifications, adverse opinions, or disclaimers, as per SA 700/705.

7. Liaising with Management and Board

• Auditors must communicate with the Board of Directors and audit committee regarding any observations, concerns, or adjustments made during the audit.
• They may also suggest improvements in the internal financial control systems based on the group structure.

Penalty for Non-Compliance

Failure to comply with the consolidation provisions can lead to the following penalties:

1. Monetary Penalty under Section 129(7)

If a company fails to comply with Section 129:

• The company shall be punishable with a fine of up to Rs. 5 lakh.
• Every officer of the company who is in default (including the directors, CFO, and any responsible manager) may also be punished with a fine up to Rs. 1 lakh.
• In some cases, where non-compliance appears intentional or repeated, additional penalties under other sections of the Act may apply.

2. Registrar of Companies (ROC) Action

If the ROC finds that a Section 8 Company has not filed consolidated financial statements or has submitted incomplete/misleading data:

• The ROC may issue a show cause notice.
• Non-response or unsatisfactory explanations can lead to inquiries, inspections, or legal proceedings under Sections 206–209 of the Companies Act.

3. Reputational Damage

For Section 8 Companies that rely on donor funding, CSR grants, or government schemes, non-compliance with statutory reporting can result in:

• Loss of credibility
• Suspension from donor programs or CSR partnerships
• Public distrust due to a lack of financial transparency

Non-profit organisations are expected to uphold the highest standards of governance, and improper financial reporting can seriously harm their reputation.

4. Disqualification of Directors (in severe cases): If repeated non-compliance is observed and leads to legal proceedings or fraud charges, directors of the company may face disqualification under Section 164 of the Companies Act.

5. Compounding of Offences: If the company wants to resolve the issue voluntarily, it can file for compounding of offence under Section 441 of the Companies Act, 2013. However, this also involves paying additional fines and court fees.

Consolidating accounts is not just about numbers, but about building trust, ensuring transparency, and staying compliant. For Section 8 Companies, proper consolidation reflects credibility and commitment to purpose. Following the legal process, timely audits, and disclosures not only safeguard against penalties but also enhance donor confidence and public trust. In this article, you will learn about the consolidation of accounts of Section 8 company. Contact Online Legal India to get support and assistance in filing a Section 8 company registration from professional experts.