Overview and Purpose
The Institute of Chartered Accountants of India (ICAI) has recently issued a Guidance Note on Financial Statements of Non-Corporate Entities, providing a standardized format for preparing and presenting financial statements of unincorporated businesses. Although this Guidance Note is recommendatory in nature, its consistent application is strongly encouraged to bring greater uniformity, transparency, and comparability to financial reporting across the non-corporate sector.
The Guidance Note is applicable to essentially all non-corporate except if:
- legally prescribed format elsewhere – for eg. Corporates, Public charitable Trusts and Co-operative Societies/Banks
- If ICAI has in its prior pronouncement prescribed any other format. For eg. Schools/Educational Institutions (especially those run by trusts or societies) and Political parties.
Importantly, through recent FAQs and pronouncements, ICAI has clarified that auditors should qualify their audit reports if an entity's financial statements do not follow this recommended format. This highlights the growing professional expectation that practitioners align non-corporate reporting with principles similar to those under Schedule III of the Companies Act, 2013, which has long governed the presentation and disclosure framework for companies.
Over the years, ICAI's Financial Reporting Review Board (FRRB) and Quality Review Board (QRB) have repeatedly pointed out various instances of non-compliance with prescribed formats and fundamental accounting principles. These observations underline how seemingly minor lapses – such as inconsistent use of accounting terminology, incomplete disclosure of notes, or incorrect application of accounting standards – can affect the quality and credibility of financial statements.
It is, therefore, imperative that we learn from these past findings and proactively adopt best practices to strengthen our reporting. Through this article, I have attempted to compile some of the common non-compliance issues highlighted by ICAI over the years. The objective is to help practitioners, preparers, and reviewers of financial statements identify and address such pitfalls, thereby enhancing the overall quality, reliability, and statutory compliance of financial reporting for non-corporate entities.
Prescribed Formats in Other Countries – A Brief Comparative Insight
India is not alone in mandating or encouraging standardized financial statement formats for certain entities. Many countries' company laws or accounting regulations prescribe formats (or at least outline minimum content/order for financial statements) to ensure uniform reporting.
United Kingdom: The UK Companies Act, along with related regulations, prescribes multiple possible formats for company accounts (for instance, two balance sheet formats and two profit-and-loss formats are given in the law). The intent is to provide a "structured framework for companies to prepare their financial statements and ensure transparency, comparability, and reliability in financial reporting."
Germany: Germany's commercial law strictly defines the format and structure of financial statements for companies. All German corporations (e.g. GmbH, AG) must follow these formats, which are legally mandated components of "German GAAP". The rationale is rooted in Germany's stakeholder-oriented accounting approach
The United States: While U.S. GAAP provides detailed rules for recognition and disclosure, it is somewhat less prescriptive about a single format. However, specific regulators do impose structured reporting in certain cases.
In summary, generally country prescribes the formats for corporate structure of entity where there are justified infrastructure in terms of man power and control system. Prescribing standard format for non-corporate entity, globally is not very common. Further, countries with such requirements have kept the format entirely flexible considering size and complexity of business.
Common Non-Compliance Issues with ICAI-Recommended Formats
The Guidance Note largely adopts formats similar to those prescribed for corporate entities. Therefore, this is the right time for us to carry out a self-evaluation and ensure compliance with statutory format requirements. We should also assess whether we are providing complete disclosures as required under Schedule III and the proposed Guidance Note.
ICAI's Financial Reporting Review Board (FRRB) and Quality Review Board (QRB) frequently publish their findings on compliance with corporate disclosure requirements. These observations offer valuable insights that can be equally applied by preparers of non-corporate financial statements. By understanding and learning from these findings, we can proactively strengthen our reporting practices.
In the following sections, a few commonly overlooked issues are highlighted. Paying careful attention to these areas can significantly enhance the quality and reliability of financial reporting.
| Non‑Compliance Area | Violation Description | Correct disclosures |
|---|---|---|
| Proper Terminology & Format |
|
The correct nomenclature is "Statement of Profit and Loss", "Cash Flow Statements". Correct nomenclature for revenue is "Revenue from Operations" Changes in inventory should be referred as "Changes in inventories of finished goods work-in-progress and Stock-in-Trade" With revised accounting standard on "Property Plant and Equipment", now for financial statement there is no terminology as "Fixed Assets". Many a time PPE is correctly referred on face of the balance sheet but loosely used as Fixed Assets in Notes, Schedules, audit reports, Directors report and accounting policies. Payment to employee including annual payment, social contribution and terminal benefit is referred as "Employee benefits expense" |
| Accounting policies |
Income and expenditure are generally recognised on an accrual basis; however, certain specific items – such as export incentives, warranty servicing costs, government grants, and employee retirement benefits – are sometimes accounted for on a cash basis. |
Accounting for certain items of income and expense on a cash basis is not in accordance with generally accepted accounting principles. Entities must recognise such items on an estimated basis and provide for them appropriately under the accrual concept. |
| Secured Borrowing. |
Disclosure of only security offered is provided. |
Apart from security being offered, disclosures are required for rate of interest and repayment terms. |
| Accounting for terminal benefit of Gratuity and accumulated Leave Salary: |
|
An entity should recognise a liability for gratuity once an employee has rendered service to the enterprise, even if the employee has not yet completed five years of service or the entity itself has been in operation for less than five years. In addition to considering statutory applicability, management should also review the terms of employment contracts. If an employment agreement provides for payment of gratuity – even where the statutory provisions do not apply – the entity becomes contractually obligated to make such a payment, and an appropriate provision should therefore be recognised. |
| Accounting for Depreciation. |
The accounting policy states that depreciation is provided in accordance with Accounting Standard (AS) 6 – Depreciation Accounting |
Accounting Standard (AS) 6 – Depreciation Accounting has been withdrawn and its provisions have been incorporated into AS 10 – Property, Plant and Equipment |
| Investments |
Long-term investments are carried at cost and are not provided for diminution in the value of investments. Many a time provision is not made stating any of the following reason:
|
A provision for diminution should be made for long-term investments if the decline in value is other than temporary. Long-term investments include investments in subsidiaries, associates, or joint ventures. Accordingly, any permanent diminution in the value of such investments should be recognised through an appropriate provision. |
| Investments |
Current investments are required to be valued at cost or fair market value, whichever is lower. However, in practice, the provision for diminution is often determined by comparing the overall value of the investment portfolio, instead of evaluating each individual investment or class of investment separately, as required. |
Current investments should be carried at the lower of cost and fair value (not market value). Furthermore, this comparison should be made either on an individual investment basis or by category of investment, but not on an overall or global portfolio basis |
| Accounting for derivative contracts. |
Provision is made for losses on open futures and options contracts, but unrealised gains on such contracts are not recognised. |
In 2015, ICAI issued a Guidance Note on Accounting for Derivative Contracts which, in line with the principle of prudence, required entities to recognise losses on derivative positions such as options while ignoring unrealised gains. However, in view of global developments and evolving best practices, the Guidance Note was revised in July 2021. Under the revised guidance, all derivative contracts must be recognised on the balance sheet and measured at fair value, regardless of whether they result in a gain or a loss |
| Inventory valuation |
Inventories of raw materials and work-in-progress are often valued only at cost, without comparing their carrying amount with net realisable value. |
Inventories should be valued at the lower of cost and net realisable value, and this principle applies to raw materials and work-in-progress as well. Accordingly, if the net realisable value of finished goods – in which such raw materials and work-in-progress are used – falls below cost, the carrying amount of the related raw materials and work-in-progress should also be written down to reflect the reduced value |
| Inventory valuation |
Cost of inventory is compared with either:
|
Inventory should be valued at the lower of cost and net realisable value. Comparing cost with any value other than net realisable value is not in accordance with generally accepted accounting principles |
| Foreign currency accounting |
Current assets and current liabilities outstanding at the year-end are revalued and accounted for at the exchange rate prevailing as on the reporting date. |
As per the applicable accounting standard, all foreign currency monetary items should be reported using the closing rate, rather than only revaluing current assets and liabilities |
| Foreign currency accounting |
Foreign currency transactions are recorded at the exchange rate prevailing on the date of the transaction, except for export sales, which are recorded at the rate notified by customs for invoicing purposes |
A foreign currency transaction should be recorded at the exchange rate prevailing on the date of the transaction. Therefore, accounting for export sales using a customs-notified rate instead of the actual exchange rate on the transaction date is not in accordance with the applicable accounting standard. |
| Reporting of revenue |
Turnover is sometimes presented as gross of GST, with a deduction shown for GST, and then reported net of GST. Additionally, turnover may include amounts charged to customers as reimbursement of expenses incurred on their behalf. |
Presenting sales gross of GST – that is, including GST within revenue – is not acceptable under ICAI guidance, as it overstates revenue by including taxes collected purely in the capacity of an agent for the government. Similarly, if an entity recovers any amount as an exact reimbursement of expenses incurred on behalf of a customer, this should be treated as a pure agent–principal transaction and should not be included in revenue. |
Conclusion:
Preparing financial statements that stand up to scrutiny requires more than simply following statutory requirements – it demands care, professional judgement, and a commitment to presenting information clearly and consistently. Many of the common errors discussed here – whether they relate to incorrect formats, inconsistent terminology, incomplete disclosures, or outdated accounting practices – are entirely avoidable with greater awareness and regular self-review.
By proactively identifying these pitfalls and addressing them in our day-to-day practice, we not only strengthen the quality of each set of financial statements, but also reinforce stakeholder confidence and uphold the standards expected of our profession.
As preparers, reviewers, or auditors, we have an important role to play in ensuring that financial statements, whether corporate or non-corporate, reflect true and fair information supported by robust, transparent disclosures. Small improvements in presentation and policy clarity can make a significant difference in credibility and compliance.
Let us use these learnings – drawn from real-world observations – as a practical checklist to take that step towards better, clearer, and more reliable financial statements.