Module no 3

The Companies Act, 2013 provides several important provisions regarding the preparation of
final accounts (financial statements) for companies. These provisions are mainly covered
under Section 129 and Schedule III of the Act. Here are the key provisions:
1. Preparation of Financial Statements (Section 129)
●​ True and Fair View: The financial statements must present a true and fair view of the
company's state of affairs, and they should comply with the prescribed accounting
standards.
●​ Financial Statements to be Prepared:
o​ Balance Sheet: Showing the company’s financial position as at the end of the
financial year.
o​ Profit and Loss Account: Reflecting the company’s financial performance
over the year.
o​ Cash Flow Statement: This statement is mandatory for listed companies and
certain other prescribed classes of companies.
o​ Statement of Changes in Equity: Required for companies that have issued
shares or equity instruments.
●​ Consolidated Financial Statements: A holding company must prepare consolidated
financial statements for the group of companies, showing the financial performance
and position of the group as a whole.
2. Accounting Standards (Section 133)
●​ The company must follow Indian Accounting Standards (Ind AS) or Generally
Accepted Accounting Principles (GAAP) prescribed by the Ministry of Corporate
Affairs (MCA).
●​ Companies must adhere to these standards unless specific exemptions or
modifications are granted.
3. Schedule III: Division of Financial Statements
●​ Format of Financial Statements: Schedule III prescribes the format of the balance
sheet, profit and loss account, and cash flow statement for different types of
companies (such as companies with share capital, and companies not having share
capital).
●​ Additional Disclosures: It also requires certain additional disclosures such as details
of share capital, borrowings, contingent liabilities, and other items.
4. Auditor's Report (Section 143)
●​ A company’s financial statements must be audited by a qualified auditor, who will
express an opinion on whether the financial statements provide a true and fair view in
accordance with the law and accounting standards.
 ●​ The auditor’s report should highlight any discrepancies, non-compliance with
accounting standards, or issues with the presentation of financial statements.
5. Approval and Signing of Financial Statements (Section 134)
●​ The financial statements must be approved by the Board of Directors before they are
signed by the directors and placed before the Annual General Meeting (AGM).
●​ The directors are responsible for the preparation of the financial statements, and they
must ensure that these documents comply with the provisions of the Companies Act,
2013.
6. Filing of Financial Statements (Section 137)
●​ After approval by the AGM, the company is required to file the financial statements
with the Registrar of Companies (RoC) within 30 days.
7. Related Party Disclosures (Section 188 & Schedule V)
●​ Companies are required to disclose transactions with related parties (such as directors,
key management personnel, and their relatives) in the financial statements, ensuring
transparency.
8. Dividends (Section 123)
●​ Before declaring a dividend, a company must ensure it has sufficient profits and that
the financial statements show a positive position.
In essence, the Companies Act, 2013, sets out detailed rules and regulations regarding the
preparation, presentation, and disclosure of financial statements, ensuring transparency,
accuracy, and compliance with accounting standards.

Green Accounting and Sustainable Reporting

Green accounting and sustainable reporting are emerging fields in corporate and
environmental management that focus on the integration of environmental factors into
financial and corporate reporting. These practices aim to ensure that businesses account for
their environmental impact and contribute to sustainable development.
Here's an overview of their need and objectives:

1. Need for Green Accounting and Sustainable Reporting

a. Environmental Degradation
●​ Rising Pollution & Climate Change: The increasing environmental pollution and
global climate change demand that businesses take responsibility for their ecological
footprint. Traditional financial accounting does not account for the depletion of
natural resources or the environmental harm caused by industrial activities.
 ●​ Natural Resource Depletion: Many industries rely on finite natural resources (like
fossil fuels, water, minerals, etc.), and their extraction impacts ecosystems. Green
accounting helps track and measure the economic value of these resources, as well as
the cost of their depletion.
b. Legal and Regulatory Compliance
●​ Government Regulations: Governments worldwide are implementing stricter
environmental laws and regulations (such as carbon emissions limits and pollution
control). Sustainable reporting ensures companies comply with these laws and avoid
penalties.
●​ International Agreements: With global initiatives like the Paris Agreement, there is
increasing pressure on businesses to reduce their carbon footprint and adopt
sustainable practices.
c. Social Responsibility and Public Expectations
●​ Stakeholder Pressure: Consumers, investors, and activists are increasingly
demanding that companies take responsibility for their environmental impact.
Sustainable reporting allows businesses to demonstrate transparency and commitment
to environmental and social goals.
●​ Corporate Reputation: Companies that embrace sustainability and green practices
are seen as more responsible, leading to improved public image and customer loyalty.
d. Financial Performance and Risk Management
●​ Cost Savings: Green accounting can highlight inefficiencies such as energy waste,
excess resource usage, or environmental risks. Addressing these issues can lead to
cost savings and improved resource management.
●​ Risk Mitigation: Environmental risks, such as extreme weather events or resource
shortages, can threaten business operations. Green accounting helps identify and
mitigate these risks through proactive reporting.

2. Objectives of Green Accounting and Sustainable Reporting

a. Integration of Environmental Costs in Financial Reporting
●​ Accurate Financial Representation: One of the main objectives of green accounting
is to include the environmental costs of business activities (e.g., pollution control,
waste management, natural resource usage) within financial reporting. This ensures
that businesses reflect the true cost of their operations.
●​ Long-Term Value Creation: By recognizing environmental costs and benefits,
companies can better understand the long-term value they create—not just in
monetary terms but also in terms of environmental and social impact.
b. Encouraging Sustainable Business Practices
 ●​ Incentive for Sustainability: Green accounting aims to highlight the financial
benefits of sustainability, such as reduced energy consumption or waste generation.
This encourages businesses to adopt greener practices that reduce their environmental
impact while enhancing operational efficiency.
●​ Waste Minimization and Resource Efficiency: By tracking environmental inputs
and outputs, businesses can identify areas for reducing waste, optimizing resource
use, and cutting costs, all of which contribute to sustainability goals.
c. Transparency and Accountability
●​ Stakeholder Communication: Sustainable reporting provides transparent
information to stakeholders (including investors, customers, and employees)
regarding a company’s environmental practices, goals, and achievements. This fosters
accountability.
●​ Disclosure of Environmental Impact: One of the key goals is to disclose the direct
and indirect environmental impacts of business activities, such as greenhouse gas
emissions, water consumption, and waste disposal.
d. Long-Term Environmental and Economic Sustainability
●​ Support for Global Sustainability Goals: Green accounting and reporting align
corporate actions with broader global sustainability initiatives such as the United
Nations Sustainable Development Goals (SDGs). Businesses can monitor their
progress toward achieving targets like reducing carbon emissions, conserving
resources, and promoting biodiversity.
●​ Balancing Profit and Planet: These practices aim to help businesses achieve a
balance between economic growth and environmental stewardship, ensuring that
financial gains do not come at the expense of environmental or social well-being.
e. Regulatory and Market Competitiveness
●​ Compliance with Regulations: Green accounting helps businesses stay ahead of
changing environmental laws and regulations, ensuring they are compliant and avoid
legal penalties.
●​ Attracting Green Investments: With investors increasingly looking to fund
companies that follow sustainable practices, green accounting and reporting enhance a
company’s attractiveness to environmentally-conscious investors, also known as
impact investors or sustainable investors.
f. Encouraging Innovation
●​ Green Innovation: Sustainable reporting can inspire companies to innovate in terms
of new technologies or processes that reduce environmental harm. Companies may
invest in cleaner production methods, renewable energy, or circular economy models,
which are essential for future growth.
Key Benefits of Green Accounting and Sustainable Reporting
●​ Promotes Environmental Awareness: Helps businesses understand and manage their
environmental impact, fostering a culture of sustainability.
●​ Builds Trust: Provides credibility and trustworthiness, particularly when businesses
can demonstrate genuine efforts toward sustainability.
●​ Improves Decision-Making: Informs management decisions by incorporating
environmental and sustainability data into strategic planning.

Data Collection and Analysis for Sustainable Reporting to Improve Business Value
Sustainable reporting requires businesses to collect and analyze data related to environmental,
social, and governance (ESG) factors. This process helps businesses assess their
sustainability performance and communicate their impact effectively to stakeholders, such as
investors, customers, and regulators. When done properly, it can significantly enhance
business value by improving decision-making, increasing efficiency, building trust, and
attracting more investment. Below is a comprehensive guide on data collection, analysis,
and how it can improve business value.

1. Data Collection for Sustainable Reporting

Effective sustainable reporting starts with accurate and reliable data collection. This data
should capture the environmental, social, and governance aspects of the business’s
operations.
a. Key Areas for Data Collection
●​ Environmental Data:
o​ Carbon Emissions: Greenhouse gas (GHG) emissions, including Scope 1
(direct emissions), Scope 2 (indirect emissions from energy use), and Scope 3
(indirect emissions from the supply chain).
o​ Energy Consumption: Total energy used, renewable vs. non-renewable
energy, and energy efficiency improvements.
o​ Water Usage: Volume of water used in production processes, conservation
efforts, and water recycling.
o​ Waste Management: Waste produced, recycling rates, disposal methods, and
efforts to reduce waste generation.
o​ Resource Usage: Natural resource consumption, including raw materials,
minerals, and other consumables.
o​ Biodiversity Impact: Impact on ecosystems, habitat preservation, and efforts
to reduce negative effects on biodiversity.
 ●​ Social Data:
o​ Labor Practices: Employee diversity, health and safety statistics, worker
rights, and fair wage practices.
o​ Community Engagement: Investment in local communities, social programs,
charity work, and stakeholder engagement.
o​ Product Safety: Compliance with safety standards, consumer protection, and
product life cycle management.
●​ Governance Data:
o​ Corporate Governance: Board composition, executive compensation, and
transparency in decision-making processes.
o​ Anti-corruption and Ethics: Measures taken to prevent corruption, fraud,
and unethical practices.
o​ Supply Chain Management: Social and environmental standards across the
supply chain.
●​ Financial Data:
o​ Sustainability-related Investments: Investments in green technologies,
energy efficiency, or other sustainable initiatives.
o​ Cost Savings: Data on cost reductions through sustainable practices, such as
energy savings, waste reduction, or process optimization.

2. Data Analysis for Sustainable Reporting

Once the data is collected, it must be analyzed to gain insights into the company's
sustainability performance. Analysis allows the company to track its progress, identify areas
for improvement, and demonstrate the value of sustainability efforts.
a. Key Analysis Methods
●​ Trend Analysis:
o​ Track key sustainability metrics over time (e.g., energy consumption, waste
generation, carbon emissions) to identify patterns and improvements.
o​ Helps to assess the impact of sustainability initiatives and set future goals
based on historical performance.
●​ Benchmarking:
o​ Compare the company’s sustainability data against industry peers, global
standards, or best practices to understand where it stands.
o​ Identifies gaps in performance and areas where the company can outperform
competitors or meet higher standards.
 ●​ Materiality Analysis:
o​ Identify and prioritize the most significant sustainability issues (both
environmental and social) that impact the business and its stakeholders.
o​ Helps in aligning reporting with what matters most to investors, customers,
and other stakeholders.
o​ Involves engagement with stakeholders to ensure the most relevant issues are
addressed in the report.
●​ Life Cycle Analysis (LCA):
o​ Evaluate the environmental impact of products or services across their entire
life cycle, from raw material extraction to disposal.
o​ Helps identify opportunities to reduce resource usage, emissions, and waste,
and to improve sustainability across product lines.
●​ Cost-Benefit Analysis (CBA):
o​ Assess the economic value of sustainability initiatives (such as reducing
emissions, improving energy efficiency, or waste management).
o​ Helps to quantify the financial returns from investments in sustainability and
make a business case for further investments.
●​ Risk and Opportunity Analysis:
o​ Assess environmental, social, and governance risks, such as regulatory
changes, resource scarcity, or reputational risks, and identify opportunities for
innovation and growth.
o​ Identifying ESG-related risks can help the company mitigate potential damage
and capitalize on emerging market trends related to sustainability.

3. Using Data for Improving Business Value

Proper data analysis and the implementation of sustainable practices lead to several
advantages for the business. The key areas where sustainable reporting can directly improve
business value include:
a. Cost Efficiency and Operational Improvements
●​ Energy and Resource Efficiency: Analyzing energy consumption and resource use
can lead to operational improvements that reduce costs, for example, by optimizing
energy use or reducing waste.
●​ Waste Reduction: Through data analysis of waste generation and recycling,
companies can reduce waste disposal costs and improve overall operational efficiency.
●​ Process Optimization: Data from environmental reporting can help optimize
production processes to reduce resource wastage, improving margins and profitability.
b. Risk Management and Regulatory Compliance
●​ Risk Identification: Through environmental and governance data analysis,
companies can identify potential risks such as non-compliance with environmental
regulations, reputational damage, or supply chain disruptions.
●​ Regulatory Compliance: Sustainable reporting ensures that the company is
compliant with current and future environmental regulations, reducing the risk of
penalties and legal challenges.
c. Enhanced Reputation and Customer Loyalty
●​ Brand Trust and Loyalty: Companies that transparently report on sustainability
efforts build greater trust with customers, investors, and other stakeholders, which can
increase brand loyalty and market share.
●​ Attracting Eco-Conscious Consumers: By showcasing sustainability initiatives
through reporting, companies can appeal to environmentally-conscious consumers
who prioritize ethical and sustainable practices in their purchasing decisions.
d. Investor Attraction and Financial Performance
●​ Access to Green Finance: Investors are increasingly focusing on ESG criteria when
making investment decisions. Companies that demonstrate strong sustainability
performance are more likely to attract ESG-focused investors, resulting in increased
investment and potentially lower capital costs.
●​ Long-Term Value Creation: Sustainable practices often lead to long-term value
creation, with companies gaining a competitive advantage through innovation,
resource efficiency, and stronger stakeholder relationships.
e. Competitive Advantage and Innovation
●​ Market Differentiation: Companies that lead in sustainability can differentiate
themselves from competitors, giving them a market edge.
●​ Product Innovation: Data-driven insights can foster the development of sustainable
products and services, attracting a new market segment and driving revenue growth.

International Financial Reporting Standards (IFRS)

The International Financial Reporting Standards (IFRS) have become the global standard
for financial accounting and reporting, providing guidelines for consistent financial statement
preparation across different jurisdictions. In recent years, there has been increasing pressure
on companies to disclose sustainability-related information in addition to their traditional
financial disclosures. This has led to the development of sustainability disclosure
standards, with a focus on improving transparency regarding the environmental, social, and
governance (ESG) performance of businesses.
The IFRS Foundation, which oversees the IFRS standards, has increasingly recognized the
need for clear and standardized sustainability-related disclosures. Here are some key
developments in this area:
1. IFRS and Sustainability Disclosures: The Growing Need
Sustainability disclosures are seen as essential for providing stakeholders (including
investors, customers, and regulators) with a complete picture of a company's performance. As
environmental and social risks and opportunities become more significant for long-term value
creation, companies are being urged to provide transparency about their sustainability
impacts alongside financial performance. This has led to the need for standards that ensure
consistency, reliability, and comparability of sustainability data.
2. IFRS Foundation's Role in Sustainability Reporting
In 2021, the IFRS Foundation took a significant step toward integrating sustainability
reporting by establishing the International Sustainability Standards Board (ISSB). This
board is tasked with creating global sustainability disclosure standards, which can be used
alongside financial reporting under IFRS.
The ISSB aims to provide companies with clear guidelines on how to report on sustainability
issues in a way that is relevant to investors, addressing the following goals:
●​ To improve transparency and comparability in sustainability disclosures.
●​ To support companies in addressing climate-related risks and opportunities.
●​ To ensure sustainability disclosures reflect the financial impacts of sustainability
factors.
3. Key IFRS Standards Related to Sustainability Reporting
While the IFRS standards do not yet directly mandate specific sustainability disclosures, they
have influenced the development of related standards and frameworks, such as those from the
Task Force on Climate-related Financial Disclosures (TCFD) and Global Reporting
Initiative (GRI). These frameworks align with IFRS because they focus on metrics that have
a financial impact or are material to stakeholders.
Here are some key areas in which IFRS standards intersect with sustainability-related
disclosures:
a. Climate-related Disclosures
●​ The Task Force on Climate-related Financial Disclosures (TCFD)
recommendations have become a global framework for reporting climate-related risks
and opportunities. While not an IFRS standard, TCFD aligns with IFRS concepts,
particularly in areas like risk management, governance, and financial impact of
climate change.
●​ In 2021, the IFRS Foundation acknowledged the importance of integrating
climate-related disclosures into the core of financial reporting, with the ISSB focusing
on developing climate-related reporting standards under IFRS.
b. Integrated Reporting
●​ Integrated Reporting (IR) aims to provide a holistic view of a company’s value
creation, covering both financial and non-financial factors, including ESG issues.
IFRS supports the concept of integrated reporting, where financial and sustainability
information are linked.
●​ The International Integrated Reporting Council (IIRC), which works closely with
the IFRS Foundation, promotes integrated thinking and the connection between a
company’s financial performance and its environmental and social impacts.
c. Financial Impact of Sustainability
●​ IFRS standards have long required companies to disclose the financial impacts of
their operations, such as asset impairments, provisions for environmental
liabilities, and financial instruments impacted by climate risks. This links to the
growing need for businesses to reflect sustainability-related risks (e.g., physical risks
from climate change, regulatory risks) in their financial statements.

4. Sustainability Reporting Frameworks and Standards

While IFRS standards themselves don’t directly mandate detailed sustainability reporting (as
of now), they are guiding the alignment and integration of sustainability disclosures with
financial reporting. Other frameworks and standards are playing a major role in this
integration:
a. Global Reporting Initiative (GRI)
●​ The GRI Standards are the most widely adopted global standards for sustainability
reporting. They focus on a broad range of ESG factors and are compatible with IFRS
reporting, especially in the context of long-term value creation.
●​ GRI standards help companies disclose their environmental impacts, social
contributions, and governance practices, which are important for stakeholders to
assess sustainability risks.
b. SASB (Sustainability Accounting Standards Board)
●​ SASB provides industry-specific standards for ESG disclosures that are financially
material. The IFRS Foundation and SASB have been working toward aligning their
efforts, especially in integrating financial and sustainability disclosures.
c. TCFD (Task Force on Climate-related Financial Disclosures)
●​ TCFD provides recommendations for disclosing climate-related financial risks and
opportunities, focusing on governance, strategy, risk management, and metrics. TCFD
aligns with IFRS because it highlights the financial impact of climate change,
including physical and transition risks, which can influence financial statements.
d. EU’s Corporate Sustainability Reporting Directive (CSRD)
 ●​ The EU’s CSRD strengthens and extends the reporting requirements for companies
regarding sustainability issues. It builds on the Non-Financial Reporting Directive
(NFRD) and aligns closely with IFRS, as it focuses on the financial materiality of
sustainability-related risks.
●​ EU companies are required to follow this directive, which promotes detailed reporting
on ESG metrics and complements IFRS financial reporting by integrating
non-financial data.

5. The Role of the ISSB and Future Developments

The ISSB, established by the IFRS Foundation, is developing global standards for
sustainability disclosures to ensure that companies report on sustainability in a way that
supports investment decision-making. This includes focusing on the financial impact of
sustainability issues, with a particular emphasis on climate-related disclosures.
The IFRS Foundation's Global Sustainability Standards (set to be finalized in 2024) are
expected to:
●​ Enhance Consistency: Establish a global framework for sustainability disclosures,
ensuring that companies follow consistent standards for ESG reporting.
●​ Support Investment Decisions: Provide investors with standardized and reliable data
on sustainability risks, particularly related to climate change and governance.
●​ Integrate ESG with Financial Performance: Allow for a clear understanding of
how sustainability factors are linked to a company’s financial performance, aiding
long-term value creation.