Restatement of Financial Statements

Meaning of Re-Statement of financials

Restatement is an accounting process by which a company or organization revises its financial statements for any adjustments or errors. In accounting terminology, Re-Statement of financials refers to reviewing one or more of a company’s previous years’ financial statement to correct an error. These financial statements are required to be reviewed and certified by peer reviewed certified Chartered Accountant firm.

Why there is a need of Restatement of financials in IPO?

Every company which is planning for initial public offer (IPO) has to prepare restated financials as part of the IPO process. As per SEBI ICDR Regulations, an Issuer is required to prepare the restated consolidated financials as part of the financial information section of the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP).

For what time period Restated financial statements are to be prepared?

The restated financial statements for IPO purposes are to be prepared for each of the 3 financial years immediately preceding the filing of the offer document and stub period (if applicable) in a tabular format as per Schedule III to the Companies Act, 2013.

As per the regulations, the financial information in the offer document cannot be more than 6 months old from the date of filing of the offer document (DRHP/RHP/Prospectus). If in case, the financials for the latest full FY included in the Offer document are older than six months from the date of filing of the document; then restated financial information for the stub period has to be prepared as per AS 25 or Ind AS 34 as applicable.

For example- Company X with a March year end files RHP after September 30. Now X would be required to present financial information for the stub period also i.e. for 6 months from 1st Apr to 30th Sept. The financial statements for the stub period shall include all those disclosures required to be presented for annual financial statements to the extent applicable. However, there is no requirement for presenting the comparatives for the stub period in the restated financial statements.

Who can do Restatement?

The Restatement of financial information shall be audited and certified by the auditors who holds a valid certificate of Peer Audit issued by the Peer Review Board of the Institute of Chartered Accountants of India (ICAI).

Understanding the applicability of Indian Accounting Standards on Restatement of Financials

The Issuer companies other than banking and insurance companies are required to present the financial statements for the three years and stub period under Ind AS. This requirement is as per the roadmap issued by the Ministry of Corporate Affairs (MCA) issued under notification dated February 16, 2015 and March 30, 2016.

Preparation of restated financials as per the Ind AS overcomes the challenges of the Issuer post listing. Transition to Ind AS is required if the Companies have prepared their restated financials as per IGAAP.

Key points in Restatement process

1. When an Issuer is already preparing the financial statements as per the Ind AS, it is required to do the restatement adjustments as per the ICDR Regulations.
2. SEBI Regulations allow SME Issuer to file restated financial statements as per IGAAP but compliance with Ind AS is applicable once the listing process is started. However, it is worth noting that the IGAAP Issuer shall adopt Ind AS well in advance and prepare restated financials accordingly. Hence, IGAAP financials have to be first adjusted for Ind AS adjustments and then restatement adjustments are done to get Ind AS restated financials.