Regulatory updates

In July 2020, ICAI had issued the Guidance Note on the Companies (Auditor’s Report) Order, 2020 (CARO 2020) to provide detailed guidance to auditors on the reporting requirements of the CARO 2020.

There have been certain amendments to the Schedule III to the Companies Act, 2013 (which include amendments that are in line with the clauses pertaining to the CARO 2020 and various additional disclosure requirements). Therefore, ICAI, in June 2022released an Exposure Draft of the Guidance Note on CARO 2020 (exposure draft). Some of the key changes suggested in the exposure draft include:

Applicability:

1. For evaluating applicability of CARO 2020, total income should be considered as a criteria instead of total revenue, and
2. For evaluating applicability of the CARO 2020 to NBFC companies, definition of Reserves and Surplus has been amended. The revised definition of Reserves and Surplus⁶ for entities following Division III of the Schedule III is now aligned with the definition of Reserves and Surplus for entities following Division II of the Schedule III.

Clause (iii) - Reporting on loans, investments, guarantees, securities and advances in nature of Loan: The exposure draft has recommended the following changes while reporting under clause (iii) of the CARO 2020:

1. Clause 3(iii)(a)(A) and (B)⁷: The exposure draft has introduced changes in the reporting format of clause (iii)(a), relating to granting of loans and advances in the nature of loans. As per the proposed format, the reporting for loans and advances in the nature of loans would be split into secured and unsecured portions. The revised format proposed by the exposure draft is given below:

Clause 3(iii)(c)⁸: Where repayment of principal and payment of interest is not regular, the auditor is required to report in a prescribed format. The exposure draft has now proposed reporting non-payment of principal and/or interest in two separate tabular formats, as given below:

For companies whose principal business is NOT to give loans: Additional column for actual date of payment has been included in the existing format- the revised format is given below:

For companies whose principal business is to give loans:
New format has been proposed for companies whose principal business is to give loans, in which only summarised informationis required to be given pertaining to:

1. No. of cases where repayments were not regular
2. Principal amount outstanding as of the reporting date, and
3. Overdue amount including interest on reporting date

(Name of the entity is not required to be provided by entities whose principal business is to give loans).

The new format introduced by the exposure draft is given below:

No. of cases where repayments were not regular	Principal amount outstanding on the reporting date	Overdue amount including interest on the reporting date

Clause 3(iii)(e)⁹: The exposure draft has amended the suggested format for reporting under this clause by adding a column for gross amount of loans/advances in nature of loan granted during the year to those parties where the overdue amount was settled by renewal or extension of a fresh loan.

Accordingly, percentage of loans renewed or extended will be computed as a percentage of total loans or advances in the nature of loans granted during the relevant year to the party where there is a renewal or extension of a loan. Earlier, the requirement was to compute the percentage of loans renewed with respect to the total loans or advances in the nature of loan granted during the year (cumulative amount for all parties).

The revised reporting format proposed by the exposure draft is given below:

Name of the parties	Aggregate amount of loans or advances in the nature of loans granted during the year	Aggregate overdue amount settled by renewal or extension or by fresh loans granted to the same parties	Percentage of the aggregate to the total loans or advances in the nature of loans granted during the year

Clause (ix)(f) -Reporting on raising of loans against pledge of securities held in subsidiaries, etc.: Auditors are currently required to report the loans raised by a company against a pledge of securities held in its subsidiaries, associates and joint ventures. As per the exposure draft, companies would now be required to disclose the nature and carrying amount of the securities pledged, and cross reference it to the relevant note in the financial statements.

Clause (xix)- Reporting on material uncertainty: Currently, auditors are required to review the liquidity ratios computed by the company and report on whether any material uncertainty exists as on the date of the audit report. However, as per the revised requirements, auditors should now use the financial ratios10 as computed and disclosed by companies in accordance with the requirement of the Schedule III to the Companies Act, 2013, instead of the liquidity ratios for reporting under this clause.

Apart from the aforementioned changes, other changes in the exposure draft are clarificatory in nature and provide reference to the Schedule III disclosures including the fact where the reporting requirement under CARO 2020 is different from that in the Schedule III.

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6. As per the revised definition, Reserves and Surplus comprise of:
   1. Capital Reserve,
   2. Retained Earnings,
   3. Securities Premium, and
   4. Other Reserves
7. Clause 3(iii)(a)(A) and (B) requires specific reporting by auditor, where a company has provided loans, advances in the nature of loans, stood guarantee or provided security to any entity.

8. Clause 3(iii)(c) requires reporting by auditor on whether the schedule for repayment of principal and payment of interest has been stipulated and whether the repayments or receipts of principal and interest respectively are regular.
9. Clause 3(iii)(e) requires auditors to report instances of evergreening of loans.

To access the text of the exposure draft, please click here