Companies Act Section 133

Companies Act Section 133- Central Government’s Authority to Prescribe Accounting Standards

Section 133 of the Companies Act, 2013 vests the Central Government with the power and responsibility to prescribe the accounting standards to be followed by companies while preparing their financial statements. These accounting standards serve as the foundation for ensuring uniformity, transparency, and reliability in financial reporting across all companies governed by the Act.

The intent behind empowering the Central Government to prescribe these standards is to ensure that accounting practices in India align with evolving global best practices, while also being tailored to the Indian economic and regulatory environment.

Process of Prescribing Accounting Standards

Role of the Institute of Chartered Accountants of India (ICAI)

The Institute of Chartered Accountants of India (ICAI), constituted under Section 3 of the Chartered Accountants Act, 1949, has a key advisory role in this process. The ICAI, being the premier professional body responsible for the development and regulation of the accounting profession in India, is tasked with developing and recommending accounting standards.

Consultation with National Financial Reporting Authority (NFRA)

Once ICAI submits its recommendations for accounting standards or any addendum to existing standards, the Central Government must consult the National Financial Reporting Authority (NFRA) before formally prescribing those standards.

This consultation with NFRA involves:

Examining the recommendations submitted by ICAI.

Reviewing whether these standards align with broader regulatory objectives, including investor protection, financial transparency, and international accounting developments.

Ensuring compatibility with accounting norms applicable to companies of public interest.

Only after this detailed examination and consultation process does the Central Government formally notify and prescribe the accounting standards that will become mandatory for companies.

Transitional Provision- Role of National Advisory Committee on Accounting Standards (NACAS)

Before Constitution of NFRA

The Companies Act, 2013 acknowledges that there could be a time gap between the enactment of the Companies Act and the actual constitution of the National Financial Reporting Authority (NFRA).

To avoid regulatory vacuum during this transition period, a special proviso applies. According to this proviso:

Until NFRA is formally constituted under Section 132, the Central Government will continue to rely on the National Advisory Committee on Accounting Standards (NACAS).

NACAS was originally constituted under Section 210A of the Companies Act, 1956.

During this interim phase, the Central Government will prescribe accounting standards (or amendments to them) based on the recommendations of ICAI after consultation with NACAS.

This transitional mechanism ensures that the process of updating and prescribing accounting standards remains uninterrupted, even before NFRA is fully operational.

Rationale and Importance

This framework under Section 133 reflects the multi-layered process of setting accounting standards in India, involving:

Technical expertise from ICAI.

Independent oversight from NFRA (or NACAS during transition).

Final approval and notification by the Central Government.

This structured, consultative approach aims to:

Enhance the credibility and acceptance of accounting standards.

Ensure these standards are aligned with global developments, such as International Financial Reporting Standards (IFRS).

Incorporate perspectives of regulatory bodies, professional institutions, and policymakers.

Ensure that companies of all types and sizes have clear, consistent, and practicable accounting rules.

Applicability and Compliance

Once prescribed by the Central Government, the accounting standards become legally binding on:

All companies governed by the Companies Act, 2013.

Companies must ensure that their financial statements are prepared in full compliance with the applicable standards.

Statutory auditors of companies are also obligated to verify and report on such compliance during their audit process.