Seems like everywhere I look these days, there’s an article about key issues for US companies wanting to do business in India. And if that wasn’t enough, several of my clients now have a presence in India requiring me to once again get familiar with the nuances of Indian laws and regulations. While I leave it to the other experts to opine on organization structure, relevant labor and currency laws and tax considerations, such as in Journal of Accountancy’s March 2013 article, How to Do Business in India, I’d like to share my two cents (or ₹1.09 at current exchange rates) on how an Indian subsidiary (component) impacts the financial reporting for the group by the parent US company.
First of all, it is important to know what statutory filings are applicable to your component in India, and hopefully, your trusted advisor on the ground there can help you meet those requirements. I will focus on the impact of one of those: A statutory requirement for an audit of the financial statements. Since all entities in India are required to follow a fiscal year end of March 31, it is quite likely that the year-end for the Indian component will differ from that of the US parent.
Why does that matter?
When preparing consolidated financial statements for the group under US generally accepted accounting principles (US GAAP), the consolidation of a component with a different year-end is permissible, provided the difference is no more than 3 months. So, if the US parent has a year-end other than December 31, you are looking at additional challenges.
Here’s where that second helping of audit comes into play:
Depending on how material the operations of the component are in relation to the group (usually calculated as a % of revenues or assets), you may need to consider performing audit procedures at the component level by a competent auditor, who is familiar with US GAAP reporting, as that will be the reporting standard for the group financials. Yes, you read that right. The component could require an additional audit under US GAAP besides the statutory audit required under Indian laws as there are marked differences between accounting treatments in US and India. Naturally, this will mean a lot of communication and agreement on scope of work to be performed between your US auditors and their Indian counterparts.
So, if you find that you could be facing the scenario described above, please heed my advice and get started sooner rather than later on getting your accountants in place. You can thank me later.