ICAI Guidance Note on Financial Statements for Non-Corporate Entities

The Institute of Chartered Accountants of India (ICAI) issued this Guidance Note to standardise the preparation and presentation of financial statements by entities that are not incorporated under the Companies Act. The Note covers sole proprietorships, partnership firms, LLPs (where exempt from corporates standards), trusts, societies, NGOs and other non-corporate bodies. Its primary aim is to prescribe minimum disclosure requirements, standard formats, and accounting presentation principles so that stakeholders—lenders, regulators, donors, tax authorities and auditors—receive consistent and reliable financial information.

The Guidance Note applies to all non-corporate reporting entities unless specific sectoral regulations require otherwise. It provides a framework similar to corporate financial reporting but is adapted to the operational and legal realities of non-corporates. Typical users include proprietorships, partnership firms, LLPs not mandatorily following Ind AS, societies, trusts, NGOs, professional firms and educational institutions.

A complete set of financial statements for non-corporates should include the following:

• Balance Sheet: Presents financial position — assets, liabilities, and capital at the reporting date.
• Statement of Profit & Loss: Shows performance — income, expenses, and surplus/deficit for the period.
• Cash Flow Statement: Recommended for medium-to-large entities to disclose cash generation and uses across operating, investing and financing activities.
• Notes to Accounts: Provide critical disclosures — accounting policies, contingent liabilities, commitments, related-party details and explanatory notes.

• True and Fair View: Financial statements should reflect economic reality beyond legal form.
• Consistency: Adopt consistent classification and presentation unless a change improves relevance or reliability.
• Materiality: Disclosures should focus on items that influence users’ decisions; immaterial details may be omitted.
• Accrual Basis: Transactions are recognised on occurrence rather than cash receipt/payment except where cash basis is explicitly permitted for very small entities.

The Guidance Note recommends a structured balance sheet format akin to corporate schedules but tailored for non-corporates. Key classification principles include:

• Non-current assets: property, plant & equipment, intangible assets, long-term loans and investments.
• Current assets: inventories, trade receivables, cash & bank balances, short-term loans and advances.
• Capital account: partners’/proprietor’s capital, accumulated surplus/deficit and reserves (if any).
• Liabilities: secured & unsecured borrowings, trade payables, provisions and other payables.

Grouping and clear labelling enhance readability for stakeholders such as banks and tax authorities.

The statement of profit and loss should separate operating and non-operating items, disclose exceptional items clearly and present taxes and prior-period adjustments transparently. Recognition follows matching principles — revenue recognised when earned and expenses matched accordingly. Exceptional or unusual items should be disclosed separately to avoid distortion of ongoing operational performance.

While very small entities may be exempt, the Guidance Note recommends cash flow statements for entities with substantial transactions. Present operating, investing and financing flows to help users assess liquidity and funding sources. The indirect method for operating activities is commonly used unless direct method is practicable and offers clearer insight.

Notes to accounts are critical—users rely on them for assumptions, valuations and contingencies. Essential disclosures include:

• Significant accounting policies and changes therein.
• Contingent liabilities and commitments.
• Related-party transactions and balances.
• Segmental disclosures where relevant.
• Details of loans, guarantees and securities.

Well-prepared notes improve the reliability and usefulness of financial statements and reduce future audit queries.

Non-corporates have unique capital dynamics. The Guidance Note requires clear disclosure of opening and closing capital balances, drawings, interest on capital, profit-sharing ratios, and adjustments due to admission, retirement or death of partners. Transparent capital accounting is essential for resolving ownership disputes and evaluating creditworthiness.

• Loans & Advances: Classify as secured/unsecured and disclose terms and security details.
• Fixed Assets: Provide reconciliation of additions, disposals, depreciation methods and useful lives.
• Inventory Valuation: Value at cost or net realisable value (lower of the two) and disclose valuation basis.
• Provisions & Contingencies: Recognise provisions when obligations are probable and estimable; disclose contingent liabilities unless remote.
• Grants & Donations (NGOs): Recognise based on conditions attached; show restricted vs unrestricted funds.

The Guidance Note aligns with ICAI’s tiered classification—Levels I to IV—so that disclosure requirements are proportionate to entity size and complexity. Level I entities (largest) follow the most comprehensive disclosure schedule, while Levels III and IV (small) have simplified requirements. This proportional approach reduces undue burden on small entities while ensuring robust reporting for larger organisations.

Auditors must assess whether financial statements comply with the Guidance Note and applicable accounting standards. Responsibilities include verifying presentation formats, evaluating accounting policies for appropriateness, ensuring adequate notes, reviewing capital movements, and reporting any deviations. Auditors should also evaluate the entity’s internal controls and recommend improvements to strengthen financial reporting practices.

Lenders: Standardised statements improve credit assessment and reduce due diligence time.

Tax Authorities: Consistent classification reduces disputes and simplifies assessments.

Owners/Partners: Clear visibility of performance, capital movements and financial position.

Donors/Grantors: Greater transparency and accountability for NGOs and trusts, strengthening donor confidence.

The ICAI Guidance Note on Financial Statements for Non-Corporate Entities provides a pragmatic and professional framework that elevates the quality, consistency and reliability of financial reporting outside the corporate sector. Adopting these recommendations enables accountants, auditors, partners, trustees and financial managers to produce statements that meet stakeholders’ informational needs, comply with regulatory expectations and uphold transparency. Consistent implementation will foster trust, facilitate access to finance and reduce future compliance complications.