CARO 2020 clause 3(xvii) asks the auditor to report whether the company incurred cash losses in the financial year under audit and in the immediately preceding financial year, and to state the amount where a cash loss exists. The difficulty is that “cash loss” is not a line item in the financial statements and is not defined in the Companies Act, Accounting Standards or Ind AS. The auditor has to compute it for this reporting purpose.
The first-party reference is ICAI's Guidance Note on the Companies (Auditor’s Report) Order, 2020 (Revised 2022 Edition). A full copy of the same Guidance Note is also available on the Comptroller and Auditor General of India website. The discussion below follows paragraph 82 of that Guidance Note.
Cash loss under CARO is not the same as negative operating cash flow
A tempting shortcut is to copy “net cash from operating activities” from the cash flow statement. ICAI's Guidance Note says that is not appropriate for this specific clause. Operating cash flow is prepared for a different reporting purpose and can classify items such as interest differently from the way they matter to the CARO cash-loss computation.
The clause also should not be confused with distributable profit, realised profit, EBITDA or a company's bank balance. It is a specific auditor-computed amount designed for CARO reporting.
Start from profit or loss after tax and remove non-cash effects
For a company following Accounting Standards, the Guidance Note starts with net profit or loss after tax shown in the statement of profit and loss and adjusts it for transactions of a non-cash nature. It gives depreciation under AS 10, amortisation under AS 26 and impairment loss or reversal under AS 28 as examples.
For an Ind AS company, the starting point is profit or loss after tax excluding other comprehensive income. That amount is then adjusted for non-cash effects such as depreciation under Ind AS 16, lease-related depreciation under Ind AS 116, amortisation under Ind AS 38 and impairment effects under Ind AS 36.
The Guidance Note also identifies deferred-tax income or expense, foreign-exchange gains or losses and fair-value changes as items that require adjustment where they are non-cash. The direction of the adjustment depends on whether the item increased or reduced accounting profit: the objective is to strip out the non-cash effect rather than mechanically add back every adjustment.
Do not add back every provision merely because cash has not yet moved
The computation is not a generic “profit plus all non-cash charges” formula. ICAI specifically says that profit or loss after tax should not be adjusted for expenses of a contingent nature merely because the related cash has not been paid. The Guidance Note gives examples such as claims not acknowledged as due and tax demands for which a provision has been made but an appeal is pending.
This distinction matters because an indiscriminate add-back of provisions can materially understate the cash loss reported under CARO.
Ind AS reporters need to examine relevant cash items recognised in OCI
For Ind AS financial statements, the starting profit or loss excludes other comprehensive income, but the analysis does not end there. The Guidance Note says cash profits or cash losses that are realised and recognised in OCI before later reclassification to profit or loss should be considered in determining cash losses. When the same amount is later reclassified into profit or loss, that reclassification is itself a non-cash adjustment and should not be counted again.
The Guidance Note cites cash-flow hedging transactions for forecast transactions and hedging transactions for investments in foreign subsidiaries as examples of areas where this issue can arise. The audit working should therefore identify the economic cash event and avoid double counting across OCI and later reclassification.
Restatements and audit qualifications can change the number
If the previous year's Ind AS financial statements have been restated under Ind AS 8, ICAI says the restated profit or loss after tax should be used for the preceding-year cash-loss computation. The comparison should therefore not automatically carry forward the amount reported in last year's CARO annexure when the underlying prior-year numbers have since been restated.
The cash-loss amount should also reflect quantified qualifications in the respective audit report. Where a qualification cannot be quantified, the auditor should state that the effect of the unquantified qualification has not been considered in the cash-loss figure. This prevents a precise-looking CARO number from implying that an unmeasurable audit adjustment has somehow been captured.
A simplified worked example
Assume a company following Accounting Standards reports a loss after tax of ₹30 lakh. Included in that loss are ₹12 lakh of depreciation, ₹2 lakh of amortisation, ₹3 lakh of deferred-tax expense and a ₹1 lakh non-cash fair-value loss. Assume, for illustration only, that there are no other non-cash adjustments, relevant OCI items, restatements or audit qualifications.
Removing those four non-cash charges gives a simplified cash loss of ₹12 lakh: the ₹30 lakh accounting loss is reduced by non-cash expenses totalling ₹18 lakh. The example is deliberately narrow. In an actual audit, the schedule should be built from the complete trial balance and financial-statement adjustments rather than from a handful of obvious add-backs.
Current year and preceding year should be concluded separately
Clause 3(xvii) requires the auditor to consider both the financial year under audit and the immediately preceding financial year. ICAI's Guidance Note specifically notes that a company may have a cash loss in only one of those years, in which case the auditor should comment on the two years separately.
That means the workpaper should contain two independent computations. Copying the prior-year reported number without reconciling it to the preceding year's audited or restated financial statements can create an avoidable inconsistency.
What a defensible audit working should contain
- Starting figure: profit or loss after tax for each of the two years, with the Ind AS starting figure excluding OCI.
- Non-cash adjustment schedule: depreciation, amortisation, impairment, deferred tax, fair-value effects, foreign-exchange effects and other material non-cash items, with the direction of each adjustment explained.
- OCI review for Ind AS entities: identification of realised cash profits or losses recognised in OCI and evidence that later reclassifications are not double counted.
- Contingent-type expenses: a check that provisions are not automatically added back contrary to the Guidance Note.
- Prior-year reconciliation: linkage to any Ind AS 8 restatement or other change in the comparative figures.
- Audit-report adjustments: quantified qualifications reflected in the computation and any unquantified qualification clearly disclosed as not considered.
- Final CARO wording: separate conclusion for the current and immediately preceding financial year, with the cash-loss amount stated wherever a loss exists.
The useful way to audit clause 3(xvii) is therefore not to search for a ready-made “cash loss” line in the accounts. Build the number from audited profit or loss, remove the effects that are genuinely non-cash under ICAI's guidance, incorporate the special OCI and qualification rules where relevant, and reconcile both years independently. That produces a CARO figure that can be traced back to the financial statements and defended in the audit file.
