Financial reporting in India has seen significant changes in
recent years. The Revised Schedule VI, issued by Ministry of Corporate Affairs,
lays down a new format for preparation and presentation of financial statements
by Indian companies for financial years commencing on or after 1 April 2011. It introduces some significant conceptual
changes such as current/non-current distinction, primacy to the requirements of
the accounting standards, etc. While the revised schedule does not adopt the international standards on disclosure
in financial statements fully, it brings corporate disclosures closer to international
practices. Overall the attempt is largely successful in modernizing and
simplifying the Schedule and making it more relevant to the present needs.
Some of the
significant aspects of the revised Schedule include:
•
The revised Schedule to
apply to all companies following Indian
GAAP – until such companies are required to follow International Financial Reporting Standards (IFRS) converged Indian accounting standards (Ind AS)
•
Accounting standards and
requirements of the Companies Act, 1956 (Act) to override the requirements of the revised Schedule, wherever the two
are inconsistent
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Information to be
mandatorily presented on the face of financial statements limited to only broad and significant items – details by way of notes
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Part IV of the pre-revised
Schedule (containing balance sheet abstract and general business profile)
dispensed with
•
Format of cash flow statement not prescribed – hence companies which
are required to present this statement (i.e., other than small and medium sized
companies) to continue to prepare it as
per AS 3, Cash Flow Statements
•
Disclosure requirements of
various accounting standards also need to be complied with.
Applicable to all companies
The revised Schedule would apply to all Indian companies till they are required to follow
IFRS-converged Indian Accounting Standards (Ind ASs). However, like its
predecessor, the revised Schedule does
not apply to banking or insurance companies.
In case of companies engaged in the generation and supply of
electricity, the revised Schedule VI may be followed by such companies till the
time a format is prescribed under the relevant statute.
PART I – Form of
BALANCE SHEET
Name of the Company…………………….
Balance Sheet as
at………………………….
(Rupees
in …….…….)
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Particulars
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Note
No.
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Figures as at the end of current reporting period
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Figures as at the end of the previous reporting
period
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1
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2
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3
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4
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I.
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EQUITY AND
LIABILITIES
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(1)
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Shareholders’ funds
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(a) Share capital
(b) Reserves and surplus
(c) Money received against
share warrants
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(2)
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Share application money
pending allotment
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(3)
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Non-current liabilities
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(a) Long-term borrowings
(b) Deferred tax liabilities
(Net)
(c) Other Long term
liabilities
(d) Long-term provisions
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(4)
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Current liabilities
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(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
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TOTAL
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II.
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ASSETS
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(1)
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Non-current assets
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(a) Fixed assets
(i)Tangible assets
(ii)Intangible assets
(iii)Capital work-in-progress
(iv)Intangible assets under
development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and
advances
(e) Other non-current assets
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(2)
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Current assets
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(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and
advances
(f) Other current assets
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TOTAL
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Analysis of
Balance Sheet
Share Capital
Disclosures relating to share capital
(to be given in the notes) are more detailed than those in the pre-revised
Schedule, which are as follows:
1) The revised Schedule
states that ‘different classes of preference share capital to be treated
separately’. Thus, if a company has issued, say, 8 percent optionally
convertible preference shares and 11 percent redeemable preference shares,
these would be disclosed as two separate classes of shares for purposes of the
Schedule.
2) for each class of shares,
disclosure is required, inter alia, of:
a) the number and amount of
shares authorized
b) the number of shares
issued, subscribed and fully paid, and subscribed but not fully paid
c) par value per share
d) a reconciliation of the
number of shares outstanding at the beginning and at the end of the reporting
period.
For each class of shares, a
reconciliation of the number of shares outstanding at the beginning and at the
end of the reporting period is required. This seems to be a response to the
malpractice of issuing a larger number of shares than represented by the amount
of paid up capital as disclosed in the balance sheet. In order to make the
disclosure more relevant to the understanding of share capital, the
reconciliation should also be given for the amount of each class of share
capital. Keeping in view the requirement to give corresponding figures, the
reconciliation should be given for the previous year as well.
Reserve & Surplus
1) The pre-revised Schedule
VI required that in case there was debit
balance in the profit and loss account, uncommitted reserves should first
be deducted therefrom. The remaining balance, if any, after such deduction was
required to be disclosed on the assets side of the balance sheet (or under
application of funds in the vertical form of balance sheet). In the
revised Schedule, it is explicitly provided that debit balance of profit and
loss shall be shown as a negative figure under the head ‘surplus’ under
‘shareholders’ funds’. Similarly, the balance of ‘reserves and
surplus’, after adjusting negative balance of surplus, if any, shall be shown
under the head ‘reserves and surplus’ even if the resulting figure is in the
negative.
2) Share options outstanding account has been specifically recognized
as a separate item under ‘reserves and surplus’. The pre-revised Schedule VI
did not specify the manner of disclosure of share options outstanding account.
However, ICAI’s Guidance Note on Accounting for Employee Share-based Payments
requires the credit balance in the ‘stock options outstanding account’ to be
disclosed in the balance sheet under a separate heading, between share capital
and reserves and surplus as part of the shareholders’ funds.
3) It may be noted that the above would also impact the balance of
reserves and surplus to be considered for compliance with various provisions of
law - thus the balance of ‘share options outstanding account’ would now be
considered as part of the reserves to determine the applicability of Companies
(Auditor’s Report) Order, 2003 (CARO).
Money received against share warrants
The revised Schedule specifically requires ‘money received against
share warrants’ to be disclosed as a separate line item as part of
‘shareholders’ funds’ – this is on the basis that money received against share
warrants represents amount which would ultimately form part of either the Share
Capital or Reserves and Surplus. The pre-revised Schedule VI did not contain
such a requirement.
Issues relating to current/non-current classification
1. The pre-revised schedule VI did not require
companies to classify assets and liabilities into current and non-current
categories. As a
result, some items of assets, which should be classified as non-current asset,
were included in current assets. Examples are deposits which the company does not expect to realize within 12 months
after the balance sheet date, that part of loans
and advances that will be recovered after 12 months from the balance sheet
date and those items of raw materials
and components which are not expected to be consumed within the normal operating cycle. Similarly,
non-current provisions and current provisions are clubbed together. At present
the total amount of the provision is clubbed together with current liabilities.
The revised schedule VI requires companies to classify assets and liabilities
into current and non-current categories. This will definitely improve the
usefulness of the balance sheet.
2. Conventionally,
current asset to current liabilities
ratio (current ratio) is calculated to evaluate the liquidity of the
company. In absence of proper classification of assets and liabilities into
current and non-current categories, this ratio gets distorted. Disclosure in
the revised schedule VI has successfully removed this distortion.
Deferred tax liabilities
The amount of deferred tax liabilities (net) is required to be
disclosed on the face of the balance sheet after long-term borrowings as part
of non-current liabilities. The deferred tax liabilities (net of deferred tax
assets) will be classified as non-current liabilities in entirety even where a
part thereof is expected to reverse within a period of 12 months. While the
pre-revised Schedule was silent on the disclosure of net deferred tax liability
(or asset), AS 22, Accounting for Taxes on Income, requires deferred tax
liabilities (net of the deferred tax assets) to be disclosed on the face of the
balance sheet separately after the head ‘unsecured loans’. There is thus no
substantive impact due to the above change in Schedule VI.
Trade Receivables/Trade Payables
A receivable should be classified as
‘trade receivable’ if it is in respect of the amount due on account of goods
sold or services rendered in the normal course of business. The pre-revised
Schedule instead required disclosure of ‘sundry
debtors’ which, as per the definition of this term in ICAI’s Guidance Note on Terms used in Financial Statements, covers
not only trade receivables, but also amounts in respect of other contractual
obligations (of counterparties). Amounts due in respect of such ‘other contractual obligations’ cannot
be included within trade receivables under the revised Schedule. Such amounts
should be classified as ‘others’ and disclosed separately, specifying their
nature. The same rule has to be followed in case of Trade Payables also.
PART II – Form
of STATEMENT OF PROFIT AND LOSS
Name of the Company…………………
Profit and loss statement
for the year ended……………………………….
(Rupees
in …….…….)
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Particulars
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Note
No.
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Figures for the current reporting period
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Figures for the previous reporting period
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1
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2
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3
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4
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I.
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Revenue from operations
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II.
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Other income
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III.
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Total Revenue (I + II)
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IV.
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Expenses:
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of
finished goods work-in-progress and Stock-in-Trade
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Employee benefits expense
Finance costs
Depreciation and amortization
expense
Other expenses
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Total expenses
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V.
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Profit before exceptional and
extraordinary items and tax (III-IV)
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VI.
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Exceptional items
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VII.
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Profit before extraordinary
items and tax (V - VI)
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VIII.
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Extraordinary Items
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IX.
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Profit before tax (VII- VIII)
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X.
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Tax expense:
(1) Current tax
(2) Deferred tax
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XI.
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Profit (Loss) for the period from
continuing operations (VII-VIII)
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XII.
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Profit/(loss) from
discontinuing operations
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XIII.
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Tax expense of discontinuing
operations
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XIV.
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Profit/(loss) from
Discontinuing operations (after tax) (XII-XIII)
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XV.
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Profit (Loss) for the period (XI + XIV)
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XVI.
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Earnings per equity share:
(1) Basic
(2) Diluted
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Analysis of Statement of Profit & Loss
Allocation of Operating Expenses
1.
The Revised Schedule VI to the Companies Act 1956 stipulates multi-step format for the presentation
of profit and loss account. It also requires allocation of operating expenses into selling and marketing expenses and administrative expenses. This has brought a significant change in
the prior structure of profit and loss account.
2.
This will require a company to apportion common expenses to
different functions/activities. Companies should apply the Cost Accounting
Standards, wherever applicable.
Cost of Sales
1. Revised
schedule VI uses the term cost of sales
instead of the term cost of goods sold.
In a merchandising business the cost
of goods sold is the total of costs incurred to bring the goods to the location
and condition of sale. Thus, it includes expenses on inward logistics. For a manufacturing company cost of goods sold
is total of costs incurred to manufacture the goods sold and the costs to bring
the goods to the location of sale. Analysts use the gross profit ratio to
evaluate the manufacturing efficiency of a manufacturing business and the
efficiency of procurement and inward logistics of a merchandising business.
2.
However, the ratio is less relevant for a
company that has significant operating expenses. The reason is that the gross profit ratio may be improved by improving
sales through advertising and product promotion expenses and expenses on
improving the efficiency and effectiveness of the distribution channel. Sales promotion and similar expenses are
included in operating expenses and not in cost of goods sold. Therefore,
gross profit ratio might be misleading.
Broad Heads by way of Separate
Disclosure
As per the Revised Schedule VI,
separate disclosure is required on the face of the Statement of Profit and Loss
for (i) cost of materials consumed,
(ii) purchases of stock-in-trade and
(iii) change in inventories of finished
goods, work-in-progress and stock-in-trade. In this regard, details of
consumption of raw materials, purchases and work-in-progress are required to be
given under ‘broad heads’.
A Company shall disclose by way of
notes additional information regarding any item of income or expenditure which
exceeds one per cent of the revenue from operations or Rs.1,00,000, whichever
is higher.
Value of imports on CIF basis
It may be noted that this requirement
does not include the import of finished goods and stores. However, it is
required to show the value of imported capital assets even though the
capital assets do not otherwise appear in the statement of profit and loss.
The value of all
imports of the relevant items made during the year, whether the imported
items were consumed/ utilized or not, is required to be shown, irrespective
of whether the imports are on rupee payment terms or against foreign currency.
The value has to be shown on CIF basis, i.e., inclusive of cost, insurance and
freight, even if the goods are insured or shipped by Indian concerns. In case
it is not possible to disclose the value of imports on CIF basis, the
value may have to be shown on FOB or some other basis. However, a note
explaining the reasons for doing so should be given. An example of such a
situation can be the case of a company which uses its own ships to carry the
goods.
Conclusion
It appears that the regulators have
attempted to align the revised Schedule VI to international practices to
the extent feasible under the accounting standards notified presently. In this
context there are a number of implementation challenges which companies have
faced in the first year of application of the revised Schedule. While some of
these challenges are general in nature, there would be many specific issues
faced by companies from different sectors with completely diverse operating
environments in bringing the presentation of their financial information in the
revised universal format. Increased onus is also placed on management’s
judgement in determining the presentation of assets and liabilities.
The revised
Schedule VI introduces significant conceptual changes specially with respect to classification of assets and
liabilities into ‘current’ and ‘non-current’ and ‘operating cycle’ of a
company, which is likely to impact companies in all the sectors. In this
presentation, I have attempted to provide our perspective on specific
challenges emanating from the requirements of revised Schedule VI.
