REVISED SCHEDULE VI: RAISING PRESENTATION LEVEL BY INDIAN CORPORATE
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• Information to be mandatorily presented on the face of financial statements limited to only broad and significant items – details by way of notes• 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 companiesThe 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 SHEETName of the Company…………………….Balance Sheet as at………………………….
(Rupees in …….…….)
| Particulars | Note No. | Figures as at the end of current reporting period | Figures as at the end of the previous reporting period | |
| 1 | 2 | 3 | 4 | |
| I. | EQUITY AND LIABILITIES | |||
| (1) | Shareholders’ funds | |||
| (a) Share capital(b) Reserves and surplus(c) Money received against share warrants | ||||
| (2) | Share application money pending allotment | |||
| (3) | Non-current liabilities | |||
| (a) Long-term borrowings(b) Deferred tax liabilities (Net)(c) Other Long term liabilities(d) Long-term provisions | ||||
| (4) | Current liabilities | |||
| (a) Short-term borrowings(b) Trade payables(c) Other current liabilities(d) Short-term provisions | ||||
| TOTAL | ||||
| II. | ASSETS | |||
| (1) | Non-current assets | |||
| (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 | ||||
| (2) | Current assets | |||
| (a) Current investments(b) Inventories(c) Trade receivables(d) Cash and cash equivalents(e) Short-term loans and advances(f) Other current assets | ||||
| TOTAL |
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 authorizedb) the number of shares issued, subscribed and fully paid, and subscribed but not fully paidc) par value per shared) 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 classification1. 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 LOSSName of the Company…………………Profit and loss statement for the year ended……………………………….
(Rupees in …….…….)
| Particulars | Note No. | Figures for the current reporting period | Figures for the previous reporting period | |
| 1 | 2 | 3 | 4 | |
| I. | Revenue from operations | |||
| II. | Other income | |||
| III. | Total Revenue (I + II) | |||
| IV. | Expenses:Cost of materials consumedPurchases of Stock-in-TradeChanges in inventories of finished goods work-in-progress and Stock-in-Trade | |||
| Employee benefits expenseFinance costsDepreciation and amortization expenseOther expenses | ||||
| Total expenses | ||||
| V. | Profit before exceptional and extraordinary items and tax (III-IV) | |||
| VI. | Exceptional items | |||
| VII. | Profit before extraordinary items and tax (V – VI) | |||
| VIII. | Extraordinary Items | |||
| IX. | Profit before tax (VII- VIII) | |||
| X. | Tax expense:(1) Current tax(2) Deferred tax | |||
| XI. | Profit (Loss) for the period from continuing operations (VII-VIII) | |||
| XII. | Profit/(loss) from discontinuing operations | |||
| XIII. | Tax expense of discontinuing operations | |||
| XIV. | Profit/(loss) from Discontinuing operations (after tax) (XII-XIII) | |||
| XV. | Profit (Loss) for the period (XI + XIV) | |||
| XVI. | Earnings per equity share:(1) Basic(2) Diluted |
Analysis of Statement of Profit & LossAllocation of Operating Expenses1. 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 DisclosureAs 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 basisIt 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.
