CA Kamal Garg
With the emergence of multinational corporations and rapid increase in cross border transactions, it is essential that our financial statements speak the global language for attracting foreign funds into India. Internationally, the observance of universally accepted reporting norms is perceived as an important measure of good corporate governance, ensuring financial transparency to the stakeholders of the company. The transparency in financial statements of a company has a significant bearing on the decision of a stakeholder to invest, as well as the quantum of his investment. The classification under the old Schedule VI was, however, not in line with the international practices followed by many developed countries, making investors reluctant to invest in the Indian companies. The Indian companies were required to prepare another set of financial statements to make foreign investors understand the performance and position of their companies, which not only resulted in higher costs, but also consumed considerable time and effort. With India moving towards convergence to IFRS, there was an urgent call to revise the old Schedule VI, as it was not compatible to meet either the disclosure requirements or the provisions of the upcoming accounting standards. Though the revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006 and has nothing to do with the converged Indian Accounting Standards, still, it has taken into consideration the classification accepted internationally. This compilation makes an attempt to throw some light on the need for revision of old schedule VI, salient features of the revised Schedule VI and the issues which may initially arise while preparing financial statements as per revised Schedule VI.
Old Schedule VI had outlived its utility
Classification in old Schedule VI was not in line with the disclosure requirements under AS: After introduction of Accounting Standards on Leases, Consolidated Financial Statements, Accounting for Taxes, Discontinuing Operations, Impairments of Assets, Provisions etc., the disclosure requirements of old Schedule VI on the face of balance sheet were felt to be insufficient. Further, appropriate heads, under which disclosures prescribed in the accounting standards have to be made, were missing in the Balance Sheet under old Schedule VI. For instance, Accounting Standard 22 requires that deferred tax assets (DTA) and deferred tax liabilities (DTL) should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities. In other words, as per AS 22, DTA and DTL have to be disclosed under the heading “non-current assets” or “non-current liabilities”, which classification was not provided for in the old schedule VI.
No place for industry specific requirements: Old Schedule VI had a fixed format in which every industry has to present its financial statements. However, the industry specific requirements could not always fit into such format. The old schedule VI did not address such problems which made it difficult for a preparer of financial statements to identify the appropriate head for their industry specific items.
No specific format for Profit and Loss Account: One of the shortcomings of old Schedule VI was that it did not contain any specific format for Profit and loss account as it had for the Balance Sheet, though the requirements for preparing profit and loss account were detailed in Part II of Schedule VI. However, it was felt that a specific format for presentation of the profit and loss account would have conveyed a clear cut picture to the preparers of financial statements.
Measurement principles under Schedule VI not in line with Accounting Standards: Apart from the disclosure requirements, even the measurement principles as per old Schedule VI were different from what was given in the accounting standards. For instance, AS 11 requires that any exchange difference in foreign currency translation is to be charged / recognized in the Profit and loss account. However, as per old schedule VI, such exchange difference in foreign currency translation should be capitalised. On account of such differences in the measurement principles, it can be said that the old schedule VI was not in conformity with the mandatory requirements of the accounting standards.
Revised Schedule VI: Effective from 1st April, 2011
The Ministry of Corporate Affairs vide its Notification no. F.No.2/6/2008-C.L-V dated 30-3-2011, notified that the Revised Schedule VI is applicable for the Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after April 1, 2011. It should be noted that Revised Schedule VI to the Companies Act, 1956, being a statutory format its early adoption is not permitted. This Revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006. The Revised Schedule VI shall come into force for the Balance Sheet and Profit and Loss Account to be prepared for the financial year commencing on or after 1.4.2011.
Objectives for Revising Schedule VI
In November, 2008, the Ministry of Corporate Affairs issued an Explanatory Memorandum for revising Schedule VI to the Companies Act, 1956 which clearly stated its objectives as follows:
(a) To have a ‘readable, useful, transparent and user friendly’ form of Schedule VI.
(b) To set out minimum disclosure requirements which are considered essential to ensure true and fair presentation of the financial position and financial performance of the company and comparability both with the company’s previous periods and with other companies.
(c) The Balance Sheet and the Statement of Profit and Loss should not be burdened with too many disclosure requirements.
(d) To remove the requirements of disclosures no longer considered relevant in view of the changed socio-economic structure and level of development of the economy.
(e) To remove disclosure requirements which are meant for statistical purposes only e.g. Part IV of Schedule VI.
(f) To have inherent flexibility for amendments and industry/sector specific improvements from time to time and to cater to industry/ sector specific disclosure requirements.
(g) To harmonize and synchronize the general disclosure requirements with those prescribed in the Accounting Standards by removing the existing inherent anomalies.
(h) The specific disclosure requirements prescribed in the Accounting Standards are not incorporated here so that amendment in the Accounting Standard does not necessitate an amendment in the Schedule VI.
(i) To attain compatibility and convergence with the International Accounting Standards and practice.
FEATURES OF REVISED SCHEDULE VI
1. Accounting Standards will prevail over the Schedule: The Revised Schedule VI requires that if compliance with the requirements of the Act and / or the Accounting standards requires a change in the treatment or disclosure in the financial statements as compared to that is provided in the Revised Schedule VI, the requirements of the Act and / or the Accounting Standards will prevail over the Schedule;
2. Requirements mentioned therein for disclosure on the face of the financial statements or in the notes are minimum requirements: The Revised Schedule VI clarifies that the requirements mentioned therein for disclosure on the face of the financial statements or in the notes are minimum requirements. Line items, sub-line items and sub-totals can be presented as an addition or substitution on the face of the financial statements when such presentation is relevant for understanding of the company’s financial position and /or performance;
3. Revised Schedule VI has eliminated the concept of ‘schedule’: In the Old Schedule VI, break-up of amounts disclosed in the main Balance Sheet and Profit and Loss Account was given in the Schedules. Additional information was furnished in the notes to account. The Revised Schedule VI has eliminated the concept of ‘schedule’ and such information is now to be furnished in the notes to accounts;
4. Terms in the Revised Schedule VI will carry the meaning as defined by the applicable Accounting Standards: The terms used in the Revised Schedule VI will carry the meaning as defined by the applicable Accounting Standards. For example, the terms such as ‘associate’, ‘related parties’, etc will have the same meaning as defined under the Accounting Standards notified under Companies (Accounting Standards) Rules, 2006;
5. Balance to be maintained between providing excessive detail that may not assist users of financial statements and not providing important information: In preparing the financial statements including the notes to accounts, a balance will have to be maintained between providing excessive detail that may not assist users of financial statements and not providing important information as a result of too much aggregation;
6. Current and Non-current bifurcation: All items of assets and liabilities are to be bifurcated between current and non-current portions and presented separately on the face of the Balance Sheet. Such classification was not required by the Old Schedule VI. Current and non-current classification has been introduced for presentation of assets and liabilities in the Balance Sheet. The application of this classification will require assets and liabilities to be segregated into their current and non-current portions. For instance, current maturities of a long term borrowing will have to be classified under the head “Other current liabilities”;
7. Rounding off requirements: There is an explicit requirement to use the same unit of measurement uniformly throughout the financial statements. Moreover, rounding off requirements have been changed to eliminate the option of presenting figures in terms of hundreds and thousands if turnover exceeds Rs. 100 crores;
8. Vertical format for presentation only prescribed: The Revised Schedule VI prescribes only the vertical format for presentation of financial statements. Thus, a company will now not have an option to use horizontal format for the presentation of financial statements as prescribed in Old Schedule VI;
9. Shareholding of more than 5% shares in the company now needs to be disclosed: Number of shares held by each shareholder holding more than 5% shares in the company now needs to be disclosed. In the absence of any specific indication of the date of holding, such information should be based on shares held as on the Balance Sheet date;
10. Share allotments for non-cash consideration, buy back to be disclosed: Details pertaining to aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will need to be disclosed only for a period of five years immediately preceding the Balance Sheet date;
11. Debit balance in the Statement of Profit and Loss will be disclosed under the head “Reserves and surplus: Any debit balance in the Statement of Profit and Loss will be disclosed under the head “Reserves and surplus.” Earlier, any debit balance in Profit and Loss Account carried forward after deduction from uncommitted reserves was required to be shown as the last item on the asset side of the Balance Sheet;
12. Share Application money: Specific disclosures are prescribed for Share Application money. The application money not exceeding the capital offered for issuance and to the extent not refundable will be shown separately on the face of the Balance Sheet. The amount in excess of subscription or if the requirements of minimum subscription are not met will be shown under “Other current liabilities”;
13. “Sundry Debtors” has been replaced with the term “Trade Receivables”: The term “sundry debtors” has been replaced with the term “trade receivables.” ‘Trade receivables’ are defined as dues arising only from goods sold or services rendered in the normal course of business. Hence, amounts due on account of other contractual obligations can no longer be included in the trade receivables;
14. Disclosure of trade receivables outstanding for a period exceeding six months from the date the bill/invoice is due for payment: The Old Schedule VI required separate presentation of debtors outstanding for a period exceeding six months based on date on which the bill/invoice was raised whereas, the Revised Schedule VI requires separate disclosure of “trade receivables outstanding for a period exceeding six months from the date the bill/invoice is due for payment”;
15. Capital Advances: “Capital advances” are specifically required to be presented separately under the head “Loans & advances” rather than including elsewhere;
16. Tangible assets under lease: Tangible assets under lease are required to be separately specified under each class of asset. In the absence of any further clarification, the term “under lease” should be taken to mean assets given on operating lease in the case of lessor and assets held under finance lease in the case of lessee;
17. Capital commitments and Other Commitments: In the Old Schedule VI, details of only capital commitments were required to be disclosed. Under the Revised Schedule VI, other commitments also need to be disclosed;
18. Defaults in repayment of loans and interest to be specified in each case: The Revised Schedule VI requires disclosure of all defaults in repayment of loans and interest to be specified in each case. Earlier, no such disclosure was required in the financial statements. However, disclosures pertaining to defaults in repayment of dues to a financial institution, bank and debenture holders continue to be required in the report under Companies Auditor’s Report Order, 2003 (CARO);
19. Additional disclosures: The Revised Schedule VI introduces a number of other additional disclosures. Some examples are:
(a) Rights, preferences and restrictions attaching to each class of shares, including restrictions on the distribution of dividends and the repayment of capital;
(b) Terms of repayment of long-term loans;
(c) In each class of investment, details regarding names of the bodies corporate in whom investments have been made, indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities, and the nature and extent of the investment made in each such body corporate (showing separately partly-paid investments);
(d) Aggregate provision for diminution in value of investments separately for current and long-term investments;
(e) Stock-in-trade held for trading purposes, separately from other finished goods.
20. New name for P & L Account: The name has been changed to “Statement of Profit and Loss” as against ‘Profit and Loss Account’ as contained in the Old Schedule VI;
21. Format for Statement of Profit and Loss: Unlike the Old Schedule VI, the Revised Schedule VI lays down a format for the presentation of Statement of Profit and Loss. This format of Statement of Profit and Loss does not mention any appropriation item on its face. Further, the Revised Schedule VI format prescribes such ‘below the line’ adjustments to be presented under “Reserves and Surplus” in the Balance Sheet;
22. Materiality aspects – percentage criterion: In addition to specific disclosures prescribed in the Statement of Profit and Loss, any item of income or expense which exceeds one percent of the revenue from operations or Rs. 100,000 (earlier 1 % of total revenue or Rs. 5,000), whichever is higher, needs to be disclosed separately;
23. Dividends from subsidiary company: The Old Schedule VI required the parent company to recognize dividends declared by subsidiary companies even after the date of the Balance Sheet if they were pertaining to the period ending on or before the Balance Sheet date. Such requirement no longer exists in the Revised Schedule VI. Accordingly, as per AS-9 Revenue Recognition, dividends should be recognized as income only when the right to receive dividends is established as on the Balance Sheet date;
24. Segregation of Revenue components: In respect of companies other than finance companies, revenue from operations need to be disclosed separately as revenue from (a) sale of products, (b) sale of services and (c) other operating revenues;
25. Foreign Currency Borrowings: Net exchange gain/loss on foreign currency borrowings to the extent considered as an adjustment to interest cost needs to be disclosed separately as finance cost;
26. Break-up in terms of quantitative disclosures for significant items: Break-up in terms of quantitative disclosures for significant items of Statement of Profit and Loss, such as raw material consumption, stocks, purchases and sales have been simplified and replaced with the disclosure of “broad heads” only. The broad heads need to be decided based on materiality and presentation of true and fair view of the financial statements;
27. Disclosures no longer required:The Revised Schedule VI has removed a number of disclosure requirements that were not considered relevant in the present day context. Examples include:
a. Disclosures relating to managerial remuneration and computation of net profits for calculation of commission;
b. Information relating to licensed capacity, installed capacity and actual production;
c. Information on investments purchased and sold during the year;
d. Investments, sundry debtors and loans & advances pertaining to companies under the same management;
e. Maximum amounts due on account of loans and advances from directors or officers of the company;
f. Commission, brokerage and non-trade discounts
However, there are certain disclosures such as value of imports calculated on CIF basis and expenditure in foreign currency, etc. that still continue in the Revised Schedule VI.
Some Issues arising on application of Revised Schedule VI
1. Do the companies need to furnish comparatives also in the Revised Schedule VI format.
The Revised Schedule VI requires that except in the case of the first financial statements laid before the company after incorporation, the corresponding amounts for the immediately preceding period are to be disclosed in the financial statements including the notes to accounts. Accordingly, comparative information will have to be presented starting from the first year of application of the Revised Schedule VI. Thus for the financial statements prepared for the year 2011-12 (1st April 2011 to 31st March 2012), comparative amounts need to be given for the financial year 2010-11.
2. On which date the bifurcation into current and non-current category has to assessed.
The Revised Schedule VI defines “current assets” and “current liabilities”, with the non-current category being the residual. It is therefore necessary that the balance pertaining to each item of assets and liabilities contained in the Balance Sheet be split into its current and non-current portions and be classified accordingly as on the reporting date.
3. A company is into multiple businesses. Does it need to consider operating cycle of all business put together or for each business on individual basis?
The expression “Operating Cycle” is defined as the time between the acquisition of assets for processing and their realization in cash or cash equivalents. A company’s normal operating cycle may be longer than twelve months e.g. companies manufacturing wines, etc. However, where the normal operating cycle cannot be identified, it is assumed to have a duration of twelve months. Where a company is engaged in running multiple businesses, the operating cycle could be different for each line of business. Such a company will have to classify all the assets and liabilities of the respective businesses into current and non-current, depending upon the operating cycles for the respective businesses.
4. Whether the preference shares should be presented as share capital only or does it mean that a company compulsorily needs to decide whether a preference shares are liability or equity based on its economic substance using AS 31 Financial Instruments: Presentation principles.
As per the ICAI Guidance Note on Terms used in Financial Statements, ‘Capital’ refers “to the amount invested in an enterprise by its owners, e.g. paid-up share capital in a corporate enterprise. It is also used to refer to the interest of owners in the assets of the enterprise.” This Guidance Note also defines ‘Share Capital’ as “the aggregate amount of money paid or credited as paid on the shares and/or stocks of a corporate enterprise.”
In respect of disclosure requirements for Share Capital, the Revised Schedule VI states that “different classes of preference share capital to be treated separately. The Revised Schedule VI deals only with presentation and disclosure requirements. Accounting for various items is governed by the applicable Accounting Standards. Thus,
a. If a company has early adopted AS 30 Financial Instruments: Recognition and Measurement, AS 31 and AS 32 Financial Instruments: Disclosures, it will decide the liability and equity classification of preference shares based on the principles laid down in AS. If the application of these principles results in all or part of preference shares being classified as liability, it will use the same classification, for presentation in the Balance Sheet;
b. However, if a company has not early adopted AS 30, AS 31 and AS 32, it should continue to classify the preference shares as part of “share capital”. Section 85(1) of the Act also refers to Preference Shares as a kind of share capital.
5. The Revised Schedule VI requires proposed dividend to be disclosed in the notes. Does this mean that proposed dividend is not required to be provided for when applying the Revised Schedule VI.
The Revised Schedule VI requires disclosure of the amount of dividends proposed to be distributed to equity and preference shareholders for the period and the related amount per share to be disclosed separately. It also requires separate disclosure of the arrears of fixed cumulative dividends on preference shares. The Old Schedule VI specifically required proposed dividend to be disclosed under the head “Provisions.” In the Revised Schedule VI, this needs to be disclosed in the notes. Hence, a question that arises is as to whether this means that proposed dividend is not required to be provided for when applying the Revised Schedule VI. AS-4 Contingencies and Events Occurring After the Balance Sheet Date of Companies (Accounting Standards) Rules, 2006 issued and notified by the National Advisory Committee on Accounting Standards of the Central Government, under Section 211(3C) of the Companies Act, 1956, requires that dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the Balance Sheet date but before approval of the financial statements, should be adjusted. Keeping this in view and the fact that the Accounting Standards override the Revised Schedule VI, companies will have to continue to create a provision for dividends in respect of the period covered by the financial statements and disclose the same as a provision in the Balance Sheet, unless AS-4 is revised. Hence, the disclosure to be made in the notes is over and above the disclosures pertaining to (a) the appropriation items to be disclosed under Reserves and Surplus and (b) Provisions in the Balance Sheet.
6. Revised Schedule VI requires that aggregate amount of current trade receivables outstanding for a period exceeding 6 months from the date they are due for payment should be separately stated. How the outstanding status should be reckoned in such cases.
The Old Schedule VI required separate presentation of debtors (i) outstanding for a period exceeding six months (i.e., based on billing date) and (ii) other debtors. However, the Revised Schedule VI requires separate disclosure of “trade receivables outstanding for a period exceeding six months from the date they became due for payment” only for the current portion of trade receivables. Where no due date is specifically agreed upon, normal credit period allowed by the company should be taken into consideration for computing the due date which may vary depending upon the nature of goods or services sold and the type of customers, etc.
7. How should we disclose unamortized portion of expense items such as share issue expenses, ancillary borrowing cost and discount or premium relating to borrowings under Revised Schedule VI.
The Revised Schedule VI does not contain any specific disclosure requirement for the unamortized portion of expense items such as share issue expenses, ancillary borrowing cost and discount or premium relating to borrowings. The Old Schedule VI required these items to be included under the head “Miscellaneous Expenditure.”
As per AS 16 Borrowing Costs ancillary borrowing costs and discount or premium relating to borrowings could be amortized over the loan period. Further, share issue expenses, discount on shares, ancillary cost-discount/ premium on borrowing, etc., being a special nature item are excluded from the scope of AS 26 Intangible Assets. Keeping this in view, certain companies have taken a view that it is an acceptable practice to amortize these expenses over the period of benefit, i.e., normally 3 to 5 years. The Revised Schedule VI does not deal with any accounting treatment and the same continues to be governed by the respective Accounting Standards/ practices. Further, the Revised Schedule VI is clear that additional line items can be added on the face or in the notes. Keeping this in view, the companies can disclose the unamortized portion of such expenses as “Unamortized expenses”, under the head “other current/ non-current assets”, depending on whether the amount will be amortized in the next twelve months or thereafter.
The author is the Fellow Member of ICAI and author of book on Company Balance Sheet and Profit & Loss Account under Revised Schedule VI and XBRL. He can be approached at [email protected]