Analysis of revised Format for Financial Statements by ICAI on non corporate entities

Introduction

ICAI have brought ana mazing guidance note on Financial Statements of Non-Corporate Entities, this move will help in enhancing the transparency and uniformity of financial reporting, also the ICAI had introduced a revised “Format of Financial Statements for Non-Corporate Entities” in 2022, which is already in effect from the financial year commencing April 1, 2024.

The Guidance Note, along with a revised structure, is a good step to bring financials of these non-corporate entities into a more formalized and globally aligned structure financial reporting ecosystem.

In this article I will present my detailed analytical view of revised Format for Financial Statements by ICAI on non corporate entities, based on the ICAI’s guidance note.

Applicability and Scope

Before we move ahead, let’s discuss the applicability and scope of the guidance note, the revised format is applicable to all non-corporate entities except those governed by specific laws prescribing their financial statement formats.

This includes sole proprietorships, partnerships, hindu undivided families or HUF, Trusts, Societies and also associations of persons (AOPs) or Body of persons (BOI).

Entities that are governed by a regulator who mandates a specific format (such as the Maharashtra Public Trusts Act) are required to follow that, but they must also refer to these ICAI’s Guidance Notes and technical material for disclosures, in short we can say this guidance note don’t supersede any other act, it’s general note.

Here, I want to emphasise on Limited Liability Partnerships as they are specifically excluded from this Guidance Note as a separate note applies to them, and even they are governed by Ministry of corporate affairs.

The format further categorizes non-corporate entities into Level I to Level IV, depending on their size, operational complexity, and public interest. Level I entities are required to comply with all prescribed disclosure and presentation norms in full.

In contrast, entities falling under Levels II to IV, typically micro, small, and medium enterprises (MSMEs) are permitted certain exemptions and relaxations in recognition of their limited resources and lower public accountability.

Before we move ahead, let’s discuss all the levels of Non corporate entities

Level I non-corporate entities are considered large or entities of public interest due to their size, regulatory oversight, or financial exposure. This category includes entities with turnover exceeding ₹50 crore or borrowings above ₹10 crore in the immediately preceding accounting year, as well as entities regulated by bodies like RBI, SEBI, IRDAI, etc., or those that are holding/subsidiaries of Level I entities. These entities are subject to full compliance with accounting standards and the revised financial statement format, requiring comprehensive disclosures and detailed presentation, similar to that applicable to large corporates. 

Level II entities are classified as medium-sized non-corporate entities with turnover between ₹10 crore and ₹50 crore or borrowings between ₹2 crore and ₹10 crore. These entities are not as complex as Level I but still significant enough to warrant a structured financial reporting approach. While they are required to comply with the accounting standards, they are granted specific exemptions and reduced disclosure requirements to ease the compliance burden while ensuring financial transparency. 

Level III includes small non-corporate entities with turnover exceeding ₹1 crore but not exceeding ₹10 crore or borrowings above ₹50 lakh but not exceeding ₹2 crore. These entities are usually family-owned businesses, professionals, or firms with limited operations. ICAI provides considerable relaxations in the application of accounting standards and disclosures for these entities, thereby promoting simplified reporting without undermining basic financial information needs of users like lenders, partners, or tax authorities.

Level IV represents micro non-corporate entities with turnover up to ₹1 crore and borrowings not exceeding ₹50 lakh. These are the smallest business entities, typically proprietorships or small partnerships with minimal operations and accounting sophistication. ICAI has allowed the maximum permissible exemptions to such entities in both recognition and disclosure requirements, aiming to facilitate ease of doing business by reducing the cost and complexity of financial reporting while maintaining essential accounting discipline.

Logic behind this guidance note

Starting with one small disclaimer, that it’s my own view point, I think the main need for a revised format addresses several critical concerns such as the absence of standardization among financial reports of non-corporate entities, secondly the lack of uniform classification and presentation of assets, liabilities, income, and expenses, thirdly dueto the rising expectations from stakeholders including lenders, investors, as well as regulators, and increasing the need for compliance, especially in the context of cases like tax scrutiny, requirements of the financial institutions, such as banks or NBFC’s as well as main moto for this is to follow global best practices.

This format draws structural inspiration from Schedule III of the Companies Act, 2013 but modifies it to suit the specific nature and scale of non-corporate entities.

Let’s discuss the prescribed format of financial statements that is applicable to non corporate entities as per the above guidelines, they were effective from FY 2024–25, but most of the clients are in process of finalising accounts now, hence I decided to discuss on it in detail.

The format is structured into three main components, i.e. Balance Sheet, Statement of Profit & Loss, and Notes to Accounts.

I. Balance Sheet which is in Vertical Format

A. Equity and Liabilities

Following are the components of Equity and Liabilities

First one is, capital / owner’s fund containing capital / partners capital / corpus add current year profit and less drawings or withdrawals (if any), and Second is Retained Earnings / Surplus 

Then comes reserves and surplus

Then loan funds containing secured loans, unsecured loans and deposits 

Then comes other non-current liabilities mainly containing Long-term Provisions 

And finally Current Liabilities containing trade payables (including MSME disclosures), other payables, short-term provisions, outstanding expenses as well as statutory liabilities 

B. Assets 

Assets are divided into two parts, Non-Current Assets, containing fixed assets (tangible/intangible), capital work in progress, non-current investments, deferred tax assets (if any) and the long-term loans & advances

Second part is the current assets containing inventories, trade receivables (with Ageing), cash and cash equivalents, short-term loans & advances and other current assets

II. Statement of Profit and Loss

A. Revenue

This contains revenue from operations (sale of goods/services, grants/donations (for NGOs, Trusts), professional income/consultancy) and other income (Interest, Dividend, Rent or any other Miscellaneous Receipts) 

B. Expenses

Similar to Schedule 3, this contains cost of goods sold/services rendered, employee benefit expenses, depreciation and amortization, finance costs and other Expenses

Other expenses contains, administrative & general expenses, selling & distribution expenses, legal & professional fees and bad debts/provisions, here, all those expenses that exceeds 1% of total turnover or INR 100000, whichever is higher, must be disclosed separately.

C. Profit Before Tax

D. Less: Provision for Taxation

E. Profit After Tax / Surplus

III. Notes to Accounts

These are mandatory for all the levels of MSME, but with few Relaxations for Level II–IV

It contains the significant accounting policies showing the basis of accounting, revenue recognition, fixed assets and depreciation, the provisions and contingencies, inventory valuation, foreign exchange dealings etc 

Next one is about the contingent liabilities and commitments, related party disclosures as per AS-18 showing the nature of relationship, type of transaction, outstanding balances etc, receivables and payables ageing schedules with a break-up by time bands (e.g., <6 months, 6–12 months, >12 months), MSME dues separately highlighted

Donations and grants (For Trusts/Societies) with the purpose-wise bifurcation and unspent balances 

Drawings/withdrawals by each partner or proprietor, if material, depreciation schedule with the asset-wise depreciation and method used (SLM/WDV), events after reporting period and segment reporting (if applicable)

IV. Additional Disclosures as applicable to Level I Entities are Reconciliation of opening and closing equity, quantitative details of inventory, consumption, lease commitments, disclosures under relevant Accounting Standards (AS 10, AS 22, AS 26, etc.)

Relaxations for Levels II–IV are given in respect of ageing schedules, detailed AS-18 disclosures, and segment reporting, these entities are allowed to omit them on their discretion, also the cash flow statement is not mandatory for Level III & IV and certain narrative disclosures can be condensed.

Now, let’s discuss the key features of the revised format as I stated above: 

First one is the uniform structure as the balance sheet and profit and loss statement follow a vertical format that ensures consistency across reporting entities. These are aligned with ICAI’s Accounting Standards rather than Ind-AS, keeping in mind the scale and accounting infrastructure available to non corporate entities. 

Secondly the classification of assets and liabilities, here the current and non-current classification is now mandatory, based on a 12-month operating cycle. This classification provides clarity on the liquidity position and financial stability of the entity. 

Thirdly all financial statements must present figures for the immediately preceding financial year for comparison. This mandates preparers to maintain records in the new format from FY 2024–25 onwards.

Also, in this guidance note, the enhanced disclosures were recommended on related party transactions, contingent liabilities, revenue and expenses classification, and notes to accounts are required, which promotes greater transparency and ensures better stakeholder communication.

Forth is ageing schedule for receivables and payables, that means the receivables and payables must be broken down into different time buckets, with specific disclosure for MSMEs. This improves monitoring of working capital and facilitates compliance with MSME payment regulations. 

Fifth one is enhanced notes to accounts, showing a tabular and narrative disclosures have become central to the reporting format. These include accounting policies, revenue recognition methods, depreciation principles, contingent liabilities, and more. 

Sixth is the disclosure of owner’s funds stating that the capital contributions, drawings, retained earnings, and partner current account balances are to be shown separately. This clarifies fund movement and appropriate accountability of partners or owners.

Also there is the segregation of revenue and expense which means operating revenue must be separated from other income. Similarly, expenses exceeding 1% of turnover or Rs. 1 lakh must be disclosed individually. This assists in identifying major cost heads.

My perspective on practical implementation

This move of ICAI brings the opportunities as well as positive outcomes for non corporate entities, such as improved creditworthiness, as the standardized reports simplify credit evaluation by financial institutions, the stronger tax compliance by specifying a clear classification and disclosures which may help in accurate tax computation and reduce the risk of litigation, it would increase the investor confidence, which means the enhanced disclosures would boost the credibility of non corporate entities among stakeholders, also it will help in better Governance and internal control.

Challenges in implementation

Many of the non corporate entities may struggle for meeting up the enhanced requirements due to structural and resource constraints. For instance, today also there are many entities which operate using outdated or manual accounting systems that require significant upgrades to accommodate the new format.

There are also critical data gaps, as historical data required for comparative figures and detailed disclosures may not be readily available. Additionally, promoters and accountants of smaller entities often lack awareness and understanding of the revised requirements, necessitating focused capacity-building efforts.

Here, the role of auditors might also become more complex, with increased emphasis on verifying ageing schedules, contingent liabilities, and related party transactions in detail.

Comparative analysis with earlier format

Let’s discuss some of the Illustrations and it’s implications

Illustration 1: ATK & Associates is a partnership firm with MSME payables

under the new format, the firm must now maintain detailed ageing schedules for all trade payables and separately highlight dues to MSMEs. Failure to disclose this accurately could attract scrutiny under MSME regulations. 

Example 2: Aman foundation, a trust with multiple donors

Trusts must now clearly show donor-wise receipts, related party donations, and contingent liabilities if donation refunds are possible due to project non-commencement.

Example 3: Aman Rajput a sole proprietor with family transactions

Related party disclosures must now include transactions with relatives (as defined under AS 18) such as rent paid to spouse, loans from parents, etc., even in a sole proprietorship.

I hope in future the ICAI may issue sector-wise illustrations (like for educational trusts, retail traders, professional firms), provide software templates for MSMEs, encourage academic research on the impact of this reform and collaborate with regulators for a unified digital compliance ecosystem, let’s see how this is going to be implemented in near future.

Conclusion

The revised format for financial statements of non-corporate entities marks a watershed moment in India’s financial reporting history. Though challenging in its initial phase, the long-term benefits of standardization, transparency, and accountability are indisputable.

As implementation already started from last year i.e. FY 2024–25, but the need for proactive engagement from all stakeholders cannot be overstated. This reform, backed by robust guidance and supported by us, will undoubtedly elevate the financial credibility of India’s vast non-corporate sector.

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Author can be contacted at aman.rajput@mail.ca.in