Posted by: CS Shilpi Thapar
Ministry of Corporate Affairs issued the Revised Schedule VI which deals with the new concepts and disclosure requirements, doing way with several statutory disclosure requirements under the Existing Schedule VI of The Companies Act, 1956. It has brought loads of changes from reporting and presentation of financial statements perspective. The Revised Schedule VI has been developed in the framework of existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules 2006. To harmonize the disclosure requirements with the accounting standards and to converge with new reforms, the Ministry of Corporate Affairs vide Notification No. S.O. 447(E), dated 28th February 2011 replaced the existing Schedule VI of the Companies Act, 1956 with the revised one. Governments vide Notification No. F.N. 2/6/2008 – C.L-V dated 30th March 2011 made the revised Schedule VI applicable to all companies for the financial year commencing from 01st April 2011.
It applied to all companies following Indian GAAP until such companies are required to follow IFRS converged Indian Accounting Standards. The requirements of the Revised Schedule VI however, do not apply to following companies as referred to in the proviso to Section 211 (1) and Section 211 (2) of the Act:
1. Any insurance or banking company, or
2. Any company engaged in the generation or supply of electricity or
3.To any other class of company for which a form of Balance Sheet and Profit and Loss account has been specified in or under any other Act governing such class of company.
The Schedule VI has been revised to capture the globally acceptable presentation principles of corporate financial statements. It is an effort to improve the presentation quality and paving the way for global harmonisation of corporate financial reporting. The Revised Schedule VI does not adopt the international standards on disclosures in financial statements fully; it brings corporate disclosures closer to international practice. It can be considered the effective arm of IFRS.
Salient Features of Revised Schedule VI-Balance Sheet (Excerpts from ICSI Supplement on Revised Schedule VI):
- The Revised Schedule contains General Instructions, Part I – Form of Balance Sheet; General Instructions for Preparation of Balance Sheet, Part II – Form of Statement of Profit and Loss; General Instructions for Preparation of Statement of Profit and Loss.
- The Revised Schedule VI has eliminated the concept of ‘schedule’ and such information is now to be furnished in the notes to accounts.
- The revised schedule gives prominence to Accounting Standards (AS) i.e. in case of any conflict between the AS and the Schedule, AS shall prevail.
- The revised schedule prescribes a vertical format for presentation of balance sheet therefore, no option to prepare the financial statement in horizontal format. It ensures application of uniform format.
- All Assets and liabilities classified into current and non-current and presented separately on the face of the Balance Sheet.
- Number of shares held by each shareholder holding more than 5% shares now needs 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.
- 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.
- 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 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.
- 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.”
- “Capital advances” are specifically required to be presented separately under the head “Loans & advances” rather than including elsewhere.
- 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.
- 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.
Key Features of Revised Schedule VI – Statement of Profit and Loss:
- The name has been changed to “Statement of Profit and Loss” as against ‘Profit and Loss Account’ as contained in the Old Schedule VI.
- 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.
- As per revised schedule VI, any item of income or expense which exceeds one per cent 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.
- 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.
- 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.
- 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.
Further following critical points are to be considered:
- 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.
- Disclosures requirements of various accounting standards also needs to be complied with including compliances required under Sec 22 of MSMED Act 2006 under the Chapter on Delayed Payments to Micro and Small Enterprises.
- Disclosures under section 77A, 211, 293A, 293B under The Companies Act, 1956 also needs to be complied with.
- The format of the statement of assets and liabilities required at the end of the half year, is drawn from the pre-revised schedule VI, it will have to be followed as clause 41(V) specifically required that disclosure in balance sheet items in half yearly results shall be in the format in Annex IX drawn from schedule VI of The Companies Act, 1956.
- MCA vide its circular dated 5.09.2011 has clarified that the presentation of financial statement for IPO during the financial year 2011-12 may be as per pre-revised Schedule VI. Hence, Revised Schedule VI will not have any impact on companies going into IPO’s in 2011-2012. Also suitable notification is required from SEBI to this effect.
- The revised schedule gives prominence to Accounting Standards (AS) i.e. in case of any conflict between the AS and the Schedule, AS shall prevail. Earlier the stand was different under the Companies (Accounting Standards) Rules, 2006, that wherever the accounting standards was not in conformity with the law, the law would prevail and financial statements will be prepared accordingly, but in revised schedule VI, not only it gets overridden by AS but also get modified accordingly so it seems difficult for the corporate to have uniform presentation of Balance Sheet and lot of controversy may arise.
- Revised Schedule VI introduced new items i.e (a) in Statement of Profit and loss called “ Adjustments to the carrying amount of investments , (b) In presenting the reconciliation for fixed assets as well as Intangible assets, any addition on account of “Business Combination” (as defined as Ind AS-103), (c ) A separate category called “ Intangible assets” comprised of various new intangibles such as brands, mining rights are introduced, (d) Under non current investments, if the value of investments is shown other than cost basis, the basis of valuation is required to shown, (e) Another item “ Other commitments” is added i.e lease, EPCG duty benefits schemes, etc which will make the financial statements overloaded and readers will have tough time.
- There are load of changes , current assets may turn out to non current assets, quick ratios may change, banks will have to reconsidered the corporate ratios again as borrowing from banks are based on a host of ratios calculated both on actual and projected.
- 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 (This was an essential and critical disclosure. Related Party Disclosures as per AS 18 don’t cover these details and even these disclosures are covered in the Corporate Governance Report);(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
- Share Application money pending allotment is to be disclosed as separate item on the face of balance sheet. Share Application money not exceeding the issued capital and to the extent not refundable is to be disclosed under this line item and where the amount is in excess of share capital or where minimum subscription requirement is not met, such amount will have to be shown separately under other liabilities.
Various disclosure requirements relating to Share Application money pending allotment are:
- Terms and Conditions.
- No. of Shares proposed to be issued.
- The amount of premium, if any.
- The period before which shares are to be allotted.
- Whether the company has sufficient authorised share capital to cover the share capital amount on allotment of shares out of share application money.
- Interest accrued on amount due for refund.
11. Further Long term borrowings shall be classified in detailed sub items as secured and unsecured and nature of security shall be specified separately in each case. Where the loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed. The word “others” used in phrase “Directors or others” would mean any person or entity other than director. Therefore, this is not restricted to mean only related parties.
12. Two different terms viz: continuing defaults (in case of long terms borrowings) and Defaults (in case of short term borrowings)have been used and should be taken to disclose default as on the date of balance sheet in both the cases. Pursuant to these requirements, details of any default in repayment of loan and interest existing as on the balance sheet date needs to separately disclosed. Any default that had occurred during the year and was subsequently of the year does not need to be disclosed.
Revised Schedule VI no doubt is a welcome step in tune with the changes in the global accounting. But the formats in many areas are not clear and raise many questions regarding presentation of particular items under particular head. There will be loads of different interpretations as addition and substitutions of line items and sub items are required to be disclosed under Provisions of Accounting Standards, Provisions of The Companies Act, 1956 and other various other allied statutory acts, which will lead to different presentation formats by the corporates and eventually, uniformity and standardization which is the intention of the Government may not be achieved. Still lot of clarifications are needed from Government to plug loose ends.
(Sources: Revised Schedule VI,ICAI Guidance note on Revised Schedule VI, ICSI Supplement on Revised Schedule VI and other Online Resources.)
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