schedulevi companies act

Revised Schedule VI

Revised Schedule VI

Key Insights and Practical Challenges

CA Navneet Kabra

Revised Schedule VI

Agenda

Introduction

Overall Approach

Key changes to Balance Sheet and practical issues and perspectives

Key changes to Profit and Loss Account and practical issues and perspectives

Simplification of Disclosures

Open Issues for SEBI

Revised Schedule VI

Overall Approach

A step in right direction as supremacy has been provided to the Accounting Standardsand the Companies Act, 1956, which would avoid disputes as well as save time oflegislature in making time to time amendments in Schedule VI

A step towards convergence to IFRS to some extent with regard to presentation offinancial statements as many features as discussed have been taken from theseInternational Financial Reporting Standards

Format of Balance Sheet and Statement of Profit and Loss

Adobe Acrobat Document

Revised Schedule VI

Format of Balance Sheet – Equity and Liabilities

Particulars Note No Amount as at end of Current Year

Amount as at end of the Previous Year

I EQUITY AND LIABILITIES 1. Shareholders’ funds (a) Share capital xxxxxx xxxxxx(b) Reserves and surplus xxxxxx xxxxxx(c) Money received against share warrants xxxxxx xxxxxx2. Share application money pending allotments xxxxxx xxxxxx3. Non current liabilities (a) Long term borrowings xxxxxx xxxxxx(b) Deferred tax liabilities (net) xxxxxx xxxxxx(c) Other long term liabilities xxxxxx xxxxxx(d) Long term provisions xxxxxx xxxxxx(4) Current Liabilities (a) Short term borrowings xxxxxx xxxxxx(b) Trade payable xxxxxx xxxxxx(c) Other current liabilities xxxxxx xxxxxx(d) Short term provisions xxxxxx xxxxxxTotal xxxxxx xxxxxx

Revised Schedule VI

Format of Balance Sheet – Assets

Particulars Note No Amount as at end of Current Year

Amount as at end of the Previous Year

II ASSETS 1. Non Current Assets (a) Fixed assets xxxxxx xxxxxx(i) Tangible assets xxxxxx xxxxxx(ii) Intangible assets xxxxxx xxxxxx(iii) Capital Work in progress xxxxxx xxxxxx(iv) Intangible assets under development xxxxxx xxxxxx(b) Non current investments xxxxxx xxxxxx(c) Deferred tax assets (net) xxxxxx xxxxxx(d) Long term loans and advances xxxxxx xxxxxx(e) Other non current assets xxxxxx xxxxxx2. Current Assets (a) Current investments xxxxxx xxxxxx(b) Inventories xxxxxx xxxxxx(c) Trade receivables xxxxxx xxxxxx(d) Cash and cash equivalents xxxxxx xxxxxx(e) Short term loans and advances xxxxxx xxxxxx(f) Other current assets xxxxxx xxxxxxTotal xxxxxx xxxxxx

Revised Schedule VI

Format of Statement of Profit and Loss

Particulars Note no For the current year

For the previous year

I. Revenue from operations xxxxx xxxxxII. Other Income xxxxx xxxxxIII. Total Revenue xxxxx xxxxxIV. Expenses Cost of material consumed xxxxx xxxxxPurchases of stock in trade xxxxx xxxxxChanges in Inventories in FG, WIP and Stock in trade xxxxx xxxxxEmployee benefit expense xxxxx xxxxxFinance cost xxxxx xxxxxDepreciation and amortization expense xxxxx xxxxxOther expense xxxxx xxxxxTotal Expense xxxxx xxxxxV. Profit before exceptional and extra ordinary items (III-IV)

xxxxx xxxxx

VI. Exceptional items xxxxx xxxxxVII. Profit before extra ordinary items and tax (V-VI) xxxxx xxxxxVIII. Extraordinary items xxxxx xxxxxIX. Profit before tax (VII-VIII) xxxxx xxxxxX .Tax expense xxxxx xxxxxCurrent tax xxxxx xxxxxDeferred tax xxxxx xxxxxXI. Profit /(Loss) for the period/year from the continuing operations

xxxxx xxxxx

XII. Profit/ (Loss) from the discontinuing operations xxxxx xxxxxXIII. Tax expense of discontinuing operations xxxxx xxxxxXIV. Profit/(Loss) from discontinuing operations(after tax) (XII-XIII)

xxxxx xxxxx

XV. Profit /(Loss) for the period(X+XIV) xxxxx xxxxxXVI. Earnings per equity share xxxxx xxxxx(1) Basic xxxxx xxxxx(2) Diluted xxxxx xxxxx

Revised Schedule VI

Comparison with old Schedule VI - Contents

The contents of the RevisedSchedule VI are as under:-I) General Instructions for preparation

of Balance Sheet and Statement ofProfit and Loss of a company.

II) Form of Balance Sheet (only verticalformat) with General Instructions forpreparation of Balance Sheet. (PART-I).

III) Form of Statement of Profit and Losswith General Instructions for preparationof Statement of Profit and Loss. (PART-II.)

The contents of Old Schedule VI are stated as under:-I) Form of Balance Sheet (including

disclosure requirements) both in horizontal as well as vertical form with general instructions for its preparation (PART-I)

II) Requirements as to Profit andLoss Account.(PART-II)

III) Interpretation (PART III)

IV) Balance Sheet Abstract andCompany’s General BusinessProfile. (Part IV).

Revised Schedule VI

Comparison with old Schedule VI - Contents

Comparison of contentsa) Balance Sheet Abstract and Company’s General Business Profile as provided in Part-IVhas been removed, which is a welcome move as this statement was of no real purpose andmeant for statistical purposes.

b) Horizontal format of Balance Sheet known as conventional or customary form of BalanceSheet has been deleted. Accordingly, now onwards only vertical format is to be used.

c) Form of Statement of Profit and Loss has been provided in Part II, which was notprescribed in old Schedule VI.

d) Further Part III on Interpretation, which contained explanation of provision, reserve, etc.has been scrapped as these terms are already covered in the Accounting Standards. It hasbeen stated in revised Schedule VI that for the purpose of this schedule, the terms usedshall be as per the applicable Accounting Standards.

Revised Schedule VI

Introduction

Ø Schedule VI to the Companies Act, 1956 which provides for the manner in which every company needs to prepare its Balance Sheet and Profit and Loss Account has been revised by the Ministry of Corporate Affairs in consultation with the ICAI and NACAS.

Ø One of the most significant changes in over half-a-century which has far-reaching impact on companies across the country, from a small private company to a large conglomerate.

Ø Revised Schedule VI is applicable for financial statements to be prepared for the financial year commencing on or after 1st April 2011.

Ø Framed based on existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 and has nothing to do with converged Accounting Standards.

Ø Lays down several new concepts and disclosure requirements and also does away with several existing disclosure requirements.

Revised Schedule VI

Introduction

Ø Disclosures required by Revised Schedule VI are minimum disclosures, Additional disclosuresrequired by Accounting Standards & Companies Act will have to be made,

Ø Changes may also be made on the face of BS and P&L if relevant to understanding of theCompany’s Financial Position / Performance / Industry-specific disclosure requirements, theCompanies may choose to present additional line item i.e. sub totals of current assets and currentliabilities.

Ø Paradigm Shift : Accounting Standards/Companies Act requirements to over-ride requirements ofRevised Schedule VI, may result in change in treatment and disclosures prescribed by RevisedSchedule VI including addition, amendment, substitution or deletion, Due to this, the Schedule VI isnot bulky as several disclosure requirements already covered in Accounting Standards have notbeen reiterated

Ø Change in the format of presentation from a combination of Schedules and Notes to entirely Notes to Accounts in line with the international style of presentation

Ø Presentation of comparatives for the immediately preceding period required from the very first year of application for all items presented in the financial statements

Revised Schedule VI

Introduction

Ø All items of the Balance Sheet to be classified between Current and Non-Current. Principlesunderlying such classification appear to be adopted from Ind-AS/IFRS.

Ø All the terms in Revised Schedule VI to be interpreted as per Accounting Standards

Ø Balance to be maintained between Excessive Detail and Excessive Aggregation, not to obscureimportant information by including it among a large number of insignificant details.

Ø Explicit requirement to use the same unit of measurement uniformly throughout the financialstatements.

Ø Rounding Off Rules modified to eliminate the option of presenting figures in hundreds and thousandsif turnover exceeds `100 crores

Ø Under revised schedule VI the upper half is referred to as Equity and Liabilities and later half isshown as Assets whereas in old schedule VI the same were referred as Sources of Funds andapplication of Funds. Accordingly the current liabilities (including short term provisions) are to beshown in upper half of balance-sheet under Equity and Liabilities whereas in old schedule VI (verticalform) it was shown as deduction from current assets, loans and advances and net current assets aredisclosed on Assets side. Due to this the Balance Sheets totals would increase to the extent of thecurrent liabilities.

Revised Schedule VI

Key changes to Balance Sheet

Ø Introduction of Current and Non-current Classification introduced for presentation ofall assets and liabilities.

Implications :Ø Implementation of appropriate systems to capture the right classificationØ Significant changes may have to be made to entity-wide ERP systems etc.Ø Systems will have to be set for each individual item of asset and liabilityØ Details for ascertaining the classification will be required even for the

immediately preceding reporting period.Ø Involvement of significant additional time and effort both for the Company as

well as the Auditors

Revised Schedule VI

Key changes to Balance Sheet (continued….)

► Current and Non-Current Classification of all Assets & Liabilities

An Asset shall be classified as Current when any of the following is satisfied :Ø It is expected to be realized in, or is intended for sale or consumption in, the entity’s normal

operating cycle;Ø It is held primarily for the purpose of being traded;Ø It is expected to be realized within twelve months after the reporting date; orØ It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability

for at least twelve months after the reporting date.

A Liability shall be classified as Current when any of the following is satisfied :Ø It is expected to be settled in the entity’s normal operating cycle;Ø It is held primarily for the purpose of being traded;Ø It is due to be settled within twelve months after the reporting date; orØ The entity does not have an unconditional right to defer settlement of the liability for at least twelve

months after the reporting date. Terms of a liability that could, at the option of the counterparty,result in its settlement by the issue of equity instruments do not affect its classification.

Revised Schedule VI


The above bifurcation of assets and liabilities between current and non-current wouldrequire major reclassifications in the Balance Sheets of all companies and would haveimpact on the current ratio. Some of such instances of reclassifications are as under:-

a) Presently even the current maturities to long term debt are shown as part of long termdebt and only disclosure of amount due to be repaid within one year is made. However, asper revised Schedule VI current maturities to long term debt would be depicted as ‘OtherCurrent liabilities”

b) As per old schedule VI interest accrued and due on long term loans were shown as partof the long term loans but in revised schedule VI the same is to be shown as currentliabilities

c) Currently all loans and advances (except capital advances) are shown under CurrentAssets and Loans and Advances but now onwards the same needs to be bifurcatedbetween current and non-current, accordingly the sub heading of long term loans andadvances has been introduced in Revised Schedule VI.

Revised Schedule VI


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d) The provisions also need to be bifurcated among long term and short term, the latter onebeing classified as current, and former being classified as non-current e.g. employeerelated provisions; accordingly subheading of long term provisions has been introduced.Under old Schedule VI all the provisions were being shown under Current Liabilities andProvisions.

e) Under old schedule VI the trade receivables (Debtors)/ Trade payables (creditors) werealways shown as Current, but in revised schedule VI, these can also be shown as Noncurrent. It appears that where the credit is offered on deferred credit basis or the paymentis not expected to be received from debtors within normal operating cycle/12 months fromreporting period, the same needs to be disclosed as Non Current

Revised Schedule VI


For understanding the above definitions let us apply the same in following cases:-

As of 31st March, 2011, a property developer has inventories of residential unitswhich it expects to sell in three years. Historically similar residential units have beensold in three years. As of 31st March, 2011, should the inventories of residentialunits be classified as current or non current assets?

An asset shall be classified as current when it satisfies any of the four criteria. Since, theinventories of residential units in the given case, satisfy the first requirement i.e. it isexpected to be realised in, or is intended for sale or consumption in, the entity’s normaloperating cycle, the residential units should be classified as current assets.

Revised Schedule VI


A primary school requires a deposit to be paid upon enrolment into the school.Should the student leave the school, this deposit is refundable within three months.However, based on historical evidence the majority of students enrolling to primaryschool continue with school and receive the deposit back at the end of six yearperiod. How should the deposits be classified?

The deposits should be classified as current liabilities. Despite the historical evidence thatindicates that the majority of the deposits are only repaid at the end of six year period, thedeposits are payable on three months notice. Revised Schedule VI states that a liabilityshould be classified as current when ‘the entity does not have an unconditional right todefer settlement of the liability for at least 12 months after the balance sheet date’.Therefore, the deposits should be classified as current liabilities.

Revised Schedule VI


Ø Share Capital

Ø Separate disclosure required for Number of shares held by each shareholder holdingmore than 5% shares.

Ø Disclosures of Preference Share Capital – as per AS 31 Financial InstrumentsØ Reconciliation of the number of shares outstanding at the beginning and at the end of

the reporting period.Ø Each class of shares held by holding Company, or its ultimate holding Company,

subsidiaries of the holding company and ultimate holding Company, associates of itsholding Company and its ultimate holding Company

Ø Disclosure of bonus shares and shares issued for a consideration other than cash –only for fives years, disclosures related to buy back

Revised Schedule VI

Key changes to Balance Sheet (continued….)Share Capital - practical issue► Number of shares held by each shareholder holding more than 5%

shares now needs to be disclosed under Revised Schedule VI. ► Such percentage should be computed as on which date?► What is the objective of such disclosures for Private Companies? ► Where shares are issued through GDR/ADR what should be the level

of details for disclosure purposes?

► In the absence of any specific indication, date of holding should be taken as the balance sheet date.

► Various shareholding information is required to be disclosed every quarter by listed companies. Private Companies generally have few shareholders who may not be interested in public disclosure of such information e.g. PE Funds etc.

► When shares are issued by means of GDR/ADR, the custodian is the direct shareholder of the Company. In the absence of any specific requirement, disclosing the name and shareholding of the real investor does not appear mandatory.

► Clarification is required from MCA in respect of all the above matters

Revised Schedule VI

Key changes to Balance Sheet (continued….)Share Capital - practical issue

► Revised Schedule VI requires different classes of Preference Shares to be “treated separately”. Whether this means preference shares should be classified based on substance over form e.g. whether redeemable preference shares should be classified as liability?

► The revised Schedule VI deals only with presentation and disclosure requirements.► Accounting treatment for all items will be governed by the applicable standards.► Companies early adopting AS-30, AS-31 & AS-32 will have to decide the liability

and equity classification of preference shares based on the principles laid in AS 31.► Other Companies will continue to classify all Preference Shares as part of Share

Capital.

Revised Schedule VI


Ø Reserves and SurplusØ Debit balance in P&L Account to be disclosed under the head Reserves & Surplus vis-

à-vis the earlier requirement of including the same on asset side of Balance Sheet.Ø Allocations and appropriations such as dividend, bonus shares and transfer to/from

reservesØ Share options outstanding account is now a part of reserves and surplus.

Revised Schedule VI


Ø Share application money pending allotmentØ Share application money pending allotment will not include share application money to

the extent this is refundableVarious disclosure requirements pertaining to Share Application Money are as follows:- terms and conditions;- number 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 authorized share capital to cover the

share capital amount on allotment of shares out of share application money;- Interest accrued on amount due for refund;- The period for which the share application money has been pending beyond the

period for allotment as mentioned in the share application form along with thereasons thereof for such share application money being pending is to bedisclosed.

The above disclosures should be made in respect of amounts classified under both Equity as well as Current Liabilities, wherever applicable.

Revised Schedule VI


Ø NON CURRENT LIABILITIES

Ø Long Term borrowings

Ø Period and amount of continuing default as on the balance sheet date in repayment ofloans and interest, Defaults in repayment of loans and interest to be disclosed forseparately for each item of Borrowings vis-à-vis defaults in repayment of dues tofinancial institutions, banks and debenture holders currently reported under CARO

Ø The nature of security shall be specified separately in each case.Ø Loans and advances from related partiesØ Terms of repayment of term loans and other loans shall be disclosed, including

deferred payment liabilities

Revised Schedule VI

Key changes to Balance Sheet (continued….)Long term borrowings - practical issue► How should a loan be classified if after the reporting period and

before the approval of the financial statements for issue, the lender agrees to waive a default in a debt covenant that occurred on or before the reporting date?

View 1► A liability is classified as Current if there is no unconditional right to defer

settlement of the liability for at least twelve months after the reporting date.► The subsequent waiver would change the classification from “current” to

“non-current” but only at the date the waiver is made going by strict application of definition.

► The issue may involve legal interpretation of the loan agreement as to whether a borrower has an unconditional right to defer settlement

► Legal interpretation may involve consideration of the wordings of the loan agreement as well as the Banking Regulation Act etc.

► Such interpretation is in line with Ind-AS/IFRS which is specific in this regard. The definitions of Current & Non-Current Liability are taken verbatim from Ind-AS/IFRS, though the Para directly addressing the issue has not been specifically adopted.

Revised Schedule VI

Key changes to Balance Sheet (continued….)Long term borrowings - practical issue► How should a loan be classified if after the reporting period and

before the approval of the financial statements for issue, the lender agrees to waive a default in a debt covenant that occurred on or before the reporting date?

View 2► The liability may be classified as Non-Current► The paragraphs which mandate the treatment of View 1 under IFRS/Ind-AS are not

included in Revised Schedule VI.► Definition of Current Liability does not specify whether the deferment right should

be ascertained at the reporting date or events after the balance sheet date can be considered

► As per AS-4, one may take the view that the subsequent waiver provides additional evidence of conditions (i.e. default and negotiations with the lenders) existing as on the balance sheet date.

Revised Schedule VI


Ø Other Long Term liabilitiesØ Trade payables include amount due on account of goods purchased or services

received in the normal course of business operations, not against the contractualobligations

Ø Amount due under contractual obligation can no longer be included within tradepayables.

Ø Long Term ProvisionsØ This should be classified into provisions for employee benefits and others

Revised Schedule VI

Key changes to Balance Sheet (continued….)Long term provisions - practical issue► A company also needs to classify its employee benefit obligations in

current and non-current categories for disclosure purposes. What is the appropriate basis for classification of these obligations into current and non-categories?► A liability is classified as current if a company does not have an unconditional right

to defer its settlement for 12 months after the reporting date► Bonus Liability : Amount payable within one year from the balance sheet date will

be classified as current► Accumulated leave outstanding on reporting date : Employees have already

earned the right to avail the leave and are entitled to avail the same at any time during the year. Hence, should be classified as Current Liability even if measured as other long-term employee benefit under AS 15.

► Funded post-employment benefit obligations : Amount due for payment to the fund within 12 months would be Current Liability.

► Unfunded post-employment benefit obligations : Amount of settlement obligation at the balance sheet date or within 12 months for employees who have already resigned or are expected to resign or are due for retirement within next 12 months will have to be classified as Current Liability.Actuary should give the Current Non-current breakup for unfunded obligation

Revised Schedule VI


Ø CURRENT LIABILITIES

Ø Short Term BorrowingsØ Current maturity of long term borrowings should not be classified as short term

borrowings, they have to be classified under other current liabilities

Ø Other Current liabilities

Ø This include Current maturities of long-term debt, current maturities of finance leaseobligations, interest accrued but not due on borrowings, Interest accrued and due onborrowings, Income received in advance, unpaid dividend, application money receivedfor allotment of securities and due for refund and interest accrued thereon and other(specify nature)

Revised Schedule VI


Ø NON CURRENT ASSETS

Ø Fixed AssetsØ Classification also includes Office EquipmentsØ Others will include items like live stock, railway sidings etc.Ø Assets under lease shall be separately specified under each class of asset.Ø Capital advances will not be part of CWIPØ Separate disclosure of Intangible assets under developmentØ Perpetual disclosure of revalued assets as per AS -10Ø Intangible assets - New head like mastheads and publishing rights, Mining Rights,

Recipes, formulae, models, designs and prototypes introduced.

Revised Schedule VI


Ø NON CURRENT ASSETS

Ø NON CURRENT INVESTMENTS

Ø Investments include investment propertyØ Segregation between trade and non trade investmentsØ Disclosure of investment in subsidiaries, associates, joint ventures and controlled

special purpose entities.Ø If investments in the capital of partnership firms: Name of the

firm (with the names of each partner, total capital and shares ofeach partner

Ø Investment carried at other than cost should be separately stated specifying the basisof valuation thereof

Revised Schedule VI


Ø LONG TERM LOANS AND ADVANCES

Ø Capital Advances to be presented separately under the head Loans & Advances instead ofincluding the same as part of Capital Work in Progress.

Ø Under loans and advances to related parties, making disclosures beyond the requirements ofAS -18 would not be necessary, the earlier requirement of amounts due from parties coveredunder section 370 of the Companies Act, 1956 is now dispensed with.

Ø Loans and advances due by Directors, any other officer or any partnership firm or a privatecompany where any such director is a director or partner or member shall be disclosedseparately as against the earlier requirement which was limited to the directors, secretaries andtreasurers.

Revised Schedule VI


Ø OTHER NON CURRENT ASSETS

- This includes long term trade receivables and others,

- Debts due by Directors, any other officer or any partnership firm or a privatecompany where any such director is a director or partner or member shall bedisclosed separately

- Unamortised ancillary borrowing costs can be disclosed under other ‘current/noncurrent assets’ depending on whether the amount will be amortised in the next 12months or thereafter.

Revised Schedule VI


Ø CURRENT ASSETS

Ø TRADE RECEIVABLES

Ø The old schedules VI required separate presentation of debtors for a period exceedingsix months (i.e. based on billing date) and other debtors. However, the revisedschedule VI require separate disclosures of ‘trade receivables outstanding for a periodexceeding six months from the date they became due for the payment” only for thecurrent portion of trade receivables.

Ø CASH AND CASH EQUIVALENTSØ Conflict should be resolved by changing the caption ‘cash and cash equivalent’ to ‘cash

and bank balance’Ø Bank deposits with more than twelve months maturity shall be disclosed separatelyØ Requirements of disclosures of balances with non scheduled banks have been

dispensed with.

Revised Schedule VI

Key changes to Balance Sheet (continued….)Current Assets - practical issue► Whether capital advances also need to be bifurcated between non-

current and current categories?

► Capital Advances are not expected to be realised in cash. ► They are given for procurement of fixed assets which are non-current assets.► Hence should be classified as Non-current.

► Earlier Schedule VI required bifurcation of Sundry Debtors between :(i) Outstanding for a period exceeding 6 months and (ii) Other debtors based on the Billing Date.

► Revised Schedule VI requires separate disclosure of “trade receivables outstanding for a period exceeding 6 months from the date they became due for payment” for the current portion of trade receivables

► Companies will need to implement sophisticated systems/make necessary changes to track such information.

Revised Schedule VI

Key changes to Balance Sheet (continued….)Cash and Cash equivalents – practical issue► Though Revised Schedule VI requires terms used therein to be

interpreted as per Accounting Standards, certain items listed under the head of “Cash and Cash Equivalents do not meet the definition of Cash Equivalents as per AS-3. How can this conflict be resolved?

► Items that do not meet the definition of Cash Equivalents :► Bank Balances held as margin money, security against borrowings/guarantees► Bank Deposits with more than 12 months maturity

► Revised Schedule VI clarifies that change in treatment or disclosure should be made wherever required by Accounting Standards - this may include addition, amendment, substitution or deletion

► Caption “Cash and Cash Equivalents” may be changed to “Cash and Bank Balances” and may be broken into two sub-heads :► Cash and Cash Equivalents► Other Bank Balances

► Cash and Cash Equivalents should include only those items that constitute Cash and Cash Equivalents as per AS-3 (and not the revised Schedule VI)

► Other Bank Balances can include all the other balances

Revised Schedule VI


Ø CURRENT ASSETS

Ø CURRENT INVESTMENTS

- No requirement to classify investments into trade and non trade in respect ofcurrent investments.

Ø INVENTORIES

- Separate disclosures for stocks of traded goods from finished goods.

Revised Schedule VI


Ø SHORT-TERM LOANS AND ADVANCES

Ø Loans and advances due by Directors, any other officer or any partnership firm or a privatecompany where any such director is a director or partner or member shall be disclosedseparately as against the earlier requirement which was limited to the directors, secretaries andtreasures.

Ø OTHER CURRENT ASSETSØ This includes unbilled revenues, unamortised premium on forward contracts etc.

Ø Following specific disclosures requirements are dispensed with:Ø Bills receivablesØ Balances with Customs, Ports trust (where payable on demand)

Revised Schedule VI


Ø CONTINGENT LIABILITIES AND COMMITMENTS

Ø All commitments apart from Capital Commitments need to be disclosed,

Ø The disclosures required to be made for ‘other commitments’ should include - the non-cancellable contractual commitments (i.e. cancellation of which will result in a penaltydisproportionate to the benefits involved) based on the professional judgement of themanagement which are material and relevant in understanding the financial statementsof the company and impact the decision making of the users of financial statements

Ø Commitments in the nature of buy-back arrangements, commitments to fundsubsidiaries and associates, non-disposal of investments in subsidiaries andundertakings, derivative related commitments

Revised Schedule VI

Key changes to Balance Sheet (continued….)Contingent Liabilities - practical issue► Revised Schedule VI requires the disclosure of all commitments i.e.

“other commitments” in addition to capital commitments. What is the nature of “commitments” that will get covered under this disclosure requirement?

► The term “other commitments” is not defined anywhere. Simply put it would mean any unrecognised contractual commitment.

► Scope of such terminology is very wide and may include contractual commitments for purchase of inventory, services, investments, sales, employee contracts etc.

► Overarching principle under General Instructions requires balance to be maintained between excessive detail and too much aggregation

► Accordingly, disclosure should be made for only non-cancellable contractual commitments which are material and impact decision making of the users

► E.g. non-cancellable long-term contracts for purchase of key raw material, significant sales commitment involving high penalty on failure, material employee commitment for bonus etc.

► Management should be responsible for completeness of disclosures

Revised Schedule VI

Key changes to Balance Sheet (continued….)Contingent Liabilities - practical issue► The existing Schedule VI requires Proposed Dividend to be disclosed

under the “Provisions” Schedule. Revised Schedule VI requires this to be disclosed in the Notes. Does it mean that proposed dividend is not required to be provided for going forward?

► Accounting Standards override Revised Schedule VI► AS-4 requires dividends relating to the period covered by the financial statements

declared after balance sheet date but before approval of the financial statements to be adjusted

► Hence provisions for Proposed Dividend will still be required to be created► Disclosure in the Notes is required in addition to the following disclosures :

► Appropriation items under Reserves & Surplus► Provisions in the Balance Sheet

Revised Schedule VI

Key changes to Profit and Loss Account

Ø This is now Statement of Profit and Loss

Ø Format specified for presentation of Profit & Loss Account unlike earlier Schedule VI

Ø Disclosure of other operating revenue

Ø Disclosure of Excise Duty on the face of Statement of Profit and Loss continues as perAS 9

Ø Dividends declared by Subsidiary companies after the Balance Sheet date but relatingto the period ending on or before the balance sheet date can no longer be recognised.Dividend from subsidiary can be recognised only when there is a right to receive thesame before the Balance Sheet date, this will require a change of accounting policies.

Ø Net exchange gain/loss on foreign currency borrowings to the extent considered as anadjustment to interest cost to be disclosed separately as a finance cost

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…) Revenue – Practical issue► For non-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. What should constitute “other operating revenues” vis-à-vis “Other Income”?► The term “other operating revenue” is not defined.► Should include income arising from a company’s operating activities, i.e., either its

principal or ancillary revenue-generating activities but, which is neither revenue from sale of products or rendering of services

► Whether a particular income constitutes “other operating income” or “other income” should be decided based on facts of the case and nature of company’s activities.

► Examples :Consider a manufacturing company with real estate division. The real estate arm is regularly engaged in leasing of properties. ► Rental Income should be classified as Other Operating Income.Consider another manufacturing company which owns a mutli-storied building but, does not temporarily require one floor for own use and gives it on rent.► Rental Income should be classified as Other Income.

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…) Revenue – Practical issue► Should the net gains arising on foreign exchange fluctuations be

included under the head “Other Operating Revenues” or “Other Income”?View 1► Classification should be based on same principles discussed in the previous issue► For a manufacturing Company, typically, net gain arising on foreign exchange

fluctuations would relate to foreign currency debtors, creditors etc. which are part of the operating activities of the company

► Other exchange gain not relating to company’s main operations such as foreign currency investments and loans should be classified as Other Income

► This is consistent with AS-17 which requires loans and investments to be classified as Segment Liability or Segment Asset only if the segment is of financial nature.

View 2► Net exchange gain/loss is purely of financial nature and hence should be classified

entirely as Other Income.

► As per the exposure draft on the Guidance Note, this can be shown under other operating revenue.

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…)Ø Disclosure of exceptional items and extraordinary items .

Ø Separate disclosure required for any item of income or expense exceeding higher of1% of revenue from operations or `100,000 whichever is higher vis-à-vis a threshold foronly Miscellaneous Expenses

Ø Revenue from operations (for non-finance companies) need to be disclosed separatelyfrom Sale of Products / Sale of Services / Other Operating Revenues

Ø Break-up in terms of quantitative disclosures for significant items of P&L Account suchas raw material consumption, inventory, purchases and sales have been simplified andreplaced with the disclosure of “broad heads” only

Ø The broad heads need to be decided based on materiality and presentation of true andfair view of the financial statements.

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…)► Revised Schedule VI requires the following additional information to be

given by way of notes:

► Broad heads are to be decided taking into account the concept of Materiality and presentation of True and Fair View of financial statements

Nature of company Disclosures required

Manufacturing companies Raw materials under broad headsGoods purchased under broad heads

Trading companies Purchases of goods traded under broad heads

Companies rendering orsupplying services

Gross income derived from services rendered underbroad heads

Company that falls in morethan one category

It will be sufficient compliance with the requirements, ifpurchases, sales and consumption of raw material andgross income from services rendered are shown underbroad heads

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…)► Clarification is required from MCA to understand the following :

► Whether a manufacturing company should disclose broad heads for both purchases and consumption of raw material?

► What is meant by “good purchased” in case of manufacturing companies?

► While there is a requirement to disclose broad heads of sales and services for companies falling in more than one category, why is there no requirement to disclose sales under broad heads for a manufacturing or a trading company?

► How should broad heads for Work-in-Progress be disclosed?

► Whether broad heads of Opening and Closing Inventory should also be disclosed?

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…)► In the absence of any guidance the following may be assumed :

► A manufacturing company may disclose broad heads for consumption of raw material only and not for purchases of raw material

► Manufacturing companies may also be involved in insignificant volume of trading. “Good purchased” in case of manufacturing companies would mean only traded goods.

► Broad heads for sales for a manufacturing or a trading company must also be disclosed. No clear requirement appears to be a drafting error.

► Broad heads for Work-in-Progress should be disclosed in terms of the same heads disclosed for Sale of Manufactured Goods.

► Broad heads of Inventory are not mandatory but, advisable to be disclosed.

Revised Schedule VI

Simplification of Disclosures

The following disclosure requirements have been removed/simplified :

Ø Disclosures relating to managerial remuneration and computation of net profits forcalculation of commission

Ø Quantitative information pertaining to Raw Materials consumed, Purchases of TradingGoods, Opening and Closing Inventory and Sale of Goods

Ø Information relating to licensed capacity, installed capacity and actual productionØ Information on investments purchased and sold during the yearØ Investments, sundry debtors and loans & advances pertaining to companies under the

same managementØ Commission, brokerage and non-trade discounts

Revised Schedule VI

Key changes to Statement of Profit and Loss (continued…)Disclosures – Practical issue► Whether certain disclosures no longer prescribed under Revised

Schedule VI such as disclosures regarding outstanding amounts and interest due to Micro, Small and Medium Enterprises can be avoided?

► Revised Schedule VI prescribes minimum disclosures► Disclosures required to be made in the financial statements by other applicable laws

and pronouncements by regulatory bodies will still have to be presented► Examples :

► Disclosures required by Micro Small and Medium Enterprises Development Act► Disclosures required under Clause 32 of the Listing Agreement► Disclosures required by ICAI Announcement on Derivatives and Unhedged Foreign

Currency Exposures► Disclosures required by ICAI Guidance Note on Employee Share Based Payments

Revised Schedule VI

Open Issues for Regulators

Revised Schedule VI


► The Balance Sheet format prescribed under Clause 41 of the Listing Agreement, which is on the lines of existing Schedule VI, will now be inconsistent with the Revised Schedule VI Balance Sheet format.

► Half Yearly Results► Clause 41(V)(h) prescribes a format for presentation of Balance Sheet items at the end of half-

year.► Though the clause specifically acknowledges that the format is drawn from Schedule VI it does

not allow automatic amendment in case of any change/revision in Schedule VI► Until new format is prescribed by SEBI, Companies will have to continue to present Half-Yearly

Balance Sheet in old format.► Annual Audited Results

► Clause 41(V)(h) does not refer to any format for annual audited balance sheet.► Two views seem possible Until Clause 41 is amended :► View 1 : Companies can use the format used for annual financial statements, i.e., as per the

revised Schedule VI► View 2 : Companies should use the same format as that used for half-yearly balance sheet.

► As per the exposure draft of guidance note on revised schedule VI, this should be in the format of revised schedule VI. SEBI should take immediate steps to align the formats with new Schedule VI

Revised Schedule VI


► The Balance Sheet and P&L format prescribed under SEBI ICDR Regulations will also now be inconsistent with Revised Schedule VI. How should companies deal with this issue?

► The formats of balance sheet and P&L account suggested under ICDR Regulations are clearly stated as “illustrative formats”

► Companies may use Revised Schedule VI format to present the required information for inclusion in offer document for all 5 years.

► Alternatively, use of the illustrative format cannot be totally ruled out since suggested by SEBI.

► Implementation of Revised Schedule VI format may pose practical challenges in arriving at Current /Non-Current Classification for BS items of the earlier 3 to 5 years

► SEBI should take immediate steps to resolve the matter e.g. one solution could be to allow the existing format to be used for presenting the earlier years figures when Revised Schedule VI was not in existence/announced

Revised Schedule VI

Thank You

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