REVISED SCHEDULE VI DISCLOSURE REQUIREMENTS: AN OVERVIEW

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1 REVISED SCHEDULE VI DISCLOSURE REQUIREMENTS: AN OVERVIEW Ministry of Corporate Affairs [MCA], Government of India, has on 3 March 2011, hosted on its website, the revised Schedule VI to the Companies Act, 1956 which deals with the Form of Balance sheet, Profit & Loss Account and disclosures to be made therein. 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 no connection with the converged Indian Accounting Standards. The revised Schedule VI will apply to all the companies uniformly for the financial statements to be prepared for the financial year and onwards. The official notification amending the Schedule VI to the Companies Act, 1956 is still awaited. The revised Schedule VI introduces many new concepts and disclosure requirements and also does away with several statutory disclosure requirements. The practical application of the revised schedule throws up a number of questions, the answers to which may not be straight-forward or need additional guidance from the MCA or the Institute of Chartered Accountants of India (ICAI). In this document, we set out an overview of the key changes and implications, critical issues and our perspectives thereon. We expect that the revised Schedule VI will be followed by the publication of detailed guidance by the MCA / ICAI. Since these questions can only be conclusively answered by the MCA/ ICAI, companies are advised not to treat our perspectives as authoritative guidance. On critical issues, they should consult the MCA/ICAI or take legal/ professional advice. An overview of revised Schedule VI Overall approach 1. The revised schedule VI clarifies that its requirements for disclosure on the face of 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 financial statements when such presentation is relevant for understanding of the company s financial position or performance. 2. It clarifies that disclosures required under accounting standards and in the Act are in addition to the disclosures set-out in the revised Schedule VI. A company will make such additional disclosures in the notes to accounts or by way of an additional statement unless these are required to be disclosed on the face of the financial statements. 3. The revised Schedule VI requires that if compliance with the requirements of the Act and/ or accounting standards requires a change in the treatment or disclosure in the financial statements, the requirements of the Act and/ or accounting standards will prevail over the Schedule VI. This is a significant change in the approach since earlier the requirements of Schedule VI were prevailing over accounting standards.

2 4. In the existing Schedule VI, break-up of amounts disclosed in main balance sheet and profit and loss (P&L) 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 will now be provided in the notes to accounts. This is in line with the practice under IFRS. Further, all information relating to a particular item of balance sheet and P&L account disclosed in the notes is required to be cross-referred to that item on the face of balance sheet/ P&L account. 5. Except in the case of the first financial statements laid before the company (after its incorporation), the corresponding amounts for the immediately preceding reporting period for all items shown in the financial statements including notes will also be given. 6. For the purposes of revised Schedule VI, the terms used therein will carry the meaning as defined by the applicable accounting standards. For example, the terms such as associate and related parties will have the same meaning as defined under the Companies Accounting Standards Rules. 7. In preparing the financial statements including the notes to accounts, a balance will 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. 8. Though the revised Schedule is applicable to companies applying Indian GAAP certain concepts such as current/ non-current classification appear to be adopted from Ind-AS/IFRS. This will require companies following Indian GAAP to familiarize themselves with Ind-AS and IFRS, though these standards may never be adopted or adopted much later by these companies. 9. There is an explicit requirement to use the same unit of measurement uniformly throughout the financial statements. Moreover, rounding off rules have been changed to eliminate the option of presenting figures in terms of hundreds and thousands if turnover exceeds `100 crores. Key changes related to balance sheet 10. The revised Schedule VI prescribes a vertical format for presentation of balance sheet. Thus, a company will not have option to use horizontal format for presentation of financial statements. 11. Current and non-current classification has been introduced for presentation of assets and liabilities in the balance sheet which is more in line with the concepts used under Ind-AS/ IFRS. The application of this classification will require assets and liabilities to be broken 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. 12. Number of shares held by each shareholder holding more than 5% shares now needs to be disclosed. In the absence of any specific indication of the date of holding, we believe that such information will be based on shares held as on the balance sheet date.

3 13. Details pertaining to aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will be disclosed only if such an event has occurred during a period of 5 years immediately preceding the balance sheet date. 14. Any debit balance in P&L account will be disclosed under the head Reserves and surplus. Earlier, any P&L debit balance carried forward after deduction from uncommitted reserves was required to be shown on the asset side of the balance sheet. 15. Specific disclosures are prescribed for the 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. 16. 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, which were earlier included in the sundry debtors, can no longer be included in the trade receivables. 17. The earlier Schedule VI required separate presentation of debtors (i) outstanding for a period exceeding 6 months (i.e., based on billing date) and (ii) other debtors, in a Schedule to the balance sheet. However, the revised Schedule VI requires separate disclosure of trade receivables outstanding for a period exceeding 6 months from the date they became due for payment. 18. Capital advances are now required to be presented separately under the head Loans & advances rather than as part of capital work-in-progress or fixed assets. 19. Tangible assets under lease are required to be separately specified under each class of asset. In the absence of any further clarification, it appears that 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. Further, leasehold improvements should continue to be shown as a separate asset class. 20. In the earlier Schedule VI, details of capital commitments were required to be disclosed. Under the revised Schedule VI, all commitments need to be disclosed. 21. The revised Schedule VI requires all defaults in repayment of loans and interest to be specified in each case. Earlier, such disclosure was required only in the Companies Auditor s Report Order (CARO) section of the audit report and only for defaults in repayment of dues to a financial institution, bank and debenture holders. 22. The revised Schedule VI introduces a number of other additional disclosures. Key examples are:

4 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 loans and period c. In each class of investment, details regarding names of the bodies corporate, indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities, in whom investments have been made and the nature and extent of the investment made in each such body corporate (showing separately partly-paid investments) d. Regarding investments in the capital of partnership firms, the names of the firms with the names of all their partners, total capital and the shares of each partner e. Aggregate provision for diminution in value of investments (separately for current and long-term investments) f. Stock-in-trade held for trading purposes, separately from other finished goods Key changes related to P&L account 23. Unlike the earlier version, the revised Schedule VI lays down a format for the presentation of P&L account. This format of P&L account does not list any appropriation item on its face. Further, the revised Schedule VI format prescribes below the line adjustments to be presented under Reserves and Surplus in the balance sheet. The classification of expenses is based on their nature and not on their function. 24. In addition to specific disclosures prescribed in the P&L account, any item of income or expense which exceeds 1% of the revenue from operations or `100,000, whichever is higher, needs to be disclosed separately. 25. The existing 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 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 by the balance sheet date. 26. 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. 27. Net exchange gain/loss on foreign currency borrowings to the extent considered as an adjustment to interest cost needs to be disclosed separately as a finance cost. 28. Break-up in terms of quantitative disclosures for significant items of P&L account such as raw material consumption, stocks, purchases and sales have been simplified and replaced with

5 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. Simplification of disclosures 29. 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. Commission, brokerage and non-trade discounts (also refer point no. 24) However, there are certain disclosures such as value of imports calculated on CIF basis and expenditure in foreign currency etc. that are still continuing in the revised Schedule VI