ACCOUNTING AND AUDITING UPDATE

Transcription

1 ACCOUNTING AND AUDITING UPDATE This February heading 2012 style is set in Univers bold 27.5pt on 30pt Revised Schedule VI This paragraph style is set at 12pt with 16pt leading and 8pt space after. Also in this issue: Secondary headline number one Description written here Secondary headline number one Description written here Secondary headline number one Description written here

2 1 Accounting and Auditing Update - February 2012

3 Accounting and Auditing Update - February Editorial It is with immense pleasure we bring forth the February 2012 edition of the Accounting and Auditing Update. Schedule VI to the Companies Act, 1956 (Act), which, prescribes the format for presentation of Balance Sheet and Statement of Profit and Loss by companies was introduced in 1960 and is almost as old as the Act itself. It is inevitable that regulators in India have felt the imperative need to marry the accounting advancements witnessed over the last two or three decades with that of the manner in which the financial information is presented. Further, some of the presentation and disclosure requirements as set out in the pre-revised Schedule VI appear to have become outdated and do not appear to synchronise with the objective of a fair presentation of financial information. Although from time to time, the Central Government had amended Schedule VI, some of the disclosures required by that Schedule such as licensed capacity, CIF value of imports, etc. are quite irrelevant from the perspective of today s investor. Furthermore, the current version of Schedule VI does not require a company to distinguish current assets from non-current assets and current liabilities from their non-current counterparts. For example, a security deposit which is likely to be refunded after 10 years from the time of origination is likely to be classified as Loans and Advances and embedded in the larger Current Assets, Loans and Advances category which could potentially mislead a reader into thinking that all Loans and Advances are current assets. Some of these limitations appear to have persuaded MCA s move to go ahead with the implementation of the revised Schedule VI for periods commencing on or after 1 April 2011 without waiting for IFRS convergence in India. Whilst the existing Schedule VI does not require companies to classify their assets and liabilities into current and non-current, the revised Schedule VI does so in order to facilitate a fair portrayal of the financial and liquidity position of a company to the readers of the financial statements. The revised Schedule VI, among other things, has also prescribed a format for Statement of Profit and Loss mandating classification of expenses by their nature as opposed to by function and added a host of incremental disclosures. In this publication, apart from discussing the specific implementation issues surrounding the changes brought out by the revised Schedule VI, we have also attempted to provide a sector specific impact analysis for few industries. We hope you find this publication insightful. We would look forward to receiving your feedback on what you would like us to cover in our future publications at aaupdate@in.kpmg.com Narayanan Balakrishnan Partner KPMG in India

4 3 Accounting and Auditing Update - February 2012 Revised Schedule VI Catching up with global trends Overview The Ministry of Corporate Affairs (MCA) has issued revised Schedule VI which lays down a new format for preparation and presentation of financial statements by Indian companies for financial years commencing on or after 1 April The pre-revised Schedule VI had been in existence for almost five decades without any major structural overhaul. In view of the drastic changes during this long period in economic philosophy and environment coupled with advancements in accounting principles and in global practices relating to corporate financial reporting, a major overhaul of the Schedule was overdue. In this context, introduction of the revised Schedule is indeed welcome. The revised Schedule VI introduces some significant conceptual changes such as current/non-current distinction, primacy to the requirements of the accounting standards, etc. While the revised Schedule does not adopt the international standard on disclosures in financial statements fully, it brings corporate disclosures closer to international practices. Overall the attempt is largely successful in modernising and simplifying the Schedule and making it more relevant to the present needs. Some of the significant aspects of the revised Schedule include: The revised Schedule to apply to all companies following Indian GAAP until such companies are required to follow International Financial Reporting Standards (IFRS) converged Indian accounting standards (Ind AS) Accounting standards and requirements of the Companies Act, 1956 (Act) to override the requirements of the revised Schedule, wherever the two are inconsistent Information to be mandatorily presented on the face of financial statements limited to only broad and significant items details by way of notes Part IV of the pre-revised Schedule (containing balance sheet abstract and general business profile) dispensed with 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 Disclosure requirements of various accounting standards also need to be complied with.

5 Accounting and Auditing Update - February Balance sheet Only vertical form of balance sheet is allowed with significant changes vis-à-vis the structure of pre-revised Schedule VI Shareholders funds to be shown after deduction of debit balance of statement of profit and loss. Reserves and surplus and shareholders funds (i.e., aggregate of Share Capital and Reserves and Surplus) could thus be negative figures. Miscellaneous expenditure can no longer be shown as a separate broad heading under Assets. It would be required to be reclassified depending on the nature of each such item. All assets and liabilities to be classified into current and non-current. This provides useful information by distinguishing assets/liabilities continuously circulating as working capital or expected to be settled/realised within 12 months from the balance sheet date from those used in long-term operations. Basic criteria for classifying an item (asset or liability) as current are: is the item a constituent of the normal operating cycle, or is the item expected to be realised/settled within 12 months of the reporting date Current/non-current distinction will have major impact on classification of accounting information and account heads. Hence, changes would be required in accounting systems and procedures. New and significant disclosures required regarding ownership of the company including all shareholdings above five percent of any class of shares. Share options outstanding account recognised as a part of reserves and surplus. Detailed disclosures required regarding defaults on borrowings. All liabilities to be classified into current and non-current on the basis of the same criteria of distinction as in the case of assets. Non-current liabilities include long-term borrowings, long-term maturities of finance lease obligations, longterm trade payables and long-term provisions. Current liabilities include current maturities of long-term debt and of finance lease obligations, short-term borrowings, all borrowings repayable on demand, unpaid matured deposits/debentures, and short-term provisions. Cash and cash equivalents to be disclosed separately. Contingent liabilities distinguished from commitments. Disclosure of all material and relevant commitments required (instead of only capital commitments as per the pre-revised Schedule). Statement of profit and loss Format of statement of profit and loss prescribed classification of expenses by nature. Various computations relating to profits (losses) to be shown: Profit (loss) before exceptional and extraordinary items and tax Profit (loss) before extraordinary items and tax Profit (loss) before tax Profit (loss) from continuing operations Profit (loss) from discontinuing operations Profit (loss) for the period. Quantitative disclosures relating to turnover, raw materials, purchases, etc. dispensed with. Other significant disclosures which have been dispensed with include capacity and actual production, calculation of managerial remuneration. The implications of the revised Schedule are varied and are expected to present a large number of implementation issues. Companies will need to plan and implement modifications in accounting systems and procedures to enable reporting under the revised Schedule. Based on our analysis of the revised Schedule, this note seeks to provide an overall understanding of the new requirements while also discussing some of the implications that may need to be considered by preparers of financial statements. Date of application As per the MCA s notification dated 30 March 2011, the revised Schedule is effective for financial years commencing on or after 1 April Thus, the pre-revised Schedule VI would be applicable to the financial statements for the year ended 31 December In view of application of the revised Schedule for financial years beginning on or after 1 April 2011, immediate action will need to be taken to effect requisite changes in accounting systems and procedures. Intangible fixed assets to be disclosed separately. Investments no longer a broad head to be included under non-current and current assets categories; disclosures rationalised. Long-term loans and advances given not to be clubbed with current assets.

6 5 Accounting and Auditing Update - February 2012 Applicable to all companies The revised Schedule would apply to all Indian companies till they are required to follow IFRS-converged Indian Accounting Standards (Ind ASs). However, like its predecessor, the revised Schedule does not apply to banking or insurance companies. In case of companies engaged in the generation and supply of electricity, the revised Schedule VI may be followed by such companies till the time a format is prescribed under the relevant statute. Applicability to consolidated financial statements While the revised Schedule has been prescribed in the context of standalone financial statements prepared under the Act, it would apply equally to consolidated financial statements. This is due to the requirement of AS 21, Consolidated Financial Statements that consolidated financial statements should be presented, to the extent possible, in the same format as adopted for the parent s standalone financial statements. However, it may be noted that as per AS 21, certain information (e.g., CIF value of imports, foreign currency expenditure and earnings, etc.) disclosed in standalone financial statements of the subsidiary and/or the parent having no bearing on the true and fair view of the consolidated financial statements need not be given therein. Thus, the requirements of the revised Schedule will need a review to determine statutory information which need not be given in consolidated financial statements. companies but also ensure that there is no perception of noncompliance with the requirements of the revised Schedule. Applicability of general exemptions The notifications issued by MCA in February 2011 granting exemption from certain disclosure requirements of prerevised Schedule VI would not be applicable in the context of the revised Schedule. In any case many of the exempted disclosures are not required under the revised Schedule. Clause 41 and revised Schedule VI Listed companies are required to furnish financial information as per the requirements of Clause 41 of the Equity Listing Agreement for each quarter in the prescribed format. The presentation and disclosure requirements of Clause 41 override the relevant requirements of AS 25, Interim Financial Reporting. A statement of assets and liabilities is required to be included as a note to the half-yearly results under Clause 41. Though the format for 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 till Clause 41 is revised. This is because Clause 41(V) specifically requires that disclosure of balance sheet items in half-yearly results shall be in the format specified in Annexure IX drawn from Schedule VI of the Companies Act Adherence to the specified nomenclature The nomenclature specified in the revised Schedule VI should be followed as far as possible. This would not only ensure uniformity in presentation of financial statements by different KPMG, an an Indian Registered Partnership Partnership and a member and a firm member of the firm KPMG of the network KPMG of network independent of independent member firms member affiliated firms with affiliated KPMG with International KPMG International Cooperative Cooperative ( KPMG ( KPMG International ), International ), a Swiss a entity. Swiss All entity. rights All reserved. rights reserved.

7 Accounting and Auditing Update - February Revised Schedule VI and Interim Financial Statements as per AS 25 Paras 10 and 11 of AS 25, Interim Financial Reporting, state as below: 10. If an enterprise prepares and presents a complete set of financial statements in its interim financial report, the form and content of those statements should conform to the requirements as applicable to annual complete set of financial statements. 11. If an enterprise prepares and presents a set of condensed financial statements in its interim financial report, those condensed statements should include, at a minimum, each of the headings and sub-headings that were included in its most recent annual financial statements and the selected explanatory notes as required by this Standard. Additional line items or notes should be included if their omission would make the condensed interim financial statements misleading. Thus, if a listed company with financial year ending on 31 March 2012 prepares a set of complete interim financial statements under AS 25, these will have to be on the basis of revised Schedule VI. On the other hand, the way AS 25 is worded, a company preparing a set of condensed interim financial statements under AS 25 will have to prepare these as per pre-revised Schedule VI, even though its annual financial statements for the year ended 31 March 2012 will have to be as per revised Schedule VI. Such a company would therefore, need to have appropriate systems and processes in place to be able to comply with requirements of both, prerevised and revised Schedule VI in the first financial year in which revised Schedule VI applies. It may be clarified that the above does not apply to financial results prepared in accordance with Clause 41 of the Listing Agreement. Applicability of Schedule VI to Public Issues and Rights Issues The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (Regulations) specify the requirements for financial information for the purpose of public issues and rights issues. As regards public issues, the Regulations also contain an illustrative format for furnishing financial information which is largely based on pre-revised Schedule VI. For a rights issue, the Regulations require companies to furnish a statement of assets and liabilities as per Schedule VI of the Act It follows that the format of the applicable Schedule VI should be followed, e.g., revised Schedule VI for companies with the financial year commencing on or after 1 April 2011 a statement of profit or loss It shall be sufficient if this contains information relating to income and expenditure required to be disclosed as per Clause 41 of the Equity Listing Agreement. The format of aforesaid information is not in line with revised Schedule VI. To facilitate transition to the revised Schedule VI, MCA vide its circular dated 5 September 2011 has clarified that the presentation of financial statements for the limited purpose of Initial Public Offer (IPO)/Follow on Public Offer (FPO) during the financial year may be made as per the pre-revised Schedule VI. Considering that the illustrative format for public issues is based on pre-revised Schedule VI, in view of the above circular, the revision of Schedule VI does not have any significant impact for companies going for public issues during However, in case a company would like to follow the revised Schedule, it is advisable to take a clarification from SEBI whether the revised Schedule can be followed since the format given by the Regulations is only illustrative. It seems that suitable modifications would be required in the SEBI Regulations before all requirements therein are in consonance with revised Schedule VI.

8 7 Accounting and Auditing Update - February 2012 Structure of Revised Schedule The revised Schedule begins with general instructions that are applicable to both the balance sheet and the statement of profit and loss. The next section is titled Part I Form of Balance Sheet. This section contains (i) a format of balance sheet and (ii) general instructions for preparation of balance sheet. The format is in vertical form and thus companies would not be permitted to present their balance sheet in horizontal form. The last section is titled Part II Form of Statement of Profit and Loss. This section contains (i) a format of statement of profit and loss and (ii) general instructions for preparation of statement of profit and loss. Thus, unlike the present position, a format for profit and loss statement has been prescribed. The prescribed format classifies the various expenses by their nature. This is a departure from the international practice which also permits classification of expenses by their function (with additional information on the nature of expenses) e.g., cost of sales, distribution costs, administrative expenses, etc. No format of cash flow statement has been prescribed in the revised Schedule. This is perhaps on account of the fact that Section 211 under which Schedule VI is formulated does not contain any reference to cash flow statement. However, AS 3, Cash Flow Statements, as notified will have to be complied with by companies to which it applies. AS 3 itself provides illustrative formats of cash flow statement. The revised Schedule makes it clear that the terms used therein have meanings assigned to them in respective accounting standards. Consequently (and unlike the prerevised Schedule), the revised Schedule does not contain definitions of provision, reserve, capital reserve, revenue reserve, etc. The requirement of giving balance sheet abstract and general business profile, contained in Part IV of pre-revised Schedule VI, is also not carried forward in the revised Schedule. General instructions The general instructions applicable to both balance sheet and profit and loss account deal with such matters as primacy of accounting standards, rounding off, corresponding figures, etc. Primacy of accounting standards/other requirements of the Act It is specifically provided that accounting standards and other requirements of the Act are primary and would be required to be complied with. Where compliance with accounting standards or other requirements of the Act necessitates any change in the treatment or disclosure including addition, amendment, substitution or deletion of any head/subhead etc., the same should be made and the requirements of the revised Schedule VI shall stand modified accordingly. It is also specifically mentioned that the revised Schedule sets out the minimum requirements for disclosure on the face of balance sheet and statement of profit and loss and in the notes, and that line items, sub-line items and sub-totals should be presented as an addition or substitution on the face of the financial statements when such presentation is relevant to an understanding of the company s financial position or performance or to cater to industry/sector-specific disclosure requirements or when required for compliance with the requirements of the Act or accounting standards. For example, profit before interest, tax, depreciation and amortisation is considered an important measure of financial performance of a company in certain specific sectors. Hence, the company may choose to present it as an additional line item on the face of the statement of profit and loss. Similarly a company may present additional sub-totals of current assets and current liabilities on the face of balance sheet for highlighting the specific features of its liquidity position. The disclosures specified in the accounting standards which are in addition to those of the revised Schedule, should be made in the notes to accounts or by way of additional statement unless required to be disclosed on the face of the financial statements. For example, AS 24, Discontinuing Operations, requires disclosure of the amount of pre-tax gain or loss recognised on disposal of assets or settlement of liabilities attributable to the discontinuing operation on the face of the statement of profit and loss. This requirement will have to be complied with, even though the format of statement of profit and loss prescribed in revised Schedule VI does not contain a requirement to this effect. Similarly, other disclosures required by the Act should also be made. For example, Section 293A of the Act requires separate disclosure of donations made to political parties or for political purposes. Such disclosures will generally be made in the notes. In our view, the above approach should also be applied in respect of disclosures required by regulatory bodies such as SEBI listing agreement (e.g., clause 32), ICAI s guidance notes (e.g., Guidance Note on Accounting for Employee Share-based Payments), ICAI s announcements, the Micro, Small and Medium Enterprises Development Act, 2006, etc.

9 Accounting and and Auditing Update - February - January Corresponding amounts The revised Schedule (like the present one) requires previous year figures to be given along with the current year figures except in the case of the first financial statements laid before a company after its incorporation. It is clarified that corresponding amounts would be required in respect of notes to accounts also. A significant issue is whether corresponding figures as per the revised Schedule would be required to be presented in the first year of application of the revised Schedule. Considering that the requirement to present previous year figures is an integral part of the revised Schedule, it can be strongly argued that compliance with the revised Schedule requires compliance with the said requirement also. On an overall comparison of the revised Schedule with the pre-revised one, it seems that though additional work would be involved in re-working the previous year figures as per the revised schedule (e.g., to segregate the current and non-current portions of borrowings, investments, loans and advances, etc), it would generally be practicable to do so. The fact of reclassification/regrouping of previous year figures to conform to the requirements of the revised Schedule would need to be brought out. To the extent that the corresponding figures are reworked figures and do not exactly match those presented in the previous year s financial statements, the auditors would need to examine the reworked figures, even though generally, the audit report does not specifically refer to previous year s figures. Where, in the specific circumstances of a case, some corresponding figures are not available even after due efforts, the fact should be mentioned at appropriate place in the financial statements. However, such cases should be rare. Rounding off The provisions relating to rounding off have undergone some change. As per the revised provisions, companies with turnover of less than INR 100 crore are also permitted to round off the figures in the financial statements to the nearest lakhs or millions, or decimals thereof apart from to the nearest hundreds or thousands or decimals thereof. It is obvious that a company having a very low turnover (say INR 5 crores) shall select a proper unit (say hundreds or thousands) so that the financial statements give a true and fair view of the significance of detailed items. Companies with turnover of INR 100 crores or more may round off to the nearest lakhs, millions or crores, or decimals thereof. In the pre-revised Schedule VI, companies with turnover between INR 100 crores to INR 500 crores were permitted to round off the figures to the nearest hundreds or thousands or lakhs or millions or decimals thereof the choice of rounding off to nearest hundreds or thousands is not available under the revised Schedule. It is specifically provided that once a unit of measurement is chosen, it should be used uniformly in the financial statements including notes to accounts. Notes to Accounts Notes to accounts will include narrative descriptions or disaggregation of items recognised in the financial statements and information about items that do not qualify for recognition in the statements (e.g., contingent liabilities, commitments, revenue recognition postponed due to uncertainty). Striking a balance between important information and excessive information The general instructions also lay down the requirement that in preparing financial statements including notes to accounts, a balance shall be maintained between providing excessive details that may not assist users of financial statements and not providing important information as a result of too much aggregation. Compliance with this requirement is a matter of judgement based on facts and circumstances of a case. It must be ensured that important information is not obscured by including it among a large amount of insignificant details or in a way that obscures important differences between individual transactions or associated risks.

10 9 Accounting and Auditing Update - February 2012 Form of balance sheet As per the revised Schedule, the balance sheet can be prepared only in vertical form. Horizontal (or T-form) of balance sheet has been done away with. There are, however, significant broad-level changes in the new vertical form as compared with the vertical form in the pre-revised Schedule. The vertical form in the pre-revised Schedule purported to show the aggregate of sources of funds as well as application of funds. However, the way the total sources of funds and applications thereof were determined under the pre-revised Schedule VI gave rise to a number of conceptual anomalies. For example, the current liabilities and provisions (without making the distinction of current/non-current) were deducted from the aggregate of current assets and loans and advances. Similarly, the net debit balance of profit and loss account was not adjusted against reserves. The new vertical form removes these anomalies and is conceptually more sound. It shows total assets as well as total equity and liabilities. Total equity or shareholders funds are correctly disclosed after deduction of net debit balance of statement of profit and loss. All liabilities are divided into current and non-current. Similarly, all assets are also classified into current and non-current categories. There is no separate broad heading of miscellaneous expenditure (or debit balance of the profit and loss account ). The above raises the question of disclosure of miscellaneous expenditure to the extent not written off or adjusted. Obviously if an item under this head is an intangible asset it would be so classified. Other items e.g., discount allowed on issue of debentures or debenture issue expenses would need to be reclassified. Current/non-current distinction A significant change is the requirement to classify all assets and liabilities into current and non-current categories. What constitutes a current asset or a current liability is explicitly defined (the definitions are essentially the same as in international standards and had to be given in the Schedule since they are not presently contained in any notified Indian Standard). This aspect is discussed in detail in the next section. Assets Assets are divided into: Non-current assets (with further sub-classification on the face) Current assets (with further sub-classification on the face). Broad headings of balance sheet The broad headings under which balance sheet is divided are equity and liabilities and assets. Equity and liabilities Equity and liabilities are divided into: Shareholders funds (with further sub-classification on the face) Share application money pending allotment Non-current liabilities (with further sub-classification on the face) Current liabilities (with further sub-classification on the face).

11 Accounting and Auditing Update - February Issues relating to current/non-current classification A major conceptual advance in the revised Schedule is introduction of current/non-current distinction in the balance sheet. Separate classification of current and non-current assets and liabilities on the face of the balance sheet provides useful information by distinguishing the assets/ liabilities that are continuously circulating as working capital or expected to be settled/realised within 12 months from the balance sheet date from those used in long-term operations. It may be emphasised that current/non-current presentation is particularly useful in the case of entities which supply goods or services within a clearly identifiable operating cycle. It may also be mentioned that in the case of entities like financial institutions, a presentation of assets and liabilities in increasing or decreasing order of liquidity provides more relevant information. However, the revised Schedule VI does not give this option. Current asset The revised Schedule states that an asset shall be classified as current when it satisfies any of the following criteria: a. it is expected to be realised in, or is intended for sale or consumption in, the company s normal operating cycle b. it is held primarily for the purpose of being traded c. it is expected to be realised within 12 months after the reporting date or d. it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date. All other assets shall be classified as non-current. Current assets include assets such as inventories and trade receivables that are sold, consumed or realised as part of the normal operating cycle even when they are not expected to be realised within 12 months after the reporting period. Current assets also include assets held primarily for the purpose of trading and the current portion of non-current financial assets. Current liability As per the revised Schedule, a liability shall be classified as current when it satisfies any of the following criteria: a. it is expected to be settled in the company s normal operating cycle b. it is held primarily for the purpose of being traded c. it is due to be settled within 12 months after the reporting date d. the company does not have an unconditional right to defer settlement of the liability for at least 12 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. All other liabilities shall be classified as non-current. Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity s normal operating cycle. Such operating items are current liabilities even if they are due to be settled more than 12 months after the reporting period. Liabilities that are not settled as part of the normal operating cycle, but are due for settlement within 12 months after the reporting period or are held primarily for the purpose of trading are also current liabilities. Thus, current liabilities also include current portion of non-current financial liabilities. Operating cycle An operating cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months. A company s normal operating cycle may be longer than 12 months e.g., real estate companies, ship-building companies, etc. Where a company constructs office buildings for third parties and the construction normally takes two to three years to complete, the company s construction work in progress would be classified as a current asset because construction over two to three years is part of the company s normal operating cycle. The same normal operating cycle applies to the classification of both assets and liabilities. If a company has different operating cycles for different parts of the business (e.g., retail and construction), then the classification of an asset as current is based on the normal operating cycle that is relevant to that particular asset. The company would not identify a single operating cycle. If a liability is part of the working capital used in the entity s normal operating cycle, then it is classified as current even if it is due to be settled more than 12 months after the reporting date. For example, an entity develops software for third parties that takes two years to complete and receives payment for this service upfront.

12 11 Accounting and Auditing Update - February 2012 Illustrations A liability that is payable on demand at the reporting date is a current liability because the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting date. A term loan from a bank is usually subject to certain debt covenants. A breach of a minor covenant such as filing of information in the last quarter may result in the bank legally having a right to recall the loan. However, the bank has not demanded repayment till the time financial statements are approved. Further, based on past experience, the management s assessment is that since, the default is minor, the bank will not recall the loan. In such cases, the loan will continue to be classified as non-current. Though it can be argued that the company does not have unconditional right to defer the repayment, it needs to be noted that in the Indian context, the stipulation of the loan becoming repayable on demand on breach of a covenant is generally added in the terms and conditions only as a matter of abundant caution and banks generally do not demand repayment of term loans on such minor defaults of debt covenants. Loan which is repayable on demand from day one (e.g., normal bank overdraft) would be classified as current even if the bank does not demand repayment at any time. Long-term employee benefits within the meaning of AS 15, Employee Benefits, should be accounted for as such in their entirety. However, an entity should distinguish between current and non-current portions of obligations arising from long-term employee benefits if it does not have the ability to defer payment beyond 12 months from the reporting date. For example, an employee is eligible to receive an additional five weeks leave after providing 10 years of continuous service to an employer; if the additional leave is not taken during employment, then it will be paid upon termination of employment/ resignation. The additional leave is a long-term employee benefit even after the benefit becomes unconditional (i.e., after the employee provides 10 years of continuous service). However, after the end of year nine, the entity no longer has the ability to defer settlement of the obligation beyond 12 months from the reporting date, and therefore, it can be argued that it should be presented as current in the balance sheet. The actuaries should be requested to provide the amount of current & non-current portions of such a liability. Provisions (or portions thereof) have also to be classified as non-current and current. An advance along with an order for supply of merchandise in which the entity trades, with supply to be made within six months from the reporting date, would be a current liability. A trade receivable with a stated and normal credit term of three months shall be classified as non-current if it is not expected to be realised within 12 months from the reporting date. Debentures issued by an entity whose current accounting year ends on 31 March 20X1 are due to mature on 30 November 20X1. As per the terms of issue, upon maturity, the debentureholders have an option to either redeem the debentures in cash or convert them into a fixed number of equity shares of the company. The share price of the company as at 31 March 20X1 as well as around the date of finalisation of the accounts makes it highly probable that debentureholders will opt for conversion rather than cash redemption. Since the option of conversion or cash redemption is with the debentureholders, not with the company, the company does not have an unconditional right to defer settlement of the debentures for at least 12 months from 31 March 20X1. Hence, the debentures should be classified as current. A manufacturing company with a normal operating cycle of 18 months gives a loan to a sister concern which is facing liquidity problem. The loan is repayable 15 months after the reporting date. Giving of such loans is not a part of normal operating cycle of the company. Further, the loan is not held for the purpose of being traded, nor is it cash or cash equivalent. The loan should be classified as non-current. Shareholders funds These are sub-classified as follows on the face of the balance sheet: Share capital Reserves and surplus Money received against share warrants. Share capital Disclosures relating to share capital (to be given in the notes) are more detailed than those in the pre-revised Schedule. The following aspects are particularly noteworthy.

13 Accounting and Auditing Update - February The revised Schedule states that different classes of preference share capital to be treated separately. Thus, if a company has issued, say, 8 percent optionally convertible preference shares and 11 percent redeemable preference shares, these would be disclosed as two separate classes of shares for purposes of the Schedule. for each class of shares, disclosure is required, inter alia, of: a. the number and amount of shares authorised b. the number of shares issued, subscribed and fully paid, and subscribed but not fully paid c. par value per share d. a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period. Unlike the pre-revised Schedule, there is no requirement to disclose the amount called up per share. Consequently, the requirement of pre-revised Schedule to present calls unpaid as a deduction for called up capital is also not carried forward in the revised Schedule. Though there is no requirement to disclose the amount per share called, if shares are not fully called-up, it would be appropriate to state the amount per share called up. Also, in the revised Schedule, calls unpaid are required to be disclosed (as a note), stating separately the aggregate value of calls unpaid by directors and officers of the company. The terms director and officer should be interpreted based on the definitions in the Act. As per Section 92 of the Act, a company, if so authorised by its Articles, may accept calls in advance from shareholders. The shareholder who has paid the money in advance is not a creditor for the amount so paid as advance, since it cannot be demanded for repayment (unless Articles so provide). The amount of calls paid in advance does not form part of the paid-up capital. There can be a view that calls in advance are akin to share application money pending allotment (i.e., not due for refund) and should therefore, be so disclosed. However, as per a circular of the Department of Company Affairs, it is better to show calls in advance under Current Liabilities and Provisions (Letter No. 8/16(1)/61-PR, dated ). Thus, under the revised Schedule, calls in advance should be disclosed under Other Current Liabilities. The amount of interest, if any, on such advance should also be disclosed as a liability. For each class of shares, a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period is required. This seems to be a response to the malpractice of issuing a larger number of shares than represented by the amount of paid up capital as disclosed in the balance sheet. In order to make the disclosure more relevant to the understanding of share capital, the reconciliation should also be given for the amount of each class of share capital. Keeping in view the requirement to give corresponding figures, the reconciliation should be given for the previous year as well. The rights, preferences and restrictions attaching to each class of shares, including restrictions on the distribution of dividends and the repayment of capital have to be disclosed. Disclosure is required of shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by subsidiaries or associates of the holding company or the ultimate holding company in aggregate. It seems that the requirement is aimed at bringing clarity regarding the identity of ultimate owners of the company. Reference should be made to the relevant accounting standards (AS 21, Consolidated Financial Statements and AS 18, Related Party Disclosures) for the definitions of the terms subsidiary, holding company and associate. In view of these definitions, the aforementioned disclosure would cover the shares held by the entire chain of holding companies, from immediate holding company to ultimate holding company, and associates of these companies as well as those held by fellow subsidiaries. However while shares (equity as well as preference) held by subsidiaries and associates of the holding company or ultimate holding company are covered, shares held by a joint venture of the holding company or ultimate holding company are not required to be included. Similarly it seems that shares held by associates and joint ventures of fellow subsidiaries are not required to be disclosed. The pre-revised Schedule required disclosure of the number of shares held by the holding company as well as by the ultimate holding company and its subsidiaries. The revised Schedule adds associates to this list.

14 13 Accounting and Auditing Update - February 2012 Disclosure is required of shares in the company held by each shareholder holding more than 5 percent shares of each class, specifying the number of shares held. The objective again seems to be to provide clarity regarding the owners of the company. The revised Schedule does not prescribe any particular date for applying the above parameter i.e., whether the limit of five percent should be with reference to any time during the year or as at the reporting date. In the absence of clarity, the relevant percentage may be computed with reference to the position as at the end of the financial year. For example, if during the year, any shareholder held more than five percent equity shares but does not hold as much at the balance sheet date, disclosure need not be made. It may be reiterated that the percentage should be computed separately for each class of shares outstanding within equity and preference shares. As with any other disclosure under the Schedule, information would be required for the previous year also. The percentage holding of five percent needs to be computed individually at the level of a shareholder rather than aggregated for a group. Shares reserved for issue under options and contracts/ commitments for the sale of shares/disinvestment, including the terms and amounts, should be disclosed. The pre-revised Schedule VI required disclosure of particulars of only any option on un-issued share capital. Disclosure is required of the following for the period of five years immediately preceding the date of the balance sheet: - Aggregate number and class of shares allotted as fully paid up pursuant to contracts without payment being received in cash - Aggregate number and class of shares allotted as fully paid up by way of bonus shares - Aggregate number and class of shares bought back. The above disclosures are required for a five-year period including current year. Each of the above disclosures is required on an aggregate basis for the five-year period, and not for each individual year. The pre-revised Schedule VI also required disclosures mentioned in the first two bullet points above but did not limit the period of such disclosure to a period of 5 years. Further, it required disclosure of the source from which bonus shares were issued; this requirement is not carried forward in the revised Schedule. The following cases are not instances of shares allotted pursuant to contracts without payment being received in cash If the subscription amount payable by the allottee is adjusted against a bona fide debt payable in money at once by the company Conversion of loan into shares in the event of default in repayment. Terms of any securities issued that are convertible into equity/preference shares have to be disclosed along with the earliest date of conversion in descending order starting from the farthest such date. This requirement would apply irrespective of whether the convertibility into equity/preference shares is compulsory or at the option of either the company or the holder of the security. Preference shares that are convertible into equity shares would also be covered by the requirement. Where conversion is to take place (compulsorily or optionally) in tranches, all the dates of conversion have to be reported. Similar treatment would be required in case of ESOPs with graded vesting features. As regards convertible bonds or debentures, etc. reference may be made to the relevant note disclosed under borrowings, etc. rather than disclosing the same again under this clause. Forfeited shares (amount originally paid up) should be disclosed. Reserves and surplus In the notes, reserves and surplus are required to be classified as follows: a. Capital reserves b. Capital redemption reserve c. Securities premium reserve d. Debenture redemption reserve e. Revaluation reserve f. Share options outstanding account g. Other reserves (specifying the nature and purpose of each reserve and the amount in respect thereof). An example of such a reserve would be Foreign Currency Translation Reserve arising on translation of financial statements of a non-internal foreign operation h. Surplus i.e., balance in statement of profit and loss, disclosing allocations and appropriations such as dividend, bonus shares and transfer to/from reserves, etc.

15 Accounting and Auditing Update - February Additions and deductions since the last balance sheet are required to be shown under each of the specified items. The pre-revised Schedule VI required that in case there was debit balance in the profit and loss account, uncommitted reserves should first be deducted therefrom. The remaining balance, if any, after such deduction was required to be disclosed on the assets side of the balance sheet (or under application of funds in the vertical form of balance sheet). In the revised Schedule, it is explicitly provided that debit balance of profit and loss shall be shown as a negative figure under the head surplus under shareholders funds. Similarly, the balance of reserves and surplus, after adjusting negative balance of surplus, if any, shall be shown under the head reserves and surplus even if the resulting figure is in the negative. Share options outstanding account has been specifically recognised as a separate item under reserves and surplus. The pre-revised Schedule VI did not specify the manner of disclosure of share options outstanding account. However, ICAI s Guidance Note on Accounting for Employee Sharebased Payments requires the credit balance in the stock options outstanding account to be disclosed in the balance sheet under a separate heading, between share capital and reserves and surplus as part of the shareholders funds. Considering that the revised Schedule prescribes a specific requirement for disclosure of share options outstanding account and such a requirement can be superseded only by the requirement of an accounting standard (and not a guidance note), the requirement of the revised Schedule would need to be followed. It may be noted that the above would also impact the balance of reserves and surplus to be considered for compliance with various provisions of law - thus the balance of share options outstanding account would now be considered as part of the reserves to determine the applicability of Companies (Auditor s Report) Order, 2003 (CARO). Money received against share warrants Share warrants are issued to promoters and others in terms of the Guidelines for preferential issues of SEBI (Issue of Capital and Disclosure Requirements), Guidelines, 2009 in the case of listed companies and as per the Unlisted Public Companies (Preferential Allotment) Rules, 2003 in the case of unlisted public companies. The revised Schedule specifically requires money received against share warrants to be disclosed as a separate line item as part of shareholders funds this is on the basis that money received against share warrants represents amount which would ultimately form part of either the Share Capital or Reserves and Surplus. The pre-revised Schedule VI did not contain such a requirement.