The Ministry of Corporate Affairs (MCA) notified the amendments to Schedule III to the Companies Act, 2013 on 24th March, 2021. There are a few questions regarding the broader issue of applicability of the amendments. These are listed below and so are the responses thereto which are the personal views of the author.
The responses are provided with reference to Division II of Schedule III that applies to non-NBFC companies following Ind AS, but may mutatis mutandis apply to Division I (applicable to entities applying AS) and Division III (applicable to NBFC entities applying Ind AS) of Schedule III as well. The ICAI has issued an Exposure Draft (ED) for public comments on the Guidance Note on Schedule III. The discussions in this article are largely consistent with the ED.
Whether the amended Schedule III applies to consolidated financial statements (CFS), those that are prepared on an annual basis, or a complete set prepared for interim purpose?
Attention is drawn to the guidance available in the pre-amended Schedule III Guidance Note of the ICAI. Paragraph 12.1 of the pre-amended Schedule III Guidance Note states as follows: ‘However, due note has to be taken of the fact that the Schedule III itself states that the provisions of the Schedule are to be followed mutatis mutandis for a CFS. MCA has also clarified vide General Circular No. 39/2014 dated 14th October, 2014 that Schedule III to the Act read with the applicable Accounting Standards does not envisage that a company while preparing its CFS merely repeats the disclosures made by it under stand-alone accounts being consolidated. Accordingly, the company would need to give all disclosures relevant for CFS only.’
The Guidance Note further elaborates on what is to be included and what needs to be excluded in the CFS. However, those inclusions / exclusions are not based on clear and consistent principles. A somewhat similar position is also taken in the ED. However, those are subject to further discussions and may undergo a change in the final Guidance Note. Therefore, which additional Schedule III disclosures are to be included or excluded in the CFS will involve a lot of judgement and guesswork till such time as the ICAI publishes its Guidance Note on the amended Schedule III.
The author believes that since most of the incremental disclosures in the amended Schedule III are regulatory in nature and beyond the requirements of accounting standards, those should not be mandated to CFS which are prepared on an annual basis or a complete CFS set prepared for an interim purpose. Alternatively, the ICAI may consider the application of the principle of materiality, which should be applied by each entity, considering their facts and circumstances. The ICAI may only provide broad guidelines on how the materiality principle will apply, without being prescriptive.
In accordance with amended Schedule III an entity reclassifies lease liabilities presented as borrowings separately as lease liabilities, i.e., borrowings and lease liabilities are presented as separate sub-headings under financial liabilities. Should the entity present a third balance sheet in accordance with paragraph 40A of Ind AS 1, Presentation of Financial Statements?
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements if the retrospective application, retrospective restatement or the reclassification has a material effect on the information in the balance sheet at the beginning of the preceding period. If lease liabilities that were presented as borrowings, and under amended Schedule III, it is reclassified as current and non-current financial liabilities, the author does not believe that it is material enough that a third balance sheet would be required in such cases. Nonetheless, the author’s view is that the lease liabilities should be included in determining the debt-equity ratio which is required to be disclosed as per amended Schedule III. Since most of the other changes required under revised Schedule III are regulatory in nature and are additional information rather than reclassification, a third balance sheet may not be required.
In case a company has a non-31st March year-end, whether amended Schedule III shall apply to the 31st December, 2021 or the 30th September, 2021 year-end financial statements?
The MCA Notification that notifies the amendment to Schedule III states that ‘the Central Government makes the following further amendments in Schedule III with effect from 1st day of April, 2021.’ This creates confusion whether the amendments apply for the financial years beginning on or after 1st April, 2021 or the financial years that end after 1st April, 2021. The author’s view is that the amendments shall apply to financial statements relating to the financial year beginning on or after 1st April, 2021 for the following three reasons:
• Firstly, the amendments are made to align with CARO’s requirement and CARO 2020 is applicable for the financial year beginning on or after 1st April, 2021.
• Secondly, the amendments also align with the Companies (Accounts) Amendments Rules, 2021 which are applicable for the financial year commencing on or after 1st April, 2021. Consequently, amended Schedule III will not apply to the 31st December, 2021 or the 30th September, 2021 year-end financial statements.
• Lastly, going by recent experience, the regulators’ intent is to apply amendments on a prospective basis rather than on a retrospective basis.
Whether amended Schedule III applies to stand-alone interim financial statements that commence on or after 1st April, 2021?
The relevant paragraphs of Ind AS 34 Interim Financial Reporting are quoted below:
‘9. If an entity publishes a complete set of Financial Statements in its interim financial report, the form and content of those statements shall conform to the requirements of Ind AS 1 for a complete set of Financial Statements.
10. If an entity publishes a set of condensed Financial Statements in its interim financial report, those condensed statements shall include, at a minimum, each of the headings and sub-totals 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 shall be included if their omission would make the condensed interim Financial Statements misleading.’
Based on the above, if a complete set of stand-alone interim financial statements is presented, all amended Schedule III disclosures are required, including their comparatives. When condensed financial statements are presented as interim financial statements, critical Accounting Standard disclosures that were not included in the last set of published financial statements are required to be provided. Distinction needs to be made between regulatory disclosures required as per Schedule III and those required by Accounting Standards. Therefore, considering the amended disclosures under Schedule III are other than accounting standard disclosures, these are not required to be included in condensed interim financial statements; but may be provided voluntarily.
With regard to quarterly and half-yearly SEBI results – SEBI LODR requires Schedule III format to be used for SEBI results. Schedule III amendments make no changes in the format of Statement of Profit and Loss. However, there are a few new line items inserted, or the grouping is changed in the format of the Balance Sheet, for example, lease liabilities to be shown as current and non-current financial liabilities on the face of the balance sheet, security deposits given to be shown under other financial assets instead of loans, current maturities of long-term borrowings to be shown separately within borrowings under the heading current liabilities instead of other financial liabilities, etc. These format changes need to be made in half-yearly results since the SEBI format is aligned to the Schedule III format. Comparative figures also need to be re-grouped / re-classified, wherever required, with appropriate notes.
Whether comparative numbers are required for interim or annual financial statements for periods / year commencing on or after 1st April, 2021 and contain the amended Schedule III disclosures in the current year / period for the first time?
Schedule III, Ind AS 34 Interim Financial Reporting, Conceptual framework for Financial Reporting under Ind AS and Ind AS 1 Presentation of Financial Statements, require comparative numbers to be presented. Comparative numbers are required for stand-alone financial statements, CFS, full set of interim financial statement and condensed interim financial statement.
