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May 2012

Reality Check in Implementing the Revised Schedule VI

By Sriraman Parthasarathy
Chartered Accountant
Reading Time 16 mins

The Revised Schedule VI is applicable for the financial statements prepared for the periods commencing on or after 1 April, 2011. Since the year end for the majority of the Indian companies happens to be 31 March, the real impact of the changes brought out in the format of financial reporting in the form of Revised Schedule VI is going to be felt by the corporate world only now! By way of introducing the changes in the reporting format of the financial statements which was prevailing for several years and introducing new concepts and disclosure requirements, the Regulator has posed an onerous obligation on the finance professionals serving the Indian corporates to understand the nuances of the reporting requirements and extract the information required to ensure appropriate reporting and compliance. Though the Revised Schedule VI itself contains several explanatory provisions for the various new reporting requirements at a macro level, there are several matters which need to be micro managed and addressed carefully. The Institute of Chartered Accountants of India (ICAI) has issued a Guidance Note on the Revised Schedule VI providing implementation guidance on various aspects of the Revised Schedule VI. In view of the extent of the changes and the complications involved in applying the changed concepts in practical business scenarios, the first year of reporting under the Revised Schedule VI will throw several questions/ implementation issues. This article is aimed at discussing some of the implementation issues that may arise in presenting the financial statements as per the Revised Schedule VI and the suggested approach for dealing with the same.

Backbone of the Revised Schedule VI

  • The essence of the changes brought out by the Revised Schedule VI could be broadly summarised as under from a macro perspective:Changing the presentation of the financial statements in line with the expectations of the international investor community. ? Bringing in clarity/standardisation in the formats.
  • Making explicit that the requirements of the Companies Act, 1956 and the Accounting Standards would override the reporting requirements.
  • Introducing the robust concept of current and non-current classification of assets and liabilities. In the light of the above, several new disclosure requirements have been introduced and similarly some of the redundant disclosures have been omitted. It is quite obvious that the extent of additions is comparatively more than the disclosures which have been discarded. A careful analysis of the Revised Schedule VI would also highlight that the disclosures required now do not imply a simple representation of the figures but also a careful compilation of the various information with sound business knowledge. 

Implementation challenges

Various implementation challenges arising out of the Revised Schedule VI could be broadly summarised under the following categories:

  • Issues relating to Applicability
  • Issues relating to Presentation
  • Issues relating to Interpretation of Concepts/ Terms
  • Other Issues

The above classification is intended for analysing the practical problems logically so as to better understand the issue and deal with the same. Needless to add that the issues identified are not exhaustive but representative only.

Issues relating to applicability

The issues that arise with respect to the applicability of the Revised Schedule VI are discussed below:

Applicability for the consolidated financial statements

As regards the applicability of the Revised Schedule VI for the consolidated financial statements, the current requirement of AS-21 stipulates that the consolidated financial statements have to be prepared in accordance with the format closer to the stand-alone financial statements. In this regard, since the standalone financial statements are expected to be prepared as per the Revised Schedule VI, it is but natural to prepare the consolidated financial statements also in accordance with the Revised Schedule VI requirements. However, to the extent the information is not relevant for meeting the AS- 21 requirements, the same need not be included. It is worth noting that the information as stipulated under the Revised Schedule VI relating to various subsidiaries including foreign subsidiaries needs to be obtained well in advance to facilitate the preparation of the consolidated financial statements.

Applicability for tax purposes

If a company has a reporting period which is different from the tax financial year which is based on April-March, there is a need for preparing a set of separate financial statements for the financial year to meet the tax requirements. There is an issue regarding the format to be used for such reporting in view of the changes made in the reporting format for the statutory accounts prepared under the Companies Act, 1956. Since there is no format prescribed as per the provisions of the Income-tax Act, 1961, the financial statements specifically compiled for the tax financial year may be prepared using the Revised Schedule VI to the extent feasible.

Applicability for Clause 41 of the Listing Agreement As regards presentation of the information for meeting the Clause 41 requirements with respect to the statement of assets and liabilities, the SEBI, recently vide its Circular No. CIR/CFD/DIL/4/2012 dated 16 April 2012, has introduced a new format for reporting the results for listed companies which is in line with the Revised Schedule VI.

Issues relating to presentation

The various issues related to presentation aspects in the Revised Schedule VI could be summarised as under:

Data relating to previous year to be provided for comparative purposes

The Revised Schedule VI stipulates that the corresponding amounts have to be provided in the financial statements for the immediately preceding reporting period for all items shown in the financial statements including notes. This would result in representing the previous year financial data as per the Revised Schedule VI which has introduced several new concepts/requirements. With respect to certain requirements where the information is not readily available with the company, suitable disclosures have to be made in the financial statements explaining the same along with the reasons. Further, wherever the previous year audited numbers are represented in accordance with the Revised Schedule VI requirements, it would be better to provide a detailed reconciliation of the reclassifications carried out for making them comparable with the current year presentation.

Cash Flow Statement presentation

The Revised Schedule VI does not stipulate any format for the Cash Flow Statement similar to that for the Balance Sheet and the State of Profit and Loss. This would imply that the Cash Flow Statement needs to be prepared based on the guidance provided in AS-3. Since majority of the companies would present the cash flow statement using the indirect method involving the derived movements between two Balance Sheets, for the purpose of presenting the movements of the previous year, the Balance Sheet of the year preceding the previous year is the starting base. If the cash flow movements have to be presented using the terminologies/principles stipulated as per the Revised Schedule VI (such as Trade receivables, trade payables with current and non-current break-ups, etc.), the exercise of identification/ regrouping of the relevant Balance Sheet items in the year preceding the previous year also needs to be carried out using the Revised Schedule VI in addition to the representation required for the previous year Balance Sheet.

Since there is no stipulated format for the Cash flow statements in the Revised Schedule VI, the possibility of presenting the Cash flow statements as per the terminologies used in AS-3 which may not be in line with the Revised Schedule VI terminologies may also be considered wherein the movements can be continued to be provided as in the case of the past for the current year as well as for the previous year.

Cash and Cash Equivalents

As per the Revised Schedule VI, Cash and Cash Equivalents have to be presented separately on the face of the Balance Sheet. Further, the term Cash and Cash Equivalents have been defined to include balance with banks, cheques and drafts on hand, cash on hand and others. However, the term cash and cash equivalent has been defined differently under AS-3 as per which, cash comprises cash on hand and demand deposits with banks and cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and that are subject to an insignificant risk of changes in value. In addition, the deposits can be considered as Cash Equivalent only when the original maturity period for the same is less than 3 months. Since the Revised Schedule VI clearly indicates that in the case of conflict, an Accounting Standard would prevail over the Schedule, there is a need for using the definition as per the AS-3 for Cash and Cash Equivalents with suitable disclosures for the other component which would imply suitable modification of the terminologies used in the Balance Sheet for presenting the Cash and Bank Balances. This view has been confirmed by the Guidance Note on Revised Schedule VI issued by the ICAI as well.

Another view could also be taken that the term Cash and Cash Equivalents defined as per AS-3 is applicable only for Cash Flow Statement preparation purposes and not necessarily for other purposes, which would imply that the reporting requirements as the per Revised Schedule VI may be presented as intended in the Revised Schedule VI with a suitable disclosure relating to the break-up of the Cash and Cash Equivalents as per AS-3 (for cash flow tie up purposes) and other items.

Issues relating to interpretation of concepts/ terms

Identification of Current Element

The Balance Sheet format in the Revised Schedule VI has been designed on the basis of classified Balance Sheet approach and hence requires all assets and liabilities to be categorised into current and non- current. One has to remember that while doing the categorisation, the term current will also include the current portion of the long-term assets and liabilities. Further, categorisations of employee benefit-related liabilities, provisions as current and non-current would pose practical difficulties and the same need to be planned upfront.

As part of this exercise of categorisation of the Balance Sheet, while applying the concept of operating cycle, identification poses practical challenges. In general, the term operating cycle is considered as the time required between the acquisition of assets for processing and their realisation in cash or cash equivalents. If a company has different operating cycles for different parts of the business, then the classification of an asset as current is based on the normal operating cycle that is relevant to that particular asset. In cases where the normal operating cycle cannot be identified, it is assumed to have duration of 12 months.

Materiality threshold for disclosure

As per the Revised Schedule VI, separate disclosure is required on the face of the Statement of Profit and Loss for (i) cost of materials consumed, (ii) purchases of stock-in- trade and (iii) change in inventories of finished goods, work-in-progress and stock-in-trade. In this regard, details of consumption of raw materials, purchases and work-in- progress are required to be given under ‘broad heads’.

The term ‘broad heads’ has not been defined under the Revised Schedule and the same needs to be decided taking into account the concept of materiality and presentation of a true and fair view of the financial statements. Such identification of broad heads requires careful consideration and exercise of professional judgment. Considering the general practice, application of a threshold of 10% of total value of purchases of stock- in-trade, work-in-progress and consumption of raw materials can be considered as acceptable for determination of broad heads. However, nothing prevents a company in applying any other threshold as well, duly considering the concept of materiality and presentation of a true and fair view of the financial statements. This position has also been reiterated by the ICAI in its Guidance Note on Revised Schedule VI in Para 10.7.

Identification of Other Operating Revenue

Revised Schedule VI requires specific classification of revenue into sale of products, sale of services and other operating revenue. Interpretation of the term Other Operating Revenue as required under the Revised Schedule VI would pose challenges to companies. This has to be carefully identified and differentiated from Other Income. Whether a particular income constitutes ‘Other Operating Revenue’ or ‘Other Income’ is to be decided based on the facts of each case and a detailed understanding of the company’s activities.

The term Other Operating Revenue would include revenue arising from the company’s operating activities, i.e., either its principal or ancillary revenue-generating activities, but which is not revenue arising from the sale of products or rendering of services.

Goods in transit for individual inventory items
Revised Schedule VI stipulates that the items of inventories of goods in transit need to be disclosed separately for each and every item of the inventory such as raw material, work -in-progress, finished goods, etc. (if any).

Other issues

Impact on ratios calculated for banking arrangements

The definitions for the terms current assets and current liabilities as per the Revised Schedule VI could lead to redefining the current ratios computed by the management and submitted for various banking and other arrangements. Similarly, the extent of cash and cash equivalents as per the Revised Schedule VI could be different from the liquid assets computed for various other purposes.

I GAAP v. Ind AS

Though the Revised Schedule VI is not expecting any change in the measurement yardstick used for accounting and reporting the financial results, there could be practical challenges in dealing with some of the disclosure aspects as per the Revised Schedule VI. For example, the stock options cost charged to the Statement of Profit and Loss needs to be disclosed separately as per the Revised Schedule VI; however, at present there is no accounting standard which deals with the accounting aspects of stock options. However, the ICAI has issued a guidance note on the subject. This poses challenges since basic accounting for stock options cost is not mandatory, whereas the disclosure requirements relating to the same are made mandatory through the Revised Schedule VI. This confusion would continue till the relevant Ind AS dealing with the accounting aspects of stock options becomes mandatory. Similar issues could arise with respect to other items as well where there is no accounting standard governing the basic accounting aspects but there is a disclosure requirement in the Revised Schedule VI.

Change in accounting policy for dividend income received from subsidiaries

As per the old Schedule VI, the parent company had to recognise dividends declared by subsidiary companies even after the date of the Balance Sheet if it pertains to the period ending on or before the Balance Sheet date. However, there is no such requirement as per the Revised Schedule VI. Hence, in line with the Accounting Standard 9 on Revenue Recognition such dividends will have to be recognised now as income only when the right to receive dividends is established.

This would also require a suitable disclosure in the financial statements regarding the change in the accounting policy followed by the company with respect to recognition of such dividend income from subsidiaries.

It is worth noting that though the Revised Schedule VI requires the disclosure of the proposed dividend as part of the notes, in view of the specific provisions of AS-4 ‘Contingencies and Events Occurring After the Balance Sheet date’ which specifically requires adjustment of the proposed dividend in the Balance Sheet, companies need to continue to adjust the proposed dividend in the Balance Sheet, though the declaration by the shareholders is pending. Till such time AS-4 is amended, this position would continue in view of the supremacy of the accounting standards over the Revised Schedule VI which has been stated specifically in the Revised Schedule VI itself.

Position regarding AS-30/31/32

As per the current position AS-30, 31, 32 on Financial Instruments have not been notified under the Companies (Accounting Standards) Rules, 2006; hence, early application of these standards by a company is encouraged only subject to compliance of the of the other notified Accounting Standards such as AS-11, AS-13 and other applicable regulatory requirements which would prevail over AS-30, 31 and 32. If a company has early adopted Accounting Standards AS-30, 31 and 32, it could have challenges in presenting the financial statements as per the Revised Schedule VI.

For example, for an entity which has early adopted AS-30, 31, and 32, presentation of preference shares and determination of its status as liability or equity based on the economic substance could be an issue for dealing with the presentation requirements of Revised Schedule VI. This has been clarified by the ICAI vide its Guidance Note on Revised Schedule VI (Para that since Accounting Standards AS-30 Financial Instruments: Recognition and Measurement, AS-31 and AS- 32 Financial Instruments: Disclosures are yet to be notified and section 85(1) of the Act refers to Preference Shares as a kind of share capital, Preference Shares will have to be classified as Share Capital.

Considering the above and the legal status of Accounting Standards AS-30, 31 and 32 which is recommendatory pending Notification by the Government, careful consideration has to be given with respect to the conflicts, if any, in the presentation between the same and the Revised Schedule VI which is part of the Companies Act, 1956.

Dealing with the requirements from other statutes

If there are any disclosure requirements which emanate from other statutes, the same needs to be provided in addition to the other disclosure requirements stipulated under Revised Schedule VI. For example, the disclosure requirements related to outstanding dues to micro small and medium enterprises should be disclosed in accordance with the Micro Small and Medium Enterprises Development Act, 2006. The same position would continue in the case of disclosures required under the Listing Agreements with the stock exchanges.


Introduction of the Revised Schedule VI is a path-breaking initiative for the Indian corporate world in the era of globalisation. The changes brought out in the financial reporting through the Revised Schedule VI cannot be considered as a simple exercise of representation of numbers in a different format, but requires careful consideration of various factors duly reflecting the business considerations and the investor expectations. There is no doubt that application of the Revised Schedule VI is intended to bring the disclosure requirements of the Indian corporate financial statements in line with the prevailing international practice. The Indian corporates are in the process of responding to the expectations of the Regulators swiftly by gearing themselves to adapt to the new environment of financial disclosures. In this process, there are bound to be various challenges and implementation issues and hence would naturally lead to enhanced learning/experience. By way of properly planning and navigating the financial reporting exercise with utmost care and attention, and taking best use of the available guidance, the implementation challenges can be well managed.

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