Some disclosures no longer required in the Revised Schedule VI
The disclosure requirements as per the Revised Schedule VI do not contain several disclosures which were required by pre-revised Schedule VI. Some of these are:
(a) Disclosures relating to managerial remuneration and computation of net profits for calculation of commission;
(b) Information relating to licensed capacity, installed capacity and 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) Maximum amounts due on account of loans and advances from directors or officers of the company;
(f) Commission, brokerage and non-trade discounts; and
(g) Information as required under Part IV of pre-revised Schedule VI.
Major changes in the format of Balance Sheet
Equity and Liabilities
A new disclosure requirement regarding details of number of shares held by each shareholder holding more than 5% shares in the company is inserted by the Revised Schedule VI. The ICAI GN has clarified that in the absence of any specific indication of the date of holding, such information should be based on shares held as on the Balance Sheet date. For this disclosure, the names of the shareholders would be normally available from the Register of Members required to be maintained by every company.
Details pertaining to number of shares issued as bonus shares, shares bought back and those allot-ted for consideration other than cash needs to be disclosed only for a period of five years immediately preceding the Balance Sheet date including the current year. Under the pre-revised Schedule VI requirement is to disclose such items at all times.
In case of listed companies, share warrants are issued to promoters and others in terms of SEBI guidelines. Since such warrants are effectively and ultimately intended to become part of capital, Revised Schedule VI requires that the same be disclosed as part of the Shareholders’ funds as a separate line-item — ‘Money received against share warrants.’ In case the said warrants are forfeited, the amount already paid up would be transferred to ‘Capital Reserve’ and disclosed as part of ‘Reserves and Surplus’.
There are specific disclosures required by the Re-vised Schedule VI for ‘Share Application money pending allotment’. It has been also stated that share application money not exceeding the issued capital and only to the extent not refundable is to be included under ‘Equity’ and share application money to the extent refundable is to be separately shown under ‘Other current liabilities’. Disclosures required regarding share application, whether included under ‘Equity’ or under ‘Other current li-abilities’ are as under:
(a) terms and conditions;
(b) number of shares proposed to be issued;
(c) the amount of premium, if any;
(d) the period before which shares are to be allotted;
(e) whether the company has sufficient authorised share capital to cover the share capital amount on allotment of shares out of share application money;
(f) Interest accrued on amount due for refund;
(g) 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 the reasons for such share application money being pending.
A major change in the format of balance sheet as per the Revised Schedule VI is the classification of all items of liabilities and assets into Current and Non-Current. The terms ‘Current’ and ‘Non-Current’ are defined by Revised Schedule VI as under:
(a) A liability is classified as Current if it satisfies any of the following criteria:
(i) it is expected to be settled in the company’s normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within 12 months after the reporting date; or
(iv) The company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.
All other liabilities shall be classified as non-current.
(b) An asset shall be classified as current when it satisfies any of the following criteria:
(i) It is expected to be realised in, or is intended for sale or consumption in the company’s normal operating cycle;
(ii) It is held primarily for the purpose of being traded;
(iii) It is expected to be realised within 12 months after the reporting date; or
(iv) 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 reporting period date.
All other assets shall be classified as non-current.
(c) ‘Operating Cycle’ is defined by Revised Schedule VI as “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 duration of twelve months”.
(d) Thus, all companies will need to bifurcate balances in respect of all liabilities and assets into ‘current’ and ‘non-current’. The definitions contain four conditions out of which even if one is satisfied, the said liability or asset would be classified as ‘current’. If none of the conditions are satisfied the said liability or asset will be classified as ‘non-current’. The four conditions are quite subjective since they use phrases like ‘expected’, ‘held primarily’, ‘due to be settled’, etc.
(e) As per the definition, current liabilities would include items such as trade payables, employee salaries and other operating costs that are expected to be settled in the company’s normal operating cycle or due to be settled within twelve months from the reporting date. Thus, liabilities that are normally payable within the normal operating cycle of a company, are classified as current even if they are due to be settled more than twelve months after the end of the balance sheet date.
(f) Similarly, as per the definition, current assets would include assets like raw materials, stores, consumable tools, etc. which are intended for consumption or sale in the course of the company’s normal operating cycle. Such items of inventory are to be classified as current even if the same are not actually consumed or realised within twelve months after the balance sheet date. Current assets would also include inventory of finished goods since they are held primarily for the purpose of being traded. They would also include trade receivables which are expected to be realised within twelve months from the balance sheet date.
(g) A company can have multiple operating cycles in case they are manufacturing/dealing in different products. In such cases, the bifurcation into ‘current’ and ‘non-current’ can become difficult.
(h) Companies will also need to bifurcate all their borrowings into ‘current’ and ‘non-current’. It is possible that the same borrowing will be classified into two components depending on the portion repayable within/after twelve months from the balance sheet date. Other detai ls in respect of borrowings such as whether secured (with terms of security) or unsecured, whether guaranteed or not, details of repayment of loans, details of redemption in case of debentures, etc. are also required to be disclosed.
(i) Since the format of the balance sheet mentions Deferred Tax Liability (DTL)/Deferred Tax Asset (DTA) as a non-current liability/asset, the same is to be always classified as non-current and cannot be classified as ‘current’ even if the deferred tax liability/asset would become payable or receivable within twelve months of the balance sheet date. It should be also noted that such DTL/DTA is always disclosed on a net basis as required by AS-22.
(j) For several items of liabilities/assets, the aforesaid classification exercise can become quite cumbersome and time-consuming for companies especially since the same is also required to be done for 2010-11.
In case of loans taken by a company, Revised Schedule VI requires specific disclosure of period and amount of continuing default as on the balance sheet date in repayment of loans and interest to be specified separately in each case.
Revised Schedule VI requires disclosure of loans and advances taken from related parties. ‘Related Parties’ for this purpose would mean those parties as defined by AS-18.
Revised Schedule VI requires disclosure of ‘Trade Payables’ as part of ‘other non-current liabilities’ or ‘current liabilities’. A payable can be classified as ‘trade payable’ if it is in respect of amount due on account of goods purchased or services received in the normal course of business. As per the pre-revised Schedule VI, the term used was ‘Sundry Creditors’ which included amounts due in respect of goods purchased or services received as well as in respect of other contractual obligations. Since amounts due under contractual obligations can no longer be included within ‘trade payables’, items like dues payables in respect of statutory obligations like contribution to provident fund, purchase of fixed assets, contractu-ally reimbursable expenses, interest accrued on trade payables, etc. will need to be classified as ‘others’.
Assets
As per Revised Schedule VI, the disclosure for fixed assets is to be segregated into:
(a) Tangible assets;
(b) Intangible assets;
(c) Capital work-in-progress; and
(d) Intangible assets under development
The classification of tangible assets is similar to the one under pre-revised Schedule VI, but has a separate item for ‘Office Equipment’. Besides, ‘Plant and Machinery’ is now renamed as ‘Plant and Equipment’.
Classification of intangible assets as a separate item of Fixed Assets is introduced by Revised Schedule VI. It is also required to classify ‘Computer Software’ separately within ‘Intangible Assets’.
It is also necessary to separately disclose, a reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations (i.e., on account of amalgamations/demergers, etc.) and other adjustments (like capitalisation of borrowing costs as per AS-16) and the related depreciation/ amortisation and impairment losses/reversals.
Since Revised Schedule VI specifically requires capital advances to be included under long-term loans and advances, the same cannot be included under capital work-in-progress. The same also cannot be therefore included within current assets.
There is also a specific requirement to include ‘assets given/taken on lease’, both tangible and intangible under each of the items of fixed assets.
As per Revised Schedule VI, all Investments are to be bifurcated into ‘current’ and ‘non-current’. They also further need to be classified (as in the pre-revised Schedule VI) into trade/non-trade and
quoted/unquoted.
The classification of investments is to be done as under:
(a) Investment property;
(b) Investments in Equity Instruments;
(c) Investments in preference shares;
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms; and
(h) Other investments (specifying nature thereof).
Revised Schedule VI also requires that under each classification, details need to be given of names of bodies corporate indicating separately whether they are:
(a) subsidiaries,
(b) associates,
(c) joint ventures, or
(d) controlled special purpose entities.
In regard to 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) need to be given. It is possible that the partnership firm maintains both ‘capital’ and ‘current’ accounts of its partners. In that case, the bal-ance in ‘capital’ account will be clas-sified as a ‘non-current’ investment in the balance sheet of the company, whereas the balance in ‘current’ account is classified as ‘current’ investment.
In case the company has an investment in a ‘Limited Liability Partnership’ (LLP), the disclosure norms of ‘partnership firm’ (as discussed in para 41 above) will not apply since an LLP is considered as a ‘body corporate’.
As per Revised Schedule VI, all loans and deposits, deposits, etc. given by a company
are to be classified into ‘current’ and ‘non-current’.
Revised Schedule VI requires disclosure of loans and advances given to related parties. ‘Related Parties’ for this purpose would mean those parties as defined by AS-18.
Revised Schedule VI requires disclosure of ‘Trade Receivables’ as part of ‘other non-current assets’ or ‘current assets’. A receivable shall be classified as ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business. As per the pre-revised Schedule VI, the term ‘sundry debtors’ included amounts due in respect of goods sold or services rendered or in respect of other contractual obligations as well. Since, amounts due under contractual obligations cannot be included within ‘Trade Receivables’, items like dues in respect of insurance claims, sale of fixed assets, contractually reimbursable expenses, interest accrued on trade receivables, etc. will need to be classified within ‘others’.
The pre-revised Schedule VI required separate presentation of debtors for those outstanding for a period exceeding six months (based on billing date) and ‘other debtors’. However, for the ‘current’ portion of ‘Trade Receivables’, the Revised Schedule VI requires separate disclosure of ‘Trade Receivables outstanding for a period exceeding six months from the date they became due for payment’. This requirement can result in a lot of work for companies since it would mean modifying their accounting systems to compile the amounts exceeding six months based on the due date. Giving corresponding data for 2010-11 would also result in added work for most companies.
The requirement for classifying ‘loans and advances’ and ‘trade receivables’ into secured/unsecured and good/doubtful also continues in Revised Schedule VI.
The Revised Schedule VI does not contain any specific disclosure requirement for the unamortised portion of expense items such as share issue expenses, ancillary borrowing costs and discount or premium relating to borrowings. These items were included under the head ‘Miscellaneous Expenditure’ as per the pre-revised Schedule VI. Though, Revised Schedule VI does not mention disclosure of any such item, since additional line items can be added on the face or in the notes, unamortised portion of such items can be disclosed (both ‘current’ as well as ‘non-current’ portion), under the head ‘other current/non-current assets’ depending on whether the amount will be amortised in the next 12 months or thereafter.
The term ‘cash and bank balances’ existing in the pre-revised Schedule VI is replaced under Revised Schedule VI by ‘Cash and Cash Equivalents’. These are to be classified into:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand; and
(d) Others (specify nature).
For ‘Cash and Cash Equivalents’, disclosure is also separately required as per Revised Schedule VI for:
(a) Earmarked balances with banks (for example, for unpaid dividend);
(b) Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments;
(c) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated;
(d) Bank deposits with more than twelve months maturity shall be disclosed separately.
Major changes in the format of Statement of Profit and Loss
Revised Schedule VI requires disclosure of ‘Revenue from Operations’ on the face of the statement of profit and loss. In the case of a company other than a finance company, such ‘Revenue from Operations’ is to be disclosed as:
(a) Sale of products
(b) Sale of services
(c) Other operating revenues
(d) Less: Excise duty
Though Revised Schedule VI specifically requires disclosure of Sale of Products on ‘gross of excise’ basis, there is no mention of whether Sales Tax/VAT and Service Tax is also to be included or not in sale of products or sale of services, respectively. Though not entirely free of doubt, the ICAI GN has stated that “Whether revenue should be presented gross or net of taxes should depend on whether the company is acting as a principal and hence responsible for paying tax on its own account or, whether it is acting as an agent i.e., simply collecting and paying tax on behalf of government authorities. In the former case, revenue should also be grossed up for the tax billed to the customer and the tax payable should be shown as an expense. However, in cases, where a company collects tax only as an intermediary, revenue should be presented net of taxes.” (Also refer BCAJ February 2012 ‘Gaps in GAAP’ for a discussion on whether taxes should be disclosed gross or net).
In addition to Revenue from Op-erations, Revised Schedule VI also requires disclosure of ‘Other Operating Revenue’ as well as ‘Other Income’. The term ‘Other Operating Revenue’ is not defined by Revised Schedule VI. The ICAI GN has how-ever clarified that “this would include revenue arising from a 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. Whether a particular income constitutes ‘other operating revenue’ or ‘other income’ is to be decided based on the facts of each case and detailed understanding of the company’s activities. The classification of income would also depend on the purpose for which the particular asset is acquired or held”.
In respect of a finance company, Revised Schedule VI requires ‘Revenue from Operations’ to include revenue from:
(a) Interest and
(b) Other financial services.
Though the term ‘finance company’ is not defined by Revised Schedule VI, the ICAI GN states that “the same should be taken to include all companies carrying on activities which are in the nature of ‘business of non-banking financial institution’ as defined in section 45I(f) of the Reserve Bank of India Act, 1935”.
In case of all companies, Revised Schedule VI requires ‘Other income’ to be disclosed on the face of the statement of profit and loss. For this purpose ‘Other Income’ is to be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain/loss on sale of Investments;
(d) Other non-operating income (net of expenses directly attributable to such income).
As can be seen from the above, in the case of all company (including a finance company) Dividend income and Net gain/loss on sale on investments will be always classified as ‘Other Income’.
‘Other Income’ will also include share of profits/ losses in a partnership firm. Though there is no specific requirement mentioned for the same in the Revised Schedule VI, the ICAI GN mentions that the same should be separately disclosed. The ICAI GN also requires that in case the financial statements of the partnership firm are not drawn up to the same date as that of the company, adjustments should be made for effects of significant transactions and events that occur between the two dates and in any case, the difference between the two reporting dates should not be more than six months.
Revised Schedule VI requires the aggregate of the following expenses to be disclosed on the face of the Statement of Profit and Loss:
(a) Cost of materials consumed
(b) Purchases of stock-in-trade
(c) Changes in inventories of finished goods, work in progress and stock in trade
(d) Employee benefits expense
(e) Finance costs
(f) Depreciation and amortisation expense
(g) Other expenses.
The ICAI GN mentions that for the purpose of disclosure, ‘Cost of materials consumed’, should be based on ‘actual consumption’ rather than ‘derived consumption’. In such a case, excesses/shortages should be separately disclosed rather than included in the amount of ‘cost of materials consumed’. This requirement was also contained in the ICAI pronouncements on the pre-revised Schedule VI.
As per Revised Schedule VI separate disclosure is also required for the following items which are classified under ‘Other Expenses’:
(a) Consumption of stores and spare parts;
(b) Power and fuel;
(c) Rent;
(d) Repairs to buildings;
(e) Repairs to machinery;
(f) Insurance;
(g) Rates and taxes, excluding taxes on income;
(h) Miscellaneous expenses.
The threshold for disclosure of ‘Miscellaneous Expenses’ is changed to those that exceed ‘1% of revenue from operations or Rs.100,000 whichever is higher’ as against the requirement of pre-revised Schedule VI of ‘1% of total revenue or Rs.5,000 whichever is higher’.
The format of Statement of Profit and Loss in Revised Schedule VI also requires specific disclosures of ‘Exceptional’, ‘Extraordinary’, items and ‘Discontinuing Operations’. These terms are defined by AS -4, AS-5 and AS-24, respectively and disclosures should be done in accordance with these definitions.
Disclosures by way of Notes
Besides the above disclosures, Revised Schedule VI also requires disclosures by way of Notes attached to the financial statements. Some of the major requirements are as under:
(a) For manufacturing companies: raw materials consumed and goods purchased under broad heads;
(b) For trading companies: purchases of goods traded under broad heads;
(c) For companies rendering services: gross income derived from services rendered under broad heads.
Revised Schedule VI does not require disclosure of quantitative details for any of the above categories of companies. The same is also clearly mentioned in para 10.7 of the ICAI GN.
The ICAI GN also mentions that ‘broad heads’ for the purpose of the disclosure in para 62 above are to be decided taking into account the concept of materiality and presentation of ‘True and Fair’ view of financial statements. The said GN also mentions that normally 10% of the total value of sales/services, purchases of trading goods and consumption of raw materials is considered as an acceptable threshold for determination of broad heads.
Revised Schedule VI requires disclosures of ‘Contingent liabilities and commitments’. For this purpose, besides others, ‘other commitments’ are also to be disclosed. Such disclosure of ‘other commitments’ was not required as per pre-revised Schedule VI.
There is no explanation of what would be covered as part of ‘other commitments’ in Revised Schedule VI. The ICAI GN has however clarified that disclosures required to be made for ‘other commitments’ should include ‘only those non-cancellable contractual commitments (cancellation of which will result in a penalty disproportionate to the benefits involved) based on the professional judgment of the management which are material and relevant in understanding the financial statements of the company and impact the decision making of the users of financial statements. Examples may include commitments in the nature of buyback arrangements, commitments to fund subsidiaries and associates, non-disposal of investments in subsidiaries and undertakings, derivative related commitments, etc.’ Most of the other disclosure requirements as per Revised Schedule VI in Notes are similar to the requirements of pre-revised Schedule VI.
Implementation of Revised Schedule VI
As can be seen from the above, disclosure requirements of Revised Schedule VI are quite different from those existing in the pre-revised Schedule VI. Many of these disclosures and concepts (like ‘current’, non-current’) are similar to terms and concepts used in IFRS. Unless, companies gear up well in time to adhere to these new requirements for 2011-12 (and corresponding figures for 2010-11), it will be difficult for them to meet the reporting deadlines of the Companies Act, 1956.
