recent amendments in schedule vi to the companies act, 1956 · pdf file ·...

Recent amendments in Schedule VI to the Companies Act, 1956

CA. P. R. Ramesh

4th May 2011

Bombay Chartered Accountants’ Society

Agenda

• History and Applicability.

• Format.

• Major Highlights.

• Comparison with the existing.

• Points and Issues.

1

History and Applicability

• The 1956 Act.

• Original Notification for Schedule VI – dated 21st March, 1961.

• Formulation of NACAS

• Convergence to IFRS.

• Discussions with ICAI on format etc.

• Present Notification – dated 28th February, 2011.

2

History – cont’d

• The MCA Site:

– The format uploaded.

– The applicability period mentioned as ‘For the financial year 2010-11’.

– Deletion of the applicability line.

– Revised applicability period mentioned as ‘…effective from 01.04.2011.’

– Notification issued – dated 28th February, 2011.

– The ‘35 Accounting Standards’.

3

History – cont’d

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Format

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Format – cont’d

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Major Highlights

• Compliance with the Act and/or Accounting Standards:

– Requirements of the Act and/or Standards will override the related requirement of Schedule VI.

• Disclosures as required by Accounting Standards:

– Additional disclosures specified in the Accounting Standards shall 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.

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Major Highlights - cont’d

• Other Disclosures:

– All other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in the Revised Schedule VI

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• Notes to Accounts:

– Shall contain information in addition to that presented in the Financial Statements and shall provide where required :

narrative descriptions or disaggregation of items recognized in those statements and

information about items that do not qualify for recognition in those statements.

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• Cross Reference:

– Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notes to accounts.

• Balance to be maintained between: providing excessive detail that may not

assist users; and not providing important information as

a result of too much aggregation

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• Presentation of figures:

– Where Turnover:

o < Rs. 100 crores = Figures to be in nearest hundreds, thousands, lakhs or millions or decimals thereof.

o > Rs. 100 crores = Figures to be in nearest lakhs or millions or crores or decimals thereof.

Once a unit of measurement is used, it should be used uniformly in the Financial Statements

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• Figures of previous period:

– The corresponding amounts (comparatives) for the immediately preceding reporting period for all items shown in the Financial Statements including notes shall also be given.

o Confusion between comparative figures and corresponding figures

• Terms used:

– As per Accounting Standards.

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• Disclosure requirements:

– These are minimum requirements.

– Requirements of industry/sector, Accounting Standards, Companies Act etc. to be considered for disclosure on the face of the Financials Statements.

21


• Balance Sheet:

– Heading changed to “Equities and Liabilities” from “Sources of Funds”; and to “Assets” from “Application of Funds”

–New Line Items - Liabilities:

Money received against Share Warrants

Share Application Money pending allotment

Trade Payables

Separate headings for classifying Non-current and Current Liabilities.

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• Balance Sheet:

– New Line Items - Assets:

o Intangible Assets under development

o Trade Receivables

o Separate headings for classifying Non-current and Current Assets.

o Cash and cash equivalents.

23


• Balance Sheet:

– Concept of Current (assets and liabilities):

o Expected to realize in or is intended for sale or consumption in the Normal Operating Cycle

o It is held primarily for the purpose of being traded

o Expected to be realized within 12 months after the reporting date

o It is cash and cash equivalents unless there are restrictions from being exchanged or used to settle a liability for atleast 12 months after the reporting date. 24


• Balance Sheet:

– Concept of Current (assets and liabilities):

o The Company’s Normal Operating Cycle:

An operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents.

Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months.

o To classify as current liabilities, the company must not have an unconditional right to defer settlement of liability for atleast 12 months after the reporting date. 25


Other changes in disclosures:

• Share Capital:

– Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate.

– Number of shares held by each shareholder in excess of 5 % together with their names.

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• Reserves and Surplus:

– 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.

o P&L Appropriation account to be disclosed under Reserves and Surplus.

– Debit balance of P&L A/c to be shown as a negative figure under the head ‘Surplus’.

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• Long-term and Short-term borrowings:

– Loans and advances from related parties.

– Period and amount of continuing default as on the balance sheet date in repayment of loans and interest, shall be specified separately in each case.

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• Long-term and Short-term provisions:

–Provision for employee benefits.

–Others (specify nature).

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• Other Current liabilities:

– Current maturities of long-term debt

– Current maturities of finance lease obligations;

– Interest accrued but not due on borrowings

– Interest accrued and due on borrowings;

– Income received in advance

– Unpaid dividends

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• Other Current liabilities: – Application money received for allotment of

securities and due for refund and interest accrued thereon.

o Share application money includes advances towards allotment of share capital.

o The period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed.

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• Other Current liabilities: – Unpaid matured deposits and interest accrued

thereon

– Unpaid matured debentures and interest accrued thereon

– Other payables (specify nature);

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• Tangible and Intangible Assets: – Movement between opening and closing balances

to be given.

– Details of reduction – by way of reduction of capital, revaluation etc. to be given by way of a note.

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• Non-current investments: – Includes Investment Property

– Under each classification, details shall be given of names of the bodies corporate, indicating separately whether such bodies are

(i) subsidiaries

(ii) associates,

(iii) joint ventures, or

(iv) controlled special purpose entities

– The nature and extent of the investment so made in each such body corporate (showing separately investments which are partly-paid). 34


• Long-term loans and advances: – Capital Advances;

– Security Deposits;

– Loans and advances to related parties (giving details thereof);

– Other loans and advances (specify nature).

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• Inventories: – Raw materials;

– Work-in-progress;

– Finished goods;

– Stock-in-trade (in respect of goods acquired for trading);

– Stores and spares;

– Loose tools;

– Others (specify nature).

Goods-in-transit shall be disclosed under the relevant sub-head of inventories.

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• Others: –The amount of dividends proposed to be distributed

to equity and preference shareholders for the period and the related amount per share shall be disclosed separately. Arrears of fixed cumulative dividends on preference shares shall also be disclosed separately.

o Thus proposed dividend is not to be provided for in the financial statements?

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• Profit and Loss: – Now known as ‘Profit and Loss Statement for the

year ended ________’.

– Format specified in new Schedule.

– Exceptional and extraordinary items need to be disclosed separately on the face of the Statement of Profit and Loss. The details of the same as also of any prior period items should be disclosed in the notes.

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• Profit and Loss: – Profit / loss before and after tax from discontinuing

operations and the tax expense from discontinuing operations need to be disclosed separately on the face of the Statement of Profit and Loss.

– The items to be disclosed under Revenue from Operations have been specifically indicated for both finance companies and others.

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• Profit and Loss: – Employee Benefits expense should be disclosed

separately as:

Salaries and wages

Contribution to provident and other funds

Expense on ESOP and ESPP

Staff welfare expenses

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• Profit and Loss: – Payments to auditor as:

a. Auditor

b. For taxation matters

c. For company law matters

d. For management services

e. For other services

f. For reimbursement of expenses

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• Profit and Loss: –Any item of income or expenditure which exceeds

one percent of the revenue from operations or Rs. 1,00,000 whichever is higher should be disclosed separately.

–Broad heads shall be decided taking into account the concept of materiality and presentation of true and fair view of financial statements.

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Comparison between the existing Schedule VI Particulars Old Schedule VI Revised Schedule VI

Authority Provisions of Schedule VI will prevail over Accounting Standards

Provisions of Accounting Standards will prevail over Schedule VI

Form of Balance Sheet

Both horizontal and vertical form were allowed

Only vertical form of Balance Sheet has been specified in the revised Schedule VI

Form of Profit and Loss Account

No format specified for Profit and Loss Account

Form of Profit and Loss Account specified under Part II

Headings in Balance Sheet

“Sources of funds” and “Application of funds”

“Equities and Liabilities” and “Assets”

Profit and Loss Appropriation Account

Opening surplus, proposed dividend and transfer to/ from reserves were shown in Profit and Loss Appropriation Account

Transfer from/ to reserves to be shown under the heading Reserves & Surplus only. No requirement of separate Profit and Loss Appropriation Account.

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Comparison (Cont’d)

Particulars Old Schedule VI Revised Schedule VI

Proposed Dividend

Proposed Dividend required to be provided for

Proposed Dividend to be disclosed in notes

Quantitative Details

Quantitative details of Raw materials, purchases, stocks and turnover to be given for each class of goods. Also licensed and installed capacity and production quantity to be given for manufacturing companies

No quantitative details required. Limited requirements for disclosure for CIF and FOB values etc.

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Rounding off of Figures appearing in financial statement

Turnover of less than Rs. 100 Crs - R/off to the nearest Hundreds, thousands or decimal thereof Turnover of Rs. 100 Crs or more but less than Rs. 500 Crs - R/off to the nearest Hundreds, thousands, lakhs or millions or decimal thereof Turnover of Rs. 500 Crs or more - R/off to the nearest Hundreds, thousands, lakhs, millions or crores, or decimal thereof

Turnover of less than Rs. 100 Crs - R/off to the nearest Hundreds, thousands, lakhs or millions or decimal thereof Turnover of Rs. 100 Crs or more - R/off to the nearest lakhs, millions or crores, or decimal thereof

46



Share Capital No requirement to disclose separately bonus shares issued during last 5 years. Also no requirement for details of shareholders holding more than 5% of shares

In addition to the disclosure requirements of old Schedule VI following additional disclosures are also required • Number of bonus shares/

shares allotted without payment being received in cash/ shares bought back during last 5 years

• Names and number of shares held by shareholders holding more than 5 percent of total shares

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Net Working Capital

Current assets & Liabilities are shown together under application of funds. The net working capital appears on balance sheet.

Assets & Liabilities are to be bifurcated in to current & Non-current and to be shown separately. Hence, net working capital will not be appearing in Balance sheet.

Fixed Assets There was no bifurcation required in to tangible & intangible assets. Capital advances used to be shown under the Head Capital Work in Progress under Fixed Assets

Fixed assets to be shown under non-current assets and have to be bifurcated in to Tangible & intangible assets. Capital advances to be shown under the head ‘Long term Loans and Advances’

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Borrowings Short term & long term borrowings are grouped together under the head Loan funds sub-head Secured / Unsecured

Long term borrowings to be shown under non-current liabilities and short term borrowings to be shown under current liabilities with separate disclosure of secured / unsecured loans. Period and amount of continuing default as on the balance sheet date in repayment of loans and interest to be separately specified

Deposits Lease deposits are part of loans & advances

Lease deposits to be disclosed as long term loans & advances under the head non-current assets

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Comparison (Cont’d) Particulars Old Schedule VI Revised Schedule VI

Investments Both current & non-current investments to be disclosed under the head investments

Current and non-current investments are to be disclosed separately under current assets & non-current assets respectively.

Loans & Advances

Loans & Advance are disclosed along with current assets Loans & Advance to subsidiaries & others to be disclosed separately.

Loans & Advances to be broken up in long term & short term and to be disclosed under non-current & current assets respectively. Loans & Advance from related parties & others to be disclosed separately.

Deferred Tax Assets / Liabilities

Deferred Tax assets / liabilities to be disclosed separately

Deferred Tax assets / liabilities to be disclosed under non-current assets / liabilities as the case may be.

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Cash & Bank Balances

Bank balance to be bifurcated in scheduled banks & others

No such bifurcation required. Bank balances in relation to earmarked balances, held as margin money against borrowings, deposits with more than 12 months maturity, each of these to be shown separately.

Profit & Loss (Debit Balance)

P&L debit balance to be separately disclosed in the Balance Sheet.

Debit balance of Profit and Loss Account to be shown as negative figure under the head Surplus. Therefore, Reserve & Surplus can have a negative balance.

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Sundry Debtors

Debtors outstanding for more than six months from invoice date to be shown separately

Debtors outstanding for more than six months from the date they became due to be shown separately

Other current liabilities

No specific mention for separate disclosure of Current maturities of long term debt No specific mention for separate disclosure of Current maturities of finance lease obligation

Current maturities of long term debt to be disclosed under other current liabilities. Current maturities of finance lease obligation to be disclosed.

Separate line item Disclosure criteria

any item under which expense exceeds one per cent of the total revenue of the company or Rs. 5,000 which ever is higher; shall be disclosed separately

any item of income / expense which exceeds one per cent of the revenue from operations or Rs. 1,00,000, which ever is higher; to be disclosed separately

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Expense classification

Function wise & nature wise

Expenses in Statement of Profit and Loss to be classified based on nature of expenses

Finance Cost Finance cost to be classified in fixed loans & other loans

Finance cost shall be classified as interest expense, other borrowing costs & Gain / Loss on foreign currency transaction & translation

Foreign exchange gain / loss

Gain / Loss on foreign currency transaction to be shown under finance cost

Gain / Loss on foreign currency transaction to be separated into finance costs and other expenses

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Purchases The purchase made and the opening & closing stock, giving break up in respect of each class of goods traded in by the company and indicating the quantities thereof.

Goods traded in by the company to be disclosed in broad heads in notes. Disclosure of quantitative details of goods is diluted. Goods-in-transit to be separately disclosed.

TDS amount on Interest, royalty received

TDS amount was required to be shown for Interest income etc.

No requirement of disclosing TDS amounts separately

Managerial Remuneration and Commission

Payment to directors and detailed calculation under section 198 was required to be disclosed

No disclosure requirements for Managerial Remuneration

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ESOP expenses No requirement to show separately as part of Employee Benefits expense

Expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP) to be shown separately as part of Employee Benefits expense

Part III-Interpretation

Terms provision, reserve, capital reserve, quoted investment etc. were defined

No such specific definitions.

Part IV- Balance Sheet Abstract

Details of company registration number, capital raised, Balance Sheet details, products etc. were required to be attached with financials

No such requirement.

Points and Issues

• Status of roll-out of converged Accounting Standards.

• Reclassification of Previous Year/Period figures.

• Computation of Net-working capital for finance.

• Ageing for receivables to be calculated from due date of payment.

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Points and Issues

• Implementation Issues:

• Legality of the amendment. Can Sch VI be amended in isolation without any notifications?

• Substantial efforts required by companies to recast and auditors to audit previous reporting period’s figures

• Challenges faced whilst preparing consolidated financial statements as per revised Sch VI for entities which have a large number of subsidiaries, associates and joint ventures in such a short duration.

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Points and Issues

• Share Capital (Para 6A)

— Disclosure of shareholding of each shareholder holding more than 5% of share capital will result in making the disclosure voluminous and the annual report bulkier

— Challenges in getting information from Depository Participants, GDR / ADR custodians

• Reserves and Surplus (Para 6B)

— Lack of clarity whether proposed dividend needs to be provided for.

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Points and Issues

• Long-term borrowing (Para 6C)

— Lack of clarity whether the long-term borrowings will get covered for the purposes of determining limits u/s 293(1)(d).

— Lack of clarity whether “Advances” and “Deposits” need to be treated as borrowings

• Non-Current Investments (Para 6K)

— Clarification required for nature and definition of “Controlled Special Purpose Entity”

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Points and Issues

• Long-term Loans and Advance (Para 6L)

— Capital Advance – whether should be considered as a Long-term Advance or as part of Capital Work-In-Progress.

• Trade Receivable

• Ageing based on due date of invoice Vs based on issue date of invoice. Will require significant systemic changes.

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Points and Issues

• Status of recent notifications for exemptions from certain disclosures (quantitative etc.).

• Disclosure under the MSME Act.

• Changes required in ERP systems and ‘Hyperion’ accounting packages.

• First step of a ‘mind-set’ change.

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Thank You

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