Introduction:
Section 211 provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case. Section 211(2) provides that “every profit and loss account” of a company shall give a true and fair view of the profit or loss for the financial year and comply with the requirements of Part-II of Schedule VI. Thus Schedule VI assumes significance in preparation of not only of balance sheet but also in preparation of profit and loss account. This article focuses on the history of Schedule VI, newly introduced format of Schedule VI and its comparison with the old format.
History of Schedule VI: The companies (Amendment) Act,1960 substituted Part-I, i.e., horizontal form of balance sheet of Schedule VI. It also amended Part-II and Part-II by making certain insertions or substitutions in Paras 3 and 4. Subsequently some amendments were made in sixties and mid seventies. The significant amendment is through notification dated 12.03.1979 which permitted companies to prepare balance sheets either in horizontal form or vertical form. Schedule VI thus remained unchanged for a longer time excepting for minor changes with regard to disclosure of unutilized moneys out of new issues and amounts due to micro small medium enterprises.
Background to introduction of revised Schedule VI:
The converged accounting standards and revised Schedule VI and Schedule XIV have been finalized by National Advisory Committee on Accounting Standards (NACAS)and recommended to the Government for notification. MCA has already laid a road map for such convergence in a phased manner with effect 1st April, 2011.Amended Schedule VI is a step in that direction and certainly facilitate convergence of Indian Accounting Standards with International Financial reporting standards as the revised Schedule VI format attempts to align itself with the existing Accounting standards.
Applicability of Revised Schedule VI:
Ministry of Corporate Affairs(MCA) initially announced on its website that the revised Schedule VI will be applicable from the financial year 2010-11 onwards which created some confusion. However on 25th March 2011, MCA has changed this note on its website to state that the revised Schedule VI will be applicable to all companies for preparation of Financial statements beginning on or from 1st April 2011 and Notification no. F.No.2/6/2008-C.L-V dated 30-3-2011 has been issued to that effect. The requirements of the Revised Schedule VI however, do not apply to insurance or banking company, or any company engaged in the generation or supply of electricity or to any other class of company.
As per the Roadmaps, the first phase of convergence is applicable for following companies:-
i. Companies which are part of NSE – Nifty 50.
ii. Companies which are part of BSE - Sensex 30.
iii. Companies whose shares or other securities are listed on stock exchanges outside India.
iv. Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores.
Why new format is welcome?
Revised schedule VI notes itself indicate that the disclosure requirements specified in Schedule VI are in addition to the disclosure requirements of the companies Act as well as the Accounting standards. Hence it gives little room for divergent practices unlike in the past. Schedule VI establishes direct communication with stake holders and elimination of conflict between Indian Accounting Standards and Schedule VI gives a true and fair view of the Balance sheet and Profit and Loss to the stakeholders.
Structure of Revised Schedule VI: The Revised Schedule VI is structured as shown below:
i. General Instructions.
ii. Part I – Form of Balance Sheet.
iii. General Instructions for Preparation of Balance Sheet.
iv. Part II – Form of Statement of Profit and Loss.
v. General Instructions for Preparation of Statement of Profit and Loss.
What changes are in ?
Key changes made in Revised Schedule VI
1. Introduction of new heads/classification: New format brought in new classification heads in the balance sheet. All items of assets and liabilities are to be bifurcated between current and non-current portions and presented separately on the face of the Balance Sheet. Such classification was not required by the Old Schedule VI.
2. Format for P& L a/c: In the old format there is no format for P& L account although Part II specifies the manner of disclosure of items. Revised Schedule VI provides a specific format and it is titled as “Statement of Profit and loss for the year ended ______”
3. Notes replace schedules: In the Old Schedule VI, break-up of amounts disclosed in the main Balance Sheet and Profit and Loss Account were given in the Schedules. Additional information was furnished in the Notes to Account. The Revised Schedule VI has eliminated the concept of ‘Schedule’ and such information is now required to be furnished in the Notes to Accounts.
4. Primacy to Accounting Standards and ACT: The terms used in the Revised Schedule VI will carry the meaning as defined by the applicable Accounting Standards. Thus primacy is given to Accounting standards and the provisions in case of conflict.
5. No option for Horizontal presentation: The Revised Schedule VI prescribes only the vertical format for presentation of Financial Statements. Thus, a company will no longer have an option to use horizontal format for the presentation of Financial Statements.
6. Opening balances: The Financial Statements prepared for the year 2011-12 (1st April 2011 to 31st March 2012), corresponding amounts need to be given for the financial year 2010-11.
7. Uniformity in figure reporting: once a unit of measurement is used, it should be uniformly followed through out in the financial statements and notes thereon. Moreover, rounding off requirements is limited to the nearest lakhs, millions or crores, if turnover exceeds 100 crores.
8. Classification of assets into Current & Non current: Assets and liabilities are to be segregated into their current and non-current portions. This classification helps in ascertaining the liquidity. For eg. current maturities of a long term borrowings will have to be classified under the head “Other current liabilities.”
9. Share capital related changes:
i. Share application money pending allotment details have to be disclosed. The amount in excess of subscription or if the requirements of minimum subscription are not met will be shown under “Other current liabilities.”
ii. Reconciliation of number of shares at the beginning and at the end of reporting period has to be made.
iii. Names of each shareholder holding more than 5% shareholding as on the balance sheet have to be disclosed.
a. Details of aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will now are required to be disclosed only for a period of five years immediately preceding the Balance Sheet date including the current year.
b. Rights and restriction attached each class of shares as to repayment of capital or dividend have to be disclosed separately.
c. Under the head shareholders Funds money received against share warrants has to be shown separately.
10. Reserves and Surplus: Any debit balance in the Statement of Profit and Loss will have to be disclosed under the head “Reserves and surplus.” Earlier, any debit balance in Profit and Loss Account carried forward after deduction from uncommitted reserves was shown as the last item on the Assets side of the Balance Sheet. Share option account has to be shown under reserves and surplus
11. Borrowings related: Borrowings have to be bifurcated into interim and short term borrowings. Long term borrowings have to be shown under non current liabilities. Short term borrowings have to be shown as current liabilities with further sub classification of secured and unsecured. Current maturing long term debts, interest accrued and due on borrowings have to be shown under current liabilities. The details such as terms of repayments, interest and any defaults as on the balance sheet date shall be given. Any related party transactions in loans and advance should be shown separately
12. Fixed assets: Fixed assets shall be shown under non current assets and they are further bifurcated into tangible, intangible and intangible assets under developments. Further the assets under lease shall be shown separately under each head.
13. Current /non current assets
a. Investments : Investments shall be classified into current and non current investments. A separate disclosure has to made indicating aggregate provision for diminution in value of investments separately for current and long-term investments;
b. Trade receivables: they are defined as dues arising only from goods sold or services rendered in the normal course of business. Aggregate of trade receivables outstanding for more than 6 months from the date they became due have to be shown separately as against old disclosure of Sundry debtors due for more than 6 months form the invoice date
c. Non current assets: Long term trade receivables are to be shown under other non current assets.
d. Short term Loans and advances: Loans and advances given to Related parties have to be disclosed under this head.
e. Secured deposits : These have to be disclosed under non current assets under the head long term loans and advances
14. Capital advances : “Capital advances” are specifically required to be presented separately under the head “Loans & advances” rather than including elsewhere.
15. Capital commitments: In the Old Schedule VI, details of only capital commitments were required to be disclosed. Under the Revised Schedule VI, other commitments also need to be disclosed.
16. Stock in Trade: Stock-in-trade held for trading purposes has to be disclosed separately from other finished goods. Goods in transit to be shown under the relevant subhead of inventories
17. Materiality criteria for separate head: Any item of income or expense which exceeds 1% of the revenue from operations or Rs. 100,000.Previously 1% of total revenue or Rs.5,000 whichever is higher was the criteria for separate disclosure of income/expenses.
18. Revenue recognition: Dividends declared after the balance sheet date( even if they relate to period prior to the balance sheet date) need not be considered in the revised format. Revenue recognition is to be as per AS 9 .
19. Defaults in payments of loans and interest: The Revised Schedule VI requires disclosure of all defaults in repayment of loans and interest to be specified in each case. Earlier, no such disclosure was required in the Financial Statements. However, disclosures pertaining to defaults in repayment of dues to a financial institution, bank and debenture holders continue to be required in the report under Companies
What is out?
It may be noted that the Revised Schedule VI has removed a number of disclosure requirements. These are :-
i. Disclosure as required under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is dropped. However it is desirable to show this disclosure as MSMED act mandates buyers of goods to give such information.
ii. Disclosure relating to managerial remuneration is also omitted. However the exercise for ascertaining the managerial remuneration will continue.
iii. Disclosures of information relating to licensed capacity, installed capacity and actual production as per old Schedule VI are not required now. This is a welcome omission as companies can block this information keeping their rivals in dark.
iv. Disclosure of Information on investments purchased and sold during the year is not required as per new Schedule VI.
v. Disclosure under heads Investments, sundry debtors and loans & advances pertaining to companies under the same management.
vi. Maximum amounts due on account of loans and advances from directors or officers of the company.
vii. Commission, brokerage and non-trade discounts, tax deducted at source on interest, Royalty received etc.
What is not changed?
Other than the new additional disclosures or specific omissions, rest of information as per old format will continue to be disclosed. Information such as value of imports calculated on CIF basis, earnings/expenditure in foreign currency, etc have to disclosed as per previous disclosure pattern
Conclusion: Financial year 2011-12 will be the first year for implementation of new revised Schedule VI and a lot of practical difficulties will surface only at the time of preparation of financial statements. Companies and Auditors will have to be guided by the Guidance note issued by the Institute of Charted Accountant of India for any ambiguity faced while preparing the financial statements.
G S Rao
Chief Manager (Legal), OCL India Limited
Email ID: gsrao@ocl.in
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