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AN ANALYSIS OF THE REVISED SCHEDULE VI OF THE COMPANIES ACT, 1956

M.George Korah

1. MCA Notification

1.1. Ministry of Corporate Affairs [MCA], Government of India, had on 3 March 2011, hosted on its website, the revised Schedule VI to the Companies Act, 1956 which deals with the Form of Balance sheet, Profit & Loss Account and disclosures to be made therein.
1.2. As per the MCA notification NO. SO 653(E) dated 30 March 2011, the revised Schedule VI shall be applicable for the financial years commencing on or after 1 April 2011.
1.3. Thus the existing Schedule VI would continue to be applicable for the year ended 31 March 2011.
1.4. The revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006 and has no connection with the converged Indian Accounting Standards

2. Applicability

2.1. The revised Schedule VI would apply to all Indian Companies.
2.2. The revised Schedule VI requires all financial statements, except the first financial statements of a company prepared after its incorporation, to disclose the corresponding amounts for the immediately preceding reporting period for all items in the financial statements and notes to the financial statements. Hence the comparative information will have to be presented in the revised format starting from its first year of application.

3. Structure

3.1. The revised Schedule VI is structured into 3 sections
A) General Instructions
General instructions are applicable to both the Balance Sheet and Profit and Loss account
B) Part I – Form of Balance sheet
The section contains (a) format of the Balance Sheet and (b) general instructions for preparation of Balance Sheet
C) Part II – Form of Statement of Profit and Loss
The section contains (a) format of statement of profit and loss account and (b) general instruction for preparation of statement of profit and loss
3.2. Part IV of the existing schedule (balance sheet abstract and general business profile) has been dispensed with.
3.3. Format of cash flow statement has not been prescribed and hence companies that are required to present the CFS will continue to prepare it as per AS 3, Cash Flow Statements.
The formats of the Balance Sheet & Form of Statement of Profit and Loss are given at the end of this paper.

4. Overview

4.1. The “general instructions” applicable to the Balance Sheet and Statement of Profit and Loss deals with matters such as primacy of accounting standards, rounding off, corresponding figures, etc.
4.2. The revised Schedule VI requires that if compliance with the requirements of the Act and/ or accounting standards requires a change in the treatment or disclosure in the financial statements, the requirements of the Act and/ or accounting standards will prevail over the Schedule VI. This is a significant change in the approach since earlier the accounting standards were subordinated to the Schedule VI requirements.
4.3. In the existing Schedule VI, details of the amounts disclosed in main balance sheet and profit and loss (P&L) account were given in the schedules. Additional information was furnished in the Notes to Accounts. The revised Schedule VI has eliminated the concept of ‘schedule’ and such information will now be provided in the Notes to Accounts. This is in line with the practice under IFRS. Further, all information relating to a particular item of Balance Sheet and P&L account disclosed in the Notes is required to be cross-referred to that item on the face of Balance Sheet/ P&L account.
4.4. There is an explicit requirement to use the same unit of measurement uniformly throughout the financial statements. Moreover, rounding off rules have been changed to eliminate the option of presenting figures in terms of hundreds and thousands if turnover exceeds Rs 100 crores.

5. Key changes to Balance sheet

5.1. The revised Schedule VI prescribes only vertical format for presentation of balance sheet. Thus, a company will not have the option to use horizontal format for presentation of financial statements.
5.2. The broad headings in the Balance Sheet are (i) Equity and Liabilities and (ii) Assets (As against “Sources of Funds” and “Application of funds” under the existing Schedule.)
5.3. Current and non-Current classification has been introduced for presentation of assets and liabilities in the balance sheet. The application of this classification will require assets and liabilities to be broken into current and non current components.
5.4. Under existing Schedule VI, current liabilities and provisions (without classifying into current and non current) are deducted from the aggregate of current assets and loans & advances and shown under “Application of funds”. Revised Schedule VI requires the segregation of current liabilities and provisions into current and non current components and presentation under “Equity and Liabilities”.
5.5. Any debit balance in P&L account will be disclosed under the head “Reserves and Surplus.” Earlier, any P&L debit balance carried forward after set off against from uncommitted reserves was required to be shown on the asset side of the balance sheet.
5.6. Number of shares held by each shareholder holding more than 5% of the shareholding of the Company needs to be disclosed.
5.7. Details pertaining to aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back, to be disclosed if such an event has occurred during a period of 5 years immediately preceding the balance sheet date. 5.8. For each class of shares, a reconciliation of the number of shares outstanding at the beginning and end of the reporting period to be presented.
5.9. Terms of any securities issued that are convertible into equity/preference shares with earliest date of conversion in descending order starting from the farthest such date to be disclosed.
5.10. Share application money pending allotment (and not due for refund) has to be shown as a separate item on the face of the balance sheet and is not included in “shareholders’ fund”. However share application money which has become due for refund has to be shown under “other current liabilities”.
5.11. Additional disclosures are required in respect of long term borrowings.
5.12. Fixed assets are to be disclosed on the face of the balance sheet as i) Tangible assets, ii) Intangible assets , iii) Capital work in progress and iv) Intangible assets under development. On the face of the balance sheet, the net block of each of the above category of assets is required to be disclosed as against the disclosure of gross block, accumulated depreciation and net block of fixed assets on the face under the existing schedule.
5.13. “Capital advances” are now required to be presented separately under the head “Loans & advances” rather than as part of “capital work-in-progress” or “fixed assets.”
5.14. Tangible assets under lease are required to be separately specified under each class of asset. In the absence of any further clarification, it appears that the term “under lease” should be taken to mean assets given on operating lease in the case of lessor and assets held under finance lease in the case of lessee. Further, leasehold improvements should continue to be shown as a separate asset class.
5.15. In the earlier Schedule VI, details of only capital commitments were required to be disclosed. Under the revised Schedule VI, all commitments need to be disclosed.
5.16. For each class of investment, the details 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, in whom investments have been made and the nature and extent of the investment made in each such body corporate (showing separately partly-paid investments) are to be shown.
5.17. Regarding 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 is to be disclosed.
5.18. The term “sundry debtors” has been replaced with the term “trade receivables.” Trade receivables are defined as dues arising only from goods sold or services rendered in the normal course of business. Hence, amounts due on account of other contractual obligations, which were earlier included in the sundry debtors, can no longer be included in the trade receivables.
5.19. The earlier Schedule VI required separate presentation of debtors (i) outstanding for a period exceeding 6 months (i.e., based on billing date) and (ii) other debtors, in a schedule to the balance sheet. However, the revised Schedule VI requires separate disclosure of “trade receivables outstanding for a period exceeding 6 months from the date they became due for payment.”

6. Key changes to Statement of Profit & Loss

6.1. Unlike the earlier version, the revised Schedule VI lays down a format for the presentation of P&L account specifying the minimum items to be presented on the face of the statement of Profit and Loss.
6.2. The revised Schedule also specifies the minimum details to be provided in the notes in respect of items shown on the face of the Profit & loss statement.
6.3. The revised Schedule prescribes that an item of income or expenses should be separately disclosed in the notes if it exceeds 1% of revenue from operations or Rs. 1 Lakh whichever is higher.
6.4. Break-up in terms of quantitative disclosures for significant items of P&L account such as raw material consumption, stocks, purchases and sales have been simplified and replaced with the disclosure of “broad heads” only. The broad heads need to be decided based on materiality and presentation of true and fair view of the financial statements.
6.5. Quantitative disclosure regarding licensed capacity, installed capacity and actual production by manufacturing companies are not required in the revised Schedule.
6.6. Disclosures relating to managerial remuneration and computation of net profits for calculation of commission are also dispensed with. However the same would have to be disclosed to the extent required by AS 18.
6.7. On the face of the Statement of Profit and Loss, the following profit segregations to be disclosed,
Profit before exceptional and extraordinary items and tax
Profit before extraordinary items and tax
Profit before tax
Profit (Loss) for the period from continuing operations
Profit/(loss) from discontinuing operations
Profit/(loss) from Discontinuing operations (after tax)
Profit (Loss) for the period

7. Current / Non Current Classification

7.1. Current Assets
The revised Schedule states that an asset shall be classified as current when it satisfies any of the following criteria;
a) it is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.
All other assets shall be classified as non-current.

7.2. Current Liabilities
The revised Schedule states that a liability shall be classified as current when it satisfies any of the following criteria;
a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.
All other liabilities shall be classified as non-current.
7.3. 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.
The same normal operating cycle applies to the classification of both assets and liabilities
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 relevant to that particular asset.
If a liability is part of the working capital used in the normal operating cycle of the Company, the same will be classified current though the liability is due for settlement more than 12 months from the end of the reporting period.

8. Long Term Borrowings

8.1. Non Current liabilities are to be disclosed as follows;
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
8.2. Long Term borrowings are to be further classified as follows;
a) Bonds/debentures.
(b) Term loans
- from banks.
- from other parties.
(c) Deferred payment liabilities.
(d) Deposits.
(e) Loans and advances from related parties.
(f) Long term maturities of finance lease obligations
(g) Other loans and advances (specify nature).
8.3. Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.
8.4. Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.
8.5. Bonds/Debentures (along with the rates of interest and particulars of redemption/conversion) to be disclosed in descending order of maturity .
8.6. Particulars of any redeemed bonds/ debentures which the company has power to reissue shall be disclosed.
8.7. The revised Schedule VI requires continuing defaults in repayment of loans and interest to be specified in each case. Earlier, such disclosure was required only in the Companies Auditor’s Report Order (CARO) section of the audit report and that too, only for defaults in repayment of dues to a financial institution, bank and debenture holders.
8.8. Terms of repayment of loans and period also to be disclosed (Both Term loans and other loans)
8.9. Provisions are required to be classified as current and non current

9. Dividend

9.1 The existing Schedule VI requires the disclosure of aggregate amount of dividend paid and/or proposed dividend on the profit and loss account as an appropriation from profits. This requirement is not seen in the revised Schedule. However, in view of the requirements of AS 4 read with the revised Schedule, proposed dividend for the year will have to be provided for and disclosed in the notes.
9.2 The existing Schedule VI required the parent company to recognize dividends declared by subsidiary companies even after the date of the balance sheet if they were pertaining to the period ending on or before the balance sheet date. Such requirement no longer exists in revised Schedule VI. Accordingly, as per AS 9 Revenue Recognition, dividends should be recognized as income only when the right to receive dividends is established by the balance sheet date.