March 2011 Revise

Supplement to Assurance Eye

Revised Schedule VI

Introduction

The Ministry of Corporate Affairs (MCA) has hosted on its website a revised Schedule VI to the Companies Act, 1956 (Act), laying down a new format for preparation and presentation of financial statements by Indian companies. As per the earlier announcement made by the MCA on its website, 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 nothing to do with the converged Indian Accounting Standards. The MCA website also states that the revised Schedule VI is applicable for the financial year 2010-11 and onwards. However, no official Gazette Notification/ Circular of the revised Schedule VI is available in the public domain till date

The revised Schedule VI introduces many new concepts and disclosure requirements and also does away with several statutory disclosure requirements. The practical application of the revised schedule throws up a number of questions, the answers to which may not be straight-forward or need additional guidance from the MCA or the Institute of Chartered Accountants of India (ICAI). In this document, we set out an overview of the key changes and implications, critical issues and our perspectives thereon. We expect that the revised Schedule VI will be followed by the publication of detailed guidance by the MCA / ICAI. Since these questions can only be conclusively answered by the MCA/ ICAI, companies are advised not to treat our perspectives as authoritative guidance. On critical issues, they should consult the MCA/ICAI or take legal/ professional advice.

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An overview of revised Schedule VI

Overall approach
1. The revised schedule VI clarifies that its requirements for disclosure on the face of financial statements or in the notes are minimum requirements. Line items, sub-line items and subtotals can be presented as an addition or substitution on the face of financial statements when such presentation is relevant for understanding of the companys financial position or performance. It clarifies that disclosures required under accounting standards and in the Act are in addition to the disclosures set-out in the revised Schedule VI. A company will make such additional disclosures in the notes to accounts or by way of an additional statement unless these are required to be disclosed on the face of the financial statements. 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 requirements of Schedule VI were prevailing over accounting standards.

4.

In the existing Schedule VI, break-up of amounts disclosed in main balance sheet and profit and loss (P&L) account was 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 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. Except in the case of the first financial statements laid before the company (after its incorporation), the corresponding amounts for the immediately preceding reporting period for all items shown in the financial statements including notes will also be given. For the purposes of revised Schedule VI, the terms used therein will carry the meaning as defined by the applicable accounting standards. For example, the terms such as associate and related parties will have the same meaning as defined under the Companies Accounting Standards Rules. In preparing the financial statements including the notes to accounts, a balance will be maintained between providing excessive detail that may not assist users of financial statements and not

providing important information as a result of too much aggregation. 8. Though the revised Schedule is applicable to companies applying Indian GAAP certain concepts such as current/ non-current classification appear to be adopted from Ind-AS/IFRS. This will require companies following Indian GAAP to familiarize themselves with Ind-AS and IFRS, though these standards may never be adopted or adopted much later by these companies. 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 `100 crores.

2.

9.

5.

6.

3.

7.

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Key changes related to balance sheet

10. The revised Schedule VI prescribes a vertical format for presentation of balance sheet. Thus, a company will not have option to use horizontal format for presentation of financial statements. 11. Current and non-current classification has been introduced for presentation of assets and liabilities in the balance sheet which is more in line with the concepts used under Ind-AS/ IFRS. The application of this classification will require assets and liabilities to be broken into their current and noncurrent portions. For instance, current maturities of a long term borrowing will have to be classified under the head Other current liabilities. 12. Number of shares held by each shareholder holding more than 5% shares now needs to be disclosed. In the absence of any specific indication of the date of holding, we believe that such information will be based on shares held as on the balance sheet date. 13. Details pertaining to aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will be disclosed only if such an event has occurred during a period of 5 years immediately preceding the balance sheet date. 14. 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 deduction from uncommitted reserves was required to be shown on the asset side of the balance sheet. 15. Specific disclosures are prescribed for the share application money. The application money not exceeding the capital offered for issuance and to the extent not refundable will be shown separately on the face of the balance sheet. The amount in excess of subscription or if the requirements of minimum subscription are not met will be shown under Other current liabilities. 16. 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. 17. 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.

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18. Capital advances are now required to be presented separately under the head Loans & advances rather than as part of capital work-inprogress or fixed assets. 19. 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. 20. In the earlier Schedule VI, details of capital commitments were required to be disclosed. Under the revised Schedule VI, all commitments need to be disclosed. 21. The revised Schedule VI requires all defaults in repayment of loans and interest to be specified in each case. Earlier, such disclosure was required only in the Companies Auditors Report Order (CARO) section of the audit report and only for defaults in repayment of dues to a financial institution, bank and debenture holders.

22. The revised Schedule VI introduces a number of other additional disclosures. Key examples are: a. Rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital Terms of repayment of loans and period In each class of investment, details regarding 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) 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 Aggregate provision for diminution in value of investments (separately for current and long-term investments) Stock-in-trade held for trading purposes, separately from other finished goods

Key changes related to P&L account

23. Unlike the earlier version, the revised Schedule VI lays down a format for the presentation of P&L account. This format of P&L account does not list any appropriation item on its face. Further, the revised Schedule VI format prescribes below the line adjustments to be presented under Reserves and Surplus in the balance sheet. The classification of expenses is based on their nature and not on their function. 24. In addition to specific disclosures prescribed in the P&L account, any item of income or expense which exceeds 1% of the revenue from operations or `100,000, whichever is higher, needs to be disclosed separately. 25. 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.

b. c.

d.

e.

f.

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26. In respect of companies other than finance companies, revenue from operations need to be disclosed separately as revenue from (a) sale of products, (b) sale of services and (c) other operating revenues. 27. Net exchange gain/loss on foreign currency borrowings to the extent considered as an adjustment to interest cost needs to be disclosed separately as a finance cost. 28. 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.

Simplification of disclosures
29. The revised Schedule VI has removed a number of disclosure requirements that were not considered relevant in the present day context. Examples include: a. Disclosures relating to managerial remuneration and computation of net profits for calculation of commission Information relating to licensed capacity, installed capacity and actual production Information on investments purchased and sold during the year Investments, sundry debtors and loans & advances pertaining to companies under the same management Commission, brokerage and non-trade discounts (also refer point no. 24)

b. c. d.

e.

However, there are certain disclosures such as value of imports calculated on CIF basis and expenditure in foreign currency etc. that are still continuing in the revised Schedule VI.

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Practical issues and perspectives

An overview of key issues arising from the revised Schedule VI and our perspectives thereon are given below. A company has 30 September year-end and is publishing its half-yearly financial statements for the period ended 31 March 2011, after the notification of the revised Schedule VI. Should the company use the existing or the revised schedule VI in the preparation of its half yearly financial statements? Paragraph 10 and 11 of AS 25 Interim Financial Reporting states as below: 10. If an enterprise prepares and presents a complete set of financial statements in its interim financial report, the form and content of those statements should conform to the requirements as applicable to annual complete set of financial statements. 11. If an enterprise prepares and presents a set of condensed financial statements in its interim financial report, those condensed statements should include, at a minimum, each of the headings and sub-headings that were included in its most recent annual financial statements and the selected explanatory notes as required by this Statement. From the above, it is clear that if the company is presenting only condensed interim financial statements, its format should conform to that used in the companys most recent annual financial statements, i.e., the existing Schedule VI. However, if it is presenting a complete set of financial statements, it should use the revised Schedule VI, i.e., the new format applicable to annual financial statements. Is a company required to present the comparative information as per the revised Schedule VI in the first year of its application? 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, we believe that the comparative information will have to be presented in the revised format starting from its first year of application. Recently, the MCA had issued a notification under section 211 of the Act to provide exemption from certain disclosures required under part II of the existing Schedule VI. To avail this exemption, companies were required to comply with certain conditions. What is the applicability of this exemption to the revised Schedule VI? We believe that the said exemption was applicable only under the existing Schedule VI. Since the revised Schedule VI will supersede the existing Schedule VI, the said exemption will not have any implication. This view can also be supported by the fact that the revised Schedule VI does not contain the disclosure requirement which were exempted in the said notification. Page 7 | Revised Schedule VI

General
When does the revised Schedule VI apply from? As per the last note on the MCA website the revised schedule VI applies from 2010-11. We believe that this will be formalized by issuance of a formal notification shortly. A company having 31 December 2010 year-end is publishing its financial statements after the notification of the revised Schedule VI. Can it voluntarily apply the revised Schedule VI in the preparation of its financial statements for the year ended 31 December 2010? Schedule VI is a statutory format and its applicability is governed by the official notification. We believe that the company can apply the revised Schedule VI in the preparation of its financial statements for the year ended 31 December 2010, only if its early application is permitted in the official notification. Irrespective of the format used in its December 2010 statutory financial statements, the company should use the revised Schedule VI in the preparation of its tax financial statements for the year ended 31 March 2011.

Issues relating to balance sheet

The revised Schedule VI requires different classes of preference shares to be treated separately. Does it mean that a company compulsorily needs to decide whether its preference shares are liability or equity based on their economic substance using AS 31 Financial Instruments: Presentation principles and present the same accordingly? If yes, will all companies disclose the redeemable preference shares as liability? The revised Schedule VI deals only with presentation and disclosure requirements. Accounting for various items will be governed by the applicable standards. Keeping this in view, we believe that the following position will apply: 1. If a company early adopts AS 30 Financial Instruments: Recognition and Measurement, AS 31 and AS 32 Financial Instruments: Disclosures, it will decide the liability and equity classification of preference shares based on the principles laid in AS 31. If the application of these principles results in all or part of preference shares being classified as liability, it will use the same classification, for presentation in the balance sheet. However, if a company has not applied AS 30, AS 31 and AS 32, it can continue to classify the preference shares as part of share capital. This is based on the argument that there is no standard

dealing with accounting for preference shares and therefore past practice should prevail. Incidentally, the Companies Act also refers to the preference shares as a kind of share capital. The revised Schedule VI requires aggregate amount of both long-term and short-term loans guaranteed by directors or others under each head to be disclosed. What is meant by the term others? The word others used in the phrase directors or others would mean any person or entity other than a director. Therefore, this is not restricted to mean only related parties or promoters. However, in the normal course a person or entity guaranteeing a loan of a company will generally be associated with the company in some manner. The revised Schedule VI requires that under the head Borrowings, details of continuing default (in case of long-term borrowing) and default (in case of short-term borrowing) as on the balance sheet date in repayment of loans and interest shall be specified separately in each case". The wordings give rise to following issues: (a) Are the disclosures relating to default pertain to borrowing from banks and financial institutions or are also required for items such as bonds/ debentures, deposits, finance lease obligations?

(b) Does a company need to disclose information for defaults other than repayment of loan and interest, e.g., compliance with debt covenants? (c) How should the terms default/ continuing default as on the balance sheet date be interpreted? Our perspectives on the above issues are as below: (a) In the above clause, the word loan has been used more in a more generic sense and is not restricted like in CARO to borrowings from banks and financial institutions. Hence, details of default in repayment of loans and interest need to be disclosed for each of the items such as bonds/ debentures, deferred payment liability, deposit, finance lease obligation, covered under the head Borrowings. (b) The revised schedule VI requires specific disclosures only for default in repayment of loans and interest. The revised Schedule VI does not require separate disclosure for other defaults, e.g., default in compliance with debt covenants. However, a company should consider the impact of such default on current and non-current classification and going concern implications. (c) Though the MCA has used two different terms, viz., continuing default (in case of long-term borrowing) and default (in case of short-term borrowing), the requirement is to disclose default

2.

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as on the balance sheet date in both the cases. Pursuant to this requirement, the details of any default in repayment of loan and interest existing as on the balance sheet needs to be separately disclosed. Any default that had occurred during the year and was subsequently made good before the end of the year is not required to be disclosed. The revised Schedule VI requires a liability to be classified as current if the company does not have an unconditional right to defer its settlement for at least twelve months after the reporting date. How this requirement will apply to the following two cases: (a) A company has taken a loan which is repayable on demand. However, based on the past experience, it is not expected that the lender will demand the repayment within next 12 months. Company B has taken a 5 year loan. The loan contains certain debt covenants, e.g., filing of quarterly information. The company defaulted in filing of such information in the previous quarter, with the effect that loan has become repayable on demand. However, based on the past experience, the management believes that default is minor and the bank will not demand the repayment of loan. It has also started the process of getting waiver for this default. After the reporting period and before the approval of

the financial statements for issue, the bank agreed to waive the default and not to demand payment as a consequence of the default. (c) A company has taken a 5 year term loan. Out of abundant caution the banks include a covenant that they have a right to recall the loan on demand even where the company has not violated any of the debt covenants.

advisors. Based on the guidance given, the following position may apply in the above cases: (a) Since the company does not have an unconditional right to defer the settlement of loan for at least 12 months after the reporting date, it will classify the loan as current. This is despite the fact that based on the past experience, it is not expected that the lender will demand the repayment within the next 12 months. In our view, what is important is whether a borrower has an unconditional right to defer the settlement irrespective of the nature of default and whether or not a bank can exercise its right to recall the loan. If the borrower does not have such right, the classification would be current. However, it should be noted that such issues may

The requirements of the revised Schedule VI concerning current and non-current classification are peculiar to Indian companies. We suggest that companies should familiarize themselves with these requirements in detail, after going through guidance in Ind-AS 1 Presentation of Financial Statements and other related guidances. If there is any doubt, they should consult their auditors / external professional

(b)

(b)

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involve legal interpretation of the loan agreement as to whether a borrower has an unconditional right to defer settlement. The legal interpretation would have to consider not only the wordings in the loan agreement, but also whether those clauses are legally enforceable as per the laws of the land, for example, the Banking Regulation Act. The revised Schedule VI does not specify whether the deferment right should be ascertained at the reporting date or events after the balance sheet date can be considered. It may be noted that as per the requirements of AS 4 Contingencies and Events Occurring after the Balance Sheet, when assessing the impact of events subsequent to the balance sheet date, one has to judge if those events confirm the conditions at the balance sheet date or arose after the balance sheet date. In the given case, at the balance sheet date, the default was not waived and hence the loan had become payable on demand and should therefore be classified as current. The subsequent waiver would change the classification from current to non-current but at the date the waiver is made. We believe that this may be an important issue for many companies and hence the MCA/ ICAI guidance is necessary. (c) Since the borrower does not have an unconditional right to defer settlement, the same should be treated as current liability.

It may also be noted that while the criteria for classification of liability is based on the borrowers unconditional right to defer the payment, the classification from the lenders perspective is decided based on the expected realization. Thus, it is likely that while the borrower will classify the above loans as current liability, the same will get classified as noncurrent asset in the financial statements of lender. From a perusal of the revised Schedule VI, it is clear that a company also needs to classify its employee benefit obligations in current and non-current categories for disclosure purposes. What is the appropriate basis for classification of these obligations into current and non-categories? Does the application of this requirement may even require the obligations such as defined benefit post employment obligations and other long-term employee benefits to be bifurcated into current and non-current components? While AS 15 Employee Benefits governs the measurement of various employee benefit obligations, there classification as current and non-current liability will be governed by the criteria laid down in the revised Schedule VI. In accordance with these criteria, a liability is classified as current if a company does not have an unconditional right as on the balance sheet date to defer its settlement for 12 months after the reporting date. Each company will need to apply these criteria to its specific facts and circumstances and decide an appropriate classification of its employee benefit

obligations. Given below is an illustrative example on application of these criteria in a simple situation: (a) Liability toward bonus, etc., payable within one year from the balance sheet date is classified as current. In case of accumulated leave outstanding as on the reporting date, the employees have already earned the right to avail the leave and they are entitled to avail the leave at any time during the year. Hence, it is disclosed as a current liability even if it is measured as other long-term employee benefit under AS 15. Regarding funded post-employment benefit obligations, amount due for payment to the fund within 12 months created for this purpose is treated as current liability. Regarding unfunded post-employment benefit obligations, a company will have settlement obligation at the balance sheet date or within 12 months for employees such as those who have already resigned or are expected to resign or are due for retirement within the next 12 months from the balance sheet date. Thus, the amount of obligation attributable to these employees is a current liability. The remaining amount attributable to other employees, who are likely to continue in the services for the next 12 months, is classified as non-current liability. If the management believes that the amount of current

(b)

(c)

(d)

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liability is not material, the entire amount may be classified as non-current. In the revised Schedule VI, there is no requirement to disclose information regarding outstanding amounts and interest due to Micro, Small and Medium Enterprises or those required under Clause 32 of the Listing Agreement. Does it mean that companies can avoid making these disclosures in the financial statements? The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 requires specified disclosures to be made in the annual financial statements of the buyer wherever such financial statements are required to be audited under any law. Hence, though not required by the revised Schedule VI, such disclosures will still be required in the audited annual financial statements. We believe that the same principle will apply to the disclosures required under Clause 32 of the Listing Agreement and disclosures required by other applicable laws/ pronouncements issued by regulatory bodies, e.g., the disclosure regarding unhedged foreign currency exposures required by the ICAI announcement. In case of tangible and intangible assets, where sums have been written off on reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, the revised Schedule VI requires each company to disclose the amount of reduction or increase together with the date thereof

for the first five years subsequent to the date of such reduction or increase. However, paragraph 39 (iii) of AS 10 Accounting for Fixed Assets requires that a company should disclose details such as gross book value of revalued assets, method adopted to compute revalued amounts, nature of indices used, year of appraisal, involvement of external valuer as long as the concerned assets are held by the enterprise. Considering the specific requirements of the revised Schedule VI, can a company avoid making disclosures required under AS 10 beyond 5 years? Further, what is the relevance of this requirement for intangible assets? The revised Schedule VI is clear that the disclosure requirements of accounting standards are in addition to disclosures required under the Schedule. Also, in case of any conflict, the accounting standards will prevail over the Schedule. Keeping this in view, we believe that companies will make disclosures required by the revised Schedule VI only for 5 years. However, details required by AS 10 will have to be given as long as the asset is held by the company, subject to materiality. AS 26 Intangible Assets does not permit revaluation of intangible assets. Hence, the revised Schedule VI requirement is relevant for intangible assets only in the context of reduction of capital arising from the Court schemes.

Whether capital advances also need to be bifurcated between non-current and current categories? If yes, on what basis? Capital advances are advances given for procurement of fixed assets which are non-current assets. Typically, companies do not expect to realize them in cash in the next 12 months or within their normal operating cycle. Rather, over the period, these get categorized as one or more fixed assets. Hence, we believe that capital advances should be treated as non-current assets. Though the revised Schedule VI states that the terms used therein will be as per the applicable accounting standards; however, it appears that the disclosures required under the head cash and cash equivalents are not as per the definition of the said term in AS 3 Cash Flow Statement. As per the revised Schedule, this heading will include and separately disclose amounts such as bank balances held as margin money, security against borrowings/ guarantees and bank deposits with more than 12 months maturity. How can this conflict be resolved? The revised Schedule VI not only mandates that the requirements of accounting standards will prevail over the Schedule, it also clarifies that in case compliance with an accounting standard requires any change in the treatment or disclosure including addition, amendment, substitution or deletion in the head/sub-head, the same will be made and requirements of the revised Schedule VI will stand modified accordingly. Hence, we believe

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that to resolve this conflict, the caption cash and cash equivalents may be changed to Cash and bank balances, which may have two sub-headings, viz., Cash and cash equivalents and Other bank balances. The former will include only the items that constitute cash and cash equivalents defined in accordance with AS 3 (and not the revised Schedule VI), while the remaining balances will be included under the latter heading. The earlier Schedule VI required the disclosure of only capital commitments. However, the revised Schedule VI requires the disclosure of all commitments, i.e., including other commitments. What is the nature of commitments that will get covered under this disclosure requirement? The word commitment is not defined in the revised Schedule VI. From a general inference perspective, this term may be interpreted to mean an unrecognized contractual commitment, e.g., non-cancellable purchase, sale or employee contracts, not recognized in the financial statements. The purchase and sale commitments extend not only to capital items, but also inventory or services or investments. However, we do not believe it is the intention of the regulator that all contractual non-cancellable commitments would require disclosure as that would be contrary to the overarching principle in the revised Schedule VI that a balance shall be maintained between providing excessive detail that may not assist

users of financial statements and not providing important information as a result of too much aggregation. However, the acceptability of this view and exact disclosures required to be made can only be clarified by an authoritative guidance from the regulators. Hence, we await MCA/ICAIs guidance on the subject. The existing Schedule VI required the proposed dividend to be disclosed under the head Provisions. In the revised Schedule VI, this needs to be disclosed in the footnotes. Does it mean that proposed dividend is not required to be provided for going forward? AS 4 still requires that dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted. Keeping this in view and the fact that accounting standards override revised Schedule VI, we believe that companies will have to continue to create a provision for dividends in respect of the period covered by the financial statements and disclose the same as a provision in the balance sheet. The format of the balance sheet prescribed under Clause 41 of the Listing Agreement based on the existing Schedule VI will now be inconsistent with the format of the balance sheet in the revised Schedule VI. How should companies address this

issue till Clause 41 is revised in line with the revised Schedule VI? Clause 41 (I)(ea) and (eaa) of the Listing Agreement states as below for presentation balance sheet items in half-yearly and annual audit results, respectively: (ea) As a part of its audited or unaudited financial results for the half-year, the company shall also submit by way of a note, a statement of assets and liabilities as at the end of the half-year. (eaa) However, when a company opts to submit un-audited financial results for the last quarter of the financial year, it shall, submit a statement of assets and liabilities as at the end of the financial year only along with the audited financial results for the entire financial year, as soon as they are approved by the Board. Further, Clause 41(V)(h) states as below for the format of balance sheet items: (h) Disclosure of balance sheet items as per items (ea) shall be in the format specified in Annexure IX drawn from Schedule VI of the Companies Act, or its equivalent formats in other statutes, as applicable. Based on the above guidance, we are of the following views on the issues raised:

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(a)

Half yearly results: Though the requirement in clause 41(V)(h) makes a reference to the Schedule VI for the presentation of balance sheet items in case of half-yearly results of a company, it has prescribed a specific format for this purpose. Further, from the language, it does not appear that the format will be automatically amended in case of any change in the Schedule VI format. Hence, we believe that till the time a new format is prescribed by the SEBI under the Clause 41, companies will continue to present their half-yearly balance sheet based on the existing Schedule VI. Annual audited yearly results: Apparently, the Clause 41(V)(h) regarding format does not refer to annual audited balance sheet. Thus, two views seem possible on this matter. One view is that since there is no prescribed format, a company can use the format used in its annual financial statements, i.e., as per the revised Schedule VI. The other view is that a company should use the same format of balance sheet items in its halfyearly and annual audited results. Thus, it will continue to use the Clause 41 format for annual audited balance sheet. We believe that till Clause 41 is amended, either view can be accepted.

The format of the balance sheet and P&L account prescribed under the SEBI (Issue of Capital & Disclosure Requirements) Regulations (ICDR Regulations) will also now be inconsistent with the format of the balance sheet/ P&L account in the revised Schedule VI. How should companies address this issue till the formats suggested under ICDR Regulations are revised in line with the revised Schedule VI? The formats of balance sheet and P&L account suggested under ICDR Regulations are clearly stated as illustrative formats. Thus, once the revised Schedule VI becomes effective, a company should use the format prescribed in the revised Schedule VI to present the financial information for the purposes of inclusion in offer document. Under the investments note, there is a requirement to disclose the names of bodies corporate, including separate disclosure of controlled special purpose entities in addition to subsidiaries, etc. What is meant by controlled special purpose entities? Since this term is neither defined under Indian GAAP (the applicable accounting standards) nor in the revised Schedule VI, it is not clear how this term should be interpreted. This term is defined under Ind-AS, however, it is questionable if Ind-AS definitions can be used to interpret Indian GAAP/ Schedule VI terms. Hence, we await MCA/ ICAI's guidance on the subject.

The revised Schedule VI requires the amount of trade receivables to be classified as current and noncurrent assets, based on the prescribed criteria. However, it prescribes the following disclosure for trade receivables only under the head "current assets." "Aggregate amount of trade receivables outstanding for a period exceeding six months from the date they are due for payment should be separately stated." Does it mean that a company needs to make the above disclosure only for trade receivables classified as current assets? Yes, we believe that the requirement as currently drafted is applicable only in the case of current trade receivables. The revised Schedule VI does not contain any specific disclosure requirement for the unamortized portion of expense items such as share issue expenses, ancillary borrowing cost and discount or premium relating to borrowings. The existing Schedule VI required these items to be included under the head Miscellaneous Expenditure. Does it mean that such expenses will have to be charged off to the P&L immediately? AS 16 Borrowing Costs alludes that ancillary borrowing cost and discount or premium relating to borrowings could be amortized over the loan period. Further, share Page 13 | Revised Schedule VI

(b)

We believe that this is an important matter and therefore the SEBI should provide guidance.

issue expenses, discount on shares, ancillary costdiscount-premium on borrowing, etc., being a special nature item are excluded from the scope of AS 26. Keeping this in view, certain companies have taken a view that it is an acceptable practice to amortize these expenses over the period of benefit, i.e., normally 3 to 5 years. The revised Schedule VI does not deal with any accounting treatment and the same continues to be governed by the respective accounting standards/ practices. Further, the revised Schedule VI is clear that additional line items can be added on the face or in the notes. Keeping this in view, we believe that companies can disclose the unamortized portion of such expenses as Unamortized expenses, under the head other current/ non-current assets, depending on whether the amount will be amortized in the next 12 months or thereafter.

other operating income or other income may need to be decided based on the facts of each case and detailed understanding of the companys activities. For instance, lets take the case of a group engaged in manufacture and sale of industrial and consumer products that has one real estate arm. The real estate arm is continuously engaged in leasing of real estate properties. In this case, the rent arising from leasing of real estate is likely to be other operating income. On the other hand, consider a consumer products company which owns a 10 floor building. The company currently does not need one floor for its own use and has given the same on rent. In that case, lease rent is not an other operating income; rather, it should be treated as other income. Should the net gains arising on foreign exchange fluctuations be included under the head Other Operating Revenues or Other Income? We believe that the classification of net foreign exchange gain should also be based on the principles discussed in the previous issue. Typically, net gain arising on foreign exchange fluctuations would relate to foreign currency debtors, creditors, loans, etc., which are part of the operating activities of the company. Hence, these gains can be classified under the head Other Operating Revenues, with a separate disclosure thereof in the notes to financial statements. However, in certain cases, where such gains are not related to the companys main operations and are arising from activities such as speculation or purchase/ sale of

foreign currency investments not related to the companys main operations, these should be classified as Other Income. However, this matter is not beyond doubt and hence the MCA/ ICAI guidance is necessary. The revised Schedule VI requires the following additional information to be given by way of notes: Nature of company Manufacturing companies Trading companies Companies rendering or supplying services Company that falls in more than one category Disclosures required Raw materials under broad heads Goods purchased under broad heads Purchases of goods traded under broad heads Gross income derived from services rendered under broad heads It will be sufficient compliance with the requirements, if purchases, sales and consumption of raw material and the gross income from services rendered are shown under broad heads.

Issues relating to P&L account

For non-finance companies, revenue from operations need to be disclosed separately as revenue from (a) sale of products, (b) sale of services and (c) other operating revenues. What is meant by the term other operating revenues? The term other operating revenue is not defined. We believe that this may include income arising from companys operating activities, i.e., either its principal or ancillary revenue-generating activities, but which is not revenue arising from sale of products or rendering of services. Whether a particular income constitutes

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Pursuant to the above requirements, what are the exact disclosures to be made in the financial statements? Apparently, the disclosures required are quite ambiguous. There are many points which are not clear. Given below are some examples in this regard: (a) (b) (c) (d) Whether a company is required to disclose quantitative details or not. Whether a manufacturing company will disclose purchase, sale or consumption of raw material. What is meant by good purchased in case of manufacturing companies? While there is a requirement to disclose gross income in case of a service company and sales in case of a company falling in more than one category, there is no clear requirement to disclose sales for a manufacturing or a trading company. With regard to a company falling in more than one category 2-3 different interpretations seem possible. One interpretation is that it should disclose purchase, sale and consumption for raw material. The other interpretation is that purchase relates to traded goods, sale relates to all goods

sold (both manufactured goods and traded goods) and for raw material, only consumptions needs to be disclosed. To resolve this confusion, either the MCA or the ICAI should provide detailed guidance explaining the disclosure requirements on a priority basis. Till such guidance is provided by the MCA/ ICAI, each company will need to consider its specific circumstances and arrive at appropriate disclosures in consultation with its auditors/ external professional advisors. Since the revised Schedule VI gives a note stating that Broad heads shall be decided taking into account the concept of materiality and presentation of true and fair view of financial statements, a company may consider the following perspectives in deciding the disclosures required: (a) (b) Apparently, there is no need to give quantitative details for any of the item. Considering the ambiguity and on a conservative interpretation, a manufacturing company may disclose the following: i. Purchase and consumption of major items of raw materials (including other items classified (c)

as raw material such as intermediates/ components/ packing material) ii. Goods purchased for trading (if any)

iii. Though the revised Schedule VI does not specifically require, it is also suggested to disclose major items of opening and closing stock. This information will be readily available with the companies and helps in reconciliation. However, it is not mandatory. iv. Considering the requirement to disclose gross income in case of a service company and sales in case of a company falling in more than one category, it is but logical to also disclose sales of finished goods under broad heads. The term broad heads may be interpreted to mean broad categories of raw materials, goods purchased, etc. These categories should be decided based on the nature of each business and other facts and circumstances. Similar principle will be followed to decide disclosure requirement in other cases

(e)

(d)

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Based on the above perspectives, given below is a suggested format for making these disclosures for the year ended 31 March 2011: Manufacturing company Particulars Opening stock 2011 Raw materials Raw material A Raw material B Others Total Particulars XX XX XX XX 2010 XX XX XX XX Purchases 2011 2010 XX XX XX XX XX XX XX XX Other adjustments, if any 2011 XX XX XX XX 2010 XX XX XX XX Closing stock 2011 XX XX XX XX 2010 XX XX XX XX
(Amount in ` million)

Consumption 2011 2010 XX XX XX XX XX XX XX XX Sales 2011 2010 XX XX XX XX XX XX XX XX

Opening stock 2011 2010 XX XX XX XX

Purchases 2011 2010 XX XX XX XX XX XX XX XX

Other adjustments, if any 2011 XX XX XX XX 2010 XX XX XX XX

Closing stock 2011 XX XX XX XX 2010 XX XX XX XX

Goods purchased Traded item A Traded item B Others Total XX XX XX XX

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(Amount in ` million)

Manufacturing company Particulars Manufactured goods sold Goods A Goods B Others Total Service company Particulars Services rendered Service A Service B Others Total Trading company Particulars Traded goods Traded goods A Traded goods B Others Total XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX Opening stock 2011 2010 Purchases 2011 2010 Closing stock 2011 2010 Sales 2011 2010 XX XX XX XX XX XX XX XX Amount 2011 2010 XX XX XX XX XX XX XX XX Sales values 2011 2010

A company falling in more than one category will also make the above disclosures, to the extent relevant. Page 17 | Revised Schedule VI

On the lines of existing Schedule VI, the revised Schedule VI also requires certain disclosures such as value of imports and expenditure in foreign currency. However, it does not provide any specific guidance on how a company will comply with these disclosure requirements. For example, will these disclosures be made on cash or accrual basis? Will the principles and guidelines enumerated in the Statement on Amendments to Schedule VI issued by ICAI continue to apply in the context of the revised Schedule VI? The ICAI had issued the Statement on Amendments to Schedule VI to address various issues in the context of the existing Schedule VI. We believe that the ICAI should issue a revised Statement/ Guidance Note to address various issues arising from the revised Schedule VI. Till such time, we may continue using guidance in the old Statement to the extent applicable, unless it is contrary to any notified accounting standard/ revised Schedule VI etc. Whether all the disclosures required for the annual financial statements under Companies Act are also required to be furnished in the financial statements prepared for tax purposes? We believe that the financial statements for tax purposes should be prepared using the basic framework of the revised Schedule VI of the Companies Act, 1956. These financial statements should include all

disclosures required in accordance with the accounting standards, without any exception. A company can avail the exemptions from disclosure requirements given in explanation to paragraph 6 (ASI 15) of the notified AS 21 Consolidated Financial Statements from presentation of statutory information, not considered relevant for presentation of true and fair view of the financial statements. However, under no circumstances, any disclosure considered relevant for the purposes of Income-tax Act, including the determination of book profit under section 115JB of the Income-tax Act, can be excluded from the tax financial statements. Based on these perspectives, the following are some examples of disclosures which companies may consider for exclusion from their tax financial statements.

iii. b.

Capital goods

Expenditure in foreign currency during the financial year on account of royalty, knowhow, professional and consultation fees, interest, and other matters Total value of all imported raw materials, spare parts and components consumed during the financial year and the total value of all indigenous raw materials, spare parts and components similarly consumed and the percentage of each to the total consumption The amount remitted during the year in foreign currencies on account of dividends with a specific mention of the total number of non-resident shareholders, the total number of shares held by them on which the dividends were due and the year to which the dividends related Arrears of fixed cumulative dividends on preference shares Payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d) for management services, (e) for other services and (f) for reimbursement of expenses

c.

d.

Disclosures related with additional statutory information as per the revised Schedule VI need not be provided in tax financial statements. For example, the following disclosures can be avoided. a. Value of imports calculated on C.I.F basis by the company during the financial year in respect of: i. ii. Raw materials Components and spare parts

e. f.

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g.

Shares in the company held by each shareholder holding more than 5% shares specifying the number of shares held Shares reserved for issue under options and contracts/ commitments for the sale of shares/ disinvestment, including the terms and amounts Particulars of any redeemed bonds/ debentures which the company has power to reissue

k. l.

Nature of security in case of both long-term and short-term borrowings Where in respect of an issue of securities made for a specific purpose, the whole or part of the amount has not been used for the specific purpose at the balance sheet date, there shall be indicated by way of note how such unutilized amounts have been used or invested

h.

i.

m. Other Commitments (specify nature) Disclosure of loans and advances as per clause 32 of listing agreement is not required

j.

Earnings in foreign exchange classified under the following heads: i. ii. iii. iv. Export of goods calculated on F.O.B. basis Royalty, know-how, professional and consultation fees Interest and dividend Other income, indicating the nature thereof

Companies may note that Clause 17 A has been included in the form 3CD w.e.f. AY 2009-10. As per ICAI guidance on clause 17 A, disclosure related with creditors covered under MSMED Act should be made in tax financial statements also.

Page 19 | Revised Schedule VI

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