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Specific Issues Related to Revised Schedule VI

Specific Issues Related to Revised Schedule VI. Presentation by: CA Rajeev Sogani. Interpretation. Consistency. Purposive Interpretation. Not like Company Law or Income Tax. IFRS Regime. Lack of Literature. Point of view of users of Financial Statements.

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Specific Issues Related to Revised Schedule VI

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  1. Specific Issues Related to Revised Schedule VI Presentation by: CA Rajeev Sogani ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  2. Interpretation Consistency Purposive Interpretation Not like Company Law or Income Tax IFRS Regime Lack of Literature Point of view of users of Financial Statements Development of Professional Judgement First Year of Application Follow / Deviate Guidance Note CA Firm – Same for all Auditees Reasonable – Liberal - Benefit of doubt - in favour of Auditee ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  3. Necessity of Line Items where disclosure is NIL or Not Applicable Mention NA / NIL Omit Line Item Para 3 of General Instruction - In preparing the Financial Statements, including the Notes to Accounts, a balance will have to 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. Line Item can beomitted ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  4. Current Liability- Unconditional Right to defer the Liability beyond 12 months • Minor Default • Major Default • No Definition Prescribed • It’s a Professional Judgement • IFRS – Rule based Regime – India Value based Only Major default will make the Liability Current ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  5. Impact of loan covenants FAQs – Q. No. 21 AS – 4 Contingencies and events occurring after the Balance Sheet date ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  6. Liabilities not directly related to Operating Cycle • Financial Liabilities • Liabilities not arising out of main Business operations • Operating Cycle criteria and its applicability. Only 12 months criteria applicable ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  7. Recommended as good practice Notes on Accounts First Time Applicability of Revised Schedule VI During the year ended 31st March 2012, the revised schedule VI notified under the Companies Act, 1956, has become applicable to the company, for preparation and presentation of its Financial Statements. Except accounting for dividend on investments in subsidiary company, the adoption of revised schedule vi does not impact recognition and measurement principles followed for preparation of financial statements. However, it has significant impact on presentation and disclosure made in Financial Statements. The Company has also reclassified the previous year figures in accordance with the requirements applicable in the current year. Ref : Good Company (India) Limited (EY) ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  8. Notes on Accounts 2. Operating Cycle Recommended as good practice • In accordance with the requirement of revised Schedule VI, Operating Cycle of the Company’s different businesses is determined and duly approved by the Audit Committee and the Board Of Directors. The duration of said Operating Cycle of different businesses is as under:- • Cement Business – 8 months • Textile Business – 15 months • Assets and Liabilities of the above Business have been classified into Current and Non Current using the above Operating Cycles and applying other criteria prescribed in Revised Schedule VI. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  9. Continuing Default : only Interest & Repayment defaults And Not Non Creation of Charge Non submission of Stock Statements Non Submission of Audited Financial Statements Not introducing Required Capital Contribution ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  10. Goods held for TradingWhether always Current Asset?? Obsolete Damaged Slow Moving Yes - always Current Asset • Valuation Allowance • No Major Effect ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  11. (Rs. in millions) Fixed Assets PreviousYear Figures Ref: Page 35 of Good Company(India) Limited(EY) ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  12. Comparatives Reconciliation Where major Adverse change in RATIOS May be given ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  13. SHAREHOLDING > 5% Names to be given ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  14. Long Term Borrowings Current and Non Current Presentation (Rs. In crore) ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  15. Unsecured Loan • From Friends and Relatives • From Market through Brokers • Promoters Contribution when Loan from Financial Institution • No specific terms of payment • No right to defer the liability beyond 12 months • Empirical Study only for Business Liabilities and not Financial Liabil8ities • Not a Group Behaviour : Therefore Empirical Study not relevant Security Deposit of Petrol Pumps/ Gas Agencies with Indian Oil ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  16. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  17. Deposits Q. • The Company has received security deposit from its customers/dealers. Either the company or the customer/dealer can terminate the agreement by giving two months notice. The deposits are refundable within one month of termination. However, based on past experience, it is noted that deposits refunded in one year are not material, with 1% to 2% of the amount outstanding. The intention of the company is to continue long-term relationship with its customers/dealers. Can the company classify such security deposits as non-current liability?? ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  18. As per Revised Schedule VI, a liability is classified as current if the company does not have an unconditional right to defer its settlement for atleast 12 months after reporting date. This will apply generally. However in specific cases, based on the commercial practice, say for example electricity deposit collected by the department, though stated on paper to be payable on demand, the company's record would show otherwise as these are generally not claimed in short term. Treating them as non-current may be appropriate and may have to be considered accordingly.A similar criterion will apply to other deposit received , for example, under cancelable leases. A. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  19. Fixed Deposits Having maturity of Over 12 months. • Cash • Cash Equivalents • Current • Non Current ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  20. As per Para 5 of AS 3 1. Cash :- Cash comprises cash on hand and demand deposits with banks. 2. Cash Equivalents :- Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  21. Para 6 of AS – 3 :- Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity). ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  22. Neither Cash nor Cash Equivalents BUT to be considered as Other Current Assets. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  23. Supported By:- • Reliance Industries Note No.15 : Cash and bank balances (` in crore) # Balance with Banks includes Unclaimed Dividend of ` 129 crore. (Previous year ` 111 crore). * Fixed Deposit with Banks includes deposit of `6,860 crores (Previous Year ` 14,255 crore) with maturity of more than 12 months. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  24. Against view :- • FAQ (Q.25) • Q 25. Fixed deposits have a maturity of more than 12 months from the Balance Sheet date. Will they be classified as current or non-current? • Ans : Non Current • DolphyD’Souza (Pg. No. 1870, 1903) • Bank Deposit with more than 12 months maturity should be classified as Non Current ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  25. Old Creditors – Current/ Non Current • Creditors • Outstanding from 2 years or more • Due for payment • Current only ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  26. Debtors and Creditors To count for normal Operating Cycle period/ 12 months from the date of each transaction in each Debtor/Creditor Average Basis – Not on Granular Basis ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  27. Preliminary Expenses Para 56 (a) of AS26 To be recognized as expense in the year in which it is incurred Hence, need not to be disclosed in Balance Sheet and be charged to Profit and Loss Account ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  28. Pre Operative Expenses Where to be disclosed? Balance Sheet under the head - Other Non Current Assets ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  29. Company Profile Whether Mandatory or not?? Not Mandatory, only part of good practice ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  30. Share Application Money Whether Date of Allotment of shares after Share Application Money is received, is also required to be given?? No, Date of Allotment is not required but the period before which such allotment of shares is to be made is required to be mentioned. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  31. Loan From Directors Whether a loan received from a Director and Outstanding for a period of more than 12 months be treated as a Short term or a Long term Borrowing?? If payable within 12 months, to be classified as Current otherwise Non Current Installments payable within 12 months of Non Current Liability to be classified as Current Liability ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  32. FAQ’s By the ICAI dated 22.05.2012 • Authority ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  33. Slow Moving Stock and Spares Q 20. How should slow moving stock of stores and spares be classified when it will neither be consumed within the normal operating cycle nor will be sold within 12 months from the Balance Sheet date? Always a Current Asset Does not appear to be a correct view ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  34. Breach of Loan Covenant Q 21. There is a breach of a major debt covenant as on the balance sheet date related to long-term borrowing. This allows the lender to demand immediate repayment of loan. However, the lender has not demanded repayment till authorization of financial statements for issue. Can the company continue to classify the loan as non-current? Will the classification be different if the lender has waived the breach before authorization of financial statements for issue? ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  35. Ans :- As per the Guidance Note on the Revised Schedule VI, a breach is considered to impact the non-current nature of the loan only if the loan has been irrevocably recalled. Hence, in the Indian context, long-term loans, which have a minor or major breach in terms, will be considered as current only if the loans have been irrevocably recalled before authorization of the financial statements for issue. Considered as Current ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  36. Loans Q24. A company has taken a three-year loan specifically for a business whose operating cycle is four years. Hence, it needs to classify the three year loan as a current liability. This gives rise to the following issues: (a) Should the loan be classified in the balance sheet under the head “long-term borrowing”, “short-term borrowing” or “current maturities of long-term debt”? (b) Does the company need to make all the disclosures required for long term borrowings for this loan also? ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  37. Ans :- Any borrowing whose repayment falls within the operating cycle will be only a current liability. Hence, it will be included under short-term borrowings. Disclosures will also be required accordingly. Considered as Current ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  38. Fixed Deposits Q 25. Fixed deposits have a maturity of more than 12 months from the Balance Sheet date. Will they be classified as current or non-current? Non Current Does not appear to be a correct view ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  39. IMPORTANT DEFINITIONS CURRENT ASSETS (Ind AS 1 PARA 66) An asset shall be classified as current when it satisfies any of the following criteria:- • it is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle; • It is held primarily for the purpose of being traded; • It is expected to be realized within twelve months after the reporting date; or • 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. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  40. IMPORTANT DEFINITIONS • CURRENT LIABILITY • (Ind AS 1-PARA 69) • A liability shall be classified as current when it satisfies any of the following criteria: • It is expected to be settled in the company’s normal operating cycle; • It is held primarily for the purpose of being traded; • It is due to be settled within twelve months after the reporting date; or • 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 , results in its settlement by the issue of equity instruments do not affect its classification. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  41. IMPORTANT DEFINITIONS • 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. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  42. Current or Non Current Components of Operating Cycle V/S Entire Operating Cycle Some may argue what is to be seen is not if these receivables are settled within the Operating Cycle but whether it is settled within the relevant component of Operating Cycle. Ref: Pg no. 1878 DolphyD’Souza May not be very relevant if 12 month criteria decides entire classification ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  43. Illustration Suppose a manufacturing concern has a manufacturing cycle of 4 months inclusive of a credit period of three months given by the supplier. After manufacturing, a 5 month credit period is allowed to debtors. Thus on the whole the Normal Operating Cycle is of 9 months. On the basis of Normal Operating Cycle of 9 months, how to classify the following assets and liabilities into current and non-current:- Debtors Rs. 50 Lacs Creditors Rs. 30 Lacs Stock of Finished Goods Rs. 20 Lacs Stock of Raw Materials Rs. 30 Lacs Other Information:- Annual Sales Rs. 96 Lacs, spread evenly throughout the year Annual Purchases Rs. 72 Lacs , spread evenly throughout the year Average monthly sales- 8 Lacs Average monthly purchases- 6 Lacs ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  44. Determination of Normal Operating Cycle for Current and Non-Current Classification 4 Months manufacturing cycle 0 9 3 4 5 Months debtors’ recovery period 3 Months creditors’ payment period Reporting Date Point of acquisition of raw materials 9 Months Normal Operating Cycle ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  45. Debtors- Classification on the Basis of recovery phase of NOC Debtors recovery period is 5 months, so debtors expected to be realized in 5 months will be 40 Lacs (5x8) and will be classified as current on the basis of recovery phase of NOC and remaining 10 Lacs will be classified as current or non-current on the basis of expected realization in the next 12 months after the reporting date. • Current • Non-Current • If expected to be realized within 12 months after the reporting date • If not expected to be realized within 12 months after the reporting date ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  46. Debtors Classification on the basis of the entire span of NOC Debtors expected to be recovered within 9 months of NOC as per average monthly sales of Rs. 8 lacs will be Rs. 72 lacs. Therefore, entire amount will be classified as Current Asset. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  47. Creditors Classification- As per payment phase of NOC Creditors payment period is 3 months, so creditors equal to purchases of 3 months i.e. 6x3= 18 Lacs will be classified as current and remaining will be segregated into current and non-current on the basis of right of deferring payment beyond 12 months after reporting date. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  48. Creditors Classification- As per entire phase of NOC Creditors equal to purchases of 9 months i.e. 54 lacs (9x6) will be current liability and remaining will be non-current. In the present case entire 30 lacs will be current liability. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  49. Classification of Stock of Raw Materials on consumption phase of NOC Average raw material consumption period is 4 months, so purchases of 4 months i.e. 4x6= 24 Lacs will be classified as current and remaining will be classified as non-current. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

  50. Classification of Stock of Raw Materials- On the entire span of NOC Raw material expected to be consumed within 9 months of NOC on the basis of average monthly purchases of Rs. 6 lacs will be Rs. 54 lacs. So in the given query, entire stock of Rs. 30 lacs will be classified as Current Asset. ICAI Jaipur Branch CA Rajeev Sogani 26/05/2012

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