Study Circle Meeting on: Revised Schedule VI under Companies Act, 1956 Organised by:

1. Study Circle Meeting on: Revised Schedule VI under Companies Act, 1956 Organised by: PUNE WEST CPE STUDY CIRCLE OF WIRC OF ICAI NILESH S. VIKAMSEY PARESH H. CLERK

2. Structure of Presentation • Setting the Context • Structure of Revised Schedule VI • Key Changes • Brain Storming on Issues • Key Takeaways NILESH S. VIKAMSEY PARESH H. CLERK

3. Setting the Context NILESH S. VIKAMSEY PARESH H. CLERK

4. Setting the Context Applicability • Applicable to all companies (except Banking and Insurance Companies but applies to Electricity Companies) • Applicability date: Financial years commencing on or after 1 April 2011 Can a company apply Revised Schedule VI early, say from 1 January 2011? Ind-AS/ IFRS • Harmonize and synchronize the disclosure requirements with International formats and in the direction of Ind–AS (IFRS converged AS) E. g. Certain concepts like Current/ Non-current classification of assets and liabilities, Elimination of concept of Schedule and such information will now be provided in the Notes to Accounts NILESH S. VIKAMSEY PARESH H. CLERK

5. Setting the Context Fundamental Change AS/ Act to override Revised Schedule VI Format • No option to use horizontal format for presentation of Balance Sheet(“BS”) • Format of Statement of Profit and Loss(“P&L”) also now included in Schedule VI • No option to use Functional Classification of Expenses • Each item of the face of the BS and P&L shall be cross referenced to any related information in notes to accounts (concept of Schedules dropped) • Revised Schedule VI has flexibility • Addition, deletion, amendment, substitution, modification of line/ sub–line items • The disclosure requirements are in addition to those required by AS and not in place of such AS requirements • Balance between providing excessive detail or excessive aggregation NILESH S. VIKAMSEY PARESH H. CLERK

6. Setting the Context Format The terms used will carry the meaning defined in applicable AS Materiality thresholdfor disclosurein Revised schedule VI: • Items of income or expense (earlier only expenses) • which exceeds 1% of the revenue from operations (earlier total revenue) or • Rs 100,000 (earlier Rs.5,000) whichever is higher Rounding-off options have been changed • Revised Schedule VI states that the figures “May be rounded off” as per specific rules. Is it mandatory or optional to apply rounding off? • Revised Schedule VI states that option once selected should be used uniformly through entire set of Financial Statements NILESH S. VIKAMSEY PARESH H. CLERK

7. Effect of rounding off • If turnover exceeds Rs.100 Crore, figures in terms of hundreds and thousands cannotbe given; earlier, figures in hundreds and thousands was permitted for any amount of turnover • If turnover is less than Rs.100 Crore, figures can be presented in terms of lakhs or millions (but not in crores) • Even if turnover is less than Rs. 500 Crore but exceed Rs.100 Crore, figures can be presented in terms of crores (earlier it was only for companies with turnover of Rs. 500 Crore or more) NILESH S. VIKAMSEY PARESH H. CLERK

8. Structure of Revised Schedule VI NILESH S. VIKAMSEY PARESH H. CLERK

9. Structure • Structure of Revised Schedule VI • General Instructions • Part I – Form of Balance Sheet • General Instructions for preparation of Balance Sheet • Part II – Form of Statement of Profit and Loss • General Instructions for preparation of statement of Profit and Loss • Structure of Exisitng Schedule VI • Part I – Form of Balance Sheet • General Instructions for preparation of Balance Sheet • Part II – Requirements as to Profit and Loss • Part III – Interpretation – for the purpose of Parts I and II of Schedule VI unless the context otherwise requires • Part IV – BS abstract and Company’s general business profile NILESH S. VIKAMSEY PARESH H. CLERK

10. Balance Sheet – Revised Format (Rupees in…………) NILESH S. VIKAMSEY PARESH H. CLERK

11. Balance Sheet – Revised Format (Rupees in…………) NILESH S. VIKAMSEY PARESH H. CLERK

12. P&L – Revised Format (Rupees in…………) NILESH S. VIKAMSEY PARESH H. CLERK

13. P&L – Revised Format (Rupees in…………) NILESH S. VIKAMSEY PARESH H. CLERK

14. Assets Classification Intangible Assets under Development Intangible Assets Capital WIP Tangible Assets NILESH S. VIKAMSEY PARESH H. CLERK

15. Equity and Liability Classification NILESH S. VIKAMSEY PARESH H. CLERK

16. Key Changes NILESH S. VIKAMSEY PARESH H. CLERK

17. Disclosures No Longer Required Balance Sheet • Loans and Advances from Subsidiary – Now covered under `Loans and Advances from Related Parties’ – Loans from Managers • Investments purchased and sold during the year • Investments, sundry debtors and loans and advances pertaining to companies under the same management • Break up of Bank Balances between Scheduled and Other Banks, Break up between Current account, Call account and Deposit accounts, Details of names, amount, maximum amounts with Non-scheduled banks • Maximum amounts due on account of loans and advances from directors or officers of the company • Dues from companies under the same management • Livestock and Railway sidings • Miscellaneous Expenditure (to the extent not written off or adjusted) NILESH S. VIKAMSEY PARESH H. CLERK

18. Disclosures No Longer Required Profit and Loss Account • Commission, brokerage and non-trade discounts • Quantitative information relating to turnover, raw material, purchases etc • Interest on Company’s debentures and other fixed period loan • Amount reserved for repayment of capital and repayment of loan Notes • Managerial remuneration and computation of net profits for calculation of commission • Licensed capacity, installed capacity and actual production • Balance sheet Abstract and Company’s General Profile under Part IV NILESH S. VIKAMSEY PARESH H. CLERK

19. New Disclosures “Current”/ “Non–current” classification • If an asset or a liability has both the portions, company will need to break the same into Current and Non-current portions e.g., Current maturities of a Long Term Borrowing will have to be separated and classified under the head “Other Current Liabilities” • Will Impact Working Capital, Current Ratio and Debt Equity Ratios Revised schedule VI requires separate disclosure for Loans and Advances received from and given to Related Parties • Earlier this disclosures was required only for Subsidiary Companies • Related parties as per AS 18 Loans guaranteed by directors or others need to be disclosed separately • Others?? NILESH S. VIKAMSEY PARESH H. CLERK

20. New Disclosures Commitments • Requires disclosure of all commitments (including commitments other than Capital Commitments) Loan Defaults • Requires disclosure of all defaults in repayment of loans and interest • Currently, CARO requires only defaults in repayment of dues to financial institutions, banks and debenture holders to be specified • Terms of repayment of Term Loans and Other Loans to be disclosed (earlier required only debentures) Shares of each class held by: • Holding Company • Ultimate Holding Company • Subsidiaries or Associatesof both Above (earlier Associate of Parent was not there) NILESH S. VIKAMSEY PARESH H. CLERK

21. New Disclosures Shareholder’s Funds – Additional Disclosures • Reconciliation of no. of shares outstanding at beginning and end of reporting period • Rights, preferences and restrictions of each class of shares including restrictions on distribution of dividends and repayment of capital • Details of shareholders holding more than 5% shares (lifting corporate veil?) • Details of shares issuable under options and contracts/ commitments • Unpaid calls by directors and officers shall be shown separately For 5 years immediately preceding the date of BS disclose Aggregate Number and Class of Shares : • pursuant to contract(s) without payment being received in cash (presently to be given throughout the life of the Company) • bonus shares (presently to be given throughout the life of the Company) • bought back (presently no such requirement) NILESH S. VIKAMSEY PARESH H. CLERK

22. New Disclosures • Share Application Money Pending Allotment • Not exceeding issued capital and not refundable – disclosure after Shareholders’ Funds and before Non-current Liability • If refundable or sum in excess of issued capital – disclosures under Other Current Liability • Additional Disclosures of Share Application Money (whether classified after Shareholders’ Funds or under Other Current Liabilities) • Terms and Conditions • Number of shares to be issued • Amount of premium • period before which shares will be allotted • Period for which it is pending beyond the date of allotment mentioned in offer document with reasons • Whether company has sufficient authorised capital to allot the shares out of application money • Is this only a disclosure requirement? Is it to be reflected always as Other Current Liabilities ? NILESH S. VIKAMSEY PARESH H. CLERK

23. New Disclosures • Share Warrants • Money received against Share Warrants, will be shown as separate line item under Shareholder's Funds • Investments • With respect to Investments, separate disclosure required for investment in “Controlled Special Purpose Entities” • What is meant by “Controlled Special Purpose Entities” NILESH S. VIKAMSEY PARESH H. CLERK

24. Recognition No Longer Required • Dividend • Existing Schedule VI required the Parent Company to recognise dividend 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. • Whether the dividend recognized in the previous year needs to be derecognized and the previous year financial statement to be restated? • By virtue of AS-4, Subsidiary Company will provide for proposed dividend and if holding Co., would not recognise the same, how to deal with it in Consolidated Accounts? NILESH S. VIKAMSEY PARESH H. CLERK

25. Disclosures Modified Debtors Currently, debtors (now to be referred to as Trade Receivable) Outstanding for a period exceeding 6 months based on billing date. Revised Schedule VI requires Trade Receivable outstanding for a period exceeding 6 months from the date they became due for payment. Capital advances • Currently, Capital advances can be presented as part of Capital Work–in–Progress / Fixed Assets • Revised Schedule VI requires the same to be presented separately under the head “Loans and Advances” Profit and Loss Account Appropriation / Reserves and Surplus • Appropriation of Profit and Loss to be presented under Reserves and Surplus • Debit Balance of Profit and Loss to be shown as a ‘negative’ figure under Surplus • Reserves and Surplus balance will be shown after adjusting negative balance of P&L, even if negative NILESH S. VIKAMSEY PARESH H. CLERK

26. Important Definitions Current/ Non-current asset – An asset is 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. Otherwise it is a Non-current Asset Current/ Non-current liability – 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. • Otherwise it is a Non-current Liability NILESH S. VIKAMSEY PARESH H. CLERK

27. Important Definitions Operating Cycle It 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. Trade Receivable A receivable shall be classified as a ‘Trade Receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business. Trade Payable A payable shall be classified as a ‘Trade Payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business. NILESH S. VIKAMSEY PARESH H. CLERK

28. Challenges for F.Y. 2010-11 • Classification of Current or Non-current • Compile additional disclosure requirements • Balances will have to be segregated, reclassified, regrouped • The figures may be required to be audited • For the purpose of Comparative Statement of Cash Flow for the year 2010-11, even the Balance Sheet as at March 31, 2010 will have to be prepared NILESH S. VIKAMSEY PARESH H. CLERK

29. Brain Storming onIssues NILESH S. VIKAMSEY PARESH H. CLERK

30. General Issues Comparative Information Whether required in the first year of its application? Half-yearly or Interim Financial Statements Whether to use the existing or the Revised Schedule VI in the preparation of its half yearly financial statements? Format of financial statements as per SEBI ICDR Regulations Whether to use the existing or the Revised Schedule VI in the preparation Restated Financial Information? Commitments Earlier Schedule VI - only “Capital Commitments”. 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? NILESH S. VIKAMSEY PARESH H. CLERK

31. General Issues Finance Companies Which companies should be considered as “Finance Companies”? Disclosure of Unamortized Expenses Disclosure of Unamortized portion of expense items such as share issue expenses, ancillary borrowing cost and discount or premium relating to borrowings? NILESH S. VIKAMSEY PARESH H. CLERK

32. Key Issues – Balance Sheet Current and Non-Current Classification • Whether Deferred Tax should always be classified as Non–Current ? • Whether Capital advances also need to be bifurcated between Non-current and Current categories? If yes, on what basis? • Unconditional right to defer settlement of liability • Non compliance of debt covenants e.g. quarterly information, non payment of monthly interest • Most loan agreements have a clause that in case of non compliance of any clause the loan will be payable on demand NILESH S. VIKAMSEY PARESH H. CLERK

33. Key Issues – Balance Sheet Current and Non-current Classification • Whether total loan will become Current or Non-current? • Classification of Long–term Investment expected to be realized within 12 months from the BS date • Employee Benefits like Bonus/ Incentives, Post employment obligations e.g. Gratuity and Pension, Other long–term benefits e.g. Accumulated compensated absence • Whether Cash credit will be classified as Current or Non-current ? • Whether the provision for tax to be classifies as Current or Non-current ? NILESH S. VIKAMSEY PARESH H. CLERK

34. Key Issues – Balance Sheet Trade Receivable/ Payable classification Whether liability for purchase of fixed assets/ receivable for sale of Fixed Assets should be classified as Trade Payable/ Trade Receivable? Investments– Basis of valuation (Revised) Vs Mode of Valuation (earlier) • Long–Term investments carried at other than cost • Current Investment (individual investments) NILESH S. VIKAMSEY PARESH H. CLERK

35. Key Issues – Balance Sheet Share Capital Shareholder holding more than 5% shares • Will disclosure apply if a shareholder was holding more than 5% shares during the year; but not at year–end ? • Disclosure in case of ADR/ GDR Shares held by holding/ ultimate holding company, including shares held by their subsidiaries/ associates • Whether applicable to preference shares classified as liability • Purpose of requiring disclosures held by associates • No need to disclose shares held by joint ventures NILESH S. VIKAMSEY PARESH H. CLERK

36. Key Issues – Balance Sheet Redeemable Preference Shares – whether Capital OR Liability? The Revised Schedule VI mentions that different classes of Preference Share Capital to be treated separately. (Note 6A of General Instructions for preparing Balance Sheet); Does this imply that a company needs to decide whether redeemable preference shares are liability or equity based on its economic substance NILESH S. VIKAMSEY PARESH H. CLERK

37. Key Issues – Profit and Loss Account Quantitative Information NILESH S. VIKAMSEY PARESH H. CLERK

38. Key Issues – Profit and Loss Account Quantitative and other Information • Is a Company required to disclose quantitative details or not? • Will a manufacturing company disclose purchase, sale or consumption of raw material? • What is meant by “good purchased” in case of manufacturing companies? • Does a manufacturing or a trading company required to disclose sales? • How should broad heads for Work–in–Progress be disclosed? • Whether broad heads of Opening and Closing Inventory should also be disclosed? NILESH S. VIKAMSEY PARESH H. CLERK

39. Key Issues – Profit and Loss Account Excise Duty, Sales Tax and VAT • Revised Schedule VI requires excise duty to be presented as deduction from revenue of a non–finance company in the notes • No specific requirement for presentation of VAT and Sales Tax • Issues • AS 9 Revenue Recognition requires excise duty to be shown as deduction from sales on the face of P&L Account (and not in notes) • No notified AS deals with accounting for VAT. However, the ICAI GN requires that revenue recognized should be net of VAT • Service Tax–?? NILESH S. VIKAMSEY PARESH H. CLERK

40. Key Issues – Profit and Loss Account • Accounting and disclosure of share of profit/ loss in Partnership Firms • Whether disclosures for Names of all Partners, Total Capital and Share (Profit/ Loss Sharing Ratio) of Each Partner should be disclosed for LLP also ? • Proposed dividend – accounting and disclosure • Whether dividend income for finance companies should be taken to main revenue or Other Income ? NILESH S. VIKAMSEY PARESH H. CLERK

41. Key Issues – Disclosure Level of disclosure pertaining to default/continuing default in repayment of loans and interest in each case i.e. category–wise or loan–wise within the category? 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: • Default pertain to borrowing from banks and FI’s or are also required for items such as bonds/ debentures, deposits, finance lease obligations? • Defaults other than repayment of loan and interest, e.g., compliance with debt covenants? • Interpretation of terms “default/ continuing default” as on the balance sheet date NILESH S. VIKAMSEY PARESH H. CLERK

42. Key Issues – Disclosure Loans and Advances to related parties • “Details” of Loans and Advances given to Related Parties to be disclosed • What details need to be disclosed are not specified? • Whether disclosures required to be made in addition to AS–18 Cash and Cash Equivalent definition • 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 Information about items that do not qualify for recognition in financial statements – what could be these items? • Postponement of Revenue Recognition • Disputed Cases – Remote Liability – Not Contingent NILESH S. VIKAMSEY PARESH H. CLERK

43. Key Issues – Disclosure • Meaning of “Other Operating Revenues” for Non-finance Companies • Where should the following be classified – Other Operating Revenue/ Other Income? - Profit on Sale of Fixed Assets - Sale of Manufacturing Scrap • Should the net gains arising on foreign exchange fluctuations be included under the head “Other Operating Revenues” or “Other Income”? • No specific guidance on disclosure of value of imports and expenditure in foreign currency whether accrual or cash • Does Small and Medium Company as defined under Companies (Accounting Standards) Rules, 2006 need to disclose Diluted EPS? NILESH S. VIKAMSEY PARESH H. CLERK

44. Key Issues – Disclosure Tangible and Intangible Assets To disclose the amount of reduction or increase (due to reduction of capital or revaluation of assets etc) together with the date thereof for the first 5 years subsequent to the date of such reduction or increase, can a company avoid making disclosures required under AS 10 beyond 5 years? NILESH S. VIKAMSEY PARESH H. CLERK

45. Key Takeaways • Comparative Numbers – To commence exercise of validating previous year numbers in Revised Schedule VI Format • Changes to be made MIS/ IT systems to collate information of Current/ Non-current portions of each asset and liabilities • Break-up of Employee Benefit Liabilities in Current and Non-current to be obtained from Independent Actuary • Review Loan Agreements to avoid becoming Current liability in case of non compliance of minor clauses • Additional time and efforts for the Companies and Auditors to understand and implement changes • Use of judgment to maintain balance between excessive information and over aggregation NILESH S. VIKAMSEY PARESH H. CLERK

46. Differential Comparison NILESH S. VIKAMSEY PARESH H. CLERK

47. Differential Comparison NILESH S. VIKAMSEY PARESH H. CLERK

48. Differential Comparison NILESH S. VIKAMSEY PARESH H. CLERK

49. Differential Comparison NILESH S. VIKAMSEY PARESH H. CLERK

50. NILESH S. VIKAMSEY PARESH H. CLERK