By K P C Rao.,
LLB., FCS., FCMA
Ministry of Corporate Affairs [MCA], Government of India, vide Notification No.S.O. 447(E), Dated 28th February, 2011 has revised Schedule VI to the Companies Act, 1956 which deals with the Form of Balance sheet, Profit & Loss Account and disclosures to be made therein.
The new schedule VI to the Companies Act, 1956 stipulates the manner in which every company prepares and presents its balance sheet and profit and loss account. The revision aims to harmonise and synchronise the general disclosure requirements under schedule VI in India with those prescribed in International Financial Reporting Standards (IFRS), from April 1, 2011.
No standard form was prescribed for the profit and loss account or for the Income and Expenditure Account of the company as has been done for the balance sheet because there are many different types of industries and business interests and one set of form may not be suitable for every company prior to introduction of revised Schedule VI during 2011. Earlier, some companies which have adopted horizontal form of balance sheet prepare their profit and loss account by putting all the expenses on the left side of the account and income on the right side. On the other hand, the companies who have adopted vertical form of balance sheet also prepare their profit and loss account in vertical form by putting expenditure below the income.
Applicability of the New Schedule VI
The New Schedule VI is applicable to all companies for financial statements prepared for financial year commencing on or after 01.04.2011 except banking, insurance and electricity companies which are governed by their own reporting formats under the respective pronouncements.
Form & Contents of Balance Sheet
Part-I Schedule VI sets out the form in which the balance sheet is to be prepared, gives details of the various items which must be disclosed and gives instructions in accordance with which assets and liabilities should be set out.
As per Section 211(4) the Central Government may, on the application or with the consent of the Board of Directors of the company, by order, modify in relation to the company, any of the requirements as to matters to be stated in the company’s balance sheet or profit and loss account for adapting them to the circumstances of the company.
The pre revised schedule VI does not require companies to classify assets and liabilities into current and non-current categories. As a result, some items of assets, which should be classified as non-current asset, are included in current assets. Examples are deposits which the company does not expect to realise within 12 months after the balance sheet date, that part of loans and advances that will be recovered after 12 months from the balance sheet date and those items of raw materials and components which are not expected to be consumed within the normal operating cycle. Similarly, non-current provisions and current provisions are clubbed together. At present the total amount of the provision is clubbed together with current liabilities. The new schedule VI requires companies to classify assets and liabilities into current and non-current categories and will definitely improve the usefulness of the balance sheet.
Conventionally, current asset to current liabilities ratio (current ratio) is calculated to evaluate the liquidity of the company. In absence of proper classification of assets and liabilities into current and non-current categories, this ratio gets distorted. Disclosure in the new schedule VI will remove this distortion.
Another important change is the requirement to present accumulated loss as a negative amount under reserves and surplus. The new schedule VI to the Companies Act 1956 stipulates multi-step format for the presentation of profit and loss account. It requires companies to disclose gross profit in the profit and loss account. It also requires allocation of operating expenses into selling and marketing expenses and administrative expenses. This will bring a significant change in the current structure of profit and loss account. This will require a company to apportion common expenses to different functions/activities. Companies should apply the Cost Accounting Standards, wherever applicable.
Form & Contents of Profit and Loss Account
Every profit and loss account of a company shall give a true and fair view of the company’s profit or loss for the financial year for which it is drawn up. For this purpose profit and loss account must be drawn in accordance with the requirements of Part II of Schedule VI of the Companies Act, 1956. The profit and loss account should disclose the following:
1) The result of the company’s working during the period covered.
2) Every material feature including credits and debits in respect of non-recurring transactions or transactions of an exceptional nature.
3) Transfers to and from reserves and provisions.
4) Any material effect to transactions or circumstances of an abnormal or exceptional or non recurrent nature.
5) Any material effect of change in the basis of accounting.
In fact, profit and loss account is the account by which the directors disclose to the shareholders of the company the result of the actual working of the company and serves to give the shareholders an idea of the earning capacity of the company in relation to its capital and enables them to judge about the administration and management of the affairs of the company.
The Profit and Loss Account should consider all items of expenditure and income which are related to the current year of operations. It should also provide for all liabilities of a revenue nature related to the current year which could be estimated with substantial accuracy.
The disclosure of gross profit by companies will be useful in analysing financial statements. Gross profit is the difference between the amount of net sales (that is sales less excise duty) and the cost of goods sold. The new schedule VI uses the term cost of sales instead of the term cost of goods sold. In a merchandising business the cost of goods sold is the total of costs incurred to bring the goods to the location and condition of sale. Thus, it includes expenses on inward logistics. For a manufacturing company cost of goods sold is total of costs incurred to manufacture the goods sold and the costs to bring the goods to the location of sale. Analysts use the gross profit ratio to evaluate the manufacturing efficiency of a manufacturing business and the efficiency of procurement and inward logistics of a merchandising business
The next level of profit is the operating profit. This is the difference between the gross profit and selling and marketing expenses and administrative expenses. Operating profit to sales ration measure the operating efficiency of the company. Operating expenses to sales ratio (operating ratio) is complementary to the operating profit to sales ratio. Certain expenses which do not have a direct cause and effect relationship with the revenue for the year are called discretionary expenses. Examples of discretionary expenses are training expense and research expense. The new schedule VI does not provide guidance on whether they should be included in cost of goods sold or in general and administrative expenses.
Sometime analysts calculate earnings before interest, tax, depreciation and amortisation (EBITDA) to sales ratio to evaluate the profitability. The ratio is called cash profit ratio. This ratio is useful to calculate the margin over current expenses, particularly in capital intensive industries like the telecommunication industry. Profit and loss account provides information required to calculate EBITDA.
Differences between the New Schedule VI and the Old Schedule VI
Significant differences as to the Balance Sheet Items between New Schedule VI and Old Schedule VI and items that require additional disclosure requirements as compared to Old Schedule VI are furnished in the following table:
Balance Sheet Items
New Schedule VI
Old Schedule VI
A) The following should be additionally disclosed
a) Shares held by holding company or
b) Shares held by ultimate holding company including shares held by subsidiaries or associates of holding or ultimate holding company
c) Shares held by shareholders holding more than 5 % specifying the number of shares held
B) The following historical disclosures are to be given for transactions that occurred over the previous five years
i) Aggregate number and class of shares allotted as fully paid up pursuant to contracts(s) without payments being received in cash.
ii) Aggregate number and class of shares allotted as fully paid up by way of bonus shares
iii) Aggregate number and class of shares bought back.
a) The requirements with respect to Clause A in Column B were not there.
b) The requirements with respect to Clause B in Column B were not restricted to five years
Reserves and Surplus
Surplus – Balance in Profit & Loss Account
1) The allocations and appropriations such as dividend, bonus shares and transfer to / from reserves should be disclosed under this head.
2) Debit balance of the statement of profit and loss shall be shown as a negative figure under the head surplus and the balance of Reserves and Surplus after the above adjustment shall continue to be shown under this head even if the resulting figure is negative.
a) The surplus in the profit and loss account is after appropriations and allocations
b) The debit balance in the profit and loss account after adjustment against the free/ uncommitted reserves should be disclosed in the Assets side of Balance Sheet
Share Application Money Pending Allotment
The following disclosures shall be made
1) The number of shares proposed to be issued
2) Amount of premium if any
3) The period before which shares shall be allotted
4) The sufficiency of company’s authorized share capital to cover this
5) If the period pending allotment is beyond the period for allotment as mentioned in the document inviting application, then the following shall be disclosed
I. the period for which it is outstanding
II. The reason for non allotment should be disclosed.
This disclosure requirement was not there in this reporting format.
Deferred tax Liabilities/ Assets
This should be given as part of non-current liabilities /assets. As compared to Old Schedule VI, here the place of disclosure is indirectly stated.
Deferred tax liabilities would be disclosed after unsecured loans and deferred tax assets would be disclosed after investments. This was not required by the schedule but was an Accounting Standard requirement.
Liability will be classified as current liability if any one (and not all) of the following is satisfied
1) it is expected to be settled in the company’s normal operating cycle(on most cases it will be less than 12 months)
2) it is held primarily for the purpose of being traded
3) It is due to be settled within 12 months after the reporting date.
4) the company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date
Note: Where the normal operating cycle cannot be identified , it is assumed to have a duration of 12 months
The following items are item heads to be presented
i) Short Term Borrowings
ii) Trade Payables
iii) Other Current liabilities
iv) Short Term Provisions
If Trade payables cannot be classified as Current Liabilities, it can be classified as Long Term Liabilities
The item to be reported under this head would be
ii) Sundry Creditors
iii) Others etc
The meaning and the terminology that was in use hitherto has been changed.
An asset will be classified as a current assert only when it satisfies any of the following criteria
1) It is expected to be realized in , or is intended for sale or consumption in the company’s normal operating cycle
2) it is held primarily for the purpose of being traded
3) It is expected to be realized within 12 months after the reporting date.
4) it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date
Note: Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months
Aggregate amount of Trade Receivables outstanding for a period exceeding six monthsfrom the date they are due for payment should be separately stated
If Trade receivables cannot be classified as Current Assets, it can be classified as Long Term Trade Receivables under the head Non –Current Assets
Cash and Cash Equivalentsshall include apart from other items , the following
1) Balances with Banks
2) Cash on hand
3) Earmarked balances with banks (for unpaid dividend)shall be stated separately
4) Balances with banks to the extent held as margin money or security against the borrowings , guarantees etc shall be disclosed separately
5) Repatriation restrictions if any, in respect of cash and bank balances shall be separately stated.
The definition of the current assets has been changed and the terminology hitherto in use has undergone a change and breakup of balances as between schedule and non-schedule banks are dispensed with.
Fixed Assets/ Capital work-in-progress
Capital work-in-progress should include only those assets which are under construction because
a) Capital Advance should be included under long term loans and advances and
b) Intangible Assets under development that qualify for capitalization, should be stated separately
Capital work-in-progress included assets under construction, capital advances and intangible assets under development.
Investments regardless of whether it is Non-Current Investment or Current Investment
Aggregate provision for diminution in value of investments should be disclosed
There weren’t such requirements in this reporting format.
Miscellaneous expenditure to the extent not written off
There is no specific disclosure requirement
There was specific disclosure requirement
Format of Balance Sheet
Only Vertical Format is prescribed. For Format of Balance Sheet please refer Part -C
Vertical and Horizontal format was prescribed, but Vertical format was predominantly followed.
The format for presentation of the Profit &Loss Account is prescribed now. There was no such format under the old schedule.
Differences between the Old and New Schedule VI with respect to the Profit and Loss Account
The significant points of differences between the old and New Schedule VI to the Companies Act, 1956 with respect to the Profit and Loss Account are furnished in the following table:
Profit And Loss Account Items
New Schedule VI
Old Schedule VI
Format for presentation
Format has been specified and minimum line items to be presented has been specified
Neither of the format or minimum line items were specified
Profit & Loss Account would end with
Current Year Profit
Appropriations from profit if any
Classification of Expenses
Based on Nature of Expenses- E.g. Line Item “Employee Benefit Expenses”
Based on nature or based on function
Criterion for separate disclosure
Any item of income or expenditure which exceeds 1% of the revenue from operations or 1, 00,000 rupees whichever is higher shall be disclosed separately.
Any item under which the expenses exceed 1% of total revenue of the company or 5000 rupees whichever is higher, shall be disclosed separately
Disclosures relating to managerial remuneration
It is withdrawn in this reporting format
The computation under section 350 of the Companies Act, 1956 was to be given
Exceptional and Extraordinary Items
It is to be disclosed separately
There were no such requirements.
Quantitative details are not required to be given. But major heads of consumption like raw materials, goods purchased are to be given under broad heads.
The value of raw materials consumed giving item wise breakup and indication of quantities thereof was required to be given.
TDS for the Current Year and the previous year need not be given along the line item
TDS for the Current Year and the previous year was supposed to be given along the line item
New Format of Balance Sheet is prescribed in New Schedule VI to the Companies Act, 1956.Other Changes
As to Rounding off
Under New Schedule VI
Where the Turnover is
Rounding off permissible
Less than 100 Crore rupees
To the nearest hundreds, thousands, lakhs or millions, or decimal thereof.
100 Crore rupees or more
To the nearest lakhs, millions or crores, or decimals thereof
Consistency in rounding off methods intended to be followed in the years to come is strongly recommended
Under Old Schedule VI
Where the Turnover is
Rounding off permissible
Less than 100 Crore rupees
To the nearest hundreds or thousands or decimals thereof
100 Crore rupees or more but less than 500 Crore rupees
To the nearest hundreds , thousands lakhs or millions , or decimals thereof
500 Crore rupees or more
To the nearest hundreds , thousands, lakhs, millions or crores or decimals thereof
In case of conflict between Schedule VI and Accounting Standards
It may be clarified that, in the New Schedule VI to the Companies Act, 1956 if there is a conflict between the Schedule and the Accounting Standards, then the Accounting Standards will prevail.
Disclosure as to Cross Reference
In the New Schedule to the Companies Act, 1956, each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notes. This would ensure that the coherency in the financial statements would be appreciated to a greater extent by the users of the financial statements.
ConclusionIn India the professional bodies like ICAI have been constantly formulating new Accounting Standards as well as revising the existing Accounting Standards from time to time with the objective to bring the Indian Accounting Standards in line with the International Accounting Standards (IASs) / International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB). Considering the global developments with regard to IFRS, smooth and proper implementation of Indian Accounting Standards converged with IFRS, is the task before all of us. Though, the revision of schedule VI is due for a long period, the government has taken it up because of the compulsion to bring it in conformity with the requirement of IFRS.