ICAI issues Guidance Note on Division I of Non Ind AS Schedule III to the Companies Act 2013

1.1 Schedule III to the Companies Act, 2013 (‘the Act’) provides the manner in which every company registered under the Act shall prepare its Balance Sheet, Statement of Profit and Loss and notes thereto. In the light of various economic and regulatory reforms that have taken place for companies over the last several years, there was a need for harmonizing and synchronizing the notified Accounting Standards as applicable (‘AS’/‘Accounting Standard(s)’).

1.2 The relevant format of Schedule III to the Act is given in Annexure A (Pg 142). As per the Act and Rules / Notifications thereunder, the Schedule applies to all companies, except for those companies where Division II and Division III of the Schedule III is applicable, for the Financial Statements to be prepared for the financial year commencing on or after April 1, 2014. This Guidance Note also incorporates the changes made by various MCA Notifications upto 31 March 2021 to Division I to the Schedule III (hereinafter, referred to as ‘Schedule III’).

1.3 The requirements of the Schedule III however, do not apply to companies as referred to in the proviso to Section 129(1) of the Act, i.e., any insurance or banking company, or any company engaged in the generation or supply of electricity or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company.

1.4 It may be clarified that for companies engaged in the generation and supply of electricity, however, neither the Electricity Act, 2003, nor the rules framed thereunder, prescribe any specific format for presentation of Financial Statements by an electricity company. Section 1(4)(d) of the Companies Act, 2013 states that the provisions of the Companies Act shall apply to companies engaged in the generation or supply of electricity, except in so far as the said provisions are inconsistent with the provisions of the Electricity Act, 2003. Keeping this in view, Schedule III may be followed by such companies till the time any other format is prescribed by the relevant statute.

2. Objective and Scope

2.1. The objective of this Guidance Note is to provide guidance in the preparation and presentation of Financial Statements of companies in accordance with various aspects of the Schedule III. However, it does not provide guidance on disclosure requirements under Accounting Standards, other pronouncements of the Institute of Chartered Accountants of India (ICAI), other Statutes, etc.

2.2. In preparing this Guidance Note, reference has been made to the Accounting Standards notified under Section 133 of the Companies Act, 2013 read together with Paragraph 7 of the Companies (Accounts) Rules, 2014 given in Annexure D (Pg 188) and various other pronouncements of the ICAI. The primary focus of the Guidance Note has been to lay down broad guidelines to deal with practical issues that may arise in the implementation of the Schedule III.

2.3. As per the clarification issued by ICAI regarding the authority attached to the Documents Issued by ICAI, “‘Guidance Notes’ are primarily designed to provide guidance to members on matters which may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are recommendatory in nature. A member should ordinarily follow recommendations in a guidance note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so. Similarly, while discharging his attest function, a member should examine whether the recommendations in a guidance note relating to an accounting matter have been followed or not. If the same have not been followed, the member should consider whether keeping in view the circumstances of the case, a disclosure in his report is necessary.”

3. Applicability

3.1. As per the Government Notification no. S.O. 902 (E) dated 26th March, 2014, the Schedule III is applicable for the Balance Sheet and Statement of Profit and Loss to be prepared for the financial year commencing on or after April 1, 2014. Schedule III has been amended vide the Government Notification dated 24th March, 2021 to include certain additional presentation and disclosures requirements and changes some existing requirements. These changes need to be applied in preparation of financial statements for the financial year commencing on or after 1st April, 2021. All companies that prepare, either voluntarily or mandatorily, Financial Statements in compliance with the Companies (Accounts) Rules, should consider Schedule III as well as this Guidance Note. Additionally, preparers of financial statements should also consider requirements of the Act as well as other Statutes, Notifications, Circulars issued by various Regulators.

3.2. The Schedule III requires that except in the case of the first Financial Statements laid before the company after incorporation, the corresponding amounts for the immediately preceding period are to be disclosed in the Financial Statements including the Notes to Accounts. Accordingly, corresponding information will have to be presented starting from the first year of application of the Schedule III. Thus, for the Financial Statements prepared for the year 2021-22 (1st April 2021 to 31st March 2022), corresponding amounts need to be given for the financial year 2020-21.

3.3. Applicability of the Schedule III format to interim Financial Statements prepared by companies in the first year of application of the Schedule:

Relevant paragraphs of AS-25 Interim Financial Reporting are quoted 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. Additional line items or notes should be included if their omission would make the condensed interim Financial Statements misleading.”

3.4. Accordingly, if a company is presenting condensed interim Financial Statements, its format should also going forward conform to that used in the company’s most recent annual Financial Statements, i.e., the Schedule III of Companies Act, 2013.

4. Summary of Division I to the Schedule III

4.1. Main principles

4.1.1. The Schedule III requires that if compliance with the requirements of the Act and/ or the notified Accounting Standards requires a change in the treatment or disclosure in the Financial Statements as compared to that provided in the Schedule III, the requirements of the Act and/ or the notified Accounting Standards will prevail over the Schedule.

4.1.2. The Schedule III sets out the minimum requirements for disclosure on the face of the Financial Statements, i.e., Balance Sheet, the Statement of profit and Loss for the period (The term ‘Statement of Profit and Loss’ has the same meaning as ‘profit and loss Account) and Notes. Cash flow statement shall be prepared, where applicable, in accordance with the requirement of the relevant Accounting Standard. Line items, sub-line items and sub-totals can be presented as an addition or substitution on the face of the Financial Statements when such presentation is relevant for understanding of the company’s financial position and/or performance.

4.1.3. The terms used in the Schedule III will carry the meaning as defined by the applicable Accounting Standards. For example, the terms such as ‘associate’, ‘related parties’, etc. will have the same meaning as defined in Accounting Standards notified under Companies (Accounting Standards) Rules, 2006 (as amended from time to time).

4.1.4. 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.

4.1.5. All items of assets and liabilities are to be bifurcated between current and non-current portions and presented separately on the face of the Balance Sheet.

4.1.6. There is an explicit requirement to use the same unit of measurement uniformly throughout the Financial Statements and notes thereon.

5. Structure of Division I to the Schedule III

The Structure of Schedule III is as under:

I. General Instructions for preparation of Balance Sheet and Statement of Profit and Loss of a company

II. Part I – Form of Balance Sheet

III. General Instructions for Preparation of Balance Sheet

IV. Part II – Form of Statement of Profit and Loss

V. General Instructions for Preparation of Statement of Profit and Loss

VI. General Instructions for the Preparation of Consolidated Financial Statements

6. General Instructions to Division I to The Schedule III

6.1. The General Instructions lay down the broad principles and guidelines for preparation and presentation of Financial Statements.

6.2. As laid down in the Preface to the Statements of Accounting Standards issued by ICAI, if a particular Accounting Standard is found to be not in conformity with the law, the provisions of the said law will prevail and the Financial Statements should be prepared in conformity with such law. The Schedule III gives overriding status to the requirements of the Accounting Standards and other requirements of the Act, such principle of law overriding the Accounting Standards is inapplicable in the context of the Schedule III.

6.3. The Schedule III requires that if compliance with the requirements of the Act including applicable Accounting Standards require any change in the treatment or disclosure including addition, amendment, substitution or deletion in the head/sub-head or any changes inter se, in the Financial Statements or statements forming part thereof, the same shall be made and the requirements of Schedule III shall stand modified accordingly.

6.4. Implications of all instructions mentioned above can be illustrated by means of the following example. One of the line items to be presented on the face of the Balance Sheet under Current assets is “Cash and cash equivalents”. The break-up of these items required to be presented by the Schedule III comprises of items such as Balances with banks held as margin money or security against borrowings, guarantees, etc. and bank deposits with more than 12 months maturity. According to AS-3 Cash Flow Statements, Cash is defined to include cash on hand and demand deposits with banks. Cash Equivalents are defined as 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. The Standard further explains that an investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from the date of acquisition. Hence, normally, deposits with original maturity of three months or less only should be classified as cash equivalents. Further, bank balances held as margin money or security against borrowings are neither in the nature of demand deposits, nor readily available for use by the company, and accordingly, do not meet the aforesaid definition of cash equivalents. Thus, this is an apparent conflict between the requirements of the Schedule III and the Accounting Standards with respect to which items should form part of Cash and cash equivalents. As laid down in the General Instructions, Para 1 of Schedule III, requirements of the Accounting Standards would prevail over the Schedule III and the company should make necessary modifications in the Financial Statements, which may include addition, amendment, substitution or deletion in the head/sub-head or any other changes inter se.

Accordingly, the conflict should be resolved by changing the caption “Cash and cash equivalents” to “Cash and bank balances,” which may have two sub-headings, viz., “Cash and cash equivalents” and “Other bank balances.” The former should include only the items that constitute Cash and cash equivalents defined in accordance with AS 3 (and not the Schedule III), while the remaining line-items may be included under the latter heading.

6.5. The comparatives for the previous years should be prepared on the same lines of guidance as provided for the preparation of current schedules.

6.6. In any case where ageing is to be given under any clause of the Schedule III; then in case of amalgamation/merger; the original date will be considered for the purpose of giving information. If such information is not available, the fact should be so stated.

6.7. Para 2 of the General Instructions to the Schedule III states that the disclosure requirements of the Schedule are in addition to and not in substitution of the disclosure requirements specified in the notified Accounting Standards. They further clarify that the additional disclosures specified in the Accounting Standards shall be made in the Notes to Accounts or by way of an additional statement unless required to be disclosed on the face of the Financial Statements. All other disclosures required by the Act are also required to be made in the Notes to Accounts in addition to the requirements set out in the Schedule III.

6.8. An example to illustrate the above point is the specific disclosure required by AS-24 Discontinuing Operations on the face of the Statement of Profit and Loss which has not been incorporated in the Schedule III. The disclosure pertains to the amount of pre-tax gain or loss recognised on the disposal of assets or settlement of liabilities attributable to the discontinuing operation. Accordingly, such disclosures specifically required by the Accounting Standard on the face of either the Statement of Profit and Loss or Balance Sheet will have to be so made even if not forming part of the formats prescribed under the Schedule III.

6.9. All the other disclosures required by the Accounting Standards will continue to be made in the Financial Statements. Further, the disclosures required by the Act will continue to be made in the Notes to Accounts. An example of this is the separate disclosure required by Sub Section (3) of Section 182 of the Act for donations made to political parties. Such disclosures would be made in the Notes. An illustrative list of disclosures required under the Act is enclosed as Annexure C (Pg 185).

6.10. Though not specifically required by the Schedule III, disclosures may be mandated by other Acts or legal requirements will have to be made in the Financial Statements. For example, until amendment to Division I to schedule II by MCA notification dated 4th September 2015, the disclosure as required by The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was required to be made in the annual Financial Statements of the buyer wherever such Financial Statements are required to be audited under any law.

6.11. The above principle would apply to disclosures required by other legal requirements. A further extension of the above principle also means that specific disclosures required by various pronouncements of regulatory bodies such as the ICAI announcement for disclosures on derivatives and unhedged foreign currency exposures, and other disclosure requirements prescribed by various ICAI Guidance Notes, such as Guidance Note on Employee Share-based Payments, Guidance Note on Accounting for Derivative Contracts, etc. should continue to be made in the Financial Statements in addition to the disclosures specified by the Schedule III.

6.12. Para 3 of the General Instructions of the Schedule III also states that the Notes to Accounts should also contain information about items that do not qualify for recognition in Financial Statements. These disclosures normally refer to items such as Contingent Liabilities and Commitments which do not get recognised in the Financial Statements. These have been dealt with later in this Guidance Note. Some of the other disclosures relating to items that are not recognized in the Financial Statements also emanate from the Accounting Standards, such as, disclosures required under AS-9 Revenue Recognition on circumstances in which revenue recognition is to be postponed pending the resolution of significant uncertainties. Contingent Assets, however, are not to be disclosed in the Financial Statements as per AS-29 Provisions, Contingent Liabilities and Contingent Assets.

6.13. The General Instructions also lay down the principle that in preparing Financial Statements including Notes to Accounts, 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. Compliance with this requirement is a matter of professional judgement and may vary on a case to case basis based on facts and circumstances. However, it is necessary to strike a balance between overburdening Financial Statements with excessive detail that may not assist users of Financial Statements and obscuring important information as a result of too much aggregation. For example, a company should not obscure important information by including it among a large amount of insignificant detail or in a way that it obscures important differences between individual transactions or associated risks.

6.14. The Schedule III requires using the same unit of measurement uniformly across the Financial Statements. Such requirement should be taken to imply that all figures disclosed in the Financial Statements including Notes to Accounts should be of the same denomination.

6.15. Depending upon the total income of the company, the figures appearing in the Financial Statements shall be rounded off as given below in the table. It is now compulsory to apply rounding off and a company cannot continue to disclose full figures. In order to apply the same, the rounding off requirement should be complied with:

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6.16. The instructions also clarify that the terms used in the Schedule III shall be as per the applicable Accounting Standards. For example, the term ‘related parties’ used at several places in the Schedule III should be interpreted based on the definition given in AS-18 Related Party Disclosures.

6.17. The Notes to the General Instructions re-clarify that the Schedule III sets out the minimum requirements for disclosure in the Financial Statements including notes. It states that line items, sub-line items and sub-totals shall be presented as an addition or substitution on the face of the Balance Sheet and Statement of Profit and Loss when such presentation is relevant to an understanding of the company’s financial position or performance or to cater to industry/sector-specific disclosure requirements, apart from, when required for compliance with amendments to the Act or the Accounting Standards.

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