The Hindu Business Line : Needed, a revised Schedule VI

All along, in the history of accounting and resultant reporting in India, Schedule VI has played midwife between the Companies Act, 1956 and the Indian Generally Accepted Accounting Principles (IGAAP). With a pretext of IGAAP harmonisation with International Financial Reporting Standards (IFRS), user-friendliness and minimum disclosure requirements, the Ministry of Corporate Affairs (MCA) had released an explanatory memorandum to revise the Schedule.

Dramatic alteration

The MCA has dramatically altered the Schedule in consultation with the Institute of Chartered Accountants of India (ICAI) and the National Advisory Committee on Accounting Standards (NACAS). Though the efforts are laudable, elimination of certain earlier disclosures could dilute transparency and analysis.

To begin with, the Schedule has brought in divisive formats with a ‘saral’ disclosure for small and medium companies (SMC) as defined by the Companies (Accounting Standard) Rules, 2006 (the Rules).

Benchmark for disclosure of classes of expenditure has been revised to Rs 10 lakh for non-SMCs and Rs 50,000 for SMCs from Rs 5,000. Stoically, the MCA lays out the ‘indirect method’ of cash flow statement which is in contrast to the provisions of Accounting Standard 3; the double-whammy being such accounting standards are notified under the Rules.

The Schedule also prescribes a format for the profit and loss (P&L) account, where presentation shall be based on function of expenses perhaps in line with internal reporting by companies, though this might eliminate multiple sets of reporting, lack of flexibility surfaces in the Schedule.

The concept of current and non-current assets and liabilities has been defined and current investments shall be grouped with current assets, whereas hitherto they were part of investments. Loans or advances have been classified into short-term or long-term and interest accrued and due on borrowings would be clubbed with other current liabilities.

The Schedule does away with the split of receivables as more- or less-than six months and the cash balances shall include cash equivalents; that is, for example, investments in G-sec mutual funds’ schemes with three months maturity. Moreover, cheques-in-hand and balances held as security need to be separately disclosed.

For financial enterprises, amounts lent would be classified as trade receivables on similar grounds of IFRS rules though realisation would occur beyond twelve months.

Specific disclosure of investments in controlled special purpose entities aids in transparency and could solve issues on reflecting securitisation of financial assets.

To deduce net worth quickly, debit balance in P&L account and un-amortised expenditure would be regrouped with liabilities as negative amounts, appropriations to the P&L account would now be reported within reserves and surplus as movements.

Unique features retained

Deferred taxes are classed as non-current assets or liabilities albeit some timing differences may reverse in the next reporting period, better disclosures for intangible assets, goods-in-transit inventory and inventories write-off, capital advances aligned with loans and advances are few of the other eye candy changes.

Features unique to the Indian corporate environment, such as debenture redemption reserve, shareholdings more than 5 per cent and deduction of excise duty from revenue have been retained.

Share application money and refundable, unpaid application money received against allotment of securities have been appropriately addressed in the Schedule, as also preference shares would still form part of capital unlike IFRS stipulations where redeemable preference shares are classified with ‘borrowings’.

On the flip side, there are few possible lacunae which can be plugged by including current concepts such as ‘financial assets’, prior period comparatives on first-time implementation of the Schedule and derivative transactions. With service sectors, including financial enterprises, gaining a growing share of India’s gross domestic product, further insights are required since revisions in the Schedule appear skewed towards the manufacturing sector.

Anomalies can be further reduced by aligning the Schedule with the financial results under the Listing Agreement of SEBI, defining ‘other operating revenues’ and laying rules on minimum alternate tax (including its entitlement) and fringe benefit tax disclosures.

The predominant focus of this revision has been restricted to standalone financial statements and, therefore, reflection of transactions arising on consolidation such as goodwill and foreign exchange translation reserve remain open.

Besides, by removing certain key data from Part II of the Schedule (licensed capacity, raw material consumption, for instance), analysis and future projected earnings would be a challenge since they are more than merely being ‘statistical’.

A tad delayed

In this age of globalisation, the Schedule trying to address repatriation restrictions is a tad delayed. Few important disclosures such as unutilised monies of shares-issue and consideration to directors on retirement from office has been done away with.

Few related party transactions still forming part of the Schedule coupled with a summary in notes to accounts required under AS 18 point to data redundancy.

With a new government in place, the long overdue Companies Amendment Bill should be passed and, ceteris paribus, the revised Schedule VI would simultaneously be rolled-out. IGAAP seems to continue weaning from simplicity by retaining presentation of financial statements as part of schedules to the Act rather than relegating it with accounting, thereby losing dynamism. On the road to synthesise IGAAP with IFRS, MCA together with ICAI and NACAS needs to step-up gas, address issues head-on in ensuring a smooth transition by 2011 rather than playing truant.

(The authors are chartered accountants.)

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