After nearly six decades, Schedule VI, which sets out the presentation and disclosure requirement in financial statements under the Companies Act, is being completely overhauled. The Schedule placed on the MCA Web site will apply to companies following Indian GAAP starting from the financial year 2010-11. The revised Schedule for companies which will follow Indian IFRS will be notified at a later date.

The revised Schedule eliminates unwanted disclosures such as information on capacities, production and has simplified the quantitative disclosures on purchase, sales and inventories, requiring such disclosures at a broader level rather than at a granular level. Certain new but relevant disclosures have been added such as the disclosure of shareholding greater than 5 per cent held by a shareholder.

Flexibility

Unlike current Schedule VI, the revised schedule provides lot of flexibility to companies, to alter the format or disclosures when it is required by an accounting standard or is relevant for better understanding of the financial statements.

The accounting standards will prevail over the requirements of Schedule VI. By maintaining such flexibility the Schedule will not need to be updated constantly, as the relevant changes in accounting standards will suffice.

Interestingly the concept of materiality has been made more realistic in the revised Schedule. Disclosure of individual items of income/expense is required only if it exceeds the greater of 1 per cent of revenue or Rs 1,00,000. as a result of too much aggregation.

The revised Schedule has been structured more in line with IFRS. The biggest change is the requirement to classify assets/liabilities as current and non-current.

For example, loans are classified as current if the borrower does not have an unconditional right at the balance sheet date to defer settlement for at least 12 months. A small violation of a debt covenant not condoned by the lender at the balance sheet date could result in a long-term loan being classified as current, even if the lender condoned it subsequent to the balance sheet date.

Similarly covenants or promissory notes from borrowers which allow the lender to recall the loan on demand, even when no covenants are violated could result in a current classification.

A current classification of a loan could have a domino effect and may result in other loans being classified as current. Needless to say, such impacts would result in substantial adverse consequences for companies and in extreme situations could threaten their ability to carry on as a going concern. This is a very onerous requirement and may need to be relooked.

There are a few areas that could be further improved in the revised schedule. The disclosure of defaults in repayment of loans and interest is also required in the Companies Auditors Report Order, and hence is duplication.

The classification of expenses in the P&L is required to be done based on their nature and not on their function. An option to do the classification either by nature or function would preferable.

Certain disclosures considered unnecessary by companies in current Schedule VI have been unfortunately retained, such as, imports or expenditure in foreign currency, or earnings in foreign exchange, etc.

Fine-tuning

A few areas would require guidance from the Institute of Chartered Accountants of India, such as, on current vs non-current classification or presentation of redeemable preference shares (whether to be presented as equity or liability), or what controlled special purpose entities means, etc. Follow-up action would be required by other regulators , for example, the Securities and Exchange Board of India would need to change the format for the half yearly balance sheet under Clause 41.

(The author is Partner and National IFRS Leader, Ernst & Young

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