Financial statements in India have, until now, been quite unique compared with those in other countries. The statements here have to strictly comply with not just the requirements as to the minimum contents, but also the format that the Companies Act, 1956 prescribes. This format has been prescribed in Schedule VI of the Act and has now undergone a substantial change this year for the first time in decades.
In India, presentation and disclosure requirements are primarily guided by the Schedule VI and the accounting standards. Accounting standards, which were, until 2006, being issued by the Institute of Chartered Accountants of India, have now been elevated in their status and are now notified by the Central Government as a part of the Act itself. However, it does not end just here. Disclosure requirements also arise from a number of other laws and/or regulators. To give a few examples, these could include the Guidance Notes and other announcements of the Institute, for listed companies — disclosures mandated by the equity listing agreement, other laws such as the Micro, Small and Medium Enterprises Development Act, 2006 and the list goes on.
All these requirements from various sources result in substantial responsibility for the management of the company to be aware of and to comply with. The revised requirements this year pose quite a challenge to companies in a number of aspects — from having an impact on the ratios to having to, in some cases, change their information systems in order to be able to produce the required information. As a part of this already extensive change, managements will need to further manage a concept which was till now not existent to a large extent — flexibility.
Flexibility in the nature and quantum of information in the financial statements was not an option till now. There were rigid and set requirements which did not offer the management much of leeway in terms of including additional disclosures that it believed would enhance the usefulness or were relevant to the understanding of the financial statements. This shortcoming has now been addressed in the revised Schedule VI, which allows companies to include information which could be relevant to an understanding of the company's financial position or performance or to cater to industry-/sector-specific disclosure requirements. This flexibility is apart from what the company can modify, add or delete in order to comply with the requirements of the accounting standards or the Act itself.
What this translates into is that a company could now choose to disclose measures such as EBITDA on the face of the Statement of Profit and Loss (what was until now called Profit and Loss Account) or an agro-products based company could now choose to disclose seasonal information. This could be used to good effect by companies, where such measures are in fact considered significant in evaluating the performance within that industry.
Companies did have plenty of options to include such disclosures and they, till now, formed part of the Directors' Report or the Management Discussion and Analysis. However, by including such disclosures as a part of the financial statements, the management will now have to ensure that such data is presented on the basis of a consistent policy as well as that this information is audited. So, this new-found flexibility in disclosures comes with strings attached and managements will need to exercise a lot of judgement in balancing out information — which does not result in an information overload or ends up disclosing too little.
Harinderjit Singh is Partner, Price Waterhouse. (With Inputs from Madhuri Ravi, Senior Manager)
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