Setting sights on international practices

The Ministry of Corporate Affairs, vide its notification dated February 28, 2011, issued the Revised Schedule VI format for the preparation of separate financial statements for all companies other than insurance and banking, those engaged in generation or supply of electricity and other class of companies governed by some other enactments.

It is applicable for accounting periods commencing on or after April 1, 2011, and substantially changes the format for financial statements.

Concepts and terminologies

The Revised Schedule has brought in many concepts from International Financial Reporting Standards, such as the classified balance sheet in which assets and liabilities are classified as current and non-current, consistency of terms used with the Accounting Standards, prevalence of Accounting Standards requirements, and so on. While multinational entities with overseas financial reporting requirements are familiar with the concept of current and non-current, this is relatively new for financial reporting in India. The challenge has been to compile the required information with greater precision for the current year, as well as present the comparative information.

A new dimension to the assessment is the operating cycle for the classification of assets and liabilities. The aging of receivables, hitherto based on the date of sale, will now be based on the due date of payment. In certain cases the new requirement also calls for changes in system configuration.

New Disclosures

The revised form of presentation calls for new disclosures, including information hitherto available only to a few:

borrowing rates for various classes of borrowing;

more than 5 per cent of shareholding, holding by each class, and details of rights, preferences and restrictions on each class of shares;

share capital calls in arrears with respect to director and officers;

terms of loans — number and amount of instalments due, applicable interest rate, amount of guarantees given by directors, details of defaults;

disclosure of other commitments, in addition to capital commitments disclosed in past notes to accounts. However, the term ‘other commitments’ has not been defined.

Debt outstanding

The current portion of long-term debt should now be classified under other current liability. Certain entities have taken the view that disclosure under other current liability is incorrect and have disclosed the current portion of long-term debt on the face of financial statements with appropriate notes. In certain cases some aggregation is required to ascertain the total outstanding account balance — for example, to arrive at the total loans outstanding as at balance sheet date, one should aggregate long-term borrowings, short-term borrowings and current portion of long-term debt. The revised schedule has also scrapped some of the old disclosures — namely, managerial remuneration, quantitative data reporting and others that are not relevant in the current economic environment. The other challenges include recasting and presenting comparative figures, including auditing them; preparing consolidated financial statements for entities with a large number of subsidiaries, associates and joint ventures; and presentation of cash flow statements worked back for two years.

After all the challenges, one can only expect further refinement in the presentation of financial information in the days to come. This was a critical first step towards alignment with global practices.

Sunil S. Kothari is Partner, and Shrikant Bhakkad is Manager, Deloitte Haskins and Sells

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