Background

The Schedule III to the Companies Act, 2013 (2013 Act) provides general instructions for preparation of the balance sheet and the statement of profit and loss of a company.

The Ministry of Corporate Affairs (MCA) issued a road map for implementation of the Indian Accounting Standards (Ind AS) converged with the International Financial Reporting Standards (IFRS):

• On 16 February 2015 by companies other than insurance companies, banking companies and Non-Banking Financial Companies (NBFCs) (corporate road map) in a phased manner commencing from accounting periods beginning on or after 1 April 2016     
• On 30 March 2016 by banking companies, insurance companies and NBFCs in a phased manner commencing from accounting periods beginning on or after 1 April 2018. 

New development

The MCA on 6 April 2016, amended Schedule III to include general instructions for preparation of financial statements of a company whose financial statements are required to comply with Ind AS. The amendment divides Schedule III into two parts i.e. Division I and II   

• Division I is applicable to a company whose financial statements are required to comply with the  current accounting standards     
• Division II is applicable to a company whose financial statements are drawn up in compliance with Ind AS.
  

Overview of the revised Schedule III – Division II

Division II of the Schedule III provides instructions for preparation of
financial statements and additional disclosure requirements for companies
required to comply with Ind AS. The following is an overview of the Division II of the Schedule III:

Applicability

• It is applicable to every company to which Ind AS apply in preparation of its financial statements.
• The provisions of Schedule III also apply when a company is required to prepare consolidated financial statements, in addition to the disclosure requirements specified under Ind AS.
  

Balance sheet  

• Schedule III provides a format of the balance sheet and sets out the minimum requirements of disclosure on the face of the balance sheet 
• Items presented in the balance sheet are to be classified as current and non-current. 
• Schedule III does not permit companies to avail of the option of presenting assets and liabilities in the order of  liquidity, as provided by Ind AS 1, Presentation of Financial Statements.
  

Statement of profit and loss 

• Schedule III provides a format of the statement of profit and loss and sets out the minimum requirements of disclosure on the face of the statement of profit and loss.
• The statement of profit and loss is to be presented in accordance with the nature of expenses and would include profit or loss for the period and other comprehensive income for the period.
  

Statement of changes in equity

• This is a new component for preparers of financial statements that have historically prepared financial statements under Indian GAAP.
• The Statement of changes in equity would reconcile opening to closing amounts for each component of equity including reserves and surplus and
  items of other comprehensive income.
• The format also includes disclosure of the equity component of compound financial instruments in ‘other equity’, which is in accordance with Ind AS 32, Financial Instruments: Presentation.
  

Statement of cash flows

• The Statement of cash flows would be presented when required in accordance with Ind AS 7, Statement of Cash Flows.

Notes

• Notes containing information in addition to that which is presented in the financial statements would be provided, including, where required, narrative descriptions or disaggregation of items recognised in the financial statements and information about items that do not qualify for such recognition.
  

Compliance with Ind AS and 2013 Act

• In situations where compliance with the requirements of the 2013 Act including Ind AS requires any change in treatment or disclosure (including addition, amendment, substitution or deletion in the head/sub-head or any changes in the financial statements or statements forming part thereof) in the formats given in Schedule III, then Schedule III permits such changes to be made and the requirements of Schedule III would stand modified accordingly.
• It further mentions that disclosure requirements specified in Schedule III would be in addition to and not in substitution of the disclosure requirements specified in Ind AS. Companies would be required to make additional disclosures specified in Ind AS either in the notes or by way of additional statement(s) unless required to be disclosed on the face of financial statements. Similarly, all other disclosures as required by the 2013 Act should be made in the notes in addition to the requirements of Schedule III.
  

Materiality

• It requires financial statements to disclose all ‘material’ items, i.e., the items if they could, individually or collectively, influence the economic decisions that users make on the basis of financial statements. Materiality depends on the size and nature of the item judged in particular circumstances. The definition of what is material is similar to that given in Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. However, while preparing the statement of profit and loss, it specifies that a company should disclose a note for any item of income or expenditure which exceeds 1 per cent of the revenue from operations or INR10,00,000, whichever is higher, in addition to the consideration of materiality.
  

Other key points

• It does not permit disclosure of extraordinary items (in line with Ind AS). However, the format for the statement of profit and loss does provide for separate disclosure of exceptional items, if any.
• It requires a separate disclosure of the Earning Per Share (EPS) for continuing and discontinued operations.
  

Next steps

Companies in India should start evaluating the potential impact of the revised Schedule III and assessing the detailed requirements made available for presentation of financial statements.

Our comments

The notification of the revised Schedule III, incorporating the requirements relating to the Ind AS financial statements is an important and a much awaited step from MCA as several companies in India are in the process of implementing Ind AS from 1 April 2016. The presentation of financial statements is one of the key impact areas on implementation of Ind AS when compared to the reporting under current Indian GAAP.

The requirements under Schedule III (relating to Ind AS financial statements) are to a large extent similar to those of the IFRS financial statements except for the fact that it specifies a bright-line to disclose a note for any item of income or expenditure which exceeds 1 per cent of the revenue from operations or INR10,00,000, whichever is higher, and also eliminates certain options on the presentation of the statement of profit and loss and the balance sheet. 

The revised Schedule III also provides flexibility in presentation of the financial statements as it states that the prescribed disclosure requirements are in addition to and not in substitution of the disclosure requirements specified in Ind AS. Further, where compliance with Ind AS requires any change in treatment or disclosure, including any addition, amendment, substitution or deletion, in the format of the financial statements, a company is permitted to make such changes and the requirements of Schedule III would stand modified accordingly. This is an important provision, as it clarifies that in situations where an accounting treatment or disclosure in an Ind AS is in conflict with the requirements of Schedule III, companies are required to comply with the relevant Ind AS.

To access the text of the MCA notification, please click here.