MY COMMENTS ON INDAS COMPLIANT TO SCHEDULE III TO THE COMPANIES ACT ,2013 .
Approach of the ASB In ushering in this ED :
ASB’s View :
Can we re-invent the wheel? Can we go back and look at significant omissions and commissions in the
Schedule III? Can we add/fill up the omissions now through this ED including certain soft amendments to
the Companies Act ? ?
My View:
If that is so, why not go to the fullest extent and bring out all the changes ?
THRESHOLD ISSUE –RELEVANCE OF ABRIDGED ACCOUNTS
In the context of IND AS‘s
relevant?
convergence with IFRS, how far the concept of `abridged balance sheet
Arguments advanced in favour of abridged Accounts :
Sec 219 0f the Companies Act ,1956 /sec136 of the companies Act 2013 (SEBI clarification SMDRP/policy
/Cir14/99dated 19-5-99 )


Balance sheet received by the shareholders results into wastage of paper,cost and time .
Ordinary shareholders are not fully aware o0f the intricasis of Accounting Standards .
My view :
1. At present most of the companies are sending only soft copies of the Balance sheet to the
shareholders and hence abridged balance sheet has lost its relevance.
2. Abridged Balance sheets do not add any value nor give any meaningful information to the stake
holders.
3. The format of the balance sheet and the important notes extracted do not aid anybody in
meaningfullydisseminating any information about the company.
Suggestion : ABOLISH ABRIDGED BALABNCE SHEET ;
MY COMMENTS ON THE NEW FORMAT :
Balance sheet format:
Liabilities Side : (new additional disclosure )
“liabilities associated with group of assets held for disposal “
Assets side :
“Non current Assets classified as held for disposal “
My view:
1. In a listed company, any classification of this type may not be permitted as SEBI /STOCK
EXCHANGES will treat this as a price sensitive information(first they should be informed . )
2. In most cases,there will be no disclosure under this head both on the assets side as well as on
the liabilities side as this will put off the bankers or the prospective buyers; A seller after
arousing the interest of the buyer fastens additional liabilities on the assets sold and attempt to
lighten his debt. This cannot be made visible beforehand; At best this may be revealed as a part
of due diligence.
3. Theoretically one can argue that these two items should be valued differently –say under a
realizable value. .This will create further distortion in the value of items appearing in the
balance sheet.
4. Any nondisposal will give rise to queries from all stake holders and hence this will be a `non
starter’
My suggestion :
Abolish the new requirement –both from the assets side as well as the liabilities side.
“Biological assets other than bearer Plants “
My View :abolish this as In my view, we are not ready to usher in Agricultural Accounting
standard.
My comments on General Instructions for the preparation of Balance Sheet:
1. Equity Share capital:
Item(6) -A states that the company shall disclose the following in the notes to the accounts: …..
Here can we add the following additional disclosures?
(a) Shares allotted for consideration other than cash :
 Promoters /key management personnel ‘s sweat equity ;
 ESOPS (at a concessional rate )
My view: Disclosure should be for all years and not for 5 years only as these share allotments are an
`aberration and one of thing’ – may be occurring in the initial year of operations of the company!
(b) Other situations: Any additional disclosure can be stipulated in the following cases?
Illustration 1:
A ltd took over a sick company by discharging the loans and interest owing by the sick company
to its bankers,by allotting its own shares at market value ; later it merges the sick company
with it : it recognises the premium derived on its shares to the share premium account
Is there any disclosure required by the acquiring company with regard to the shares allotted to
bankers in each of the subsequent years after the take over ? (My view is that this is not
covered by 6A (i) This is also not specifically envisaged in “Guidance note
payments”
on share based
Illustration 2:
A Ltd acquires the investment in an overseas company by issuing its own shares, at a premium
to the shareholders of the foreign company (after taking approval of the Govt)
The premium on its shares is credited to capital reserve and the investments are recognised at
their fair value.
Is there any need for additional disclosure with regard to the share allotment and the
corresponding recognition of the premium ? My view : Yes; to be disclosed for all years.
Illustration 3 :
In the past a set of companies issued bonus shares by capitalizing the revaluation reserve. Is it
enough,that the disclosure requirement gets abated after 5 years ,as this practice is a `way out
of ordinary ‘ ? My view :Should be stated for all years.
Illustration 4 :
If there is any shareholders agreement between the main promoters (part of Articles), can there
be made a reference to this under this head ? My view : Yes; Disclosure to be made excepting in
specific JVS formed with a specified purpose.
Illustration 5 :
Many JV companies formed by construction giants in country specific destinations /project
specific activities have a limited shelf life, their existence ending with that of the project
resulting in the cancellation of the capital.
Can a reference to this made mandatory in the Financial Statement of JV companies till their
existence on an yearly basis ?
My View : Yes.
B: Other Equity :
Other reserves :
(a) Capital Reserves : Whether to continue with this concept of `capital reserve ‘?
Popular examples are :
(i) Government Subsidies ( back ward Area subsidy, investment subsidy etc)
(ii) Capital grants ;
(iii) Amalgamation Surplus
(iv) Waiver of loan by the lenders :
(v) Fair value of the gifted assets received by the reporting entity.
Excepting (I) & (ii) when do these other reserves get merged into `general reserves ?
My view :
There is no purpose in having them labelled as capital reserve in respect of item nos (iii)
(iv) & (v): Can we add it as note to say :”excepting where there are conditionalities
attached in respect of utilization of grants for a specified period by Government , all other
gains should be directly credited to general reserve with full disclosure in the year of receipt
/ gain and the term` capital reserve’ should be phased out totally . ( This is because there
are always two views with regard to the utilization of the capital reserve and many
companies do not have information as to why these capital reserves are created in the first
place (refer also to purchase method of accounting in AS14 ).Thus capital reserves continue
forever!)
Clarity also is needed in respect of when accompany recognises `premium on its own shares
for acquiring investments (see illustration 2 in previous para) . Whether the premium to be
treated as `capital reserve‘ or share premium ?
(b) Capital redemption reserve :
Why this is needed? On the one hand, there is a view that preference shares are to be
reckoned as a liability (this is elaborately dealt in the subsequent paras ) If so why there
should be a Reserve created with a further stipulation that this reserve should be utilised
only for issue of bonus shares ?
A reserve of this nature is needed only when the preference shares are considered as
capital (that is why it is called Capital redemption reserve – The capital to remain, in a new
form, even after the redemption of preference shares. There is a contradiction in case the
preference shares have to be treated as a liability.
If ASB wants to follow the IFRS model , first the law to be amended to the effect that the
requirement of creating a capital redemption reserve should be dispensed with along with
the companies Act stipulation that the same should be utilised for giving fully paid bonus
shares ; after all the management can decide when they should give bonus shares , that too
out of what amount ; (the recent example of Reliance Power, which IPO was hugely
oversubscribed saw its share price being hammered immediately after the IPO listing ; The
company immediately announced a Bonus share to all the shareholders(excepting to its
promoters) to make adjustment for the loss in IPO price suffered ; The Bonus one can say
came out of reserves allocated out of demerger of power business. This case study proves
the `wisdom ‘and the resource mobilization on the part of the management of a listed
company !
Question : How far it is relevant to have Capital redemption reserve for redeeming
preference share ,especially, the all predominant view appears to be to treat as a liability ?
I “property Plant and Equipment”
(g) Delete “bearer Plants “ as this emanates from Ind AS on Agriculture which , in my view need
to be postponed .
(e) Vehicles :
Illustration from ONGC Balance Sheet :
Vehicles include Survey Ships, Crew Boats and Helicopters and also Support Vessels handed
over to Indian Navy for manning , maintenance and operations :
Question :
Issue : 1: Where assets are in the permanent custody of the third party (like the Navy ) ,any
separate disclosure compulsorily need to be made ?
Issue 2 : Many Infra structure companies , educational companies which have won Government
Contracts have the right to own and operate the assets for a given time period but at the end
are obligated to hand over the assets on as is where is basis to the Government Authorities.
Any Special disclosure requirement can be added in respect of contracts of this type – say assets
held under BOOT MODEL?
ISSUE 3 the term “Assets under Lease “ in item no (ii) normally refers to assets taken on lease ;
What about assets given on short term lease – say to wholly owned subsidiary ? ( I am aware the
present ED is with regard to non NBFC companies ; Leasing company may be covered as NBFC .
However when assets are temporarily given to other group entities (custody of the assets are
not with the reporting entity ) whether any special disclosure is required under this head ?
Issue 4 :
Many companies have under the Fixed Assets (now under Property , plant and Equipment ) an
amount shown as “capital work in progress”. These sums remain in many case unadjusted for
many years.
Question :
1. How far this is correct to reflect under the new nomenclature as property , plant and
equipment ? In other words , whether capital work in progress can find a place under the
new Schedule of Property , plant and Equipment ?
2. Can Capital work in progress become a new class of assets so that the reconciliation as per
item (iii) is imposed on it ?
(new Balance sheet format shows this item on the face of the Balance sheet . Is it correct or
material ?
Item K : Other Intangible assets:
Illustration :
When Indian entity is allowed the licence to exploit the intangible asset in the Indian territory for a
specified number of years, this aspect – namely the period of ownership rights should be disclosed in
the balance sheet ?
My view : Any restriction in the ownership of asset to be disclosed.
Item L: Non current Investments :
Question : 1. Whether investment in LLP need to be disclosed separately ?
2: If a reporting entity invests in semi - illiquid investments (say as per lender’s covenant
these assets cannot be encumbered ) ,whether these should be disclosed separately, depending on the
size of the organisation ?
3. Whether Investments in Foreign Subsidiaries –Equity /loan capital need to be disclosed
separately to alert the readers about the risk perception? (it is feared that in future all the
auditors would be required to add a para about the their risk perception on the entity
/associates in their audit report.
ITEM M : Long term loans and Advances :
Question 1.
Whether investment by way of advance against equity / or interest free loan given to
the subsidiary / associate to be disclosed separately ?
Q2 : in the alternative can we make a separate Schedule with regard to loans and advances by
classifying them separately :
(i)
(ii)
Interest bearing loans and Advances ;
Non interest bearing loans and Advances;
Item R : Balance with banks :
Can we prescribe a further classification into:
(i) Balances with Indian Banks (in India)
(ii) Balances with Indian Banks (outside India)
(iii)
Balances with Foreign banks
ITEM NO 9:
Classification of preference shares either as equity or liability .
“ For instance , redeemable preference shares shall be classified and presented under liabilities as long
term borrowings and the disclosure requirements in this regard as applicable to such borrowings shall
be applicable mutatis mutandis to redeemable preference shares “
My views :
1. This is quite contrary to the provisions of the Companies Act –sec 43 of the Companies Act 2013
2. Sec 55 (2) prescribes a capital redemption reserve to be created out of profits for the purpose of
redemption – the main reason being to keep intact the capital even after redemption through
the reserve, till it is eventually distributed by way of bonus shares.
3. Basic characteristics of Preference capital: (extracted from Principles of Company Law
by Gower )
 They have a right to fixed return of both dividend and capital.
 The holders of preference shares are members of the company ;
 They get their voting rights in special circumstances e.g: When dividends are in arrears ;
 Though they share the disadvantage of debenture holders, they lack their advantages.
They can only receive a return on their money if profits are earned and dividends
declared , they rank after creditors on a winding up ,and they have less effective
remedies for enforcing their rights. Suspended midway between true creditor and true
members,they get the worst of both worlds .
4. Thus it is clear that without amending the Companies Act , to impose a new meaning for aterm
well known to accountants –viz preference capital is incorrect ;before any attempt is made in
this regard , first the Act has to re-written
5. There are instances where a company was incorporated under the Companies Act 1956 only
with preference capital. Does it mean here there is no share capital and only a loan capital
exists ?
STATEMENT OF PROFIT AND LOSS :
The significant Changes here as compared to Schedule III
1. Numbering of items in P&L altered (items like other income, total revenue are not numbered.
2. Item V – “profit before Exceptional and extraordinary items and tax “ in Schedule III changed to
“ profits before exceptional items and tax”:
(i)
One interpretation: “extraordinary items “ need not be disclosed separately !
(ii)
Second interpretation :
Ind AS 1 says (para 87) says “an entity shall not present any item of income or expenses as
extraordinary item in the statement of profit and loss or in the notes. “ Probably this is the view
that has forced this change.
Questions : 1. What has forced the modification in old AS 5 –which gave an example of
“extraordinary item “ and also defined the term “ asincome or expenses that arises from events
or transactions that are clearly distinct from ordinary activities and therefore not expected to
recur frequently or regularly “
Question 2. What is the definition of exceptional items ?
 Question 3 Para 48 of AS20 –Earnings per share mandates that Basic and Dilutive EPS
should be computed on the basis of earnings excluding extraordinary items (net of tax
expense ) . If there are no extraordinary item, then the corollary is there is no need to
compute EPS in accordance with AS 20
3. III The words should be : “profit /Loss before exceptional items and tax “ ( The word “Loss” is
omitted )
4. Whether additional columns for “profit after tax in respect of continuing operations “ etc should
be introduced for the sake of uniformity has to be seen
5. Item no XII is totally new and not self explanatory despite “general instructions for preparation
of statement of profit and loss
All items in 6A (i)to (iv) –like changes in revaluation surplus etc – why these should be added to
P&L – no relevance at all .All these terms need further elaboration – “equity instruments
through other comprehensive Income “ –what this means ?
Similarly item 6(B) –“debt instruments through other comprehensive income “, “the effective
portion of gains and loss on hedging instruments in a cash flow hedge “ –all these terms need
lot of explanation.
Other items in the Notes :
Item 4 : Finance costs :
Item “(ii) dividend on redeemable preference shares “– incorrect treatment and classification under the
existing law.
Item (iii) –“ Applicable net gain /loss on foreign currency transactions and translations: “
My understanding from the above description :




Foreign currency gain and loss can be netted and net amount can be shown under
Finance cost.
Gain arising out of forex transactions and Forex translations can be aggregated.
Query 1: Why the word `applicable ‘is used ? can it be deleted ?
Query2 : If only the net effect of gain /loss on account of Forex has to be shown , why
not for interest also? Can we net off interest income against interest expenditure if
both pertain to operations ? (export credit facility require a deposit to made with a
banker of a fixed sum . Can we net off the interest expenditure against interest income
show net interest in item (a) ?
Item 5 : Other Income
Item ( c) - other nonoperating income –‘net of expenses directly attributable to such
income to be shown ‘
Taking an example: If an overseas subsidiary is sold or a huge land is sold , any
expenditure incurred on earning that income need not bedisclosed separately but
netted out . Is it correct?
Concluding comments:
1. What is attempted by ASB appears to be to rewrite Companies Act 2013 under the guise of
prescribing a format of Balance sheet /Profit & Loss Account. Many areas to be focused on before
making these balance sheet format changes.
2. Convergence with IFRS has to be looked at keeping in mind the present company law frame work
in India and not only under international perspective.
3
Balance sheet & P&L Format should be self explanatory and easy to comprehend ; Then only the
compilers of the information can prepare the same ,without errors . Every item in the other
comprehensive income needs lot of elaboration before persons can understand their full impact.
4 A Balance sheet compilation is part of adherence to the law. Law should be precise and capable of
Easy understanding.
Thanks for the patient hearing.
SRAMANUJAM
Membership no : 19364