Comments on Indian Accounting Standards (Ind AS) compliant Schedule III
1. The Draft of Ind AS compliant Schedule III is on the basis of a classified balance sheet,
i.e., Current and Non-Current classification. It may be noted that Ind AS 1 provides a
general option to follow either current and non-current classified balance sheet or a
balance sheet where assets and liabilities are presented in order of liquidity. Specifying
only current and non-current classification as required format for all companies other
than NBFCs is not in accordance with Ind AS 1.
2. Internationally, the format of Balance Sheet is to present Assets first and then Liabilities
and lastly, Equity which is the residual as per the Framework. In Schedule III, the reverse
order is taken. What I am unable to understand is, may be because of my lack of
experience, what is so unique about Indian companies to follow a reverse order of
presentation of Balance Sheet which is not congruent with the principles specified in the
Framework.
3. Share application money pending allotment is presented as a line item in addition to
equity and liability. Under Ind AS or existing AS, there are five elements of financial
statements:
a. Assets
b. Liabilities
c. Equity
d. Income
e. Expense
Assets, Liabilities and Equity pertain to Balance Sheet and Income and Expense pertain
to the Statement of Profit and Loss. Thus, share application money pending allotment
should be either within equity or liability. This is also the requirement of Ind AS 32,
“Financial Instruments: Presentation” that the financial instruments issued by the entity
can be classified either as equity or liability. There cannot be a third classification as
“Share Application money pending Allotment”. It should be noted that there is no
financial instruments standard in existing Accounting Standards notified under the
Companies (Accounting Standards) Rules, 2006. The very presence of the standards on
financial instruments in Ind AS affects the presentation significantly and needs to be
taken care of with double emphasis.
4. Paragraph 7 of the General Instructions for preparation of Balance Sheet and Statement
of Profit and Loss of a Company states that “For the purpose of the Schedule, the terms
used herein shall be as per the Indian Accounting Standards”. Clause (a) of Note 6E of
the General Instructions for the preparation of Balance Sheet, “Provision for Employee
Benefits” is specified under long-term provisions. It should be noted that employee
benefits payable in cash are financial liabilities as per the definition of financial liabilities
contained in Ind AS 109. However, such financial liabilities are scoped out of Ind AS 109
as there is a specific standard on Employee Benefits. Thus, the provision for Employee
Benefits under Long-term provisions would include only those employee benefits that
will never become vested. Separating vested benefit and non-vested benefits for
presentation would not only increase complexity but also impair understandability. Not
separating vested benefits and non-vested benefits would be in violation of Paragraph 7
of the General Instructions for preparation of Balance Sheet and Statement of Profit and
Loss of a Company of Ind AS compliant Schedule III.
5. Current liabilities by definition include those items that are due within twelve months
after the end of the reporting period, if the liability is not a part of operating cycle or is
not held for trading. Thus, most of the current liabilities would be financial liabilities
unless the settlement is by other than cash. All short-term employee benefit liability is a
financial liability. Presenting them as short-term provisions and not as financial liabilities
would be in violation of Paragraph 7 of the General Instructions for preparation of
Balance Sheet and Statement of Profit and Loss of a Company of Ind AS compliant
Schedule III.
6. Clause (e) of Note 6G. Other Current Liabilities of General Instructions for preparation of
Balance Sheet, “Income received in advance” is specified. It should be noted that
“Revenue” differs from “Income”. Further Ind AS 115 requires that revenue received in
advance be disclosed separately. Revenue received in advance is termed as Contract
Liability. However, Ind AS 115 permits the use of difference nomenclature. Moreover,
neither income received in advance nor revenue received in advance includes Refund
Liability which is to be presented separately as per Ind AS 115. Though paragraph 2 of
General Instructions for Preparation of Balance Sheet and Statement of Profit and Loss of
a Company will take care of the differences in the presentation requirements of Schedule
III and Ind ASs, my view is that why do we leave such line items from the Schedule,
when we know very well that these line items are required by Ind AS 115. Paragraph 2
should be used for future amendments in Ind ASs and disclosures in Ind ASs as Schedule
III is not expected to be amended frequently.
7. Sub-clause (viii) and clause (iv) of Note 6C. Long-term borrowings and Note F. Shortterm borrowings do not include deposits. Whether defaults in deposits is not relevant?
This is the position in existing Schedule III too. Let us learn from the past and improve.
8. Clause (i) of Note 6L. Non-Current Investments of General Instructions for preparation
of Balance Sheet requires non-current investments to be classified into seven categories.
Further, it requires that under each classification, details shall be given of names of the
body corporate (indicating
separately whether such bodies are (i) subsidiaries (ii)
associates (iii) joint ventures or (iv) controlled special purpose entities) in whom
investments have been made and the nature and extent of the investment to be made in
each such body corporate showing separately investments which are partly paid. As per
Ind AS 110, any entity that is controlled is a subsidiary. Hence, there is no difference
between subsidiary and controlled special purpose entities. Therefore, the requirement to
show separately investment in controlled SPE should be removed.
9. Note 6L. Non-Current Investments of General Instructions for preparation of Balance
Sheet, it appears that the Schedule has been prepared from individual financial statements
point of view only. Under Ind AS, consolidated financial statements are primary financial
statements. Hence, The Schedule III should be appropriately changed keeping in view the
aspect of consolidated financial statements. This conclusion has been arrived at because
the note requires investments in equity instruments to be classified into investments in
subsidiaries, joint ventures and associates. Also, investments in partnership firms will not
appear as investments in balance sheet unless the partnership firm is judged to be a joint
venture.
10. Clause (i) of Note 6O. Current Investments specifies the following classifications:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Investments in Equity Instruments;
Investment in Preference Shares;
Investments in government or trust securities;
Investments in debentures or bonds;
Investments in Mutual Funds;
Investments in partnership firms
Other investments (specify nature).
The classification of investments as current can only be when investments are held for
trading. Investments that are to be sold within twelve months of the end of the reporting
period will be classified as Non-Current Assets held for sale. Therefore, the Clause (i)
should provide only those classifications that can be held for trading.
11. Short-term loans and advances are specified under financial assets. There can be loans
and advances that are held to receive goods or services. Such loans and advances are not
financial assets and hence, will be classified under “Other Current Assets”. This will
impair the understandability of financial statements.
12. Ind AS 1, “Preparation of Financial Statements” requires all changes in equity whether it
be transaction with owners or any other movements within components of equity to be
stated in a single statement of changes in equity. Presenting two statements, one for
equity share capital and other for other components of equity does not ensure proper
application of the requirement of Ind AS 1. Internationally all components of equity are
presented in a single statement of changes of equity. What is so unique about Indian
Companies equity that two separate statements are required? If a company issues bonus
shares out of retained earnings, the movement will have to be presented in two statements
separately. Such duplication can very well be avoided by having one statement of
changes in equity.
13. The other components of equity are specified in rows whereas movements are specified
in columns. Internationally the format followed is that the components are specified in
columns and movements in rows. The reason being that the components of equity are
limited in number whereas there can be different movements in equity. Presenting each
movement separately would require additional columns. This would make the statement
quite large to comprehend. What is so unique about Indian companies equity that we
need to follow reverse order?
14. The items presented in OCI are either items of income or expense but not recognised in
the statement of profit and loss. Thus, the items presented in OCI are not reserves.
Terming such items as reserves impairs understandability of financial statements.
15. All reserves have been divided into two categories as under:
(i). Reserves representing unrealized gains / losses
(ii).Other reserves
A perusal of the items specified under reserves representing unrealized gains / losses
reveals that it contains the items recognised in OCI. Two items being “Fair value changes
relating to Own credit Risk” and “Share of OCI in Associates and Joint Ventures” need to
be specified. The row on others should be removed.
16. The items recognised in OCI also include items that are realized in cash. First of all the
term “ unrealized gains / losses” has neither been defined in the Companies Act, 2013 nor
in Ind AS. Using a term that is open to multiple interpretations impairs understandability
and comparability of financial statements.
17. Note 6B (ii) of the General Instructions for preparation of Balance Sheet specifies the
classification of other reserves. A perusal of those classes reveals that those classes also
contain unrealized gains/ losses. For example, Share Options Outstanding Account.
Therefore, the categorization of reserves representing unrealized gains / losses and other
reserves is confusing impairing understandability and comparability of financial
statements.
18. The movement in “Other Reserves” is proposed to be presented on aggregate basis. This
sort of presentation defeats the very purpose of statement of changes in equity. All
movements in each and every component of equity should be shown separately. Thus, the
proposed presentation of “Other Reserves” on aggregate basis is not proper. Movement in
each of the classes of “Other Reserves” should be shown separately.
19. The statement of changes in equity does not specify “Share application money pending
allotment”. This is not in accordance with Ind AS which requires all movements in each
of the components of equity should be presented separately in the Statement of Changes
in Equity. Hence, it is proposed that the movements in “Share Application money
pending allotment” should be presented separately in the Statement of Changes in equity.
20. Note 6X of the General Instructions for preparation of Balance sheet specifies that if in
the opinion of the Board, any of the current assets do not have a value on realization in
the ordinary course of business at least equal to the amount at which they are stated, the
fact that the Board is of that opinion, shall be stated. Such a note could be held relevant
when there were no Accounting Standards. Such a note under existing Schedule III could
still be considered as valid in absence of standard on financial instruments. Under Ind
AS regime which includes comprehensive financial instruments standards such a note is
redundant and should be removed from Schedule III. The impairment provisions of
various standards take care of this requirement and where there is no standard the
framework would sufficiently take care of this.
21. Note 8 of the General Instructions for preparation of Balance sheet specifies when share
application money should be presented under equity and when under liability. It may be
noted that Ind ASs do not consider issued capital for classification of equity and liability.
Such a requirement is in violation of Ind AS 32 “Financial Instruments: Presentation” and
hence should be removed. This note is required in existing Schedule III due to the
absence of Financial Instruments standard.
22. Ind AS 1 requires only a single amount for the total of discontinued operations. Why do
we want entities to present more line items on the face of the primary financial statements
making the face long with various marks and thereby reducing the beauty?
23. Ind AS 33 requires EPS from discontinued operations to be disclosed in notes. Once
again, we are unnecessarily extending the face.