FAQs On Revised Schedule VI

For internal use only
Frequently Asked Questions (FAQs) – Revised Schedule VI
What is our audit responsibility with respect to current and non-current classification,
regrouping of the comparative figures as well as other comparative information that need to
be furnished for the first time under revised Schedule VI, e.g., other commitments?
Comparability is a feature enshrined in the Framework for the Preparation and Presentation of
Financial Statements. Hence, in order for the financial statements to give a true and fair view
comparatives are required to be presented and the auditor will need to ensure that the
corresponding numbers are fairly stated. Accordingly, we will have to perform necessary audit
procedures to ensure that all corresponding figures/ information in the financial statements,
including those required by revised Schedule VI, are fairly stated.
A company has classified the loan as non-current liability in the previous year. The loan
becomes a current liability in the current year financial statements. Is the company required
to reclassify the loan as current liability in previous year also to match current year
classification?
Current/ non-current classification of assets/ liabilities is determined on a particular date, viz., the
balance sheet date. Thus, the company should have determined current/ non-current
classification of previous year balances based on the position existing as at the end of previous
year. If there is any change in the position at the end of current year resulting in different
classification of assets/ liabilities in the current year, it will not impact the classification made in
the previous year. In other words, the company will continue to classify the loan as non-current
liability in previous period figures.
A company is preparing its financial statements in accordance with revised Schedule VI for
the first time. In identifying current/ non-current assets/ liabilities at the end of previous
year, can a company apply hind-sights based on development happening in the current year?
As stated in the previous issue, current/ non-current classification of assets/ liabilities is

determined on a particular date, viz., the balance sheet date. If there is any new development in
the current period, it should not impact the classification of assets and liabilities for the previous
year. Hence, a company is not allowed to use the hindsight should in arriving at current/ non-
current classification of assets at liabilities at the end of previous year.
However, in our view, it is important to distinguish the facts existing at the previous balance sheet
date from hind-sights. In certain cases, the events happening in the current period may not be new
developments; rather, they may merely an additional evidence of condition existing as at the
previous year balance sheet. Obviously, these events need to be incorporated in arriving at
current/ non-current classification of assets at liabilities at the end of previous year. In many
cases, identification of two events separately may not be straight forward and require exercise of
significant judgment.
Let us take an example where A Limited (the company) is preparing its 31 March 2012 financial
statements in accordance with revised Schedule VI for the first time. These financial statements
will include comparative balance sheet as at 31 March 2011. The company has sold goods to one
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customer on 28 February 2011 and the customer has not paid its dues till 31 March 2012. In
deciding current/ non-current classification of receivables as at 31 March 2011, the company
needs to access whether subsequent non-repayment of dues is a new event happening in the
current year or the customer was not expected to pay amount due for more than 12 months even
at 31 March 2011.
Let us take another example where A Limited has taken a term loan in January 2010, repayable in
January 2014. However, it has actually repaid the loan in September 2011. For deciding current/
non-current classification of loan on 31 March 2011, the company should evaluate whether it was
actually expected to make the payment within normal operating cycle as on the previous balance
sheet date. If yes, then the loan is classified as current liability even at 31 March 2011. However,
if the repayment is result of subsequent events happening after the previous balance sheet date
and at 31 March 2011 there were no indications suggesting repayment within one year/ operating
cycle, the company will classify it as non-current liability at the end of previous year.
A company is preparing its financial statements in accordance with revised Schedule VI for
the first time. For certain information required to be disclosed in notes, the current year
amounts are nil. For example, let us assume that there is no default in repayment of loan and
interest existing as at the end of current year. Is the company required to previous year
figures for such notes? Alternatively, can it omit previous year information since no
disclosure is required in the current year?
Revised Schedule VI requires that “Except in the case of the first financial statements laid before
the company (after its incorporation), the corresponding amounts (comparatives) for the
immediately preceding reporting period for all items shown in the financial statements including
notes shall also be given.”
We believe that the objective of presenting comparative information is to help users of financial
statements in understanding trends and key changes vis-à-vis previous period financial
statements. The inter-period comparability of information assists users in their making economic
decisions. For example, the knowledge of fact that a company had defaulted in repayment of loans
in the previous year and the said default has been corrected in the current year may impact
economic decision making. Hence, we believe that a company needs to present comparative
information for disclosures required under revised Schedule VI even if their current period amount
is nil.
Can a company prepare abridged financial statements (AFS) in accordance with revised
schedule VI?
Both the Companies Act, 1956, and the listing agreement allow companies to send Abridged
Financial Statements (AFS) to shareholders, instead of full annual report. Recently, the SEBI
amended paragraph in clause 32 of the listing agreement which allowed listed companies to send
AFS to their shareholders. The language used in amended clause 32 suggests that a company
needs to follow the following process for sending documents to shareholders:
(i) First, a company should initiate the process whereby it collects email id from shareholders
who will like to receive soft copy of the annual report. Shareholders, who register their
email id for receiving soft copy of the annual report, should receive the soft copy.
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(ii) Shareholders, who did not so register, should receive a hard copy of the AFS.
(iii) Only shareholders who have specifically requested for a hard copy of full annual report will
receive the same.
Some companies may question whether the above view reflects intention of the regulator. These
companies may argue that regulators will like an investor to have full information, and sending
hard copy of full annual report is preferred practice. Hence, sending AFS to shareholders is not a
mandatory requirement but an option. We believe that this is a legal/ regulatory issue. If needed,
the management should consult its legal professionals and take an appropriate view.
If a company decides to prepare AFS, then it is noted that form 23AB prescribed under rules to
the Companies Act contains format for preparation of AFS. The format of balance sheet
prescribed in the said rule is aligned to pre-revised Schedule VI. Further, it requires a functional
classification of expenses (which is prohibited under revised Schedule VI). Hence, it raises an issue
whether a company needs to prepare its AFS in form 23AB format, or it can tailor the same to
revised Schedule VI format.
We believe that the format of AFS is also a legal/ regulatory issue and needs to be clarified by the
MCA and SEBI. Pending such clarification, we have evaluated this issue and noted that there are
arguments in favor of both the views. After considering these arguments, the firm has taken a
view that till the time a formal guidance is provided by the MCA/ SEBI, a company preparing its full
financial statements in revised Schedule VI format can prepare its abridged balance sheet also
based on revised Schedule VI format. Similarly, it may use nature-wise classification for
presentation of abridged P&L. This view is supported by the following key arguments:
(i) One footnote to form 23AB states that “amounts disclosed under AFS should be the same
as that shown in the corresponding aggregated heads in the financial statement prepared
in accordance with Schedule VI or as near thereto as possible.”
(ii) The Guidance Note on the Revised Schedule VI to the Companies Act, 1956 (GNRVI),
prohibits functional classification of expense. It appears logical that a company preparing
full set of financial statements based on nature-wise classification under revised Schedule
VI applies the same basis for AFS.
(iii) This view better represents the requirement of the law that the AFS should contain salient
features of the full set of financial statements.
(iv) If a company decides to prepare AFS in pre-revised Schedule VI format, the shareholders
opting to receive hard/ soft copy of full annual report will receive financial information in
revised Schedule VI format. However, the shareholder receiving AFS will get financial
information is the pre-revised Schedule VI format. This is not logical.
A company, having December year-end, will prepare its first revised Schedule VI financial
statements for statutory purposes for the period 1 January to 31 December 2012. Whether
such a company needs to prepare its tax financial statements for the period from 1 April
2011 to 31 March 2012 in accordance with revised Schedule VI or pre-revised Schedule VI?
Section 115JB of the Income-tax Act requires P&L to be prepared in accordance with Schedule VI
to determine book profits for minimum alternate tax (MAT) purposes. The section 115JB also
states that if a company adopts financial year under the Companies Act, which is different from
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the previous year under the Income-tax Act, then (i) accounting policies, (ii) accounting standards,
and (iii) depreciation methods/ rates adopted for tax financial statements including P&L will
correspond to accounting policies, accounting standards and depreciation methods/ rates used for
preparing financial statements including P&L for such financial year or part of such financial year
falling within the relevant previous year.
Besides the above, section 44AB of the Income-tax Act does not prescribe any format for tax
financial statements. However, the Guidance Note on Tax audit under section 44AB of the Income-
tax Act, 1961 (GNTA) suggests that a company should use Schedule VI format for presenting tax
financial statements. Neither section 115JB nor section 44AB nor GNTA clarifies the format that
should be followed if there is a change in Schedule VI during the period. It may be noted that tax
previous year of a company having 31 December year end under the Companies Act will have two
parts (i) 1 April 2011 to 31 December 2011 where it has used pre-revised Schedule VI, and (ii) 1
January 2012 to 31 March 2012 where it will use revised Schedule VI. Hence, the principle in
section 115JB to use the same accounting policies, accounting standards, and depreciation
methods/ rates as the financial year or part thereof is also directly not relevant.
As per the MCA notification, revised Schedule VI is applicable from accounting period commencing
on or after 1 April 2011. Keeping this in view, our preferred view is that a company, having
December year-end, should prepare its tax financial statements for the period from 1 April 2011
to 31 March 2012 in accordance with revised Schedule VI. However, considering the ambiguity
and the fact that reference to Schedule VI is given only in section 115JB, we may be flexible on
this issue and allow the use of pre-revised Schedule VI for preparing tax financial statements for
the period from 1 April 2011 to 31 March 2012 if the company is liable to tax under normal
provisions and is not liable to MAT and/ or where the use of revised/ pre-revised Schedule VI does
not impact MAT liability. However, in cases where the application of revised Schedule VI can
change MAT liability, the company should use revised Schedule VI for preparing tax financial
statements for periods commencing 1 April 2011.
A similar view will apply to companies having other year-ends, e.g., a company having June year-
end.
A company having other than 31 March year-end is preparing its tax financial statements for
period/ year ended 31 March 2012 in accordance with revised Schedule VI. What are the
various disclosures that that company can omit from its tax financial statements?
The company has already decided to prepare its tax financial statements in accordance with
revised Schedule VI. Thus, the financial statements for tax purposes should be prepared using the
basic framework of revised Schedule VI of the Companies Act, 1956. These financial statements
should include all disclosures required in accordance with the accounting standards, without any
exception. A company can avail exemptions from disclosure requirements given under ASI 15
(notified AS 21) from presentation of statutory information, not considered relevant for
presentation of true and fair view of the financial statements. However, under no circumstances,
any disclosure considered relevant for the purposes of Income-tax Act, including the
determination of book profit under section 115JB of the Income-tax Act can be excluded from the
tax financial statements. Based on these principles, the following disclosures can be avoided
particularly for tax financial statements:
(a) Value of imports calculated on CIF basis in respect of:
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(i) Raw materials

(ii) Components and spare parts
(iii) Capital goods
(b) Expenditure in foreign currency on royalty, know-how, professional and consultation fees,
interest, and other matters
(c) Total value of all imported raw materials, spare parts and components consumed during
the financial year and the total value of all indigenous raw materials, spare parts and
components similarly consumed and the percentage of each to the total consumption
(d) The amount remitted during the year in foreign currencies on account of dividends with a
specific mention of the total number of non-resident shareholders, the total number of
shares held by them on which the dividends were due and the year to which the dividends
related
(e) Arrears of fixed cumulative dividends on preference shares
(f) Payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law
matters, (d) for management services, (e) for other services and (f) for reimbursement of
expenses
(g) Shares reserved for issue under options and contracts/commitments for the sale of
shares/disinvestment, including the terms and amounts
(h) Particulars of any redeemed bonds/debentures which the company has power to reissue
shall be disclosed
(i) Earnings in foreign exchange classified under the following heads, namely:
(i) Export of goods calculated on FOB basis
(ii) Royalty, know-how, professional and consultation fees
(iii) Interest and dividend
(iv) Other income, indicating the nature thereof
(j) Disclosure regarding nature of security in case of both long-term and short-term
borrowings
(k) Where in respect of an issue of securities made for a specific purpose, the whole or part of
the amount has not been used for the specific purpose at the balance sheet date, there will
be indicated by way of note how such unutilized amounts have been used or invested
Disclosure of loans and advances as per clause 32 of listing agreement is also not required.
It is emphasized that while the above disclosures are not required to be provided, in case any of
our clients choose to provide it then of course we will have no option other than auditing the
additional disclosures thus provided. Further, please note that the inclusion of Clause 17 A in 3CD
w.e.f. AY 2009-10. As per ICAI guidance on clause 17 A, disclosure related with creditors covered
under MSMED Act should be in financial statements for tax accounts also.
According to MCA circular, presentation of financial statements for the limited purpose of
IPO/ FPO during the financial year 2011-12 may be made in pre-revised Schedule VI format.
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However, for periods beyond 31 March 2012, they need to present financial statements only
in revised Schedule VI format. This gives rise to the following questions:
(a) A company having 31 March year-end is going for IPO/ FPO in May 2012. In the offer
document, it will include restated financial information for the stub-period period
ending 31 January 2012. Can it prepare the said financial information using pre-
revised Schedule VI format?
(b) A company having 31 December year-end is going for IPO/ FPO in September 2012
and its IPO process is expected to close by 30 November 2012. In the offer document,
it will include restated financial information for the stub-period ending 30 June 2012.
Can it prepare the said financial information using pre-revised Schedule VI format?
The Circular dated 5 September 2011 states as below:
“The Ministry has examined this matter and clarifies that the presentation of financial
statements for the limited purpose of IPO/ FPO during the financial year 2011-12 may
be made in the format of the pre-revised Schedule VI under the Companies Act, 1956.
However, for period beyond 31 March 2012, they would prepare only in the new format as
prescribed by the present Schedule VI of the Companies Act, 1956. Also the companies
would ensure that it will prepare and file the Annual Accounts for the Financial Year 2011-
12 as per revised Schedule VI of the Companies Act, 1956.”
From the above paragraph, it is clear that the MCA intends to give a temporary relief to
companies. The language used indicates that this exemption is only for IPOs/ FPOs happening
taking place during the financial year 2011-12. Hence, the firm is of the view that a company can
use the exemption given in the MCA circular only if the IPO/ FPO gets closed on or before 31
March 2012. For any IPO/ FPO, which will get closed after 31 March 2012, the company will
prepare its restated financial information in accordance with revised Schedule VI. This view will
prevail irrespective of the date of financial information included in the offer document and the
financial year-end of the company.
For inclusion in Qualified Institutional Placement (QIP) placement document, is a company

required to prepare its financial statements in accordance with revised Schedule VI?
Schedule XVIII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009,
which govern QIPs, require financial statements prepared in accordance with Indian GAAP to be
included in the QIP placement document. There is no requirement to include restated financial
information. Typically, companies going for QIP include last 3 years audited financial statements
in the placement document. Since a company is including only audited financial statement without
any restatement in the placement document, it will include financial statements as presented
historically in the document.
Thought SEBI ICDR regulations do not require restatement of historical financial information,
some reformatting is done on the same, say, to present three years figures in the columnar form
and to present accounting policies and notes at one place. Such reformatting does not entail any
changes to the format or numbers used in earlier years.
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Ifs a company having 31 March year-end goes for QIP after the financial year 2011-12, its most
recent financial statements would be as per revised Schedule VI but those of the prior years will be
as per pre-revised format. In such cases, challenges will arise in presentation of reformatted
financial statements which need to be clarified by the SEBI. Till the time this issue is clarified by
the SEBI, we suggest that, a company may restate its financial statements on the lines of view
taken for IPO/ FPO. However, consultation with merchant bankers is preferred.
How revised Schedule VI will impact presentation of the cash flow statement? Particularly,
the following key issues need to be considered:
(i) Revised Schedule VI requires presentation of lines items, either on face or in the
notes, which are different vis-à-vis those required under pre-revised Schedule VI. For
example, revised VI requires presentation of trade receivables as against sundry
debtors required by pre-revised Schedule VI. Is it mandatory for a company to present
revised line items in cash flow statement also?
(ii) As part of working capital movement, is it mandatory to present separate movement
for current and non-current components? For example, a company has segregated
trade receivables into current and non-current components based on revised Schedule
VI criteria. Is it mandatory for the company to disclose movement in current and non-
current trade receivables separately?
(ii) As part of investing and financing activities, is a company required to present cash
inflows and outflows separately for current and non-current items? For example, a
company has taken a loan of `1000,000. Out of this, `800,000 is classified as non-
current liability and `200,000 is current liability. Is it mandatory for the company to
disclose inflow from current and non-current component of loan separately?
We believe that line items/ headings used in cash flow statement should be in sync with those used
in other parts of the financial statements. In accordance with GNRVI, the terms “trade
receivables” and “sundry debtors” can different meanings. Hence, a company cannot present
trade receivables in the balance sheet and show movement in “sundry debtors” in cash flow
statement. The cash flow statement should also refer to them as trade receivables.
With respect to the issues (ii) and (iii), AS 3 Cash Flow Statements, does not mandate such
presentation. Nor is such presentation required in revised Schedule VI or GNRVI. Hence, we
believe that it is not mandatory for a company to present separate movement/ inflow and outflows
from current and non-current components of various line items separately.
Consider that a company has operating cycle of 3 years. It typically allows one month credit
period to all its customers and it has included this period in computation of operating cycle.
For one very large customer, it has agreed to provide 18 months credit period. At the balance
sheet date, the company expects to recover the amount from this customer in 17 months.
Will it classify this trade receivable as current or non-current?
In accordance with revised Schedule VI, operating cycle is time between the acquisition of assets
for processing and their realization in cash or cash equivalents. As depicted in the diagram, it
typically comprises various activities starting from purchase of raw material till realization of cash.
For each activity forming part of the operating cycle, the normal time period is very relevant. If
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one of these activities takes a longer duration, the

company will not be able to realize cash in the duration
Cash/bank decided for normal operating cycle. Thus, for asset
balances arising from activities which are directly part of
Debtor Purchase the operating cycle, classification as current or non-
realization of RM
current should be based on the normal time taken for
that particular activity.
Operating
cycle
In this case, the company has allowed extended credit

Conversion
Sales
to FG period to one of its customers. This does not extend
normal operating cycle of the company or its business
Inventory from 36 months to 53 months. Based on these
arguments, the company is not able to recover
receivable in time allocated to this activity in the normal
operating cycle. Hence, it will classify the receivable as
Activities take 35 months non-current, unless it satisfies any other criteria of
revised Schedule VI for classification as current asset.
Activity takes 1 month
While the company uses the above criterion for current/ non-current classification of assets
forming directly part of operating cycle, current/ non-current classification of liabilities and other
assets, which are directly attributed to business but do not arise from activities directly sitting on
the operating cycle, is decided based on overall length of operating cycle.
We believe that a company will need to make such an assessment at individual level only if
amounts involved are material.
Raw material supplier typically takes 3 months time to supply raw material from the time an
order is placed. Is the lead time for procuring raw material included in operating cycle?
Operating cycle of a business should comprise normal time required to complete its processes of
(i) acquiring raw material, (ii) processing the same into finished goods, (iii) making the sale, and
(iv) their realization in the cash. In the given case, the normal lead time to acquire raw material is
three months. Hence, it should be included in determination of operating cycle.
Is credit period allowed by supplier reduced in determination of operating cycle? Let us

assume that a company requires 36 months to complete the entire circle of acquisition of
assets for processing and their realization in cash or cash equivalents. The raw material
supplier typically allows six months credit period. Is the operating cycle of the company 36
months or 30 months?
In accordance with revised Schedule VI, operating cycle is the time between the acquisition of
assets for processing and their realization in cash or cash equivalents. This suggests that
operating cycle should comprise normal time spent on various activities starting from purchase of
raw material till realization of cash and there is no need to reduce credit period allowed by supplier
from the same. Further, though the company has not paid for raw material during first six months,
it might have started incurring expenses on other items such as labor and overhead cost. Hence,
in the given case, the operating cycle of the company is 36 months.
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There is a breach of major debt covenant as on the balance sheet date relating to long-term
borrowing. This allows the lender to demand immediate repayment of loan; however, the
lender has not demanded repayment till the authorization of financial statements for issue.
Can the company continue to classify the loan as current? Will the classification be different
if the lender has waived the breach before authorization of financial statements for issue?
In accordance with revised Schedule VI, a liability is classified as non-current if and only if the
borrower has unconditional right to defer its payment for atleast 12 months at the reporting date.
GNRVI clarifies that if a term loan becomes repayable on demand because of violation of a minor
debt covenant (for e.g., submission of quarterly financial information), the company can continue
to classify the same as non-current unless the lender has demanded repayment before approval of
financial statements.
GNRVI does not clarify the classification where a company has violated a major debt covenant as
on the reporting date. However, a reading of GNRVI suggests that the exemption is given only with
regard to violation of minor debt covenants and not for violation of major covenants. Thus, if
major debt covenant is violated, there can be three situations – (a) the banker has asked for
repayment before approval of financial statements, (b) the banker has not asked for repayment
and has not forgiven the violation before approval of financial statements, and (c) the banker has
forgiven the violation before the approval of financial statements. In situations (a) & (b), we
believe that the loan should be classified a current liability. However, in situation (c), where the
banker has actually forgiven the violation before approval of financial statements, one may argue
that the intention of the ICAI is that a company should continue to classify the loan as non-current,
if the possibility of loan being recalled is negligible. Subsequent waiver of breach confirms this
aspect and therefore the company may continue to classify the loan as non-current.
Can breach of a financial covenant, say, failure to comply with target current ratio, be
treated as breach of minor debt covenant?
GNRVI does not define what is meant by breach of minor or major debt covenants. It merely gives
“non-filing of quarterly information” as an example of breach of “minor” covenant. Typically, a
company will need to decide whether a particular debt covenant is major or minor depending on
detailed facts and circumstances. Typically, financial covenants can have significant impact on a
company’s ability to repay loan as per agreed terms. Hence, in most cases, financial covenants are
likely to constitute major debt covenants.
However, in some limited circumstances, it may be possible to ignore the breach in financial
covenants, such as non-compliance with current ratio, as a minor breach specially when there are
other compensatory factors which practically nullify such breach beyond doubt. For example, a
company has breached current ratio for a very short period of time or only by an insignificant
margin; however, it has very strong liquidity, debt-equity and other performance ratios which are
good enough to give a comfort to the lender that despite the breach, no issue is expected to arise
in timely servicing of the loan.
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How would rollover/ refinance arrangement entered for a loan, which was otherwise required
to be repaid in six months, impact current/ non-current classification of the loan? Consider
three scenarios: (a) rollover is with the same lender on the same terms, (b) rollover is with
the same lender but on substantially different terms, and (c) rollover is with a different
lender on similar/different terms?
If the rollover arrangements are with the same lender at the same or similar terms, the company
will continue to classify the loan as non-current, provided that the rollover arrangement was in
existence at the balance sheet date. If the rollover arrangement has been entered into with a
different lender either on similar or different terms, the arrangement is more akin to
extinguishment of the original loan and refinancing the same with a new loan. Hence, in such
cases, the existing loan should be classified as current liability. If the rollover arrangement is
entered into with the same lender but on substantially different terms, the position is not clear.
We understand that the matter is under debate at the IASB level and mixed practices are being
followed globally as well. Keeping this in view, one may argue that it can classify the loan as non-
current, provided that the rollover arrangement was in existence at the balance sheet date.
A company deals with corporate customers and government customers. Corporate

customers normally pay their dues in three months. In contrast, government customers
normally take 18 months to pay their dues. How should the company identify its operating
cycle? Can it identify different operating cycles for different category of customers?
In accordance with revised Schedule VI, operating cycle is the time period between acquisition of
assets for processing and their realization in cash or cash equivalents. As per paragraph 7.2.1 of
GNRVI, “Where a company is engaged in running multiple businesses, the operating cycle could be
different for each line of business. Such a company will have to classify all the assets and liabilities
of the respective businesses into current and non-current, depending upon the operating cycles
for the respective businesses.”
It is clear that a company should identify operating cycle at company or business level. If a
company is engaged in sale of the same goods or services to corporate and government
customers, an apparent view is that it constitutes one line of business and therefore one operating
cycle be identified for the business. However, in the given case, there is a significant difference
between collection period for corporate and government customers. Hence, it may not be able to
determine one operating cycle for the entire business. This may require the company to go at
more granular level and identify separate operating cycle for each class of customer as if such
customer class constitutes separate business. We believe that while identifying operating cycle at
customer level, a company should consider the following key points:
(a) A company can identify separate operating cycle for a class of customers, but not at an
individual customer level. Typically, the class of customers identified as separate business
should cover significant population of total customer base for the company.
(b) Related party transactions may not be at an arm’s length. Hence, they are not relevant in
identification of operating cycle.
(c) The extended credit period to one class of customer should normal business practice, as
against one-off transaction.
(d) Though operating cycle is identified separately for each business, it may be helpful to
consider whether industry players also allow extended credit period.
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(e) Considering the extended credit period, it is possible that a company charges higher price
to government customers for loss of interest. Alternatively, a company may have different
considerations in dealing with government customers, e.g., its willingness to maintain
good relations with government or other indirect benefits.
For start-up manufacturing companies which are yet to commence commercial production,
how will operating cycle be determined?
Operating cycle is the time between the acquisition of assets for processing and their realization in
cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to
have duration of 12 months. Typically start-up manufacturing companies which are in the process
of setting up their plant and machinery would not have started their operating processes. Hence,
until such time, 12 months should be taken as operating cycle for such companies.
How should slow moving stock of stores & spares that is neither expected to be consumed
within the normal operating cycle nor to be sold within 12 months from the balance sheet
date be classified?
An asset, other than cash and cash equivalents, is classified as current when it (a) is expected to
be realized in or intended for sale or consumption in the company’s normal operating cycle, or (b)
is held primarily for the purpose of being traded, or (c) is expected to be realized within 12 months
after the reporting date. As per the facts of the case, stores and spares neither satisfy conditions
(a) nor (c) for classification as current. Further, though a company may treat these spares as
“inventory”, these are not held for the purpose of trading. Hence, such stores and spares do not
meet any of the criteria for classification as current asset and the company will need to classify
them as non-current asset.
A company has taken 3 year loan specifically for a business whose operating cycle is 4 years.
Hence, it needs to classify 3 year loan as current liability. This gives rise to the following
issues:
(a) Should the loan be classified in the balance sheet under the head “long term
borrowing”, “short term borrowing” or “current maturities of long-term debt”?
(b) Does the company need to make all disclosures required for long-term borrowings for
this loan also?
Paragraph 8.3.1.6 of GNRVI states the following with regard to long-term borrowings:
“The phrase long-term has not been defined. However, the definition of non-current
liability in the revised Schedule VI may be used as long-term liability for the above
disclosure.”
Paragraph 8.6.1.2 of GNRVI states the following with regard to short-term borrowings:
“Loans payable on demand should be treated as part of short-term borrowings. Short-term

borrowings will include all loans within a period of 12 months from the date of the loan.”
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Apparently, there is an internal inconsistency in GNRVI. In accordance with the above paragraphs,
the loan becomes neither long-term nor short-term borrowing. However, this should not be the
intention of the ICAI. We believe that based on principle laid down in paragraph 8.3.1.6, the more
appropriate approach may be to identify long-term and short-term borrowings in sync with
definition of terms current and non-current liability. In the given case, since the entire loan is
current liability from day one, the company should treat it as short-term borrowing.
Since the loan is classified as short-term borrowing, disclosures required for short-term borrowing
will apply to this loan as well.
Will a company classify its investment in preference shares, which are convertible into equity
shares within one year from the balance sheet date, as current or non-current asset?
In accordance with Revised Schedule VI, an investment expected to be realized within 12 months
from the reporting date is classified as current asset. We believe that such realization should be in
from cash or cash equivalents; rather than, through conversion of one asset into another non-
current asset. For example, GNRVI clarifies that capital advance against which fixed assets will be
received rather than cash is classified as non-current asset, irrespective of the expected timing of
receipt of fixed assets. Drawing an analogy from the same guidance, the company will classify the
investment in preference shares, which are convertible into equity shares within one year from
the balance sheet date, as non-current asset provided that it does not satisfy any other criteria for
classification as current asset. For example, let us assume that a company holds preference
shares which are convertible into equity shares after 9 months. It may classify investment in
preference shares as current asset, if it expects to sell preference shares and realize cash within 9
months or sell equity within 3 months after conversion.
Whether operating cycle needs to be disclosed?
Neither revised schedule VI nor GNRVI requires a company to disclose operating cycle. However,
as a matter of best practice, a company may disclose the same. In our view, this disclosure will be
particularly helpful to the users of financial statements where determination of operating cycle
involves significant judgment and it is more than 12 months.
The company has received security deposit from its customers/dealers. Either the company
or the dealer can terminate the agreement by giving 2 months notice. The deposits are
refundable within one month of the termination. However, based on past experience, it is
noted that deposits refunded in a year are not material, i.e., 1% to 2% of amount outstanding.
The intention of the company is to continue long term relationship with their dealers. Can the
company classify such security deposits as non-current liability?
As per revised schedule VI, a liability is classified as current if the company does not have an
unconditional right to defer its settlement for atleast 12 months after the reporting date. In the
given case, the company does not have such right since the customer/dealer can terminate the
agreement by giving 2 months notice and deposit has to be refunded within 1 month of
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termination. Hence, the security deposit should be classified as current liability. The intention of
the company to not terminate the agreement or past experience is not relevant.
A similar criterion will apply for other deposits received, for example, under cancellable leases.
The company has taken premises on operating leases for which it has paid security deposit to
the lessor. The lease term is 5 years however the agreement can be terminated by both the
parties by giving 3 months notice. The deposits are refundable immediately on termination of
agreement. The intention of the company is to continue the lease agreement for 5 years.
Further, the company has taken electricity connection for which it has paid security
deposits. These deposits are repayable on demand on surrender of the electricity connection.
Can the company classify these security deposits as current assets?
Unlike deposits received, classification of deposits paid depends on the expectation of its
realization. Hence, a company will classify lease/ electricity deposits given as non-current asset,
unless it expects to recover the same within 12 months after the reporting date, i.e., by cancelling
the lease contract or surrendering electricity connection.
For funded defined benefit plans, GNRVI requires that amount due for payment to the fund
within next twelve months is treated as current liability. Since a company will also recognize
service cost in the next year, how should it determine the component of net deficit in the
fund to be classified as current liability? For example, deficit is `500 and the LIC is expected
to demand a payout of `300 in next year. The expected cost for the next year is `200.
Current/ non-current classification will depend on the relevant provisions of the Contract Act and
Arrangement with LIC.
GNRVI requires deferred tax assets/ liabilities to be classified as non-current. Does it imply
that provision for tax (net of advance tax)/ advance tax (net of provision) also to be
classified as non-current?
Paragraph 27 of AS 22 states that, “An enterprise should offset assets and liabilities representing
current tax if the enterprise has a legally enforceable right to set off the recognized amounts and
intends to settle the asset and liability on a net basis”. We understand that as per the Income-tax
Act, a company has the legal right to offset only advance tax relating to one year against advance
tax for the same year. Hence, the provision for tax and advance tax can be offset only on year-by-
year basis and a company cannot offset advance tax of year 1 against provision for year 2.
After such year-by-year offset, if there is excess provision or excess advance tax, the same is
classified into current/non-current based on the definition of current asset and current liability
given in revised schedule VI. Unlike deferred tax assets/ liabilities, there is no specific requirement
to classify these items as current or non-current only.
Typically, a company needs to pay provision for tax immediately either in the form of advance tax
or self assessment tax. Hence, it may normally be classified as current liability. The classification
of advance tax would be based on its expected realization/ settlement.
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How should derivatives be classified between current and non-current assets/ liabilities?
A derivative could be an asset or a liability. A derivative entered into by a company to gain from
short term price fluctuation is treated as current because the primary purpose is trading. Even if a
derivative instrument is not due for settlement within 12 months from the end of the reporting
period, it will still be classified as current if it is held primarily for being traded.
A derivative could be entered into with the intention to hedge certain risks but no hedge
accounting is applied. Assume that the hedged item is a loan with fixed interest payments with a
term of 5 years. The derivative is a fixed-floating interest rate swap with the same life and the
same notional amount and annual payments. Although AS 30 states that a derivative is classified
as held-for-trading unless designated as a hedging instrument, this classification is for determining
the appropriate measurement basis for the instrument. However, the purpose of entering into the
contract (the intention) determines its classification in the balance sheet. Although the company is
unable to demonstrate the instrument qualifies as a designated hedging instrument under the
hedge accounting criteria in AS 30, the instrument was entered into to hedge certain risks and it is
intended that it will be held for a period exceeding 12 months from the end of the reporting
period. The portion of the instrument relating to cash flows occurring in the first 12 months is
classified as current, with the remaining portion classified as non-current. The same classification
will apply if the company was applying hedge accounting in the given situation.
We believe that a similar position will apply even if a company has accounted for its derivatives
under the ICAI announcement.
Revised Schedule VI requires a company to present trade receivables in the following format:
Trade receivable
Secured, considered good XX,XXX
Unsecured, considered good XX,XXX
Doubtful X,XXX
Total XX,XXX
Less: Provision for bad and doubtful debts X,XXX
Trade receivables XX,XXX
A company needs to disclose trade receivables under “current” and “non-current” assets
depending on revised Schedule VI criteria. Is a company required to divide “provision for bad
and doubtful debts” as well into current and non-current portions? If yes, on what basis?
A company segregates its trade receivables into “current” and “non-current” portions in
accordance with revised Schedule VI criteria. Since a “provision for bad and doubtful debts”
pertains to an underlying receivable, a company will present the same as deduction from the same
class of asset to which it pertains.
The Reserve Bank of India (RBI), vide its notification No. DNBS.223/CGM (US)-2011 dated
17 January 2011, has issued directions to all NBFCs to make provision of 0.25% on standard
Page 14
assets. The RBI requires this provision to be shown as a liability and not netted from loan
balance. Does an NBFC need to split the provision into “current” and “non-current”
portions?
An NBFC creates provision on the standard assets at the rate prescribed by RBI. In accordance
with the revised schedule VI, it will classify these standards assets into current and non-current
portions. Since the provision is closely linked to the underlying asset, we believe that an NBFC
should split the standard asset provision also into current and non-current portions, by using the
same criterion.
A real estate company is involved in developing multiple projects involving significantly

different periods of time, for example, some projects may get completed in 1 to 2 years time
and other projects may take longer time to complete, say, 5 to 8 years. Keeping this in view,
how should the operating cycle of a real estate company be determined? Can a real estate
company take a view that each real estate project has a different operating cycle?
Alternatively, can a real estate company take a view that operating cycle cannot be
determined reliably and therefore 12 months period should be treated as operating cycle?
Revised Schedule VI defines the term “operating cycle” as below:
“An operating cycle is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents. Where the normal operating cycle cannot be
identified, it is assumed to have duration of 12 months.”
Paragraph 7.2.1 of GNRVI provides the following guidance on operating cycle:
“Where a company is engaged in running multiple businesses, the operating cycle could be
different for each line of business. Such a company will have to classify all the assets and
liabilities of the respective businesses into current and non-current, depending upon the
operating cycles for the respective businesses.”
Based on the above guidance, the following key principles need to be considered for determination
of operating cycle:
(i) The “operating cycle” is time period between the acquisition of assets for processing and
their realization in cash or cash equivalents. This may not necessarily be equal to the
project period. Let us assume that a company, having only one real estate project,
acquires one piece of land which is ready to launch the project. The company launches the
project immediately and it is able to sell the entire project in next few days. The company
receives 30% booking amount which is sufficient to cover land fair value. The company
raises and receives progress payment from customers as and when it achieves a defined
milestone on the project, say, construction of additional two floors. The company is able to
achieve billing milestones in a comparatively small period of time, typically, 2-3 months,
and progress payment received cover fair value of additional construction. In this case, it
is clear that time period between the acquisition of assets for processing and their
realization in cash or cash equivalents is much smaller than overall project period. Hence,
the company should treat such smaller period as “its operating cycle.”
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Consider the second scenario where a real estate company is able to sell its projects
upfront; however, it is not able to collect major component of cash flows till the projects
are complete or substantially complete. For example, this may happen where the company
runs “book now, pay on possession” scheme. In these cases, the entire project period will
be treated as operating cycle.
However, the second scenario should not be confused with a situation where a company
does not wish to sell property till future date for reasons, such as, taking benefit of price
increase. In this case, the company is holding the property for capital appreciation; rather
than for immediate sale. Hence, it will not include additional property holding period in
determination of operating cycle. Similarly, in contrast to the second scenario, consider a
situation where a real estate project in slow moving due to reasons such as lack in market
demand and legal issues in title of land. Due to these reasons, the company is expected to
sell the project over a period of 10 years; whereas, normal timeframe to complete such
projects and realize cash is 2 to 3 years. Since revised Schedule VI requires normal
operating cycle of a company/ business to be determined, such abnormal delays cannot be
considered as part of “normal operating cycle.”
(ii) Revised Schedule VI read with GNRVI requires operating cycle to be identified either at
company or business level. Since real estate sale constitutes one line of business for the
company, it is expected that many real estate companies may be able to identify one single
operating cycle for their real estate business, using guidance at (i) above. However, in
certain cases, projects undertaken by a real estate company may involve significantly
different time period between the acquisition of assets for processing and their realization
in cash or cash equivalents. In such cases, the company may be able to demonstrate that
different projects constitute different businesses for the company and therefore it can
identify separate operating cycle for each project.
(iii) A real estate company should typically be able to identify operating cycle for its projects.
Hence, the argument that “operating cycle cannot be determined reliably” does not seem
acceptable in most cases.
Let us assume that based on guidance given in the previous issue, a real estate company can
demonstrate that different operating cycles need to be identified for each of its real estate
project. In such a case, is the company also required to allocate/ identify related asset and
liabilities with each project and classify the same as current / non-current accordingly? If
yes, how the assets and liabilities related to each project can be identified?
Project specific asset and liabilities (including project loans) need to be classified as current/ non-
current based on the project specific operating cycle. The company will identify assets and
liabilities related to each project by cost accounting principles, i.e., asset and liabilities directly
attributable to each project will be identified as project assets/ liabilities. The assets/ liabilities,
which cannot be identified to a project, will be classified as current/ non-current by using 12
month criterion.
A real estate company holds huge land-bank. Out of this land bank, the active development
for sale is taking place on certain portions. Other portions are held for undetermined use and/
or for future development/ sale at an appropriate time, say, when prices increase certain
level, existing projects get completed or when there is an additional demand for real estate. A
Page 16
small portion of the land has been acquired for short-term profit making and the company is
actively searching for a buyer to sell this land. Since there is no clear guidance on
classification of land bank as inventory or investment property, the company has classified
the entire land bank as inventory. Can it disclose the entire land as current asset?
The current/ non-current classification of land involves significant judgment and will require
detailed understanding of facts, including intention of the management. We believe that a
company will need to satisfy one of the following three criteria to classify land as current:
“(a) It is expected to be realized within twelve months after the reporting date.
(b) It is expected to be realized in, or is intended for sale or consumption in, the company’s
normal operating cycle.
(c) It is held primarily for the purpose of being traded.”
In accordance with the above criteria, any asset expected to be realized within twelve months
after the reporting date is treated as current. If an asset does not meet 12 months criterion for
classification as “current,” the following broad principles will apply:
(i) Regarding the land, which is under development, the company will obviously decide the
operating cycle for its real estate business/ respective project, using the above guidance.
If it expects to realize/ sell/ consume the land in this operating cycle, it will classify the
same as current asset. Alternatively, the company may demonstrate that land is being
developed for immediate sale and therefore, it meets “held-for-trading” criterion and can
be classified as current asset.
(ii) Regarding the land, which is held for future development/ sale at appropriate time,
“operating cycle” criterion does not seem appropriate since no active development is in
progress. Further, we believe that to satisfy “held-for-trading” criterion also, the company
should have purchased the land for immediate sale/ sale in near future so that it can earn
profits through dealer margin or through short-term price fluctuations. The land held by
the company for undetermined use or for future development/ sale at an appropriate time,
say, when the land price increases certain level, the existing projects get completed or
when there is more demand for real estate in the market, is more akin to land held for
capital appreciation. The company will classify such land as non-current asset.
(iii) The land, acquired by the company for short-term profit making and for which it is actively
searching for a buyer, seems to meet “held-for-trading” criterion. Hence, the company can
classify this portion of land as current asset.
A company acquires a piece of land with the intention of constructing a 5-floor building and it
immediately started construction activity on the land. Out of five floors, the company will be
using first two floors for its business. It will sell the remaining three floors, with an undivided
share in the land. Should the company present land as current or non-current asset?
As the building will have a dual use, both portions (i.e. the “fixed asset-portion” and the
“inventory-portion”) should be accounted for separately from the start. This requires that cost of
land to be allocated to both portions based on relative fair values (e.g., 40% to fixed asset and 60%
to inventory). The company will classify the fixed asset portion as non-current asset. The current
or non-current classification of inventory portion will be decided based on criteria applicable to
real estate projects.
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Most real estate companies need to undertake the following activities before they actually
start construction on real estate project:
(i) Acquisition of land. In certain case, the land acquisition may be long drawn process.
During this period, the company may have paid significant advances which will get
converted into land after a substantial period of time.
(ii) Obtaining approval for conversion of agricultural land into residential/ commercial use
(iii) Obtaining necessary approvals for development
Will the company classify land advances/ land pending development as current or non-
current asset?
In cases involving long drawn processes of land acquisition (already identified and in process of
acquisition), conversion or approval for development, appropriate determination of “normal
operating cycle” is crucial. We believe that these processes will become part of normal operating
cycle only if the following conditions are met:
(i) The activities do not involve abnormally long-period of time to complete and there are no
abnormal delays beyond the expected term. For example, if a company or its
representative needs to enter into a lengthy process of negotiating with multiple sellers/
occupants having different demands, it may be difficult to justify that acquisition process is
complete in a normal period of time.
(ii) It is reasonably certain that the company will be able to complete activities in a normal
period of time and it has actively started working on the same. Hence, the activities
involved are more procedural in nature.
(iii) The company can demonstrate that it is undertaking these activities to develop the land
for sale and that active development on the land will start immediately on completion of
these activities.
If the above conditions are satisfied, the activities, such as, land acquisition, conversion and
approval, will form part of the company’s normal operating cycle. If this is the case, the company
can classify land advances/ land pending development as current asset.
A real estate company has entered into agreements for sale with certain customers outside
India. In such cases, the company receives progress payments in foreign currency. How
should the company make disclosure regarding earnings in foreign currency in such cases?
Paragraphs 11.5.2 and 11.5.3 of GNRVI, among other matters, provide as below:
“11.5.2 … Since the statement of profit and loss is prepared on an accrual basis, it
may be suggested that foreign currency earnings should also be disclosed on a similar
basis.
11.5.3 Since, foreign exchange earnings are to be disclosed on an accrual basis,
the subsequent receipt of foreign exchange in a later year should be ignored, as otherwise
the same earnings would be disclosed twice.”
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From the above, it is clear that disclosure regarding foreign currency earnings should be based on
accrual basis and the amount recognized in P&L as revenue for the period from the respective
contract should be disclosed as foreign currency earning.
Some loans taken by real estate companies contain a clause (which is contractually and
legally enforceable) whereby the banker can demand immediate repayment of loan from day
one, without assigning any reason. However, the experience suggests that the banker will
demand repayment of such loans only at the due date mentioned in the agreement.
Considering the exemption given in GNRVI for breach of minor debt covenants, can a
company classify such loans as non-current liability?
Paragraph 7.1.8 of GNRVI is clear that the exemption given for breach of minor debt covenant is
not available to a loan which is repayable of demand from day one. GNRVI clearly states that a
company will continue to classify such loan as current liability, even if the banker does not demand
early repayment of the loan.
EPC contracts involve receipt of upfront mobilization advances that are adjusted over the
period of contract and retention money to be received only when specified time elapses after
the completion on contract. How should an EPC company classify such mobilization advances
received upfront and retention money receivable after completion of contract?
We recommend that an EPC contractor may adopt the following approach:

(i) An EPC contractor may identify separate operating cycle for each contract. Considering
the involvement of mobilization advance and retention money, such operating cycle will be
based on the overall contract period.
(ii) The company will classify contract related assets and liabilities, e.g., project inventory, as
current assets and liabilities if they are expected to be realized/ settled within normal
contract period. The company also classifies contract receivables/ payables, retention
money and mobilization advances as current assets/ liabilities if these amounts are
expected to be realized/ settled in accordance with the terms agreed with the contractee,
in normal course of business. However, if an abnormal delay, say, due to litigation or other
reasons, is expected in realization/ settlement of these assets and liabilities, the company
may need to classify these amounts as non-current asset/ liability.
(iii) Contract specific asset and liabilities (including loans) will need to be classified as current/
non-current based on the contract specific operating cycle. The company will identify
assets and liabilities related to each contract by using cost accounting principles, i.e., asset
and liabilities directly attributable to each contract will be identified as contract assets/
liabilities. The assets/ liabilities, which cannot be identified to a project, will be classified as
current/ non-current by using 12 month criterion.
A real estate and EPC company has many subsidiaries engaged in real estate and EPC
projects. Each of these subsidiaries has determined separate operating cycle for its
activities. Is the parent company required to re-assess normal operating cycle of each of
these subsidiaries in the preparation of consolidated financial statements (CFS)?
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Revised Schedule VI requires operating cycle to be identified at company/ business level. Further,
we believe that each of the subsidiaries should have followed the revised Schedule VI criteria,
along with GNRVI and the above guidance, in determining its operating cycle. If so, there does not
seem to be any need for re-assessing operating cycle at CFS level. However, if a subsidiary has not
determined its operating cycle correctly at SFS level, the parent will obviously need to reassess
the same at CFS level.
Finance companies, say, NBFCs, provide loan of differing tenures to their customers. For
example, an NBFC may provide personal loans to customers which are for periods 12 to 24
months, vehicle loans for periods upto 5 years and home loans for periods which can be as
long as 15 to 20 years. Typically, these loans are repayable in equal monthly installments
(EMIs) over the loan period. How should the operating cycle of a finance company, which is
required to prepare financial statements in accordance with revised Schedule VI, be
determined? Should the company determine operating cycle separately for each line of
business, say, housing loans, vehicle loans and personal loans? Or a separate operating cycle
needs to be identified for each loan?
Revised Schedule VI defines the term “operating cycle” as below:
“An operating cycle is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents. Where the normal operating cycle cannot be
identified, it is assumed to have duration of 12 months.”
From the above, it appears that the concept of “operating cycle” is more relevant for companies
engaged in manufacturing, service, construction or trading activities, rather than for a company
engaged in finance operations. To support this view, one may also make the following key
arguments:
(i) IAS 1 Presentation of Financial Statements, which contain similar requirements for
current/ non-current classification of assets and liabilities, acknowledges that entities,
such as financial institutions, do not supply goods or services within a clearly identifiable
operating cycle.
(ii) Companies in financial sector, say, NBFCs, typically work on daily cash settlement/
management basis. These companies do not assess and determine their working capital
requirements in the manner as it happens for companies engaged in manufacturing,
service, construction or trading activities.
(iii) Though an NBFC grants loan for a long period of time, say, 10 to 15 years, it collects
regular cash on these loans, i.e., through equal monthly installments (EMIs).
Keeping in view the above, we believe that a finance company should ordinarily take a view that
operating cycle cannot be determined reliably. Hence, it should use 12 months criterion to classify
various assets and liabilities as current or non-current.
How should “fixed assets held for sale” be classified in the balance sheet?
Neither revised Schedule VI nor GNRVI specifically deal with this issue. In the absence of such
guidance, the following two arguments seem possible:
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(i) The Expert Advisory Committee (EAC) opinion no. 1.26 included in volume 14 on the
subject Disclosure of plant and machinery retired from active use but still held for disposal
states that “the machines, which are retired from active use and dismantled and are not
actually sold off, should be disclosed appropriately at the lower of net realizable value and
net book value in the schedule of fixed assets or on the face of the balance sheet under the
head fixed assets.” Further, the Accounting Standards Board (ASB) of the ICAI has
published its views on certain accounting issues in September 2002 Journal The Chartered
Account. As part of this write-up, the ASB has stated that “project under sale if it was
originally treated as a fixed asset would continue to be a fixed asset would continue to be a
fixed asset even if it is under sale and will not, therefore, be classified as a current asset.”
Based on the above literature, one argument is that AS 10 Accounting for Fixed Assets
specifically requires that “fixed assets held for sale” should continue to be presented as
part of fixed asset. However, a company will disclose the same separately either in the
fixed assets note or on the face of the balance sheet under the head fixed assets.
(ii) The EAC opinion no. 30 included in volume 26 on the subject Accounting for fixed assets
held for sale states that “when an entity identifies a fixed asset as held for sale; it expects
that carrying amount of that asset will be primarily recovered through its sale rather than
from its continuing use in the production of goods or rendering of services. Thus, these
assets will no more be of the nature of fixed assets, rather these will be of the nature of
current assets.” Paragraph 24 of AS 10 “material items retired from active use and held
for disposal should be stated at the lower of their net book value and net realizable value
and shown separately in the financial statements.”
The counter argument is that AS 10 merely requires fixed assets held for sale to be shown
separately; however, it does specify the heading under which such assets are presented.
Since these assets are in the nature of current assets, the application of revised Schedule
VI guidance will require the same to be classified under the head “current assets” and
disclosed separately either on the face of the balance sheet or in notes.
We believe that both the views are arguable on this matter.
Is a company required to make disclosure regarding shareholders holding more than 5%

shares based on legal or beneficial ownership? Can a company include information regarding
beneficial ownership on a selective basis?
Legal and beneficial ownership of shares may be different in scenarios such as issuance of ADR/
GDR or when shares are held by trust for benefit of third party. Neither revised Schedule VI nor
GNRVI provide any guidance on whether disclosure pertaining to shareholding information should
be based on legal or beneficial ownership. In the absence of such guidance, it will be sufficient
compliance if a company discloses shareholding information based on either legal or beneficial
ownership. If it discloses information based on beneficial ownership, it should disclose the entire
shareholding information based on beneficial ownership, after considering all data available with
or reasonably expected to be available with the company.
We suggest that for the benefit of readers, a company should specifically state in the financial
statements the basis adopted to disclose the shareholding information.
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Revised Schedule VI requires that a company will disclose for a period of five years
immediately preceding the balance sheet date, information such as, aggregate number and
class of shares (a) allotted as fully paid up pursuant to contract(s) without payment being
received in cash, (b) allotted as fully paid up by way of bonus shares, and (c) bought back. In
accordance with GNRVI, a company is not required to give year-wise break-up of the shares
allotted or bought back; rather, the aggregate number for last five financial years needs to be
disclosed. Is a company required to give comparative information for this disclosure? If yes,
how the comparative will be presented?
To illustrate, let us assume that a company is preparing its financial statements for the year
ended 31 March 2012. In the current year column, it will give information for shares allotted/
bought back during the period of 1 April 2007 to 31 March 2012. In the previous year
column, will the company disclose information for shares allotted/ bought back during the
period 1 April 2006 to 31 March 2011?
Revised Schedule Vi is clear that except in for the first financial statements laid before a company
(after its incorporation), it will disclose the corresponding (comparatives) amounts for the
immediately preceding reporting period for all items shown in the financial statements, including
notes. The application of this principle requires the company to disclose corresponding figures for
information relating to shares allotted/ bought back during the period of five years.
Typically, the comparative information disclosed in the current period financial statements is the
figures disclosed in the previous period financial statements. If the company would have prepared
financial statements for the year ended 31 March 2011 in accordance with revised Schedule VI, it
must have disclosed information for shares allotted/ bought back during the period 1 April 2006
to 31 March 2011, in those financial statements. Hence, the same information will be disclosed as
comparative number in the current period.
A company has issued two series of debentures, viz., series A and series B in the year 2010.
These debentures are redeemable in 3 equal installments as follows: Series A – January
2012, January 2013 and January 2014 and Series B – October 2012, October 2013 and
October 2014. During the year ended 31 March 2012, the first installment for series A was
already paid.
Revised Schedule VI requires bonds/ debentures to be disclosed in the descending order of

maturity or conversion, starting from farthest redemption or conversion date, as the case
may be. Where bonds/ debentures are redeemable by installments, the date of maturity for
this purpose must be reckoned as the date on which the first installment becomes due. In the
above case, how the descending order of maturity will be determined? Particularly, for series
A debentures, should the first date of maturity be taken as its initial date January 2012
(which is no longer outstanding) or January 2013 (outstanding on balance sheet date)?
We believe that for the above disclosure, the first date of maturity is the date on which the first
installment of bonds/ debentures falls due for payment irrespective of whether that installment
has already been paid. Thus, in the given case, the first date of maturity for series A debentures is
January 2012 even though that installment is already paid.
Page 22
In accordance with GNRVI, a payable is classified as “trade payable” if it pertains to amount

due toward goods purchased or services received in the normal course of business. Based on
this principle, can a company include liability toward employees, leases or other contractual
liabilities in trade payables?
Paragraph 8.4.1 of GNRVI provides the following with regard to identification of trade payables:
“A payable shall be classified as trade payable if it is in respect of amount due on account

of goods purchased or services received in the normal course of business. As per the Old
Schedule VI, the term sundry creditors included amounts due in respect of goods
purchased or services received or in respect of other contractual obligations as well.
Hence, amounts due under contractual obligations can no longer be included within Trade
payables. Such items may include dues payables in respect of statutory obligations like
contribution to provident fund, purchase of fixed assets, contractually reimbursable
expenses, interest accrued on trade payables, etc. Such payables should be classified as
others and each such item should be disclosed nature-wise. However, acceptances should
be disclosed as part of trade payables in terms of the Revised Schedule VI.”
Typically, an argument can be made that any obligation, except statutory obligation, incurred by a
company pertains to goods or services received in normal course. For example, employee benefit
liability pertains to employee services received. Hence, explanation given in GNRVI is unclear and
may be subject to various interpretations. Considering the ambiguity, an appropriate way to deal
with this issue is to determine items that are not included in trade payables. For example:
(i) GNRVI states that liability toward purchase of fixed assets is not “trade payable.” Based on
the same analogy, a company cannot include finance lease liability in trade payable.
(ii) GNRVI states that liability toward contribution to provident fund is not included in trade
payables since it is a statutory obligation. Hence, a company can not include statutory
dues and due to government/ regulatory bodies in trade payable. However, this does not
imply that a company should exclude all employee benefit liability from trade payables.
(iii) GNRVI states that contractually reimbursable expenses are not included in trade payables.
We believe that here the intention is exclude payable in respect of expenses incurred on
behalf of a third party which are not charged to P&L of the company.
Besides the specific exclusions, any payable in respect of goods or services received in normal
course of business should be included in trade payable. For example, employee benefit and
operating lease liability which pertain to services received in normal course of business are
included in trade payable.
A company has single class of equity shares. Is the company still required to disclose rights,
restrictions and preferences with respect to the same?
Revised schedule VI requires disclosures of rights, preferences and restrictions attaching to each
class of shares. If a company has only one class of equity shares, it is still required to make this
disclosure.
Page 23
Revised Schedule VI requires balance to be maintained between excessive detail and too
much aggregation. Can a company use this principle to avoid giving disclosures specifically
required by revised Schedule VI/ GNRVI, say, security details for each loan?
The principle of “balance to be maintained between excessive detail and too much aggregation” is
new to Indian regulatory environment. Further, since this is the first year of application of revised
schedule VI, it is not yet known as to how the regulators will view this requirement. Keeping this in
view and other uncertainties, we believe that a company should not used this principle to avoid
making material disclosures which are specifically required by revised schedule VI, accounting
standards, guidance notes etc. Since disclosure regarding security for each loan is required by
revised schedule VI and GNRVI, a company cannot avoid making this disclosure. However, a
company may make an exception to separate disclosure of loan and security details provided that
both loan and security given there-against are immaterial.
A company incurs certain out-of-pocket expenses (OPE) on behalf of its customers in normal
course of selling goods/ services. The company is entitled to recover these expenses from
the customer without any margin. Can the company include amount recoverable toward OPE
as part of trade receivables?
Like trade payables, there is an ambiguity with regard to the meaning of trade receivables as well.
As per paragraph 8.7.4 of GNRVI, contractually reimbursable expenses are not included in trade
receivables. On the lines of trade payables, the intention seems to exclude from “trade
receivables” expenses incurred by the company as an agent and on behalf of a third party. Hence,
a company can include OPE incurred and recoverable from customer in trade receivables, if it is
determined that the company is acting as principal in the arrangement and presents gross
revenue and expense in its P&L. If it is acting as an agent of the customer and uses net
presentation in P&L, it should not include OPE recoverable as part of trade receivables.
Revised schedule VI requires period and amount of continuing default/default as on the

balance sheet date in the repayment of loans and interest to be disclosed. Will a company be
required to make this disclosure if the default has been made good after the reporting date?
Revised schedule VI requires disclosure of default in the repayment of loan and interest existing
on the balance sheet date. We believe that a company needs to make this disclosure even if the
default has been made good after the reporting date. However, it may choose to also disclose the
fact that default has been made good after the reporting date.
Revised schedule VI requires disclosures of rights, preferences and restrictions attaching to

each class of shares. Is a company required to make this disclosure separately for ADR/ GDR
issued?
In case of ADR/ GDR, a company typically issues its shares to a bank in the foreign country.
Against such shares, the foreign bank issues depository receipts to the investors in the foreign
country. Hence, from the perspective of the company, it has issued shares for which disclosure of
rights, preferences, restrictions etc. are already disclosed. If there are any additional rights/
restrictions attached to ADR/ GDR, those rights and restrictions need to be disclosed. If there are
Page 24
no additional rights/ restrictions attached to ADR/ GDR, it will not be required to make separate
disclosure for rights, preferences and restrictions attached to GDR. In any case, it will disclose the
fact of ADR/ GDR issued by way of an appropriate note.
Revised Schedule VI lays down format for presentation of the statement of profit and loss
which requires nature of various expenses to be disclosed on the face. Keeping this in view,
GNRVI states that functional classification of expenses is prohibited. Can a company give
functional classification of expenses in the notes as additional information?
We believe that GNRVI intends to prohibit functional classification of expenses on the face of
statement of profit and loss. However, a company may choose to present such classification of
expenses as additional information in the notes.
Can a company sub-classify “other expenses”, required to be disclosed separately on the

face of the statement of profit and loss, into functional heads such as other operating
expenses, other administrative expenses and other selling expenses?
As mentioned earlier, GNRVI prohibits functional classification of expense on the face of the
statement of profit and loss. We believe that the same restriction applies with regard to sub-
classification of other expenses on the face. However, if a company desires so, it can make this
disclosure in the notes as additional information.
Revised Schedule VI read with AS 9 Revenue Recognition requires a company to present

income on the face of its statement of profit and loss as below:
Revenue from operations (gross) XX,XXX

Less: excise duty (XXX)
Revenue from operations (net) XX,XXX
Other income X,XXX
Total revenue XX,XXX
In notes to financial statements, a company gives the following break-up for its “revenue
from operations”:
Sale of products XX,XXX

Rendering of services X,XXX
Other operating revenues X,XXX
Revenue from operations (gross) XX,XXX
Clause 41 to the listing agreement requires the following disclosure to be made in the
quarterly financial results:
1. (a) Net sales/ income from operations XX,XXX

(b) Other operating income X,XXX
2. Expenditure
…
Page 25
3. Profit from operations before other income, interest

and exceptional items (1-2) XX,XXX
4. Other income X,XXX
Do the terms “other operating revenue” and “other operating income,” used in revised
Schedule VI and clause 41, have the same or different meanings?
Neither revised Schedule VI nor clause 41 define the terms “other operating revenue” and “other
operating income,” respectively. GNRVI provides the following guidance on “other operating
revenue”:
“This would include revenue arising from a company’s operating activities, i.e., either its
principal or ancillary revenue-generating activities, but which is not revenue arising from
the sale of products or rendering of services. Whether a particular income constitutes
other operating revenue or other income is to be decided based on the facts of each case
and detailed understanding of the company’s activities. The classification of income would
also depend on the purpose for which the particular asset is acquired or held. For instance,
a group engaged in manufacture and sale of industrial and consumer products also has one
real estate arm. If the real estate arm is continuously engaged in leasing of real estate
properties, the rent arising from leasing of real estate is likely to be “other operating
revenue”. On the other hand, consider a consumer products company which owns a 10
storied building. The company currently does not need one floor for its own use and has
given the same temporarily on rent. In that case, lease rent is not other operating revenue;
rather, it should be treated as other income.”
We believe that a similar guidance will apply to identification of “other operating income” under
clause 41. Hence, the terms “other operating revenue” and “other operating income,” used in
revised Schedule VI and clause 41 respectively, should be interpreted to have the same meaning.
Consequently, the term “other income” will have the same meaning both for revised Schedule VI
and clause 41 respectively purposes.
Keeping the above in mind, the principle can be explained using a simple example. A leasing
company will show income as revenue from services, a manufacturing company that is engaged in
leasing regularly (but does not run it like a separate business unit) will show the revenue as other
operating revenue. A manufacturing company that does one off lease transaction to save on
taxes or otherwise will show the leasing income as other income.
Should a company classify the following items as other operating revenue or other income?
· Liability written back (net)
· Insurance claim
· Bad debts recovery (net)
If a company needs to classify one or more of these line items as “other income,” then should
these items be included under the line “other non-operating Income” or presented as a
separate line item in the “other income” note?
Page 26
Please refer previous issue for presentation/ disclosure requirements of revised Schedule VI and
guidance on “other operating revenue” given in GNRVI. In our view, whether an item should be
classified as “other operating revenue” or “other income” is a matter of judgment and requires
consideration of specific facts. In a number of cases, the dividing line between these two items
may be very blur and require exercise of significant judgment.
We believe that income arising from items, such as, liability written back, insurance claim and bad
debts recovery (net), is purely incidental in nature. Though related to operating assets/ liabilities,
these do not arise a company’s operating activities, i.e., either principal or ancillary. Hence, a
company should classify these amounts as “other income.”
The head “other income”, in revised Schedule VI, does not contain separate line item for liabilities
written back (net), insurance claims and bad debts recovered (net). However, it is clear that a
company may add additional line items/ sub-line items on the face or in the notes, to explain its
financial position/ performance. Based on this principle, if amounts involved are material, a
company may present one or more of these items separately under the note “other income.”
A company is engaged in manufacture and sale of fertilizers to farmers. In accordance with

the government policy, the company needs to sell fertilizer at subsidized rates. To
compensate for lower realization on sale, the company receives subsidy from the government
in form of bonds. The following key issues need to be considered regarding this subsidy:
(i) How should a company present subsidy received in its statement of profit and loss?
Can it include the same under the head sale of goods or other operating revenues?
(ii) The company typically receives govt. bonds of fixed maturity in lieu of the subsidy.
Can the company include maturity of these bonds in deciding its operating cycle?
Should these bonds be classified as current or non-current asset?
(iii) How should the interest income on the govt. bonds be presented in the statement of
profit and loss?
In accordance with AS 9 Revenue Recognition, the amount recognized as sale of goods should
include amount received/ receivable from customers toward sale of goods. Hence, a company may
not be able to include such amount of subsidy under the head “sale of goods.” We believe that
such subsidy is in the nature of government grant. AS 12 Accounting for Government Grants
requires that government grants related to revenue should either be shown separately under
“other income” or deducted in reporting the related expense. Keeping this in view, the Financial
Reporting Review Board (FRRB) of the ICAI has also commented that the inclusion of such amount
in revenue is not in accordance with AS 9. Hence, we believe that the preferred view is to present
“fertilizer subsidy” under the head “other income.”
Regarding issue (ii), revised Schedule VI explain the term “operating cycle” as time between the
acquisition of assets for processing and their realization in cash or cash equivalents. Based on
this, one view is that the company has not received cash. Hence, it should include increase its
operating cycle for the bond holding period. However, the contrary view is that govt. bonds
typically carry interest. Though the company has not received cash on date of receipt of bond; in
substance, it is getting cash which needs to be invested immediately in govt. bonds. Hence, the
operating cycle of the company ends of date of receipt of the govt. bond. We believe that the
second view is more correct on this issue. Accordingly, the company may need to classify govt.
Page 27
bonds as non-current asset, unless they satisfy other criteria, viz., held-for-trading, expected
realization within 12 months or operating cycle, for classification as current asset.
Regarding issue (iii), paragraph 9.2.2 of GNRVI is clear that all kinds of interest income for a non-
finance company should be disclosed under the head “other income.”
How should charges, such as, bill discounting and delayed payment charges to electricity
board, etc., are present under the revised Schedule VI scenario?
In our view, the following guidances are relevant in this regard:

(i) In accordance with paragraph 9.8.1.3 of GNRVI, any interest on shortfall in payment of
advance income-tax is in the nature of finance cost and hence should not be clubbed with
the current tax. The same should be classified as Interest expense under finance costs.
However, such amount should be separately disclosed.
(ii) Paragraph 9.8.1.4 of GNRVI state that any penalties levied under Income tax laws should
not be classified as current tax. Penalties which are compensatory in nature should be
treated as interest and disclosed in the manner explained above. Other tax penalties
should be classified under other expenses.
We believe that similar principles should apply in this case also. Hence, bill discounting and
delayed payment charges, to the extent these are regarded in the nature of finance cost (i.e., time
value of money), should be included under the head “finance cost” and disclosed separately. The
other amount, e.g., delayed payment changes in the nature of penalty, should be included under
the head “other expense.”
A company estimates charges in the nature of “borrowing costs” by applying an appropriate

interest rate to the underlying amount.
Revised Schedule VI requires disclosure of information with respect to raw material,

purchases, sales, etc., under broad heads. GNRVI suggests that normally, 10% of total value
of sales/services, purchases of trading goods and consumption of raw material is considered
as an acceptable threshold for determination of broad heads. Any other threshold can also be
considered taking into account the concept of materiality and presentation of true and fair
view of financial statements. Neither revised Schedule VI nor GNRVI provides any further
interpretative suggestions and hence could lead to significant disparity in practice; for
example:
1. Should an automobile company treat different categories of cars falling in different
segment as different broad heads?
2. Should a white goods manufacturer treat all white goods as one broad head or classify
them as washing machine, refrigerators, etc.?
3. An IT company renders software services to various industries, viz., financial
services, manufacturing, telecom and retail. Should it treat each of these divisions as
separate broad heads?
Page 28
The term “broad heads” is interpreted to mean broad categories of raw materials, goods
purchased, etc. It is noted that revised Schedule VI typically focuses on nature of the item; rather
than its function or risk and reward (which is the criteria for segment reporting). We therefore
believe that a company may decide broad heads based on the nature of its business, products
sold, raw material and other facts and circumstances. Further, the information provided should be
meaningful to the users of financial statements. For example, if a company presents aggregate
information relating to all automobiles, say, various categories of cars and trucks under one
common category, say, “automobiles,” it will not communicate meaningful information to the
users. Similarly, cars falling in different categories, e.g., entry-level car and luxury car, are
typically considered to have significantly different nature and clubbing information relating to
these cars under one broad head will not give meaningful information. Hence, an automobile
company may need to treat different categories of cars as different broad heads. Similarly, it is
commonly understood that the nature of a washing machine is different from that of a television
or a refrigerator. Hence, these may also be treated as separate broad heads.
An IT company may either sell standardized software to various industries, which involve very
little or no customization. Alternatively, it may develop and sell separate software for each
industry specific applications. In the former case, software sold to various industries is the same
product and thereby will constitute single broad head. However, in the latter case, the company is
selling different software products to different industries. Hence, these are likely to get classified
as separate broad heads.
A company has entered into a forward/ swap (derivative) contract to hedge foreign currency
risk of a highly probable forecast transaction. Since AS 11 excludes accounting such forward
contracts, the company has chosen to account for gain/ loss on the derivative contract using
hedge accounting principles of AS 30. It recognizes gain/ loss on derivative in P&L in the
same period in which it recognizes the underlying sale transaction. How should the gain or
loss on the derivative recycled to P&L in this manner be classified? Can the company club
such gain/ loss as part of revenue?
How should the derivative gain/loss be classified if hedge accounting is not applied?
There is no clear guidance on presentation of gain/ loss on derivative contracts used for hedging.
However, a perusal of various literatures indicates that preferred view is to include gains and
losses from designated and effective hedging instruments in the same line item as the gains and
losses from hedged items (i.e., sales revenue). Hence, if a company has applied hedge accounting,
it may include effective portion of derivative gain/ loss as part of sales revenue. Alternately, if a
company wishes to include such gains/ losses on effective hedges in “other income”, it is also
acceptable practice. The company should adopt either of two presentations as accounting policy
choice and follow the same consistently.
Gains and losses on derivatives held for trading (including both derivatives that are not designated
as hedging instruments and those that do not qualify for hedge accounting, for example because
they fail an effectiveness test) are not presented as part of the company’s revenue, cost of sales
or specific operating expenses. They are usually presented either in a separate line item in the
P&L (if significant), within other income and expense.
Page 29
We believe that a similar position will apply even if a company has accounted for its derivatives
under the ICAI announcement.
In accordance with revised Schedule VI read with GNRVI, a company needs to disclose
repayment terms of loan liabilities. These terms, among other matters, include period of
maturity with respect to the balance sheet date, number and amount of installments due,
applicable interest rate and other significant relevant terms. Can a company make these
disclosures under appropriate buckets/ range? For example, can it state that all ECB loans
carry interest rate in the range of LIBOR + 1% to LIBOR + 3%”?
With regard to repayment terms, paragraph 8.3.1.17 of GNRVI states that “Disclosure of terms of
repayment should be made preferably for each loan unless the repayment terms of individual
loans within a category are similar, in which case, they may be aggregated.”
From the above, it is clear that it is preferable to disclose separate repayment terms for each
material loan. However, the company may club this disclosure and make it under appropriate
buckets where amounts involved are not material and/ or terms of loan are the same or similar to
each other. In any case, the company should not use very wide ranges/ bucket for making this
disclosure.
Page 30

FAQs On Revised Schedule VI

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FAQs On Revised Schedule VI

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Frequently Asked Questions (FAQs) – Revised Schedule VI

As stated in the previous issue, current/ non-current classification of assets/ liabilities is

(i) Raw materials

The Circular dated 5 September 2011 states as below:

For inclusion in Qualified Institutional Placement (QIP) placement document, is a company

one of these activities takes a longer duration, the

In this case, the company has allowed extended credit

Is credit period allowed by supplier reduced in determination of operating cycle? Let us

A company deals with corporate customers and government customers. Corporate

“Loans payable on demand should be treated as part of short-term borrowings. Short-term

Whether operating cycle needs to be disclosed?

A real estate company is involved in developing multiple projects involving significantly

Revised Schedule VI defines the term “operating cycle” as below:

Paragraph 7.2.1 of GNRVI provides the following guidance on operating cycle:

We recommend that an EPC contractor may adopt the following approach:

Revised Schedule VI defines the term “operating cycle” as below:

We believe that both the views are arguable on this matter.

Is a company required to make disclosure regarding shareholders holding more than 5%

Revised Schedule VI requires bonds/ debentures to be disclosed in the descending order of

In accordance with GNRVI, a payable is classified as “trade payable” if it pertains to amount

“A payable shall be classified as trade payable if it is in respect of amount due on account

Revised schedule VI requires period and amount of continuing default/default as on the

Revised schedule VI requires disclosures of rights, preferences and restrictions attaching to

Can a company sub-classify “other expenses”, required to be disclosed separately on the

Revised Schedule VI read with AS 9 Revenue Recognition requires a company to present

Revenue from operations (gross) XX,XXX

Sale of products XX,XXX

1. (a) Net sales/ income from operations XX,XXX

3. Profit from operations before other income, interest

A company is engaged in manufacture and sale of fertilizers to farmers. In accordance with

In our view, the following guidances are relevant in this regard:

A company estimates charges in the nature of “borrowing costs” by applying an appropriate

Revised Schedule VI requires disclosure of information with respect to raw material,

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