Accounting Advisory Services

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Revised Schedule VI
Further clarifications provided by the Institute of Chartered Accountants of India

Background
Schedule VI to the Companies Act, 1956 (the Act) provides the format in which companies registered under the Act prepare and present their financial statements. The Ministry of Corporate Affairs (MCA) has notified the Revised Schedule VI on 28 February 2011 vide Notification No. S.O. 447 (E) (as amended by Notification No. S.O. 653 (E)) dated 30 March 2011. The Revised Schedule VI introduces some significant conceptual changes such as current/ non-current classification; important disclosures for capital, standard profit/ loss account format, primacy to the requirements of the accounting standards etc. While the Revised Schedule VI does not adopt the international standards on disclosures in financial statements completely, it brings corporate disclosures closer to international practices. Overall, the attempt has been focussed on modernising and simplifying the Schedule and making it more relevant to present day needs. The Institute of Chartered Accountants of India (ICAI) has on 22 May 2012, issued a set of Frequently Asked Questions (FAQs) to provide further clarity on a number of implementation issues that had been encountered by numerous constituents during the course of practically applying the Revised Schedule VI.

Key areas covered in the FAQs released by the ICAI

The ICAI has sought to provide clarifications on a number of areas which were not specifically addressed by the previously issued guidance in the Revised Schedule VI and the Guidance Note issued on the same subject. The issuance of these FAQs is a positive development and should be a useful aid to a number of stakeholders as they apply or analyse financial statements prepared as per the Revised Schedule VI. It is worthwhile noting that the FAQs provide specific implementation guidance that, in some cases, appears to differ from interpretations that have already been applied by certain companies and in other cases, either requires or provides considerable scope for judgment to be applied to determine the appropriate presentation and disclosure under the Revised Schedule VI. As various stakeholders absorb the changes and clarifications provided by the FAQs, it is possible that further clarifications may be required to work towards eliminating the diversity that exists in practice currently. Key aspects that are covered by the FAQs are set out below.

Key clarifications
Overall reporting requirements
Companies having a year-end other than March would be required to prepare its tax financial statements for the period from 1 April 2011 to 31 March 2012 in accordance with the Revised Schedule VI. Revised Schedule VI presentation would be applicable to all companies preparing their financial statements for an Initial Public Offering (IPO) / Follow-on Public Offering (FPO) which has not closed before 31 March 2012 , irrespective of the year end followed by the company. This will result in additional efforts for restatement of last five year financial information in the offer document, as applicable. A company may disclose the operating cycle, especially if it is more than 12 months. In absence of clear requirement to disclose the length of the operating cycle even after the issuance of these FAQs, diversity of disclosures may exist in practice.

Balance sheet related clarifications

The FAQs clarify that even in situations where a company has only a single class of equity shares in issue; it would still be required to disclose the rights, preferences and restrictions attached to such shares. This clarification may be particularly relevant and sensitive for companies that have raised funds through venture capital / private equity investors since terms of such arrangements have not previously been made public. Even if a company has made good a default in its repayment of loan and interest after the reporting date, it would still be required to make the necessary disclosures of the period and amount of default as on the balance sheet date in accordance with the requirements of Revised Schedule VI. For a number of Indian entities where relatively minor delays in repayment of loans may occur on a regular basis, this disclosure is potentially a sensitive matter. However, the FAQs also clarify that where there has been a breach (either minor or major) of a debt covenant as on the balance sheet date related to a long term borrowing, the company would be required to classify such a borrowing as current only if the borrowing has been irrevocably recalled by the lender before authorisation of the financial statements. This guidance is significantly different from the requirements under IFRS and US GAAP. Under IFRS, if the loan can be recalled, it is classified as a current liability, irrespective of whether the breach is minor or major and irrespective of whether the loan is actually recalled or not. Treatment under US GAAP is similar to IFRS, except where the lender has agreed not to recall the loan before the financial statements are authorized for issue, in which case it is classified as non - current. This clarification is likely to be a significant relief for a number of Indian companies.

Income statement related clarifications

The FAQs clarify that significant judgment and consideration of facts need to be applied by companies on a case to case basis for classification of items such as liability written back (net), insurance claim, bad debts recovery (net) as either other operating income or other income. Diverse practices in presentation of such income may continue in absence of specific guidance.

Where there is a rollover / refinancing of loan expected, which would have otherwise been repaid within the next twelve months, classification of loan as current / noncurrent could be subject to judgment in certain circumstances and no bright lines have been prescribed. The position of the FAQs suggest that diversity in practice would continue in this area.

Borrowings with repayments falling due within the operating cycle of a company will be classified as a current liability and included under short term borrowings. This could have a significant impact on classification of borrowings by companies in business where operating cycle generally exceeds 12 months such as real estate and infrastructure. Further, judgement will need to be exercised for classification by companies that have multiple businesses with different operating cycles but borrowings / treasury operations are managed at a central level. This may also result in differences in presentation in standalone and consolidated financial statements. Deposits received in the nature of lease deposits, customer / dealer deposits may be considered as noncurrent where the company is able to demonstrate a practice that such deposits are not generally claimed back within the short term. This shall be irrespective of the fact that the deposits are legally payable on demand. The FAQs permit companies to consider expectation of settlement of liability for classification of current and noncurrent liability as opposed to only considering an unconditional right of the company to defer settlement

for at least 12 months after the reporting date. The FAQs guidance is also different from the current requirements under IFRS and US GAAP.

Inventories including, slow moving stock of stores and spares which shall neither be consumed within the normal operating cycle nor will be sold within 12 months from the balance sheet date shall be classified as current assets. Fixed deposits having a maturity of more than 12 months from the balance sheet date shall be classified as noncurrent irrespective of the nature and terms of fixed deposits. Further, the FAQs do not consider the companys expectation of withdrawal / utilization of these fixed deposits as a basis for current / non -current classification. Current year tax provision (net of advance tax) will be treated as a current liability, whereas the current year advance tax (net of provision), as well as past years advance tax (net of provision) shall be classified as non-current asset.

How KPMG in India can assist

The implications of the Revised Schedule VI are varied and even post these FAQs by the ICAI, it is expected to present a number of implementation issues. Companies will need to plan and implement modifications in accounting systems and procedures to enable reporting under the Revised Schedule VI. Based on our knowledge and experience in providing our clients with training and implementation assistance on Revised Schedule VI, we can offer the following services:

Implementation assistance
Along with training and impact assessment, assistance in preparation of draft financial statements for the years ended 31 March 2012 and 2011 based on the Revised Schedule VI requirements. We also provide clients with our customized toolkit comprising of checklists and templates to gather relevant information required for disclosures as per the Revised Schedule VI.

Training
Provide customized training sessions to help accounting and financial reporting teams to gain an in-depth understanding of requirements of the Revised Schedule VI and the practical challenges in implementing the new reporting requirements.

IT assistance
As an extension to impact assessment or implementation assistance, we assist clients in assessing impacts on IT systems. Through an integrated approach involving our IT advisory team, we can also advise on designing and implementing the changes to IT systems including chart of accounts and thereafter testing the changes implemented in IT systems. Our implementation assistance and IT assistance service offerings help clients transition to Revised Schedule VI format in an efficient and smooth manner and making this reporting exercise business as usual.

Impact assessment
Assistance in identifying gaps in terms of additional information required in preparation and presentation of financial statements for the years ended 31 March 2012 and 2011 respectively (or as per the reporting year end of the entity), based on the requirements under the Revised Schedule VI vis--vis the requirements under the existing Schedule VI.

About KPMG In India

KPMG in India is part of a global network of professional firms providing Audit, Tax and Advisory services. KPMG International operates in 152 countries and has 145,000 people working in independent member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG in India, a professional services firm, is the Indian member firm of KPMG International and was established in September 1993. KPMG in India has offices at Delhi, Chandigarh, Ahmedabad, Mumbai, Pune, Bangalore, Chennai, Kochi, Hyderabad, and Kolkata.

Our dedicated Accounting Advisory Services (AAS) practice in India provides accounting advisory services to a number of Indian clients across different sectors of the economy. Our team includes professionals with experience in accounting and financial reporting principles and processes. We have assisted more than 200 companies on various accounting advisory projects, which include implementation assistance for the Revised Schedule VI of the Companies Act, IFRS/ Ind-AS conversions, IPO reporting, learning solutions and other accounting advisory work. KPMG in India has also launched the IFRS Institute website (www.in.kpmg.com/ifrsinstitute) to provide information to various stakeholders relating to the planned convergence from Indian GAAP to IFRS.

Contact us
Accounting Advisory Services
Jamil Khatri Global Head Accounting Advisory Services T: +91 22 3090 1660 E: jkhatri@kpmg.com Venkataramanan Vishwanath Partner Accounting Advisory Services T: +91 22 3090 1944 E: vv@kpmg.com Madhu Sudan Kankani Partner Accounting Advisory Services T: +91 80 3980 6042 E: mkankani@kpmg.com Sandip Khetan Director Accounting Advisory Services T: +91 124 307 4295 E: skhetan@kpmg.com Koosai Lehery Director Accounting Advisory Services T: +91 22 3090 2646 E: klehery@kpmg.com

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