Commonly Found Non-Compliances in Sch. II and Sch. III

Commonly Found Non-Compliances
of Schedule II and III of the

Companies Act, 2013
By:
CA. Kamal Garg
[B. Com(H), FCA, DISA (ICAI), M. Com]
Insolvency Professional
Legal Requirements under the Companies Act, 2013
No dividend shall be In making the computation

declared or paid by a
of net profits of a
company for any financial company in any financial
year except out of the
year for the purpose of
profits of the company for section 197, depreciation
that year arrived at after
providing for to the extent specified in
depreciation as per section 123 shall be
Schedule II – Section
deducted – Section
123(1) and (2) 198(4)(k)
Question
• Whether since providing depreciation is required only for the purposes of
computing profits for:
a) dividend declaration; and/ or
b) managerial remuneration,
• Can it be said that if above two purposes are not there for the current financial
year, then there is no need to provide depreciation in the books of account?
Legal Requirements under the Companies Act, 2013
The financial statements

shall give a true and fair
view of the state of affairs
of the company or Auditor to report whether,
companies, comply with in his opinion, the financial
the accounting standards statements comply with
notified under section 133 the accounting standards
and shall be in the form or
– Section 143(3)(e)
forms as may be provided
for different class or classes
of companies in Schedule
III – Section 129(1)
Question
• Whether the statutory auditors be concerned about presentation of Financial
Statements as per Schedule III even if the accounting has been carried out as
applicable accounting standards?
Let’s analyse (1/2)
• The auditor shall make a report to the members of the company on the accounts
examined by him and on every financial statements which are required by or under this
Act…………………….and the report shall after taking into account the provisions of
this Act, the accounting and auditing standards and matters which are required to be
included in the audit report under the provisions of this Act or any rules made thereunder
or under any order made under sub-section (11) and to the best of his information and
knowledge, the said accounts, financial statements give a true and fair view of the
state of the company's affairs as at the end of its financial year and profit or loss and
cash flow for the year and such other matters as may be prescribed ~ Section 143(2)
• Every auditor shall comply with the auditing standards ~ Section 143(9)
Let’s analyse (2/2)
• The auditor's opinion on the financial statements deals with whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework
~ SA 200;
• The applicable financial reporting framework often encompasses financial reporting standards
established by an authorised or recognised standards setting organisation, or legislative or regulatory
requirements ~ SA 200;
• Misstatement – A difference between:
a) the amount, classification, presentation, or disclosure of a reported financial statement item;
and
b) the amount, classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework ~ SA 200 and SA 450;
• It is the auditor's responsibility, while forming an opinion on the financial statements, to conclude
whether reasonable assurance has been obtained about whether the financial statements as a
whole are free from material misstatement ~ SA 700
Schedule II
Abstract of accounting policy of a company on
Depreciation of PPE
Non-compliance Requirement
• Depreciation on property, plant & equipment (PPE) • As per the requirements of Schedule II to the
is provided on Straight Line Method over their Companies Act, 2013, it was viewed that when
useful lives and in the manner specified in different useful lives have been used by the
Schedule II to the Companies Act, 2013. However, company for the purpose of charging deprecation
in respect of certain Plant & Machineries and on PPEs, such useful lives shall be specifically
Electric Installations, depreciation is provided as disclosed by the company by way of notes to the
per their useful lives assessed on the basis of accounts;
technical evaluation by the external valuer, ranging • It was thus required that proper disclosures
from 20 to 40 years.
regarding the useful lives of plant & machineries
and electrical installations should have been made
identifying the items of plant & machineries and
electrical installations with their respective useful
lives as estimated by the external valuer.
Depreciation of PPE
• Schedule II to Companies Act, 2013 • Schedule II does not specify any method of
introduced concept of useful life of asset charging depreciation but only provides the
instead of using specific depreciation rates indicative useful life of the assets. The
as provided in Schedule XIV to company can use any appropriate method of
Companies Act, 1956. Therefore, the depreciation, such as, SLM, WDV considering
the useful life of the assets and other
company viewed that Schedule II to requirements as specified in Schedule II to
Companies Act, 2013 provides only Companies Act, 2013;
straight line method of depreciation and
any other method cannot be used. • Therefore, the view of the company that
Schedule II to Companies Act, 2013 provides
only Straight Line Method of depreciation is not
correct.
Depreciation of PPE
• Property, Plant and Equipment are stated at • Schedule II does not specify any method of
cost, net of recoverable taxes, trade discount charging depreciation but only provides the
indicative useful life of the assets. The company
and rebates less accumulated depreciation can use any appropriate method of depreciation,
and impairment losses, if any, as computed in such as, SLM, WDV considering the useful life of
accordance with the method prescribed under the assets and other requirements as specified in
Schedule II of the Co. Act, 2013; Schedule II to Companies Act, 2013;
• Intangible Assets are stated at cost of • Further, Schedule II also does not deal with
acquisition net of recoverable taxes, trade impairment of assets. Para 2 of Schedule III in fact
states that for the purpose of this Schedule, the
discount and rebates less accumulated term depreciation includes amortisation;
amortisation/depletion and impairment losses,
if any, as computed as per the method • Therefore, the policy stated by the company is not
correct.
prescribed under Sch. II of the Co. Act, 2013
Depreciation of PPE
• Depreciation on property, plant & equipment (PPE) • The useful lives as given under Schedule II for
is provided on Straight Line Method over their various types of assets are indicative only and are
maximum useful lives as specified in Schedule II to not minimum or maximum;
the Companies Act, 2013, except where different
• Where the useful lives of various specific assets
useful lives are adopted on the basis of technical are the same as those under Schedule II, the
advice obtained by the company from independent company should use these useful lives;
experts
• In case the useful life of an asset as estimated by
the company, supported by the technical advice,
external or internal, differs, i.e., higher or lower from
the indicative useful life given under Schedule II,
the former should be applied by the company for
providing depreciation
Depreciation of PPE
• Depreciation on those assets, whose actual cost • Schedule II does not prescribe any such
does not exceed Rs. 5,000/=, has been provided requirement to provide depreciation @ 100%.
@ 100% in accordance with Schedule II of the • GN states that as the life of the asset is a matter
Companies Act, 2013 of estimation, the materiality of impact of such
charge should be considered with reference to
the cost of asset. The size of the company will
also be a factor to be considered for such policy;
• Accordingly, a company may have a policy to
fully depreciate assets upto certain threshold
limits considering materiality aspect in the year
of acquisition
Schedule III
AS
Compliant
Companies
Division I – Part – I : Balance Sheet
EQUITIES AND LIABILITIES
Shareholders’ Funds
(a) Share Capital
(b) Reserves & Surplus
(c) Money Reserved against share warrants
Share Application money pending Allotment
Non Current Liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
Current Liabilities
(a) Short-term borrowings
(b) Trade Payables:—
(A) total outstanding dues of micro enterprises and small enterprises; and
(B) total outstanding dues of creditors other than micro enterprises and small enterprises
(c) Other current liabilities
(d) Short-term provisions
TOTAL
ASSETS
Non-Current Assets
(a) Property, Plant and Equipment [and Intangible assets]
(i) Tangible assets Property, Plant and Equipment
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long-term loans and advances
(e) Other non-current assets
Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
TOTAL
Division I – Part – II : Statement of Profit & Loss
Particulars Note Figures at the Figures at the
No. end of current end of previous
reporting reporting
period period
Revenue from Operations
Other Income
Total Revenue Income ( I + II)
Expenses
Cost of Material Consumed
Purchases of Stock in Trade
Changes in inventories of finished goods,
Work in progress and stock in trade
Employee Benefit expense
Finance Costs
Depreciation and amortization expense
Other expenses
Profit Before Exceptional and extraordinary
items and tax
Exceptional Items
Division I – Part – II : Statement of Profit & Loss
Particulars Note No. Figures at the Figures at the
end of current end of previous
reporting period reporting period
Profit Before extraordinary items and tax
Extraordinary Items
Profit Before Tax
Tax Expense
Current Tax
Deferred Tax
Profit (loss) for the period from continuing
operations
Profit (loss) from discontinuing operations
Tax expense of discontinuing operations
Profit(loss) from discontinuing operations (after tax)
Profit (loss) for the period

Earnings per equity share
Basic
Diluted
General Instructions For Preparation of
Balance Sheet
• The Schedule III requires all items in • GN recommended that the
the Balance Sheet to be classified disclosure about the company’s
as either Current or Non-current; operating cycle be given as a part of
• One of the underlying criteria for ‘Notes to the Financial Statements’
such classification is ‘operating
cycle’
• No disclosure was made for
‘operating cycle’
Balance Sheet
• In one case, notes to accounts stated • GN requires that since the company
that company’s operating cycle is six does not expect to receive the payment
months. The sale contract provides for a within twelve months from the reporting
normal credit period of three months. date, the same should be classified as
However, the company does not expect “Non-Current” in the Balance Sheet
to receive the payment within twelve
months from the reporting date due to
ongoing litigation with the customer;
• Still the company classified trade
receivable for such customer under
‘current asset’ category
Balance Sheet
• In one case, investments were classified • GN states that though the Schedule III
into ‘current’ and ‘non-current’ category clarifies that the Accounting Standards
under Schedule III; would prevail over itself in case of any
inconsistency between the two;
• Whereas AS 13 requires to classify • AS-13 does not lay down presentation
investments as ‘current’ and ‘long-term’; norms, though it requires disclosures to be
• Still the company did not make made for current and long-term Investments;
appropriate disclosures about • Hence, portion of long-term investment as
investments under Schedule III as to per AS13 which is expected to be realized
classification in tandem with AS 13 within twelve months from the Balance
Sheet date needs to be shown as Current
investment under the Schedule III
Balance Sheet
• In one case, Deferred Tax Liability was • GN states that with regard to the
classified into current and non-category; presentation and classification of net
Deferred Tax asset or liability, the same
• In another case, Deferred Tax Asset was should always be classified as “non-current”.
classified into current and non-category;
• Deferred Tax/ Liability was classified into
current and non-current category
Balance Sheet
• In one case, there was convertible debt • GN states that based on the specific
where the conversion option lied with the exemption granted only to those cases
issuer; where the conversion option is with the
counterparty, the same should not be
• In another case, there was mandatorily extended to other cases where such option
convertible debt instrument; lies with the issuer or is a mandatorily
• In both the cases, such convertible debt convertible instrument;
was classified into non-current category • Hence, the timing of such settlement would
on the grounds that Schedule III states also decide the classification of such liability
that the terms of a liability that could, at in terms of Current or Non-current
the option of the counterparty, result in
its settlement by the issue of equity
instruments do not affect its classification
Balance Sheet
• In one case, there was unpaid amount • Section 2(64) and Section 10A of the
towards shares subscribed by the Companies Act, 2013 read with GN requires
subscribers of the MOA; that:
a) unpaid amount towards shares subscribed
• The company hence gave a descriptive by the subscribers of the MOA should be
note for the same without any treatment considered as 'subscribed and paid-up
in Financial Statements capital' in the Balance Sheet; and
b) the debts due from the subscriber should
be appropriately disclosed as an asset in
the balance sheet
Balance Sheet
• In one case, a reconciliation of the • GN requires that:
number of shares outstanding at the a) to make the disclosure relevant for
beginning and at the end of the reporting understanding the company’s share
period was given; capital, the reconciliation is to be given
even for the amount of share capital;
• The company, however, gave such
b) should be disclosed separately for both
reconciliation for total number of shares Equity and Preference Shares; and
in aggregate, whereas the notes also
stated that company has issued Equity c) reconciliation for the comparative previous
period is also to be given
Shares as well as Preference Shares
Balance Sheet
• In one case, shares in the company held • GN requires that:
by each shareholder holding more than a) companies should disclose the
5% shares was given by specifying the shareholding for each class of shares,
number of shares held; both within Equity and Preference Shares;
and
• The company however gave such
b) this information should also be given for
shareholding for total number of shares the comparative previous period
in aggregate whereas the notes also
stated that company has issued Equity
Shares as well as Preference Shares
Balance Sheet
• In one case, the loan payable by the • GN requires that such an allotment is
company was converted into equity considered as shares allotted for payment
under an arrangement between the being received in cash and not as without
payment being received in cash and
company and the lender; accordingly, the same is not required to be
• The company disclosed the same as disclosed in pursuance of afore-mentioned
shares allotted as fully paid up pursuant Clause (i) of Note 6A of Part I of Schedule III
to contract(s) without payment being
received in cash
• Note: Clause (i) of Note 6A of Part I of
Schedule III requires separate
disclosures for non-cash allotments
Balance Sheet
• In one case, the company made a • GN requires that the companies should also
separate disclosure of shareholding of its disclose number and percentage of shares
promoters including the percentage at the beginning of the year as additional
columns in order to facilitate an
change therein during the year; understanding of the percentage change
• The company disclosed the same in the during the year
format prescribed under Schedule III
which requires disclosure only in respect
of shares held at the end of the year
• Reference: Clause (m) of Note 6(A)
Balance Sheet
• In one case, the company received ‘calls • GN states that the shareholder who has paid
in advance’ from some shareholders; the money in advance is not a creditor for
the amount so paid as advance, as the same
• The company disclosed the same as a cannot be demanded for repayment and the
part of the paid-up capital company cannot pay him back unless
• Reference: In terms of Section 50, a Articles so provide;
company, if so authorized by its Articles, • Hence, calls paid in advance are to be
may accept from any member the whole reflected under “Other Current Liabilities” ~
or a part of the amount remaining unpaid similar view was also expressed by DCA in
on any shares held by him, although no its Letter No. 8/16(1)/61-PR, dated 9.5.1961.
part of that amount has been called up
Balance Sheet
• In one case, the company was having • Till 31.3.2021, current maturities of all long-
long term borrowings; term borrowings were required to be
disclosed under ‘other current liabilities’;
• The company no where separately
• Now from 1.4.2021, the current maturities of
disclosed the current maturities of such all long-term borrowings will be disclosed
long-term borrowings under ‘short-term borrowings’ and not under
‘other current liabilities’.
Balance Sheet
• In one case, the company was having • GN requires that:
secured long term borrowings; a) a blanket disclosure will not suffice and
• The company disclosed that all long hence the nature of security shall also be
specified separately in each case;
terms borrowings are secured against
tangible assets owned by the company b) the nature of security should also cover the
type of asset given as security e.g.
and personal security of promoters, inventories, PPE, intangible assets, etc.;
shareholders and third parties
c) when promoters, shareholders or third party
gives any personal security for any
borrowing, such as shares or other assets
held by them, disclosure should be made
thereof, though such security does not result
in classifying such borrowing as secured
Balance Sheet
• In one case, the company was having • GN states that leasehold improvements
some ‘leasehold improvements’; should be shown as a separate asset class
• The company disclosed ‘leasehold
improvements’ by clubbing the same
under ‘Assets held under Lease’
Balance Sheet
• In one case, the company was having • GN states that a LLP is a body corporate
some investments in LLPs; and not a partnership firm as envisaged
under the Partnership Act, 1932.
• The company disclosed the same under
• Hence, disclosures pertaining to Investments
the sub-heading “investments in in partnership firms will not include
partnership firm”; investments in LLPs.
• Note: Schedule III requires disclosure in • The investments in LLPs will be disclosed
regard to investments in the capital of separately under “other investments”.
partnership firms, the names of the firms
(with the names of all their partners, total
capital and the shares of each partner)
Balance Sheet
• In some cases, the company has given • Capital Advances are shown separately
capital advances for procurement of under the heading ‘Long-term Loans and
PPE; Advances’ and are not classified under
Capital Work-in-Progress;
• One company disclosed the same under • GN states that typically companies do not
the sub-heading “Capital Work-in expect to realize capital advances in cash;
Progress”; rather, over the period, these get converted
• Another company disclosed the same as into PPE and Intangible Assets which, by
‘Short-Term Advance’ as the PPE was nature, are non-current assets;
expected to be received in next months • Hence, capital advances should be treated
from the reporting date. as non-current assets irrespective of when
such assets are expected to be received and
should not be classified as Short-Term/
Current
Issue: Cash and Cash Equivalents
• Deposits with original maturity of three months or less
only should be classified as cash equivalents – AS 3;
• Thus, Bank balances held as margin money or security
against borrowings are neither in the nature of demand
deposits, nor readily available for use by the company, and
accordingly, do not meet the aforesaid definition of cash
equivalents;
• However, under Schedule III – Cash and Cash
Equivalents comprise of:
“Balances with banks held as margin money or
security against borrowings, guarantees, etc. and
bank deposits with more than 12 months maturity.”
Cash and Cash Equivalents
• Question: How to deal with this apparent conflict between the
requirements of the Schedule III and the AS with respect to which
items should form part of Cash and cash equivalents
• Answer:
1) AS would prevail over the Schedule III;
2) Company to make necessary modifications in the F.S.;
3) Accordingly, the conflict should be resolved by changing the
caption “Cash and Cash Equivalents” to “Cash and Bank
Balances,” which may have two sub-headings:
a) “Cash and Cash Equivalents” and
b) “Other Bank Balances.”
4) The former should include only the items that constitute Cash
and cash equivalents defined in accordance with AS 3 (and
not the Schedule III), while the remaining line-items may be
included under the latter heading
Share
Application
Money
What does Companies Act say
• A company making shall allot its securities within 60 days from
the date of receipt of the application money.
• If the company is not able to allot the securities within that period, it
shall repay the application money to the subscribers within 15
days from the date of completion of 60 days.
• If the company fails to repay the application money within the
aforesaid period, it shall be liable to repay that money with interest
@12% p.a. from the expiry of 60th day – Section 42(6).
• If the securities for which application money or advance for such
securities was received cannot be allotted within 60 days from
the date of receipt of the application money and such application
money is not refunded to the subscribers within 15 days from the
date of completion of 60 days, such amount shall be treated as a
deposit – Rule 2(1)(c)(vii) of Companies (Acceptance of Deposits)
Rules, 2014
What does CARO say
Para 3(v) Para 3(xiv)
in case, the company has accepted whether the company has made any
deposits, whether the directives preferential allotment or private
issued by the Reserve Bank of India placement of shares or fully or partly
and the provisions of sections 73 to convertible debentures during the
76 or any other relevant provisions year under review and if so, as to
of the Companies Act, 2013 and the whether the requirement of section
rules framed thereunder, where 42 of the Companies Act, 2013
applicable, have been complied have been complied with and the
with? If not, the nature of such amount raised have been used for the
contraventions be stated purposes for which the funds were
raised. If not, provide the details in
respect of the amount involved and
nature of non-compliance
Areas not to be overlooked
• Harmonised Reporting: While reporting for private placement of
securities if share application money is not dealt with in accordance with
Section 42 then not only the reporting under Para 3(xiv) of CARO, 2016 is
required but the reporting is also required under Para 3(v) and Para 3(xiii)
of CARO, 2016
• Maintenance of liquid assets and creation of deposit repayment
reserve account on or before the 30th day of April of each year with any
scheduled bank - the amount remaining deposited shall not at any time fall
below 20% of the amount of deposits maturing during the financial year;
• Disclosure in the financial statement: Every private/ public company
shall disclose in its financial statement, by way of notes, about the money
received from the directors, [or relatives of directors] – Rule 16A:
▪ Twin compliances namely AS 18 and Rule 16A;
▪ Public company cannot accept deposits from relatives of directors;
▪ HUF neither relative under AS 18 nor under Section 2(77)(i)
Areas not to be overlooked - Question
RST (P) Limited As at As at
Equity and Liabilities (Extract) 31.3.2022 31.3.2021
(in Lakhs) (in Lakhs)
Share application money pending allotment 100 100
(money was received through Banking
channels on 16th January, 2021)
Disqualification of Directors – Section 164(2)
Made defaults in
Cannot
be re-
Any Co. appointed
Then
(other as
Repayment directors
than Filing of of such director
Govt. of Deposits/ of such
annual Interest company
Co.) F.S. or company
thereon/ or
annual Or Debentures/
returns for appointed
Interest in other
3 thereon/
continuous company
Dividend for next 5
F.Y.
> 1 year years
from due
date
General Instructions For Preparation of Statement of
Profit and Loss
• In one case, the company was engaged • GN states that sale of manufacturing scrap
in manufacturing of cars and has made arising from operations for a manufacturing
sale of scrap which was generated company should be treated as ‘other
operating revenue’ since the same arises
during the manufacturing process; on account of the company’s main
• The company disclosed the sale of operating activity
scrap as ‘other non-operating income’
Profit and Loss
• In one case, the company was having • GN states that kinds of interest income for
interest from customers on amounts a company other than a finance company
overdue; should be disclosed under the heading
‘Other Income’
• The company has disclosed the same
as ‘other operating revenue’
Profit and Loss
• In one case, certain penalties were • GN states that penalties and other similar
levied upon the company under PF amounts paid to the statutory authorities
Law; are not strictly in the nature of ‘contribution’
and should not be disclosed here
• The company has disclosed the same
under ‘Employee Benefit Expenses’ as
‘contributions to provident fund’
Profit and Loss
• In one case, the company has taken • GN states that finance charges on finance
certain assets on finance lease and was leases are in the nature of interest expense
paying lease rent for the same; and hence should also be classified as
interest expense under the heading
• The company has disclosed the finance ‘Finance Cost’
charges on finance leases under the
heading ‘Miscellaneous Expenses’
Profit and Loss
• In one case, the company has paid • GN states that interest on shortfall in
some interest on shortfall in payment of payment of advance income-tax is in the
advance income-tax; nature of finance cost and hence should not
be clubbed with the Current tax;
• The company has clubbed such interest • The same should be classified as Interest
with ‘current tax’ under the heading ‘Tax expense under finance costs. However,
Expense’ such amount should be separately
disclosed.
Profit and Loss
• In one case, the company has incurred • GN states that expenditure on CSR
CSR expenditure; activities, that qualify to be recognised as
expense should be recognised as a
• The company has disclosed the CSR separate line item as ‘CSR expenditure’ in
expenditure under the heading ‘Other the statement of profit and loss;
Expenses’ with a sub-heading ‘CSR • Further, the relevant note should disclose
Expenditure for the year’ the break-up of various heads of expenses
included in the line item ‘CSR expenditure’.
Issue: Earning Per Share
Para 15 of Accounting Standard 20, "Earnings Per Share", requires
that BEPS should be calculated by dividing net profit for the
A company (company Z) has prepared its financial statements for
period attributable
the year ended March to 31,the20XX.
equity shareholders
During the year Aprilby1, 20XX
weighted
to
average number
March 31, 20XX,ofCompany
equity sharesZ hasoutstanding
issued new during the period.
equity shares. The
company has computed Basic Earnings Per Share (BEPS) by
dividing
From the netPara
the above profit15for
of the period
AS 20, an attributable
entity shouldtousethe weighted
equity
shareholders
average numberby of
number
equityofshares
equity shares outstanding
outstanding during atthetheperiod.
end of It
the use
can't year.number of equity shares outstanding either at the beginning
or at the end of the year, except when there is no increase/
decrease in equity share capital during the period.
Whether Company Z has computed BEPS correctly
Referring to above, in the instant case Company Z has not computed
BEPS correctly.
• RST Limited
• 1st April, 2019 – Equity Shares – 10,000 shares
• 1st Oct, 2019 – fresh issue – 1,000 shares (additionally issued)
• 31st March, 2020 – outstanding equity shares – 11,000 shares
• PAT = Rs. 1,10,000
• BEPS = 1,10,000/ 11,000 = is it correct ? = no
• Weighted Avg. Number of Equity Shares = [(10,000 (x) 12/12) + (1,000 (x)
6/12)] = ’10,500’ number of shares
• BEPS = 1,10,000/ ’10,500’ = this is correct position as per AS 20
Ind AS
Compliant
Companies
ASSETS
Non-Current Assets
(a) Property, Plant and Equipment
(b) Capital Work-in-Progress
(c) Investment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under development
(g) Biological Assets other than bearer plants
(h) Financial Assets ~ (i) Investments; (ii) Trade Receivables; (iii) Loans; (iv) Others
(i) Deferred tax assets (net)
(j) Other non-current assets
Current Assets
(a) Inventories
(b) Financial Assets ~ (i) Investments; (ii) Trade Receivables; (iii) Cash and cash equivalents; (iv)
Bank balances other than (iii); (v) Loans; (vi) Others
(c) Current Tax Assets (Net)
(d) Other current assets
TOTAL ASSETS
Division II – Part – I : Balance Sheet
EQUITIES AND LIABILITIES
Equity
(a) Equity Share Capital
(b) Other Equity
Liabilities
Non Current Liabilities
(a) Financial Liabilities ~ (i) Borrowings; (ii) Lease Liabilities; (iii) Trade Payables; (iv) Others
(b) Provisions
(c) Deferred tax liabilities (Net)
(d) Other Long term liabilities
Current Liabilities
(a) Financial Liabilities ~ (i) Borrowings; (ii) Lease Liabilities; (iii) Trade Payables; (iv) Others
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities (Net)
TOTAL EQUITY AND LIABILITIES
Division II – Part – II : Statement of Profit & Loss
Particulars Note Figures for the Figures for the
No. current previous
reporting reporting
period period
Revenue from Operations
Other Income
Total Income ( I + II)
Expenses
Cost of Material Consumed
Purchases of Stock in Trade
Changes in inventories of finished goods,
Stock in trade and Work in progress
Employee Benefit expense
Finance Costs
Depreciation and amortization expense
Other expenses
Profit/ (Loss) Before Exceptional items and tax
Exceptional Items
Division II – Part – II : Statement of Profit & Loss
Particulars Note No. Figures for the Figures for the
current reporting previous
period reporting period
Profit/ (Loss) Before Tax
Tax Expense:
Current Tax
Deferred Tax
Profit (loss) for the period from continuing operations
Profit (loss) from discontinued operations
Tax expense of discontinued operations
Profit(loss) from discontinued operations (after tax)
Profit (loss) for the period
Other Comprehensive Income
Total Comprehensive Income
Earnings per equity share (separate break up required
for Continuing, Discontinued and Overall Operations)
(i). Basic
(ii). Diluted
General Instructions For Preparation of Balance Sheet
• In some cases, the company has given • Capital advances/ advances for purchase
capital advances for procurement of of capital assets should be included under
PPE; other non-current assets and hence, should
not be included under CWIP.
• One company disclosed the same • GN states that typically companies do not
under the sub-heading “Capital Work-in expect to realize capital advances in cash;
Progress”; rather, over the period, these get converted
• Another company disclosed the same into PPE and Intangible Assets which, by
as ‘Short-Term Advance’ as the PPE nature, are non-current assets;
was expected to be received in next • Hence, capital advances should be treated
months from the reporting date. as non-current assets irrespective of when
such assets are expected to be received
and should not be classified as Short-Term/
Current
• In one case, the company was having • GN states that although Ind AS 7 permits
Bank Overdraft; bank overdrafts to be included as cash and
cash equivalent, however for the purpose of
• The company has disclosed ‘Bank presentation in the balance sheet, it is not
Overdraft’ under the heading ‘Cash and appropriate to include bank overdraft as a
Cash-equivalents’ component of cash and cash equivalents;
• Hence, Bank overdraft, in the balance
sheet, should be included as ‘borrowings’
under Financial Liabilities
• In one case, the company has • Ind AS 32 read with GN states such
outstanding ‘compulsory convertible instruments meet the definition of ‘Equity’ in
debentures’ without any component of entirety and when they do not have any
component of liability, should hence termed
liability, i.e. 100% convertible into as ‘Instruments entirely equity in nature’.
equity;
• Instruments entirely equity in nature, may
• The company has disclosed the same be presented as a separate line item on the
as ‘Borrowings’ under the heading ‘Non- face of the Balance Sheet under ‘Equity’
current Liabilities’ after ‘Equity Share Capital’ but before
‘Other Equity’
• In one case, in CARO, 2016, the auditor • Ind AS Schedule III requires that under the
reported that there was a default in head “Borrowings,” period and amount of
repayment of borrowings and interest default as on the Balance Sheet date in
repayment of borrowings and interest shall
during the year; be specified separately in each case;
• The company however has not • Even one default by a company would
disclosed the same in the notes to create an obligation to disclose the period
accounts as required by Schedule III and amount of default;
• Further, in line with Ind AS 107, if there was
a default during the reporting period, an
entity shall provide a disclosure even if the
default was remedied before the financial
statements were approved for issue.
Profit and Loss
• In one case, the company has suffered • Ind AS 1 prohibits an entity from presenting
loss due to fire-breakdown of factory any items of income or expense as
plant; extraordinary items, in the statement of
profit and loss or in the notes;
• The company has presented such loss • Accordingly, there are no line items like
as an ‘extraordinary loss’ ‘Extraordinary items’ and ‘Profit before
extraordinary items and tax’ in this
Schedule
Profit and Loss
• In one case, the company was having • In terms of Ind AS 12, MAT Credits are in
brought forward ‘MAT Credit’; the form of unused tax credits that are
carried forward by the company for a
• The company has presented such MAT specified period of time;
Credit as ‘MAT Credit Entitlement’ under • Accordingly, MAT Credit Entitlement should
the heading ‘Other Non-Current Assets’ be grouped with Deferred Tax Asset (net) in
the Balance Sheet of an entity and a
separate note should be provided
specifying the nature and amount of MAT
Credit included as a part of deferred tax.
Profit and Loss
• In one case, the company was having • In terms of Ind AS 12, MAT Credits are in
brought forward ‘MAT Credit’; the form of unused tax credits that are
carried forward by the company for a
• The company has presented such MAT specified period of time;
Credit as ‘MAT Credit Entitlement’ under • Accordingly, MAT Credit Entitlement should
the heading ‘Other Non-Current Assets’ be grouped with Deferred Tax Asset (net) in
the Balance Sheet of an entity and a
separate note should be provided
specifying the nature and amount of MAT
Credit included as a part of deferred tax.
Other
Observations
Units of Measurement
• It was observed from note relating to RP • Under Schedule III, there is an explicit
Disclosures given in the Annual Report of a requirement to use the same unit of
company that the amounts of corporate measurement uniformly throughout the
financial statements and notes thereon;
guarantees given on behalf of RPs were
disclosed in foreign currencies. • Accordingly, such presentation of
information is not in line with the
• It was observed that whereas in the given requirements of Schedule III
case the financial statements have been
reported in rupees, certain transactions
under related party disclosures have been
reported in terms of US dollars (USD),
Australian Dollars (AUD) and Japanese
Yens (JPY)
Issue: Cash Flow Statement
In the cash flow statement an entity has categorised its cash
flows during a particular period into four categories, which are,
Cash flow from Operating Activities, Cash flow From Investing
Activities, Cash Flow from Financing Activities and Cash flow
from Other Activities.
Whether the entity has categorised its cash flows correctly as

per AS 3/ Ind AS 7, Cash Flow Statements?
Particulars Amount Amount
(Rs.) (Rs.)
Net Profit before Tax 1,000
Non-cash items and working capital adjustments (100)
Cash from Operating Activities (A) 900
Cash from Investment Activities (B) 500
Cash from Financing Activities (C) (200)
Net increase in cash and cash equivalents 1,200
[(A) + (B) + (C)]
Cash and cash equivalents at beginning of period 1,800
(D)
Cash and cash equivalents at end of period (E) 3,100
Changes during year on account of (D) and (E) 1,300
Particulars Amount Amount
(Rs.) (Rs.)
Net Profit before Tax 1,000
Non-cash items and working capital adjustments (100)
Cash from Operating Activities 900
Cash from Investment Activities 500
Cash from Financing Activities (200)
Cash from Other Activities 100
Net increase in cash and cash equivalents 1,300
Cash and cash equivalents at beginning of period 1,800
Cash and cash equivalents at end of period 3,100
Issue: Related Party Disclosures
AsA per AS 18/

company (C Ind
Ltd.)AS 24, if into
entered there have been
transactions transactions
with with
various related
parties including
related parties, key management
during personnel of
the existence and atheir relatives.
related In
party
the financial statement the company has disclosed these
transactions the
relationship, entity should
by dividing disclose
related parties into athree
description
categories,ofi.e.,
the
relationship
'key managementbetween the parties.
personnel (KMP), 'relatives of KMP' and 'other
Inrelated
the parties'.
instant case, C Ltd. has disclosed description of
relationship only in case of transactions with KMP and their
relatives, but has not disclosed the type of relationship in case
of transactions with other related parties.
Whether related party transactions have been properly disclosed?
Therefore, related party transactions in this case have not
been properly disclosed.
Issue: Govt. Grants related to revenue
A company (say Company X) is engaged in the business of

manufacturing and selling of tea. During the previous financial
year it had received subsidy on fertilisers from the government.
While preparing financial statements for previous year, X has
clubbed the amount of subsidy with revenue of that year.
Is accounting treatment of governmental subsidy correct?

• As per AS 12/ Ind AS 20, Government grants related to
revenue should be recognised on a systematic basis in
the profit and loss statement over the periods
necessary to match them with the related costs which
they are intended to compensate. Such grants should
either be shown separately under 'other income' or
deducted in reporting the related expense.
• Therefore, the company X should disclose the subsidy
on fertilisers as other income or should net off the
amount of subsidy from the expenditure incurred on
purchase of fertilisers.
Issue: Provision for gratuity
An entity has a rule that no gratuity shall be payable to an

employee if he or she leaves service before completion of
five years. The company believes that no liability should be
accrued for gratuity till the first five years of an employee.
Is the contention of the company correct ?

• Albeit the gratuity benefit may not vest in first five years, yet there
is a probability that certain employees shall complete five years
and shall become eligible for gratuity. Merely because a benefit
has not vested does not mean that the obligation does not exists.
The 'probability' concept account for percentage of
employees for which the benefit will/ will not vest. Accordingly
provision should be created during the first five years of service.
• In other words, the benefit of gratuity although becomes
payable after 5 years but the obligation accrues over a period
of 5 years. Hence an entity must estimate the number of
employees who will become eligible for gratuity (depending upon
the attrition percentage across different levels) and accordingly
estimate the amount of provision required each year even if the
employees are not eligible for gratuity as on date.
Issue: Interest on borrowed funds, initially capitalized
as per accrual concept but later waived off by lenders
A company is engaged in business of manufacturing and sale of

chemicals. The company borrowed funds for purchasing of assets
in the preceding years. Interest cost on the borrowed funds was
capitalised in accordance with the laws and regulations till the
time of commercial production. Later on after the start of
commercial production, no interest was paid to lender because of
the financial problems. During the current year the company
repaid the principal amount to the lenders and as per the
arrangement the lenders waived off the interest which was
already capitalised. The company recognised the waived interest
as capital reserve. How should such interest waiver be treated in
books of account ?
• No, the interest waiver cannot be recognised as a
capital reserve. Instead, the interest that has been
capitalised as part of the historical cost of the
asset and has subsequently been waived off,
should be reduced from the fixed asset cost and
accumulated depreciation. The adjustment should
be carried out as on the date of waiver. The
rationale is that, since the asset has been correctly
capitalised based on actual cost incurred, but
subsequently not paid, the capitalised amount of the
fixed asset should be reduced - EAC opinion Query
23 Volume 23
Issue: Disclose whether entity has conducted any
impairment test
In the financial statement a company (F Ltd.) has
not disclosed any information to indicate that it has
conducted any impairment test of its assets during
the financial year.
Is it correct disclosure?
• As per AS 28/ Ind AS 36, "Impairment of Assets“ an
entity should assess at each balance sheet date
whether there is any indication that an asset may be
impaired.
• So, an entity should disclose either its
accounting policy in respect of impairment of
assets or whether the entity has conducted
impairment test during the financial year. In the
instant case, F Ltd. also should disclose the same.
IFRS I Corporate Laws I Due Diligence I Forensic Audits
Thank you
Kamal Garg & Associates

Commonly Found Non-Compliances in Sch. II and Sch. III

Uploaded by

Copyright:

Available Formats

You might also like

Commonly Found Non-Compliances in Sch. II and Sch. III

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Commonly Found Non-Compliances in Sch. II and Sch. III

Uploaded by

Copyright:

Available Formats

Commonly Found Non-Compliances

of Schedule II and III of the

No dividend shall be In making the computation

The financial statements

Profit (loss) for the period

Whether the entity has categorised its cash flows correctly as

AsA per AS 18/

A company (say Company X) is engaged in the business of

Is accounting treatment of governmental subsidy correct?

An entity has a rule that no gratuity shall be payable to an

Is the contention of the company correct ?

A company is engaged in business of manufacturing and sale of

Kamal Garg & Associates

You might also like