Financial Statements-Schedule-III – Companies Act, 2013

1. Section 129 of companies act 2013, provides for preparation of financial statements.

2. 2(40) to include balance sheet, profit and loss account/income and expenditure account, cash flow statement, statement of changes in equity and any explanatory note annexed to the above.

3. New section 129 corresponds to existing section 210. It provides that the financial statements shall give a true and fair view of the state of affairs of the company and shall comply with the accounting standards notified under new section 133.

4. It is also provided that the financial statements shall be prepared in the form provided in new schedule III of Companies Act, 2013.

5. It may be noted that in the new schedule III the provisions for preparation of balance sheet and statement of profit and loss have been given which are on the same lines as in the existing schedule VI.

6. Further, in the new Schedule III detailed instructions have been given for preparation of consolidated financial statements as consolidation of accounts of subsidiary companies is now made mandatory in section 129.

7. It may be noted that for the first time a provision has been made in the new section 129(3)that if a company has one or more subsidiaries it will have to prepare a consolidated financial statement of the company and of all the subsidiaries in the form provided in the new schedule III of Companies Act, 2013.

8. The company has also to attack along with its financial statement, a separate statement containing the salient features of the financials of the subsidiary companies in such form as may prescribed by the rules.

9. It is also provided that if the company has interest in any associate company or a joint venture the accounts of that company as well as joint venture shall be consolidated.

10. For this purpose associate company has been definedinnewsection2(6) company has significant influence i.e. it has. 20% of the total share capital of the company or has control on the business decision under an agreement.

11 .The Central Government has power to exempt any companies from complying with any of the requirements made under the section.

(3) (i) Notes to accounts shall contain information in addition to that presented in the Financial Statements and shall provide where required

a) narrative descriptions or disaggregation’s of items recognised in those statements; and

b) Information about items that do not qualify for recognition in those statements.

(ii) Each item on the face of the Balance Sheet and Statement of Profit and Loss shall be cross-referenced to any related information in the notesto accounts. In preparing the Financial Statements including the notes to accounts, a balance shall be maintained between providing excessive detail that may not assist users of financial statements and not providing important information as a result of too much aggregation

(4) (i) Depending upon the turnover of the company, the figures appearing in the Financial Statements maybe rounded off as given below:—

PART I-BALANCE SHEET

Name of the Company…………………….

Balance Sheet as at………………………

(b) Reserves and Surplus

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(b) Trade payables

(c) Other current liabilities

(i) Tangible assets

(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

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short-term loans and advances

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET

(c) it is expected to be realised within twelve months after the reporting date; or

(c) It is due to be settled within twelve months after the reporting date; or

c. Par value per share.

d. A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period.

e. The rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital.

f. Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate.

g. Shares in the company held by each shareholder holding more than 5 per cent, shares specifying the number of shares held.

h. Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts.

i. For the period of five years immediately preceding the date as at which the Balance Sheet is prepared.

i. Aggregate number and class of shares allotted as fully paid-up pursuant to contract(s) without payment being received in cash.

ii. Aggregate number and class of shares allotted as fully paid-up by way of bonus shares.

iii. Aggregate number and class of shares bought back.

j. Terms of any securities convertible into equity/preference shares issued along with the earliest date of conversion in descending order starting from the farthest such date.

k. Calls unpaid (showing aggregate value of calls unpaid by directors and officers).

3) Securities Premium Reserve;

4) Debenture Redemption Reserve;

5) Revaluation Reserve;

6) Share Options Outstanding Account;

7) Other Reserves(specify the nature and purpose of each reserve and the amount in respect thereof);

8) Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and appropriations such as dividend, bonus snares and transfer to/from reserves, etc.;

(ii) from other parties

3) Deferred payment liabilities;

5) Loans and advances from related parties;

6) Long term maturities of finance lease obligations;

(ii) from other parties.

(iii) Loans and advances from related parties;

3) Interest accrued but not due on borrowings;

4) Interest accrued and due on borrowings;

5) Income received in advance;

6) Unpaid Jividends;

7) Application money received for allotment of securities and due for refund and interest accrued thereon. Share application money includes advances towards allotment of share capital. The terms and conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted shall be disclosed. It shall also be disclosed whether the company has sufficient authorised capital to cover the share capital amount resulting from allotment of shares out of such share application money. Further, the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed. Share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and share application money to the extent refundable, i.e., the amount in excess of subscription or in case the requirements of minimum subscription are not met, shall be separately shown under “Other current liabilities”;

8) Unpaid matured deposits and interest accrued thereon;

9) Unpaid matured debentures and interest accrued thereon;

3) Plant and Equipment;

4) Furniture and Fixtures;

6) Office equipment;

3) Computer software;

4) Mastheads and publishing titles;

5) Mining rights;

6) Copyrights, and patents and other intellectual property rights, services and operating rights;

7) Recipes, formulae, models, designs and prototypes;

8) Licences and franchise;

3) Investments in preference shares;

4) Investments in Government or trust securities;

5) Investments in debentures or bonds;

6) Investments in Mutual Funds;

7) Investments in partnership firms;

8) Other non-current investments (specify nature). Under each classification, details shall be given of names of the bodies corporate indicating separately whether such bodies are

(iii) joint ventures, or

3) Loans and advances to related parties (giving details thereof);

Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

3) Investments in Government or trust securities:

4) Investments in debentures or bonds;

5) Investments in Mutual Funds;

6) Investments in partnership firms;

(iii) joint ventures, or

3) Aggregate amount of unquoted investments;

3) Finished goods;

4) Stock-in-trade (in respect of goods acquired for trading);

5) Stores and spares;

Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

1) Estimated amount of contracts remaining to be executed on capital account and not provided for;

2) Uncalled liability on shares and other investments partly paid;

PART-II – PROFIT & LOSS STATEMENT

Name of the Company……………………..

Profit and Loss statement for the year ended………….

(b) Purchases of stock-in-trade

(c) Changes in inventories of finished goods, work-in progress and stock-in-trade

(d) Employee benefits expense

(e) Finance costs

(f) Depreciation and amortisation expense

EXAM QUESTIONS

AUDIT-MAY-14

Q.1 KAY Ltd. is in the process of finalizing its accounts for year ended 31st March,2014andfurnishes the following information:

(I) Finished goods normally are held for 30 days before sale.

(ii) Sales realization from Debtors usually takes 60 days from date of credit invoice.

(iii) Raw materials are held in stock to cover one month’s production requirements.

(iv) Packing materials, being specifically made for the company and having lead time of 90 days is held in stock for 90 days.

(v) The holding period in respect of unfinished goods is 30 days.

(vi) Being a monopoly KAY Ltd. enjoys a credit period of 12.5 months from its suppliers who sometimes at the end of their credit period opt for conversion of their dues into long term debt of KAY Ltd.

You are required to compute the operating cycle of KAY Ltd. as per revised Schedule III of Companies Act, 1956. As the suppliers of the company are paid off after a credit period of 12.5 months should this be part of Current Liability? Would your answer be the same if the creditors are settled in 330 days?

Answer

(a) Operating cycle of Kay Ltd. will be computed as under: Raw material stock holding period + Work-in-progress holding period + Packing Materials holding period+ finished goods holding period + Debtors collection period = 1 + 1 + 3 + 1 + 2 = 8 months Classification of liability to suppliers: Schedule III provides that: —A liability shall be classified as current when it satisfies any of the following criteria:

i. It is expected to be settled in the company’s normal operating cycle;

ii. It is held primarily for the purpose of being traded;

iii. It is due to be settled within twelve months after the reporting date; or’

iv. the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Terms of a liability that could, at the option of the counter party, result in its settlement by the issue of equity instruments and do not affect its classification.

There are two situations:

a. When credit period given by supplier is 12.5 months: The nature of classification of liability is to be seen with reference to the reporting date. Hence all liabilities except those that arise in the last fortnight of the accounting period will be—Current as this will have to be settled within 12 months of the reporting date. Thus, all liabilities that do not arise in the last fortnight of the accounting period will be —Non – Current.

b. When credit period given by suppliers is 330 days (i.e. 11 months approx.): If the Creditors are settled in 330 days i.e. within 11 months. This satisfies the third condition i.e. it is due to be settled within twelve months after the reporting date and there is no option to defer it. Hence, in the case it will be treated as current liability.

AUDIT-May-13

Q.2 The Balance Sheet of G Ltd as at 31st March 13 is as under. Comment on the presentation in terms of revised Schedule III and Accounting Standards issued by NFRA.

Answer-

Following Errors are noticed in presentation as per Schedule III:

(I) Share Capital & Reserve & Surplus are to be reflected under the heading Shareholders’ funds, which is not shown while preparing the balance sheet. Although it is a part of Equity and Liabilities yet it must be shown under head Shareholders ‘funds. The heading Shareholders ‘funds is given in the question missing in the balance sheet.

(ii) Reserve & Surplus is showing zero balance, which is not correct in the given case. Debit balance of statement of profit & Loss should be shown as a negative figure under the head Surplus’. The balance of Reserves and Surplus’, after adjusting negative balance of surplus shall be shown under the head Reserves and Surplus ‘even if the resulting figure in negative.

(iii) Schedule III of Companies Act, 2013 requires that Employee Stock Option outstanding should be disclosed under the heading Reserves and Surplus

(iv) Share application money refundable shall be shown under the sub-heading Other Current Liabilities. As this is refundable and not pending for allotment, hence it is not a part of equity.

(v) Deferred Tax Liability has been correctly shown under Non-Current Liabilities. But Deferred tax assets and deferred tax liabilities, both, cannot be shown in balance sheet because only the net Balance of Deferred Tax Liability or Asset is to be shown.

(vi) Under the main heading of Non-Current Assets, Fixed Assets are further classified as under:

I. Tangible assets II. Intangible assets

III. Capital work in Progress IV. Intangible assets under development.

Keeping in view the above, the CWIP shall be shown under Fixed Assets as Capital Work in Progress. The amount of Capital advances included in CWIP shall be disclosed under the sub heading Long term loans and advances under the heading Non-CurrentAssets.

(vii) Deferred Tax Asset shall be shown under Non-Current Asset. It should be the net balance of Deferred Tax Asset after adjusting the balance of deferred tax liability.

AUDIT-NOV-12

Q.3 H Ltd. engaged in the business of manufacturing lotus wine. The process of manufacturing this wine takes around 18 months. Due to this reason H Ltd. has prepared its financial statements considering its operating cycle as 18 months and accordingly classified the raw material purchased and held in stock for less than 18 months as current asset. Comment on the accuracy of the decision and the treatment of asset by H Ltd. As per Schedule III of Companies Act, 2013.

Answer

1. As per Schedule III of Companies Act, 2013, one of the criteria for classification of an asset as a current asset is that the asset is expected to be realised in the company’s operating cycle or is intended for sale or consumption in the company’s normal operating cycle.

2. Further, Schedule III of Companies Act, 2013 defines that an operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents.

3. However, when the normal operating cycle cannot be identified, it is assumed to have duration of 12 months. As per the facts given in the question, the process of manufacturing of lotus wine takes around 18 months; therefore, its realisation into cash and cash equivalents will be done only when it is ready for sale i.e. after 18 months.

4. This means that normal operating cycle of the product is 18 months. Therefore, the contention of the company’s management that the operating cycle of the product lotus wine is 18 months and notl2 months is correct. H. Ltd. will classify the raw material purchased 8cheld in stock as current asset in

5. (CA Surendra Agrawal (M.COM,LLB,ACA) PH-9313336776 – Email- [email protected] can be contacted by those who wants to Complete CA Final Audit in 18 Days)