INCOME TAX NOTES

Guidance note on Ind AS Schedule III – Key clarifications

Background


The Schedule III to the Companies Act, 2013 (2013 Act) became applicable to all companies for the preparation of financial statements for financial years beginning on or from 1 April 2014. The Schedule III provides general instructions for preparation of the balance sheet and the statement of profit and loss of a company.
The Ministry of Corporate Affairs (MCA) through a notification dated 16 February 2015 issued the Companies (Indian Accounting Standards) Rules, 2015 (Ind AS Rules) which laid down a road map for entities (other than insurance entities, banking entities and Non-Banking Financial Companies (NBFCs) (corporate road map) for implementation of Ind AS (converged with IFRS) in a phased manner.
On 6 April 2016, MCA amended Schedule III to include general instructions for preparation of financial statements of a company whose financial statements are required to comply with Ind AS. The amendment divides Schedule III into two parts i.e. Division I and II:
  • Division I is applicable to a company whose financial statements are required to comply with the current accounting standards
  • Division II is applicable to a company whose financial statements are drawn up in compliance with Ind AS (Ind AS Schedule III).
The Institute of Chartered Accountants of India (ICAI) on 20 April 2017 issued an exposure draft on the Guidance Note (GN) on Division II - Ind AS Schedule III to the 2013 Act which was open for comments until 30 April 2017.
New development
The ICAI on 27 July 2017 issued the GN on Division II - Ind AS Schedule III to the 2013 Act. The primary focus of the GN is to provide guidance in the preparation and presentation of financial statements in accordance with various aspects of Ind AS Schedule III, for entities adopting Ind AS. The GN has been structured in the following categories:
  • Guidance on each of the line item of the balance sheet, statement of profit and loss
  • Major differences in Division I and Division II of the Schedule III to the 2013 Act
  • Illustrative format for stand-alone financial statements and consolidated financial statements
  • Illustrations that provide guidance on application of the principles provided in the GN.
This issue of IFRS Notes provides an overview of some of the significant clarifications/ guidance provided in the GN issued by the ICAI.


MCA


MCA Compliance Requirement
Per the 2017 modification to the Companies Act 2013, every company should prepare the profit and loss account and balance sheet as per the format prescribed in new Schedule III. Refer the following link for details on the same:

Format of Balance Sheet as per companies Act 2013





Instructions for preparation of balance sheet

II. General instructions for preparation of balance sheet in the stand-alone financial statements

General instruction for preparation of balance sheet are provided in the Schedule III and relevant Ind AS standards. The following points highlight additional guidance provided in the GN:

a) Property, Plant and Equipment (PPE)

Previous Generally Accepted Accounting Principles (GAAP) information (8.1.1.3): If the company has applied the deemed cost exemption at the date of transition to Ind AS, it may disclose information regarding the following under previous GAAP only as an additional information by way of a note forming part of the financial statements:

Gross block of assets

Accumulated depreciation

Provision for impairment.

Presentation of land and building (8.1.1.6): Ind AS 16, Property, Plant and Equipment allows for grouping land and building under the same class for revaluation purposes, while in Ind AS Schedule III, land and buildings are presented as two separate classes of PPE. The GN states that companies should continue to present land and building separately as per Ind AS Schedule III and such presentation should be followed consistently.

b) Investments

Classification of investments (8.1.8.6):

Ind AS Schedule III does not set out whether investments should be first disclosed as per category as per Ind AS 109, Financial Instruments (for example; measured at amortised cost, mandatorily measured at Fair Value Through Profit and Loss (FVTPL), designated at FVTPL, etc.) or by nature (for example; investment in equity instruments, investment in preference shares, etc.)

Ind AS Schedule III allows addition or substitution of line items on the face of the financial statements in order to comply with the 2013 Act or with Ind AS.

The GN clarifies that companies may disclose investments by grouping them in the following manner:

o Broad categories as per Ind AS 107,

Financial Instruments: Disclosures

o Under each broad categorisation, nature-based classification as per Ind AS Schedule III

o Under each nature-based classification, grouping based on the relationship of bodies corporate (viz., subsidiaries, associates, joint ventures, and structured entities) as required by Ind AS Schedule III

o Under each grouping of bodies corporate, details giving names of and nature and extent of investments in bodies corporate as required by Ind AS Schedule III.

Where a company chooses not to provide investment details in the format given above, it could present the information in other ways by changing the order of grouping. For example, investments may be classified first as per their nature and then within each nature

– sub-classified into broad categories. 


Details regarding names of bodies corporate and nature and extent of the investment made (8.1.8.1):

Ind AS Schedule III requires companies to give names of the bodies corporate that are subsidiaries, associates, joint ventures or structured entities. It has done away with the requirement to give names of all body corporates in which the company has made any form of investment (i.e. equity shares, preference shares, debentures, etc.), except as mentioned below for investments designated at Fair Value Through Other Comprehensive Income (FVOCI). [This requirement is still present in AS Schedule III.]

Companies to disclose the names, number of equity instruments held and the face value of such instruments of all other bodies corporate for which they have designated the investments in equity instruments at FVOCI. This indicates that, in practice, companies may still be required to disclose this information for most investments in equity instruments.

Under each sub-classification of investments, disclose:

o Names, nature and extent of the investment in each body corporate which is a subsidiary, associate, joint venture or structured entity; i.e. the number of such instruments held and face value of such instruments

o Disclose separately whether investments are fully or partly paid.

Disclosure of aggregate amount of investments and market value thereof (8.1.8.2):

Market value of quoted investments would generally mean disclosure of the ‘fair value’ of quoted investments as at each reporting date. However, based on the company’s evaluation, if it determines that a quoted price does not represent fair value, then the company shall disclose the market value of quoted investments based on the quoted price which would be different from the investment’s fair value.

Where the investments are measured at either FVTPL or FVOCI, as per Ind AS 109, the carrying amount and the market value of such investments are expected to be same and should be disclosed accordingly.

– Quoted investments to mean an investment in respect of which there has been granted a quotation or permission to deal on a recognised stock exchange.


Aggregate amount for impairment in value of investments (8.1.8.3):

GN requires that loss allowances for Expected Credit Losses (ECL) on financial assets measured at amortised cost are to be presented as an adjustment to the amortised cost of the investment.

For debt securities at FVOCI, a company is required to estimate a portion of fair value change, if any, attributable to a change in credit risk of such investment, by applying the impairment requirements of Ind AS 109 in recognising and measuring the loss allowance. The loss allowance is charged to profit or loss with a corresponding impact in Other Comprehensive Income (OCI). In other words, the company should not reduce the carrying amount of such investment in the balance sheet as the investment needs to be presented at fair value.

All equity instruments measured at Fair Value (FV) and all other investments measured at FVTPL do not require a separate calculation/evaluation of impairment amount. Hence in case of such investments, this disclosure is not applicable.

Disclosure of aggregate provision for impairment in the value of investments would be equal to the aggregate amount of impairment recognised and measured in accordance with Ind AS 109.

The aggregate provision for impairment in the value of investments may be either presented in totality for all its investments or separately for each class of investments (e.g., ‘Investment in amortised cost’, ‘Investment in FVOCI’) disclosed in the financial statements.

Investments in subsidiaries/associates/joint ventures (8.1.8.4)

– Ind AS 32, Financial Instruments: Presentation Ind AS 107 and Ind AS 109 scope out those interests in subsidiaries, associates, joint ventures that are accounted for in accordance with Ind AS 110, Consolidated Financial Statements, Ind AS 27, Separate Financial Statements or Ind AS 28, Investments in Associates and Joint Ventures. However, such investments still meet the definition of financial instruments and may be presented as a separate line item on the face of a company’s stand-alone balance sheet. In any case, the disclosure requirements of Ind AS 107 would not apply to such investments.

In some cases, Ind AS 110, Ind AS 27 or Ind AS 28 require or permit a company to account for an interest in a subsidiary, associate or joint venture in accordance with Ind AS 109. Accordingly, only in its stand-alone financial statements, the company shall present such interests in a subsidiary, associate or joint venture under the head ‘Investments’ separately on the face of a company’s standalone balance sheet or in the notes, grouped under ‘Financial Assets’. Such presentation would be in line with the guidance provided in para 8.1.8.6 and disclosure requirements of Ind AS 107 would also apply.

For a company’s Consolidated Financial Statements (CFS), investments accounted using the equity method (i.e. associates and joint ventures) should be shown as a separate line item, separately from financial assets as per the requirements of Ind AS 1, Presentation of Financial Statements para 54.

Investments in structured entities (8.1.8.5)

– Ind AS Schedule III requires disclosure of the nature and extent of the investments so made. As a structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, a brief description of the nature of contracts may be provided along with the rights held in such companies as evidenced by such contracts.


c) Non-current and current trade receivables and loans (8.1.9 – 8.1.10, 8.1.15)

GN specifies that impairment loss allowance would not reduce the carrying amount of trade receivables. Companies should separately disclose the amount of loss allowance, presented in a separate line item as a deduction from the gross carrying amount of the trade receivables.

In disclosing a trade receivable as ‘doubtful’, companies should disclose the amount of credit loss that is expected on that trade receivable. The balance amount of trade receivable other than the amount considered as doubtful should be disclosed as ‘good’. Reference has been drawn from Ind AS 109 which defines ‘credit loss’ as ‘the difference between all contractual cash flows that are due to a company in accordance with the contract and all the cash flows that the company expects to receive (i.e. cash shortfalls), including cash flows from the sale of collateral held.’

Loans given should also be disclosed as ‘doubtful’ or ‘good’ on similar lines as followed for trade receivables above.

Apart from the specific guidance included in the GN on current trade receivables, certain guidance given under non-current trade receivables that is relevant for current trade receivables, would also be applicable.


d) Other non-current assets (8.1.11)

Ind AS Schedule III specifically requires bank deposits with more than 12 months maturity to be disclosed as a part of ‘other financial assets’ under financial, non-current assets. The GN mentions that the maturity should be construed as remaining maturity of more than 12 months.

Ind AS Schedule III does not specify about the presentation of finance lease receivables unlike finance lease obligations which are to be grouped under ‘Financial Liabilities’. The GN states that the non-current portion of a finance lease receivable should be presented under ‘Other non-current financial assets’ while its current portion should be presented under ‘Other current financial assets’. The disclosure requirements of Ind AS 107 would apply to such receivables.


e) Cash and bank balances (8.1.16)

The GN clarifies that the bank overdraft, in the balance sheet, should be included as ‘borrowings’ under financial liabilities.


f) Equity share capital

Instruments entirely equity in nature (8.2.1.7): Instruments entirely equity in nature (for example; compulsorily convertible preference shares, compulsorily convertible debentures, etc.) may be presented as a separate line item on the face of the balance sheet under ‘equity’ after ‘equity share capital’ but before ‘other equity’. Ind AS Schedule III permits the additional line items to be presented when such presentation is relevant to an understanding of the company’s financial position or performance. The GN provides an illustration for presentation of reconciliation for instruments entirely equity in nature in the statement of changes in equity. Instruments that meet the definition of ‘equity’ under Ind AS 32 in their entirety and that do not have any component of liability shall be termed as ‘Instruments entirely equity in nature’.

Equity component of a compound financial instrument (8.2.1.10): Companies should provide all relevant disclosures for an equity component of a financial instrument that apply to ‘equity share capital’ (to the extent applicable). Since this item represents a component of an instrument, companies may need to provide extensive disclosures based on the terms of the entire compound instrument.

Terms of any security convertible into equity/preference shares (8.2.1.20): Disclosure is required for any instruments convertible into equity or preference shares. This disclosure is recommended for instruments that are entirely equity in nature and compound instruments that have an equity component and a liability component. It is clarified that in order to avoid duplication of disclosures, this disclosure is not required for instruments which are entirely liability in nature since similar disclosure needs to be provided as part of ‘borrowings’. Companies may consider inserting a reference to the relevant disclosure provided under ‘borrowings’.


g) Reserves and surplus (8.2.2.1)

The GN provides specific guidance from the respective Ind AS on every line item to be presented under ‘Reserves and Surplus’. Some of the key guidance provided under this head is as follows:

Capital reserves: Profit on re-issue of forfeited shares should be credited to capital reserve. Similarly, a gain on bargain purchase arising in a business combination where clear evidence of the underlying reasons does not exist, should be recognised directly in equity as capital reserve.

Gain/loss on changes in the proportion held by Non-Controlling Interests (NCI) (8.2.2.2): Ind AS 110, Ind AS 1 and Ind AS Schedule III do not specify where gain or loss on changes in the NCI should be presented i.e. whether they should be presented separately under ‘capital reserve’ or under ‘other reserves’. In this regard, the GN mentions that a company may present such gain/loss separately as NCI reserve shown under ‘other reserves’ by specifying the nature.

Re-measurement of net defined liability (8.2.2.3): A company should present the accumulated re-measurements of defined benefit plans at the end of each reporting period as part of retained earnings.

Securities premium account (8.2.2.1): Though the terminology used in Ind AS Schedule III is securities premium reserve, the GN clarifies to use the terminology as per the 2013 Act i.e. ‘securities premium account’.

Others: The GN provides specific guidance from the respective Ind AS for other items of reserves and surplus, such as:

o Debt instruments through OCI

o Equity instruments through OCI

o Effective portion of cash flow hedge reserve

o Revaluation surplus

o Exchange differences on translating the financial statements of a foreign operation,

o Other items of OCI

o Money received against share warrants, etc.


h) Other current financial liabilities (8.2.10)

Current maturities of long term debt: Ind AS Schedule III requires presenting ‘Current maturities of long-term debt’ under ‘Other financial liabilities’ grouped under ‘Current liabilities’. Long-term debt is specified in Ind AS Schedule III as a borrowing having a period of more than 12 months at the time of origination. While current maturities of long-term debt are in the nature of ‘Borrowings’, since Ind AS Schedule III specifically provides a separate line item for presenting current maturities of long-term debt under Other financial liabilities, it is recommended that companies follow the presentation requirements of Ind AS Schedule III.

Interest accrued: Interest accrued on financial liabilities should form part of the financial liabilities’ carrying amount whether they are at amortised cost (i.e. as per Effective Interest Rate method (EIR)), or at fair value. Accordingly, a company may not present ‘Interest Accrued’ separately from the related financial liability.


i) Contingent liabilities and commitments (8.2.14.2)

Ind AS Schedule III does not require disclosure of financial guarantee as a contingent liability as a financial guarantee is recognised in the financial statements under Ind AS 109. The GN clarifies that entities are required to disclose guarantees other than financial guarantees as part of contingent liabilities.


j) Specified Bank Notes (SBNs) (8.5)

The GN provides that companies may disclose separately, the details about SBNs as required, in the notes to accounts. It provides reference to the implementation guide on auditor’s report issued by the ICAI for appropriate disclosures under this head.



Instructions for preparation of P&L



III. General instructions for preparation of profit and loss in the stand-alone financial statements
General instruction for preparation of statement of profit and loss are provided in the Ind AS Schedule III and relevant Ind AS standards.
Following points highlight additional guidance provided in the GN:
a) Revenue from operations (9.1.6): The collection of Goods and Services Tax (GST) by an entity would not be an inflow on the entity’s own account but it shall be made on behalf of the government authorities. Accordingly, the GN clarifies that the revenue should be presented net of GST.

b) Other income (9.2): Interest income on financial assets measured at amortised cost and financial assets (debt instruments) at FVOCI, calculated using the EIR method, and should be presented in separate line items under ‘Other income’.
Interest income on financial assets measured at FVTPL is included as part of fair value changes. Accordingly, a company should disclose as its accounting policy whether it presents interest income on financial assets at FVTPL as part of fair value changes or presents it separately. Additionally, the GN also prescribes the nature of line items and manner of disclosure for net fair value gains or losses on financial assets measured at FVTPL. It mentions that the according to Ind AS 107 fair value gains or losses (net) on financial assets at FVTPL should be presented under ‘other non-operating income’.
For other non-operating income, income should be disclosed net off expenses directly attributable to such income. However, the expenses so netted off should be separately disclosed.

c) Finance costs (9.5.5)
   • Interest expense: The GN specifies the following types of finance charges to be shown under this head:
      − Interest cost on financial liabilities measured at amortised cost (e.g., borrowings from banks and others, on debentures, bonds or similar instruments etc.) calculated as per the effective interest method
      − Unwinding of the discount that results in an increase in financial liabilities such as security deposits for assets taken on lease
      − Increases in the carrying amount of provisions/decommissioning liabilities where such increase reflects the passage of time
      − Finance charges on finance leases that are in the nature of interest expense
      − Net interest on net defined benefit liability which reflects the change in net defined benefit liability that arises from the passage of time.
The GN specifies that all of the above should be classified as interest expenses except that a company has a choice in presenting the net interest on net defined benefit liability, which reflects the change in net defined benefit liability that arises from the passage of time, as employee benefit costs.
Further, Ind AS 107 para 20(b) requires total interest expense calculated using the effective interest method for financial liabilities that are not measured at FVTPL to be shown separately. Accordingly, the GN mentions that the same should be presented as a separate line item under ‘Finance costs’.
   • Dividend on redeemable preference shares:
      – Dividend on preferences shares, whether redeemable or convertible, is of the nature of ‘interest expense’, only where there is no discretion of the issuer over the payment of such dividends. In such a case, the portion of dividend as determined by applying the effective interest method should be presented as ‘interest expense’ under ‘Finance cost’. Accordingly, the corresponding Dividend Distribution Tax (DDT) on such portion of non- discretionary dividends should also be presented in the statement of profit and loss under ‘interest expense’.
      – Discretionary payments of dividend on preference shares, whether redeemable or convertible should be presented in statement of changes in equity and resultant DDT should also be presented in statement of changes in equity.
   • Exchange differences regarded as an adjustment to borrowing costs: Foreign exchange differences relating to foreign currency borrowings to the extent not capitalised under Ind AS 23, Borrowing Costs would be disclosed under finance costs.

However, para 11.3 of the Ind AS Schedule III GN provides guidance on the net gain or loss on foreign currency translation (other than considered as finance cost) would be classified under other expenses and such amount should be separately disclosed.

d) Deferred tax (9.7.2)
   • Minimum Alternative Tax (MAT) credit entitlement should be grouped with deferred tax asset (net) in the balance sheet and a separate note should be provided specifying the nature and amount of MAT credit included in the deferred tax. The company should review at each balance sheet date the reasonable certainty to recover deferred tax asset including MAT credit entitlement.

e) Profit/(loss) from discontinued operations (9.8)
   • Profit or loss from discontinued operations needs to be separately disclosed on the face of the statement of profit and loss. If a single amount of profit or loss from discontinued operations is presented then additional disclosures analysing this single amount should be presented by a company either in the notes or on the face of the statement of profit and loss (as per requirements of Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations) and the disclosure would include the following items:
      – The revenue, expenses and pre-tax profit or loss of discontinued operations
      – The gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation
      – The related income tax expense as required by paragraph 81(h) of Ind AS 12, Income Taxes.
   • If the above analysis is presented in the statement of profit and loss, then it should be presented in a section identified as relating to discontinued operations i.e. separately from continuing operations.

f) OCI (10.3)
   • The GN lists down additional components of OCI in line with Ind AS 1 (that are not included in the Ind AS Schedule III) such as:
      – Items that will not be reclassified to profit or loss and its related income tax effects:
            o Gains and losses on hedging instruments that hedge investments in equity instruments measured through OCI
      – Items that will be reclassified to profit or loss and its related income tax effects:
            o Changes in time value of options when separating the intrinsic value and time value of an option contract and designating only intrinsic value changes as the hedge instruments
            o Changes in the value of the forward elements of forward contracts when separating the forward element and spot element of a forward contract and designating only spot element changes as hedging instrument
            o Changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument.
   • Guidance as per Ind AS 1 has been provided in the GN on presentation of tax effects of the items presented in OCI.
   • In line with Ind AS 1 a company should present for each component of equity, an analysis of OCI either in the statement of changes in equity or in the notes to accounts.


g) Additional information to be disclosed by notes to statement of profit and loss
   • Net gain or loss on sale of investments (11.2): A company should disclose the fair value gains or losses (net) on sale of financial assets which are measured at FVTPL (realised and unrealised both) as part of ‘net gain on financial assets measured at FVTPL in the statement of profit and loss. However, the ‘net gain or loss on sale of investments’ should be presented separately by way of a note.

   • Changes in regulatory deferral account balances (11.7): The GN includes guidance on Ind AS 114, Regulatory Deferral Accounts relating to items recognised in OCI and their related disclosures.



Instructions for preparation of CFS


IV. General Instructions for preparation of CFS
   • The requirements of Schedule III (as explained in the stand-alone financial statements’ section) would be equally applicable in preparation of CFS and a company would provide disclosures relevant from the CFS perspective. Accordingly, following exemptions/modifications based on the relevance to the CFS:
      – Share capital: The GN mentions that it would be adequate to present paid up capital and any calls in arrears.
      – Sources from which bonus shares are issued, e.g. capitalisation of profits or reserves or from securities premium account: The GN mentions that this disclosure is not required as it is not relevant at the CFS level.
      – Disclosures of all unutilised monies out of the issue indicating the form in which such unutilised funds have been invested: The GN mentions that this disclosure is not required as it is not relevant at the CFS level. 
      – Materiality from CFS perspective: A materiality threshold of 10 per cent of the respective balance sheet item should be considered while providing following disclosures:
   • Period and amount of continuing default as on the balance sheet date in repayment of borrowings and interest
   • Loans and advances due to directors or other officers of the company or any of them either severally or jointly with any other persons or amounts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated
   • Debts due by directors or officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.
   • 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 shall be indicated by way of note how such unutilised amounts have been used or invested.
      – Share application money pending allotment shall be classified into equity or liability in accordance with relevant Ind AS: The GN mentions that separate disclosure should be given for such monies due outside the group in respect of entities which are consolidated.

      – Additional disclosures: The GN mentions that certain disclosures such as payments to auditors, amounts of expenditure incurred on corporate social responsibility, disclosures on Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 have no relevance at CFS level and may be dispensed with.