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The Ministry of Corporate Affairs (MCA) has prescribed a revised Schedule VI to the Companies Act, 1956 vide Notification dated 28.02.2011 which is applicable for the financial statements prepared for all financial periods beginning on or after 1 April 2011 by Indian Companies. The revised Schedule VI introduces many concepts and disclosure requirements and also does away with several statutory disclosure requirements. The existing form of Balance sheet in Schedule VI was inserted by The Companies (Amendment) Act, 1960.
The revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 and has no direct connection with the converged Indian Accounting Standards. The comprehensive revision in the Schedule VI has come after a long time and was infact overdue.
The revised Schedule VI has introduced several new concepts and disclosure requirements for financial reporting and it has also done away with several redundant statutory disclosure requirements. This article is intended to discuss one important item i.e. shareholders’ funds and its implications. The existing Schedule requires disclosure of only share capital and reserve and surplus and not talking about money received against share warrants.
In revised Schedule VI the shareholders’ funds are sub classified as follow on the face of the balance sheet:
1. Share Capital.
2. Reserve and Surplus.
3. Money received against Share Warrants.
1. Share Capital
Disclosure relating to share capital (to be given in the notes) of revised Schedule VI are more detailed than existing ones. The following additions/modifications are particularly significant:
a. For each class of shares, a recognition of the number of share outstanding at the beginning and at the end of the reporting period is required. This seems to be a response to malpractice of issuing a larger number of shares than represented by the amount of paid up capital as disclosed in the balance sheet.
b. The rights, preferences and restrictions attaching to each class of shares, including restrictions on the distribution of dividends and the repayment of capital.
c. Disclosure of shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by subsidiaries or associates of the holding company or the ultimate holding company in aggregate. It seems that the requirement is aimed at bringing clarity regarding the identity of ultimate owners of the company.
It may be noted that while share held by subsidiaries and associates of the holding company or ultimate holding company are covered, shares held by a joint venture of the holding company or the ultimate holding company are not required to be included.
The existing Schedule VI requires disclosure of only the number of shares held by the holding company as well as by the ultimate holding company and its subsidiaries.
i. Disclosure of shares in the company held by each shareholder holding more than 5% shares, specifying the number of shares held. The objective again seems to be provide clarity regarding owners of the company.
ii. Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts. The existing Schedule VI requires disclosure of only particulars of any option on unissued share capital.
iii. Disclosure of the following for a period of 5 years immediately preceding the date of the balance sheet:
a. Aggregate number and class of shares allotted as fully paid up pursuant to contracts without payment being received in cash.
b. Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
c. Aggregate number and class of shares brought back.
The existing Schedule VI too requires disclosures mentioned in the first arrow bullet points above but does not limit the period of such disclosure to a period of 5 years. Further, it requires the source from which bonus shares have been issued to be specified: this requirement is not carried forward in the revised Schedule VI.
Terms of any securities issued that are convertible in to equity/preference shares along with the earliest date of conversion in descending starting from the farthest such date.
As per the revised Schedule VI the information of shareholders’ funds to be mandatorily presented on the face of financial statements limited to only broad and significant items, details will be given in Notes to Accounts by way of notes. In revised Schedule VI, there is no provision of Schedule No 1, 2 or 3. In revised Schedule VI all details will be given in Notes to Accounts by Note No. 1, 2 or 3.
A company shall disclose the following in the notes to account under note head “Share Capital”:
For each class of share capital (different classes of preference shares to be treated separately):
(a) the number and the amount of share authorised;
(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully paid,
(c) par value per shares,
(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% 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 a period of 5 years immediately preceding the date as at which the Balance Sheet is prepared:
1. Aggregate number and class of shares allotted as fully paid up pursuant to contract without payment being received in cash.
2. Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
3. Aggregate number and class of shares bought back.
(j) terms of any securities convertible in to 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);
(l) forfeited shares (amount originally paid up).
2. Reserve and Surplus
As per revised Schedule VI, in the Notes to Account, the reserve and surplus are required to be classified as follow:
(a) Capital reserve.
(b) Capital Redemption Reserve.
(c) Securities Premium Reserve.
(d) Debenture Redemption Reserve.
(e) Revaluation Reserve.
(f) Share Options Outstanding Account.
(g) Other reserves (specifying the nature and purpose of each reserve and the amount in respect thereof).
(h) Surplus i.e. balance in statement of profit and loss, disclosing allocations and appreciations such as dividend, bonus shares and transfer to/from reserve, etc.
(Additions and deductions since last balance sheet to be shown under each of the specified heads)
A reserve specifically represented by earmarked investments shall be termed as a ‘fund’.
Debit balance of statement of profit and loss shall be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserve and Surplus’ after adjusting negative balance of surplus, if any, shall be shown under the head ‘Reserve and Surplus’ even if the resulting figure is in the negative.
The existing Schedule VI requires that in case there is debit balance in profit and loss account, uncommitted reserves should first be deducted therefrom. The remaining balance, if any, after such deduction is required to be disclosed on the assets side of the Balance sheet (or under application of funds in the vertical form of balance sheet).
In the revised Schedule, it is explicitly provided that a debit balance of profit and loss shall be shown as a negative figure under the head ‘surplus’ under “shareholders’ funds”. Similarly, the balance of reserve and surplus, after adjusting negative balance of surplus, if any, shall be shown under the head ‘reserve and surplus’ even if the resulting figure is in the negative.
Share options outstanding account has been specifically recognized as a separate item under the “reserve and Surplus”. At present, Schedule VI does not specify the manner of disclosure of share options outstanding account. However, ICAI’s Guidance Note on Accounting for Employee Share-based Payments requires the credit balance in the ‘Stock Option Outstanding Account’ to be disclosed in the balance sheet under a separate heading, between share capital and reserves and surplus as part of shareholders’ funds. Considering that the revised Schedule prescribes a specific requirement for disclosure of share options outstanding account and such a requirement can be superseded only by the requirement of an accounting standard (and not a guidance note), the requirement of the revised Schedule would need to be followed.
It may be noted that the above would also impact the balance of reserve and surplus to be considered for compliance with the various provisions of law. For example, an issue would arise whether the balance of ‘share options outstanding account’ should be considered as part of the free reserve for computation of limit under section 372A of the Act or for computation of reserves to determine the applicability of Companies (Auditor’s Report) Order, 2003 (CARO).
3. Money Received Against Share Warrants
The revised Schedule specifically requires ‘money received against share warrants’ to be disclosed as a separate line item as a part of “shareholders’ funds”. The existing Schedule VI does not contain such a requirement.
The extent of changes made in Shareholders’ Funds in the revised Schedule VI is path breaking and is in the right direction. In the global environment where disclosure is a dominant factor in the financial statement, greater and transparent disclosures about shareholders’ funds in the financial statements are not only going to enhance the investors’ confidence but also improve the level of comfort amongst the international community.
Thanks & Regards
CS Ajay Mishra
Email: firstname.lastname@example.org and email@example.com