A glance through of the Ind. AS- will highlight a hell of a difference of treatment of Equity share Capital from IGAPP as well the definitions in The Companies Act 2013.
Notes to the General Instructions for Preparation of Balance Sheet require a company to disclose in the Notes items referred to in Note 6(D). Note 6(D)(I) deals with disclosures for Equity Share Capital and such disclosures are required for each class of equity share capital. The disclosure requirements for share capital are - mostly common under Non-Ind. AS Schedule III as well as Ind. AS Schedule III.
However, Division II relating to Ind AS restricts the disclosures to 'Equity' while Division I makes it applicable for all kinds of 'Share Capital' but states an exception that different classes of preference shares are to be treated separately.
Part A of Division II of Schedule III that relates to the format of Ind. AS Balance Sheet starts with ASSETS (Non current- and Current) and end with end with EQUITY and LIABILITIES- as against Division I Format which is vice versa. What could be the reason? --- If we rack up our mind, the plausible reason could be that the Business men/industrialists should first see and perceive as to- what are the assets that are to be positioned so as to organise the required funds- perhaps, it is based on this logic, Balance sheet starts with ASSETS- and conclude with EQUITY- and Liabilities..
Capital under the companies Act, 2013:
Section 2(84) of the Companies Act defines 'share' as 'a share in the share capital of a company and includes stock'.
While, section 2(30) of the Act defines 'debenture' to 'include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not'.
Further, section 43 of the Act gives two kinds of share capital of a company limited by shares viz,
(a) Equity share capital;
(b) Preference share capital.
But, what is Equity under Ind.AS.32:
On the other hand, Ind. AS 32 defines an equity instrument as 'any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities'. The accounting definition of 'Equity' is principle based as compared to the legal definition of 'Equity' or 'Share', such that any contract that evidences residual interest in an entity's net asset is termed as 'Equity' irrespective of whether it is legally recognised- as a 'Share' or not. Accordingly, all instruments (including convertible preference shares and convertible debentures) that meet the definition of 'Equity' as per Ind. AS 32 in its entirety and when they do not have any component of liability, should be considered as having the nature of 'Equity' for the purpose of Ind. AS Schedule III. Such instruments shall be termed as 'Instruments entirely equity in nature'
How presented in Ind.AS Balance Sheet?
Instruments entirely equity in nature, 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', as shown below:
(A) Equity Share Capital
(B) Instruments entirely equity in nature - (It is assumed that Instruments entirely equity in nature have such terms and conditions that qualify them for being entirely equity in nature based on the criteria given in Para 16 of Ind. AS 32. Companies should assess terms and conditions specific to their instruments for deciding whether they are entirely equity in nature).
(a) Compulsorily Convertible Preference Share
(b) Compulsorily Convertible Debentures
(C) Other Equity
The STATEMENT OF CHANGES IN EQUITY:
Balances at the beginning of the reporting period, Changes in (A) (B that is a &b mentioned above) and (c) [Instrument] (Any other instrument entirely equity in nature) during the period and Balances at the end of the reporting period are to be given in the STATEMENT OF CHANGES IN EQUITY
As a part of Statement of Changes in Equity, the portion for 'Other Equity' requires an entity to provide a reconciliation during a particular reporting period, as a part of one single statement, of all items other than equity share capital- Guidance Note on Division II - Ind. AS Schedule III to the Companies Act 2013, that are attributable to the holders of equity instruments of an entity. The items included in columnar form are listed below:
(a) Share application money pending allotment;
(b) Equity component of compound financial instruments;
(c) Reserves and Surplus: (i) Capital Reserve; (ii) Securities Premium; (iii) Other Reserves (specify nature); (iv) Retained Earnings; (d) Debt instruments at fair value through other comprehensive income; (e) Equity instruments at fair value through other comprehensive income; (f) Effective portion of Cash Flow Hedges; (g) Revaluation Surplus; (h) Exchange differences on translating the financial statements of a foreign operation; (i) Other items of other comprehensive income (specify nature); (j) Money received against share warrants; (k) Non-controlling interests (for Statement of Changes in Equity of Consolidated Financial Statements)
The reconciliation of above line items needs to be provided by way of the following line items: (i) Balance at the beginning of the reporting period; (ii) Changes in accounting policy or prior period errors; (iii) Restated balance at the beginning of the reporting period; (iv) Total comprehensive income for the year; (v) Dividends; (vi) Transfer to retained earnings; (vii) Any other change (to be specified); (viii) Balance at the end of the reporting period
Besides, all the disclosures as required by Note 6(D)(I) to General Instructions in Preparation of Balance Sheet shall be provided for all instruments entirely equity in nature, to the extent applicable
Items to be grouped under 'Other Equity 'covers:
- Premium received on Compulsorily Convertible Preference Shares which are entirely equity in nature shall be classified and presented as a part of 'Other Equity' under 'Securities Premium'.
- All those compound financial instruments which have both 'Equity' and 'Liability' components, shall be split in accordance with Ind. AS 32 and their 'Equity component' shall be presented under 'Other Equity' portion of Statement of Changes in Equity while their 'Liability component' shall be presented as a separate line item under 'Borrowings'.
Ind AS Schedule III Division II, Notes 9 and 10 of General Instructions for Preparation of Balance Sheet highlight that the disclosure and presentation requirements as applicable to the relevant class of 'Equity' or 'Liability' shall be applicable mutatis mutandis to the instruments (including, their components) classified and presented under the relevant heads in 'Equity' and 'Liabilities'. Accordingly, it is recommended that the companies provide all the relevant disclosures for 'Equity component of a compound financial instrument' as applicable to 'Equity Share Capital'(given in Note 6(D)(I) of General Instructions for Preparation of Balance Sheet), to the extent applicable. An example could be to disclose, for equity component of compound financial instrument, terms as per Clause (j) i.e. terms of any securities convertible into equity shares issued along with the earliest date of conversion in descending order starting from the farthest such date, etc.
For the liability component of financial instruments, all the disclosures applicable to 'Borrowings'(refer Para 8.2.3 to Para 126.96.36.199 ICAI GN) shall be made, to the extent applicable. An example could be to disclose the rate of interest, particulars of redemption or conversion stated in descending order of maturity or conversion, etc. However, for those instruments which are entirely liabilities in nature, all disclosures applicable to 'Borrowings' should be made.
Authorized Capital Clause (a) of Note 6(D)(I) - the number and amount of shares authorized):
As per the Guidance Note on Terms Used in Financial Statements 'Authorized Share Capital' means 'the number and par value, of each class of shares that an enterprise may issue in accordance with its instrument of incorporation. This is sometimes referred to as nominal share capital.' This disclosure is recommended for instruments entirely equity in nature as well as for compound instruments that have an equity component, to the extent applicable. (188.8.131.52 ICAI GN).
If so, a clarity is required as to refundable Preference share capital) under the companies Act
Clause (b) of Note 6(D)(I) - the number of shares issued, subscribed and fully paid, and subscribed but not fully paid:
The disclosure is for shares:
- Subscribed and fully paid;
- Subscribed but not fully paid
Though the disclosure dwells on only for the number of shares under each of the above three categories, to make the disclosure relevant to understanding the company's share capital, even the amount for each category - issued, called up. Subscribed fully/not fully paid, should be disclosed. Paid-up Share Capital' is 'that part of the subscribed share capital for which consideration in cash or otherwise has been received. This includes bonus shares allotted by the corporate enterprise.'
- To quote ICAI Guidance Note 184.108.40.206,
'Clause (c) of Note 6(D)(I) - par value per share: Par value per share is the face value of a share as indicated in the Capital Clause of the Memorandum of Association of a company. It is also referred to as 'face value'per share. In the case of a company having share capital, (unless the company is an unlimited company), the Memorandum shall also state the amount of share capital with which the company is registered and their division thereof into shares of fixed amount as required under clause (e)(i) to the sub-section (1) of section 4 of the Act. In the case of a company limited by guarantee, Memorandum shall state that each member undertakes to contribute to the assets of the company in the event of winding-up while he is a member or within one year after he ceases to be a member, for payment of debts and liabilities of the company, as the case may be. There is no specific mention for the disclosure by companies limited by guarantee and having share capital, and companies limited by guarantee and not having share capital. Such companies need to consider the requirement so as to disclose the amount each member undertakes to contribute as per their Memorandum of Association. This disclosure is recommended for instruments entirely equity in nature as well as for compound instruments that have an equity component, to the extent applicable.'
In the light of the last sentence of the above quoting, the GN only recommends for instruments of the nature specified. In view of this, this disclosure even if preferred it is ideal to disclose along with other discourses under Note No. 6 D I on Equity and on D II on Other Equity.
For brevity, the above said Note may be referred to the General Instructions.
The GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET to the Division II of Schedule III and the ICAI Guidance Note on Division II of Ind.AS Schedule III to the Companies Act have- no doubt copiously dealt with to lay a clear road map for Ind.AS Schedule III.
However, since the Companies Act deals with two kinds Of Share capital - Equity share Capital and Preference Share Capital, as against principle (Conceptual) based approach under Ind.AS, there is still some confusions lingering in the minds of Accounts and Audit Community as to:
Where the authorized Capital as to Preference Shares is to be disclosed until issued with terms of issue as to conversion along with equity Share Capital until then, is it not more appropriate to disclose as part of the Notes 6D I?
As per ICAI GN 220.127.116.11 on Note 6(D)(I), - the number and amount of shares authorized, it is unambiguously spelt out, to quote verbatim, it runs as follows:
'This disclosure is recommended for instruments entirely equity in nature as well as for compound instruments that have an equity component, to the extent applicable'.
But, as an abundant caution, companies' display along with Equity Authorized- Capital, notwithstanding very clear on convertible portion. Therefore, The ICAI should come forward with practical examples so as to provide for correct road line on presentation/disclosure for different dispensations -
- Preference Share Capital not convertible, fully convertible- and partially convertible.
- Debentures- fully convertible, partially convertible and not convertible.
- Dividend on Preference shares on similar situations (as above mentioned), along with contingent liability.
- Interest on Debentures on similar situations (as above mentioned)
The ICAI should rise to the occasion with practical examples on various situations as spelt out so as to do away with the confusion.