In the Part 1 and Part
2 of the ‘Ten Minutes’ series of New Schedule VI an overview of the Balance
sheet and Profit and Loss account changes were dealt with. In this last Part I’d
like to touch upon my perspective of certain practical issues in putting
Schedule VI in place.
Issue 1:
The
aggregate amount of both long term and shot term loans guaranteed by directors
or “others” under each head is to be disclosed. Who does this “others” signify?
Solution:
The words “others”
would mean any person or entity other than a director. It is therefore, not
restricted to mean only promoters or related parties. In the normal course, a
person or entity will generally guarantee a loan of the company only if it is
associated with the company in some manner.
Issue 2:
A
liability is to be classified as current if the company has an unconditional
right to defer its settlement for at least 12 months after the reporting date.
How will a 5-year loan which the company has taken is repayable on demand?
Based on the past experience, it is not expected that the lender will demand
the repayment within next 12 months.
Solution:
As the company does not
have an unconditional right to defer the settlement of loan for at least 12
months after the reporting date, it will classify the loan as current. This is
despite the fact that based on the past experience, it is not expected that the
lender will demand the repayment within the next 12 months.
Issue 3:
Do
we need to classify Capital advances between non-current and current categories?
If yes, on what basis?
Solution:
Capital advances are
advances given for procurement of fixed assets which are non-current assets. Companies
do not expect to realize them in cash in the next 12 months or within their normal
operating cycle. Rather, over the period, these get categorized as one or more
fixed assets. Hence capital advances should be treated as non-current assets.
Issue 4:
In
the New Schedule VI “Proposed Dividend” needs to be disclosed in the footnotes.
Earlier proposed dividend was being disclosed under the head “Provisions”. Does
it mean that proposed dividend is not required to be provided for going forward?
Solution:
The Indian Accounting
Standard (AS) 4 – Contingencies and Events Occurring after the Balance Sheet
date requires that dividends in respect of the period covered by the financial
statements, which are proposed or declared by the company after the balance
sheet date but before approval of financial statements, should be adjusted. The
new schedule VI has stated an accounting standards override. This simply means
that accounting standards will override the New Schedule. The companies will
have to continue to create a provision for dividends in respect of the periods
covered by the financial statements and disclose the same as provision in the
balance sheet.
