New Schedule VI – Profit & Loss Account
The old version of Schedule VI did not have any format for Profit and Loss account. The New Schedule VI lays down a format for the presentation of P& L account. This format of P& L does not list any appropriation item on its face. Further, the New Schedule VI format prescribes that below the line adjustments to be presented under “Reserves and Surplus” in the balance sheet. The classification of expenses is based on their nature and not on their function.
What is classification of expenses based on nature or function?
In nature based classification of expenses an entity aggregates expenses within profit or loss according to their nature, for example; purchases of materials, transport costs, employee benefits, depreciation, marketing costs, etc and the expenses are not reallocated among functions within the entity. The main advantage of using this “nature of expense” method is that it is simple to apply because allocation of expenses according to functional classifications is not necessary.
In function based classification of expenses or “cost of sales” (as it usually called) an entity classifies expenses according to their function as part of cost of sales or, for example, the costs of distribution or administrative activities. At a minimum, an entity discloses its cost of sales under this method separately from other expenses. While this presentation can provide more relevant information to users, the allocation of costs to function can often be arbitrary.
Five Important Changes to the Profit & Loss Account – New Schedule VI way
1. Any item of income or expense which exceeds 1% of the revenue from operations or Rupees 100,000, whichever is higher, needs to be disclosed separately.
2. The old Schedule VI required the parent company to recognize dividends declared by subsidiary companies even after the date of the balance sheet if they were pertaining to the period ending on or before the balance sheet date. Such requirement no longer exists in New Schedule VI. Such requirement no longer exists in new Schedule VI. Accordingly, as per Indian Accounting Standard (AS) 9 Revenue Recognition, dividends should be recognized as income only when the right to receive dividends is established by the balance sheet date.
3. For companies other than finance companies, revenue from operations need to be disclosed separately as revenue from:
i. Sale of products;
ii. Sale of services; and
iii. Other operating revenues
4. Exchange gain or loss on foreign currency borrowings (net) to the extent considered as an adjustment to interest cost needs to be disclosed separately as a finance cost
5. Granular approach in terms of quantitative disclosures for significant items of P&L account such as raw material consumption, stocks, purchases and sales have been simplified and replaced with disclosure of “broad heads” only. The broad heads need to be decided based on materiality and presentation of true and fair view of the financial statements.
