Share Application Money Pending Allotment

Share application money pending allotment (and not due for refund) has to be shown as a separate item on the face of the balance sheet and is not included in 'shareholders' funds'. 

However, share application money (or application money for other securities) which has become due for refund has to be presented under 'other current liabilities' along with interest accrued thereon. 

The existing practice is to disclose share application money as a separate line item under shareholders' funds (unless it is due for refund).

In case of the share application money pending allotment, the terms and conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted has to be disclosed. 

It has also to be disclosed whether the company has sufficient authorised capital to cover the share capital amount resulting from allotment of shares out of such share application money. 

Further, the period for which the share application money has been pending beyond the stipulated period for allotment along with the reasons for delay should be disclosed. In some cases shares are allotted but money is refunded after a few years. In such a case it is funding by loan.

Money Received Against Share Warrants

The revised Schedule specifically requires 'money received against share warrants' to be disclosed as a separate line item as part of 'shareholders' funds'. It is on the basis that money received against share warrants would ultimately form part of Share Capital or Reserves and Surplus.

Reserves and Surplus

In the notes, reserves and surplus are required to be classified as follows :

1. Capital reserves
2. Capital redemption reserve
3. Securities premium reserve
4. Debenture redemption reserve
5. Revaluation reserve
6. Share options outstanding account
7. Other reserves (specifying the nature and purpose of each reserve and the amount in respect thereof). For example, Foreign Currency Translation Reserve arising on translation of financial statements of a non-integral foreign operation.
8. Surplus i.e. balance in statement of profit and loss, disclosing allocations and appropriations such as dividend, bonus shares and transfer to/ from reserves, etc.

The existing Schedule VI requires that in case there is debit balance in the 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 debit balance of profit and loss shall be shown as a negative figure under the head 'surplus' under 'shareholders' funds'. Similarly, the balance of 'reserves and surplus', after adjusting negative balance of surplus, if any, shall be shown under the head 'reserves and surplus' even if the resulting figure is in the negative.

It may be noted that the above would also impact the balance of reserves and surplus to be considered for compliance with 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 reserves for computation of limits under Section 372A of the Act or for computation of reserves to determine the applicability of Companies (Auditor's Report) Order, 2003 ('CARO').

Operating Cycle

Operating Cycle

An operating cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months.

Where a company constructs office buildings for third parties and the construction takes two to three years to complete, the company's construction work in progress would be classified as a current asset because construction over two to three years is the company's normal operating cycle.

The same normal operating cycle applies to the classification of both assets and liabilities.

If a company has different operating cycles for different parts of the business (e.g. retail and construction), then the classification of an asset as current is based on the normal operating cycle that is relevant to that particular asset. The company need not identify a single operating cycle.

If a liability is part of the working capital used in the entity's normal operating cycle, then it is classified as current even if it is due to be settled more than 12 months after the reporting date. 

For example, an entity develops software for third parties that takes two years to complete and receives payment for this service upfront. Deferred revenue recognised as a result of the upfront payment is classified as current even if the related service is not expected to be performed within 12 months of the reporting date.

Other Current Liabilities

Other current liabilities are required to be sub-classified in the notes into the following categories :

1. Current maturities of long-term debt
2. Current maturities of finance lease obligations
3. Interest accrued but not due on borrowings
4. Interest accrued and due on borrowings
5. Income received in advance
6. Unpaid dividends
7. Application money received for allotment of securities and due for refund and interest accrued thereon
8. Unpaid matured deposits and interest accrued thereon
9. Unpaid matured debentures and interest accrued thereon
10. Other payables (specifying nature)

It seems that in case of 'interest accrued but not due on borrowings' and 'income received in advance', only the 'current' portion should be classified above and the non current portion should be disclosed under non-current liabilities.

As per the existing Schedule VI, interest accrued and due on borrowings is added to the carrying amount of the related borrowing.

In the case of share application money, the period for which the money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed.

Current Asset

Current Asset

The revised Schedule states that an asset shall be classified as current when it satisfies any of the following norms :

1. it is expected to be realised in, or is intended for sale or consumption in, the company's normal operating cycle;
2. it is held primarily for the purpose of being traded;
3. it is expected to be realised within 12 months after the reporting date; or
4. it is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date.

All other assets shall be classified as non-current.

Current assets include assets such as inventories and trade receivables that are sold, consumed or realised as part of the normal operating cycle even when they are not expected to be realised within 12 months after the reporting period. Current assets also include assets held primarily for the purpose of trading and the current portion of non-current financial assets.

Broad Headings of Balance Sheet

The broad headings under which balance sheet is divided are 'equity and liabilities' and 'assets'.

Equity and Liabilities

Equity and liabilities are divided as follows :

1. Shareholders' funds (with further sub-classification on the face)
2. Share application money pending allotment 
3. Non-current liabilities (with further sub-classification on the face)
4. Current liabilities (with further sub-classification on the face)

Assets

Assets are divided as follows :

1. Non-current assets (with further sub-classification on the face)
2. Current assets (with further sub-classification on the face)

STRUCTURE OF REVISED SCHEDULE

The revised Schedule begins with 'general instructions' that are applicable to both balance sheet and profit and loss account.

1. Format of Balance Sheet : The next section is titled 'Part I - Form of Balance Sheet'. This section contains (i) a format of balance sheet and (ii) general instructions for preparation of balance sheet. The format is in vertical form and thus companies would not be permitted to present their balance sheet in horizontal form.
2. Format of P & L A/c : The last section is titled 'Part II - Form of Statement of Profit and Loss'. This section contains (i) a format of statement of profit and loss and (ii) general instructions for preparation of statement of profit and loss. Thus, unlike the present position, a format for profit and loss statement has been prescribed. The prescribed format classifies the various expenses by their nature.
3. No Format for Cash Flow : No format of cash flow statement has been prescribed in the revised Schedule. This is perhaps on account of the fact that Section 211 of the Act under which Schedule VI is formulated does not contain any reference to cash flow statement. However, AS 3, Cash Flow Statements, as notified will have to be complied with by companies to which it applies. AS 3 itself provides illustrative formats of cash flow statement.
4. No Definition of Reserve / Provision : The revised Schedule makes it clear that the terms used therein have meanings assigned to them in respective accounting standards. Consequently (and unlike the existing Schedule), the revised Schedule does not contain definitions of' provision', 'reserve', 'capital reserve', 'revenue reserve', etc.
5. Part IV not Carried Forward : The requirement of giving balance sheet abstract and general business profile, contained in Part IV of existing Schedule VI, is also not carried forward in the revised Schedule.

Applicability of Revised Schedule VI

APPLICABILITY

The revised Schedule would apply to all Indian companies till they are required to follow IFRS converged Indian accounting standards. It is not applicable to Banking and Insurance Companies.

The MCA has already announced a roadmap for convergence with IFRSs and has very recently also issued converged Ind ASs. However, in the near future, only a small percentage of Indian companies will be required to follow these converged standards; an overwhelming majority of companies would still be following the accounting standards presently notified under the Companies (Accounting Standards) Rules, 2006.

Important aspects of Revised Schedule VI

IMPORTANT ASPECTS

Some of the significant aspects of the revised Schedule VI include :

1. Applicable to all : The revised Schedule to apply to all companies following Indian GAAP–until such companies are required to follow International Financial Reporting Standards (IFRS) converged Indian accounting standards (Ind AS).
2. Accounting Standards Override : Accounting standards and requirements of the Act to override the requirements of the revised Schedule, wherever the two are inconsistent.
3. Broad Items : Information to be mandatorily presented on the face of financial statements limited to only broad and significant items – details by way of notes.
4. Part IV Dispensed with : Part IV of the existing Schedule (giving balance sheet abstract and general business profile) dispensed with.
5. No Change in Cash Flow : Format of cash flow statement not prescribed – hence companies which are required to present this statement (i.e. other than small and medium sized companies) to continue to prepare it as per AS 3, Cash Flow Statement.
6. Compliance with Accounting Standards : Disclosure requirements of various accounting standards also need to be complied with.

Explain the Areas of Policies

Areas of Policies

The following is a list of areas in which different policies may be adopted by different enterprises:

1. Valuation of Inventories.
2. Cash Flow Statement.
3. Contingencies and Events occurring after the Balance Sheet date.
4. Depreciation Accounting.
5. Construction Contracts.
6. Net Profit or Loss for the Period prior period items and changes in Accounting Policies.
7. Revenue Recognition.
8. Accounting for Fixed Assets.
9. The Effects of Changes in Foreign Exchange Rates.
10. Accounting for Govt. Grants.
11. Accounting for Investments.
12. Accounting for Amalgamations.
13. Employees Benefit.
14. Borrowing Costs.
15. Segment Reporting.
16. Related Party Disclosures.
17. Leases.
18. Earning Per Share.
19. Consolidated Financial Statements.
20. Accounting for Taxes on Income.
21. Accounting for Investment in Associates in Consolidated Financial Statements.
22. Discontinuing Operations.
23. Interim Financial Reporting.
24. Intangible Assets.
25. Financial Reporting of Interests in Joint Ventures.
26. Impairment of Assets.
27. Provisions, Contingent Liabilities and Contingent Assets.

• AS 1 requires that :
1. All significant accounting policies adopted by the enterprise should be disclosed.
2. Such disclosure should form part of financial statements and should be at one place.

Discuss the different accounting Policies.

Different Policies

Makers of financial statements i.e. Profit & Loss Account and Balance Sheet have to ascertain true and fair position of the company. For this purpose, profitability and true financial position of the company during the accounting period has to be correctly and accurately shown in the financial statements. Therefore, different policies have to be adopted for preparation of Profit & Loss Account and Balance Sheet and their presentation for the users' interest. 

The following are different important policies, which are adopted by the company and also disclosed, in the financial statements:

1. Inventory Valuation Policies.
2. Cash Flow Statement Policies.
3. Depreciation Policy.
4. Policy regarding Construction Contracts.
5. Revenue Recognition Policies.
6. Fixed Assets Accounting Policies.
7. Accounting for Investments Policies.
8. Employees Benefits Policies.
9. Segment Reporting Policies.
10. Leases Accounting Policies.
11. Earning Per Share Policy.
12. Policy on Accounting for Taxes on Income.
13. Interim Financial Reporting Policies.
14. Accounting of Intangible Assets Policy.
15. Policies on Provision, Contingent Liabilities and Contingent Assets.

In all there are 29 Accounting Standards, which are issued by ICAI, which indicate as to how policies should be adopted and followed. Most of these standards are mandatory and are applicable to most of the enterprises. However, every company management has to follow not only Accounting Standards but also adhere to several laws, rules and regulations made like Company Law, ICAI etc.

Explain the proforma of a statement of Profit & Loss as per Revised Scheduled VI.

Profit and loss statement for the year ended _____

(Rupees in _____)

	Particulars	Note No.	Figures for the current reporting period	Figures for the previous reporting period
I.	Revenue from operations		xxx	xxx
II.	Other Income		xxx	xxx_
III.	Total Revenue (I + II)		xxx	xxx
IV.	Expenses : Cost of materials consumed Purchases of Stock–in–Trade Changes in inventories of finished goods work–in–progress and Stock–in–Trade		xxx	xxx
	Employee benefits expense Finance costs Depreciation and amortization expense Other expense		xxx	xxx
	Total expenses		xxx	xxx
V.	Profit before exceptional and extraordinary items and tax (III – IV)		xxx	xxx
VI.	Exceptional items		xxx	xxx
VII.	Profit before extraordinary items and tax (V – VI)		xxx	xxx
VIII.	Extraordinary items		xxx	xxx
IX.	Profit before tax (VII – VIII)		xxx	xxx
X.	Tax expense :
	1. Current tax		xxx	xxx
	2. Deferred tax		xxx	xxx
XI.	Profit (Loss) for the period from continuing operations (VII – VIII)		xxx	xxx
XII.	Profit/(loss) from discontinuing operations		xxx	xxx
XIII.	Tax expenses of discontinuing operations		xxx	xxx
XIV.	Profit/(loss) from Discontinuing operations (after tax) (XII – XIII)		xxx	xxx
XV.	Profit (Loss) for the period (XI + XIV)		xxx	xxx
XVI.	Earnings per equity share :
	1. Basic		xxx	xxx
	2. Diluted		xxx	xxx