The revised Schedule VI of Companies Act, 1956, requires companies to report their financials for the year ended March 31, 2012 and beyond in the new-format balance sheet. A main reason for the revision was to see that financial statements provide more relevant information to users and are better aligned to international reporting formats.

One of the fundamental changes is the classification of liabilities between the current and non-current component. All liabilities due for repayment within 12 months from the balance sheet date are generally classified as current liabilities. It also applies to liabilities where the company does not have an unconditional right to defer payment for at least 12 months from the balance sheet date. Thus, loan instalments that are repayable within 12 months should be classified as current liabilities under the revised schedule even if the loan is otherwise a term loan with a final maturity exceeding 12 months. This change has resulted in a significant increase in current liabilities reported by Indian companies, and the new disclosure provides useful information on the company’s liquidity.

However, the above requirement has posed several challenges. Recently, the Institute of Chartered Accountants of India issued an FAQ to clarify some of the implementation issues.

For example, consider a term loan that is repayable after five years but contains certain covenants calling for providing periodic financial information to the lender and maintaining prescribed debt-equity ratios.

In certain cases, the loan agreement may stipulate that failure to meet these covenants gives the lender the right to recall the loan. International reporting practices stipulate that if a company has breached these covenants on the balance sheet date and the loan can technically be recalled by the lender, then the loan should be classified as a current liability despite the five-year term. This would result in several term loans being classified as current, impacting the reported liquidity position.

The ICAI has now clarified that in such cases, the loan should remain classified as non-current unless the lender has actually recalled it prior to the finalisation of accounts.

Similarly, consider the dealer deposits collected by a company, which are repayable when the dealership arrangement is terminated. Internationally, such deposits are classified as current liabilities if the dealership arrangement can be terminated by the dealer. However, the ICAI has clarified that the company may consider past practice to determine if the deposits will be claimed in the short term. Based on this analysis the company may report such liabilities as non-current even though the timing of repayment is outside its control.

The above provisions are likely to provide relief to companies and reduce the reported amount of current liabilities.

On the other hand, the ICAI has clarified that for businesses where the operating cycle exceeds 12 months, even term loans exceeding 12 months would need to be classified as current liabilities if the loan tenure is shorter than the operating cycle.

This provision may increase the current liabilities reported by certain businesses with long operating cycles (for example, certain real-estate, infrastructure and construction companies). The practice is likely to evolve on determining the operating cycle as this assessment is based on facts and circumstances and involves the use of judgment.

Similarly, the clarifications would require companies with a fiscal yearend other than March 31 (for example, December 31) to prepare their tax financial statements for the March 31, 2012, period using the revised Schedule VI even though it becomes applicable to statutory financial statements only at a later date (December 31, 2012).

Lastly, the clarifications confirm that companies that seek to complete an initial public offering subsequent to March 31, 2012, would need to restate the five-year financial information in the prospectus as per the revised Schedule VI even though normally restatement is required only for the previous year.

Thus, the FAQ softens the impact of the revised Schedule in some instances and raises additional challenges in others.

Companies that seek to conform to international reporting practices would also need to deal with the fact that certain clarifications would result in a deviation from international practices.

Jamil Khatri is Global Head of Accounting Advisory Services, KPMG

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