This article is written by Ms. Sushree Surekha Choudhury, a law graduate from KIIT School of Law, Bhubaneswar. The article gives a detailed overview of Division I of Schedule III of the Companies Act, 2013 which contains regulatory provisions and instructions for the preparation of financial statements for companies complying with the Companies (Accounting Standards) Rules, 2006. It talks about the steps, diligence, and compliance requirements that companies must follow while preparing their balance sheet, statement of profit and loss, and consolidated financial statement as per Division I of Schedule III.

It has been published by Rachit Garg.

Introduction

Schedule III of the Companies Act, 2013 provides guidelines and instructions for the preparation of financial statements, which include the balance sheet, the statement of profit and loss, cash flow statements, notes to accounts or notes to financial statements, and related statements of a company. Any company incorporated under the Companies Act, 2013 is required to prepare its annual financial statements as per the provisions of Schedule III and Section 129 of the Act. It is mandatory to prepare and file the annual financial statement because it contains a true record of the company’s state of affairs and a reflection of its financial health. Further, a financial statement is used for taxation and auditing purposes, and is a record of the company’s financial and investment activities. 

The preparation of financial statements for a company is an integral part of their financial management and disclosure as per regulatory requirements. Schedule III refers to Section 129 of the Companies Act, 2013, and both provisions are read along and integrally complied with. Schedule III provides guidelines for the preparation of the balance sheet and the statement of profit and loss of the company, and Section 129 talks about the preparation of the annual financial statement by the companies.

Division I of Schedule III contains instructions for the preparation of financial statements for companies complying with the Companies (Accounting Standards) Rules, 2006. Division I deals with the instructions for the preparation of balance sheets, statements of profit and loss, and consolidated financial statements for companies complying with the 2006 regulation. 

In this article, we will learn more about the preparation of financial statements for companies that comply with Division I of Schedule III of the Companies Act, 2013.

Components of financial statement

Mentioned below are the various components of a financial statement:

Balance sheet

The main component of the financial statement is the balance sheet of the company. The balance sheet contains information about the equity and shareholding pattern of the company and the money involved in these activities, an account for the assets and liabilities of the company, and notes on the accounts providing all such details as may be necessary and essential.

Statement of profit and loss

The statement of profit and loss reflects the overall (net) profit made or loss incurred by the company. It also includes factors like unit economics, logistics, and operational charges, all other expenses of the company, and the revenues generated by the company from different sources. Finally, it provides an account for the net profit and loss statement after adding the gains and deducting the expenses, taxes, depreciation, etc. It also provides information about the equity structure of the company, including the total equity given up by the company (in amount and number) and such relevant information as may be necessary. 

Cash flow statement

A cash flow statement reflects the company’s inflow and outflow of cash in a given financial year. Inflow and outflow of cash are accounted for from the state of affairs of the company in the form of financing, investment, operations, etc. It also accounts for dividends paid and the value of repurchased shares of the company.

Note to financial statements

A note to financial statements, or note on accounts, is a list of detailed information provided by the company in relation to its revenue, expenses, and other heads under the profit and loss statement as well as the balance sheet. For every entry made in these statements, the note to the financial statements provides a detailed description as and when necessary.

Equity statement

The equity statement provides the equity structure of the company and the changes that have occurred to it over time. It makes a part of the balance sheet as well as the statement of profit and loss to provide data for the equity diluted by the company, shareholders’ equity (in number, nature and amount), buybacks, forfeited shares, etc.

Consolidated financial statement

When a company owns one or more subsidiaries or associate companies, they are required to file a consolidated statement of profit and loss and a consolidated balance sheet providing details for the holding company as well as its subsidiaries, associate companies, and joint ventures, etc. These companies must comply with the requirements of Division I of Schedule III while doing so.

Section 129 of Companies Act, 2013

Section 129 of the Companies Act, 2013, talks about the annual financial statement that a company is required to publish. These are treated as records of the company’s businesses and used as evidence of their activities.

Section 129(1)

Section 129 of the Companies Act, 2013 reflects upon the nature of a financial statement by stating that a financial statement shall be a “true and fair view of the state of affairs of the company.” The financial statement will comply with the requirements of Schedule III of the Act, and the accounting standards set forth under Section 133 of the Act.

Section 129(1) provides that the provisions of this Section will not apply to companies whose financial statements are prepared under the direct regulations of the Central Government or a specific Act of Parliament. For instance, the provisions of Section 129 shall not be applicable to banking companies, insurance companies, or companies engaged in the generation, supply, or distribution of electricity. Thus, if a company has refrained from sharing any information that is not statutorily required to be disclosed, the financial statements of the company will not be considered incomplete or deceiving for not disclosing a true view of its state of affairs. Section 129 (1) applies in the cases of:

1. In the case of these companies, the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999 for insurance companies; 
2. the Banking Regulation Act, 1949 for banking companies; and 
3. the Electricity Act, 2003, for companies in the supply or distribution of electricity.
4. Similarly, for any other class of companies being governed under special statutes, the regulations under those statutes will be applicable in the preparation of their financial statements. 

Section 129(2)

Section 129(2) states that the annual financial statement prepared by the company as per Schedule III and other provisions of the Act will be presented by the Board of Directors at the Annual General Meeting (AGM) of the company under Section 96 of the Act. 

Section 129(3)

Section 129(3) states that companies with one or more subsidiaries that are required to prepare a consolidated financial statement shall do so in accordance with Schedule III of the Act in the same manner as a financial statement under this Section is prepared, in addition to following the relevant and applicable accounting standards. These companies preparing a consolidated financial statement will additionally disclose all necessary information as required in their balance sheet, statement of profit and loss, and notes on accounts in the consolidated financial statement. These companies will be required to comply with the additional rules or mandatory regulations that the Central Government can prescribe from time to time. 

Section 129(4)

The preparation, adoption, and audit of the consolidated financial statements of subsidiaries or associate companies will be similar to those of  their holding company.

Section 129(5)

The regulators have given importance to compliance, and as such, every company filing a financial statement or consolidated financial statement is required to comply with the relevant Accounting Standards formulated by the Ministry of Corporate Affairs (MCA). 

Section 129(5) states that companies that deviate from the prescribed accounting standards will disclose information about such deviations in their financial statements. They shall also provide the reasons for such a deviation.

Section 129(6)

Section 129(6) talks about the discretionary powers of the central government. Any class or classes of companies can be exempted by the Central Government from complying with certain regulations and rules in relation to the preparation of their financial statements. The Central Government can do this suo moto via notification, or on an application by these classes of companies. Such an exemption must be backed by appropriate reasoning, and it can either be unconditional or contingent on notified conditions. 

Section 129(7)

Section 129(7) talks about the penalty and punishment for contravention of this Section. When a company fails to comply with the rules, regulations, and standards set forth under the Act and thereby contravenes the provisions of this section, the managing director, the whole-time director (in charge of finance), the Chief Financial Officer (CFO), or any other person in charge of complying with the regulatory requirements shall become liable. In the absence of all these officers, all the directors of the company will become liable and punishable with imprisonment up to one year, a fine of fifty thousand rupees, extendable to five lakh rupees, or both.

Accounting standards for the preparation of financial statements : Section 133 and Indian Accounting Standards (Ind AS)

A financial statement acts as evidence for the company’s affairs and helps creditors, investors, and other shareholders understand the business and growth of the company. The financial statement is important because it helps evaluate the earning potential of the company. Schedule III of the Companies Act, 2013, read along with Section 129 and additionally complying with the Accounting Standards set for under Section 133 of the Act, and by the Ministry of Corporate Affairs (MCA) provides guidelines and regulates the preparation of the financial statement of a company. 

Section 133 reiterates that the MCA, with the approval of the Central Government, can prescribe such accounting standards as may be necessary for the purposes of filing the financial statements of companies. These accounting standards are in the form of rules and guidelines by the MCA as well as Ind AS by the Institute of Chartered Accountants of India (ICAI) under the Institute of Chartered Accountants of India Act, 1949. These accounting standards are framed after consultation and recommendation by the National Financial Reporting Authority (NFRA) constituted under Section 132 of the Companies Act, 2013.

Companies (Accounting Standards) Rules, 2006

The Ministry of Corporate Affairs, with the approval of the Central Government and as per the recommendation of the Institute of Chartered Accountants of India, prepared the Companies (Accounting Standards) Rules, 2006. The regulation prescribes accounting standards that companies are mandated to comply with while preparing their financial statements as per Division I of Schedule III of the Companies Act, 2013. As per the ICAI recommendation, Accounting Standards 1–7 and 9–29 are applicable to companies preparing their financial statements as per Division I of Schedule III. These accounting standards deal with different compliance requirements by the companies in filing their financial statements, such as disclosure requirements, valuation standards, preparation of cash flow statements, an account for employees’ benefits, an account of investments, and equity earnings, among others. These are ethical standards and regulatory requirements that companies must comply with while preparing their financial statements as per Division I of Schedule III of the Act.

Division I of Schedule III of the Companies Act, 2013 : an overview

Division I contains information about the preparation of the balance sheet and provides a format along with general instructions for its preparation in the first part. Further, it provides instructions for the preparation of the statement of profit and loss in a format that includes accounting for the company’s revenues, expenses, depreciation, taxes, and other heads to obtain a final statement that indicates whether the company is profitable or making losses. Finally, Division I instructs on the preparation of consolidated financial statements for companies that are required to file them as per the 2006 regulation. Division I also contains instructions for the addition of notes on accounts for each of these components containing relevant information.

Mentioned below are the provisions for the preparation of financial statements as per Division I of Schedule III following the Companies (Accounting Standards) Rules, 2006: 

Preparation of balance sheet and statement of profit and loss of a company : general instructions

Division I of Schedule III of the Companies Act, 2013 talks about the manner in which financial statements should be prepared by a company that complies with the provisions of the Companies (Accounting Standards) Rules, 2006. It is mandatory for companies registered under the Companies Act, 2013 to comply with the regulatory and statutory requirements for preparing and filing their annual financial statement. Division I of Schedule III is specifically applicable to companies that comply with the Companies (Accounting Standards) Rules, 2006.

Compliance with the 2006 regulation

Division I of Schedule III begins with a set of general instructions for companies to prepare their balance sheets, and profit and loss statements for each financial year. For the purposes of this Schedule, companies that require compliance with the provisions of the Companies Act, 2013 and the Companies (Accounting Standards) Rules, 2006 will also continue to comply with the requirements for the preparation of balance sheets and financial statements as per the provisions of this Schedule unless any addition, amendment, substitution, or deletion is made by any amendment. When any addition, substitution, deletion, or change is made under this Schedule, the same shall become applicable to all the companies under the ambit of this Act or the Companies (Accounting Standards) Rules, 2006 as well.

Disclosure requirements

The disclosure requirements set forth under Division I of Schedule III of the Companies Act, 2013 are in addition to all the other provisions for disclosure requirements under the Companies Act, 2013 and the accounting standards prescribed under the Companies (Accounting Standards) Rules, 2006. The provisions of Division I of Schedule III cannot be substituted with those of these regulations regarding disclosure requirements. Whenever any additions are made to these rules and regulations or when the companies need to make additional disclosures in their financial statements, they must do so under the head of “notes to accounts” in their financial statements, along with complying with all the mandatory disclosure requirements under Division I of Schedule III and the interrelated rules. These “notes to accounts” will contain information in addition to that disclosed in the financial statement, such as: 

1. Details of the items listed in the financial statements for a particular financial year and disaggregation of those recognised items. 
2. A list of those items that do not qualify as recognised items in the financial statement and information about the same. 

Notes to accounts

The preparation of the balance sheet and the statement of profit and loss should be done in such a manner that a balance is maintained in the disclosure of information on list items for those listed in these records and those mentioned in the “notes to accounts.” The information should be disclosed in such a way that a perfect amount of information is shared, neither more than what is needed to be disclosed nor keeping any important information from being disclosed. Each item on the face of the balance sheet and statement of profit and loss shall be cross-referenced to any related information in the notes to the accounts. The relevant data or additional information that is required to be disclosed is added in detail to the notes to accounts.

Turnover and rounding off

The total income made by the company or the revenue generated by them in a given financial year is referred to as the annual turnover of the company. For ease of making calculations, these values are rounded off in a manner provided by Division I of Schedule III. Division I of Schedule III of the Companies Act, 2013 also provides instructions about rounding off the turnover of a company during the preparation of financial statements based on the turnover of the company. For ease and accuracy of calculations, the turnover of a company can be shown in the financial statements after rounding off in the following manner: 

• When the turnover of the company is less than one hundred crore rupees, it shall be rounded off to the nearest amount of hundreds, thousands, lakhs, millions, or decimals thereof while making an entry in the financial statement of the company.
• When the turnover of the company is one hundred crore rupees or more, it shall be rounded off to the nearest lakhs, millions, crores or decimals thereof while making an entry in the financial statement of the company. 

Additional information 

The manner in which these numbers in the financial statement are rounded off will be maintained uniformly throughout the report. Further, when a company files a financial statement, it should also provide data regarding the previous reporting period’s financial statement for the items listed in the current financial statement. This information is provided as comparative data to assess the health of the business and its financial growth over the years. An exception to this general rule is the very first financial statement  filed by the company after its incorporation, since there has been no previous reporting period. All the terms used in Division I of Schedule III will be applicable as per the relevant accounting standards applicable for the preparation of the financial statements of a company.

Division I Part I : preparation of the balance sheet

Part I of Division I under Schedule III provides guidelines for the preparation of the balance sheet of a company. A balance sheet should begin with the name of the company, the financial year for which the balance sheet is being prepared, and the amount in rupees for which the accounts in the balance sheet are provided. For each item listed in the balance sheet, the company shall provide information (in figures) for the current reporting year as well as the previous reporting year. 

A simple balance sheet is an account of the assets, equity, and liabilities of a company and makes a sum total calculation of each to figure out the health of the business. In simple terms, a balance sheet accounts for the total assets (current and non-current assets), total liabilities (current and non-current liabilities), and total shareholders’ equity, which includes share capital and retained earnings.

Equity and liabilities

The balance sheet of a company should have a detailed description of the equity owned or shared by the company and the liabilities borne by it in the given financial year. The equity and liabilities item will contain detailed information about the following: 

• Information about the shareholders’ funds that include details about the share capital, money in the company’s reserves and surplus fund. It also contains information about the money received in shareholders’ funds against share warrants.
• Information about the amount pending allotment against share application. 
• Details about current liabilities like short term borrowings and trade payables, and non-current liabilities like long term borrowings, deferred tax liabilities (a tax liability that is created in one financial year but becomes due in the next financial year. This is due to the difference in the time of its accrual and the due date.), and other long term provisions such as long term loans, securities, etc. Trade payables under current liabilities include outstanding dues from micro and small enterprises, outstanding dues other than these enterprises like dues to creditors and other short term provisions like loans taken for a shorter time period, temporarily rented equipment, etc., and current liabilities. 

A total account of all these details is mentioned in the equity and liabilities column. 

Operating cycle

Companies regularly engage in buying goods, preparing finished products, selling these products, and receiving cash or cash equivalent against the sale. This whole procedure, from buying the goods or raw materials to receiving cash against the sale, is one whole cycle. The complete cycle is known as the operating cycle of a company’s products or services.

Trade receivable and trade payable

Trade receivables refer to the amount that the company will receive from its customers or vendors for the goods sold or services provided by them in an operating cycle.

Trade payables refer to the amount that the company is billed to pay to its suppliers and other vendors for the goods bought by them during an operating cycle.

Current liabilities in the balance sheet

Further, for the purposes of Division I of this Schedule, an item can be classified as a liability if it fulfils the following criteria:

1. A current item becomes a liability if the company intends to settle it in its usual ongoing operating cycle.
2. A current item can be re-classified as a liability when it is held primarily for the purpose of trading.
3. A current item converts into a liability when it is due for settling within 12 months from the reporting date.
4. A current item is seen rather as a liability when the company does not have an unconditional right to deviate from setting or trading it for a period of 12 months beyond the reporting date. 

Except under these conditions, assets that fall within any other category are classified as non-current liabilities while preparing the balance sheet of the company. When any asset or liability under these provisions is intended to be traded, such “trade receivables” are considered in reference to the amount due for goods sold or services rendered in the regular and usual course of business. Similarly, when the amount due is in reference to any goods purchased or services availed, the items are classified as “trade payables.” All this information shall be notified by the company in “notes on accounts” while preparing the balance sheet. 

Share capital 

For the purpose of listing and totalling the share capital of the company, the following shall be taken into consideration and computed to obtain the net data:

1. Total shares authorised by the company (in numbers and amount).
2. An account for the issued shares (in number) and an account for the subscribed and fully paid up shares, and subscribed but not fully paid up shares.
3. The par value of each share. 
4. An account for the number of shares that were outstanding at the beginning of the reporting period and those outstanding at the end of it.
5. The kinds and nature of shares allotted – rights, preferences, and limitations attached to each of those shares or share categories. Other details may be necessary for the distribution of dividends or repayment of capital, as and when necessary and applicable. 
6.  Division of shares among different classes in the company and the number and nature of shares held in each class is to be taken into consideration in reference to the holding company, its subsidiaries or the associates, and the aggregate of the values including those held by the ultimate holding company.
7. An account for shares held by individual shareholders when the total shares held by them accounts for more than 5 percent of the total share capital of the company. 
8. An account for shares that are kept aside or reserved for options, contracts, commitments, or sale or shares/disinvestment.
9. An account of the aggregate shares allotted (in number and class) as fully paid up contracts in advance without receiving a payment in cash is to be provided. Additionally, an account of the aggregate shares allotted (in number and class) as fully paid up bonus shares, and the shares that are bought back are taken into consideration. All this data is accumulated for the previous 5 years from the date on which the balance sheet is prepared. 
10. An account for any convertible (to equity/preference shares) securities issued by the company.
11. An account for the unpaid called up shares (including those by directors and other officeholders).
12. An account of shares forfeited by the company.
13. An account for total shares held by the promoters of the company (in number, value and nature).

Reserves and surplus

For the preparation of the balance sheet, the amounts accounting for the different reserves of the company need to be included. A company and its different departments maintain a reserve account with the bank, and the amount in these reserves is part of the company’s financial statement. Different reserve accounts of the company include:

• Capital reserves account
• Capital redemption reserve
• Securities premium account (now omitted)
• Debentures redemption reserve
• Revelation reserve 
• Share options outstanding account
• Any other reserves or accounts that may be maintained by the company. 

Further, the company keeps an account for the surplus amount left at the end of a financial year. This is the balance amount after allocating different payables to the company. This part of the balance sheet shall account for all other additions and deductions that are computed for that financial year.

Non-current liabilities : Long term borrowings 

Borrowings can be short term or long term depending on the nature of the borrowing and the number of years for which they are availed. Borrowings of the company are added as a liability in the company’s balance sheet. Further, long term borrowings fall into the category of non-current liabilities. Long term borrowings include debentures or bonds, loans from banks, investors, or other parties, deposits, deferred payments, maturities, advances of any nature, etc. All these outstanding payables shall be clubbed together to constitute the long term borrowings of the company for the purpose of preparing the balance sheet. 

Once all the borrowings are accounted for, they will be classified further. The classification is done in order to determine the priority of repayment of loans and advances. Thus, borrowings are divided into secured or unsecured loans and advances. The nature of security involved in the case of secured loans and borrowings should be further mentioned. Other borrowings, like debentures and bonds, shall be listed in the order of their date of maturity, repayment, or redemption. The company can also reissue these bonds and debentures after redemption. In that case, it shall be disclosed in the financial statements of the company.

Borrowings also include trade payables of the company and any other amount that is due payment from the company to an institution, investor, or otherwise. Apart from these, the company is also obliged to pay certain benefits or bonuses to its employees, whenever promised and applicable. This includes stock options, bonuses, or other provisions made by the company with regard to employees’ benefits. These are all considered ‘payables’ of the company in a given financial year.

Short term borrowings 

Companies frequently make short term borrowings. These borrowings form part of the current liabilities of a company as they are required to be repaid in a shorter period of time as compared to long term loans and advances. Short term borrowings are in the form of loans and advances from different sources like the bank, investors, third parties, related parties, and deposits, among others. These borrowings are usually payable at a predetermined future date or on demand. Further, similar to long term borrowings, short term borrowings, too, are classified on the basis of their nature and collateral security. Secured borrowings are given priority in repayment over unsecured borrowings. These borrowings are entered into the balance sheet in the order of their repayment on the basis of nature, a predetermined date, and/or demand.

Trade payables 

Further, the notes on accounts for these borrowings and current liabilities shall disclose information relating to trade payables of Micro, Small and Medium Enterprises (MSMEs). These notes shall contain information such as the loans or advances availed by these enterprises and an account of those that remain unpaid at the end of an accounting year. Such amount due and interest paid/due by the MSME company to its seller as per the provisions of Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006. These notes shall carry such other information related to the MSME companies and their repayment of loans and interest as per the provisions of Division I of this Schedule of the Companies Act, 2013 as well as the  Micro, Small, and Medium Enterprises Development Act, 2006. The notes on accounts shall also contain information about the dues and payables by the creditors of the company. 

Other current liabilities 

Further, current liabilities also include certain other forms of liabilities, such as interest accrued on borrowings (due/not due), current maturities of obligations, advance incomes received, as well as dividends due payment. It also includes application money due for refund, which was charged during allocation of securities. Further, current liabilities are inclusive of matured deposits or debentures that are due for payment. Other short term provisions, like the amount allotted for employees’ options and benefits, also form part of current liabilities for the purpose of preparation of the balance sheet.

Assets

The company must share accounts of its assets for a given financial year on the balance sheet. These accounts shall include information regarding both current and non-current assets. A total of these current and non-current assets will form part of the assets column in the balance sheet. 

Current assets include:

• Current investments
• Inventories 
• Trade receivables
• Cash and cash equivalents
• Loans and advances (short term)
• Other current assets. 

Non-current assets include:

• Property, plant and equipment
• Intangible assets
• Capital work-in-progress
• Intangible assets under development
• Non-current investments
• Net deferred tax assets
• Loans and advances (long term)
• Other non-current assets. 

These items shall be followed by notes in the financial statement with relevant information. As per the provisions of Division I of this Schedule, an asset will be considered a current asset when it fulfils certain criteria. 

Current assets in the balance sheet

Criteria for classification as current assets are:

1. When the asset is intended for sale or consumption or is to be realised by the company in its normal operating cycle, it will be classified as a current asset.
2. When an asset is classified primarily for the purpose of being traded, it will be classified as a current asset.
3. When an asset is prepared to be realised within 12 months from its reporting date, it will be classified as a current asset.
4. When an asset is considered for cash or a cash equivalent, it will be classified as a current asset, unless this asset is restricted from being exchanged or used for setting off a liability (till 12 months from the date of reporting). 

For the purposes of Division I of this Schedule, an operating cycle refers to the time between the purchase of the asset or its acquisition and the time it is realised for value in cash or cash equivalent. In cases where it is difficult to determine the operating cycle in these terms, it is then considered to be twelve months. 

Plants, property and equipment

Assets are classified into current assets and non-current assets for the purpose of preparing the balance sheet. Plant, property, and equipment owned by the company form part of the non-current assets, as these assets are retained and used by the company over a long period of time. 

Tangible assets

Assets include land, property, buildings, plant, machinery, equipment, furniture, fittings, vehicles, and other office equipment. However, while preparing the balance sheet, separate lists or mentions shall be made for assets with complete ownership of the company and those that are brought under a lease. This part of the balance sheet shall also disclose information relating to depreciation charged on each class of asset and the gross and net values of the asset before and after making deductions, repairs, value additions, etc., and the revaluation obtained thereafter. 

Intangible assets 

Non-current assets further include intangible assets, whose details must be entered into the balance sheet of the company. Intangible assets like trademarks, copyrights, goodwill of the company, mining rights, branding, software, patents, formulae/recipe, franchises, etc. all form part of intangible assets owned and utilised by the company. These are accounted for on the balance sheet of the company since they create revenues. The gross revenue generated by these assets will be mentioned in the balance sheet. Furthermore, the net revenue shall be computed and mentioned too. This is done after considering the amortised value of these assets due to repairs, acquisitions, combinations, destructions, or other adjustments. The revaluation amount is mentioned in the balance sheet after considering these factors and the written-off values (if any). 

Non-current investments 

Companies make regular investments in their different operating cycles. These investments are trade investments or any other kind, such as investments in property, shares, and equity, government securities, mutual funds, debentures, bonds, and investments in partnership firms, among others. When a company makes these investments, which involve an investment in any other company or body corporate, such details shall be added to the balance sheet. Information such as the nature of the company, whether a holding company, subsidiary, associate company, joint venture, or otherwise, shall be mentioned in the balance sheet. The company shall also add information such as the name and nature of the investment and the extent to which it has been made (in monetary value and time). Finally, this part of the balance sheet shall reveal the aggregate values of quoted and unquoted investments made by the company, along with the market value of those investments. It shall also contain information about the depreciation or reduction in value of any of these investments and the provisions thereof. 

Long term loans and advances 

A company’s non-current assets also include the long term loans and advances made by the company, the directors, or other officers. These can be loans and advances to related parties, third parties, and capital advances, among others. These loans are classified by the company as secured, unsecured, and doubtful/bad loans. This data shall be entered into the balance sheet along with all other necessary and relevant data. 

Further, the balance sheet shall also contain information about certain other non-current assets, such as trade receivables (long term, good and undisputed/doubtful and disputed), security deposits, unbilled dues (secured, unsecured, or doubtful), and debts due by directors or other officers. 

Current investments 

Current assets are an integral part of the overall assets of the company. Such current assets include current investments in the form of investment in shares, securities, bonds, debentures, government instruments, property, mutual funds or other systematic investments, partnership firm investments, etc. These investments shall be reflected in the balance sheet as current investments, and such other information as the nature and amount of investment in the kind of company (holding, subsidiary, associate, or other body corporate) made shall be disclosed by the company. Information such as the basis of valuation, the provisions for depreciation or other deductions, and the aggregate amount of quoted and unquoted investments of the company along with their market values shall be disclosed in the balance sheet. 

Inventories 

The current assets of the company also include inventories used by the company in everyday business and operation cycles, such as raw materials for goods, work-in-progress, finished goods, stocks put in trade or transit, running stores, tools, machinery, and others.

Trade receivables 

Current assets also include trade receivables due to the company. Trade receivables can be disputed or undisputed, depending on the nature of the transaction. These undisputed receivables are considered to be good, and those that are disputed are considered to be doubtful receivables, and both are separately and specifically mentioned in the balance sheet. Similarly, unbilled dues to be received by the company also form a part of receivables, and these are either secured, unsecured, or doubtful in nature. 

Cash or cash equivalent 

Assets that are in the form of money, cash, and/or cash equivalents form part of the current assets of the company, and a detailed account is mentioned in the balance sheet for the same. This includes the money that the company has at hand with banks in the form of cheques, drafts, or any other form of monetary instrument. Conditional or restricted cash or cash equivalents, such as earmarked balances, money as security against loans taken or otherwise, long term deposits exceeding 12 months, etc., will be mentioned separately and specifically in the balance sheet. 

Short term loans and advances

Current assets of the company include loans and advances made by the company for a short period of time to related parties, other third parties, etc. These advances can be secured, unsecured, or doubtful, depending on the nature of the advances made. 

All the current assets that do not fall into any of the aforementioned categories are added to a separate heading for “other current assets” in the balance sheet.

Additional entries in the balance sheet

Apart from those mentioned so far as assets, liabilities, equity, share capital, and others, the balance sheet shall contain certain other heads with information or items that are not accounted for in any of these categories. 

• The balance sheet shall include information about contingent liabilities and commitments. Contingent liabilities include the liabilities which are due from the company such as guarantees, or claims. These liabilities are not included as debt. Similarly, commitments refer to the approximate amount accounted for by the company which are not yet fixed or executed for payment. It also includes partially paid up shares or uncalled shares. 
• Other miscellaneous heads include dividends which will be paid for equity or preference shares held by such shareholders of the company. Notes relating to partially utilised or paid up amounts against different assets or liabilities shall be included here. 
• The balance sheet shall also include information on title deeds held against immovable property. However, this title deed is not held directly in the name of the company, rather it is held in the name of a director, promoter or a related party to the company. It shall be accompanied by additional information such as the name and details of the person in whose name the property is held, their relationship with the company, the value of property held by them and the reason why such property is not directly held in the company’s name.
• Similarly, when the company extends loans or advances to their directors, promoters, key managerial personnel, or such other officers, it shall be disclosed in the company’s balance sheet. It shall be accompanied by information such as the period of loan or advancement, nature and amount, and name, details and relationship of such officer with the company. 
• Further, the balance sheet shall disclose information about the work-in-progress projects of the company in which capital expenditure is made or estimated to be made in the go. It shall be accompanied by information such as the nature of the project, amount estimated, and time period for the completion of the project. 
• Further, additional information shall also include information about intangible assets of the company under development, along with the nature of the asset or project, the amount due or estimated, and the estimated or predetermined time period for the project.
• Further, the balance sheet shall also account for any benami properties held by the company that are undergoing proceedings under the Benami Transactions (Prohibition) Act, 1988. The company shall disclose information such as details, amount, beneficiaries, and other details relating to the property, the transaction, and the status of the legal proceeding.
• The company shall also disclose information in their balance sheet if and when it makes a willful default against any amount due to the bank, any financial institution, or otherwise.
• The balance sheet will include information about the relationship of the company with any other struck off company if there exists any monetary overdue with the company which has been struck off. Such information shall disclose the nature of the amount due, the nature of the relationship between the two companies, the amount due and all other relevant information. 
• The balance sheet shall disclose information about any registration charges made or due to be made by them to the registrar of companies.
• When the company makes inter-corporate loans and advances, they need to disclose such information in the balance sheet such as compliance with the number of permitted layers and such other regulatory requirements under the Companies (Restriction on number of layers) Rules, 2017.
• The company shall disclose information about certain ratios maintained by them and comparative data of these ratios in the previous accounting years. Such ratios include debt-equity ratio, net profit ratio, inventory turnover ratio, returns on investments, etc. 
• When any scheme of arrangement is made and approved for the company under Sections 230 – 237 of the Companies Act, 2013, such accounts in the books of the company shall be disclosed in the balance sheet as well.
• At times, companies invest funds, either from borrowed money or money from share premiums. These investments can be made to foreign entities, intermediaries, or to a person. When this is done, the company shall disclose all relevant information in the company’s balance sheet. This shall include information such as the amount invested, date of investment, date of maturity, kind of investment made, entity invested in, and all such other details which are deemed necessary and relevant to these transactions. Similarly, when the company has received any fund in the form of investment from any foreign entity, intermediary or otherwise, it shall further share all such details relating to the transaction as may seem necessary and appropriate. 

Division I Part II : preparation of statement of profit and loss

For providing a detailed financial report, a company will prepare a statement of profit and loss for each financial year. This profit and loss statement will provide a detailed revenue structure of the company, the expenses incurred by them, the revenues generated, and finally, the profit made or loss incurred by them after making all deductions in a given financial year. A typical statement of profit and loss will begin by stating the name of the company, the amount that the statement is accounting for, and the financial year for which the statement is prepared. The statement of profit and loss will contain the following details and calculations:

• First, the revenue generated by the company in operations is written in value. Thereafter, income generated by the company from different other sources is clubbed together as “other income.”
• The revenue generated and other income values are added to obtain the “total income” of the company in that financial year.

i.e., revenue (operations) + other income = total income.

• Further, the total value of expenses made by the company is determined. This includes the following:

1. The total cost of the materials used by the company in the given accounting year.
2. Stock-in-trade purchases made during that particular year.
3. Inventory costs including that used for work-in-progress goods, finished goods and stock-in-trade.
4. Expenses made for employees’ benefits and options. 
5. Finance costs incurred by the company.
6. Depreciation and amortisation in the value of assets.
7. All other miscellaneous expenses. 

These costs are grouped together under the head of “expenses” for the purpose of the statement of profit and loss.

• The total expenses are deducted from the total income of the company to obtain an initial profit value.

I.e., total income – expenses = profit before exceptional and extraordinary items, and tax.

• Value for “exceptional items” is deducted from this to obtain “profit before extraordinary items and tax.”
• Further, the costs incurred for “extraordinary items” are deducted to obtain “profit before tax” or PBT.
• Further, the tax to be paid for that particular year is computed for a deduction. 
• Further, tax is calculated separately for continuing and discontinuing operating expenses.
• When this is calculated and tax is deducted, two separate values are obtained of profit/loss by continuing/discontinuing expenses. 
• These values, profit/loss from continuing operations and profit/loss from discontinuing operations are clubbed together, i.e.,

Profit/loss from continuing operations + profit/loss from discontinuing operations = total profit/loss. 

This value is the total amount of the company, regardless of whether they have made profits or incurred losses in the given financial year. A positive figure denotes profit and a negative figure denotes loss, while 0 indicates a neutral stage where the company has neither made profits nor incurred losses. 

Finally, the statement of profit and loss also indicates details about the equity shares of the company, such as the earnings made by the company by diluting their equity (in monetary values).

Notes for preparation of the statement of profit and loss

Mentioned below are certain general instructions for the preparation of the statement of profit and loss of the company:

• The provisions of Division I, Part II of Schedule III of the Companies Act, 2013 apply alike to companies running businesses in India, as well as to companies running a non-profit company or activity as under Section 2(40)(ii) of the Companies Act, 2013. 
• Except for finance companies, all other companies shall disclose the revenue generated from the following operations:

1. Sale of products
2. Sale of services rendered 
3. Donations or grants received (in reference to Section 8 of the Act)
4. Other operating revenues.

These four values will be clubbed together, and excise duties paid will be deducted from this summation to obtain the “revenue from operations” value for a particular financial year.

• In the case of a finance company, the revenue from operations shall be obtained by adding revenue in the form of interest, and from other financial services.
• In computing financial costs, the following shall be included:

1. Expenses as interest
2. Borrowing costs
3. Gain/loss from foreign currency transactions (if applicable).

• “Other income” will include the following sources of revenue:

1. Income as interest (other than finance company)
2. Income as dividend 
3. Sale of investments (net gain or loss)
4. Others. 

• “Notes on accounts” after the statement of profit and loss shall contain certain additional information. One such piece of information will be about the money put aside for employees’ benefits. This includes salaries paid to the employees, wages, bonuses, provident funds, welfare benefits like medical protection, and other benefits like employee stock options (ESOPs) and employee stock purchase plans. These are expenses made by the company and shall be maintained separately in the statement of profit and loss.
• The notes on accounts will further contain information about the depreciation and amortisation computed costs of the company for different and all classes of assets. Depreciation refers to the loss in the monetary value of an asset (tangible) at the end of its useful life and amortisation is a similar calculation for intangible assets.
• The notes shall contain information about any and all sources that contribute more than 1 per cent or Rs. 1,00,000/- to the company’s revenue.
• The notes will contain additional information such as income as interest, expenditure as interest, dividends to be paid by the company, gain/loss (net) from the sale of investments of the company, adjustments made by the company, gain/loss (net) from foreign investments and transactions.
• The notes will contain information about payments made to auditors for their services like auditor’s services, services on tax matters, management, company law subjects, reimbursement of expenses, etc. 
• The notes will additionally cover information related to the Corporate Social Responsibility (CSR) activities undertaken by the company when the company falls within the ambit of Section 135 of the Companies Act, 2013.
• The notes shall contain the list of items that fall into the category of extraordinary items and exceptional items.
• When the company is involved in the manufacturing business, the notes will contain a list of raw materials purchased by the company and goods purchased in the given financial year.
• When the company’s business is primarily in trading, the details and list of goods traded shall be maintained in the notes.
• When the company’s primary business is rendering services, the details of services rendered and income generated from those services shall be maintained in the notes.
• All details and updated data on work-in-progress projects shall be contained in the notes on accounts. 
• The notes will also contain information about the materials set aside to reserve them for future use and not as a liability or contingency. Further, if any such materials are taken back, the details shall be mentioned in the notes. If the materials set aside form part of any liability or contingency, they shall be mentioned separately.
• Additional expenses incurred by the company, such as rent, store maintenance, reparations, fuel, power consumption, insurance, taxes, etc., shall be made a list in the notes. 
• The notes shall contain such relevant information about subsidiary companies as may be required, such as dividends to be paid, losses incurred (if any), etc.
• Further, the notes on accounts will contain information about the imports made by the company for raw materials, spare parts, etc. It shall also contain details about foreign currency transactions, royalties, know-how, different professional fees, interests and dividends, or other forms of bank transactions and remittances. Similar transactions from exports shall be mentioned separately.
• If and when the company omits from disclosing any information in their financial statements and such undisclosed income is later added and disclosed during the tax assessment under the Income Tax Act, 1961, details about such undisclosed information shall also be contained in the notes on accounts in the statement of profit and loss.
• Corporate Social Responsibility (CSR) related information in the notes of accounts shall contain relevant information such as the total amount that the company is required to spend on CSR activities in that particular year, the amount actually spent by them, shortfallings (if any), the reason for such shortfalling, comparative data for previous year’s CSR activities, etc. It shall also state the kind of CSR activities undertaken by the company, related party transactions made (if any), and other relevant information.
• Finally, the notes on accounts shall contain information about the virtual/digital currency and cryptocurrency owned by the company. This shall contain information about the currencies owned by the company, the transactions made using virtual currencies, deposits, payments, etc. made using virtual currencies, and other relevant information. 

Consolidated financial statement : preparation as per Division I of Schedule III of Companies Act, 2013

The provisions of Division I of this Schedule apply mutatis mutandis (applies in a similar manner along with necessary changes) to companies which are required to prepare a consolidated financial statement for their company. A consolidated financial statement includes a consolidated balance sheet and a consolidated statement of profit and loss. A financial statement is one which consists of the balance sheet and the statement of profit and loss which reports about a standalone company’s financial health and operating stats. A consolidated financial statement is required to be prepared in the case of a company being a consolidation of a parent company and its subsidiaries or associates. When the financial statement containing the balance sheet and the statement of profit and loss covers consolidated data for the parent company and its subsidiaries or associates as a whole, such a financial statement is referred to as a “consolidated financial statement.” 

In addition to preparing the consolidated financial statement as per the provisions of Division I of this Schedule of the Companies Act, 2013, companies preparing a consolidated financial statement must also adhere to the compliance requirements as per the Accounting Standards. The consolidated financial statement will disclose information such as:

• Profit and loss in relation to “minority interest” in the company shall be disclosed. Additionally, information regarding profit and loss attributable to owners in the parent company shall also be included. 
• Information regarding the equity division and structure shall be included. Such information shall contain details about the equity attributable to minority interest in the company and those to the owners of the parent company shall be separately and specifically mentioned in the consolidated balance sheet of the consolidated financial statement. 

The consolidated financial statement will contain information for the following companies:

1. Parent company in India
2. Subsidiary companies in India
3. Foreign subsidiaries 
4. Minority interest in these subsidiaries (equity based)
5. Joint ventures as per proportion in consolidation (or equity based) – within India
6. Joint ventures as per proportion in consolidation (or equity based) – foreign JVs.

All this information shall be totalled and presented as the consolidated financial statement. While providing this information, the following details about each category shall be mentioned separately:

1. Name of the entities
2. Net assets of each entity (net asset = total assets – total liabilities)

1. In percentage
2. In amount 

3. Shares of these entities (in profit or loss)

1. In percentage
2. In amount

This consolidated financial statement will cover all, Indian as well as foreign subsidiaries, associate companies, joint ventures, etc. If and when a company excludes any of its subsidiary or associate companies from the list in the consolidated financial statements, such information shall be disclosed by the company along with the reasons for making such an exclusion.

Amendments to Division I of Schedule III of Companies Act, 2013

The Ministry of Corporate Affairs, exercising powers under Section 467(1) of the Companies Act, 2013, issued an amendment via notification on 24 March, 2021, to the three divisions of Schedule III under the Companies Act,  2013. Division I of Schedule III was thus amended to include the following new provisions:

Amendment on rounding off

The previous regulation took into consideration the turnover of the company when rounding off values for the purposes of the preparation of the financial statement. The 2021 amendment modified this provision to consider the ‘total income’ of the company instead of the company’s turnover. While turnover referred to the revenue generated by the company by the sale of goods or the rendering of services, the total income of the company is the summation of revenue/income generated from the operations along with revenue from other sources,

I.e., total income = revenue from operations + other income.

Amendment on promoters’ shareholding

The 2021 amendment requires the companies to disclose information on the shareholding patterns of their promoters in the notes on accounts under the share capital head of the financial statement. Such information shall contain details of the shareholding of the promoters, along with necessary changes and updates. 

Ageing schedule on trade payables 

The notes on trade payables will contain additional information in the form of a schedule on ‘trade payables due payment.’ This schedule will contain information on the ageing of trade payables. This schedule will contain the time periods within which the company needs to clear its payments.

Ageing schedule on trade receivables 

Similar to trade payables, the notes on accounts on trade receivables will contain an ageing schedule for the trade receivables of the company. This schedule will be added to the long term trade receivables head for non-current assets of the company. 

Amendment on Property, Plant and Equipment / Intangible Assets

• The head ‘tangible assets’ will be replaced with ‘Property, Plant and Equipment’ for the purpose of Division I of this Schedule. 
• Further, the notes on Property, Plant and Equipment will disclose information about the change in amount for the purpose of revaluation. Such change in valuation will be mentioned if and when the change amounts to 10 per cent or more of the previous value for Property, Plant and Equipment. This valuation is done in reference to the ‘net carrying value’ for these assets of the company. 
• Similarly, the notes on ‘intangible assets’ will disclose information about the change in amount for the purpose of revaluation. Such change in valuation will be mentioned if and when the change amounts to 10 per cent or more of the previous value for intangible assets. This valuation is done in reference to the ‘net carrying value’ for these assets of the company.
• For the purposes of this Division of Schedule III, the net carrying value refers to the book value of assets after deducting depreciation at the end of an accounting year.

Current maturities 

The head ‘short term borrowings’ in the financial statement of a company will include an additional clause on the ‘current maturities’ of the company. This will be mentioned separately as clause (v). Earlier, current maturities were mentioned as a part of ‘other current liabilities.’ After the 2021 amendment, it forms part of the ‘short term borrowings’ of the company. 

Security deposits

The clause on ‘security deposits’ will be removed from the head ‘long term loans and advances’ and newly included under the ‘other non-current assets’ head.

Additional regulatory information

As per the 2021 amendment, the financial statement shall also include the following information:

On benami transactions

The financial statement notes on benami transactions (if any) of the company will mention information about any ongoing proceedings of the company for holding benami properties (if any) under the Benami Transactions (Prohibition) Act, 1988, and disclose all necessary information appropriately. 

Title deeds

The company will also disclose information about all the title deeds that are not held in the name of the company and other relevant information. 

Revaluation 

When revaluation is made for the plant, property, and equipment of the company, the company shall disclose whether such revaluation is done by a registered valuer under Rule 2 of the Companies (Registered Valuers and Valuation) Rules, 2017.

Loans and advances

Information relating to loans or advances made to promoters, KMPs, related parties, and directors shall be disclosed by the company. Such information should specify whether the repayment will be made on demand or on a predetermined date.

Capital work-in-progress and intangible assets

The ageing schedule for capital work-in-progress will contain a separate heading with information about the work that has been suspended by the company.

Similarly, the ageing schedule for intangible assets will contain information about the projects that have been suspended by the company.

Willful defaulter

The company shall disclose necessary information, if applicable, on willful defaulters of the company. Such information will disclose whether the company has been declared a willful defaulter by the bank, financial institutions, or any lender. It will also disclose if the loans were diverted for other purposes than for which they were taken and details of such a deviation. Finally, the company will disclose whether short term loans have been diverted towards long term goals.

Solvency

When the solvency disclosure of the company is provided through information on different ratios, such as the debt-equity ratio, net profit ratio, etc., any change exceeding 25 percent in the ratio as compared to the preceding accounting year shall be disclosed separately.

Inter-corporate loans 

The company shall disclose information about inter-corporate loans transacted by it. The company shall disclose if it has used funds to meet the obligations of its subsidiaries or joint ventures. If the company has raised any loan on security and the securities of the subsidiaries, associate companies, or joint ventures have been pledged in that regard, such information shall be disclosed as per the 2021 amendment. 

Additional information 

• The financial statements will contain information about the company’s relationship with struck off companies (if any) in terms of transactions made with them and the amount that is outstanding.
• Information about pending registrations or satisfaction of charges to be made to the registrar and reasons for delay.
• Information about non-compliance, if the company has failed to comply with the ‘number of layers’ restriction under the Companies (Restriction on Number of Layers) Rules, 2017 and reasons for such non-compliance.
• Information and declaration of compliance with accounting standards and other rules, if any scheme of arrangement has been approved for the company under the Companies Act, 2013 provisions for corporate restructuring. 
• Donations received by the company as per the provisions of Section 8 of the Companies Act, 2013 will be separately mentioned in the general instruction for the preparation of the statement of profit and loss.
• Information about undisclosed income that was later disclosed during tax assessments.

Corporate Social Responsibility (CSR)

If the company is required to undertake CSR activities as per the provisions of Section 135 of the Companies Act, 2013, and, pursuant to that, puts aside funds in a separate account within 6 months after the expiry of the financial year, such information shall be disclosed as per the 2021 amendment.  

Cryptocurrency or virtual currency 

When the company uses, transacts with, invests in, or stores virtual currencies like cryptocurrency, it shall disclose such relevant information as per the 2021 amendment. Such disclosure shall contain information about the amount held virtually, profit or loss generated in virtual transactions, and deposits or advances made virtually.  

Conclusion 

A company incorporated under the Companies Act, 2013 is mandated to comply with the provisions of Schedule III unless they are specifically exempted by the government or an Act of Parliament. Thus, companies are required to prepare their balance sheet, statement of profit and loss, or consolidated financial statements as per the provisions of this Schedule. Division I of Schedule III talks about the balance sheet, statement of profit and loss, and consolidated financial statements separately in parts. As per the provisions of Division I of this Schedule, the balance sheet shall account for all necessary information related to the assets owned by the company, the liabilities of the company, and the equity and shareholding structure of the company. Further, the statement of profit and loss provides detailed data on the revenues generated by the company from the sale of its goods, services rendered, or income generated from any and all other sources. Therefore, the statement of profit and loss makes all necessary additions (revenue sources) and deductions in the form of expenses, depreciation, taxes, and amortisation among others.

It is essential for companies to comply with the provisions of Division I of this Schedule and the Companies Act, 2013 as a whole, or any special legislation as notified by the Central Government. The balance sheet helps in evaluating the liquidity and solvency of the company by keeping an account of the assets, liabilities, and equity holdings of the company. On the other hand, the statement of profit and loss reflects the profitability of the company as well as the business growth by recording and comparing the data of the previous year to this year. Thus, Division I of Schedule III guides and regulates the preparation of these statements for companies, and a contravention of the laid down provisions leads to penalties. 

Frequently Asked Questions (FAQs)

When was Schedule III made applicable?

The provisions of Schedule III have been applicable to companies since the financial years commencing on or after 1st April, 2014.

What is the difference between Division I and II of Schedule III?

Division I of Schedule III is applicable to companies that comply with the Companies (Accounting Standards) Rules, 2006, whereas Division II is applicable to companies that comply with the Companies (Indian Accounting Standards) Rules, 2016.

Is rounding off mandatory for both Division I and II entities?

Rounding off was not as mandatory for Division I companies as it was for Division II companies. However, after the 2021 amendment, the rounding off provision became mandatory for Division I companies as well.

References 

• https://wirc-icai.org/wirc-reference-manual/part5/schedule-iii-companies-act-2013.html 
• https://ca2013.com/129-financial-statement/ 
• https://www.mca.gov.in/Ministry/pdf/ScheduleIIIAmendmentNotification_24032021.pdf 
• https://www.icsi.edu/media/filer_public/87/d9/87d95f34-8345-45d6-a752-3138571a0f69/presentation_for_latest_changes_in_schedule_iii_of_companies_act_on_12032022_cs_vijay_kumar_m_p.pdf 

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