Menu Top


Structure and Content of Company Financial Statements

Types Of Financial Statements

As introduced earlier, the primary financial statements for a company as per Schedule III of the Companies Act, 2013, are the Balance Sheet and the Statement of Profit and Loss, along with the Cash Flow Statement, Statement of Changes in Equity, and Notes to Accounts.

Schedule III prescribes the format in which these statements must be presented, ensuring uniformity and comparability among companies. This standard format is mandatory for all companies preparing financial statements as per the Companies Act, 2013.

Important Features Of Presentation (as per Schedule III)

Schedule III divides items in the Balance Sheet and Statement of Profit and Loss into logical groupings and mandates a specific order of presentation. Some key features include:

1. Division into Major Heads

The Balance Sheet is broadly divided into two main parts: 'Equity and Liabilities' and 'Assets'. Each part is further sub-divided into major heads.

Equity and Liabilities:

Assets:

2. Current and Non-Current Classification

Assets and liabilities are mandatorily classified into Current and Non-current categories based on a specified operating cycle or a 12-month period from the reporting date. This provides insights into the company's liquidity and long-term financial structure.

3. Order of Presentation

Within each major head, sub-headings and line items are presented in a prescribed order. For example, under 'Shareholders' Funds', Share Capital is shown first, followed by Reserves and Surplus.

4. Disclosure of Notes to Accounts

Detailed information for each line item presented in the main statements is given in the Notes to Accounts. Each line item in the Balance Sheet and P&L statement must reference its corresponding note number.

5. Comparative Figures

Financial statements must present corresponding amounts for the immediately preceding reporting period for all items shown in the current period's statements. This aids comparison.

6. Rounding Off

The amounts in the financial statements should be rounded off as per the total income or turnover of the company, using specified norms (e.g., to the nearest hundreds, thousands, lakhs, or crores).

Understanding the structure and content of Schedule III is essential for preparing and analysing company financial statements in India.

Shareholders Fund

Shareholders' Funds represent the owners' stake or equity in the company. It is the amount contributed by the shareholders plus the accumulated profits (or minus accumulated losses) that belong to them.

It appears on the 'Equity and Liabilities' side of the Balance Sheet.

Components of Shareholders' Funds:

Formula for Shareholders' Funds = Share Capital + Reserves and Surplus + Money received against share warrants.

Alternatively, Shareholders' Funds = Total Assets - Total Liabilities (excluding Shareholders' Funds).

Reserve And Surplus

This is a significant component of Shareholders' Funds, representing the accumulated profits or gains that have not been distributed as dividends but retained in the business, and reserves created for specific purposes.

Types of Reserves and Surplus:

Capital Reserves

Created out of capital profits (profits not arising from normal business operations). Examples: Profit on Sale of Fixed Assets, Profit on Redemption of Debentures, Profit on Forfeiture and Reissue of Shares (amount transferred to Capital Reserve), Premium on Issue of Shares/Debentures (Securities Premium). Capital Reserves are generally not available for distribution as dividends (except Securities Premium under certain conditions).

Revenue Reserves

Created out of revenue profits (profits arising from normal business operations). Examples: General Reserve, Dividend Equalisation Reserve, Workmen Compensation Fund (excess over liability), Investment Fluctuation Fund (excess over loss). Revenue reserves are generally available for distribution as dividends (except for amounts set aside for specific purposes like DRR).

Surplus (Balance in Statement of Profit and Loss)

The accumulated profit or loss for the period and brought forward from previous periods, after appropriations. A debit balance indicates accumulated losses.

Specific Reserves mandated by Law

Debenture Redemption Reserve (DRR) and Capital Redemption Reserve (CRR) are created as per requirements of the Companies Act.

The notes to accounts for Reserves and Surplus provide a detailed movement of each reserve during the period (opening balance + additions - deductions = closing balance).

Money Received Against Share Warrants

A share warrant is a bearer document issued by a public company stating that its holder is entitled to the shares mentioned in it. Share warrants can only be issued by a public company and must be fully paid-up.

When a company issues share warrants and receives money against them, this money is shown under Shareholders' Funds separately until the warrants are exchanged for share certificates (conversion) or they expire. Upon conversion, this amount is transferred to Share Capital. Money received against share warrants does not represent Share Capital until the shares are actually issued against them.

This item is usually presented after Share Capital and before Reserves and Surplus under the heading 'Shareholders' Funds' in the Balance Sheet.

Current And Non-Current Classification

This classification is fundamental to the Schedule III format and is crucial for assessing a company's liquidity and long-term financial stability.

Current Asset

An asset shall be classified as current when it satisfies any of the following criteria:

  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 twelve months after the reporting date.
  4. It is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

All other assets are classified as Non-current Assets.

Current Liability

A liability shall be classified as current when it satisfies any of the following criteria:

  1. It is expected to be settled in the company's normal operating cycle.
  2. It is held primarily for the purpose of being traded.
  3. It is due to be settled within twelve months after the reporting date.
  4. The company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date.

All other liabilities are classified as Non-current Liabilities.

Operating Cycle: The time between the acquisition of assets for processing and their realisation in cash or cash equivalents. If the normal operating cycle cannot be identified, it is assumed to be twelve months.

Example: For a manufacturing company, the operating cycle might involve purchasing raw materials, processing them into finished goods, selling finished goods, and collecting cash from debtors. This entire duration is the operating cycle.

This classification helps users understand how much of the company's assets can be quickly converted into cash and how much of its liabilities need to be settled in the near future.

Borrowings

Borrowings represent funds raised by the company through debt instruments or loans. These are liabilities for the company.

Borrowings are classified as:

Non-current Borrowings

These are borrowings that are due for repayment more than twelve months after the reporting date or beyond the normal operating cycle, whichever is longer. Examples include:

Current Borrowings

These are borrowings that are due for repayment within twelve months from the reporting date or within the normal operating cycle, whichever is longer. Examples include:

Notes to accounts for borrowings provide details about the nature of borrowings (secured/unsecured), interest rates, terms of repayment, assets against which secured, etc.

Trade Payables

Trade Payables represent the amounts due to suppliers for goods purchased or services received in the ordinary course of business. These are liabilities.

Trade Payables are typically classified as Current Liabilities because they are generally expected to be settled within the company's operating cycle or within twelve months.

Examples: Creditors for goods purchased on credit, Bills Payable arising from trade credit.

Schedule III often requires separate disclosure of Trade Payables due to Micro, Small, and Medium Enterprises (MSMEs) and others, as per the MSMED Act, 2006.

Proposed Dividend

Proposed dividend is the dividend recommended by the Board of Directors for the shareholders. As per the Companies Act, 2013, proposed dividend is not treated as a liability in the Balance Sheet until it is declared by the shareholders in the Annual General Meeting (AGM).

Instead, the amount of proposed dividend is disclosed separately in the Notes to Accounts under the head 'Contingent Liabilities' (as it is contingent upon shareholder approval) or simply as a note stating the amount recommended by the board.

Once the dividend is declared by the shareholders in the AGM, it becomes a liability and is shown as 'Dividends Payable' under 'Other Current Liabilities' in the Balance Sheet of that period.

Dividend Distribution Tax (DDT) was previously applicable on dividends paid by companies, but this has been abolished, and dividends are now taxable in the hands of shareholders.

Provisions

A provision is a liability of uncertain timing or amount. It is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits, but the timing or amount of the outflow is uncertain.

Provisions are classified into Non-current and Current based on when the outflow of resources is expected:

Non-current Provisions

Provisions where the settlement is expected beyond twelve months after the reporting date or beyond the normal operating cycle, whichever is longer. Examples:

Current Provisions

Provisions where the settlement is expected within twelve months after the reporting date or within the normal operating cycle, whichever is longer. Examples:

A provision is distinguished from a contingency. A contingency is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Contingent liabilities are disclosed in the notes, while provisions are recognised as liabilities in the Balance Sheet.

Fixed Assets

Fixed Assets are assets held with the intention of being used for the purpose of producing or providing goods or services and not for sale in the ordinary course of business. They are expected to be used for more than one accounting period.

As per Schedule III, Fixed Assets are now typically presented under the head Property, Plant and Equipment and Intangible Assets.

Property, Plant and Equipment (Tangible Assets)

These are tangible items held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period. Examples:

These are typically shown at Cost less Accumulated Depreciation and Impairment Loss.

Intangible Assets

These are identifiable non-monetary assets without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Examples:

These are typically shown at Cost less Accumulated Amortisation and Impairment Loss.

Schedule III requires a detailed disclosure of movements in each class of fixed assets (Gross Block, Accumulated Depreciation/Amortisation, Net Block) in the notes to accounts.

Investments

Investments are assets held by an entity for the purpose of earning income by way of dividends, interest, and rentals, or for capital appreciation, or for other benefits to the investing enterprise. Investments are not held for sale in the ordinary course of business.

Investments are classified into Non-current and Current:

Non-current Investments

Investments intended to be held for more than twelve months after the reporting date. Examples:

Generally valued at cost, though accounting standards may require specific treatment for certain types of investments.

Current Investments

Investments held for not more than twelve months after the reporting date. These are readily realisable. Examples:

These are typically valued at cost or market value, whichever is lower.

Notes to accounts provide details about the nature, value, and movement of different categories of investments.

Inventories

Inventories are assets:

  1. Held for sale in the ordinary course of business;
  2. In the process of production for such sale; or
  3. In the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventories are always classified as Current Assets because they are part of the company's normal operating cycle.

Types of Inventories:

Inventories are valued at cost or net realisable value (NRV), whichever is lower. The cost is determined using methods like FIFO (First-In, First-Out) or Weighted Average Cost. NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.

Notes to accounts provide details about the valuation method used and the breakdown of inventory values by category.

Trade Receivables

Trade Receivables represent amounts due to the company from customers for goods sold or services rendered in the ordinary course of business. These typically include:

Trade Receivables are classified into:

Non-current Trade Receivables

Amounts due from customers beyond twelve months from the reporting date or beyond the normal operating cycle.

Current Trade Receivables

Amounts due from customers within twelve months from the reporting date or within the normal operating cycle.

Trade Receivables are generally shown at their realisable value, i.e., after deducting the Provision for Doubtful Debts.

Notes to accounts provide details about the aging of trade receivables, amounts considered good or doubtful, and the movement in the provision for doubtful debts.

Cash And Cash Equivalent

Cash comprises cash on hand and demand deposits with banks.

Cash Equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. They are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.

Examples of Cash Equivalents:

Cash and Cash Equivalents are always classified as Current Assets. Details about balances with banks, cash on hand, cheques/drafts in hand, etc., are provided in the notes.

Form And Content Of Statement Of Profit And Loss

The Statement of Profit and Loss (P&L) for a company, as per Schedule III, presents the results of the company's operations over a reporting period. It is prepared in a vertical format.

The P&L statement shows the income earned and expenses incurred, leading to the profit or loss for the period. Key items and their order of presentation include:

  1. Revenue from Operations: Income earned from the primary activities of the company (e.g., Sale of Goods, Rendering of Services).
  2. Other Income: Income from activities other than primary operations (e.g., Interest Income, Dividend Income, Gain on Sale of Investments, Rent Received).
  3. Total Revenue (1 + 2)
  4. Expenses: Various costs incurred during the period, such as:
    • Cost of Materials Consumed
    • Purchases of Stock-in-Trade
    • Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade
    • Employee Benefits Expense
    • Finance Costs (Interest on Borrowings, Debenture Interest)
    • Depreciation and Amortisation Expense
    • Other Expenses (various operating and administrative expenses)
  5. Total Expenses
  6. Profit Before Exceptional and Extraordinary Items and Tax (Total Revenue - Total Expenses)
  7. Exceptional Items: Items of income or expense that are significant by virtue of their nature, size or incidence (e.g., voluntary retirement scheme costs, restructuring costs).
  8. Profit Before Extraordinary Items and Tax (Profit before Exceptional Items and Tax $\pm$ Exceptional Items)
  9. Extraordinary Items: Income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the entity and, therefore, are not expected to recur frequently or regularly (e.g., loss due to earthquake). (These are rare under Ind AS, but the concept exists).
  10. Profit Before Tax (Profit before Extraordinary Items and Tax $\pm$ Extraordinary Items)
  11. Tax Expense: Comprising Current Tax and Deferred Tax.
  12. Profit for the period from continuing operations (Profit Before Tax - Tax Expense)
  13. Profit/Loss from Discontinuing Operations (Net of Tax)
  14. Profit/Loss for the period (Profit from continuing operations $\pm$ Profit/Loss from discontinuing operations)
  15. Earnings Per Share (EPS): Basic and Diluted EPS, calculated on Profit/Loss for the period.

Detailed breakdown of each expense and income head is provided in the Notes to Accounts. Comparative figures for the previous period are also presented.

The P&L statement provides insights into the company's earning capability and the factors affecting its profitability.