FINANCIAL STATEMENTS OF COMPANIES
LEARNING OBJECTIVES
Aft er st udyi ng t hi s c ha pt er, t he st ude nt s will be a bl e t o underst a nd :
Format of Statement of Profit and Loss and Balance Sheet
Accounts related to current tax, advance tax, tax payable, etc.
Deferred tax
Provisions relating to disposal of profits, particularly dividends
Preparation of Statement of Profit and Loss and Balance Sheet as per Division I Non-Ind AS, Schedule III.
Overview of Division II Ind AS, Schedule III.
FINANCIAL STATEMENT
Meaning of Financial Statement
“ Acc or di ng t o S . 2( 40) fina nci al st at e me nt i n r el ati o n t o a c o mpa ny, i ncl udes
(i) a bal a nce s heet as at t he e nd of t he fi na nci al ye ar; (ii) a pr o fit a nd l oss acc o unt, or i n c as e of a c o mpa ny c arr yi ng o n a ny acti vi t y not f or pr o fit, a n i nc o me a nd e x pe ndi t ur e acc o unt f or t he fina nci al ye ar;
(iii) c as h flo w st at e me nt f or t he fina nci al ye ar;
(iv ) a st at e me nt of c ha nges i n e q ui t y, i f a ppli c a bl e; a nd
(v) a ny e x pl a nat or y not e a nne xe d t o, or f or m i ng part of, a ny doc u me nt r ef err e d t o i n s ub- cl a us e (i) t o s ub- cl a us e (iv).”
Ho we ver, t he fina nci al st at e me nt, w i t h r es pect t o One Pers o n Co mpa ny, s mall c o mpa ny a nd dor ma nt c o mpa ny ( S . 455) may not i ncl ude c as h flo w st at e me nt. I n ot her wor ds, as per s ecti o n 2( 40) c as h fl o w st at e me nt i s not r e q ui r e d t o be pr e par e d by One Pers o n Co mpa ny, s mall c o mpa ny a nd dor ma nt c o mpa ny
9.1
9.2
FI NA NCI AL STATE ME NTS OF C O MPA NI ES
Meaning of Financial Year
Acc or di ng t o S 2( 41), fina nci al ye ar, i n r el ati o n t o a ny c o mpa ny or bo dy c or por at e, me a ns t he peri o d e ndi ng o n t he 31st day of Mar c h e ver y ye ar Wher e a c o mpa ny has bee n i nc or por at e d o n or aft er 1st day of J a n uar y of a ye ar ( s ay 2022), t he first fina nci al ye ar will e nd o n 31st day of Mar c h of t he f oll o w i ng ye ar (i. e., 2023).
I f a c o mpa ny or bo dy c or por at e whi c h i s a hol di ng c o mpa ny or a s ubsi di ar y or ass oci at e c o mpa ny of a c o mpa ny i nc or por at e d o ut si de I ndi a a nd i s r e q ui r e d t o f oll o w a di ff er e nt fina nci al ye ar f or c o ns oli dati o n of i t s acc o unt s o ut si de I ndi a, t he Tri b unal may, i f i t i s s ati s fie d, all o w a ny peri o d as i t s fina nci al ye ar, whet her or not t hat peri o d i s a ye ar
Types of Financial statements on the Basis of Period
The f oll o w i ng ar e t he t wo t y pes of fina nci al st at e me nt s:
1 Ann ual fi na nci al st at e me nt s: Thes e ar e pr e par e d o nce i n a fi na nci al ye ar
2. Quart erl y fi na nci al st at e me nt s: Thes e ar e pr e par e d by li st e d c o mpa ni es o n q uar - t erl y basi s as per S E BI r e q ui r e me nt s
Legal Requirements related to Financial Statements as provided in S. 129
Secti o ns 128 t o 138 de al w i t h fina nci al r e q ui r e me nt s. The f oll o w i ng ar e t he l e gal r e q ui r e me nt s as pr ovi de d i n s ecti o n 129:
Secti o n 129( 1) of t he Co mpa ni es Act, 2013 pr ovi des t hat t he fina nci al st at e me nt s (i) s hall gi ve a t r ue a nd f ai r vi e w of t he st at e of aff ai rs of t he c o mpa ny or c o mpa ni es, (ii) c o mpl y w i t h t he acc o unti ng st a ndar ds noti fie d under S . 133, (iii) s hall be i n t he f or m or f or ms as may be pr ovi de d f or di ff er e nt cl ass or cl ass es of c o mpa ni es i n Sc he d ul e III a nd (iv) t he i t e ms c o nt ai ne d i n s uc h fina nci al st at e me nt s s hall be i n acc or da nce w i t h t he acc o unti ng st a ndar ds
Ho we ver, t he af or es ai d pr ovi si o ns of S . 129( 1) s hall not a ppl y t o a ny i ns ur a nce or ba nki ng c o mpa ny or a ny c o mpa ny e ngage d i n t he ge ner ati o n or s uppl y of el ect ri ci t y, or t o a ny ot her cl ass of c o mpa ny f or whi c h f or m of fina nci al st at e me nt has bee n s peci fie d i n or under t he Act g over ni ng s uc h cl ass of c o mpa ny
Secti o n 129( 2) pr ovi des t hat at e ver y ge ner al meeti ng of a c o mpa ny, t he Boar d of D i r ect ors of t he Co mpa ny s hall l ay bef or e s uc h meeti ng fina nci al st at e me nt s f or t he fina nci al ye ar
Secti o n 129( 3) pr ovi des t hat wher e a c o mpa ny has o ne or s ubsi di ari es or ass oci at e c o mpa ni es, i t s hall, i n a ddi ti o n t o st a ndal o ne fi na nci al st at e me nt pr e par e d under s ecti o n 129( 2), pr e par e a c o ns oli dat e d fi na nci al st at e me nt of t he c o mpa ny a nd of all t he s ubsi d - i ari es a nd ass oci at e c o mpa ni es The c o ns oli dat e d fi na nci al st at e me nt s hall be pr e par e d by t he c o mpa ny i n t he s a me f or m a nd ma nner as t hat of i t s o wn a nd i n acc or da nce w i t h a ppli c a bl e st a ndar ds The c o ns oli dat e d fi na nci al st at e me nt s hall al s o be l ai d bef or e t he a nn ual ge ner al meeti ng of t he c o mpa ny al o ng w i t h t he l ayi ng of t he st a ndal o ne fi na nci al st at e me nt.
Secti o n 129( 4) st at es t hat t he pr ovi si o ns of t he Act a ppli c a bl e t o t he pr e par ati o n, a dopti o n a nd a udi t of t he fina nci al st at e me nt s of a hol di ng c o mpa ny s hall, mutatis mutandis, a ppl y t o t he c o ns oli dat e d fina nci al st at e me nt s r ef err e d i n S . 129( 3).
FI NA NCI AL STATE ME NTS OF C O MPA NI ES 9.3
Secti o n 129( 5) pr ovi des t hat wher e t he fina nci al st at e me nt s of a c o mpa ny do not c o mpl y w i t h t he acc o unti ng st a ndar ds r ef err e d t o i n S . 129( 1), t he c o mpa ny s hall di s cl os e i n i t s fina nci al st at e me nt s, t he de vi ati o n f r o mt he acc o unti ng st a ndar ds, t he r e as o ns f or s uc h de vi ati o n a nd t he fina nci al eff ect s, i f a ny, ari si ng o ut of s uc h de vi ati o n.
Secti o n 129( 6) e mpo wers t he Ce nt r al Gover n me nt t o e xe mpt a ny cl ass or cl ass es of c o mpa ni es f r o m c o mpl yi ng w i t h a ny of t he r e q ui r e me nt s of S . 129 or r ul es ma de t her e under, i f i t i s c o nsi der e d necess ar y t o gr a nt s uc h e xe mpti o n i n t he p ubli c i nt er est.
The Ce nt r al Gover n me nt may, by noti fic ati o n, c o nsti t ut e a
National Financial Reporting Authority (i n s hort, NF RA) t o pr ovi de f or matt ers r el ati ng t o acc o unti ng a nd a udi ti ng st a ndar ds under t he Co mpa ni es Act, 2013 [ S 132] [ The Ce nt r al Gover n me nt has c o nsti t ut e d NF RA]
The Ce nt r al Gover n me nt may pr es cri be t he standards of accounting or a ny a dde nd u m t her et o, as r ec o mme nde d by t he I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a, i n c ons ul t ati on w i t h a nd aft er e xa m i nati o n of t he r ec o mme ndati o ns ma de by t he Nati o nal Fi na nci al Re porti ng Aut hori t y [ S 133] [ The Ce nt r al Gover n me nt has pr es cri be d s uc h st a ndar ds of acc o unti ng. ]
The Ce nt r al Gover n me nt has noti fi e d AS- 1 t o AS- 29 whi c h ar e prima facie s a me as t he Acc o unti ng St a ndar ds i ss ue d by t he I CAI a nd s a me s hall a ppl y t o pr es cri be d c at e g ori es of c o mpa ni es The Ce nt r al Gover n me nt has al s o noti fi e d I nd AS 1 t o 40 a nd 101 t o 108 whi c h ar e i n acc or da nce w i t h I AS/I F RS ( Co nver ge d Acc o unti ng St a ndar d) a nd t hes e ar e a ppli c a bl e t o pr es cri be d c at e g ori es of c o mpa ni es s uc h as bi g li st e d c o mpa ni es. For det ail s, s ee c ha pt er o n Acc o unti ng St a ndar ds i n Fi na nci al Acc o unti ng by Bh us ha n Ku mar Goyal a nd H . N . Ti wari.
MONEY RECEIVED AGAINST SHARE WARRANTS
As per AS- 20, Ear ni ngs of Per Shar e, de fines ‘ s har e warr a nt s ’ as “ fina nci al i nst r u me nt s whi c h gi ve t he hol der t he ri g ht t o ac q ui r e e q ui t y s har es”. Th us, s har e warr a nt s wo ul d ul ti mat el y f or m part of t he s har e hol ders’ f unds. As s har es ar e yet t o be all ott e d agai nst s har e warr a nt s, t hes e ar e not s ho wn as part of s har e c a pi t al. It is shown as a separate line item: ‘Money received against share warrants’ under Shareholder’s Funds.
SHARE APPLICATION MONEY PENDING ALLOTMENT
Shar e a ppli c ati o n mo ne y pe ndi ng all ot me nt i s t o be di s cl os e d as a s e par at e li ne ti me o n t he f ace of t he bal a nce s heet bet wee n “ Shar e hol ders’ Funds” a nd “ No n- c urr e nt li a bili ti es”. Shar e a ppli c ati o n mo ne y not e xcee di ng t he i ss ue d c a pi t al a nd t o t he e xt e nt not r ef unda bl e i s t o be di s cl os e d under li ne i t e m : “ Shar e a ppli c ati o n mo ne y pe ndi ng all ot me nt”. The bal a nce of s uc h mo ne y i s s ho wn under t he he a d “ Ot her c urr e nt li a bili ti es” But t he a mo unt d ue f or r ef und a nd i nt er est t her e o n, i f a ny, will be s ho wn under t he he a d “ Ot her c urr e nt li a bili ti es”
9.4
FI NA NCI AL STATE ME NTS OF C O MPA NI ES
SCHEDULE III TO THE COMPANIES ACT, 2013
Sc he d ul e III of t he Co mpa ni es Act, 2013 pr ovi des t he ma nner i n whi c h e ver y c o mpa ny r e gi st er e d under t he Act s hall pr e par e i t s St at e me nt of Pr o fit a nd Loss, Bal a nce Sheet a nd Not es t o Acc o unt s or Not es t o Fi na nci al St at e me nt s. Ther e was a nee d of e nha nci ng t he di s cl os ur e r e q ui r e me nt s under t he Ol d Sc he d ul e VI t o t he Co mpa ni es Act, 1956 t o har mo ni s e t he m w i t h t he noti fie d acc o unti ng st a ndar ds. Ther ef or e, t he M i ni st r y of Cor por at e Aff ai rs i ss ue d a r e vi s e d f or m of Sc he d ul e VI, vide Noti fic ati o n No S O 447( E), dat e d Fe br uar y 28, 2011
The Revised Schedule VI to the Companies Act, 1956 was applicable to the companies for the Financial Statements to be prepared for the financial year commencing on or after April 1, 2011. As per the new Companies Act, 2013 this has been numbered as Schedule III. Sc he d ul e III t o t he Co mpa ni es Act, 2013 pr es cri bes f or mat of fina nci al st at e me nt s f or t he f oll o w i ng t hr ee c at e g ori es:
DIVISION I
Fi na nci al st at e me nt s f or a c o mpa ny whos e fina nci al st at e me nt s ar e r e q ui r e d t o c o mpl y w i t h t he Co mpa ni es ( Acc o unti ng St a ndar ds) Rul es, 2006.
DIVISION II
Fi na nci al St at e me nt s f or a c o mpa ny whos e fina nci al st at e me nt s ar e dr a wn up i n c o m - pli a nce of t he Co mpa ni es ( I ndi a n Acc o unti ng St a ndar ds) Rul es, 2015
DIVISION III
Fi na nci al St at e me nt s f or a No n- Ba nki ng Fi na nce Co mpa ny whos e fina nci al st at e me nt s ar e dr a wn upi n c o mpli a nce of t he Co mpa ni es ( I ndi a n Acc o unti ng St a ndar ds) Rul es, 2015
SCHEDULE III
DIVISION I - NON IND AS
Fi na nci al St at e me nt s f or a c o mpa ny whos e fina nci al st at e me nt s ar e r e q ui r e d t o c o mpl y w i t h Co mpa ni es ( Acc o unti ng St a ndar ds) Rul es, 2006
General Instructions for Preparation of Financial Statements
1. Overriding status to other requirements of the Companies Act and to the Accounting Standards: Sc he d ul e III of t he Co mpa ni es Act, 2013 Act pr ovi des t hat wher e c o mpli a nce w i t h t he r e q ui r e me nt s of t he Act i ncl udi ng Acc o unti ng St a ndar ds as a ppli c a bl e t o t he c o mpa ni es r e q ui r e a ny c ha nge i n t r e at me nt or di s cl os ur e i ncl udi ng a ddi ti o n, a me nd me nt, s ubsti t uti o n or del eti o n i n t he he a d/s ub- he a d or a ny c ha nges inter se, i n t he Fi na nci al St at e me nt s or st at e me nt s f or m i ng part t her e of, t he s a me s hall be ma de a nd t he r e q ui r e me nt s of t he Sc he d ul e III s hall st a nd mo di fie d acc or di ngl y Thus, the Schedule III of the Companies Act, 2013 gives overriding status to the other requirements of the Companies Act, 2013 and the Accounting Standards as applicable to the companies. In other words, the requirements of the Accounting Standards and other provisions of the Companies Act would prevail over the Schedule.
2. Disclosure requirements of the Schedule III are in addition to and not in substitution of disclosure requirements of the Accounting Standards : Disclosure requirements specified in Part I (Form of Balance Sheet) and Part II (Form of Statement of Profit and
Loss Account) of the Schedule are in addition to and not in substitution of the disclosure requirements specified in the Accounting Standards prescribed under the Companies Act, 2013. Addi ti o nal di s cl os ur es s peci fie d i n t he Acc o unti ng St a ndar ds s hall be ma de i n t he Not es t o Acc o unt s or by way of a ddi ti o nal st at e me nt unl
r e
r
t
be di s cl
e d o n t he f ace of t he Fi na nci al St at e me nt s Si mil arl y, all ot her di s cl os ur es as r e q ui r e d by t he Co mpa ni es Act s hall be ma de i n t he Not es t o Acc o unt s i n a ddi ti o n
he
q ui r e me nt s s et o ut i n t he Sc he d ul e
3. Notes to Accounts shall contain information in addition to that presented in Financial Statements : The Not es t o Acc o unt s s hall c o nt ai ni nf or mati o ni n a ddi ti o n t o t hat pr es e nt e d i n t he Fi na nci al St at e me nt s a nd s hall pr ovi de wher e r e q ui r e d ( a) narr ati ve des cri pti o ns or di s aggr e gati o n of i t e ms r ec og ni z e d i n t hos e st at e me nt s a nd ( b) i nf or mati o n a bo ut i t e ms t hat do not q uali f y f or r ec og ni ti o n i n t hos e st at e me nt s Thes e i t e ms nor mall y i ncl ude c o nti nge nt li a bili ti es a nd c o mm i t me nt s whi c h ar e not s ho wn o n t he f ace of t he Bal a nce Sheet.
It f urt her pr ovi des t hat e ac hi t e mo n t he f ace of t he Bal a nce Sheet a nd St at e me nt of Pr o fit a nd Loss s hall be cr oss- r ef er e nce d t o a ny r el at e d i nf or mati o n i n t he Not es t o Acc o unt s I n pr e pari ng t he Fi na nci al St at e me nt s i ncl udi ng t he Not es t o Acc o unt s, a bal a nce s hall be mai nt ai ne d bet wee n pr ovi di ng e xcessi ve det ail t hat may not assi st us ers of Fi na nci al St at e me nt s a nd not pr ovi di ng i mport a nt i nf or mati o n as a r es ul t of t oo muc h aggr e gati o n.
The ma nner of cr oss r ef er e nce has bee n c ha nge d t o “ Not e No ” as c o mpar e d t o “ Sc he d ul e No ”
4. New norms of rounding off
: Ne w nor ms of r o undi ng off have bee ni nt r oduce d de pe ndi ng upo n t he t ot al i nc o me of t he c o mpa ny. The fig ur es a ppe ari ng i n t he Fi na nci al St at e me nt s s hall be r o unde d off as bel o w:
Total Income Rounding off
(i ) l ess t ha n o ne hundr e d cr or es r upees
(ii ) o ne hundr e d cr or e r upees or mor e
To t he near est hundr e ds, t ho us a nds, l a k hs or milli o ns, or deci mal s t her e of
To t he near est l a k hs, milli o ns or cr or es, or deci mal s t her e of.
Once a uni t of me as ur e me nt i s us e d, i t s ho ul d be us e d uni f or m l y i n t he Fi na nci al St at e me nt s
5. Figures for immediately preceding period : Exce pt i n t he c as e of t he first Fi na nci al St at e me nt s l ai d bef or e t he Co mpa ny ( aft er i t s i nc or por ati o n) t he c orr es po ndi ng a mo unt s ( c o mpar ati ves) f or t he i mme di at el y pr ece di ng r e porti ng peri o d f or all i t e ms s ho wn i n t he Fi na nci al St at e me nt s i ncl udi ng not es s hall al s o be gi ve n
6. Terms used in the Schedule: The t er ms us e di n t he Sc he d ul e s hall be as per t he a ppli c a bl e Acc o unti ng St a ndar ds.
Notes to General Instructions : This part of Schedule sets out the minimum requirements for disclosure on the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as “Financial Statements” for the purpose of this Schedule) and Notes, Line items, sub-line items and sub-totals shall be presented as an addition or substitution on the face of the Financial Statements when such presentation is relevant to an understanding of the company’s financial position or performance or to cater to
9.6
industry/sector-specific disclosure requirements or when required for compliance with the amendments to the Companies Act or under the Accounting Standards.
PART I
Format of BALANCE SHEET
The f oll o w i ng i s t he f or m of t he Bal a nce Sheet as per Sc he d ul e III ( Di vi si o n I - No n I nd AS) of t he Co mpa ni es Act, 2013, as a me nde d i n 2021 :
Name of the Company ……… Balance Sheet as at …......…… ( Rupees i n......... )
Particulars
Note No. Figures as at the end of current reporting period Figures as at the end of the previous reporting period 1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
( a ) Shar e ca pi t al
(b ) Res er ves a nd s ur pl us
( c ) Mo ney r ecei ve d agai nst s har e warr a nt s
(2) Share application money pending allotment
(3) Non-current liabilities
(a) Lo ng- t er m borr o w i ngs
(b) Def err e d t ax li a bili ti es ( Net)
(c) Ot her Lo ng- t er mli a bili ti es
(d) Lo ng- t er m pr ovi si o ns
(4) Current liabilities
(a) Short- t er m borr o w i ngs
(b) Tr a de paya bl es : -
( A) t ot al o ut st a ndi ng dues of m i cr o e nt er pri s es a nd s mall e nt er pri s es; a nd
( B) t ot al o ut st a n di n g d ues of cr e di t or s ot her t ha n m i cr o e nt er pri s es a nd s mall e nt er pri s es.
(c) Ot her c urr e nt li a bili ti es
(d) Short- t er m pr ovi si o ns
T OTAL
Particulars
Note No. Figures as at the end of current reporting period Figures as at the end of the previous reporting period 1 2 3 4
II. ASSETS
(1) Non-current assets
(a) Pr opert y, Pl a nt a nd Eq ui p me nt a nd
I nt a ngi bl e Ass et s *
(i ) Pr opert y, Pl a nt a nd Eq ui p me nt**
(ii ) I nt a ngi bl e ass et s
(iii ) Ca pi t al wor k-i n- pr ogr ess
(iv ) I nt a ngi bl e ass et s under devel op me nt
(b) No n- c urr e nt i nvest me nt s
(c)
(d)
(e)
Def err e d t ax ass et s ( net)
Lo ng- t er ml oa ns a nd a dva nces
Ot her no n- c urr e nt ass et s
(2) Current assets
Curr e nt i nvest me nt s
(a)
(b) I nve nt ori es
(c)
(d)
(e)
(f)
Tr a de r ecei va bl es
Cas h a nd cas h e q ui val e nt s
Short- t er ml oa ns a nd a dva nces
Ot her c urr e nt ass et s T OTAL
See accompanying notes to the financial statements.
Notes:
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET
The ge ner al i nst r ucti o ns f or pr e par ati o n of Bal a nce Sheet as per Sc he d ul e III ar e r e pr o d uce d bel o w :
1. An asset shall be classified as current when it satisfies any of the following criteria: ( a ) i t i s e x pect e d t o be r e ali z e d i n, or i s i nt e nde d f or s al e or c o ns u mpti o n i n, t he c o mpa ny ’ s nor mal oper ati ng c ycl e;
* Substi t ut e d by G . S . R . 207( E) dat e d 24t h Mar c h, 2021 ( w . e. f. 1- 4- 2021) f or Pr opert y, Pl a nt a nd Eq ui p me nt
** Substi t ut e d by G S R 207( E) dat e d 24t h Mar c h, 2021 ( w e f 1- 4- 2021) f or Ta ngi bl e ass et s
9.8
FI NA NCI AL STATE ME NTS OF C O MPA NI ES
(b ) i t i s hel d pri maril y f or t he p ur pos e of bei ng t r a de d;
( c ) i t i s e x pect e d t o be r e ali z e d w i t hi n t wel ve mo nt hs aft er t he r e porti ng dat e; or
(d ) i t i s c as h or c as h e q ui val e nt unl ess i t i s r est ri ct e d f r o m bei ng e xc ha nge d or us e d
t o s ettl e a li a bili t y f or at l e ast t wel ve mo nt hs aft er t he r e porti ng dat e
All ot her ass et s s hall be cl assi fie d as no n- c urr e nt.
Sc he d ul e III pr ovi des t hat i n c as e of c o nfli ct bet wee n Sc he d ul e III a nd Acc o unti ng St a n - dar ds, t he Acc o unti ng St a ndar ds s hall pr e vail over t he Sc he d ul e III
As per the Guidance Note on Division I Non-Ind AS Schedule III to the Companies Act, 2013 (Revised January, 2022 Edition, Para 8.7 “Based on the above definition, on the face of the Balance Sheet, the following items shall be disclosed under non-current assets:
( a ) Pr opert y, Pl a nt a nd Eq ui p me nt
(b ) I nt a ngi bl e ass et s
( c ) Ca pi t al Wor k-i n- pr ogr ess
(d ) I nt a ngi bl e ass et s under de vel op me nt
( e ) No n- c urr e nt i nvest me nt s
(f ) Def err e d t ax ass et s ( net)
( g ) Lo ng- t er ml oa ns a nd a dva nces
(h ) Ot her no n- c urr e nt ass et s ”
Explanation of the definition of current assets
Clause (a): If an asset is expected to be realised in, or is intended for sale or consumption in the company’s normal operating cycle: It i ncl udes de bt ors, fini s he d g oo ds, st oc k-i nt r a de a nd r a w mat eri al De bt ors ar e e x pect e d t o be r e ali s e d w i t hi n t he oper ati ng c ycl e of t he b usi ness, t her ef or e s uc h de bt ors ar e c urr e nt ass et s Ho we ver, i f s o me de bt ors ar e not e x pect e d t o be r e ali s e d w i t hi n 12 mo nt hs f r o m t he r e porti ng dat e or i n t he nor mal oper ati ng c ycl e of t he b usi ness, t he n t hos e de bt ors will be cl assi fie d as no n- c urr e nt ass et s.
Clause (b): If an asset is held primarily for the purpose of being traded: It i ncl ude st oc k-i n- t r a de a nd fini s he d g oo ds, as t hes e ar e hel d pri maril y f or t he p ur pos e of bei ng t r a de d, a nd he nce t hes e ar e c urr e nt ass et s I nvest me nt s may al s o c o me under t hi s cl a us e, i f t hes e ar e pri maril y hel d f or t he p ur pos e of bei ng t r a de d.
Clause (c) : If an asset is expected to be realised within 12 months after the reporting date: It i ncl ude i nvest me nt s ma de i n t he de be nt ur es of a not her c o mpa ny a nd mat uri ng w i t hi n 12 mo nt hs aft er t he r e porti ng dat e Suc h part of t he i nvest me nt s ar e cl assi fie d as c urr e nt ass et s
Clause (d): If an asset is cash or cash equivalents unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date: Cas h e q ui val e nt s ar e s hort- t er m( upt o 3 mo nt hs), hi g hl yli q ui di nvest me nt s t hat ar e r e a dil y c o nverti bl e i nt o k no wn a mo unt s of c as h a nd whi c h ar e s ubj ect t o a n i nsi g ni fic a nt ri s k of c ha nges i n val ue. Ho we ver, i f c as h or c as h e q ui val e nt s i s r est ri ct e d f r o mbei ng e xc ha nge d or us e d t o s ettl e a li a bili t y f or at l e ast 12 mo nt hs aft er t he r e porti ng dat e, t he n i t will not be cl assi fie d as c urr e nt ass et. For e xa mpl e, i f a c o mpa ny has a ba nk bal a nce of ` 50, 000 i n a
ba nk a ndi t has t a ke n a l oa n of ` 5, 00, 000 a nd t her e i s a n agr ee me nt bet wee n t he c o mpa ny, ba nk a nd t he l e nder under whi c h t her e i s r est ri cti o n f or us e of ` 40, 000 o ut of t he af or es ai d ` 50, 000 f or mor e t ha n 12 mo nt hs aft er t he r e porti ng dat e ( bal a nce s heet), t he ba nk bal a nce of ` 40, 000 o ut of ` 50, 000 i s not a c urr e nt ass et f or t he r e porti ng dat e ( bal a nce s heet).
The peri o d of t hr ee mo nt hs s ho ul d be c o unt e d f r o mt he dat e of i nvest me nt t o det er m i ne whet her t he i nvest me nt i s c as h e q ui val e nt or not
2. Operating cycle i s t he ti me bet wee n t he ac q ui si ti o n of ass et s f or pr ocessi ng a nd t hei r r e ali z ati o n i n c as h or c as h e q ui val e nt s. Oper ati ng c ycl e may be a peri o d of l ess t ha n 12 mo nt hs, e q ual t o 12 mo nt hs or mor e t ha n 12 mo nt hs Wher e t he nor mal oper ati ng c ycl e c a nnot be i de nti fie d, i t i s ass u me d t o have a d ur ati o n of 12 mo nt hs
For e xa mpl e, whil e pr e pari ng Bal a nce Sheet of B . K . Lt d. ( of whi c h oper ati ng c ycl e i s 15 mo nt hs) as at 31st Mar c h, 2023, ` 50 l a k h d ue f r o m Ra mes h, a c ust o mer o n 30t h April, 2024 will be cl assi fi e d as c urr e nt ass et, bec a us e t he e x pect e d peri o d of r e ali z ati o n i s l ess t ha n t he oper ati ng c ycl e peri o d al t ho ug h e x pect e d peri o d of r e ali z ati o n i s mor e t ha n 12 mo nt hs
Wher e a c o mpa ny i s e ngage d i n r unni ng mul ti pl e b usi ness es, t he oper ati ng c ycl e c o ul d be di ff er e nt f or e ac h li ne of b usi ness. Suc h a c o mpa ny will have t o cl assi f y all t he ass et s a nd li a bili ti es of t he r es pecti ve b usi ness es i nt o c urr e nt a nd no n- c urr e nt, de pe ndi ng o n t he oper ati ng c ycl e f or t he r es pecti ve b usi ness es
It e ms of i nve nt or y whi c h may be c o ns u me d or r e ali s e d w i t hi n t he c o mpa ny ’ s nor mal oper ati ng c ycl e s ho ul d be cl assi fie d as c urr e nt e ve n i f t he s a me ar e not e x pect e d t o be c o ns u me d or r e ali s e d w i t hi n t wel ve mo nt hs aft er t he r e porti ng dat e.
ILLUSTRATION 1 (Operating
Cycle and Determination of Current Assets)
Classify trade receivables as current asset/non-current asset from the following information:
Particulars (i ) (ii ) (iii ) (iv ) ( v ) (vi ) (vii )
Operating Cycle (Months) 10 15 10 13
Expected period of realization of trade receivable (months from the reporting date) 6 14 11 15
Solution
Tr a de r ecei va bl e i s c urr e nt i f i t i s ex pect e d t o be r eali
mpa ny ’ s oper ati ng cycl e or i f i t i s ex pect e d t o be r eali z e d w i t hi n 12 mo nt hs aft er t he r e porti ng dat e
I n cas es (i ), (iii ) a nd (vii ), t he t r a de r ecei va bl es ar e ex pect e d t o be r eali z e d w i t hi n 12 mo nt hs f r o m t he r e porti ng I n s uc h cas es, t he ass et will be cl assi fi e d as c urr e nt whet her t he oper ati ng cycl e i s l ess or mor e t ha n 12 mo nt hs
I n cas es (ii ) a nd (vi ), t he oper ati ng cycl e i s mor e t ha n t he peri o d of r eali z ati o n of t he t r a de r ecei va bl es. Ther ef or e, i n t hes e cas es al s o t he t r a de r ecei va bl es ar e c urr e nt ass et s.
If t he peri o d of r eali z ati o n of t r a de r ecei va bl es i s mor e t ha n 12 mo nt hs a nd i t i s al s o mor e t ha n t he peri o d of t he oper ati ng cycl e, t he t r a de r ecei va bl es will be cl assi fi e d as no n- c urr e nt ass et Ther ef or e, i n cas es (iv ) a nd ( v ) t he t r a de r ecei va bl es ar e no n- c urr e nt ass et s.
3. A liability shall be classified as current when it satisfies any of the following criteria: ( a ) i t i s e x pect e d t o be s ettl e d i n t he c o mpa ny ’ s nor mal oper ati ng c ycl e;
9.10
FI NA NCI AL STATE ME NTS OF C O MPA NI ES
(b ) i t i s hel d pri maril y f or t he p ur pos e of bei ng t r a de d;
( c ) i t i s d ue t o be s ettl e d w i t hi n t wel ve mo nt hs aft er t he r e porti ng dat e; or
(d ) t he c o mpa ny does not have a n unc o ndi ti o nal ri g ht t o def er s ettl e me nt of t he li a - bili t y f or at l e ast t wel ve mo nt hs aft er t he r e porti ng dat e Ter ms of a li a bili t y t hat c o ul d, at t he opti o n of t he c o unt er part, r es ul t i n i t s s ettl e me nt by t he i ss ue of e q ui t y i nst r u me nt s do not aff ect i t s cl assi fi c ati o n.
All ot her li a bili ti es s hall be cl assi fie d as no n- c urr e nt.
Explanation of definition of current liabilities
Clause (a): If a liability is expected to be settled in the company’s normal operating cycle: A li a bili t y, whet her ari si ng i n t he or di nar y c o urs e of b usi ness or ot her w i s e, will be cl assi fie d as a c urr e nt li a bili t y i f i t i s e x pect e d t o be s ettl e d i n t he c o mpa ny ’ s nor mal oper ati ng c ycl e. Ther ef or e, t r a de cr e di t ors ar e cl assi fie d as c urr e nt li a bili t y as t he y ar e e x pect e d t o be s ettl e d w i t hi n t he nor mal oper ati ng c ycl e of t he b usi ness whi c h may be l ess t ha n, e q ual t o or mor e t ha n 12 mo nt hs
ILLUSTRATION 2 (Determination of Operating Cycle, Current Assets and Current Liabilities)
Bharat Tushar Ltd. provides you the following information:
Raw material stock holding period: 4 months, Work-in-progress holding period: 2 months, Finished goods holding period: 3 months, Debtors collection period: 5 months You are required to compute the operating cycle and State with reason whether the following should be disclosed as Current Assets or Non-Current Assets or Current Liabilities or Non-Current Liabilities in the Balance Sheet as at 31st March, 2022 as per Schedule III:
(i) W, a customer whose expected realization date is 30th April, 2023.
(ii) X, a customer whose expected realization date is 30th June, 2023.
(iii) Y, a supplier whose expected payment date is 30th April, 2023.
(iv) Z, is supplier whose expected payment date is 30th June, 2023. [B. Com. Delhi, 2022]
Solution
An oper ati ng cycl e i s t he ti me bet wee n t he ac q ui si ti o n of ass et s f or pr ocessi
n- pr ogr ess hol di ng peri o d + Fi n - i s he d peri o d + De bt ors c oll ecti o n peri o d = 4 + 2 + 3 + 5 = 14 mo nt hs
(i ) Current asset : Reason: Ex pect e d r eali s ati o n peri o d i s l ess t ha n t he oper ati ng cycl e peri o d al t ho ug h i t i s mor e t ha n 12 mo nt hs
(ii ) Non-current asset : Reason: Ex pect e d r eali s ati o n peri o d i s mor e t ha n bot h t he oper ati ng cycl e peri o d a nd t he 12 mo nt hs peri o d
(iii ) Current liability : Reason: Ex pect e d pay me nt peri o d i s l ess t ha n t he oper ati ng cycl e peri o d al t ho ug h i t i s mor e t ha n t he 12 mo nt hs peri o d
(iv ) Non-Current liability : Reason: Ex pect e d pay me nt peri o d i s mor e t ha n bot h t he oper ati ng cycl e peri o d a nd t he 12 mo nt hs peri o d
Clause (b) : If a liability is held primarily for the purpose of being traded: I f a li a bili t y i s pri maril y hel d f or t he p ur pos e of bei ng t r a de d, i t will be cl assi fie d as a c urr e nt li a bili t y Thi s ha ppe ns whe n a c o mpa ny t r a des i n t he li a bili t y ( c urr e nt or no n- c urr e nt) of ot her or ga ni z ati o n f or a c o mm i ssi o n or a ny ot her f or m of c o mpe ns ati o n
