Newsletter Issue No 7-15th July 2012 - PKF Sridhar & Santhanam

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PKF SRIDHAR & SANTHANAM Chartered Accountantsccountants Insights into Revised Schedule VI CA.J. Ramnarayanan Now all the listed companies’ statutory audits are over, it is time for small and medium companies’ audits to be taken up. Unlike big companies, in small and medium companies, the role of auditor in guiding the finance department and the management on revised schedule VI is much more. Through this article, I would like to share with you certain basic things on revised schedule VI which should be taken care at the time of finalising presentation of accounts. Accounting Standards prevail over Revised Schedule VI Wherever there is conflict in presentation requirements between Accounting Standards and the Revised Schedule VI, the requirements of the Accounting Standard would always prevail. Classic example is Cash & Cash equivalents. While there is no differentiation between cash equivalents (short term highly liquid investments generally of upto 3 months maturity readily convertible into known amount of cash) and others in revised schedule VI, AS 3 Cash flow Statements require the same to be bifurcated and shown separately. ICAI GN suggests Cash and Bank balances as the overall heading in BS under which Cash and cash equivalents may be listed. Classification between current and non-current Though the revised schedule VI gives the definition of what is current and non-current, many times there will always be doubt on whether to classify a particular asset/liability as current or non-current. To overcome this situation, we shall keep a simple thumb rule. In the case of assets, we shall go by expectation and in the case of liability, we shall go by right to defer settlement. This has been further illustrated in the ICAI’s FAQ on revised schedule VI in Questions 27 & 28. What will come under Trade Payables Though Ministry of Corporate Affairs (MCA) had come out with definition of trade payables, many times there is doubt in our mind on whether amount due to employees should be treated as trade payables as it is in the nature of services rendered. To resolve this doubt, ICAI has clearly spelt out that as dues to employees are in the nature of contractual obligations under employer - employee relationship, the same need not be considered as part of trade payables through FAQ no.9 on revised schedule VI. Classification of long term employee benefits into current and non-current 2 www.pkfindia.in
PKF SRIDHAR & SANTHANAM Chartered Accountants As per Revised Schedule VI, even long term employee benefits like gratuity, pension, post-retirement medical benefit, etc. should also be bifurcated into current and non-current. To achieve this objective, we should take the help of actuaries and should insist for bifurcated amount to be mentioned in the actuarial valuation report itself. Presentation of taxes paid and provision made for taxation In pre-revised schedule VI era, people used to net-off cumulative taxes paid for different assessment years against the cumulative provision for tax made in the books and the resultant figure is either shown under current assets or current liabilities as the case may be. But under revised schedule VI, one has to bifurcate them as well into current and non-current. To facilitate the same, we should ask our clients to provide us with assessment year wise provisions made & taxes paid and should make the netting off assessment year-wise and present the assessment year-wise balances under non-current assets (unless say a refund order is received and receipt is expected) or current liabilities as the case may be. Capital Advances and Capital Work-in-progress Under revised schedule VI, one has to bifurcate between advances paid for projects till date and the work completed till date. To distinguish between advances and payments made against work completed till date, we have to review each & every contract at the time of audit as well as the nature of contract. For instance, all payments made in the case of turnkey contracts will have to be classified under capital advances only till the time of completion (i.e. capitalisation) of the project. Capital advances need to be disclosed as non-current assets even if they are received in Apr next. Classification of trade receivables based on due dates Another significant change made in revised schedule VI is the classification of trade receivables into less than & more than 6 months based on due dates. Earlier it was based on the date of invoice. At the time of audit, one has to go through each and every sale order terms to identify the credit period offered and accordingly classify the trade receivables into less than 6 months, more than 6 months and more than 12 months. For practical reasons you may also adopt for each uniform group of customers an average credit period, if there are numerous customers. 3 www.pkfindia.in
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Newsletter Issue No 7-15th July 2012 - PKF Sridhar & Santhanam

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