Schedule III of the Companies Act, 2013, provides a uniform format for the preparation and presentation of financial statements by companies in India. It is applicable based on the type of company and the accounting standards followed. The format and disclosures are divided into three main divisions based on the applicability of accounting standards.
Companies Complying with Accounting Standards – Division I
Division I applies to companies that follow the Companies (Accounting Standards) Rules, 2006. These companies are required to prepare their financial statements, including the Balance Sheet, Profit and Loss Statement, and Cash Flow Statement, by the general instructions and formats prescribed under Division I. This category generally includes small and medium-sized companies that are not required to follow Indian Accounting Standards (Ind AS).
Companies Complying with Indian Accounting Standards (Ind AS) – Division II
Division II applies to companies that follow Indian Accounting Standards (Ind AS) as prescribed under the Companies (Indian Accounting Standards) Rules, 2015. These companies, typically listed companies or large unlisted companies meeting the specified thresholds, must follow the formats and additional disclosure requirements applicable to Ind AS-compliant entities. Division II incorporates the principles of fair value accounting and requires extensive disclosures compared to Division I.
Non-Banking Financial Companies (NBFCs) – Division III
Division III applies to NBFCs that prepare their financial statements in accordance with Ind AS. The format under this division is tailored specifically to the financial reporting needs and nature of NBFCs, including additional disclosure requirements related to financial instruments, fair valuation, and liquidity. NBFCs have to ensure that their presentation and disclosures align with regulatory expectations and the specific format provided under Division III.
Composition of Financial Statements
Schedule III mandates the structure and content of financial statements for the respective divisions. The financial statements must include specific components, and each element must be presented in the format and manner prescribed.
Balance Sheet
The Balance Sheet must be prepared in the prescribed vertical format, showing the classification of assets and liabilities as current and non-current. Assets and liabilities must be appropriately grouped and disclosed with sufficient detail, enabling users to understand the financial position of the company.
Statement of Profit and Loss
The Statement of Profit and Loss must provide a detailed view of the company’s performance during the financial year. It should include revenue from operations, other income, expenses classified function-wise or nature-wise, and profit or loss for the year. For Ind AS-compliant companies, it must also include other comprehensive income.
Cash Flow Statement
The Cash Flow Statement is mandatory for all companies except for small companies and dormant companies. It must be prepared using the indirect method and should show cash flows from operating, investing, and financing activities. Ind AS-compliant companies have to provide additional reconciliation and classification of cash flows under specified headings.
Notes to Financial Statements
The notes form an integral part of the financial statements. They must contain a summary of significant accounting policies and other explanatory information. Notes should also include narrative explanations or disaggregation of items presented in the primary financial statements to provide additional clarity.
General Principles Governing Schedule III Disclosures
Schedule III emphasizes that the disclosures made under the schedule are in addition to those required under Accounting Standards or Ind AS. These disclosures are not a substitute for compliance with other financial reporting requirements.
Supplementary Nature of Disclosures
The disclosures mandated by Schedule III supplement but do not replace those required by applicable accounting standards. Companies must ensure compliance with both, and any additional disclosures needed for a true and fair view must also be included.
Rounding Off Figures
The figures in the financial statements may be rounded off depending on the turnover of company. The rounding off should be consistent throughout the financial statements. Companies with a turnover of less than Rs. 100 crores can round off to the nearest hundreds, thousands, lakhs, or millions, or decimals thereof. Companies with a turnover of Rs. 100 crores or more should use lakhs, millions, crores, or decimals thereof.
Previous Year Figures
The financial statements must disclose the corresponding figures for the previous year for all amounts reported in the current period, except when presenting the first financial statements after incorporation. This comparison helps stakeholders understand changes over time and assess financial performance and position more accurately.
Classification into Current and Non-Current
Schedule III requires the classification of assets and liabilities into current and non-current categories, based on the expected realization or settlement period and the operating cycle of the business.
Importance of Operating Cycle
The operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. If the company’s normal operating cycle is not identifiable, it is assumed to be twelve months. The operating cycle plays a vital role in determining whether an asset or liability is current or non-current.
Definition of Current Asset
An asset is classified as current if it satisfies any of the following conditions:
Condition One: Expected Realization in Operating Cycle
If the company expects to realize the asset or intends to sell or consume it during its normal operating cycle, it is classified as a current asset. For example, if the operating cycle is 15 months, raw material that will be consumed within 8 months, 14 months, or even 18 months may be considered current. Similarly, if the cycle is 9 months, raw material intended to be consumed within 4 months or 10 months will also fall into the current category if it aligns with the cycle.
Condition Two: Expected Realization Within Twelve Months
An asset is considered current if the company expects to realize it within twelve months after the reporting date. For instance, a debtor expected to pay in 3 months or even 15 months may be considered current if it aligns with the operating cycle. Sales made on credit involving machinery and expected payments in 3, 13, or even 16 months may also be classified accordingly based on context.
Condition Three: Held for Trading
Assets held primarily for trading, including derivative instruments, are classified as current regardless of the period of realization. This includes inventory or any financial asset acquired principally to sell in the near term.
Condition Four: Cash or Cash Equivalent
Cash or cash equivalents are current unless they are restricted from being used to settle a liability for at least twelve months after the reporting period. In that case, they would be classified as non-current.
Classification of Liabilities
Just like assets, liabilities must also be classified as current or non-current based on specific criteria. The classification depends on the company’s expectations about the timing of settlement and the nature of the obligation.
Criteria for Current Liabilities
A liability is classified as current when it satisfies any one of the following conditions. The company expects to settle the liability in its normal operating cycle. The liability is held primarily for the purpose of being traded. The liability is due to be settled within twelve months after the reporting period. The company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Liabilities that do not meet these conditions are classified as non-current.
Balance Sheet Disclosures
The Balance Sheet under Schedule III requires disclosures in detail for various components, ensuring transparency and aiding stakeholders in making informed decisions. The major elements of the Balance Sheet include equity, borrowings, liabilities, assets, and contingent obligations. Each item must be presented in sufficient detail, and where applicable, reconciliations and supporting data must be included.
Share Capital
The share capital section must provide the authorised, issued, subscribed, and paid-up capital for each class of shares. The number of shares outstanding at the beginning and end of the period must be disclosed. Companies must provide a reconciliation of the number of shares outstanding. Information must also be disclosed on shares held by holding and subsidiary companies and shareholders holding more than five percent of total shares. Any shares allotted as fully paid up by way of bonus or under contracts without payment in cash must also be separately disclosed.
Long-Term and Short-Term Borrowings
Borrowings must be classified into long-term and short-term and disclosed based on their nature and party. Borrowings may include debentures, term loans from banks, financial institutions, or related parties. Details must include whether the borrowings are in Indian or foreign currency. The nature of security provided for secured borrowings must be explained. Disclosures must also cover interest rates, payment terms, repayment scheduless, and changes in terms during the year. If guarantees are given by directors or others, these must be specifically disclosed.
Other Long-Term and Current Liabilities
Other liabilities include trade payables and various other current obligations. Trade payables refer to dues on account of goods purchased or services received, including acceptances. However, contractual obligations like interest accrued, provident fund payable, and similar items must not be included under trade payables. Other current liabilities may include interest accrued on borrowings, advances from customers, employee benefits payable, and statutory dues like PF and TDS. Unpaid dividends must be disclosed, with a clear statement on whether any amounts are due for transfer to the Investor Education and Protection Fund.
Tangible and Intangible Assets
Companies must provide a movement schedule for each class of tangible and intangible assets, showing gross block and accumulated depreciation. Assets owned, assets acquired on a finance lease, and those given on an operating lease must be distinguished clearly. Any acquisitions made through amalgamation must be separately disclosed. Revaluation of assets must be supported by the effective date of revaluation, whether conducted by an independent valuer, and significant assumptions used. Disclosures on impairment losses or reversals must be made if applicable. Borrowing costs capitalised to qualifying assets must be disclosed. Fixed assets retired from active use or held for sale must be separately shown at the lower of net book value or net realisable value. Intangible assets must be disclosed along with unamortised balances and useful life.
Non-Current and Current Investments
Investments must be presented separately as trade investments and other investments. The cost of investment in property and related depreciation should be disclosed under the cost model. Investments must be classified based on type, such as equity shares, debentures, bonds, mutual funds, or partnership interest. Whether investments are quoted or unquoted must be mentioned. Investments in related entities like subsidiaries or joint ventures require separate disclosure. Additional information includes quantity, face value or paid-up value, aggregate market value of quoted investments, and classification as current or non-current.
Inventories
The inventories section must include classification into raw materials, work-in-progress, finished goods, traded goods, stores and spares, and loose tools. Companies should disclose the composition of major categories within each classification. While quantity disclosure is not mandatory, it is suggested for a better understanding. Stock in transit must be disclosed separately. Any lien or charge on inventories should also be stated.
Trade Receivables
Trade receivables should be presented as secured or unsecured, and recoverability must be assessed. Receivables outstanding for more than six months from the due date of payment must be disclosed separately. Classification into good, doubtful, or otherwise must be made. If a provision for doubtful debts is created, then gross receivables and provision amounts must be disclosed. Receivables from related parties should be disclosed separately, with the relationship specified.
Cash and Bank Balances
Cash and bank balances should be divided into cash on hand, cheques on hand, balances in current accounts, demand deposits with maturity less than three months, and short-term liquid investments. Other bank balances include deposits with maturity between three and twelve months. Bank overdrafts should not be netted against balances unless the company has a legal right of set-off. Generally, overdrafts are classified under current liabilities.
Contingent Liabilities
Contingent liabilities must be disclosed separately from provisions. These include claims against the company not acknowledged as debts. Each item must be described along with its nature and the extent of possible liability. If any deposit has been made under protest in respect of disputes, the deposit should not be offset against the liability but shown separately. In addition to contingent liabilities, the company must also disclose capital commitments and other commitments outstanding at the reporting date.
Statement of Profit and Loss Structure
The Statement of Profit and Loss under Schedule III is structured to provide a clear and comprehensive view of a company’s financial performance for the reporting period. It must be presented in a vertical format and include revenue, expenses, profit or loss for the period, and other comprehensive income, where applicable. Ind AS-compliant companies must include a detailed section for other comprehensive income items that are not routed through the profit and loss account.
Revenue from Operations
Revenue from operations includes income earned by the company in the ordinary course of its business. It includes the sale of products, rendering of services, and other operating revenue. Companies should separately disclose revenue from the sale of goods, revenue from the rendering of services, and revenue from other operating income such as commission, lease rental, and export incentives. It is important to separately disclose excise duty, if applicable, and report net revenue.
Other Income
Other income includes income not directly related to the main operations of the business. This may include interest income, dividend income, profit on sale of investments or assets, rental income, foreign exchange gains, and miscellaneous income. Each category of other income must be presented separately in the notes to accounts to provide clarity to users of financial statements.
Expenses
Expenses in the Statement of Profit and Loss must be classified under specific heads to improve comparability and understanding. The major categories of expenses include the cost of materials consumed, purchase of stock-in-trade, changes in inventories, employee benefit expenses, finance costs, depreciation and amortisation, and other expenses. Any material item must be disclosed separately, and exceptional items must be described with appropriate explanations.
Cost of Materials Consumed and Purchases
For manufacturing companies, the cost of raw materials consumed must be shown separately. This figure is calculated by adjusting the opening stock with purchases and the closing stock of raw materials. In trading companies, purchases of stock-in-trade must be disclosed, along with changes in inventories, showing the increase or decrease in stock compared to the previous year.
Employee Benefit Expenses
These include salaries, wages, bonuses, gratuity, contributions to provident and other funds, staff welfare expenses, and other related costs. Companies must disclose the amount for each component separately. If any actuarial valuation is involved in the determination of expenses, that should also be noted under accounting policies or in explanatory notes.
Finance Costs
Finance costs must be broken down into interest expenses on borrowings, amortisation of discounts or premiums on borrowings, and other borrowing costs. Exchange differences considered as an adjustment to interest costs under Ind AS must also be included. Finance costs that are capitalised under qualifying assets must be separately disclosed.
Depreciation and Amortisation Expense
This line item includes depreciation on tangible fixed assets and amortisation of intangible assets. The basis of depreciation, the method used, and the useful lives adopted for different asset classes should be disclosed under accounting policies. Any change in the estimation of useful life or depreciation method during the period must be explained in the notes.
Other Expenses
Other expenses should be itemised to the extent possible. These may include rent, repairs and maintenance, insurance, communication costs, travel, advertisement, legal and professional fees, loss on sale of assets, bad debts written off, and impairment losses. If an item is material in nature, it must be disclosed separately. Schedule III also mandates that payments to auditors must be disclosed under specific heads such as audit fees, fees for other services, reimbursement of expenses, and certification services.
Exceptional Items
Exceptional items are significant items of income or expense arising from ordinary activities but of such size, nature, or incidence that their separate disclosure is relevant. Examples include write-offs of large bad debts, litigation settlements, losses due to natural calamities, or restructuring expenses. These must be separately presented and explained in the notes.
Profit or Loss Before Tax
This is derived after accounting for all revenue and expense items. It forms the basis for computing the current tax and deferred tax provisions. Any adjustments arising due to changes in accounting estimates or errors discovered during the period must also be incorporated.
Tax Expense
The tax expense must be bifurcated into current tax and deferred tax. The basis for computation, rates applicable, and the method for recognising deferred tax assets and liabilities must be explained in the notes. If any adjustments relate to earlier years, they must be shown separately.
Profit or Loss After Tax
This represents the net earnings of the company attributable to the shareholders. Companies must disclose earnings per share, both basic and diluted, calculated as per accounting standards. For Ind AS companies, the reconciliation of net profit as per the Statement of Profit and Loss with total comprehensive income is also required.
Other Comprehensive Income
For companies following Ind AS, items of other comprehensive income are disclosed separately after the net profit or loss for the period. These may include remeasurement of defined benefit plans, changes in fair value of equity instruments, effective portion of gains and losses on hedging instruments in cash flow hedges, and foreign currency translation differences. Each item must be disclosed net of taxes and must not be routed through the profit and loss section.
Total Comprehensive Income
Total comprehensive income is the sum of profit or loss and other comprehensive income for the period. It represents the total earnings or losses attributable to the equity shareholders and non-controlling interests, wherever applicable. This helps users understand both realised and unrealised gains and losses affecting shareholder equity.
Notes to Financial Statements and Disclosure of Accounting Policies
Schedule III mandates that financial statements be accompanied by detailed notes, including a summary of significant accounting policies and other explanatory information. These notes provide context, assumptions, and estimates used in the preparation of financial statements. Companies must clearly describe their accounting framework, significant judgments, and measurement bases used.
Related Party Disclosures
Companies must disclose transactions with related parties, including subsidiaries, joint ventures, key managerial personnel, and their relatives. Disclosures include the nature of the relationship, description of transactions, outstanding balances, and any commitments. These disclosures are essential to ensure transparency and assess conflict of interest or potential risks to independence.
Segment Reporting
If a company operates in multiple business or geographical segments, it must disclose segment-wise performance and financial position. This includes revenue, profit, assets, liabilities, and other material information for each segment. The basis of segmentation must be clearly defined, and inter-segment transactions must be explained.
Capital Commitments and Other Commitments
In addition to contingent liabilities, companies must also disclose commitments. Capital commitments refer to future capital expenditures that the company has contractually committed to, but which have not yet been recognised as liabilities in the books. These include agreements for the purchase or construction of fixed assets or investments that have not yet been delivered. Other commitments may include long-term contracts for supply or service arrangements, lease obligations, or financial guarantees not classified as contingent liabilities. The nature and amount of each such commitment must be clearly stated to provide a transparent picture of future obligations that could impact liquidity or cash flow.
Provisions and Contingent Assets
Provisions are recognised when the company has a present obligation as a result of a past event, there will probably of resources, and a reliable estimate can be made. These must be distinguished from contingent liabilities, which are possible obligations or present obligations that do not meet the recognition criteria. The nature of the obligation, expected timing, and uncertainties involved must be explained. Contingent assets are not recognised but are disclosed when the inflow of economic benefits is probable, to avoid misleading users about future profits.
Presentation of Consolidated Financial Statements
Where a company is required to or chooses to prepare consolidated financial statements, Schedule III requires additional disclosures. The consolidated financial statements must present the financial position and results of the group as a whole. The basis of consolidation, list of subsidiaries, joint ventures, and associates, their ownership interests, and changes in the group structure must be disclosed. Non-controlling interest must be shown separately in the consolidated balance sheet and profit and loss statement. Uniform accounting policies must be followed across all group entities to ensure consistency.
Changes in Equity
The Statement of Changes in Equity is a mandatory component for companies following Ind AS. It presents changes in equity during the period, including share capital, other equity components like securities premium, revaluation reserves, and retained earnings. Each movement,, such as the issue of shares, dividend payment, or changes due to revaluation or foreign exchange translation,, must be captured. Reconciliations must be provided to explain how the opening balance of each component has moved to the closing balance, providing transparency on equity structure changes.
Disclosure of Key Accounting Judgments and Estimates
The preparation of financial statements requires management to make judgments, estimates, and assumptions. Schedule III, along with accounting standards, requires disclosure of areas involving significant judgments and estimates that affect reported amounts. These include impairment assessments, valuation of financial instruments, provisions for litigation, useful lives of assets, and recoverability of deferred tax assets. Detailed disclosure helps users assess the reliability and subjectivity involved in financial reporting.
Fair Value Measurements
For Ind AS-compliant companies, fair value measurements are critical in the presentation of financial instruments, investment properties, and other assets and liabilities. Schedule III requires companies to disclose the fair value hierarchy, valuation techniques used, key assumptions, and whether valuations were performed by an independent valuer. Assets and liabilities measured at fair value must be disclosed as per levels defined in the standards: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs).
Disclosure on Financial Instruments
Companies must provide extensive disclosures about financial instruments, including their classification, measurement, risk exposure, and management strategies. Categories such as financial assets at amortised cost, financial assets at fair value through profit or loss, and financial liabilities at fair value must be clearly explained. The disclosures should also cover credit risk, liquidity risk, market risk, and how the entity manages these risks. Derivative instruments and hedging strategies, if any, must be fully disclosed with their impact on financial position.
Events After the Reporting Period
Events occurring after the reporting period but before the approval of financial statements must be disclosed. If the events provide additional evidence of conditions existing at the reporting date, adjustments must be made in the financial statements. If the events relate to conditions that arose after the reporting date, they must be disclosed without adjustment. Examples include declaration of dividends, significant changes in asset value, and major business combinations or disposals.
Disclosures Related to Corporate Social Responsibility
Companies meeting the criteria under the Companies Act for Corporate Social Responsibility must disclose the amount required to be spent, the amount spent, and the nature of CSR activities undertaken. If there is any unspent amount, it must be separately disclosed and the reasons provided. For amounts unspent on ongoing projects, specific disclosure of transfers to a separate account is required.
Additional Disclosures for Specific Companies
Certain types of companies are subject to additional disclosure requirements under Schedule III. For example, insurance companies, banks, and non-banking financial companies have special reporting needs. NBFCs following Ind AS must make disclosures relating to liquidity, capital adequacy, loan classification, and exposure norms. Manufacturing companies may need to disclose capacity utilisation, production details, and consumption of imported versus indigenous raw materials. Real estate companies must disclose inventory classification and project completion stages.
Comparative Financial Information
All line items in the financial statements must be presented with comparative figures for the previous reporting period. This helps users evaluate financial trends, operational performance, and changes in financial position. In case there is any reclassification of items from the previous year for consistency, it must be explained through notes.
Importance of True and Fair View
The overarching principle in preparing financial statements under Schedule III is that they must present a true and fair view of the financial position, financial performance, and cash flows. This principle overrides format rigidity, allowing companies to add additional line items, subheadings, and explanations wherever required for better clarity and representation. While adherence to the prescribed format is essential, judgment must be applied to ensure completeness and accuracy.
Conclusion
Schedule III plays a pivotal role in standardising financial reporting for Indian companies. By prescribing detailed formats and mandatory disclosures, it enhances the transparency, comparability, and reliability of financial statements. Companies must stay updated with amendments to Schedule III and related accounting standards to ensure full compliance. In practice, Schedule III does not work in isolation but must be read in conjunction with the applicable financial reporting framework, regulatory requirements, and auditor expectations.