The Companies Act of 2013 significantly changed the landscape of corporate governance and financial reporting in India. One of its key components, Schedule III, is critical for enhancing transparency and ensuring uniformity in the financial disclosures made by companies. Any company established under the Companies Act of 2013 must prepare its annual financial statements in accordance with Schedule III and Section 129 of the Act.
This requirement is essential as it ensures that a company's financial health is accurately and transparently recorded, allowing stakeholders to assess the financial integrity and performance of the business accurately.
This schedule not only mandates a standardized format for financial statements. (e.g. the Balance Sheet, the Statement of Profit and Loss, Cash Flow Statement etc.) but also promotes accountability by making these statements clear and comparable across different businesses.
Schedule III of the Companies Act aims to help businesses understand and implement the requirements effectively, thereby contributing to the overall integrity and reliability of financial reporting in India.
Are you interested in pursuing a career in Law? The Legal School in collaboration with IndusLaw has created unique programs for a Certification in Mergers & Acquisitions, Private Equity and Venture Capital Laws & Certification in Mergers & Acquisitions for fresh law graduates as well as professionals looking to advance in their careers! Enquire now for details!
Purpose and Scope of Schedule III:
Schedule III dictates the format and specific disclosures required in the financial statements, ensuring adherence to regulatory standards and comparability across entities.
It covers balance sheets, profit and loss accounts, and other comprehensive income statements, structuring how financial information is to be presented.
Check out the Latest Amendments in Companies Act 2013
Section 129 of the Companies Act 2013
Section 129 of the Companies Act, 2013 mandates that the financial statements of a company must be prepared in accordance with the provisions under Schedule III of the Act. These statements must give a true and fair view of the company's state of affairs, comply with accounting standards, and be consistent from one year to the next. Additionally, companies must consolidate their financial statements if they have subsidiaries, associates, or joint ventures, reflecting the overall financial health and performance of the corporate group.
Get Insights on Kotak Mahindra Bank’s Acquisition of Sonata Finance Case Study
Overview of Schedule III of the Companies Act 2013
Schedule III of the Companies Act, 2013, is divided into three distinct divisions to address different categories of companies:
Division I: Applies to most companies that follow traditional Indian Generally Accepted Accounting Principles (Indian GAAP). It outlines the general format for the preparation and presentation of financial statements for these entities.
Division II: Tailored for companies that are required to comply with Indian Accounting Standards (Ind AS). It specifies the format and additional disclosure requirements for the financial statements of these companies, ensuring alignment with global reporting standards.
Division III: Introduced specifically for non-banking Financial Companies (NBFCs) that adhere to Ind AS. This division provides detailed guidelines on the preparation and presentation of financial statements, reflecting the unique operational and regulatory requirements of NBFCs.
Get to know How Net Worth of a Company is Calculated
Recent Amendments in Schedule III of the Companies Act 2013
Recent amendments specifies the financial statement formats for companies following Accounting Standards (AS) and Indian Accounting Standards (Ind AS) across two divisions. Additionally, a new Division III has been introduced, targeting Non-Banking Financial Companies (NBFCs) under Ind AS, requiring them to provide extensive disclosures about trade receivables, loan receivables, and trade payables, which also align with the requirements of the Micro, Small and Medium Enterprises Development Act, 2006.
Amendment in Division I
The adjustments to Division I of Schedule III involve minor updates, mainly in the terminology used within the Balance Sheet for companies adhering to Accounting Standards. For example, "Fixed assets" under the category of "Non-current assets" has been updated to "Property, Plant, and Equipment."
Amendment in Division II
Amendments for Ind AS-compliant companies under Division II have introduced several updates to enhance financial statement transparency:
Trade Payables: Now explicitly disclosed under "Equity and Liabilities" are amounts owed to micro and small enterprises, as well as to other enterprises, displayed directly on the balance sheet.
Equity Descriptions: Detailed notes are now required for each reserve listed under "Equity" on the balance sheet, explaining the purpose of reserves and any changes over the fiscal year.
Trade and Loan Receivables Classification:
Trade and loan receivables are now further categorized based on security (secured or unsecured) and credit risk (good, significant increase in credit risk, or credit impaired).
Previous classifications were simply secured (considered good), unsecured (considered good), and doubtful.
MSME Disclosures: Additional details required include unpaid principal and interest at year-end, interest paid in compliance with the MSME Act, along with any accrued interest or penalties due to delayed payments. These details aim to provide clearer insight into dealings with micro, small, and medium enterprises.
Also, Learn How Section 127 of Companies Act 2013 deals with the Penalty for failure to Distribute Dividends?
Amendment in Division III
The Division III amendment to Schedule III under the Companies Act, 2013, introduced specific guidelines for Non-Banking Financial Companies (NBFCs) that must adhere to Indian Accounting Standards (Ind AS). This division mandates that NBFCs prepare their financial statements in accordance with these standards, adapting as needed based on regulatory requirements or specific circumstances.
It emphasizes enhanced disclosure for better transparency, including detailed notes on financial statements about items that do not qualify for recognition and instructions on rounding off financial figures based on the total income of the NBFC.
The amendments ensure that NBFCs disclose all material information that could impact stakeholders' decisions, maintaining consistency with previous financial statements for comparison, unless it's the company's first financial statement post-incorporation.
The guidelines also allow for flexibility in the presentation of financial statements, permitting adjustments to the presentation order to suit the operations of the NBFC.
Get to Know about Section 136 of the Companies Act, 2013
In summary
The majority of the changes in Schedule 3 were to match the two reporting frameworks and improve transparency between the company and the users of financial statements. It further enabled the reduction of the risk of fraud and other unethical behavior on the part of the companies.
Schedule III of the Companies Act, 2013, is instrumental in standardizing financial reporting in India, enhancing the quality and comparability of financial statements across companies. As businesses continue to evolve, so too will the interpretations and applications of these regulations, ensuring ongoing improvements in corporate governance and financial transparency.
Also Know Section 142 of the Companies Act, 2013
FAQs on Section 129 of the Companies Act 2013
Q1. What is the importance of Schedule III in the Companies Act, 2013?
It standardizes the financial reporting format, enhancing transparency and comparability across companies.
Q2. How do recent amendments affect Schedule III reporting?
Amendments aim to improve disclosure quality, focusing on critical areas like financial instruments and borrowings.
Q3. What are the penalties for non-compliance with Schedule III?
Non-compliance can lead to penalties, including fines and legal action against the defaulting company and its officers.
Q4. How does Schedule III align with international financial reporting standards?
While closely aligned with IFRS in terms of disclosure quality, Schedule III contains specific requirements tailored to the Indian context.
Q5. Where can companies find detailed guidelines on implementing Schedule III provisions?
The Ministry of Corporate Affairs website and other professional advisory services provide detailed guidelines and updates on implementing Schedule III.
