The Companies Act, 2013 is the law that manages how companies work in India. One important part of this law is called Schedule 3. This section gives a fixed format for how companies should show their financial data. Financial data includes details about income, expenses, assets, and debts.
Schedule III helps companies prepare clear and similar financial statements. These statements are important for investors, government, and others to understand a company’s position. It applies to most companies except banks, insurance, and electricity companies.
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Overview of Schedule 3 of the Companies Act 2013
This section gives a background on why Schedule 3 was introduced and how it helps companies present financial data in a uniform way. Schedule III was brought into effect from 1st April 2014. It replaced the old Schedule VI under the Companies Act, 1956. The new schedule was needed because rules had to match global practices. It became a guide for how companies should present their accounts in a clean and simple way. It ensures that all companies show their financial reports using the same format. This makes it easier to compare different companies. It also helps in avoiding confusion due to different styles of reporting.
Structure of Schedule 3 of the Companies Act 2013
This section explains how Schedule 3 is organized into three divisions based on the type of accounting standards followed by companies. Schedule III is divided into three main parts. These are called divisions:
Division I: For companies that follow traditional Indian rules. These rules are called Accounting Standards or AS.
Division II: For companies that use modern standards. These are called Indian Accounting Standards or Ind AS. These are used mostly by big or listed companies.
Division III: For NBFCs. NBFC means Non-Banking Financial Companies. These companies do finance-related work but are not banks. They also follow Ind AS but need special formats.
Each division gives a format for:
Profit and Loss Statement
Notes to Accounts
Division I (For AS-based companies)
This division provides simple formats for companies using older Indian accounting standards. These companies follow the older set of Indian accounting rules. Division I gives a basic and easy format. It lists assets, liabilities, income, and expenses clearly.
The Balance Sheet in Division I includes:
Assets like buildings, machines, cash, and money owed to the company.
Liabilities like loans and money owed by the company.
The Profit and Loss Statement shows:
Revenue earned from sales or services.
Expenses like salaries, rent, and power bills.
Profit or loss after deducting expenses from revenue.
Division II (For Ind AS-based companies)
This division covers companies using Indian Accounting Standards, which follow international guidelines. This division applies to companies that use Ind AS. These are updated standards similar to global IFRS rules. Ind AS companies need to give more detailed reports. Division II asks for:
Statement of Changes in Equity: This is a new report. It shows changes in owner’s money.
More detailed Notes to Accounts.
More disclosures and data points.
The goal is to give a full picture of the company’s financial health. The layout is more structured and professional.
Division III (For NBFCs using Ind AS)
This division gives reporting formats for Non-Banking Financial Companies using Ind AS. This division is only for NBFCs. NBFCs give loans, buy stocks, or give financial advice. But they are not full banks. Their reporting needs are different. Division III helps NBFCs show:
Interest income and finance income.
Loans given and their details.
Borrowings and interest expense.
Investment details.
This helps in understanding the financial services part better.
Scope of Schedule 3 of the Companies Act 2013
This section tells which companies must follow Schedule III and which companies are excluded. Schedule III is used by most companies in India.
It applies to:
Private Companies
Public Companies
One Person Companies
Small Companies
It does NOT apply to:
Insurance companies
Banking companies
Electricity companies
Companies with special laws that provide a different format
These excluded companies have their own financial rules.
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Recent Amendments in Schedule 3 of the Companies Act 2013
The Ministry of Corporate Affairs (MCA) amended Schedule III of the Companies Act, 2013, effective from April 1, 2021. These amendments introduced significant changes across all three divisions—Division I (Indian GAAP), Division II (Ind AS), and Division III (NBFCs under Ind AS)—to enhance transparency and align financial reporting with evolving regulatory requirements, including CARO 2020.
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.
1. Mandatory rounding off of figures based on total income.
2. Disclosure of promoter shareholding with percentage changes during the year.
3. Aging schedules for trade receivables and payables introduced.
4. Reclassification of current maturities of long-term borrowings under short-term borrowings.
5. Mandatory disclosure of:
Benami property proceedings.
Undisclosed income revealed during tax assessments.
Cryptocurrency transactions and holdings.
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.
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Amendment in Division III
Specific guidelines for Non-Banking Financial Companies (NBFCs) that must follow Indian Accounting Standards (Ind AS) were introduced by the Division III amendment to Schedule III of the Companies Act, 2013. As required by regulations or specific situations, this division makes sure that NBFCs follow these standards when they put together their financial statements. It stresses more information sharing to make things clearer. For example, it includes detailed notes on financial statements about things that don't need to be recognized and instructions on how to round off financial numbers based on the NBFC's total income. The changes make sure that NBFCs share all important information that could affect the decisions of stakeholders. They also make sure that the most recent financial statements are consistent with the ones that came before, unless this is the first financial statement for the company after it was incorporated. The guidelines also give financial statements some flexibility in how they are presented, letting the NBFC change the order in which they are shown to fit their needs.
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.
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Schedule 3 of Companies Act 2013: FAQs
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.
