A brief analysis of the Amendments in Schedule III of the Companies Act 2013

(i) Whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the company to or in any other person(s) or entity(es), including foreign entities (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;

Note: Auditors have to check the details in notes to account and take a representation from the director about such clause and check all the transaction of Company in respect of a loan, advance, investment & their respective documents.

(ii) Whether the management has represented, that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person(s) or entity(ies), including foreign entities (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and

Note: Auditors have to check the details in notes to account and take a representation from the director about such clause and check all the transaction of Company in respect of loan and advance received by the company & their respective documents.

(iii) Based on such audit procedures that the auditor has considered reasonable and appropriate in the circumstances, nothing has come to the notice that has caused them to believe that the representations under sub-clause (i) and (ii) contain any material misstatement.

(f) Whether the dividend declared or paid during the year by the company is in compliance with section 123 of the Companies Act, 2013.

(g) Whether the company has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.]

Ques:4 Whether it is mandatory for auditors to add above mentioned three points in auditor’s reports of all the Companies for FY. 2020-21?

Ques:5 Whether this amendment applicable to the Auditor’s Report of every company or exemptions are given to some classes of companies?

Amendment 3 : Amendment in Schedule III

Schedule III i.e. Financial Statement of Companies.

The Ministry of Corporate Affairs vide Notification dated 24 March 2021 has amended Schedule III to the Companies Act, 2013, which shall be effective from the 1st day of April 2021.

Schedule III divided into three parts:

• • Division I – Financial Statements for a company whose Financial Statements are required to comply with the Companies (Accounting Standards) Rules, 2006.
  • Division II – Financial Statements for a company whose financial statements are drawn up in compliance of the Companies (Indian Accounting Standards) Rules, 2015.

• Division III – Financial Statements for a Non-Banking Financial Company (NBFC) whose financial statements are drawn up in compliance with the Companies (Indian Accounting Standards) Rules, 2015

The notification incorporates various additional disclosure requirements while preparing the financial statements of an entity which are covered under the three divisions of Schedule III to the Companies Act, 2013.

Purpose of Amendment:

In recent years, there have been substantial changes in the reporting requirement by the auditors, but no such corresponding amendments were made in Schedule III for the preparation of the financial statements. Thus, to align the company’s financial statements in accordance with the auditor’s reporting requirements, the following amendments have been discussed in this write-up. majority of the amendments to Schedule III to the Companies Act, 2013 have been undertaken in response to the amendments covered in the newly issued Companies (Auditors and Report Order) 2020 and the Companies (Indian Accounting Standards) Amendment Rules, 2020.

Brief on amendments to Schedule III Division I, to the Act (for Companies whose financial statements are required to comply with the Accounting Standards):

1. General Instruction for preparation of Balance Sheet:

Rounding Off: It is the option to do a rounding off of figures till the financial year ended 31.03.2021. For the purpose of rounding off the figures appearing in the Financial Statements for the financial year ending 31.03.2022 the total income of the Company shall be considered as the basis.

Additional Disclosure in Notes to Balance Sheet:

1. Shareholding of Promoter: The note on Share Capital in the Financial Statements shall mention details of the Shareholding of the Promotes along with changes, if any, during the Financial Year. The format of such disclosure shall be as follows:

Note:

• Here management shall give details separately for each class of shares.
• percentage change shall be computed with respect to the number at the beginning of the year or if issued during the year for the first time then with respect to the date of issue.”

Ques:6 [4]What is the meaning of promoter under the Companies Act, 2013?

1. Trade Payable (Creditors) aging Schedule: Companies henceforth be required to provide an aging schedule for trade payables due to the periodicity of 1 year, 1-2-year, 2-3 years & more than 3 years. These include trade payables to MSMEs, disputed dues to MSMEs, and other dues and disputed dues. Similarly, disclosures shall also be made where no due date of payment is specified. Information for unbilled dues is also required to be disclosed separately.

Trade Payables aging schedule: (Amount in Rs.)

• Trade receivables (Debtors) aging Schedule: Companies will be required to disclose the aging schedule of their trade receivables i.e. including undisputed and disputed trade receivables considered good and doubtful with aging classified as less than 6 months, 6 months to 1 year, 1-2 years, 2-3 years and 3 years or more along with disclosures separate disclosure for information of unbilled dues. These undisputed and disputed trade receivables are further categorized into good and doubtful.

Trade Receivables Ageing schedule: (Amount in Rs.)

Title deeds of Immovable Property not held in name of the Company:  The Company shall provide the details of the immovable property (other than properties where the Company is the lessee and the lease agreements are duly executed in favor of the lessee) whose title deeds are not held in the name of the Company in the prescribed format.

If such immovable property is jointly held with others, details are required to be given to the extent of the Company’s share;

Disclosure on revaluation of Assets:  Where the Company has revalued its Property, Plant, and Equipment, the company shall disclose as to whether the revaluation is based on the valuation by a registered valuer as defined under rule 2 of the Companies (Registered Valuers and Valuation) Rules, 2017.

Disclosure on Loans/ Advance to Directors/ KMP/ Related parties:  disclosures shall be made where Loans or Advances in the nature of loans are granted to promoters, directors, KMPs, and the related parties (as defined under Companies Act, 2013,) either severally or jointly with any other person, that are:

(a) repayable on demand or

(b) without specifying any terms or period of repayment

• Details of Benami Property held: In case, any proceedings have been initiated or pending against the entity under the Benami Transactions (Prohibitions) Act, 1988, the corresponding disclosures shall be provided in the financial statements. The Company shall disclose the followings:
  1. Details of such property, including a year of acquisition,
  2. Amount thereof,
  3. Details of Beneficiaries,
  4. If the property is in the books, then reference to the item in the Balance Sheet,
  5. If the property is not in the books, then the fact shall be stated with reasons,
  6. Where there are proceedings against the company under this law as an abetter of the transaction or as the transferor then the details shall be provided,
  7. Nature of proceedings, the status of same and company’s view on same.

• Details of Borrowing: Where the Company has borrowings from banks or financial institutions on the basis of security of current assets, it shall disclose the following: –

1. whether quarterly returns or statements of current assets filed by the Company with banks or financial institutions are in agreement with the books of accounts.
2. if not, a summary of reconciliation and reasons for material discrepancies, if any to be adequately disclosed.

Wilful Defaulter:  Where a company is a declared wilful defaulter by any bank or financial institution or other lenders, the following details shall be given:

1. 1. Date of declaration as wilful defaulter,
   2. Details of defaults (amount and nature of defaults),

* “wilful defaulter” here means a person or an issuer who or which is categorized as a wilful defaulter by any bank or the financial institution (as defined under the Act) or consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India.

Relationship with Struck off Companies:  Where the company has any transactions with companies struck off under section 248 of the Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall disclose the following details: –

Registration of charges or satisfaction with Registrar of Companies:  Where any charges or satisfaction yet to be registered with Registrar of Companies beyond the statutory period, details and reasons thereof shall be disclosed.

Compliance with the number of layers of companies Where the company has not complied with the number of layers prescribed under clause (87) of section 2 of the Act read with Companies (Restriction on Number of Layers) Rules, 2017, the name and CIN of the companies beyond the specified layers and the relationship/extent of holding of the company in such downstream companies shall be disclosed.

Suggested Reads: 

• Companies Amendment Act 2020: Notified Sections
• Relaxations for Small Companies in Budget 2021
• Case Laws – Objection of the employees in case of the shifting of the registered office
• Conversion of a Public Company into a Private Limited in Seven Easy Steps
• Process of Restoration of the Name of the Company

Disclosure of Ratios

The amendment requires the companies covered under division I and II of Schedule III to disclose the following ratios:

• Current Ratio,
• Debt-Equity Ratio,
• Debt Service Coverage Ratio,
• Return on Equity Ratio,
• Inventory turnover ratio,
• Trade Receivables turnover ratio,
• Trade payables turnover ratio,
• Net capital turnover ratio,
• Net profit ratio,
• Return on Capital employed,
• Return on investment.

Note: The company shall explain the items included in the numerator and denominator for computing the above ratios and an explanation shall be provided for any change in the ratio by more than 25% as compared to the preceding year.

Details in respect of Utilization of Borrowed funds and share premium shall be provided in respect of:

1. Transactions where an entity has provided any advance, loan, or invested funds to any other person (s) or entity/ entities, including foreign entities.
2. Transactions where an entity has received any fund from any person (s) or entity/ entities, including foreign entity.
3.  

Compliance with approved Scheme(s) of Arrangements: Where any Scheme of Arrangements has been approved by the Competent Authority in terms of sections 230 to 237 of the Companies Act, 2013, the Company shall disclose that the effect of such Scheme of Arrangements has been accounted for in the books of account of the Company ‘in accordance with the Scheme’ and ‘in accordance with accounting standards’ and deviation in this regard shall be explained holding of the company in such downstream companies shall be disclosed.

Additional Disclosure in Notes to Profit & Loss Account:

• Undisclosed Income (Reconciliation of Income Tax and Companies Act): The Company shall give details of any transaction not recorded in the books of accounts that have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 unless there is immunity for disclosure under any scheme and also shall state whether the previously unrecorded income and related assets have been properly recorded in the books of account during the year.
• CSR Disclosure: Where the company covered under section 135 of the Companies Act, the following shall be disclosed with regard to CSR activities: –
  1. the amount required to be spent by the company during the year,
  2. amount of expenditure incurred,
  3. the shortfall at the end of the year,
  4. total of previous years shortfall,
  5. reason for the shortfall,
  6. nature of CSR activities,
  7. details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per relevant Accounting Standard,
  8. where a provision is made with respect to a liability incurred by entering into a contractual obligation, the movements in the provision during the year should be shown separately.

Details of Cryptocurrency or Virtual Currency:

1. Where the Company has traded or invested in Cryptocurrency or Virtual Currency during the financial year, the following shall be disclosed: –
   1. profit or loss on transactions involving Cryptocurrency or Virtual Currency
   2. amount of currency held as at the reporting date,
   3. deposits or advances from any person for the purpose of trading or investing in Crypto Currency/ virtual currency.

[1] http://www.mca.gov.in/Ministry/pdf/AuditAuditorsAmendmentRules_24032021.pdf

[2] http://www.mca.gov.in/Ministry/pdf/AccountsAmendmentRules_24032021.pdf

[3] http://www.mca.gov.in/Ministry/pdf/ScheduleIIIAmendmentNotification_24032021.pdf

[4] “promoter” means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;