Amended Schedule III to the Companies Act, 2013- mandatory but very flexible manner of rounding off allowed is not proper. More slabs and uniform rounding off is desirable.

[DEV KUMAR KOTHARI]

Amended  Schedule III to the Companies Act, 2013- mandatory but very flexible manner of rounding off allowed is not proper. More slabs and uniform rounding off is desirable.

Earlier article on related matter:

Amendment in Schedule III to the Companies Act – what should be effective date- there is no harm in becoming more transparent voluntarily and as soon as possible.  By: - DEV KUMAR KOTHARI        Dated: 16-09-2021

As appears from title of the earlier article, author had discussed issue relating to effective date of amended Schedule III to the Companies Act, 2013 relating to  the Financial Statements of companies. Amendments, so far relating to more disclosures can be opted and applied as soon as possible without waiting for end of financial year beginning on or after 1^st April, 2021. Author had suggested to opt for amended disclosures even for FY2020-21 for which annual accounts are approved by Board of Directors of company on or after 1^st April, 2021.

Scope of this write-up:

Scope of this article is limited to issue of rounding off of figures. This is very important from the point of view of readers of financial statements.

A rounded off figure means that each figure need to be read  carefully and interpreted to find out full value. Therefore, rounding off must be in a manner which provide easy to understand figures. This depends on majority of various entries appearing in statements and range of figures.

For a small company having values in lakhs any rounding off may not be desirable. In fact I have observed many companies using full numbers instead of rounding off. Full numbers in such cases are easy to understand because they do not require more careful reading and interpretation.

Rounding off and inter firm comparison:

Interfirm comparison is important between companies having similar amount of volume of business, similar nature and similar past period of operations.  A fifty year old company cannot be compared with a new company.

However, so far amounts are concerned, companies having large disparity cannot be compared on basis of turnover if the disparity in amount is many fold.

For interfirm comparison figures rounded off in similar manner will be easy to compare, otherwise one will be required to convert figures in similar manner of rounding off to easily carry out inter firm comparisons.

Therefore, rounding off in similar manner is desirable.   

For companies having large voluminous figures, rounding off becomes important for reading and interpretation and use of data.

For example at BSE we find data of summary of results of companies which  are given in crores and on applying option can be read into millions. For example see data for Reliance Industries Ltd at link

https://www.bseindia.com/stock-share-price/reliance-industries-ltd/reliance/500325/financials-results/

1. Amounts in Crores:

(in Cr.)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	90,570.00	85,977.00	67,400.00	61,246.00	50,446.00	2,65,069.00
Other Income	3,588.00	2,797.00	3,616.00	4,164.00	4,211.00	14,818.00
Total Income	94,158.00	88,774.00	71,016.00	65,410.00	54,657.00	2,79,887.00
Expenditure	-81,461.00	-78,785.00	-61,966.00	-58,418.00	-43,678.00	-2,43,476.00
Interest	-2,351.00	-3,001.00	-3,140.00	-4,819.00	-4,780.00	-16,211.00
PBDT	12,697.00	9,989.00	9,050.00	6,992.00	10,979.00	36,411.00
Depreciation	-2,509.00	-2,582.00	-2,209.00	-2,233.00	-2,174.00	-9,199.00
PBT	10,188.00	7,407.00	6,841.00	4,759.00	8,805.00	27,212.00
Tax	-1,593.00	210.00	1,787.00	1,787.00	948.00	4,732.00
Net Profit	8,595.00	7,617.00	8,628.00	6,546.00	9,753.00	31,944.00
Equity	6,550.00	6,445.00	6,445.00	6,445.00	6,445.00	6,445.00

https://www.bseindia.com/stock-share-price/reliance-industries-ltd/reliance/500325/financials-results/

B Amounts in  Millions:

(in Million)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	9,05,700.00	8,59,770.00	6,74,000.00	6,12,460.00	5,04,460.00	26,50,690.00
Other Income	35,880.00	27,970.00	36,160.00	41,640.00	42,110.00	1,48,180.00
Total Income	9,41,580.00	8,87,740.00	7,10,160.00	6,54,100.00	5,46,570.00	27,98,870.00
Expenditure	-8,14,610.00	-7,87,850.00	-6,19,660.00	-5,84,180.00	-4,36,780.00	-24,34,760.00
Interest	-23,510.00	-30,010.00	-31,400.00	-48,190.00	-47,800.00	-1,62,110.00
PBDT	1,26,970.00	99,890.00	90,500.00	69,920.00	1,09,790.00	3,64,110.00
Depreciation	-25,090.00	-25,820.00	-22,090.00	-22,330.00	-21,740.00	-91,990.00
PBT	1,01,880.00	74,070.00	68,410.00	47,590.00	88,050.00	2,72,120.00
Tax	-15,930.00	2,100.00	17,870.00	17,870.00	9,480.00	47,320.00
Net Profit	85,950.00	76,170.00	86,280.00	65,460.00	97,530.00	3,19,440.00
Equity	65,500.00	64,450.00	64,450.00	64,450.00	64,450.00	64,450.00

 

In the above case of Reliance Industries Ltd we find that it is easy to understand figures in crores because while reading millions more mathematical aptitude and skill is required. Suppose if RIL choose to round off figures in lakhs, it will be more difficult to read and understand.

Medium size  companies:

https://www.bseindia.com/stock-share-price/jay-shree-tea--industries-ltd/jayshreetea/509715/financials-results/

Jayshree tea in crores:

(in Cr.)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	85.73	96.29	166.24	194.82	79.39	536.74
Other Income	6.17	10.24	5.42	6.87	6.96	29.49
Total Income	91.90	106.53	171.66	201.69	86.35	566.23
Expenditure	-85.29	-137.72	-152.86	-120.77	-80.77	-492.12
Interest	-5.30	-6.17	-6.93	-8.30	-9.28	-30.68
PBDT	6.61	-31.19	18.80	80.92	5.58	74.11
Depreciation	-3.43	-3.49	-4.03	-4.25	-4.16	-15.93
PBT	3.18	-34.68	14.77	76.67	1.42	58.18
Tax	--	-0.47	--	--	--	-0.47
Net Profit	3.18	-35.15	14.77	76.67	1.42	57.71
Equity	14.44	14.44	14.44	14.44	14.44	14.44

Jayshree tea in  millions:

(in Million)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	857.30	962.90	1,662.40	1,948.20	793.90	5,367.40
Other Income	61.70	102.40	54.20	68.70	69.60	294.90
Total Income	919.00	1,065.30	1,716.60	2,016.90	863.50	5,662.30
Expenditure	-852.90	-1,377.20	-1,528.60	-1,207.70	-807.70	-4,921.20
Interest	-53.00	-61.70	-69.30	-83.00	-92.80	-306.80
PBDT	66.10	-311.90	188.00	809.20	55.80	741.10
Depreciation	-34.30	-34.90	-40.30	-42.50	-41.60	-159.30
PBT	31.80	-346.80	147.70	766.70	14.20	581.80
Tax	--	-4.70	--	--	--	-4.70
Net Profit	31.80	-351.50	147.70	766.70	14.20	577.10
Equity	144.40	144.40	144.40	144.40	144.40	144.40

In case of Jayshree tea also we find that amounts in crores is easy to understand than in millions. If it be rounded off to lakhs, it will be more difficult to interpret data.

Small companies:

https://www.bseindia.com/stock-share-price/ledo-tea-coltd/ledotea/508306/

IN case of Ledo Tea Co. Ltd in crores:

(in Cr.)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	1.30	0.78	4.37	6.12	1.08	12.34
Other Income	0.01	0.14	0.02	0.01	0.01	0.17
Total Income	1.31	0.92	4.39	6.13	1.09	12.52
Expenditure	-2.33	-2.71	-4.38	-4.27	-0.92	-12.28
Interest	-0.29	-0.26	-0.22	-0.25	-0.28	-1.01
PBDT	-1.02	-1.80	0.00	1.86	0.17	0.24
Depreciation	-0.07	-0.06	-0.07	-0.07	-0.07	-0.27
PBT	-1.09	-1.85	-0.07	1.79	0.10	-0.03
Tax	--	0.24	--	--	--	0.24
Net Profit	-1.09	-1.61	-0.07	1.79	0.10	0.21
Equity	0.86	0.86	0.86	0.86	0.86	0.86

 
 

(in Million)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	13.03	7.77	43.67	61.21	10.78	123.43
Other Income	0.07	1.41	0.19	0.07	0.08	1.74
Total Income	13.10	9.18	43.86	61.29	10.86	125.18
Expenditure	-23.32	-27.13	-43.84	-42.67	-9.15	-122.78
Interest	-2.92	-2.58	-2.24	-2.50	-2.77	-10.08
PBDT	-10.22	-17.95	0.02	18.61	1.71	2.40
Depreciation	-0.68	-0.55	-0.72	-0.72	-0.72	-2.72
PBT	-10.90	-18.50	-0.70	17.89	0.99	-0.32
Tax	--	2.38	--	--	--	2.38
Net Profit	-10.90	-16.11	-0.70	17.89	0.99	2.06
Equity	8.64	8.64	8.64	8.64	8.64	8.64

In this case also we find that figures in crores is easy to understand by an Indian reader.

Companies having nominal turnover example GV Films Ltd

https://www.bseindia.com/stock-share-price/ledo-tea-coltd/ledotea/508306/financials-results/

(in Cr.)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	--	--	--	--	0.04	--
Other Income	0.07	0.02	0.04	0.16	0.00	0.22
Total Income	0.07	0.02	0.04	0.16	0.04	0.22
Expenditure	-0.47	-0.31	-0.41	-0.30	-0.30	-1.24
Interest	-0.13	-0.12	-0.12	-0.13	-0.18	-0.50
PBDT	-0.40	-0.28	-0.37	-0.14	-0.26	-1.02
Depreciation	-0.02	-0.02	-0.02	-0.02	-0.05	-0.07
PBT	-0.42	-0.30	-0.39	-0.16	-0.31	-1.09
Tax	--	--	--	--	--	--
Net Profit	-0.42	-0.30	-0.39	-0.16	-0.31	-1.09
Equity	91.46	91.46	91.46	91.46	91.46	91.46

 

(in Million)	Jun-21	Mar-21	Dec-20	Sep-20	Jun-20	FY 20-21
Income Statement
Revenue	--	--	--	--	0.40	--
Other Income	0.66	0.23	0.36	1.59	0.02	2.19
Total Income	0.66	0.23	0.36	1.59	0.42	2.19
Expenditure	-4.66	-3.07	-4.10	-3.00	-3.03	-12.41
Interest	-1.25	-1.21	-1.23	-1.25	-1.79	-4.96
PBDT	-4.01	-2.83	-3.74	-1.41	-2.61	-10.22
Depreciation	-0.15	-0.17	-0.15	-0.19	-0.45	-0.71
PBT	-4.16	-3.00	-3.89	-1.60	-3.06	-10.93
Tax	--	--	--	--	--	--
Net Profit	-4.16	-3.00	-3.89	-1.60	-3.06	-10.93
Equity	914.63	914.63	914.63	914.63	914.63	914.63

In this case figures in lakhs would be more appropriate.

From above examples of summarised results and on review of summarised results of  many other listed companies  we find that  desirable rounding off is dependent on range of figures.  In case of major part of unlisted companies amounts can be easy to read if full amounts are given.

The above example are of summarised results, however, amended provision are applicable to annual  financial statements which are in detail. In those statements many amounts are very small and many very large. Therefore, rounding off within limited formats will make presentation and reading both difficult.

The amended provisions shall apply to all companies – listed or not listed, public and private companies and from tiny to gigantic companies. Therefore, more slabs are desirable and in case of small companies full figures must be allowed.

 The amended provision regarding rounding off reads as follows with highlights added by author:

     4. (i) Depending upon the [Total Income] of the company, the figures appearing in the Financial Statements [shall] be rounded off as given below:-

[Total Income]	Rounding off
(a) less than one hundred crore rupees	To the nearest hundreds, thousands, lakhs or millions, or decimals thereof.
(b) one hundred crore rupees or more	To the nearest lakhs, millions or crores, or decimals thereof.

          (ii) Once a unit of measurement is used, it [should] be used uniformly in the Financial Statements.

We find that the expression “turnover” has been substituted with new expression “total income”

And rounding off has been made mandatory by use of word “shall’ in place of “may”, therefore discretion of rounding off or not and manner of rounding off has been changed to statutory and compulsory requirement.

Slabs or limits of amount provided is not proper:

Only two slabs have been provided that is total turnover is

1. less than one hundred crore rupees
2. one hundred crore rupees or more

These slabs are not proper because large number of companies are not having even total income of Rs. One crore ( 100 lakh). So putting first slab to cover companies having turnover of less than one hundred crore rupees is not proper.  There must be many slabs in this category for example:

Small companies having total income up to ₹ 50 crore should be allowed to give full amount or round off in crores or lakhs for easy understanding permitting grounding off in thousands and hundreds will make work of presentation and reading both difficult.

 Author recall recently  read  105^th  annual report of  the India Jute and Industries Ltd. This is a very old company so many figures are small like of share capital, whereas amount of assets and turnover are large amounts. Turnover was less than 100 crore so company had option to round off even in hundreds.

The company has rounded off amounts to thousands ((Amount in '000)  so author found it  difficult to read and interpret various amounts.

In this case rounding off in crores could be better option.  However, as per provisions company could round off figures even in hundreds. That will make it more difficult.

Therefore, more slabs with limited options of rounding off is desirable. For example:

Companies having Total income  up to ₹ 25 crore can be permitted to give full figures or in Crores.  

Companies having Total income more than 25 crore and above  can be given option  to  round off in  crores.    

Rounding of in hundreds and thousands is not at all suitable.

Figure in crores is easily understood all over world, therefore, in case of Indian companies rounding off in millions can be avoided.

Rounding off in millions can be an optional and additional or alternate presentation in case of companies having foreign readers of its financial statements.

In nut shell either full amounts should be given or rounding off in crores should be preferred.

Off course in many of cases of rounding off with  decimals will be required because range of small and large amounts is wide spread in any financial statement. And many figures, although very small need to be given.

Discussions to this article

[CAGOPALJI AGRAWAL]

Dear Kothari Ji

I really appreciate the article and the issues raised need to be escalated at the appropriate level.