Mandatory requirement for disclosure of accounting ratios in the Financial Statements

In order to bring greater transparency and to improve the quality of reporting in the financial statements, an amendment to Schedule III to the Companies Act, 2013 was introduced by the Ministry of Corporate Affairs (MCA) vide notification dated 24.03.2021. These amendments were brought to align the reporting framework in accordance with the reporting requirement of CARO 2020. Wherein, several new disclosures grouped under “Additional Regulatory Information” are also to be provided in the Financial Statements.

Disclosure of the following 11 key accounting ratios is one among such additional regulatory information that is mandatory to be provided in the Financial Statements:

1. Current Ratio
2. Debt-equity ratio
3. Debt service coverage ratio
4. Return on equity ratio
5. Inventory turnover ratio
6. Trade receivables turnover ratio
7. Trade payables turnover ratio
8. Net capital turnover ratio
9. Net profit ratio
10. Return on capital employed
11. Return on investment

An explanation shall be provided for all the items included in the numerator and denominator for computing the above ratios. Also, where the change in such ratios is more than 25% (whether positive or negative) in comparison to the preceding year’s ratio, a commentary explaining such change shall be provided.

The same may be provided in the manner below:

Further, if there is any change in the current period in relation to any item in the numerator or denominator of any ratio, then the same change shall be made for the comparative period as well and a footnote explaining the change in the item shall be added along with the reason thereof.

For Example, during the current Financial Year(FY) old appearing balance of trade receivables amounting to Rs. 80 Lakhs were found bad and accordingly the same was written off from the books of account in the current FY. The current ratio of the company was also computed by taking the reduced amount of trade receivables i.e. after write off of Rs. 80 Lakhs. But, in the previous FY, such an amount (Rs. 80 Lakhs) was also considered for computing the current ratio.

Hence, as per the requirement of Schedule III, such reduction shall also be done in the respective figures of the comparative period (i.e. previous financial year) for fair analysis. It should also be noted that the ratios presented in any other place in the annual report should be consistent with the ratios mentioned in the financial statement.

The above amendment shall be applicable to all the companies preparing Financial Statements for the financial year 2021-22 onwards.

Sahil Goyal, Audit Associate, SW India