The Institute of Chartered Accountants of India (ICAI) has introduced a revised format for financial statements applicable to Non-Corporate Entities (NCEs). This comprehensive framework aims to standardise financial reporting practices across the diverse spectrum of businesses that operate outside the corporate structure. This guide offers you a clear overview of these changes, empowering you to ensure your financial statements are robust and compliant.
Why did ICAI issue a new format?
For years, the financial reporting guidelines for NCEs in India, including sole proprietorships, partnerships, Hindu Undivided Families (HUFs), trusts, and societies, lacked a uniform structure. This often led to inconsistencies, making it challenging for stakeholders to accurately assess an entity's financial health.
The ICAI's new Guidance Note, effective from the financial year commencing 1 April 2024, addresses this by providing a standardised, vertical format for your Balance Sheet, Statement of Profit & Loss, and Notes to Accounts. This move aligns Indian NCE reporting closer to global best practices, enhancing transparency and comparability.
Understanding your entity level: Tailored compliance for MSMEs
The ICAI recognises that not all NCEs operate at the same scale. To provide practical compliance, the Guidance Note categorises entities into four levels based on turnover and borrowings. Understanding your entity's classification helps determine the specific reporting requirements that apply to your business.
- Level I: Largest entities with substantial turnover or borrowings (entities with turnover above ₹50 crore or borrowings above ₹10 crore in the previous year).
- Level II: Large entities with moderate financial metrics (entities with turnover between ₹10 crore and ₹50 crore or borrowings between ₹2 crore and ₹10 crore in the previous year).
- Level III: Medium-sized entities (entities with turnover between ₹1 crore and ₹10 crore or borrowings between ₹50 lakh and ₹2 crore in the previous year).
- Level IV: Small entities with minimal turnover and borrowings (entities with turnover up to ₹1 crore or borrowings up to ₹50 lakh in the previous year).
Due to this tiered approach, while larger NCEs meet strict requirements, MSMEs are not unduly burdened, allowing them to focus on their core business operations.
Key changes in financial statements you need to embrace
The revised format introduces several significant changes designed to provide a clearer and comprehensive picture of your financial standing. These updates are aimed at enhancing the dependability and quality of financial information for all users.
- Uniform vertical structure: Both your Balance Sheet and Statement of Profit & Loss will now follow a vertical format, promoting consistency and easier readability. This standardised layout ensures that, irrespective of your entity type, your financials present information in a consistent manner.
- Current and non-current classification: A clear distinction between current and non-current assets and liabilities is now mandatory. With a 12-month operating cycle, this classification provides you with a rapid interpretation of the liquidity levels of your business and its long-term viability.
- Mandatory comparative figures: Your financial statements must now include figures for the immediately preceding financial year. This approach facilitates a highly practical year-over-year comparison by aligning financial attribution and performance.
- Enhanced disclosures: The new format requires increased disclosures, particularly for related-party transactions, contingent liabilities, and a detailed classification of revenue and expenses. These enhanced details promote greater transparency and improve communication with all stakeholders.
- Ageing schedule for receivables and payables: A crucial update for MSMEs, this requires you to categorise your receivables and payables into different time buckets. This will enhance working capital tracking and also ensure adherence to MSME payment regulations, all while ensuring smoother cash flow management.
- Comprehensive notes to accounts: These notes are now more central to your financial reporting. They want extensive tabular and narrative disclosures about your accounting policies, revenue recognition policies, depreciation policies, contingent liabilities, etc. and provide more granularity on your financial practices.
- Clearer owner's funds disclosure: The format mandates separate disclosure of capital contributions, drawings, and retained earnings, providing a clear understanding of fund movements and accountability within your entity.
Benefits of the new format for your MSME
While transitioning to the new format may require some effort, adopting the new ICAI format offers substantial benefits that can directly impact your business's growth and stability. These advantages can help you create a stronger financial foundation.
- Easier access to finance: Standardised and transparent financial statements streamline credit evaluations. When your financials are clear and consistent, lenders like TallyCapital's partners can assess your business's financial health more quickly and confidently, potentially leading to faster loan approvals and better terms.
- Improved credibility and reputation: Adhering to professional reporting standards boosts your company's image among all stakeholders, including investors, suppliers, and customers. You can open doors to new business opportunities and stronger partnerships through this enhanced credibility.
- Better internal decision-making: With clearer financial data, you can make better operational and strategic decisions for your business. You are also in a position to easily identify improvement areas and growth opportunities with these detailed breakdowns.
- Enhanced tax compliance: Accurate and well-structured financial statements minimise reporting errors, reducing the risk of disputes or penalties with tax authorities. This enables you to enjoy smoother tax filings and seamless compliance with the rules.
- Stronger internal controls: The demand for enhanced disclosures and organised data naturally encourages more robust internal financial oversight, leading to better management and reduced risk.
The ICAI's new guidance note for NCEs is a welcome step towards achieving quality and professionalism in financial reporting practices across the diverse spectrum of the Indian business ecosystem.
