Background

The Securities and Exchange Board of India (SEBI) on 30 November 2015, issued a circular (CIR/CFD/CMD/15/2015) which prescribed formats for listed companies publishing financial results as per the requirements of Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

SEBI,in its circular dated 5 July 2016 (CIR/CFD/FAC/62/2016) provided certain relaxations to listed entities that were transitioning to Indian Accounting Standards (Ind AS) from 1 April 2016. As part of this circular, SEBI requires listed entities to comply with the existing formats prescribed under the SEBI circular dated 30 November 2015, for reporting financial results until the period ending 31 December 2016. Thereafter, financial results are required to be provided as per the formats prescribed in Schedule III of the 2013 Act.

The format prescribed by SEBI permits ‘income from operations’ to be disclosed net of excise duty. However, Schedule III of the Companies Act, 2013 (2013 Act) notified on 6 April 2016, requires ‘revenue from operations’ to be disclosed inclusive of excise duty.

New development

As a result of the above, there is divergence in practice with some companies disclosing ‘revenue from operations’ excluding excise duty and others disclosing revenue inclusive of excise duty in their financial results for the quarter ended 30 June 2016.

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) issued a notification on behalf of SEBI, on 20 September 2016, which clarifies that companies should follow a uniform approach in their revenue disclosures. Accordingly, ‘income from operations’ may be disclosed inclusive of excise duty, instead of net of excise duty, as specified in the 2013 Act.

This clarification is based on the guidance in the SEBI circular
(CIR/CFD/FAC/62/2016) dated 5 July 2016, which stated that ‘in case of any technical difficulty in the interpretation of any specific item in the formats or implementation of this circular while publishing the financial results, the listed entities shall be guided by the relevant provisions of the Companies (Indian Accounting Standards) Rules, 2015 (Ind AS Rules)/Companies (Accounting Standards) Rules, 2006 (AS Rules) and Schedule III to the 2013 Act and may make suitable modifications, as applicable’.

The clarification is also consistent with the view proposed by the Ind AS
Transition Facilitation Group (ITFG) of the Institute of Chartered Accountants of India (ICAI) in its fourth bulletin. The ITFG, based on guidance in Ind AS 18, Revenue and Schedule III of the 2013 Act, considered excise duty to be a liability of the manufacturer, which forms part of the cost of production. Accordingly, revenue should be presented as a gross amount inclusive of excise duty, which should therefore be reflected as an expense.

Our comments

In their Ind AS financial results for the quarter ended 30 June 2016,
approximately 40 per cent of the companies that are part of the BSE 100 have presented revenue inclusive of excise duty, indicating significant divergence in practice. This clarification is now expected to bring uniformity and consistency in the presentation of revenue by listed companies that are
preparing their financial results for the quarter ended 30 September 2016.

The notifications issued by the BSE and NSE state that ‘income from operations’ may be disclosed inclusive of excise duty, which brings in some ambiguity and could be interpreted as being optional. However, SEBI’s intent is to ensure that companies follow a uniform approach. In addition, the notification requires listed companies to take note of the clarification provided and comply accordingly. This indicates that the notification is probably more prescriptive in nature and companies are required to present income from operations inclusive of excise duty.

In addition, further clarification may be required from SEBI to determine whether companies that have presented revenue net of excise duty in their first quarter results are required to revise their comparatives when presenting their second quarter financial results.

To access the text of the BSE notification, please click here.