Disclosures under Schedule VI to the

Companies Act, 1956

1.A public limited company is an advertising agency. Its services can be essentially classified into two categories:

(a) Advertising through various media such as press, radio, T.V., cinema, hoardings, etc.

(b) Preparation of the relevant advertisement material.

2.The payments to the various advertising media for use of space or time are fully recovered from the agency’s clients. These recoveries are separately invoiced to the clients by the agency but in most cases, the supporting bill of the advertising media organization is not provided to the client. In addition, invoicing is also done for preparation of the advertising material. In percentage terms, the recovery of advertising media costs constitutes about 60% of total billing with the remaining 40% being for charges of preparing the advertising material.

3.The company presently shows the entire amount billed as income in the profit and loss account captioned “Advertising Services”. No further details are provided. Similarly, an amount comprising payments made to media plus expenditure for preparing advertising material are disclosed under the caption “Cost of Services”. Again no further details are provided.

4.The querist has sought the opinion of Expert Advisory Committee on the following issues:

(a) Whether the method adopted by the company is adequate to comply with the provisions of Schedule VI to theCompanies Act, 1956.

(b) If the company’s disclosure is not adequate, the manner in which such disclosures are to be made should be suggested.

Opinion January 23, 1990

1.The Committee notes paras 2.2 and 8.3 of the ‘Statement on the Amendments to Schedule VI to the Companies Act, 1956’, issued by the Institute of Chartered Accountants of India, which states, inter alia:

“2.2 The quantities and amounts in respect of the turnover of each class of goods dealt with by the company are to be shown separately in the Profit and Loss Account. In the case of service companies, the gross income from different types of services is to be similarly disclosed.

8.3 The aforesaid provision states that any item of expenditure which exceeds 1% of the total revenue or Rs. 5000/- which ever is higher, is not to be combined “with any other item to be shown under miscellaneous expenses”. It would be too literal an interpretation of this requirement to suggest that it is permissible to combine such expenditure with any caption other than “Miscellaneous Expenses”. Logically, it would have been more appropriate if the Notification had merely countermanded the combination of such expenditure with any other item in the Profit and Loss Account without specifying “Miscellaneous Expenses”. However, one should place a logical interpretation on the requirement. Also, the requirement is in two parts. There is a negative prohibition against combining any such expenditure with “Miscellaneous Expenses” and in addition, there is also the positive requirement to disclose such expenditure separately. Consequently, it can not be suggested that separate disclosure is not required if such items of expenditure is merged with a caption other than “Miscellaneous Expenses”.”

2.The Committee also notes para 2.3 of the ‘Statement on Auditing Practices’, issued by the Research Committee of the Institute of Chartered Accountants of India, which states, inter alia:

“Materiality

2.3 It will be observed that at various places in Part II of Schedule VI reference is made to materiality, e.g., paragraph 3(xv). Materiality is also a matter of importance in relation to items in the balance sheet. Questions of materiality arise inter alia under the following circumstances: -

………..

(d) Whether any items of income or expenditure or assets or liabilities is of such an amount that apart from statutory requirements it is necessary to disclose it separately.”

3.Based on the above, the Committee is of the view that since the activities of the company can be classified into two categories namely, advertising through media and preparation of relevant advertisement material, for which separate invoicing is done, the company should disclose the gross income from both the activities separately in the profit and loss account.

4.On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist in para 4 of the query:

(a) The method adopted by the company is not adequate to comply with the provisions of Schedule VI to the Companies Act, 1956.

(b) The gross income from both the activities, i.e., advertisement through media and preparation of advertisement material, should be disclosed separately in the profit and loss account. Payments made to media should also be disclosed separately in the profit and loss account. Any item of expenditure included under the caption “Cost of Services” should be shown separately if

(i) either the expenditure is in excess of 1% of the total revenue or Rs. 5000/-, whichever is higher; or

(ii) any provision of Part II of Schedule VI to theCompanies Act, 1956 requires separate disclosure in respect of such item of expenditure.

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