Other expenses under Schedule III: the 1% rule and payments to the auditor

In most small-company accounts, "Other expenses" is the largest note in the Statement of Profit and Loss and the one most likely to be thrown together at the end. The ledgers that did not fit anywhere else go into it, and a large "Miscellaneous expenses" figure takes up the rest. For other expenses, Schedule III (often searched as Schedule 3) actually lays down three rules: eight items that must always be shown separately, a 1% of revenue threshold for every other item, and a six-way split of payments to the auditor. This guide covers each rule against the text of Division I, with worked threshold calculations, a format table for the note and the GST question on audit fees. It applies to companies following the Accounting Standards (Division I). Ind AS companies use Division II. For the whole format, see our Schedule III guide.

Other expenses under Schedule III: where the rules are

The face of the Statement of Profit and Loss (Part II of Division I) has a single expense line, "Other expenses". The detail comes from paragraph 5 of the General Instructions for the Preparation of the Statement of Profit and Loss, which requires additional information by way of notes:

ICAI's Guidance Note on Division I (Revised January 2022) deals with this note in paragraph 9.5.7. It says all other expenses not classified under other heads are classified here, that any item above the 1% or ₹1,00,000 threshold is disclosed separately, and that the paragraph 5(vi) items are also classified under other expenses.

The eight items always shown separately

Paragraph 5(vi) lists expenditure that must be disclosed item by item, whatever the amount:

1. Consumption of stores and spare parts
2. Power and fuel
3. Rent
4. Repairs to buildings
5. Repairs to machinery
6. Insurance
7. Rates and taxes, excluding taxes on income
8. Miscellaneous expenses

Three points come up in almost every file:

• Repairs are two lines, not one. Repairs to buildings and repairs to machinery are listed separately. Repairs to vehicles, computers or other assets are neither. If they are large enough they get their own line under the 1% rule, and if not they go into miscellaneous. A single "Repairs and maintenance" line does not meet the requirement.
• Rates and taxes exclude income tax. Current and deferred tax are on the face as tax expense. The Guidance Note adds that interest on a shortfall in advance income tax is a finance cost (interest expense, disclosed separately) and is not part of current tax. Tax penalties that are compensatory in nature are treated as interest, and other tax penalties are classified under other expenses (paras 9.8.1.3 and 9.8.1.4). Municipal taxes, stamp duty, ROC fees, professional tax on the company and non-creditable GST belong in rates and taxes.
• The list has no materiality exemption. The 1% rule does not apply to these eight items. Power and fuel of ₹40,000 is still shown as power and fuel. In practice, a listed item that is nil in both years is usually left out rather than shown as a row of dashes.

The 1% of revenue rule, with worked examples

The exact words of paragraph 5(i)(c) are: "Any item of income or expenditure which exceeds one per cent. of the revenue from operations or Rs.1,00,000, whichever is higher". Four things follow from the wording:

• The base is revenue from operations, not total income and not turnover including other income. Use the revenue from operations on the face of the statement, which is net of excise duty where applicable. Our guide to revenue from operations vs other income covers what belongs in that figure.
• Whichever is higher. The threshold is never below ₹1,00,000. Up to ₹1 crore of revenue the threshold is ₹1,00,000, and above that it is 1% of revenue.
• "Exceeds" means strictly more than the threshold.
• Income as well as expenditure. The same test applies to items in other income.

The test applies to each item, so apply it to the ledgers that make up the miscellaneous figure as well as to that figure. A "Miscellaneous expenses" line of ₹5.90 lakh is acceptable at a ₹6.40 lakh threshold only if no single item inside it is above ₹6.40 lakh. In practice, run the test on this year's trial balance before drafting. Show any line that crosses the threshold in either year for both years, so the comparatives stay complete. The 1% rule is a disclosure threshold set by the Schedule. It is not the audit materiality under SA 320 materiality, and the two should not be mixed up in the file.

Format of the other expenses note, with a worked example

Take a manufacturing company with revenue from operations of ₹640.00 lakh this year (₹560.00 lakh last year), so the thresholds are ₹6.40 lakh and ₹5.60 lakh. The ledgers that are not one of the eight listed items are tested first:

The note then reads:

The foreign exchange line is there because of paragraph 5(i)(i). The Guidance Note (para 10.2) says a net exchange loss is classified under other expenses and the amount included is disclosed separately, except for exchange differences treated as borrowing costs under AS 16. The total of ₹88.70 lakh is the figure on the face against "Other expenses", and the note reference on the face should point to Note 24. The figures are rounded to the unit chosen under the Schedule III general instructions on rounding off, and every line must add to that total.

Payment to auditor disclosure under Schedule III

Paragraph 5(i)(j) requires payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d) for management services, (e) for other services and (f) for reimbursement of expenses. The Guidance Note (para 10.3) says the payments covered are payments made to the auditor's firm, and the remuneration is disclosed under each of these sub-heads. Continuing the example:

• As auditor is the fee fixed under section 142 for the statutory audit. Section 142(2) says the auditor's remuneration includes expenses incurred in connection with the audit but not remuneration for other services rendered at the company's request. Those other services go in the other heads.
• Taxation matters is where fees for tax audit and tax work by the same firm are commonly shown. Schedule III does not define the heads, so the firm's practice should be the same every year.
• Management services is in practice usually nil. Section 144 prohibits the company's auditor from rendering management services, directly or indirectly, to the company, its holding company or its subsidiary. The same section also prohibits accounting and book keeping, internal audit and the other listed services. A figure in this line, or bookkeeping fees inside "other services", raises a question about compliance with section 144 that goes beyond disclosure.
• Reimbursement of expenses covers the out-of-pocket expenses billed by the firm.

Disclose on an accrual basis: the audit fee provided for the year is shown for the year, even if it is paid after the year end.

GST on the auditor's fees: include it or not?

Neither Schedule III nor the Division I Guidance Note says whether GST should be included in the payments to the auditor figure. Paragraph 10.3 of the Guidance Note does not mention it. The sensible approach is to disclose what has actually been charged to profit and loss:

• Input tax credit taken. Where the company is registered and takes the credit, the GST is recoverable and is not an expense, so the auditor's remuneration is shown without GST.
• Input tax credit not available or not taken, for example because the company is unregistered or makes only exempt supplies, or because the credit is reversed. Here the GST is part of the cost and is included in the amount disclosed.
• State the basis in a footnote to the note, such as "excluding GST, for which input tax credit has been availed", so a reader can compare the figure with the fee in the appointment resolution.

The GST & Indirect Taxes Committee's Handbook on Finalisation of Accounts with GST Perspective, an ICAI publication that carries a disclaimer that the views are its authors', raises two related points. It says out-of-pocket expenses billed by an audit firm attract GST, whereas a reimbursement for a payment required by law, such as an MCA filing fee, does not. It also says input tax credit should not be accounted on year-end provisions for services such as audit fees where no tax invoice has been received. Check how the year-end audit fee provision has been booked before deciding which column the GST belongs in.

CSR expenditure and prior period items

CSR. A company covered by section 135 (net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more in the immediately preceding financial year) discloses the amount of CSR expenditure under paragraph 5(i)(k). It also gives the details in paragraph 5(x): the amount required to be spent, the amount spent, the shortfall at the end of the year, the total of previous years' shortfall, the reasons, the nature of the activities, related party transactions and the movement in any provision. ICAI's Guidance Note (para 10.13) recommends showing CSR expenditure as a separate line item, "CSR expenditure", in the Statement of Profit and Loss, with a note giving the break-up. A CSR contribution should not go into donations or miscellaneous expenses.

Prior period items. Paragraph 5(i)(m) requires prior period items to be disclosed. The Guidance Note (para 10.4) relies on the AS 5 definition: income or expenses arising in the current period as a result of errors or omissions in preparing the financial statements of one or more prior periods. An expense of last year that was omitted in error and is booked this year therefore does not belong in the ordinary other expenses lines. A bill that could not reasonably have been estimated at last year end is not a prior period item. Under AS 5, a change in an accounting estimate is not a prior period item. Short or excess provision of tax for earlier years is disclosed separately within tax expense, not in other expenses (Guidance Note para 9.8.1.5).

Common slips in the other expenses note

• A single "Repairs and maintenance" line instead of buildings and machinery separately.
• Income tax or interest on income tax included in rates and taxes (interest on delayed TDS is usually treated the same way).
• Miscellaneous expenses that include an individual ledger above the threshold. Freight, commission and professional fees are common examples.
• The threshold worked out on total income or turnover including other income instead of revenue from operations.
• Payments to the auditor shown as one figure, or including fees paid to a different firm for internal audit or GST work.
• A GST basis that differs between the two years, so the auditor's remuneration appears to jump.
• CSR spend or last year's expenses buried in miscellaneous expenses.

Most of these appear when the note is put together from a ledger dump at the last minute. Our list of Schedule III mistakes in small company accounts covers the ones that show up in other notes.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, Part II and General Instructions for the Statement of Profit and Loss, para 5; sections 135, 142 and 144 (India Code, amended text)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 9.5.7, 9.8.1, 10.2, 10.3, 10.4 and 10.13
• ICAI GST & Indirect Taxes Committee — Handbook on Finalisation of Accounts with GST Perspective (2020), para 4.1.11 and FAQ 18
• ICAI — Accounting Standards (AS 5, AS 11, AS 16)

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