[Opinion] Practical Challenges in New NCE Financial Statement Format for MSME Disclosures

CA Anjali Singhal & Rakshita Gupta – [2025] 181 taxmann.com 480 (Article)

1. The New Format of Financial Statements

The new format for financial statements of Non-Corporate Entities (NCEs) was introduced by ICAI through the Guidance Note on Financial Statements of Non-Corporate Entities.

This Guidance Note outlines the standardised framework for preparing and presenting financial statements for NCEs, and it is designed to standardisation, transparency, and consistency in financial reporting across non-corporate entities such as partnerships, proprietorships, and trusts.

The primary objective was to align NCEs with more structured financial reporting practices, similar to corporate entities, ensuring comparability and clarity for stakeholders.

The key changes involve a revised structure of the balance sheet as well as the Statement of Profit and Loss (P&L). For the Balance Sheet clearly differentiating between owner’s funds, non-current and current assets, and liabilities along with the compulsory inclusion of comparative figures.

For the P&L, the format requires a structured presentation with clear segregation of Revenue from Operations from Other Income, and the mandatory grouping of expenses by nature (e.g., Employee Benefits Expense, Finance Costs). It also requires the clear display of intermediate profit figures like Profit Before Tax (PBT) and enhanced disclosures through Notes to Accounts, including detailed Ageing Schedules for Trade Receivables and clearer reporting of Related Party Transactions and Contingent Liabilities.

The revised format closely aligns with the Schedule III presentation requirements applicable to company financial statements. The specific variations relating to MSMEs will be addressed later in this article.

Let’s now examine the requirements outlined in the new format for financial statements.

2. MSME Disclosure Requirements as per the New Format

The new format for financial statements mandates detailed disclosures in the Notes to Accounts of Trade Payables regarding amounts due to Micro, Small, and Medium Enterprises (MSMEs), as defined under the MSMED Act, 2006. The disclosures are as follows:

✓ Bifurcation of Trade Payables – A clear primary bifurcation of the total Outstanding Trade Payables into “Outstanding Dues of Micro, Small and Medium Enterprises” and “Outstanding Dues of Creditors Other Than Micro, Small and Medium Enterprises.

It is important to note that this disclosure differs from the requirements prescribed under Schedule III for the financial statements of companies. The key distinctions are as follows:

(a) Under Schedule III, the above bifurcation is required to be presented on the face of the balance sheet. In contrast, for NCEs, this bifurcation is to be provided in the notes to trade payables.

(b) Schedule III mandates disclosure only in respect of micro and small enterprises, whereas NCEs are required to disclose information relating to medium enterprises as well.

✓ Principal and Interest Unpaid – The principal amount and the interest due thereon (shown separately) that remains unpaid to any MSME supplier at the end of the accounting year.

This stipulates that the closing balance of MSME vendors must be bifurcated into two main categories:

(a) Principal

(b) Interest

✓ Interest Paid on Delayed Payments – The amount of interest paid by the buyer under Section 16 of the MSMED Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during the year.

✓ Interest Due (Without Penal Interest) – The amount of interest due and payable for the period of delay in making payment (applicable even if the payment was made, but beyond the appointed day during the year), excluding the specific penal interest defined under the MSMED Act, 2006.

✓ Accrued and Unpaid Interest – The amount of interest that has accrued (built up) and remains unpaid at the end of the accounting year.

✓ FutureInterest Liability (for Disallowance) – The amount of further interest remaining due and payable even in the succeeding years, until the interest dues are actually settled. This specific disclosure is included to facilitate the disallowance of deductible expenditure under Section 23 of the MSMED Act, 2006.

3. MSMED Act Mandate vs. Pre-Guidance Note Reporting

Let us now discuss the mandatory disclosures required under the MSMED Act, 2006, in comparison with the reporting requirements that existed prior to the issuance of the recent ICAI Guidance Note. The mandatory disclosure of dues to MSMEs was always a statutory requirement for non-corporate entities whose accounts were subject to audit, rooted in Section 22 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.

This specific section quotes “Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts” the additional information include the principal amount and the interest due thereon remaining unpaid to registered MSME suppliers, along with other interest-related figures for tax disallowance purposes.

Despite the clear legal mandate of the MSMED Act, non-corporate entities such as sole proprietorships, partnership firms, trusts, AOPs and HUFs often omitted or condensed these critical disclosures.

This oversight occurred because, unlike companies that follow the highly structured Schedule III of the Companies Act, these entities had no universally prescribed financial statement format under any specific law. Due to the lack of an authoritative, standardised reporting structure, the existing statutory requirement under the MSMED Act was frequently overlooked or deemed non-mandatory in practice.

The new Guidance Note corrects this by providing an authoritative format that structurally forces the inclusion of these statutory disclosures in the Notes to Accounts.