## Schedule III: Financial Ratio Disclosure Requirements

Under Schedule III to the Companies Act, 2013, disclosing ratio values alone is non-compliant. Two distinct requirements must be met:

### Requirement 1 – Explain Numerator and Denominator (Unconditional)

For every ratio disclosed, the company must state the specific line items used in the numerator and denominator. This is not conditional on any threshold — it applies to all ratios.

### Requirement 2 – Explain Changes Exceeding 25% (Conditional)

Where any ratio changes by more than 25% compared to the preceding year, the company must provide a narrative explanation.

### How to Compute Variation

```

Variation % = |Current Year – Previous Year| / Previous Year × 100

```

Ratio	Current	Previous	Variation	Explain?
Inventory Turnover	3.00	6.00	50%	Yes
Trade Receivables Turnover	1.75	5.00	65%	Yes
Net Profit Ratio	13%	10%	30%	Yes
Current Ratio	2.50	2.30	8.69%	No

### Auditor's Verification Steps

1. Confirm numerator/denominator explanations exist for all disclosed ratios.

2. Compute variation % for each ratio and identify those exceeding 25%.

3. Verify that narrative explanations are present for all ratios above the threshold.

4. Verify mathematical accuracy of both the ratios and the variation percentages.

Worked example

### Example 1

STU Private Limited disclosed four ratios for FY 2022-23 vs 2021-22 in a bare table with no numerator/denominator explanations. Inventory turnover fell from 6.00 to 3.00 (50% change), trade receivables turnover from 5.00 to 1.75 (65%), and net profit ratio changed from 10% to 13% (30%). Current ratio moved from 2.30 to 2.50 (8.69%). Non-compliance exists on two grounds: (a) no numerator/denominator explanations for any ratio — a mandatory requirement irrespective of variation; (b) no narrative explanation for the three ratios exceeding 25%. The auditor must require rectification or reflect this deficiency in the audit report.

### Example 2

Computing variation for net profit ratio: |(13% – 10%)| / 10% × 100 = 30% > 25%, so explanation is required. For current ratio: |(2.50 – 2.30)| / 2.30 × 100 = 8.69% < 25%, so no explanation needed — but the numerator/denominator explanation is still mandatory.

⚠️ Common exam mistakes

Using absolute change (e.g., 3.00 – 6.00 = –3.00) as the variation instead of computing the percentage relative to the prior year figure.
Focusing only on the 25% change rule and forgetting the separate, unconditional requirement to explain the numerator and denominator for every disclosed ratio.
Using the current year ratio as the base for variation calculation instead of the previous year figure.
Assuming only adverse changes (ratio worsening) trigger the explanation requirement — any change exceeding 25%, whether improvement or deterioration, requires disclosure.

Bare-Act text Schedule III · Companies Act, 2013 · click to expand

The company shall explain the items included in numerator and denominator for computing the ratios. Further explanation shall be provided for any change in the ratio by more than 25% as compared to the preceding year.

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Schedule III – Ratio Disclosure: Numerator/Denominator and 25% Change Rule

Worked example

⚠️ Common exam mistakes