02.4 · The balance sheet, line by line¶

Why this matters: the income statement tells you what a company earned; the balance sheet tells you what it had to tie up to earn it, who financed that, and what could go wrong. Every return-on-capital ratio, every leverage test and every equity-value bridge in a DCF starts from this one page.

Learning objectives — after this lesson you can:

Read a Schedule III (Division II) balance sheet top to bottom and say, for every line, what it is, how it is measured and which note holds the detail.
Classify an item as current or non-current, and as operating or financing, and compute net working capital, net debt, capital employed, invested capital and book value per share for Kaveri Pumps FY26.
Roll forward PP&E, CWIP, right-of-use assets, intangibles and other equity between two balance sheets and explain what moved each one.
Explain which assets sit at historical cost and which at fair value under Ind AS, and estimate what a cost-based number might be hiding.
List what is not on the balance sheet (home-grown brands, people, contingent liabilities, guarantees, promoter-level risks) and size those items for Kaveri from its notes.
Explain the MSME-dues split in trade payables and why it matters for cash tax.

Prerequisites: 02.1 The accounting equation & double entry, 02.3 The income statement, line by line · Time: ~100 min

1. What a balance sheet is — and three ways to read it¶

A balance sheet (Ind AS calls it the balance sheet; IFRS says statement of financial position) is a photograph of a company at one instant — for Indian companies, usually midnight on 31 March. It lists what the company controls (assets), what it owes to outsiders (liabilities) and the residual that belongs to shareholders (equity). You met the identity in 02.1:

\[\text{Assets} = \text{Liabilities} + \text{Equity}\]

The single most useful mental model is stocks versus flows. The income statement and cash-flow statement are flows — water running in and out over a year. The balance sheet is a stock — the level of water in the tank at the moment you look. Two balance sheets a year apart, plus the flows in between, must reconcile exactly; that is the whole subject of 02.6.

There are three ways to read the same page, and a good analyst switches between them without thinking.

Reading 1 — resources and claims. The left side is what the company owns or controls; the right side is who has a claim on it and in what order. Lenders and suppliers come first; shareholders get whatever is left.

Reading 2 — uses and sources of money. The right side is where money came from (shareholders' capital and retained profits, banks, bondholders, suppliers who gave credit); the left side is where it was put (factories, inventory, money owed by customers, cash).

Reading 3 — operating versus financing (the analyst's reading). Split every line into operating (needed to run the business: plant, inventory, receivables, minus the free credit that suppliers and customers give) and financing (debt, cash, liquid investments, equity). Then

\[\underbrace{\text{Net operating assets}}_{\text{invested capital}} \;=\; \underbrace{\text{Net debt} + \text{Equity} + \text{other financing claims}}_{\text{how it was financed}}\]

This reformulation is what you will use for ROIC in 04.3 and for the equity bridge in 06.3. For Kaveri at 31-Mar-2026 (all ₹ Cr, from the running example):

Operating side	₹ Cr	Financing side	₹ Cr
Net block (PP&E)	495.3	Total equity	706.1
CWIP	2.0	Borrowings (92.0 + 96.0)	188.0
Right-of-use assets	16.5	Lease liabilities	18.2
Intangible assets	8.0	Deferred tax liability	22.0
Net working capital (see §9)	365.0	Less: cash & cash equivalents	(32.5)
		Less: current investments	(15.0)
Invested capital	886.8	Financing, net	886.8

Both columns come to ₹886.8 Cr — not a coincidence but the accounting identity rearranged. (We park the deferred tax liability with financing because it is a non-interest-bearing claim of the tax authority; other conventions exist, and 04.3 discusses them.)

flowchart LR
  subgraph A[Assets — what the company controls]
    NCA[Non-current assets<br/>PPE, CWIP, ROU, goodwill,<br/>intangibles, LT investments, DTA]
    CA[Current assets<br/>inventories, receivables,<br/>investments, cash, other]
  end
  subgraph C[Claims — who financed it]
    EQ[Equity<br/>share capital + other equity<br/>+ NCI in consolidated]
    NCL[Non-current liabilities<br/>LT borrowings, leases,<br/>provisions, DTL]
    CL[Current liabilities<br/>ST borrowings, payables,<br/>other, provisions, tax]
  end
  NCA --- EQ
  CA --- CL
  NCA --- NCL

2. The Schedule III format¶

Indian companies do not choose their own layout. Section 129 of the Companies Act, 2013 requires financial statements in the form set out in Schedule III, which has three divisions:

Division I — companies still on the older Indian GAAP (the Companies (Accounting Standards) Rules; mostly smaller unlisted companies — see 02.9).
Division II — companies on Ind AS other than NBFCs. This is what almost every listed non-financial company you will analyse uses, and what this lesson follows.
Division III — NBFCs on Ind AS (lenders present a different balance sheet — loans, borrowings, ECL — which 07.1 covers using Nirmal Finance).

Unlike a US 10-K (which lists current assets first, in order of liquidity), the Indian format starts with non-current assets, then current assets; on the other side, equity first, then non-current and current liabilities. Division II prescribes these captions (source: Schedule III Division II, as reproduced by ComplianceIndia; verified Sep-2026):

Block	Captions, in order
Non-current assets	Property, plant and equipment · Capital work-in-progress · Investment property · Goodwill · Other intangible assets · Intangible assets under development · Biological assets other than bearer plants · Financial assets (investments, trade receivables, loans, others) · Deferred tax assets (net) · Other non-current assets
Current assets	Inventories · Financial assets (investments, trade receivables, cash and cash equivalents, bank balances other than cash and cash equivalents, loans, others) · Current tax assets (net) · Other current assets
Equity	Equity share capital · Other equity (plus non-controlling interests in consolidated statements)
Non-current liabilities	Financial liabilities (borrowings, lease liabilities, trade payables, other financial liabilities) · Provisions · Deferred tax liabilities (net) · Other non-current liabilities
Current liabilities	Financial liabilities (borrowings, lease liabilities, trade payables — split into dues of micro & small enterprises and others — other financial liabilities) · Other current liabilities · Provisions · Current tax liabilities (net)

Three things about this format trip up newcomers.

"Financial" vs "other". A financial asset is, roughly, a contractual right to receive cash (a receivable, a loan given, a deposit, an investment); a financial liability is a contractual obligation to pay cash (a loan, a payable). They are separated from "other" assets and liabilities — such as an advance paid to a supplier (you expect goods, not cash) or GST input credit — because Ind AS 109 measures financial items differently. When an old report or an aggregator says "loans and advances", it is using the pre-Ind AS vocabulary of Division I, which lumped financial loans and non-financial advances together.

Current vs non-current. Under Ind AS 1, an asset is current if it will be realised, sold or consumed within the company's normal operating cycle or within 12 months, is held for trading, or is cash. A liability is current if it is due within 12 months (or within the operating cycle) or the company has no right to defer settlement beyond 12 months. The operating cycle can exceed a year: a real-estate developer's four-year project inventory is still a current asset. Note what this does to ratios — a builder can show a spectacular current ratio built on flats that will not be sold for years.

Where the detail lives. Every caption carries a note number. The face of the balance sheet is a table of contents; the notes are the book (03.3 teaches you to read them in order of importance).

India notes

2021 amendments to Schedule III. The MCA notification of 24-Mar-2021 (effective for financial years starting on or after 1-Apr-2021) added, among others: ageing schedules for trade receivables, trade payables, CWIP and intangibles under development; promoter shareholding and its changes; title deeds of immovable property not held in the company's name; loans to promoters, directors, KMP and related parties; eleven ratios with explanations for any change above 25%; relationships with struck-off companies; wilful-defaulter status; and current maturities of long-term debt shown within current borrowings (Vinod Kothari Consultants summary, verified Sep-2026). These ageing schedules are gold for analysts — Kaveri's ">6 months overdue" receivables number comes from exactly this kind of disclosure.
Half-yearly balance sheets. A listed company must include a statement of assets and liabilities as at the half-year end, as a note to its half-yearly results — SEBI LODR Regulation 33(3)(f) (text via CAIRR, verified Sep-2026). So you get a balance sheet in the Q2 (September) and Q4 (March) results, not every quarter.

3. Non-current assets, line by line¶

3.1 Property, plant and equipment (PP&E)¶

PP&E is tangible assets used for more than a year to produce goods or services: land, buildings, plant and machinery, furniture, vehicles, computers. Three numbers matter:

Gross block — the historical cost of everything still owned (purchase price + import duties + installation and commissioning + borrowing costs capitalised during construction, a topic for 02.7).
Accumulated depreciation — the total depreciation charged on those assets since they were bought.
Net block = gross block − accumulated depreciation (− any impairment). This is what the face of the Ind AS balance sheet shows; the note shows the full movement.

Land is not depreciated (it does not wear out). Kaveri FY26: gross block ₹830.0 Cr, accumulated depreciation ₹334.7 Cr, net block ₹495.3 Cr. The ratio of accumulated depreciation to the depreciable gross block is a crude age indicator: Kaveri's land is ₹18.0 Cr at cost (₹22.0 Cr at 31-Mar-2020 less the ₹4.0 Cr parcel sold in FY25), so 334.7 / (830.0 − 18.0) = 41.2% of the depreciable asset base has already been written off. A ratio creeping towards 70–80% tells you the plant is old and a replacement capex cycle may be coming.

3.2 Capital work-in-progress (CWIP)¶

CWIP is capex on assets that are not yet ready for use — a factory under construction, a machine being installed. It is not depreciated (the asset is not in use), and when the asset is commissioned the amount is transferred into gross block, after which depreciation starts.

Kaveri shows the whole life cycle. CWIP rose to ₹68.0 Cr at FY23 while the Hosur motors plant was being built; at end-FY24 the plant was commissioned (cost ~₹190 Cr), CWIP fell to ₹0.0 and gross block jumped from ₹518.0 Cr to ₹734.0 Cr (+₹216.0 Cr, of which the plant is the bulk). PP&E depreciation then stepped up from ₹25.8 Cr in FY24 to ₹37.0 Cr in FY25 — the first full year of depreciating Hosur.

Two things to watch. First, the CWIP ageing schedule: a project stuck in CWIP for three years either has a problem or is a place to park costs that should have been expensed (09.3). Second, CWIP earns nothing yet, so a big CWIP balance depresses return on capital today and flatters depreciation; analysts often exclude it from capital employed when judging the existing business.

3.3 Investment property¶

Land or buildings held to earn rent or for capital appreciation, not for use in the business. Under Ind AS 40 only the cost model is allowed (IFRS also permits a fair-value model), but the fair value must be disclosed in the notes (MCA, Ind AS 40; verified Sep-2026). That note is one of the few places a cost-based Indian balance sheet tells you what something is actually worth.

3.4 Right-of-use (ROU) assets¶

Since Ind AS 116 (notified 30-Mar-2019, applicable from 1-Apr-2019, i.e. FY20), a lessee recognises almost every lease longer than 12 months on its balance sheet: an ROU asset (the right to use the shop, warehouse or vehicle) and a matching lease liability (the present value of the rent it has promised to pay). Kaveri: ROU assets ₹16.5 Cr, lease liabilities ₹18.2 Cr. The ROU asset is amortised (₹4.7 Cr in FY26); the liability accrues interest (₹1.4 Cr) and is paid down by rent. Why this rule changed EBITDA for retailers and airlines is covered in 02.7; for now, note that a lease liability is debt in all but name and belongs in net debt for valuation (the reference valuation deducts Kaveri's ₹18.2 Cr in the equity bridge).

3.5 Goodwill and other intangible assets¶

Intangible assets are identifiable non-physical assets the company controls and that will produce future benefits: software, licences, patents, acquired brands and trademarks, acquired customer relationships. Kaveri's are small (₹8.0 Cr, mostly software). Intangible assets under development is the intangible equivalent of CWIP.

Goodwill is different: it arises only when a company buys another business, and equals the price paid minus the fair value of the identifiable net assets acquired. It is what you paid for things you cannot separately identify — synergies, an assembled workforce, market position. Under Ind AS it is not amortised; instead it is tested for impairment at least annually (02.7 and 02.8). Kaveri has no goodwill line, which suggests it has never bought a business for more than its identifiable net assets.

The single most important rule about intangibles: brands, customer lists and know-how that a company builds itself are not recognised (Ind AS 38). Only acquired ones are. This creates a striking asymmetry.

Worked example 1 — HUL: the brands you buy versus the brands you build

On 1-Apr-2020 Hindustan Unilever (HUL) completed its all-equity merger with GlaxoSmithKline Consumer Healthcare (GSK CH), issuing 4.39 HUL shares per GSK CH share, and separately bought the Indian Horlicks intellectual-property rights for cash. Source: HUL Integrated Annual Report 2020-21, standalone balance sheet and Notes 4 and 40 (₹ crore).

HUL standalone, ₹ Cr	31-Mar-2020	31-Mar-2021
Goodwill	36	17,316
Other intangible assets	395	27,925
Total assets	19,602	68,116
Other equity	7,815	47,199
Deferred tax liabilities (net)	–	5,986

Note 40 allocates the ₹40,242 Cr of net assets acquired in the merger: right to use the Horlicks brand ₹19,274 Cr, Boost trademark ₹4,800 Cr, other identifiable assets less liabilities (including a ₹6,132 Cr deferred tax liability), and goodwill of ₹17,265 Cr. The Horlicks IPR purchase added a further ₹3,136 Cr to intangibles (a ₹3,045 Cr price plus ₹91 Cr of transaction costs).

Arithmetic: goodwill plus other intangibles = 17,316 + 27,925 = ₹45,241 Cr = 66.4% of total assets. Almost two-thirds of HUL's balance sheet became brands and goodwill overnight.

The lesson: brands HUL built itself over decades carry essentially nothing on the balance sheet, while the brands it bought sit at their acquisition-date fair values. Two companies with identical economics can show wildly different book values, ROE and ROCE depending on whether they grew organically or by acquisition. When you compute returns for an acquirer, compute them both with and without goodwill and acquired intangibles (04.3).

3.6 Biological assets other than bearer plants¶

Living animals or plants held for agricultural activity (livestock, growing produce). Bearer plants that merely produce crops year after year — tea bushes, rubber trees — are treated as PP&E instead; the tea leaves growing on them are the biological asset. Relevant only for plantation and agri companies.

3.7 Non-current financial assets¶

Investments — in a standalone balance sheet, investments in subsidiaries, associates and joint ventures are usually carried at cost; other equity investments are carried at fair value (through profit or loss, or through OCI if the company so elects). Large "investments in subsidiaries" in a standalone balance sheet are a signal to read the consolidated statements (02.8).
Loans — money lent to subsidiaries, group companies, employees. Loans to promoter-group entities are a classic leak of minority shareholders' money (05.6).
Other financial assets — security deposits (e.g., with landlords and electricity boards), bank deposits with more than 12 months to maturity, derivative assets.

3.8 Deferred tax assets (net) and other non-current assets¶

Deferred tax assets/liabilities arise when the tax books and the accounting books recognise the same income or expense in different years — 02.8 builds the intuition. Kaveri shows a net deferred tax liability of ₹22.0 Cr on the other side; in Indian manufacturers this typically comes from tax depreciation running faster than book depreciation (the reference page does not give Kaveri's breakdown).

Other non-current assets is a bucket that deserves a glance every year: capital advances (money paid to equipment suppliers before delivery — legitimate for a company in a capex cycle, suspicious if large, old and paid to related parties), balances with government authorities (for example, taxes paid under protest), and long-term prepaid expenses.

4. Current assets, line by line¶

Caption	What it is	How it is measured	What to look for
Inventories	Raw materials, work-in-progress, finished goods, stock-in-trade (goods bought for resale), stores & spares	Lower of cost and net realisable value (expected selling price less costs to complete and sell)	Growth vs sales; the split (finished goods piling up = demand problem); write-downs. Kaveri: ₹188.1 Cr = 80 days of material cost
Current investments	Short-term treasury holdings — in India typically liquid/overnight debt mutual funds	Fair value through profit or loss	Is it genuinely liquid? Kaveri: ₹15.0 Cr of liquid funds, down from ₹30.0 Cr
Trade receivables	Amounts customers owe for goods/services already invoiced	Invoice amount less an expected credit loss (ECL) allowance	Growth vs revenue; ageing; disputed dues; concentration. Kaveri: ₹346.7 Cr, +28.6% vs revenue +12.5%
Cash and cash equivalents	Cash, demand deposits, and highly liquid investments with an original maturity of ≤3 months	Face value	Whether it is actually available (see next row)
Bank balances other than cash & cash equivalents	Fixed deposits of 3–12 months; earmarked balances (unpaid-dividend accounts); margin money held against bank guarantees or letters of credit	Face value	Earmarked and margin-money deposits are not free cash — exclude them from net debt
Loans (current)	Short-term loans given (employees, group companies)	Amortised cost less ECL	Loans to related parties
Other financial assets	Interest accrued, security deposits, derivative assets, sometimes unbilled revenue	Mostly amortised cost; derivatives at fair value	Rising unbilled revenue (02.2)
Current tax assets (net)	Advance tax paid in excess of the tax provision	Amount paid	Large refunds stuck with the tax department
Other current assets	Advances to suppliers, prepaid expenses, GST input-tax credit, contract assets	Cost	A fast-growing "other" bucket is a soft asset (09.3). Kaveri: ₹39.5 Cr
Assets held for sale	Assets the company has decided to sell within a year	Lower of carrying amount and fair value less costs to sell	Signals a disposal or exit

Two measurement ideas deserve a sentence each. Net realisable value exists so that a company cannot keep obsolete stock at cost — if a motor model is discontinued and will sell only at a discount, inventory must be written down. Expected credit loss means the receivable is shown net of the losses the company expects on it, not just losses that have already happened. Kaveri's ECL allowance at FY26 is ₹4.0 Cr. Schedule III balance sheets show receivables net of this allowance, so we read Kaveri's ₹346.7 Cr as net; gross receivables are then ≈₹350.7 Cr. Of the gross, ₹62.4 Cr (17.8%) is overdue by more than six months, mostly from two state nodal agencies, and the allowance covers only 4.0 / 62.4 = 6.4% of that bucket. That single comparison is one of the central questions of the Kaveri story (09.2).

5. Equity¶

Equity is the shareholders' residual claim: assets minus liabilities. It has two captions.

Equity share capital is the number of shares issued multiplied by their face value (a nominal legal amount, unrelated to the market price). Kaveri: 6.00 crore shares × ₹5 = ₹30.0 Cr. The note distinguishes authorised capital (the ceiling in the company's charter), issued and subscribed, and paid-up capital, and — since the 2021 amendments — shows the promoters' shareholding and how it changed during the year.

Other equity is everything else, and its components tell different stories:

Component	Where it comes from	Why you care
Securities premium	Shares issued above face value: the excess over face value	Contributed capital, not earned. Section 52 of the Companies Act restricts its use (e.g., bonus issues, buybacks, share-issue expenses) — it cannot fund a normal dividend
Retained earnings (surplus in P&L)	Cumulative PAT minus dividends and transfers	The bridge between P&L and balance sheet (02.1); distributable reserves
General reserve	Legacy transfers from profit (once customary in India)	Economically the same as retained earnings
Capital redemption reserve	Created when shares are bought back out of free reserves	Signals past buybacks
Capital reserve	Gains of a capital nature (e.g., bargain purchase on an acquisition)	Usually not distributable
Share options outstanding	Cumulative ESOP expense not yet exercised	The equity side of the non-cash ESOP charge
OCI reserves	Fair-value changes on FVOCI equity investments, cash-flow-hedge reserve, foreign-currency translation reserve, revaluation surplus	Gains and losses that bypassed profit (02.3, 02.8)
Money received against share warrants	Upfront money (typically 25%) on warrants, often issued to promoters	Future dilution (01.3)

Kaveri's reference page does not split its ₹676.1 Cr of other equity, but you can reconstruct how it grew. Share capital was unchanged at ₹30.0 Cr through FY21–FY26, so no new equity was raised; other equity rose from ₹344.0 Cr (31-Mar-2020) to ₹676.1 Cr, an increase of ₹332.1 Cr = cumulative PAT 416.9 − dividends 90.0 + share-based payment expense 5.2 (0.8 + 2.0 + 2.4 in FY24–FY26). A real note would show that ₹5.2 Cr as "share options outstanding", and might reveal that part of the opening ₹344.0 Cr is securities premium from the IPO era.

Reserves are not cash. This is the most common beginner error in Indian markets, where headlines say "company X has reserves of ₹Y crore". A reserve is a claim on the right-hand side; the money was long ago spent on plant, inventory or receivables. HUL makes the point vividly: in FY21 its other equity rose by 47,199 − 7,815 = ₹39,384 Cr, of which ≈₹40,200 Cr came from shares issued for the GSK CH merger (after adding back the year's dividends and removing PAT and OCI) — while its cash and cash equivalents actually fell, from ₹3,130 Cr to ₹1,740 Cr.

Non-controlling interests (NCI) appear only in consolidated statements: the share of a subsidiary's net assets owned by outside shareholders (if the parent owns 70%, the other 30% is NCI). Ind AS presents NCI inside equity, but for valuation it is a claim that does not belong to your shares and is deducted in the equity bridge (01.2). Kaveri has none.

Book value per share = total equity attributable to owners ÷ shares outstanding. Kaveri FY26: 706.1 / 6.00 = ₹117.7. At ₹390 the stock trades at 390 / 117.7 = 3.3× book. Equity movements over the year are shown in the statement of changes in equity, a fourth primary statement that most beginners skip and should not.

6. Liabilities, line by line¶

6.1 Borrowings¶

Non-current borrowings are debt due after 12 months: term loans from banks, non-convertible debentures (NCDs), external commercial borrowings (ECBs, foreign-currency loans). Current borrowings include working-capital facilities (cash credit/overdraft, working-capital demand loans, packing credit for exporters), commercial paper, bills discounted with recourse, and — per the 2021 amendment — the current maturities of long-term debt. The borrowings note gives security (which assets are charged), interest rates, repayment schedules and covenants; 04.5 shows how to use it.

Kaveri FY26: term loans ₹92.0 Cr (down ₹20.0 Cr as it repaid Hosur debt) and current borrowings ₹96.0 Cr (up ₹38.0 Cr, +65.5%). Short-term debt is now 51% of total debt, up from 34% a year earlier. Short-term borrowing rising while long-term debt is repaid, in a year when receivables jumped ₹77.0 Cr, says the working-capital lines are funding customers who are paying slowly.

6.2 Lease liabilities¶

Present value of future lease payments (§3.4). Division II asks for a split between the non-current and current portions; Kaveri's reference page shows one line of ₹18.2 Cr, and we keep it in the non-current block for simplicity.

6.3 Trade payables — and the MSME split¶

Trade payables are amounts owed to suppliers for goods and services received. They are free financing — the supplier is funding your inventory — which is why payables reduce working capital. Kaveri: ₹143.4 Cr, 61 days of material cost.

Schedule III requires payables to be split into "total outstanding dues of micro enterprises and small enterprises" and "others", with an ageing schedule. HUL's FY21 standalone balance sheet, for example, shows ₹64 Cr owed to micro and small enterprises (MSEs) against ₹8,563 Cr to others (HUL AR 2020-21). The split matters for three reasons:

The MSMED Act, 2006. Section 15 requires a buyer to pay an MSE supplier within the agreed period and never later than 45 days from acceptance (15 days if there is no written agreement); Section 16 imposes compound interest at three times the RBI bank rate on late payments; Section 22 requires the unpaid principal and interest to be disclosed in the audited accounts; and Section 23 makes that interest non-deductible for tax (IBC Laws, s.22, IBC Laws, s.23; verified Sep-2026).
Cash tax. Since FY24, an amount owed to a registered micro or small enterprise and not paid within the MSMED time limit is deductible only in the year it is actually paid (old Section 43B(h) of the Income-tax Act, 1961). The Income-tax Act, 2025 replaced the 1961 Act from 1-Apr-2026 (Wikipedia); secondary sources report the MSE rule carried into Section 37(2)(g) of the new Act (Busy, Sep-2026). Verify the section number on the Income Tax Department's site before relying on it.
Analytical signal. A company that stretches small suppliers beyond 45 days is either cash-strapped or exploiting bargaining power — and pays a tax cost for it.

Mini-example. A manufacturer taxed at 25.17% owes ₹12.0 Cr to MSE suppliers that is more than 45 days old at 31 March. The ₹12.0 Cr is added back to taxable income this year: extra current tax = 12.0 × 25.17% = ₹3.02 Cr, recovered (as a deduction) in the year the suppliers are paid. Profit is barely affected (a deferred tax asset is recognised); cash is. A trade-payables number that falls sharply in the March quarter of FY24 and later can simply be companies paying MSEs before year-end to protect the deduction — a working-capital effect you should not extrapolate.

6.4 Other financial liabilities, provisions, deferred tax, other liabilities¶

Other financial liabilities — capital creditors (amounts owed for capex already received), interest accrued, unpaid dividends, security deposits taken from dealers, derivative liabilities.
Provisions — liabilities of uncertain timing or amount that meet the Ind AS 37 test (a present obligation from a past event, an outflow that is probable, and a reliable estimate): employee benefits (gratuity, leave encashment), product warranties, restoration obligations. A provision released back to profit is a lever management can pull (09.3).
Deferred tax liabilities (net) — tax that will become payable later because of timing differences (§3.8).
Other current liabilities — advances from customers and contract liabilities (cash received before revenue is earned — see 02.2), statutory dues (GST, TDS, provident fund), deferred government grants.
Current tax liabilities (net) — tax provision in excess of advance tax paid.

Kaveri's reference page combines the operating items into "Other current liabilities & provisions" (₹65.9 Cr) and shows no tax payable line, which is why its current tax (₹29.5 Cr) equals tax paid in the cash-flow statement.

7. How the numbers are measured: historical cost versus fair value¶

A balance sheet is not a valuation. It is a mixed-attribute document — different lines use different yardsticks:

Item	Measurement basis under Ind AS	Consequence
PP&E	Cost less depreciation and impairment (revaluation model permitted but rare)	Land bought decades ago sits at a fraction of its value
Investment property	Cost only; fair value disclosed in notes	Read the note
Goodwill, indefinite-life brands	Cost less impairment; not amortised	Stays until written down — often late
Inventories	Lower of cost and NRV	Conservative, asymmetric
Trade receivables, loans	Amortised cost less expected credit loss	Depends on management's loss estimates
Liquid mutual funds, most equity investments	Fair value (through P&L or OCI)	Marked to market
Derivatives	Fair value	Marked to market or to model
Borrowings	Amortised cost (effective interest method)	Not marked to market when rates move
Provisions	Best estimate, discounted if material	Judgement-heavy

Why keep historical cost at all? Because it is verifiable — an invoice exists — and it stops managements from writing up assets to flatter equity. The price is that the balance sheet goes stale. Ind AS 101 allowed companies adopting Ind AS (in India, from FY17 onwards) to use fair value as the deemed cost of PP&E on transition; some companies revalued land once at that point, permanently lifting book value and depressing ROE. When a company's equity jumps in its Ind AS transition year, read the reconciliation note before comparing ROE across the break.

Worked example 2 — the land Kaveri still owns

In FY25 Kaveri sold a land parcel with a book value of ₹4.0 Cr for ₹18.0 Cr, booking a ₹14.0 Cr exceptional gain. Proceeds were 18.0 / 4.0 = 4.5× book value.

Kaveri's remaining land is ₹22.0 − 4.0 = ₹18.0 Cr at cost. What if (an illustration, not a fact about the land) the rest were worth the same 4.5× book?

Implied value = 18.0 × 4.5 = ₹81.0 Cr; hidden surplus = 81.0 − 18.0 = ₹63.0 Cr before tax on the gain.
Per share: 63.0 / 6.00 = ₹10.5, about 2.7% of the ₹390 price.

Or suppose a valuer says the land is worth ₹90.0 Cr. Adjusted book value = 706.1 + (90.0 − 18.0) = ₹778.1 Cr, or ₹129.7 per share, and P/B at ₹390 falls from 3.3× to 3.0×. Useful context, but it changes little: Kaveri is valued on its earnings, not its land. Where land is the thesis (old textile mills, some PSUs, real estate), this adjustment becomes the main event (06.7).

Trader's lens

Treat the balance sheet as an end-of-day position report with inconsistent marks. Some positions are marked to market (liquid funds, derivatives), some to model (ECL allowance, goodwill impairment tests, gratuity actuarial valuations), and the biggest ones are held at cost (plant, land). You would never aggregate such a book without re-marking it; do the same here. And remember it is a single timestamp: a company can collect hard in the last week of March, delay supplier payments and pay down its cash-credit line on 31 March, then redraw on 1 April — the quarter-end window-dressing that fund NAVs are also accused of. Average balances and half-yearly balance sheets help you see through it.

8. What is not on the balance sheet¶

Much of what makes a business valuable — or dangerous — never appears on the face of the balance sheet.

Home-grown intangibles. Brands, distribution networks, customer relationships, software built in-house, know-how and people. Research spending is expensed (development can be capitalised only under strict conditions — 02.7). This is why the market value of good businesses runs far above book: Kaveri at ₹390 has a market capitalisation of 390 × 6.00 = ₹2,340 Cr against book equity of ₹706.1 Cr — ₹1,633.9 Cr of value the market ascribes to things the accountants do not record (or, the sceptic says, ₹1,633.9 Cr of optimism).

Contingent liabilities. Under Ind AS 37, a contingent liability is a possible obligation whose existence depends on uncertain future events (a tax demand under appeal, a lawsuit), or a present obligation where an outflow is not probable or cannot be measured. It is disclosed in the notes, not recognised. Kaveri FY26:

Kaveri off-balance-sheet items (FY26 notes)	₹ Cr	Per share (₹)	vs equity 706.1
GST demand under appeal (solar rate classification)	38.0	6.3	5.4%
Income-tax disputes	11.0	1.8	1.6%
Contingent liabilities	49.0	8.2	6.9%
Bank guarantees given (performance/tender)	96.0	16.0	13.6%

The GST dispute is new in FY26 and tied to the solar business; an analyst would read the note, estimate a probability of losing and treat the expected amount as quasi-debt in valuation.

Guarantees and commitments. Performance bank guarantees (Kaveri: ₹96.0 Cr, growing with solar tenders) are not liabilities unless invoked, but they consume the company's non-fund bank limits and are usually backed by margin money. Capital commitments (contracts signed for capex not yet delivered) show what is coming. Guarantees given for group companies' loans are a governance flag even when their accounting value is small.

Off-balance-sheet funding. Receivables sold to a bank or factor without recourse leave the balance sheet; supplier finance (reverse factoring) can make payables look like ordinary trade credit when they are really bank funding. Ind AS 7 now requires specific supplier-finance disclosures (paragraphs 44F–44H, for periods beginning on or after 1-Apr-2025; Taxmann, verified Sep-2026). 04.5 and 09.4 go deeper.

Things that belong to the promoters. A promoter pledge (Kaveri: 6% of promoter shares, created Nov-2025) is the promoters' borrowing, not the company's — but a margin call can crash the share price and change control. Assets inside promoter-owned entities are also invisible: Kaveri Castings Pvt Ltd supplies 10.4% of Kaveri's material cost, so part of Kaveri's real production capacity sits in a company minority shareholders do not own.

Economic assets the rules ignore. Kaveri's unexecuted solar order book of ₹410 Cr (1.15× FY26 solar revenue) is valuable information and appears nowhere in the balance sheet.

9. The annotated Kaveri FY26 balance sheet¶

Everything above, applied to one real-looking document. The table re-orders Kaveri's reference balance sheet into the Schedule III sequence (₹ Cr; % = share of FY26 total assets).

Schedule III caption	FY25	FY26	Change	% of TA	What to notice
Non-current assets
Property, plant & equipment (net block)	484.9	495.3	10.4	43.3%	Gross block 830.0 less acc. dep. 334.7; Hosur plant inside
Capital work-in-progress	4.0	2.0	(2.0)	0.2%	No big project under way — capex is maintenance + automation
Right-of-use assets	15.2	16.5	1.3	1.4%	Leased depots/vehicles; mirrors lease liability
Other intangible assets	7.5	8.0	0.5	0.7%	Software; no goodwill → no acquisitions
Current assets
Inventories	161.3	188.1	26.8	16.4%	+16.6% vs revenue +12.5%; 80 days of material cost
Current investments (liquid funds)	30.0	15.0	(15.0)	1.3%	Treasury halved to fund working capital
Trade receivables (net of ECL 4.0)	269.7	346.7	77.0	30.3%	The line of the year: +28.6%, 96 days; ₹62.4 Cr >6 months
Cash & cash equivalents	28.0	32.5	4.5	2.8%	Some of this may back bank guarantees (check note)
Other current assets	35.2	39.5	4.3	3.5%	Advances, prepaid, GST credit — tracks revenue
Total assets	1,035.8	1,143.6	107.8	100.0%
Equity
Equity share capital	30.0	30.0	0.0	2.6%	6.00 Cr shares × ₹5
Other equity	607.2	676.1	68.9	59.1%	= 607.2 + PAT 90.5 − dividends 24.0 + ESOP 2.4
Non-current liabilities
Borrowings (term loans)	112.0	92.0	(20.0)	8.0%	Hosur loan amortising
Lease liabilities	16.7	18.2	1.5	1.6%	Debt-like; in net debt for valuation
Deferred tax liabilities (net)	21.0	22.0	1.0	1.9%	= FY26 deferred tax charge of 1.0
Current liabilities
Borrowings (WC + current maturities)	58.0	96.0	38.0	8.4%	+65.5%: funding the receivables
Trade payables	132.3	143.4	11.1	12.5%	61 days, down from 64 — suppliers not stretched further
Other current liabilities & provisions	58.6	65.9	7.3	5.8%	Statutory dues, advances, warranty etc.
Total equity & liabilities	1,035.8	1,143.6	107.8	100.0%

Roll-forwards — checking that every change is explained. No asset was sold in FY26, so:

PP&E + CWIP: additions to gross block = 830.0 − 780.0 = ₹50.0 Cr; CWIP fell by ₹2.0 Cr; so cash capex on PP&E = 50.0 − 2.0 = ₹48.0 Cr — exactly the "purchase of PP&E incl. CWIP" line in the cash-flow statement. Accumulated depreciation: 295.1 + 39.6 = 334.7 ✓.
ROU assets: 15.2 + new leases − amortisation 4.7 = 16.5 → new leases = ₹6.0 Cr (a non-cash addition).
Intangibles: 7.5 + 4.0 purchased − 3.5 amortised = 8.0 ✓.
Other equity: 607.2 + 90.5 − 24.0 + 2.4 = 676.1 ✓ (dividend paid = ₹4.0/share × 6.00 Cr shares).
Deferred tax liability: 21.0 + 1.0 = 22.0 ✓.

Derived numbers you will use in every later module (verified in Python):

Metric	Definition used in this course	FY25	FY26
Net working capital (NWC), ₹ Cr	Inventories + receivables + other current assets − payables − other current liabilities	275.3	365.0
NWC as % of revenue		23.5%	27.7%
Net debt, ₹ Cr	Borrowings − cash − current investments	112.0	140.5
Net debt incl. leases, ₹ Cr	+ lease liabilities	128.7	158.7
Capital employed, ₹ Cr	Equity + borrowings + lease liabilities	823.9	912.3
Invested capital, ₹ Cr	Net block + CWIP + ROU + intangibles + NWC	786.9	886.8
Current ratio	Current assets ÷ current liabilities	2.11×	2.04×
Debt / equity	Borrowings ÷ equity	0.27×	0.27×
Book value per share, ₹	Equity ÷ 6.00 Cr shares	106.2	117.7

The story the balance sheet tells. Total assets grew ₹107.8 Cr. Of that, receivables alone took ₹77.0 Cr and inventories ₹26.8 Cr. The company paid for it by drawing ₹38.0 Cr more on working-capital lines and selling ₹15.0 Cr of liquid funds, while repaying ₹20.0 Cr of term debt. NWC jumped from 23.5% to 27.7% of revenue; net debt rose from ₹112.0 Cr to ₹140.5 Cr despite a profitable year. None of this is visible in a P&L that shows ₹90.5 Cr of profit — which is exactly why you read the balance sheet. 02.5 shows the same story from the cash side, and 04.4 turns it into days and cash-conversion ratios.

# Reproduce the derived table from the course data (runs offline)
import pandas as pd
k = pd.read_csv("tools/data/kaveri_pumps_annual.csv", index_col="line_item")  # same frame as tools/fi/data.py::load_kaveri()
for fy in ["FY25", "FY26"]:
    c = k[fy]
    nwc = c.inventory + c.receivables + c.oca - c.payables - c.ocl
    net_debt = c.lt_debt + c.st_debt - c.cash - c.cur_inv
    ic = c.net_block + c.cwip + c.rou + c.intangibles + nwc
    print(fy, round(nwc, 1), round(nwc / c.rev, 3), round(net_debt, 1), round(ic, 1), round(c.equity / 6.0, 1))

Common mistakes

Treating reserves as cash. "Other equity" is a claim, not a bank balance. Look at the asset side to see where the money is.
Taking every rupee of "cash" as free. Margin money, earmarked unpaid-dividend accounts and deposits lien-marked to lenders are restricted. Read the cash and bank-balances notes before netting cash against debt.
Forgetting lease liabilities (and other debt-like items) in net debt. Also consider unpaid capital creditors, big customer advances that are really financing, and contingent liabilities you expect to crystallise.
Comparing book values across organic growers and acquirers. HUL's FY21 book value is two-thirds acquired brands and goodwill; a company that built its brands shows none of that.
Reading one balance-sheet date for a seasonal business. Kaveri's March balance sheet sits at the end of its peak Q4 season; averages or half-yearly balance sheets give a truer picture.
Mixing standalone and consolidated numbers, for example consolidated revenue with standalone receivables.
Ignoring the notes. The face of the balance sheet is a table of contents; the ageing schedules, borrowings terms and contingent liabilities live in the notes.

Key terms¶

Term	Meaning
Balance sheet	Snapshot of assets, liabilities and equity at a date; Assets = Liabilities + Equity
Schedule III	The Companies Act, 2013 format for financial statements; Division II for Ind AS non-financial companies
Current / non-current	Realised or settled within 12 months or the operating cycle, or not
Operating cycle	Time from buying inputs to collecting cash from customers
Gross block / net block	Historical cost of PP&E / cost less accumulated depreciation and impairment
CWIP	Capital work-in-progress: capex on assets not yet ready for use; not depreciated
Right-of-use (ROU) asset	A lessee's right to use a leased asset, recognised under Ind AS 116
Lease liability	Present value of future lease payments; debt-like
Goodwill	Price paid for an acquired business minus fair value of its identifiable net assets
Intangible asset	Identifiable non-physical asset (software, acquired brand); home-grown brands are not recognised
Investment property	Property held for rent or appreciation; cost model only under Ind AS 40
Net realisable value (NRV)	Estimated selling price less costs to complete and sell; inventory cap
Expected credit loss (ECL) allowance	Deduction from receivables for losses expected over their life
Cash equivalents	Highly liquid investments with original maturity ≤3 months
Margin money	Bank deposit pledged against guarantees or letters of credit; restricted cash
Securities premium	Amount received for shares above face value; restricted use under Section 52
Retained earnings	Cumulative profits not paid out as dividends
Non-controlling interest (NCI)	Outside shareholders' share of a subsidiary's equity (consolidated only)
Book value per share	Equity attributable to owners ÷ shares outstanding
MSE dues	Trade payables owed to micro and small enterprises; 45-day rule under the MSMED Act
Contingent liability	Possible obligation disclosed in notes but not recognised
Net working capital (NWC)	Operating current assets minus operating current liabilities
Invested capital	Operating assets net of operating liabilities; equals net financing claims
Deemed cost	Ind AS 101 option to use fair value as the cost of PP&E at transition

Check your understanding¶

Compute Kaveri's FY25 invested capital two ways — from the operating side and from the financing side — and show they agree.

Answer

Operating: net block 484.9 + CWIP 4.0 + ROU 15.2 + intangibles 7.5 + NWC (161.3 + 269.7 + 35.2 − 132.3 − 58.6 = 275.3) = ₹786.9 Cr. Financing: equity 637.2 + borrowings (112.0 + 58.0) 170.0 + leases 16.7 + DTL 21.0 − cash 28.0 − current investments 30.0 = ₹786.9 Cr. They agree because the identity A = L + E has simply been rearranged: move cash and investments to the right-hand side and operating liabilities to the left.

Kaveri's CWIP was ₹68.0 Cr at FY23 and ₹0.0 at FY24, while gross block rose from ₹518.0 Cr to ₹734.0 Cr. Explain what happened and why PP&E depreciation rose in FY25 rather than FY24.

Answer

The Hosur motors plant was under construction in FY23 (in CWIP, not depreciated). It was commissioned at end-FY24: its cost was transferred from CWIP to gross block (together with FY24's further spending), so gross block rose ₹216.0 Cr and CWIP fell to zero. Because commissioning happened at year-end, FY24 carried almost no depreciation on the plant; FY25 was the first full year, so PP&E depreciation stepped up from ₹25.8 Cr to ₹37.0 Cr.

A news story says: "Company Z has reserves and surplus of ₹4,000 crore, so it can easily pay a ₹1,000 crore special dividend." What two things must you check before believing this?

Answer

(1) Cash, not reserves: reserves are a claim on the right-hand side; you need cash, liquid investments or borrowing capacity on the left. Check cash, current investments, restricted balances and debt. (2) Which reserves are distributable: dividends must come from profits (retained earnings/free reserves), not from securities premium, capital reserve or revaluation surplus. A large part of Z's "reserves" may be premium from share issues — as with HUL, whose FY21 other equity rose ≈₹40,200 Cr from a share-for-share merger while its cash fell.

Why do Horlicks and Boost appear on HUL's balance sheet at ₹19,274 Cr and ₹4,800 Cr while HUL's own long-established brands carry almost nothing? What does this do to HUL's ROE and ROCE after FY21?

Answer

Ind AS 38 recognises only acquired intangibles (at fair value on acquisition); internally generated brands are never capitalised — their building costs were expensed as advertising and salaries over decades. The merger brought ₹41,339 Cr of brands and goodwill (19,274 + 4,800 + 17,265) onto the balance sheet. Standalone equity went from 216 + 7,815 = ₹8,031 Cr to 235 + 47,199 = ₹47,434 Cr (5.9×) while PAT rose only 18% (₹6,738 Cr → ₹7,954 Cr), so reported ROE and ROCE must fall mechanically, even though returns on the tangible capital that runs the business did not collapse. Compute returns both including and excluding acquired intangibles and goodwill.

Classify each item (financial or other; current or non-current; operating or financing): (a) advance received from a customer for pumps to be delivered next quarter; (b) advance paid to a machine supplier for equipment due in 14 months; (c) a fixed deposit held as margin money against a tender bank guarantee, maturing in 8 months; (d) units of a liquid mutual fund; (e) a security deposit paid to a landlord under a 9-year lease; (f) GST input-tax credit.

Answer

(a) Other (non-financial — settled by delivering goods) current liability; operating (a contract liability). (b) Other non-current asset (capital advance); operating/capex — watch its size and counterparty. (c) Financial current asset, shown under "bank balances other than cash and cash equivalents"; financing in nature but restricted — exclude from net-debt cash. (d) Financial current asset (current investment at FVTPL); financing/treasury — include in net debt as cash-like. (e) Financial non-current asset (other financial assets); operating. (f) Other current asset (a statutory receivable, not contractual); operating.

Kaveri's ECL allowance is ₹4.0 Cr against ₹62.4 Cr of receivables overdue by more than six months. If the auditor insisted on a 50% allowance against that bucket, what would happen to FY26 PAT and book value per share? (Tax 25.17%.)

Answer

Required allowance = 50% × 62.4 = ₹31.2 Cr, so an extra charge of 31.2 − 4.0 = ₹27.2 Cr pre-tax. Post-tax = 27.2 × (1 − 0.2517) = ₹20.4 Cr, or 22.5% of FY26 PAT of ₹90.5 Cr. Equity falls to 706.1 − 20.4 = ₹685.7 Cr and book value per share from ₹117.7 to ₹114.3. Cash is unaffected today — but the provision would be admitting that some cash will never arrive.

A company owes ₹12.0 Cr to micro and small enterprise suppliers that is more than 45 days old at year-end and pays it three weeks after year-end. Tax rate 25.17%. What is the effect on this year's current tax and on reported PAT?

Answer

The ₹12.0 Cr is not deductible this year (it becomes deductible next year, when paid), so current tax rises by 12.0 × 25.17% = ₹3.02 Cr this year. Reported PAT is essentially unchanged, because a deferred tax asset of ₹3.02 Cr is recognised for the timing difference (deferred tax credit offsets current tax charge). Cash tax is higher this year and lower next year. Late-payment interest under the MSMED Act would also be payable and is not tax-deductible.

Go deeper¶

HUL Integrated Annual Report 2020-21 — read the standalone balance sheet and Notes 4 and 40 to see a large acquisition hit every line discussed here.
ICAI Guidance Note on Division II – Ind AS Schedule III (copy hosted by BCAS) — the authoritative line-by-line explanation of every caption; check for a later ICAI edition.
Stephen Penman, Financial Statement Analysis and Security Valuation (McGraw-Hill) — the classic treatment of reformulating balance sheets into operating and financing components.
Martin Fridson & Fernando Alvarez, Financial Statement Analysis: A Practitioner's Guide (Wiley) — readable on what balance-sheet numbers do and do not mean.
MCA — Ind AS 40, Investment Property — a short standard that shows the Indian "cost model plus fair-value disclosure" approach.

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