On 1 April 2015, the Institute of Chartered Accountants of
India (ICAI) has issued guidance in the form of Frequently Asked Questions
(FAQs) on the provisions of corporate social responsibility (CSR) under Section
135 of the Companies Act, 2013 (2013 Act).
Section 135 creates a social responsibility of every Indian
company with a net worth of Rs 500 crore or more, or turnover of Rs 1000 crore
or more, or a net profit of Rs 5 crore or more during any financial year. The
2013 Act requires the Board of every such company to ensure that it spends, in
every financial year, at least 2% of the average net profits made during the
three immediately preceding financial years, on CSR activities.
The Companies (Corporate Social Responsibility Policy)
Rules, 2014 and Schedule VII of the 2013 Act lay down the framework for companies
to formulate their CSR policies. The Ministry of Corporate Affairs (MCA) has
also issued two circulars to provide clarifications and additional guidance.
The FAQs, approved by the Corporate Laws and Corporate Governance Committee of
the ICAI, provide additional useful guidance, especially for accounting and
presentation of the CSR amounts in the financial statements of a company.
Following is the executive summary of the FAQs.
The FAQs should be read in light of the law and principles established by the
MCA circulars, including that a liberal interpretation is permitted in order to
comply with the CSR law in spirit.
Accounting for CSR expenditure
1. CSR
expenditure gives rise to an asset
Recognition on balance sheet
The FAQs clarify that if the CSR expenditure meets the
definition of an asset, the same should be recognised on the balance sheet. An
asset is defined as a resource controlled by the enterprise as a result of past
events from which future economic benefits are expected to flow to the
enterprise.
Such assets may be classified under natural heads, e.g.
plant and machinery, with a specific description to distinctly identify them.
To illustrate, the FAQs use the prefix ‘CSR’; so, for example, vehicles purchased only to be
used for CSR activities may be labelled as ‘CSR Vehicles’.
Depreciation, etc. on CSR assets
However, once the cost of the asset has been considered as
CSR expenditure, subsequently, depreciation, etc. shall not be considered as CSR expenditure to
avoid double-counting.
CSR assets under construction
If the company covered under Section 135 incurs expenditure
for an asset, which is still under construction on the balance sheet date, the
same should be disclosed
by way of footnote to the statement of profit and loss, together with
the other CSR expenditure, in terms of Item 5(a) of the General Instructions
for Preparation of Statement of Profit and Loss under Schedule III.
Also, while the FAQs do not specifically provide this, we
believe that the companies may also choose a specific description to distinctly
identify the CSR assets under construction, e.g. CSR capital work-in-progress, and may additionally
also choose to disclose the CSR capital commitments.
2. CSR
expenditure does not give rise to an asset
Appropriation of profit or a charge against profit
The FAQs clarify that if the CSR expenditure does not give
rise to an asset, the company needs to determine whether the amounts incurred
are part of its normal business activity or not. If the CSR expenditure is in
fact incurred as part of the normal business activity (e.g. a FMCG company
distributes its ready-to-eat products free of cost to people affected by
flood), the same shall continue to be charged to the statement of profit and loss.
However, if the CSR expenditure is not incurred as part of normal business activity
(e.g. an IT company distributes ready-to-eat products free of cost to people
affected by flood), the same shall be presented as an appropriation of profit.
Presentation in statement of profit and loss
The FAQs also clarify that all CSR expenditure that
qualifies to be recognised as expense in the statement of profit and loss can
be presented in a separate line item labelled as ‘CSR expenditure’.
Alternatively, the company can continue to present them according to their
natural classification.
For example, a FMCG company that distributes its
ready-to-eat products free of cost to people affected by flood can continue to
show them in the cost of goods sold, however, it will anyway be required to
disclose the same by way of footnote to the statement of profit and loss,
together with the other CSR expenditure, in terms of Item 5(a) of the General
Instructions for Preparation of Statement of Profit and Loss under Schedule
III.
3. Disclosure
of shortage and excess of CSR expenditure
The FAQs provide that any shortfall in the CSR expenditure
from the 2% threshold shall not be recognised as a provision for expense unless
it meets the recognition criteria of the relevant accounting standard, e.g. a
contractual obligation to incur CSR expenditure at the balance sheet date will
need to be provided for.
On the other hand, if a company incurs CSR expenditure in
excess of the 2% threshold in a financial year, the same shall not be counted
towards the 2% threshold in the subsequent financial years. The FAQs remark
that a company, while explaining the shortfall, if any, in its annual report of
such subsequent financial years, is entitled to disclose such excess spending
in the past.
4. Examples
of CSR expenditure
The FAQs also provide a few useful examples of expenditure
that can be and that should not be considered as CSR expenditure.
Expenditure in the ‘ordinary course of business’
More importantly, it provides examples to help establish the
principle that expenditure ‘in the ordinary course of business’ cannot be
considered as CSR expenditure. The FAQs also provide that following should not
be considered as CSR expenditure:
·
activities carried out as a pre-condition for
setting up a business, or
·
activities carried out as part of a contractual
obligation undertaken by the company, or
·
activities carried out in accordance with or in
order to comply with any other law,
as they will be deemed to be undertaken ‘in the ordinary
course of business’. Similarly, activities that benefit only the employees and
their families shall not be considered CSR expenditure, unless the benefit is
also available to the general public.
5. Amounts
earmarked but not yet spent
The FAQs also illustrate that if a company decides that for
every pack of its product sold, it will contribute Re 1 towards the education
of a girl child, the amount earmarked from such sale shall not be automatically
considered as CSR expenditure until and unless the company actually spends it
for the designated CSR activity.
6. Expenditure
on training
The FAQs clarify that expenditure on training of existing
employees shall not qualify as CSR expenditure. However, if a company incurs
expenditure on skill development for apprentice trainees, cost of such
training, e.g. stipend, faculty, infrastructure, etc. shall be eligible to be
considered as CSR expenditure; this is not dependent on the fact that such
training may increase the employability of the apprentices and that the company
may actually hire the apprentices as full-time employees at the end of their
apprenticeship.
7. Contributions
to charity, NGO, etc.
Contributions made by a company to charities, NGOs, Section
25 companies, etc. can be considered as CSR expenditure, if such charity, NGO,
etc. meet the track record and other criteria as per Rule 4(2) of the Companies
(Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules).
8. In
summary
The guidance issued by the ICAI is well timed, especially
considering the fact that the companies will now be preparing their annual
financial statements for the financial year 2014-15 and the FAQs shall prove
useful in addressing most of their questions. The FAQs also contain the amended
text of the
2013 Act, the related Rules, Schedule VII, and
the MCA circulars issued on the subject and will also serve as a concise
handbook for ready reference
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