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Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities (Issued May 15, 2015)
May, 16th 2015
 

                                               GN(A) 34  
     
    Guidance  Note  on  Accounting  for  Expenditure  on  Corporate  Social 
    Responsibility Activities (Issued May 15, 2015) 
     

    (The  Council  of  the  Institute  of  Chartered  Accountants  of  India  (ICAI)  has  issued  this 
    Guidance  Note  on  Accounting  for  Expenditure  on  Corporate  Social  Responsibility 
    Activities which comes into effect from the date of its issuance. Pending finalisation of the 
    Guidance  Note,  as  it  was  under  discussion  with  the  relevant  authorities,  the  Corporate 
    Laws &  Corporate  Governance  Committee had issued  `Frequently  Asked  Questions on  the 
    provisions  of  Corporate  Social  Responsibility  under  Section  135  of  the  Companies  Act 
    2013  and  Rules  thereon'  which,  inter  alia,  provided  an  interim  guidance  with  regard  to 
    certain  accounting  issues.  On  issuance  of  this  Guidance  Note  on  Accounting  for 
    Expenditure  on  Corporate  Social  Responsibility  Activities,  the  FAQs  related  to  areas 
    covered by the Guidance Note stand withdrawn.)  



    Introduction

    1. Section 135 of the Companies Act, 2013 (the Act), requires the Board of
       Directors of every company having a net worth of Rupees 500 crore or more, or
       turnover of Rupees 1,000 crore or more or a net profit of Rupees 5 crore or more,
       during any financial year, to ensure that the company spends in every financial
       year atleast 2% of the average net profits of the company made during the three
       immediately preceding financial years on Corporate Social Responsibility (CSR)
       in pursuance of its policy in this regard. The Act requires such companies to
       constitute a Corporate Social Responsibility Committee which shall formulate and
       recommend to the Board a Corporate Social Responsibility Policy which shall
       indicate the CSR activities to be undertaken by the company as specified in
       Schedule VII to the Act.






    Objective

    2. The objective of this Guidance Note is to provide guidance on recognition,
        measurement, presentation and disclosure of expenditure on activities relating
        to corporate social responsibility.



                                                                                                     1

 
 



    Scope

    3. What constitutes CSR activities is specified in Schedule VII to the Act.
       Reference is also invited to the circular issued by the Ministry of Corporate
       Affairs (MCA) No. 21/2014 dated October 24, 2014. Accordingly, the Guidance
       Note does not deal with identification of activities that constitute CSR activities
       but only provides guidance on accounting for expenditure on CSR activities in
       line with the requirements of the generally accepted accounting principles
       including the applicable Accounting Standards.



    Definitions

    4. For the purpose of this Guidance Note, the definitions mentioned at sl. nos. (a) to
        (f) are reproduced from the Companies Act, 2013, and the Companies
        (Corporate Social Responsibility Policy) Rules, 2014 and in the event of any
        change in the Act or the Rules made thereunder, these definitions shall stand
        automatically revised/modified to that extent:

          (a) Any financial year: "any financial year" referred under sub-section (1) of
              Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014,
              implies `any of the three preceding financial years'. (Clarification vide MCA
              General Circular No. 21/2014)

          (b) Average Net Profit: Average Net Profit is the amount as calculated in
              accordance with the provisions of Section 198 of the Companies Act,
              2013.

          (c) Financial Year: "financial year", in relation to any company or body
              corporate, means the period ending on the 31st day of March every year,
              and where it has been incorporated on or after the 1st day of January of a
              year, the period ending on the 31st day of March of the following year, in
              respect whereof financial statement of the company or body corporate is
              made up:

             Provided that on an application made by a company or body corporate,
             which is a holding company or a subsidiary of a company incorporated
             outside India and is required to follow a different financial year for
             consolidation of its accounts outside India, the Tribunal may, if it is
             satisfied, allow any period as its financial year, whether or not that period
             is a year:

                                                                                         2

 



 


       Provided further that a company or body corporate, existing on the
       commencement of this Act, shall, within a period of two years from such
       commencement, align its financial year as per the provisions of this
       clause;


    (d) Net Profit: "net profit" means the net profit of a company as per its financial
        statement prepared in accordance with the applicable provisions of the
        Act, but shall not include the following, namely:-

       (i)    any profit arising from any overseas branch or branches of the
              company, whether operated as a separate company or otherwise;
              and

       (ii)   any dividend received from other companies in India, which are
              covered under and complying with the provisions of section 135 of
              the Act:

       Provided that net profit in respect of a financial year for which the relevant
       financial statements were prepared in accordance with the provisions of
       the Companies Act, 1956, (1 of 1956) shall not be required to be re-
       calculated in accordance with the provisions of the Act:

       Provided further that in case of a foreign company covered under these
       rules, net profit means the net profit of such company as per profit and
       loss account prepared in terms of clause (a) of sub-section (1) of section
       381 read with section 198 of the Act.

    (e) Net worth: "net worth" means the aggregate value of the paid-up share
        capital and all reserves created out of the profits and securities premium
        account, after deducting the aggregate value of the accumulated losses,
        deferred expenditure and miscellaneous expenditure not written off, as per
        the audited balance sheet, but does not include reserves created out of
        revaluation of assets, write-back of depreciation and amalgamation;


    (f) Turnover: "turnover" means the aggregate value of the realisation of
        amount made from the sale, supply or distribution of goods or on account
        of services rendered, or both, by the company during a financial year;

    (g) Spend: The term `spend' in accounting parlance generally means the
        liabilities incurred during the relevant accounting period.


                                                                                     3

 
 

    5. Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014,
       requires that the CSR activities that shall be undertaken by the companies for
       the purpose of Section 135 of the Act shall exclude activities undertaken in
       pursuance of its `normal course of business'. The Rules also specify that CSR
       projects or programmes or activities that benefit only the employees of the
       company and their families shall not be considered as CSR activities in
       accordance with the requirements of the Act. Such programmes or projects or
       activities, that are carried out as a pre-condition for setting up a business, or as
       part of a contractual obligation undertaken by the company or in accordance
       with any other Act, or as a part of the requirement in this regard by the relevant
       authorities cannot be considered as a CSR activity within the meaning of the
       Act. Similarly, the requirements under relevant regulations or otherwise
       prescribed by the concerned regulators as a necessary part of running of the
       business, would be considered to be the activities undertaken in the `normal
       course of business' of the company and, therefore, would not be considered
       CSR activities.



    Recognition and Measurement of CSR Expenditure in Financial Statements


    Whether Provision for Unspent Amount required to be created?


    6. Section 135 (5) of the Companies Act, 2013, requires that the Board of every
        eligible company, "shall ensure that the company spends, in every financial
        year, at least 2% of the average net profits of the company made during the
        three immediately preceding financial years, in pursuance of its Corporate
        Social Responsibility Policy". A proviso to this Section states that "if the
        company fails to spend such amount, the Board shall, in its report ... specify the
        reasons for not spending the amount".

    7. Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy)
        Rules, 2014, prescribes that the Board Report of a company under these Rules
        shall include an annual report on CSR, containing particulars specified in the
        Annexure to the said Rules, which provide a Format in this regard.

    8. The above provisions of the Act clearly lay down that the expenditure on CSR
       activities is to be disclosed only in the Board's Report in accordance with the
       Rules made thereunder. In view of this, no provision for the amount which is not
       spent, i.e., any shortfall in the amount that was expected to be spent as per the
       provisions of the Act on CSR activities and the amount actually spent at the end
                                                                                         4

 
 

       of a reporting period, may be made in the financial statements. The proviso to
       section 135 (5) of the Act, makes it clear that if the specified amount is not spent
       by the company during the year, the Directors' Report should disclose the
       reasons for not spending the amount. However, if a company has already
       undertaken certain CSR activity for which a liability has been incurred by
       entering into a contractual obligation, then in accordance with the generally
       accepted principles of accounting, a provision for the amount representing the
       extent to which the CSR activity was completed during the year, needs to be
       recognised in the financial statements.

    9. Where a company spends more than that required under law, a question arises
       as to whether the excess amount `spent' can be carried forward to be adjusted
       against amounts to be spent on CSR activities in future period. Since `2% of
       average net profits of immediately preceding three years' is the minimum
       amount which is required to be spent under section 135 (5) of the Act, the
       excess amount can not be carried forward for set off against the CSR
       expenditure required to be spent in future.



    Other Considerations in Recognition and Measurement

    10. A company may decide to undertake its CSR activities approved by the CSR
        Committee with a view to discharge its CSR obligation as arising under section
        135 of the Act in the following three ways:

          (a) making a contribution to the funds as specified in Schedule VII to the Act;
              or

          (b) through a registered trust or a registered society or a company established
              under section 8 of the Act (or section 25 of the Companies Act, 1956) by
              the company, either singly or along with its holding or subsidiary or
              associate company or along with any other company or holding or
              subsidiary or associate company of such other company, or otherwise ; or

          (c) in any other way in accordance with the Companies (Corporate Social
              Responsibility Policy) Rules, 2014, e.g. on its own.

    11. In case a contribution is made to a fund specified in Schedule VII to the Act, the
        same would be treated as an expense for the year and charged to the statement
        of profit and loss. In case the amount is spent in the manner as specified in
        paragraph10 (b) above the same will also be treated as expense for the year by
        charging off to the statement of profit and loss. The accounting for expenditure
                                                                                         5

 
 

       incurred by the company otherwise e.g. on its own would be accounted for in
       accordance with the principles of accounting as explained hereinafter.

    CSR activities carried out by the company covered under paragraph 10 (c)

    12. In cases, where an expenditure of revenue nature is incurred on any of the
        activities mentioned in Schedule VII to the Act by the company on its own, the
        same should be charged as an expense to the statement of profit and loss. In
        case the expenditure incurred by the company is of such nature which may give
        rise to an `asset', a question may arise as to whether such an `asset' should be
        recognised by the company in its balance sheet. In this context, it would be
        relevant to note the definition of the term `asset' as per the Framework for
        Preparation and Presentation of Financial Statements issued by the Institute of
        Chartered Accountants of India. As per the Framework, an `asset' is a "resource
        controlled by an enterprise as a result of past events from which future
        economic benefits are expected to flow to the enterprise". Hence, in cases
        where the control of the `asset' is transferred by the company, e.g., a school
        building is transferred to a Gram Panchayat for running and maintaining the
        school, it should not be recognised as `asset' in its books and such expenditure
        would need to be charged to the statement of profit and loss as and when
        incurred. In other cases, where the company retains the control of the `asset'
        then it would need to be examined whether any future economic benefits accrue
        to the company. Invariably future economic benefits from a `CSR asset' would
        not flow to the company as any surplus from CSR cannot be included by the
        company in business profits in view of Rule 6(2) of the Companies (Corporate
        Social Responsibility Policy) Rules, 2014.



    13. In some cases, a company may supply goods manufactured by it or render
        services as CSR activities. In such cases, the expenditure incurred should be
        recognised when the control on the goods manufactured by it is transferred or
        the allowable services are rendered by the employees. The goods manufactured
        by the company should be valued in accordance with the principles prescribed
        in Accounting Standard (AS) 2, Valuation of Inventories. The services rendered
        should be measured at cost.. Indirect taxes (like excise duty, service tax, VAT or
        other applicable taxes) on the goods and services so contributed will also form
        part of the CSR expenditure.




                                                                                        6

 
 

    14. Where a company receives a grant from others for carrying out CSR activities,
        the CSR expenditure should be measured net of the grant.



    Recognition of Income Earned from CSR Projects/Programmes or During the
    Course of Conduct of CSR Activities



    15. Rule 6 (2) of the Companies (Corporate Social Responsibility Policy) Rules,
        2014, requires that "the surplus arising out of the CSR projects or programs or
        activities shall not form part of the business profit of a company". The term
        `surplus' ordinarily means excess of income over expenditure pertaining to an
        entity or an activity. Thus, in respect of a CSR project or programme or activity,
        it needs to be determined whether any surplus is arising therefrom. A question
        would arise as to whether such surplus should be recognised in the statement of
        profit and loss of the company. It may be noted that paragraph 5 of Accounting
        Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and
        Changes in Accounting Policies, inter alia, requires that all items of income
        which are recognised in a period should be included in the determination of net
        profit or loss for the period unless an Accounting Standard requires or permits
        otherwise. As to whether the surplus from CSR activities can be considered as
        `income', the Framework for Preparation and Presentation of Financial
        Statements issued by the Institute of Chartered Accountants of India, defines
        `income' as "increase in economic benefits during the accounting period in the
        form of inflows or enhancements of assets or decreases of liabilities that result
        in increases in equity, other than those relating to contributions from equity
        participants". Since the surplus arising from CSR activities is not arising from a
        transaction with the owners, it would be considered as `income' for accounting
        purposes. In view of the aforesaid requirement any surplus arising out of CSR
        project or programme or activities shall be recognised in the statement of profit
        and loss and since this surplus can not be a part of business profits of the
        company, the same should immediately be recognised as liability for CSR
        expenditure in the balance sheet and recognised as a charge to the statement
        of profit and loss. Accordingly, such surplus would not form part of the minimum
        2% of the average net profits of the company made during the three immediately
        preceding financial years in pursuance of its Corporate Social Responsibility
        Policy.

    Presentation and Disclosure in Financial Statements


                                                                                        7

 
 






    16. Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit
        and Loss under Schedule III to the Companies Act, 2013, requires that in case
        of companies covered under Section 135, the amount of expenditure incurred
        on `Corporate Social Responsibility Activities' shall be disclosed by way of a
        note to the statement of profit and loss. . From the perspective of better financial
        reporting and in line with the requirements of Schedule III in this regard, it is
        recommended that all expenditure on CSR activities, that qualify to be
        recognised as expense in accordance with paragraphs 10-14 above should be
        recognised as a separate line item as `CSR expenditure' in the statement of
        profit and loss. Further, the relevant note should disclose the break-up of
        various heads of expenses included in the line item `CSR expenditure'.

    17. The notes to accounts relating to CSR expenditure should also contain the
        following:

          (a) Gross amount required to be spent by the company during the year.

          (b) Amount spent during the year on:

                                                     In cash      Yet to be Total
                                                                  paid    in
                                                                  cash

             (i)          Construction/acquisition
                          of any asset


             (ii)         On purposes other than
                          (i) above




      The above disclosure, to the extent relevant, may also be made in the notes to
      the cash flow statement, where applicable.

          (c) Details of related party transactions, e.g., contribution to a trust
              controlled by the company in relation to CSR expenditure as per
              Accounting Standard (AS) 18, Related Party Disclosures.


                                                                                          8

 
 

    (d) Where a provision is made in accordance with paragraph 8 above the
        same should be presented as per the requirements of Schedule III to the
        Companies Act, 2013. Further, movements in the provision during the
        year should be shown separately.




                                                                             9

 

 
 
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