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ICAI issues norms for CSR accounting by cos
May, 22nd 2015

The Institute of Chartered Accountants of India ( ICAI) recently issued a guidance note which will help India Inc in accounting for its corporate social responsibility (CSR) expenses.

To ensure transparent financial reporting, this guidance note requires the company to debit (charge) its profit and loss account (P&L a/c) with the CSR expenses incurred by it during the year. Further, such expenses are to be shown as a separate line item in the P&L a/c.

"The guidance note by calling for a debit to the P&L a/c of the CSR expenditure rightly puts to rest an ongoing debate as to whether such expenditure could have been adjusted as an appropriation from reserves," says Sumit Seth, partner, PriceWaterhouse.

Further, ICAI's guidance note has also addressed issues of a shortfall by a company in meeting with the minimum CSR expenditure criteria and also those instances where a company has spent more than the minimum requirement.

"ICAI's guidance note is clear and easy to implement. It has stayed with the letter and the spirit of the legal provisions. India Inc was facing many doubts in accounting for CSR expenses, as India is the first country in the world that mandates CSR expense," says Shailesh Haribhakti, group chairman, DH Consultants.

The legal obligation to comply with CSR norms kicked in as of April 1, 2014. Such expenses will reflect for the first time in the financial statements of India Inc as of March 31, 2015 which are currently under finalization and audit.

Companies meeting certain financial criteria such as a net worth, turnover or net profit of at least Rs 500 crore, Rs 1,000 crore and Rs 5 crore respectively have to comply with CSR norms. Such companies have to spend in each financial year 'at least' 2% of the average net profits made during the previous three financial years towards eligible CSR activities.

According to an EY report, nearly 8,000 companies are impacted by the CSR norms. Sachin Pilot, former minister of corporate affairs, under whose aegis the new Companies Act containing the CSR norms was ushered in, had said CSR spend by India Inc could aggregate to Rs 15,000-20,000 crore in a year.

There can be scenarios where a company spends more or less than the minimum 2% criteria. ICAI's guidance note states that the Companies Act requires the board of directors of a company to specify the reasons for not meeting with the CSR obligations. In light of this, if there is any shortfall, no provision is required to be made in the profit and loss account of the company. For instance, if the 2% criteria required a CSR spend of at least Rs 50 lakh, but the company spends only Rs 40 lakh during the year, the difference of Rs 10 lakh need not be provided in its profit and loss statement. A provision would have reduced the book profits of the company. However, the directors will be required to state in their report the reasons for such shortfall.

ICAI's guidance note also looks at a scenario when a company spends more than the minimum requirement. The issue in this scenario was whether the excess amount of CSR spent can be carried forward to be adjusted against amounts to be spent on CSR activities in the future. To illustrate, if a company spent Rs 60 lakh, instead of the minimum required Rs 50 lakh, could this excess Rs 10 lakh be carried forward and adjusted against next year's CSR required expenditure? ICAI's guidance note has clarified that, since "2% of the average net profits of immediately preceding three years is the 'minimum' amount which is required to be spent under section 135(5) of the Companies Act, the excess amount cannot be carried forward for any future adjustment".

Haribhakti adds, "The approach suggested in the guidance note of not carrying forward excess expenditure and for not providing for shortfalls in a particular year are justified. This is also the intent of the law makers to let market and peer pressure work."

ICAI's guidance note has also illustrated that, in some cases, the CSR expenditure could result in creation of a tangible asset — say a school building. Invariably, the future economic benefit from a 'CSR asset' would not flow to a company, thus even the expenditure towards creation of an asset should be charged to the P&L a/c (and not capitalized in the balance sheet), clarifies the guidance note.

If a company, as part of its CSR activities, supplies goods manufactured by it or renders services, these goods and services will also form part of the CSR expenditure and will be duly valued and charged to the company's P&L a/c.

According to government sources, the financial statements of a company, including notes to the accounts and the director's reports, will help keep track of the CSR spending by India Inc. Currently, there is no penalty imposed for not complying with these norms — only a disclosure is required in the director's report.

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