Section 135 of the Companies Act, 2013 (Act) deals with the provisions of Corporate Social Responsibility (CSR) and requires every company that comes under the purview of the mandatory spend to spend on CSR in that financial year. The Guidance note on Accounting for expenditure on Corporate Social Responsibility Activities (Guidance Note) issued by ICAI in note 10 to 16 has dealt with the provisions on how to spend, where to spend and how to account for CSR, which can be a revenue or capital expenditure.
Agents of CSR
Note 10 in the guidance note deals with the agencies through which the CSR spend can be spent. In fact an analysis of Nifty 50 companies in India reveals that companies have spent CSR directly, through NGO’s, by contribution to funds and others. As auditors it is the responsibility to first identify the amount allocated for CSR spendand then verify the mode of entity through which the CSR is spent.The Board may discharge its CSR obligation 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
The responsibility of the auditor is to check the authenticity of the transaction and the entity through whom the funds are spent. In case of NGO care has to be taken to check if the trust / society / section 8 company is registered under FCRA (Foreign Contribution Regulation Act) in case a subsidiary of a foreign company is making the CSR contribution. The next check that is required is to identify the trustee or owner of these institutions, as any transaction that is made can result in a organisation that is a PEP (politically exposed person).
Entry in books of account
As per note 11 of the guidance note in case a contribution is made to:
i. 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. This can be in the form of a contribution to the Prime Minister’s Relief Fund;
ii. In case the amount is spent in the manner as specified in paragraph10 (b), which is through a Trust or Society or a Section 8 company,the same will also be treated as expense for the year by charging off to the statement of profit and loss. This can be in the form of contribution to Akshayapatra scheme run by ISKON, a NGO;
iii. The bigger challenge in reporting seems to be direct expenses made by the company say construction of a toilet or a school or payments made for education to students directly. The accounting for expenditure incurred by the company otherwise e.g. on its own would be accounted for in accordance with the principles of accounting as explained hereinafter.
The third category referred herein above can result in expenditurethat can result in creating an asset in the books of the company.
Revenue or Capital expenditure
As per point 12 of the guidance note 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.
As per point 13 of the guidance note 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.
Revenue - Sale of goods that are manufactured
The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard (AS) 2, Valuation of Inventories. 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.
Revenue - Monetisation of the services rendered by employees
The services rendered by employees should be measured at cost. This is the most difficult part of the accounting treatment as the auditor has to dabble with what to monetize and how much to monetize is debatable. In fact clause 3.13.3 of the report of the high level committee constituted by the Government does not favour Monetisation of the services as it is not feasible and may be subjective in allocating cost. As auditor it may become a bigger challenge to monetize the efforts spent on a social cause between the CEO and the employee in the middle level management.
Capital - Creating a liability for an asset
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, as per the Framework for Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India, 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”.
The example cited in the guidance note says, 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.
Recognition of Income Earned from CSR Projects/ Programmes or During the Course of Conduct of CSR Activities
Point 15 of the guidance note justifies Rule 6 (2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, to state that 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’.
CSR for a company may be an entry into the hearts of stakeholders; but for an auditor it is about an entry in accounts and is more a responsible accounting. This financial year we can hope to see better transparency in reporting on CSR by Indian Companies, who will be ably assisted by the auditors and whose reporting will be under the guidance of the Guidance note issued by ICAI.
This series of articles written by me on CSR Reporting is the outcome of a session that I delivered for Bangalore Cantonment branch of ICAI where all of us were found grappling with more questions than answers on CSR.
CSR reporting is still in the learning period as the High Level Committee of CSR rightly puts it.
Knowledge courtesy – Guidance Note issued by ICAI
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