Highlights of guidance note on accounting for corporate social responsibility

25 May 2015

1) It comes into effect from date of its issuance.

2) Sec 135 of the Companies Act 2013 requires Board of Directors of every company having:

a) Net Worth of Rs. 500 crore or more, or
b) Turnover of Rs. 1000 crore or more, or
c) Net Profit of Rs. 5 crore or more

during any FY to ensure that Co. spends in every FY at least 2% of the avg net profit of Co. made during immediately 3 proceeding FY on CSR. Act also requires such companies to constitute a CSR committee which shall formulate and recommend to board CSR policy which shall indicate CSR activities to be undertaken by Co. as specified in Schedule VII.

3) Some Important Definations

A) Net Profit: Net Profit means the net profit of the company as per its financial statements prepared in accordance with applicable provisions of the act, but shall not include the following:

i) Any Profit arising from any overseas branch/es of the Co. whether operated as a seperate Co. or otherwise.,

ii) Any Dividend received from other companies in India, which are covered under and complying with provisions of Sec 135 of the Act.

B) Net Worth: Net Worth means agg value of paid up share capital and all reserves created out of profits and securities premium A/c after deducting agg value of accumulated losses, Deferred Exp and Misc Exp not written off but does not include reserves created out of revaluation of assets.

C) Turnover: Turnover means agg value of realisation made from sale, supply or distribution of goods or on account of services rendered or both by Co. during FY.

4) Rule 4 of Companies (Corporate Social Responsibility Policy) Rules, 2014 requires that:-

a) Activities that shall be undertaken by the Companies for the purpose of Sec 135 shall exclude the activities undertaken in pursuance of its 'Normal Course of Business'.

b) CSR projects or programmes or activities that benefit only the employees of the company and their families shall not be considered as CSR activities.

c) Such Programmes or Projects or activities, that are carried out as a Pre Condition for setting up a business or as a part of the requirement in this regard by relevant authorities cannot be considered as CSR activity.

5) Recognition & Measurement of CSR Expenditure in Financial Statements.

a) Shortfall in the amount spent as required u/s 135 of the Companies Act, 2013: No Provision for the amount which is not spent i.e. Shortfall in the amount that was expected to be spent as per the provisions of the act on CSR Activities and the amount that is actually spent.

Proviso to sec 135(5) of the act makes it clear that if specified amount is not spent by the company during the year, the director’s report should disclose the reason for not spending. However, if a company has already undertaken a CSR activity for which liability has been incurred by entering into contractual obligation then a provision for the amount representing the extent to which CSR activity was completed during the year needs to be recognized during the year.

b) Excess amount spent as required u/s 135 of the Companies Act, 2013: Where a company spends more than required under law, a question arises as to whether the excess amount spent can be carried forward to be adjusted against amount to be spent on CSR activities in future periods. Since 2% of average net profits of immediately preceding 3 yrs is minimum amount required to be spent u/s 135(5), the excess amount cannot be carried forward for set off against the CSR expenditure required to be spent in future.

6) A Company may decide to undertake its CSR activities approved by CSR committee with a view to discharge its CSR obligation as arising u/s 135 of the act in following 3 ways:-

a) making a contribution to funds as specified in schedule VII to the act.

b) Through a registered trust or a registered society or co. established u/s 8 of the act (or sec 25 of companies act, 1956) by the company either singly or along with its holding or subsidiary or associate co. or along with any other co.

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

In case contribution is made as referred to point (a) and (b) above, then it would be treated as an expense for the year and charged to profit & loss A/c. The accounting for expenditure 6 incurred by the company otherwise e.g. on its own would be accounted for in accordance with the principles of accounting as explained hereinafter:-

i) 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.

ii) In case the expenditure incurred by the company is of such nature which may give rise to an ‘asset’ should be recognized by the company in its balance sheet. In this context, it would be relevant to note the definition of the term ‘asset’. 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”.

Thus in cases where the control of the ‘asset’ is transferred by the company it should not be recognized as ‘asset’ in its books and such expenditure would need to be charged to the statement of profit and loss.

In cases where company retains the control of the asset 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.

7) In some cases, a company may supply goods manufactured by it or render services as CSR activities.

a) Expenditure incurred should be recognized when the control on the goods manufactured by it is transferred. The goods manufactured by the company should be valued in accordance with the principles prescribed in Accounting Standard (AS) 2, Valuation of Inventories.

b) Expenditure incurred should be recognized when the allowable services are rendered by the employees. 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.

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

9) Recognition of Income Earned from CSR Projects/Programmes or During the Course of Conduct of CSR Activities:-

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”.

Whether such surplus should be recognized in the statement of profit & loss A/c of Co?

i) As per Para 5 of AS-5, all items of income which are recognized 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.

ii) Income refers “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.

iii) 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.

iv) But since surplus can not be a part of business profits of the company, the same should immediately be recognized as liability for CSR expenditure in the balance sheet and recognized as a charge to the statement of profit and loss.

v) 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.

10) Presentation & Disclosure in Financial Statement

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: